Some smart tax savings after the 2010 budget

Confused by RPGT? Intricacies of RPGT explained by a tax expert

After an absence of three years, real property gains tax has been reintroduced. Bad news for some, but it is not all doom and gloom on the tax front. Would-be investors should not be put off because there is plenty of good news, and that is what I want to tell you about.

The new-style real property gains tax is less painful than the earlier version

The tax applies to all disposals of real property from January 1, 2010 but only where the property was acquired within five years before the date of disposal. The most obvious tax saving strategy is just to postpone the disposal until the five-year period has expired as there will then be no tax to pay.  Normally, you can plan this exactly, but there are exceptions. 

The seller’s disposal date, as well as the buyer’s acquisition date, is normally the day when the sale and purchase agreement (SPA) is signed. For the seller, the two relevant dates are the date of his disposal and his original acquisition. However, if there is no SPA, the disposal (and the corresponding acquisition) is deemed to take place on the date when the ownership is transferred to the acquirer or when the whole of the purchase consideration has been received by the acquirer, whichever is earlier. Even when there is a SPA, if there are prior conditions to be fulfilled such as the exercise of an option or the obtaining of official consents, the disposal date (and the corresponding acquisition date) will be pushed forward until the conditions are fully satisfied. It is worth understanding how this works so that you do not get caught out. A miss is as good as a mile! 

What is also good news is that everybody gets an exemption capping the final tax rate at only 5% of the amount of the chargeable gain. (A chargeable gain is the excess of the disposal price over the acquisition price after taking into account adjustments for allowable costs). For many, this is much better than the previous system under which rates were as high as 30% in the initial years of ownership. It is particularly good news for companies. At that time only individuals ceased to be liable for tax after five years of ownership. Individuals who are non-citizens and non-residents will also benefit. Previously they were liable to tax at 30% throughout the first five years of ownership.

Beware though. The exemption capping the tax rate at 5% for all is given under a statutory order but the Real Property Gains Tax Act 1976 itself still provides for tax at rates of up to 30%. Withdrawing the exemption at some point in the future would be a very simple matter so it is unwise to assume that either the five-year period or the 5% rate is set in stone. These are the tax rates that would apply in the absence of the statutory order:

The separate exemption given to a resident individual on each disposal has been improved. Now, it is  RM10,000 (previously RM5,000) or 10% of the chargeable gain whichever is greater. This means that the effective rate of tax is never more than 4.5%, and it might be considerably less if the chargeable gain is below RM100,000. For individuals who habitually book properties on new launches, doing the sums might well show that any real property gains tax payable on a disposal within five years of acquisition will be less than the cost of holding on to the property.

An example might help to illustrate this:

One tax-planning route still left open to individual taxpayers is to claim the once only exemption for a gain on the disposal of a private residence within five years of the date of acquisition and pay no tax. Provided that the building is occupied or certified fit for occupation as a residence, the owner need not have occupied it himself. There are other hurdles to overcome but the main consideration here must be weighing up the advantage of saving 5% tax on the current disposal against the loss of opportunity to use the exemption ever again during your lifetime. The gain might be much larger (and the tax rate may be higher) when the next opportunity comes along!

Enjoy a stamp duty exemption for a Green Building Index certificate.

The certificates are awarded to developers of residential and other properties who adhere to certain environmentally friendly building methods. Besides giving a tax break to the developer, they can benefit the buyer of a property by exempting him from stamp duty on a proportion of the purchase price. The proportion is based on the additional cost incurred by the developer to obtain the green certificate. As the highest rate of stamp duty on the transfer of property is 3%, charged on values in excess of RM500,000, this could give the buyer a useful tax saving.

Investment in REITs is tax-efficient.

The special tax rate on income distributions to non-corporate investors has been maintained at the reduced level of only 10% up to the end of 2011. After that it is likely to go back to the 20% rate that applied before 2009. The tax is deducted at source.

REITs, or real estate investment trusts, are quoted funds set up for the purpose of investing in real property, usually commercial buildings, for income. The investor buys or subscribes for units on which he can expect to be paid an income, based on the income earned from rents and other property income. In spite of the 10% deduction at source, it is a tax-efficient investment by comparison with a direct interest in property because 10% is all the tax there is to pay. The income of the REIT itself is exempted from tax provided that 90% of the income is distributed to unit holders every year. Also there is no stamp duty for the investor to pay on acquiring the investment nor real property gains tax on disposal.