Understanding Malaysian Property Taxation

13 October 2012 TST Consultants Sdn Bhd 1

Malaysian Property Taxation

Prepared By

Dr Tan Thai Soon

Singgahsaan Hotel, PJ

13 October 2012

1


Disclaimer All content on this presentation is for general information and educational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of professional advice. The presenter disclaims all responsibility for any losses, damages suffered directly or indirectly from reliance on such information.


Chapter 1. Real Property Gains Tax (RPGT)

Chapter 2. Real Property Companies (RPC) &

RPC Shares (RPGT)

Chapter 3 Income from Letting of Real Property

(IT)

Chapter 4. Invest Holding Companies

Chapter 5. RPGT Vs IT


An Overview of Property Tax

Transactions On Real Assets On RPC shares

Chargeable Gains Capital Gains/

RPGT

Revenue Gains/

ITA

Rental Income Non-business source/

S4(d)

Business source/

S4(a)

Deductibility Direct Expenses Indirect expenses/

Permitted expenses


Part 1

Real Property Gains Tax


1.0. Historical Developments of RPGT

1976 RPGT Act.1976 was introduced

(Effective from 7-11-1975)

1988 Impose liability on gains on the disposal of

shares in "Real property Companies”


2004

Budget

The Minister provides exemption to the RPGT

on disposal of chargeable assets for a limited

period

(From 1-06-2003 to 31-5-2004)


1.0. Historical Developments of RPGT

2007 The Minister exempts all persons from the RPGT Act 1976 in

respect of any disposal of chargeable assets


(RPGT Exemption)

2010

Budget

The Minister reinstated the RPGT. All persons are subject to

RPGT gains on disposal of chargeable assets within 5 years

period.



Chargeable Concepts-Chargeable persons

Chargeable Person (CP)

Chargeable Gain (CG)

Chargeable Asset (CA)

TST © 2010

RPGT


Chargeable Persons (S6, Schedule 1)

Resident individual & company,

Non-resident individual

Body of persons, partnerships

Co-proprietorship, and

executors and trustees

Limited liability partnership (Budget 2013)


Chargeable Concepts




TST © 2010

RPGT


Chargeable Assets –S3(1)

A) Real Property; and

B) Shares in Real Property Companies


Chargeable Concepts




TST © 2010

RPGT


Chargeable Gains & Allowable Losses (S7)

Disposal Price > Acquisition Price

= Chargeable Gain

Disposal Price < Acquisition Price

= Allowable Losses

Disposal Price = Acquisition Price

= No Gain or Loss


RPGT Flowchart A. Ascertain the “Acquisition price”

B. Ascertain the “Disposal Price”

C. Determine the “Chargeable Gains/Loss”

Computation

of RPGT

Submission

of Return

DP > AP

DP ≤ AP

No RPGT

Exemption

Under RPGT

No RPGT

CP

CA

CG/

CL

Abbreviations:

CP : Chargeable person

CA : Chargeable Assets

CG : Chargeable Gains

DP : Disposal Price

AP : Acquisition Price

TST © 2010


A) Acquisition Price Acquisition Price

Add:

Incidental acquisition expenses, fees xx

Commission, to surveyor, valuer, xx

Stamp duty, advertising costs and legal fees xx

XX

Less:

Compensation monies received in respect of damage to asset. (xx)

Insurance monies received for damaged asset (xx)

Deposits forfeited in respect of abortive sale (xx) (xx)


B) Disposal Price RM

Disposal Price (S & P Price) xx

Less:

Expenses incurred in improving

or preserving the asset xx

Expenses incurred in establishing,

preserving or defending title to asset xx

Incidental expenses such as fees,

commission, to surveyor, valuer,

Stamp duty, advertising costs and legal fees xx

xx


C. Chargeable Gains (Loss)

Disposal Price X

Less: Acquisition Price X

Chargeable Gains (Loss) X


Time of accrual of chargeable gains-Para.14 Sch.2

The chargeable gain is deemed to accrue to disposer at the time of the disposal

Whether the consideration has been received


Acquirer’s default in payment- Para.18 Sch.2

In the event of default in payment

Disposer may appeal to DG for CG to be adjusted accordingly


Exemption

A. Basic exemption (Sch.4)

B. Exemption-Special cases (Sch.2 Para.3)

C. Exemption - Transfer of CA between companies in “same group”

(Sch.2 Para.17)

D. Exemption – Estate Duty (Sch.4. Para.4)

E. Exemption – Government Bodies (Sch.4. Para.3)

F. Private Residence (Section 8)

G. Gifts Between H & W, parent & child or Grandparent & grant child

(Sch.2 Para12)


RPGT Flowchart

Computation

of RPGT

Basic

Exemption

DP > AP

DP ≤ AP

No RPGT

Exemption

Under RPGT

No RPGT

CP

CA

CG/

CL

Abbreviations:

CP : Chargeable person

CA : Chargeable Assets

CG : Chargeable Gains

DP : Disposal Price

AP : Acquisition Price

TST © 2010

Submission

of Return


A. Basic Exemption Sch.4 Para.2

10% of chargeable gain or RM10,000

(whichever is greater for individuals)


B. Exemption - Specific Cases (Paragraph 3, Schedule 2)

Disposal Price =Acquisition price

DP = AP Para.3(a) A devolution of asset under a will (from deceased to executor)

Para.3(c) Transfers to a nominee or trustee

Para.3(d) Conveyance or transfers as security

(including transfer and re-transfer on the redemption)

Para.3(e) Transfers as gifts to the Government, a State Government, a local authority or a charitable institution

Para.3 (f) Transfers due to compulsory acquisition under any law


B. Exemption – Family control company

Para.3(b) Sch.2

1. Transferred to a controlled company by an individual

or his wife or both or a connected person (spouse’s

brother, sister/ whether or not resident in Malaysia)

2. Where the consideration is shares in the company or

“substantially of shares” ie. not less than 75% in

shares


C. Exemption - Transfer of CA between companies in “same group” (Para.17 Sch.2)

a Para.17(1)(a) To enhance greater efficiency in operations

(the consideration is substantially of shares )

b Para.17(1)(b)

In a scheme of reorganization, reconstruction or

amalgamation

c Para.17(1)(c)

By a liquidator in a scheme of reorganization,

reconstruction or amalgamation

All the above The transferee company must be resident in Malaysia

Prior approved of the DGIR must be obtained

For (b) & (c ) To a resident company which is restructured

In accordance with Government policy on capital

participation in industry.


D. Exemption – Estate Duty

Estate Duty-Para.4, Sch.4

In a case where an asset is disposed because the

disposer is compelled to dispose a property in order to

settle estate duty. The exemption is equal to the amount of

estate duty.

Estate duty was abolished from 1 November 1991


E. Exemption – Government Bodies

Exemption for Government Bodies-Para.3, Sch.4

Chargeable Gains of the Government, State Government or a local authority.


F. Private Residence-Section 8 Gains arising from the disposal of private residence

By citizen or permanent residence

Exempted.

Exemption is limited to one unit only-Para.9(1),Sch.3

Elect an exemption and specifying which asset

No further exemption in respect of any other private residence, and

Made in writing and the election shall be irrevocable.


G. Gift-Para. 12 & 19, Sch.2 A chargeable asset given as a gift is deemed to have

been disposed of at market value.

However, a gift between husband and wife, parent and child, grandparent and grandchild made within five years after the date of acquisition of the asset by the donor. ( no gain or loss for the donor). There is no need to make any election for the exemption.

The acquisition price for the donee is the donor’s acquisition price plus permitted expenses.


Amount

withhold

Acquirer responsibility (e.g. purchaser’s lawyer)

To retain either the whole of the cash consideration or

a sum not exceeding 2% of the total consideration

whichever is less.

Period Remit to LHDN within 60 days from the date of

disposal

Penalty Failure to comply

10% penalty will be imposed to the purchaser.

Withholding Monies-W.E.F 1/1/2010


Example

Non cash consideration RM495,000

Cash consideration RM 5,000

Total Consideration RM500,000

2% of RM500,000 RM10,000

Tax Remitted (Max cash consideration) RM5,000


Part I, II and III, Schedule 5 Scale Rates still applicable, subject to “special

formula”

Type of disposal Company Citizen

or PR

Not Citizen

& Not PR

Disposal within 2 years after date of acquisition 30% 30% 30%

Disposal in the 3rd year 20% 20% 30%

Disposal in the 4th year 15% 15% 30%

Disposal in the 5th year 5% 5% 30%

Disposal in the 6th year and thereafter 5% 0% 5%


Effective RPGT Rate

-Companies, Individuals and Non-citizen individuals

2010 2012 2013

Disposal within 2 years 5% 10% 15%

Disposal in the 3rd, 4th or 5th year 5% 5% 10%

Disposal more than 5 years 0% 0% 0%


Special Formula for exemption

W.E.F 1 January 2010 & therafter

RPGT (Exemption) Order 2/2009 (PU(A) 486/2009) & 2011

Formula A/B x C

A Chargeable gain x scale rate

Less chargeable gain x effective rate

B Chargeable gain x scale rate

C Chargeable gain

Disposal on the sixth year

For both individual or company disposal on the 6th year and

thereafter is nil.


Example: YA 2012 : Disposal on third year

Disposal (3rd yr=20%) RM300,000

Acquisition RM250,000

Chargeable gain RM 50,000

Sch 4 exemption RM 10,000

Net chargeable gain RM 40,000

A RM40,000x20%-RM40,000x5% RM 6,000

B RM40,000x20% RM 8,000

C RM40,000 RM40,000

Exemption A/B x C=6,000/8,000x40,000 RM30,000

Tax Payable Net chargeable gain 40,000

Less: exemption 30,000

10,000 x 20%

RM2,000


Example: YA 2012: Disposal on second year

Disposal (2nd yr=30%) RM300,000

Acquisition RM250,000

Chargeable gain RM 50,000

Sch 4 exemption RM 10,000

Net chargeable gain RM 40,000

A RM40,000x30%-RM40,000x10% RM 8,000

B RM40,000x30% RM 12,000

C RM40,000 RM40,000

Exemption A/B x C=8,000/12,000x40,000 RM26,667

Tax Payable Net chargeable gain 40,000

Less: exemption 26,667

13,333 x30%

RM 4,000


Submission of Return Forms

S&P Agreement Within 60 days of an agreement to dispose, submit to the

IRD Board

Transaction in

Real Asset

CKHT 1A –by a seller

CKHT 2A –by a purchaser + CKHT 502 (2%)

Transaction in

RPC Share

CKHT 1B – by a seller of RPC shares

CKHT 2A – by a purchaser of RPC shares +

CKHT 502 (2%)

Not Taxable CKHT 3- by a seller (not Sto RPGT/ with CKHT 1A or 1B)

Private Resident Statement of Private Resident exemption

Statement of

Assessment

CKHT 605A

Notice of

Assessment

Form K -Payment within 30 days (CKHT501))


Part 2

Income from Letting of Real Property


2.1. Rental Income

Public Ruling No.4/2011 (effective for YA 2011)

• rent as a non-business income source-S4(d);

• rent as business income source-S4(a);

• how all properties are to be grouped

Commencement date of letting of real property

Allowable expenses and non allowable expenses


2.2. Rent as a business source

Maintenance services or support services

“Comprehensively” and “actively” provided

actively provided and not passively


2.2.1. Maintenance services or support services comprehensively

Maintenance of structural elements of the building; and

Maintenance of the exterior parts of the property

(Security services only is not sufficient)

2.2.2. Services actively provided

Provides himself; or

Hires another person or firm to provide maintenance services

See example in 2.2.3


2.2.3 Example of business source/ S4(a)

1 Block of

condominium

Maintenance of lift, cleaning, security,

Maintenance of playing fields and car parks

4-storey building

32 units

Maintenance of structure building, lift, cleaning,

and area outside the building

office building

42 units

Cleaning inside and outside of building

Centralized air conditioner,

Maintenance of car park and security services

1 unit Bungalow

With 15 rooms

Maintenance of structure building, cleaning, and

area outside the building

Maintenance of garden & security services


2.3.Rental as a non-business source

Without providing maintenance services

Income is charged under S4(d)

2.3.1. Rental as a non-business source

-with passive maintenance services

Maintenance service are passively derived

Let out 2 apartments, and maintained by joint management corporation

Income charge under S4(d)


2.3.2. Example of Non-business source

I Block of office

building

Only provides security services

5-storey building

Without maintenance services

5-storey building Maintenance service provided by third

party company


2.4. Letting to related parties

Considered as business source (include

maintenance and services)

If not at arm’s length (IRD would adjust the

rental payment)


2.5.1. Commencement date of letting of real

property under S4(d)

Date the property is lets out for the first time

Expenses before commencement date is not allow

Advertisement

Date

Date available

for letting Date of letting Commencement

Date of letting

1.9.2010 1.11.2010 1.2.2011 1.2.2011


2.5.2. Commencement date of letting of real

property under S4(a)

Date the property is made available for letting

Advertisement to obtain the first tenant is not

allowable

Advertisement

Date Date available

for letting

Date of letting Commencement

Date of letting

1.4.2010 1.6.2010 1.8.2010 1.6.2010

1.4.2010 1.6.2010 1.1.2011 1.6.2010


2.6. Rental income source

• Rental grouped under single business source-S4(a)

• Rental grouped under single non-business source-S4(d)

• Mixture of rental business source and non-business source

• Mixture of enterprises business income and rental income


2.6.1. Rental grouped under single business source-S4(a)

Example:

Real Property

S4(a) source

Gross Income

(RM)

Allowable

expenses (RM)

Capital

Allowance (RM)

Building A

60,000 14,000 7,000

Building B

10,000 12,000 3,000

Total 70,000 26,000 10,000

Answer: RM

Gross income from rental 70,000

Less: Allowable expenses 26,000

Adjusted income 44,000

Less: Capital allowance (furniture) 10,000

Statutory income from rental 34,000


2.6.2. Rental grouped under single non-business source-S4(d)

Example:

Real Property

S4(d) source

Gross income

(RM)

Allowable expenses

(RM)

Terrace house 12,000 3,000

Apartment 9,000 11,000

Shop house 24,000 8,000

Vacant land 1,500 1,800

Total 46,500 23,800

Answer: RM

Gross income from rental 46,500




2.6.3.Mixture of rental business source and

non-business source

Example

Real Property

S4(a) source

Gross income

(RM)

Allowable

expenses (RM)

Capital allowances

(RM)

Building A 60,000 14,000 7,000

Building B 10,000 12,000 3,000

Total 70,000 26,000 10,000

Real Property

S4(d) source

Gross income

(RM)

Allowable

Expenses (RM)

Capital

allowances (RM)

Terrace House 8,000 11,000 -

Apartment 6,000 4,000 -

Total 14,000 15,000 -


2.6.4. Computation of rental business source and non-

business source

Answer:

.

RM RM

Statutory business source-S4(a)

Gross income 70,000



Less: Capital Allowance 10,000

Statutory income 34,000

Statutory non-business source-S4(d)

Gross income 14,000


Adjusted loss (1,000) Nil

Aggregate income/Total income 34,000


2.6.5. Comments

The adjusted loss from non-business source

amounting to RM1,000 cannot be deducted

against statutory business income

RM1,000 is not allowed to be carried forward to

the subsequent year.


2.6.6.Mixture of enterprises business income

and rental income

Example

Source of income Adjusted income

(RM)

Adjusted loss

(RM)

Capital

Allowance (RM)

Business enterprises 100,000 - 15,000

4-Storey building

S4(a)

- (10,000) 5,000

Terrace House

S4(d)

- (3,000) -


2.6.6. Computation of business enterprises/rental income

Answer:

The total income is calculated as follows:

RM RM

Business enterprises –S4(a)


Less Capital allowance 15,000

Statutory income 85,000

Rental business source-S4(a)

Adjusted loss (10,000)

Less: capital allowance 5,000

Statutory income Nil

Rental non-business source-S4(d)

Adjusted source (3,000)

Statutory income Nil

Aggregate income 85,000

Less: Current year business loss (10,000)

Total income 75,000


2.6.6. comments

Current year business loss of RM10,000 is allow

to deduct from aggregate income, and the

capital allowance of RM5,000 which cannot be

absorbed is carried forward to subsequent YA

Current year non-business loss of RM3,000

cannot be deducted against the aggregate

income and be written off.


2.6.7. Deduction of direct expenses from

income under S4(d)

Assessment and quit rent

Interest on loan

Fire insurance

Expense on rent collection fee

Expenses on rent renewal

Ordinary repair


Example: rental income RM RM

Rental (3000x12) 36,000

Less: Adjustment

Assessment 2,400

Insurance 1,100

Quit Rent 800

Repair & maintenance 2,500

Bank interest 12,000 18,800



2.6.8. Rental income received in advance

Rental received in advance is treated as gross

income for the basis period in which it is

received,


2.6.8. Example of advance rental for 1 house

Income/

Expenses

31.12.2011

(RM)

31.12.2012

(RM)

31.12.2013

(RM)

Rental income 36,000 - -

Expenses 4,000 5,000 3,000


2.6.8. The statutory income for YA 2011 is

computed as follows:

RM

Rental income 36,000

Less: Expenses 4,000


Less: Expenses for Y/E 2012 5,000

Amended adjusted income 27,000

Less: Expenses for Y/E 2013 3,000

Amended adjusted income 24,000


2.6.9. Advantages to treat rental as a business source

capital allowance/industrial building allowance can be

claimed

Losses can be carried forward


Part 3. Summary


Summary

Transactions Purchase Real Assets Purchase RPC shares

-Easy to transfer

-Available of land title (JV)

Entity Purchase under individual

-Tax rate

-Resident house

Purchase under Company

-Tax rate

Chargeable Gains Capital Gains

-RPGT

-Long holding period

Revenue Gains

-ITA

-Frequency of transactions

Classification of asset

In Audited Accounts

Capital Gains

-Disposal of Fixed asset

Revenue Gains

-Disposal of Current asset


Summary (Con’t)

Type of Rental Income Non-business source/ S4(d)

-no capital allowance

-can not C/F loses

Business source/ S4(a)

-Claim capital allowance

-Loses can be C/F

Commencement

1st tenant

Non-business source/S4(d)

-Date of letting

Business source/S4(a)

-Date available for letting

Deductibility of

Expenses

Non-business source/S4(d)

-direct expenses

Business source/S4(a)

-direct expenses

-Permitted expenses

(IHC/Non-IHC)


General topics under property tax:

• Real property gains tax

• Real property company

• Landowners’ income under Joint venture

• Developers Accounts & Tax issues

• Income from letting of real property

• Investment holding companies


Q & A Presented By

Dr.Tan Thai Soon

H/P 016 209 2085

Website : www.tst.com.my

www.malaysiantaxation.com

Email : [email protected]

: [email protected]

Facebook: http://www.facebook.com/DrTanThaiSoon

http://www.tst.com.my/

http://www.malaysiantaxation.com/

mailto:[email protected]

mailto:[email protected]

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Understanding Malaysian Property Taxation

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