City & Country: Will GST exemption translate into cheaper homes?

ANTICIPATION is high that an increase in the Real Property Gains Tax (RPGT) and a ban on the developer interest-bearing scheme (DIBS) will bring down property prices. But there has been little focus on the government’s move to exempt residential properties from the Goods and Services Tax (GST), which will replace the current sales and service tax from April 2015.

That the government will revise the RPGT upwards in Budget 2014 was a foregone conclusion that generated many a discussion. However, the effectiveness of the new RPGT structure, and the DIBS ban, in forcing property prices down to more affordable levels remains to be seen because, ultimately, pricing is a function of supply and demand.

In the meantime, let’s focus on the exemption of residential properties from GST and its impact on homebuyers. Will prices dip or at least remain unchanged?

Unlikely. Why? First, there is a need to understand GST and the three supplies that come under it — standard-rated supply, zero-rated supply and exempt supply.

Simply put, standard-rated supply refers to goods and services that are subject to GST at a standard rate (which will be 6% based on the Budget 2014 announcement).

What this means: GST is collected by the businesses and paid to the government. Businesses providing standard-rated supplies are required to charge a GST of 6% on products or services provided to customers. This is known as the output tax. They themselves would have paid for supplies (goods or services) that are subject to GST, which is known as the input tax. If the input tax of the businesses is bigger than their output tax, they can recover the difference from the government.

Under zero-rated supplies, businesses are eligible to claim from the government input tax credit incurred from acquiring supplies to produce such goods or services. This means the consumer does not pay any GST.

Yam: There needs to be engagement and clarity, so that there will be no hiccups come April 2015

As for exempt supplies — the category in which residential properties have been placed — they are not subject to GST. Businesses providing exempt supplies cannot charge their customers GST on the end product (in this case, the residential property), but the developer of the residential property is not eligible to claim input tax credit from the government on GST paid to develop the project.

This being the case, the developer will be saddled with extra costs due to the 6% GST that is payable on nearly all its inputs (construction cost, services, materials and so on) which it cannot claim from the government. Being business entities, they would pass on the non-claimable input tax to the consumer (read: residential property buyer).

The effective percentage increase in cost to the developer due to the non-claimable input tax credit is not immediately clear.

Yes, a developer currently pays a certain amount of sales and service tax on, for example, consultant fees, but that would be a fraction of the input tax credit for, for instance, the cost of construction and infrastructure, which, incidentally, could account for up to 40% or 50% of the total cost of a development.

So, how can housing prices dip?

Commercial properties, on the other hand, come under standard-rated supplies. But will serviced apartments, which are, for all intents and purposes, dwellings built on commercial land, be classified as residential or commercial properties for the purposes of GST?

Then, there are the mixed-use developments that comprise residential, commercial and industrial offerings. Developers will face challenges in apportioning input tax credits on indirect costs. Should it be based on the gross built-up area? Or perhaps even on employee time for different aspects of the project.

Whatever the model, variations in the numbers can be expected as the project gets underway and this could stretch for 5, 6 or even 10 years, depending on the project’s size and market conditions.

Inevitably, developers will need to spend a hefty sum on GST compliance. Now, who will pick up the tab for this added cost? The consumer, of course.

Still, to echo Real Estate and Housing Developers’ Association Malaysia president Datuk Seri Michael Yam, the government cannot be expected to declare property development a zero-rated supply. Indeed, development companies are paying some form of sales and service tax even now.

“We support GST. Because the business of property development is complex, there needs to be engagement and clarity, so that there will be no hiccups come April 2015,” Yam says. “Otherwise, the experience could be hellish …”

Level the playing field

If you had bought a property last year, you would have signed on the dotted line with the understanding that whatever gains you make will be subject to a 10% or 5% tax if you were to dispose of it in the second or third year of ownership.

The government’s moves may not result in lower property prices

However, with the new RPGT structure that is effective from Jan 1, 2014, you will be taxed 30% on your gains should you sell the property within the first three years of ownership.

If indeed the sole intention of the government in raising the RPGT is to curb speculation, is there a need to render it retrospective? While this is not a new practice, what would stand Malaysia in good stead would be to level the playing field and make it transparent so that investors are bound by the RPGT that existed at the point of investment.

According to Rehda, the government collected a total of RM540 million from RPGT in 2011; RM300 million in 2010; RM42 million in 2009 and RM110 million in 2008.

Another move by the government to curb speculation is the abolition of DIBS. Developers are also required to be transparent on their pricing. In addition, foreigners can only buy properties priced at least RM1 million — up from RM500,000 before.

In all these moves, Yam sees the government equating the rise in property prices with speculation, and he begs to differ.

For instance, he says, the secondary market accounted for the bulk or RM50 billion of the RM68 billion worth of residential property transactions last year. Speculators tend to focus on new launches.

The minimum entry level of RM1 million for foreign buyers should also be location-specific, Yam says.

For instance, a Malaysia My Second Home participant wishing to settle away from the property hot spots will not require a RM1 million home, which would be too spacious for his or her lifestyle.

“We have 26,000 acres to build in Iskandar Malaysia. Do we or don’t we wish to roll out the red carpet for foreign buyers?” asks Yam.

And, oh, for those who are relieved that Budget 2014 was silent on higher stamp duties on property purchases, it may be too soon to celebrate. The government does not need to wait until Budget 2015 to review this.

Au Foong Yee is managing director of The Edge Communications Sdn Bhd

This article first appeared in The Edge Malaysia Weekly, on November 4, 2013.

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