MBC3423

Intermediate Taxation

Bachelor in Accountancy

School of Business Management

NAME FADILLAH KARNI

STUDENT ID BAC17090003

LECTURER’S NAME MISS NANCY LING ING

Briefly explain real property gain tax and how is it going to be applied in Malaysia.

Examine its impact toward Malaysia property developer and investor. Discuss the effect

of choosing flat interest rate and reducing balance rate for property financing as an

investment. (20 marks)

Answer:

1. What is RPGT and How RPGT is Applied in Malaysia

Real property gain tax is defined in Tax Brochure 2017 LHDMN-R/013/17: Real

Property Gains Tax (RPGT) as Real Property Gains Tax (RPGT) is charged on gains arising

from the disposal or sale of real properties or shares in Real Property Companies (RPC).

On the other hand, Real Property Gains Tax (RPGT) Act 1976 Section 2 defined real

property means any land situated in Malaysia and any interest, option or other right in or over

such land. Gain is further defined in the same section as:

(a) gain other than gain or profit chargeable with or exempted from income tax under

the income tax law; or

(b) in the case of a unit trust, gain not treated as income under the income tax law;

While land is further defined in the same section to includes:

(a) the surface of the earth and all substances forming that surface;

(b) the earth below the surface and substances therein;

(c) buildings on land and anything attached to land or permanently fastened to

anything attached to land (whether on or below the surface);

(d) standing timber, trees, crops and other vegetation growing on land; and

(e) land covered by water;

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While tax is further defined as the tax imposed by Real Property Gains Tax (RPGT) Act

1976.

While shares are further defined as all or any of the following:

(a) stock and shares in a company;

(b) loan stock and debentures issued by a company or any other corporate body,

wherever incorporated;

(c) a member’s interest in a company not limited by shares whether or not it has a

share capital;

(d) any option or other right in, over or relating to shares as defined in paragraphs (a)

to (c)

Real Property Gains Tax (RPGT) is a tax chargeable on the profit gained up from the

disposal of a property in Malaysia and is payable to the Inland Revenue Board. All things

considered, RPGT is only applicable to a seller. It was suspended briefly from year 2008 to

year 2009, and reintroduced in year 2010. In 2014, RPGT has increased for the fifth straight

year since 2009 to 2014 In view of the Real Property Gains Tax Act 1976, RPGT is a tax on

chargeable gains got from disposal of property. A chargeable gain is the difference between

when the purchased price exceeds the disposal cost of the property. RPGT applies to both

residents and non-residents. Certain incidental costs of the acquisition of the property and

disposal of the property are entitled to deduction by the RPGT Act 1976.So you will only be

tax on the disposal cost less the purchased priced less the incidental charges which equal to

positive net capital gains. Example of incidental charges is, stamp duties, legal fees,

promotion and advertisement charges, and so forth.

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 A waiver on the taxable amount is allowed to individuals people but not granted on

organizations. Once in a lifetime exemption are entitled for every disposer or seller.

However, this exemption is only applicable for the disposal of a "private residence". The

RPGT Act 1976 defines a private residence as a building or part of a building in Malaysia

owned by an individual and occupied or certified fit for occupation as a place of residence.

As such, commercial property is not applied to gain exemption. In order to apply for an

exemption, the applicant must show that the private residence is owned and occupied by an

individual and the certificate of fitness for occupation or the Certificate of Completion &

Compliance has been issued for that private residence. It must be noted this exemption only

applies to individuals. It does not apply if a company owned the private residence. A

Permanent Resident in Malaysia is also entitled to apply for this exemption.

However, it is a bit different for a seller to disposed or sale a property held under the

estate of the deceased to a purchaser or buyer. In this instance, the date of the deceased is the

date on which the Inland Revenue Board will take into account to determine the acquisition

date. In other words, if the disposal of the property is made within 5 years from the date of

death of the deceased, there is RPGT payable even though the property has been owned for

more than 5 years by the deceased during his lifetime.

There is no RPGT payable if there is transfer of property between family member

because RPGT Act 1976 provides for full exemption from having to pay RPGT in the case of

transfer of property between family members by way of love and affection if the transfer

between husband and wife or the transfer between parent and child or transfer between

grandparent and grandchild. Apart from the aforementioned transfers, any forms of transfer

between family members are not entitled to apply for exemption, such as transfer between

siblings. In these instances, the transferor is deemed to have received no gain and suffered no

loss and the transferee is deemed to have acquired the property at an acquisition price equal

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to the acquisition price paid by the transferor together with any permitted expenses incurred

by the transferor.

RPGT is only chargeable if there is a profit picked up from the disposal of the

property, then the RPGT become chargeable. All things considered, there is no profit picked

up if the transfer cost is lower than the obtaining cost, and in this manner, RPGT is not

payable. Moreover, if the acquisition price is equivalent to the disposal cost, there is neither

an allowable loss nor a chargeable gain. In that capacity, no RPGT is payable. As endorsed

by law,3% of the purchased price from the deposit are required to be hold by the purchaser’s

solicitors and transmit the same to the Inland Revenue Board within sixty (60) days from the

date of the deal of sale and purchase agreement to meet the RPGT payable. Any payment

after sixty (60) days will cause penalty payable by the seller. The penalty is 10% of the

amount payable as RPGT. The seller has to pay the RPGT plus the penalty.

In situations where the permission of the State Authority is needed to sell the property

to a buyer as well as charge the property to a financial institution, or a court order for sale is

required to disposed the property, settlement of the 3% of the purchase price might be

deferred until the point when such consent or court order available to sale the property is

acquired.

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The effective RPGT rates are as follows:

The seller may opt to file the necessary forms with the Inland Revenue Board by

seeking assistance from the solicitors at a fee prescribed by the Solicitors Remuneration

Order 2006 or file the necessary form with the Inland Revenue Board individually.

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2. Impact of RPGT on Malaysia Property Investor and Investor

The highest of RPGT rates in Malaysia is since the year 2014, with tax on the first 3

years standing at 30%, the fourth year at 20% and the fifth year at 15%. Prior to that, between

the years 1995 to 1997 is the only other time that the RPGT rates were almost as high, which

was then followed by an abolishment of RPGT between the years 2008 and 2009. The RPGT

was then gradually increased again year-on-year starting from the year 2010 until it reached

its peak again in 2014.

Unfortunately for many Malaysia’s property developer, they may have to hold on to

their properties for longer than expected, which will affect those with no holding power.

Those who will be most affected will be those that own more than one investment property

and are not able to settle their monthly mortgage loans. Even as the age group for bankruptcy

cases decrease. This is a time where the number of bankruptcy cases may increase even more

dramatically as new projects are completed,

Some sellers or developers may decide to just sold their property at the best price they

can get; even if that means taking a loss in order to avoid bigger losses. After all, it is better

being able to sell at below market price and at the same time reduce your loss than being

labelled as a bankrupt and all the inconveniences that come with it. In a way, there is a

probability that upon more completion of new development the market may all of a sudden

be overwhelmed with exceptionally reasonable properties’ price. This is likewise similar to

the 'property bubble' that property specialists have been gauging for a very long time now.

The general accord of an addition in RPGT is that it won't hurt genuine purchasers or

investors. This is by large intended to prevent mass purchasing and causing property costs to

rise steeply. There are however several backlashes to this.

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 While this situation may not recognizably influence the market, there might be a

deferral in venture launches because of the moderate market sentiments. A case of this can be

seen in Twilight Residences in Section 13 of Petaling Jaya has now been postponed

inconclusively which should have been propelled in the second quarter of 2016.

On the off chance that the property market is to stagnate further after the 2017 budget

announcement, there might have less decisions for property purchasers due to more

development might be put off.

Direct proportion to the RPGT charged, as sellers transfer the cost to buyers may

cause price of the subsale rise in guide extent to the RPGT charged. He cost of RPGT may

need to bear by the purchasers who are extremely anticipating owning a home of an

especially new project.

The property developer will be not able sale without assuming a loss when the

development is recently finished because of RPGT if the advancement hasn't crossed the 5-

year mark, consequently they will pass the cost on to the purchaser.

All things considered, extraordinary compared to other parts about a stagnant property

market caused by a rised RPGT are the complimentary gifts and rebates that developers give

out trying to draw in purchasers, investor or buyer. It is amid this period that speculators with

holding power benefit the most, as they can get better deal while bargaining with developers.

Some more extraordinary offerings that designers are putting forth now incorporates

colored themes, for example at The Opus in Kuala Lumpur where the purchaser can pick a

lighter or darker color themes. Different attraction includes semi-furnished units where the

typical unit nowadays come with kitchen cupboards and hood and hob. A portion of the

higher end ones even gloat higher quality sterile product, for example, Roca and Hans Grohe.

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3. Effect Choosing Flat Interest Rate and Reducing Balance Rate for Property

Financing as an Investment.

There are pros and cons in choosing method for property financing for investment.

There are primarily two methods in applying for loan for property financing as an investment.

The methods are flat interest rate method and reducing balance rate.

In the most straightforward of terms, Flat Interest Rate is the kind of interest that will

remain the same on the principal loan amount, all through the loan tenure. This implies

whatever interest rate that you're charged at the time you take out the loan will remain

precisely the same as your last month's loan repayment.

Here's an extremely basic equation to compute Flat Rate Interest:

(Original Loan Amount x Number Of Years x Interest Rate Per Annum) ÷ Number Of

Instalments = Interest Payable Per Instalment

For example, you’re taking out a personal loan of RM50,000 with a flat rate interest of 7%

over 5 years.

(RM50,000 x 5 x 7%) ÷ 60 = RM292

Now, do note that this is just the interest per instalment, no matter how much you

have paid down on your principal loan amount. Logically speaking, your monthly instalment

from your loan amount of RM50,000 should be RM834 per month (RM50,000 ÷ 60 months).

Combining both of them (RM833 + RM292), you’ll be paying RM1,125 per month for your

loan repayment over the period of 60 months (5 years). At the end of your loan tenure, you

would end up paying 35% interest, which rounds up your repayment amount to RM67,500.

That’s RM17,500 more than what you originally borrowed.

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 Reducing Balance Rate are also known as the Diminishing Balance Rate. Reducing

Balance Rate benefits you as in you pay significantly less as your loan tenure passes by,

following the balance of the loan’s principal amount. As shown in the table, despite the fact

that your loan’s monthly payment may continue as before, the sum paid to both interest and

principal loan is distinctive every month on the grounds that the interest charged on the

principal loan amount gets lower every month as you keep on paying down the principal loan

amount.

The total interest paid at the end of your loan tenure will be RM9,404, with the total

repayment being RM59,404. That’s a difference of RM8,096 when you compare it to the Flat

Interest Rate option.

Although more calculations are needed for this type of interest – as you’ll need to

calculate it every month, but the formula is fairly simple:

Interest amount per instalment = Interest rate per instalment x Outstanding loan amount

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 As a conclusion, Flat Interest Rate are generally used in personal loans and hire

purchase loans. While Reducing Balance Rate are generally used in financial products

especially for housing or mortgage loans, property loan even overdraft facilities and credit

cards and is the preferred option to many compared to the Flat Interest Rate because it only

charges interest on your loan’s remaining balance.

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References

1. Real Property Gains Tax (RPGT) Act 1976 (online)

http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN/Act%2016

9%20-%20diluluskan%20TPPUU%2029_10_2015.pdf

2. Tax Brochure 2017 LHDMN-R/013/17: Real Property Gains Tax (RPGT) (online)

http://lampiran1.hasil.gov.my/pdf/pdfam/13_2017_2.pdf

3. Jo Yan Lim and Mak Ka Wai: Malaysia: Understanding How Real Property Gains

Tax (RPGT) Applies To You In Malaysia (online)

http://www.mondaq.com/x/469010/Understanding+How+Real+Property+Gains+

Tax+RPGT+Applies+To+You+In+Malaysia

4. Impact on RPGT in Malaysia (online)

(http://www.starproperty.my/index.php/articles/investment/budget-2017-impact-

on-rpgt-malaysia/

5. Financial News, Review and Advices (online)

https://www.comparehero.my/blog/how-to-calculate-flat-rate-interest-and-

reducing-balance-rate

6. Choong Kwai Fatt: Malaysian Taxation Principles and Practice 2016 Twenty

Second Edition

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