Recent news shows that the government is expected to collect RM22 billion from the Sales & Service Tax (SST) in 2019, which is half of the RM44 billion collected from Goods and Services Tax (GST) in 2017.
Why is this important? The Real Property Gains Tax (RPGT) plays an increasingly important role as a revenue outlet. Hence why in Budget 2019, the RPGT has increased across the board with a minimum floor tax of 5%. RM92 million worth of taxes have been collected thus far since the implementation of this new tax law.
With Budget 2020 tabling sometime this mid-October, now would be a good time to explain what exactly is RPGT, and later explore how it may affect your investment decision-making.
What is RPGT?
The Real Property Gains Tax (RPGT) is a tax on the profits you gain from selling a property. This tax applies to any form of real estate, regardless if it’s residential, commercial industrial, or even empty plots of land.
Do note that this tax is only applicable if you have managed to profit from the sale fo the property. Nothing is taxable if you are able to somehow sell the house below its original purchasing price.
Assuming that Mr Tan has bought a property for RM420,000, and sold it at RM500,000 six years down the road. Under the current tax laws, the calculation is as follows:
RM500,000 (Sale Price) – RM 420,000 (Purchasing Price) = RM 80,000 (Chargeable Gain)
RM80,000 (Chargeable Gain) – RM 10,000 (Exemption Waiver) = RM 70,000 (Nett Chargeable Gain)
RM70,000 (Nett Chargeable Gain x 5% (Holding Period Tax Rate) = RM 3,500 (Amount Payable)
The amount of tax you pay is heavily dependant on how long you have held onto the property and the exemptions available at your disposable.
The tax schedule is as follows:
| Holding Period | Tax Rate for Malaysian Citizens |
|---|---|
| Up to 3 years | 30% |
| 4 years | 20% |
| 5 years | 15% |
| Up to 6 years | 5% |
Do note that each citizen is entitled to a once-in-a-lifetime RPGT exemption of the property if the property is classified as a personal residence. If not utilised, citizens are entitled to a waiver of RM 10,000 or 10% of Chargeable Gain, whichever is higher.
In the case of Mr Tan, he only needs to fork out RM3,500 in taxes for the sale of his property.
The Purpose of RPGT
In simple terms, the RPGT’s primary role is to dissuade the practice of “flipping” properties. “Flipping” properties is the act of buying a home below market rate, repairing and outfitting the property, and reselling it on the market quickly.
Flipping properties, done wrongly, can be considered an act of fraud in the United States, and it is known to negatively impact the surrounding communities. Imagine seeing a new neighbour every six months, or house prices suddenly spiking within just a few years in your district.
It is a practice that is generally discouraged and frowned upon within the community, and the government is taking active measures to prevent that.
Selling Strategy
As long as the RPGT is set in place, the act of flipping properties is no longer as lucrative as it once was. The most straightforward way to maximise your profits would be to only sell your property after holding it for more than six years.
Fun fact:
For development projects, the RPGT holding period is calculated from the SPA signing date, and not the Vacant Possession date. If you purchase a serviced apartment in 2018 which will be completed in 2021, technically you only need to wait for three more years after receiving the keys to maximise the benefits.
Seeing that property is an illiquid asset, it will take some time for the property sale to take place. You might want to consider putting the property up for sale earlier in the fifth year, in order to save time so to speak.
Before you do sell the property, you might also want to consider repairing and refurbishing parts of the property. Doing so will attract more buyers, and adds more value to the property itself. Be careful not to go overboard on the refurbishing, as the increased selling price needs to justify the costs put into fixing up the property.
Developers have been calling for lower RPGT rates in the upcoming budget tabling. You might want to consider holding onto the property for a while longer until the new tax laws have been announced. It will take some time for the law to set in place on 1st January 2020, so you will have a few months of buffer period to alter your investment plans if changes were made to the tax laws.
As an investor, it is essential to factor in these miscellaneous costs whenever you decide to let go of a property.
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