Copyright April 2010 by the Malaysian Institute of Accountants (MIA). All rights reserved. Permission is granted to make copies of this work provided

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1 MIA 6/2010 REAL PROPERTY GAINS TAX in Malaysia April 2010

2 Copyright April 2010 by the Malaysian Institute of Accountants (MIA). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal use and are not sold or disseminated and provided that each copy bears the following credit line: Copyright (Month and Year) by the Malaysian Institute of Accountants (MIA). All rights reserved. Used with permission of MIA. Contact for permission to reproduce, store or transmit this document. Otherwise, written permission from MIA is required to reproduce, store or transmit, or to make other similar uses of, this document, except as permitted by law. Contact

3 INTRODUCTION In the 2010 Budget Speech delivered on 23 October 2009, the Honourable Prime Minister and Finance Minister of Malaysia, Y.A.B. Dato Sri Mohd Najib bin Tun Abdul Razak has proposed to re-impose the Real Property Gains Tax ( RPGT ) of 5% on gains from the disposal of real property with effect from 1 January Subsequently, an announcement was made on 28 December 2009 to reaffirm that with effect from 1 January 2010, chargeable gains from the disposal of real properties which are held for more than 5 years will be exempted from the Real Property Gains Tax of 5%. This exemption is applicable on gains from all types of real property including shares in real property companies disposed of by all categories of property owners including individuals (citizens, permanent residents, non citizens and non permanent residents of Malaysia), companies as well as other property owners. Revisiting History of RPGT in Malaysia The first legislation to tax gains from the disposal of real property was introduced via the Land Speculation Tax Act 1974 ( LSA ) which came into force on 6 December LSA was introduced to curb speculation on immovable property. The Act provided for a single tax rate of 50% on chargeable gains in properties disposed of within two years from the date of acquisition and if the disposal consideration was greater than 200,000. The LSA was, however, repealed in 1975 and replaced by the Real Property Gains Tax Act 1976 ( RPGTA ) effective from 7 November In accordance with the RPGTA, resident individuals were taxed at rates of 0% to 30% and companies were taxed at rates of 5% depending on the holding period. However, an individual who is not a Malaysian citizen or permanent resident will be charged at the rate of 30% of gains made from the disposal of the asset. Effective 1 April 2007, the Government has exempted all persons from the provisions of the RPGTA on assets disposed after 31 March All disposals occurring from 1 April 2007 will be exempted from the real property gains tax and there are no requirements to file the relevant forms for any sale and purchase of property to the Inland Revenue Board ( IRB ). Pursuant to the Budget 2010, the Government re-introduced RPGT to be imposed on gains from the disposal of real property with effect from 1 January

4 Meaning of Real Real Property Property In a nutshell, the term real real property property includes any landed property in Malaysia such as residential properties (apartments, condominiums and houses), commercial properties (factories, office buildings, shop houses) and land. Section 2 of the RPGTA defines real property to mean any land situated in Malaysia Ma and any interest, option or other right in or over such land. Land is defined in Section 2 of the Act to include: a. the surface of the earth and all substances forming that surface; b. the earth below the surface and substances therein; c. building on land and anything attached to land or permanently fastened to anything attached to land (whether on or below the surface); 2 d. standing timber, trees, crops and other vegetation growing on land; and e. land covered by water.

5 The Budget 2010 Highlights on RPGT The following exemptions for individuals under the RPGTA are retained:- gifts between parent and child, husband and wife, grandparent and grandchild; and disposal of a residential property once in a lifetime for an individual who is a citizen or permanent resident of Malaysia The Budget proposals on RPGT are tabulated below: Description Submission of return Budget 2010 Proposal To be furnished to the IRB within 60 days from the date of disposal. RPGT rate 5% regardless of the holding period (subsequently changed to 5% on the disposal within 5 years). Exemption for individual Exemption of 10,000 or 10% of the chargeable gain, whichever is greater. Tax relief Tax relief for loss on disposal is to be replaced by the claim of allowable loss arising from the disposal of chargeable assets against chargeable gains from subsequent disposals. Any unabsorbed allowable loss can be carried forward for offset against future chargeable gain until it is fully utilised. Tax relief prior to 1 April 2007 Tax relief brought forward from disposals made prior to 1 April 2007 is allowed to be utilised for deduction from tax assessed after 31 December Withholding tax The acquirer is required to withhold either the whole amount of money received or 2% of the total value of the consideration, whichever is lower and remit it to the IRB within 60 days from the date of disposal. A penalty of 10% on that sum will be imposed on the acquirer for late payment. An illustration on the computation is included in Appendix [Example 3 & 4] of this publication. Interest incidental cost The interest paid to finance the acquisition of a chargeable asset is no longer to be regarded as an incidental cost of acquisition of chargeable asset. Filing of return Taxpayers will be allowed to file the RPGT returns electronically. Certificate of clearance The certificate of non-chargeability will be issued to disposer for cases with no chargeable gain. 3

6 Amendments to Provisions within RPGTA Real Property Gains Tax (Exemption)(No. 2) Order 2009 [P.U.(A) 486/2009] NEW Disposal of Chargeable Asset Held After 5 years This Order specifies that any person is exempted from the payment of tax on the chargeable gain in respect of any disposal of a chargeable asset on or after 1 January 2010 where the disposal is made after five years from the date of acquisition of such chargeable asset. Disposal of Chargeable Asset Held Within 5 years Where the disposal of a chargeable asset is made within five years from the date of the acquisition of such chargeable asset, this Order is applied to compute the amount of exemption to be deducted from the chargeable gain in respect of the disposal of such chargeable asset on or after 1 January The amount computed shall be determined in accordance with the following formula: A B x C where, A is the amount of tax charged on the chargeable gain on the person at the appropriate tax rate reduced by the amount of tax charged on such chargeable gain at the rate of five percent; B is the amount of tax charged on such chargeable gain at the appropriate tax rate; C is the amount of such chargeable gain. An illustration on the computation of RPGT for disposal of chargeable asset held within 5 years is included in Exhibit B, Example 1 of this publication. 4

7 Exemptions Available under the RPGTA The following exemptions are available in respect of disposal of real properties: Schedule 4 Exemption A gain arising on disposal prior to 7 November 1975, the date of coming into force of the RPGTA. An amount of 10,000 or 10% of the chargeable gain, whichever is greater for each disposal of a property by an individual. However, the asset cannot be part of larger chargeable asset at time of disposal). A gain accruing to the Government, a State Government or a local authority. A gain equal to the amount of estate duty payable where the disposer is compelled to dispose the property in order to pay the estate duty. Paragraph 12, Schedule 2 Exemption Transfer as gifts between husband and wife, parent and child or grandparent and grandchild. Paragraph 3(b), Schedule 2 Exemption Transfer of assets between spouses. Transfer of assets to a company (whether or not resident in Malaysia) by an individual who controls the company by himself or by his wife or jointly or with a connected person (relatives) and where the consideration consist of at least 75% of shares of the company and the balance of a money payment. Paragraph 17, Schedule 2 Exemption Transfer of asset between companies in the same group to bring about greater efficiency in operation for a consideration consisting of not less than 75% shares in the transferee company and the balance of a money payment. Transfer of asset between any companies for any consideration in any scheme of reorganization, reconstruction or amalgamation whereby the transferee company is being restructured to implement any such scheme in compliance with the Government policy on capital participation in industry. Distribution of asset by a liquidator of a company and the liquidation of the company was made under a scheme of reorganization, reconstruction or amalgamation whereby the transferee company being restructured to implement any such scheme in compliance with Government policy on capital participation in industry. However, the above transactions must have the prior approval from the Director General of Inland Revenue ( DGIR ) and if he is satisfied that the scheme or arrangement involving the transfer or distribution of ownership of the asset to a company resident in Malaysia is in accordance with the existing government policy on capital participation in industry. Para 3(a), Schedule 2 Exemption The devolution of the assets from a deceased person to his executor or legatee. Private residence Exemption Disposal of a residential property once in a lifetime by an individual who is a citizen or permanent resident of Malaysia. 5

8 RPGT Rates Schedule 5 of the RPGTA sets out rates of tax as follows: Part I Except where Part II or Part III is applicable, the following rates of tax shall apply: Category of disposal Rate of tax Disposal within two years after the date of acquisition of the chargeable assets 30% Disposal in the third year after the date of acquisition of the chargeable asset 20% Disposal in the fourth year after the date of acquisition of the chargeable asset 15% Disposal in the fifth year after the date of acquisition of the chargeable asset or thereafter 5% Part II In the case where the disposer is a company, the following rates of tax shall apply: Category of disposal Rate of tax Disposal within two years after the date of acquisition of the chargeable asset 30% Disposal in the third year after the date of acquisition of the chargeable asset 20% Disposal in the fourth year after the date of acquisition of the chargeable asset 15% Disposal in the fifth year after the date of acquisition of the chargeable asset or thereafter 5% Part III In the case of an individual who is not a citizen and not a permanent resident, the following rates of tax shall apply: Category of disposal Rate of tax Disposal within five years after the date of acquisition of the chargeable asset 30% Disposal in sixth year after the date of acquisition of the chargeable asset or thereafter 5% 6

9 Tax Administration Types of Forms (w.e.f 1 January 2010) Every disposer and acquirer is required to submit the completed RPGT return to the tax authorities within 60 days from the date of disposal. A. Disposer s Responsibilities Type Description Remarks CKHT 1A Disposal of real property CKHT 1B Disposal of shares in the properties company CKHT 3 Note: Must be submitted together with CKHT 1A or 1B A copy is given to the acquirer and must be submitted together with CKHT 2A CKHT 3 form is to be completed when the acquirer is not required to remit 2% of the total value of the consideration or the whole amount of money received, whichever is lower on the following disposal:- Disposal of 5 years from the date of acquisition Private residence exemption paragraph 9, Schedule 3 (Section 8) of RPGTA No gain or no loss transaction - exemption under Paragraph 12, Schedule 2 of RPGTA CKHT 501 Remittance slip RPGT payment B. Acquirer s Responsibilities Type Description Remarks CKHT 2A Acquisition of real property/ shares in the properties company CKHT 502 Remittance slip Payment under Section 21B of RPGTA (remit sum of money received or 2% of the total consideration whichever is lower within 60 days from the date of disposal) The above RPGT returns can be obtained from the IRB s website 7

10 Exhibit A Format of RPGT Computation Disposal of Chargeable Asset Held Within 5 Years Note Consideration received x Less: Incidental cost 1 (x) Permitted expenses 2 (x) Disposal Price LESS: Consideration paid x Add: Incidental cost 1 (x) Recoveries 3 (x) Acquisition Price Ref x x Chargeable gain / Allowable loss 4 x Less: Exemption under Paragraph 2, Schedule 4 (for individual) 10,000 or 10% of chargeable gain whichever higher Less: Allowable loss (restricted to (a)) Less: Exemption Order P.U. (A) 486/2009 [ (A x B%) - (A x C%) ] x A A x B% A = chargeable gain B = appropriate tax rate in accordance to the holding period of the real property as specified in Schedule 5, RPGTA C = 5% Chargeable gain to be taxed (c) x Tax payable [ (c) x B% ] 0.00 Less: Tax relief (disposal made prior to ) 0.00 Net tax payable 0.00 Allowable loss carried forward,, if any x Tax relief carried forward,, if any x (a) (b) (x) x (x) x (x) Note:- 1. Incidental cost comprise of: Legal fees Stamp duty Advertisement Tax agent fees Commission Valuation fees (excluding interest expense) 2. Permitted expenses comprise of: Enhancement cost (construction, extension, renovation) Legal fees in defending land/property title 3. Recoveries comprise of: Compensation received for damages Compensation received from insurance for damages Forfeiture of deposit from an intended purchase 4. a) Chargeable gain = disposal price acquisition price (if disposal price > acquisition price) b) Allowable loss = acquisition price disposal price (if disposal price < acquisition price) 8

11 Exhibit B Illustration of RPGT Computation (Source : IRB website Example 1 ZZ Sdn Bhd bought a shophouse on for 240,000; sold on at 300,000; holding period 3 years (applicable rate will be 20%) Consideration received 300,000 Less: Consideration paid (240,000) Gain on disposal 60,000 Less: Exemption P.U. (A) 486/2009 (60,000 x 20%) (60,000 x 5%) x 60,000 (60,000 x 20%) (45,000) Chargeable gain to be taxed 15,000 RPGT payable [15,000 x 20%] 3, Example 2 Same fact as Example 1. However the shophouse was sold on (i.e. 5 years after the date of acquisition). Consideration received 300,000 Less: Consideration paid (240,000) Chargeable gain to be taxed 60,000 Amount exempted from RPGT [60 60,000 x 5%] 3, Example 3 Disposal price on : 100,000 (in cash) 2% of the total consideration or money received : 2,000 (whichever is lower) If the acquirer fails to remit 2,000 to the IRB within 60 days from the date of disposal, a penalty of 200 (2,000 x 10%) will be imposed. Example 4 Same fact as Example 3. However, the disposal price consists of shares and balance in cash. Disposal price on : 100,000 1,000 in cash 99,000 in share 2% of the total consideration or money received : 1,000 (remit to the IRB) 9

12 Exhibit B (continued) Illustration of RPGT Computation (Source : IRB website Example 5 a. Aishah bought a piece of land in Alor Setar for 350,000 on and disposed of on for 300,000. Consideration received (cash) 300,000 Less: Incidental cost (legal fee and advertisement) ( 2,000) Disposal price on ,000 Less: Acquisition price on Consideration paid 350,000 Add: Transfer cost 4,500 (354,500) Allowable loss (56,500) b. On Aishah has bought another piece of land in Kulim for 255,000 and subsequently disposed on (which is subject to RPGT) for 500,000. Consideration received (cash) 500,000 Less: Incidental cost (legal fee and advertisement) ( 3,000) Disposal price on ,000 Less: Acquisition price on Consideration paid 255,000 Add: Transfer cost 45,000 (300,000) Chargeable gain 197,000 Less: Exemption Para. 2, Schedule 4 (10,000 or 10% of 197,000) (19,700) Chargeable gain 177,300 Less: Allowable loss brought forward ( 56,500) Chargeable gain to be taxed 120,800 Amount exempted from RPGT (120,800 x 5%) 6,

13 Exhibit B (continued) Illustration of RPGT Computation (Source : IRB website Example 6 a. DEF Sdn Bhd has disposed of a piece of land at 1,300,000 on The land was purchased on at the price of 800,000. Consideration received 1,300,000 Less: Incidental cost (legal fee and advertisement) ( 50,000) Disposal price on ,250,000 Less: Acquisition price on Consideration paid 800,000 Add: Transfer cost 20,000 (820,000) Chargeable gain 430,000 Less: Exemption P.U. (A) 486/2009 (430,000 x 30%) (430,000 x 5%) x 430,000 (430,000 x 30%) (358,333) Chargeable gain to be taxed 71,667 RPGT payable (71,667 x 30%) 21, b. DEF Sdn Bhd acquired a factory on at a purchase price of 1,000,000 and sold the factory on for 700,000. Consideration received 700,000 Less: Incidental cost (legal fee and advertisement) ( 25,000) Disposal price on ,000 Less: Acquisition price on Consideration paid 1,000,000 Add: Transfer cost 50,000 (1,050,000) Allowable loss (375,000) Note: The allowable loss arising from the second disposal within the same year cannot be offset against the chargeable gain arising from the first disposal. This is due to the asset in the second disposal being held more than five (5) years. 11

14 Exhibit B (continued) Illustration of RPGT Computation (Source : IRB website Example 7 a. Latif bought a two-storey terrace house on for 120,000 and disposed of on for 100,000. Disposal price on ,000 Less: Acquisition price on (120,000) Loss on disposal ( 20,000) Tax relief carried forward (20,000 x 30%) 6, b. On , Latif has disposed of a piece of land at 200,000 which he bought at a price of 150,000 on Disposal price on ,000 Less: Acquisition price on (150,000) Chargeable gain 50,000 Less: Exemption Para. 2, Schedule 4 (10,000 or 10% of 50,000) (10,000) Chargeable gain 40,000 Less: Exemption P.U. (A) 486/2009 (40,000 x 20%) (40,000 x 5%) x 40,000 (40,000 x 20%) (30,000) Chargeable gain to be taxed 10,000 RPGT payable (10,000 x 20%) 2, Less: Tax relief YA 2006 (restricted to) (2,000.00) Net RPGT payable Nil Tax relief brought forward 6, Less: Amount utilised (2,000.00) Tax relief carried forward 4, Note: The Inland Revenue Board (IRB) has recently issued a guideline on Real Property Gains Tax which explains the amendments on the Real Property Gains Tax Act 1976 and sets out the procedure for submission of RPGT return forms and payments. This guideline is available at the IRB s website 12

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