Most of us at some point in life would like to own a house(s). Most of us would also have moved house at some point in our life now. However, do you really know what are some of the tax implications of moving houses and selling off the previous residence?
Real Property Gains Tax (RPGT) in Malaysia is a tax levied upon disposal of a real property, mainly to do with land, paid to the IRB. Since it is paid upon disposal, it is applicable to the vendor of the transaction.
Under section 3 of the RPGT Act 1976, it states that
Real property is defined as “any land situated in Malaysia” and any interest, option or other rights in or over such land”. If you have any knowledge of the National Land Code, this includes leases, licenses and charges where you have “disposed” of them.
Depending on when you sell the piece of land, you will be charged different RPGT rates:
2. How is RPGT calculated?
In arriving the tax payable upon disposal, the following three-step equations are used.
Step 1: Chargeable Gain = Disposal Price – Purchase Price – Miscellaneous Charges
Step 2: Net Chargeable Gain = Chargeable Gain – Exemption waiver (RM10k or 10% of chargeable gain, whichever is higher)
Step 3: RPGT payable = Net Chargeable Gain x RPGT Rate
3. Items exempted from RPGT
Since RPGT is charged upon a gain from disposal, it is important to first determine when the acquisition and disposal actually happened, at what consideration both events were completed and whether a loss or gain was made. This is to prevent any fraud/ tax evasion because parties may purposefully conduct the transaction at below market value price to make what is actually a profitable transaction to a loss-making one and for the party to claim allowable losses. There are a few instances where you can get RPGT exemptions or deductions.
(a) Allowable loss is defined as under section 7 subsection (4)
And subsection (b) deals with where you have no gains to be reduced, it will be brought forward to subsequent years until the allowable loss has been fully absorbed, even if it was done 5 years after acquisition.
(b) Incidental cost: The RPGT Act 1976 allows certain incidental costs of the acquisition of the property and disposal of the property to be taken into account. This is where expenditure wholly and exclusively incurred by the disposer for the purposes of the acquisition or the disposal such as legal fees for the acquisition and disposal of the property and estate agency fees.
(c) No gain no loss: You also do not need to pay RPGT where acquisition cost equals disposal cost at which you are in a no gain no loss situation.
(d) Private residence: Accordingly, every citizen in Malaysia (and also PR residence) is entitled to a “once in a lifetime” exemption on disposal of a private residence. A private residence is 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.
Only residence/ persons are able to claim for this exemption. This does not apply to companies holding private residence.
(e) Transfer of property between family members as gifts
Transfer of real property as gifts between parent/ children, husband/ wife or grandparents/ child is also exempted.
For the donor, if he is a Malaysian citizen, he is deemed to have received no gain and suffered no losses.
For the receiver, if the gift is made within five years after the date of acquisition by the donor, the recipient shall be deemed to acquire the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor.
4. How is RPGT paid?
Upon disposal of a property, it is the duty on the part of the acquirer’s lawyers to retain and remit 3% of the purchase price from the deposit to the Inland Revenue Board (IRB) within 60 days upon disposal. If the 3% is found to be higher than the tax payable, the IRB will refund; If the 3% is lower than the tax payable, the vendor might be charged an additional penalty of 10% of the amount outstanding upon failure to furnish the outstanding amount within time.
It might be noteworthy to add that owing to the Finance Act 2017, the amount to be retained by the acquirer had increased from 3% to 7% of the purchase price where the vendor is not a Malaysian citizen nor a permanent resident.
Where a transaction is conducted consists not wholly in money, the acquirer shall either retain the whole of the money or a sum not exceeding 3% of the total value of consideration, whichever is lower.
After listening to a podcast on RPGT on BFM89.9, it is noted that RPGT contributes only 0.7% of the total revenue received by the government. That being said, it is reported that Capital Gains Tax will not include gains on shares in Budget 2018. This is to keep Bursa Malaysia competitive and attractive for investors thus the only Capital Gains Tax in Malaysia is only on Real Property at the moment.
To be honest, I am very much surprised by how little RPGT contributes to the government’s revenue considering that land prices can be very steep at times. I think this is the reason why there are many case law on even if people hold real property for more than 5 years, they may be charged the income tax rate of 24% as oppose to RPGT rate of 5% because they are deemed to be trading properties instead of investing. Note that the IRB does not consider 5 years to be a substantially long period for an investment. So take note of this if you plan to invest in real property in the future or else you might end up having to pay more than you think.