When the real property gains tax (RPGT) was suspended in April 2007 and followed by further liberalisation of the Foreign Investment Committee’s (FIC) guidelines, investors breathed a collective sigh of relief. They were happy that finally, Malaysian real estate was entering an era of free enterprise and that the government was committed to attracting foreign direct investment (FDI).
A lot of people took credit for the suspension of the RPGT, including a young property developer wannabe and a slew of non-governmental organisations. This time, no one has come forward to take credit for the imposition of the 5% RPGT. But I remember an interesting fact that was raised back then at a meeting with the then prime minister — that despite the huge personnel and management infrastructure of the FIC, the average annual collection from RPGT was only about RM200 million compared with receipts of more than RM2.5 billion from stamp duty. Just something to think about.
In the aftermath of the RPGT suspension, we saw a large number of prime properties owned by old money around KLCC surfacing for sale.
One particular sale was a two-acre site by a family who no longer resides in Malaysia. I asked the matriarch why she did not want to wait for a better market as she was selling at the beginning of the US subprime crisis.
Her answer can be considered a barometer of our national real estate policy.
She said: “Your government has a reputation for going back and forth on its property-related policies. I don’t trust that the RPGT won’t be reintroduced soon, so I am selling now. This has been my family home for more than 60 years.”
Prophetic words indeed, because the tax is back without any warning, albeit at a lower but fixed rate. But it is also retrospective in nature as those investors who had bought their properties based on the convincing declaration of their agents and solicitors that there was no RPGT are now affected by it.
Property transactions will be taxed, so why not stocks too which have gone back to their previous highs? Perhaps, it’s politically harder to tax these.
Someone once said that, like women, property is a soft target and in a property-owning democracy like Malaysia, it is an easy and accountable target.
The question is, how will RPGT affect the property market? How will it be implemented?
The previous implementation of RPGT was pilloried for the time taken to deliberate on assets being sold. Rumours that civil servants could derail a bona fide purchase for other than economic reasons were rampant. So, when a landmark property was being sold, it was always a crapshoot to get the approval of the FIC, which had taken up to a year sometimes to deliberate on acquisitions.
Malaysians purchasing from each other were treated like foreign purchasers, so you can imagine the agony of those involved in real estate if we went back to that system.
It’s not that there are no property taxes elsewhere in the world. But other tax regimes cover the whole investment market, not just real estate. This looks awfully like selective discrimination of one of the pillars of the economy.
If the application of the tax is transparent, there should be no issue but when it is coloured by other social considerations, we may again deter foreign investment in Malaysian real estate and that would make us the backwater of Asia.
I did a crude survey of the effects of the new tax with property agents, developers, tax advisers and private equity investors and surprisingly, received a mixed bag of opinions.
The property players were consistent in their frustration over another change in policy after having spent the last two years hammering home the point that Malaysia does not impose RPGT through their marketing efforts on the international market. They are certain that there will be a drop in sales and that the confidence that returned recently after the US subprime crisis will vanish. They are also sure that the tax forms will be complicated and difficult to understand. In their opinion, it was the efforts of Malaysia Property Inc and property developers to give a clear and encouraging picture of Malaysian real estate that put a positive spin on Malaysian property over the last three years.
Meanwhile, the tax and finance guys see the 5% RPGT as a sign that the goods and services tax (GST) is going to be introduced soon and that this is a precursor to the other services, including stocks, getting taxed in the future.
They believe the 5% RPGT will not bring large returns to the government but will cool the market and allow genuine investors to study it before making any purchases. They say it will end the overpricing of real estate, which is part of a money-laundering strategy.
So, there you have it — two opposing views on the tax, both with the interests of the industry at heart.
This writer hopes that this time round, the tax, if implemented from Jan 1, 2010, will not be changed for at least another 10 years to give investors the assurance that it will be reviewed only after a set period.
The funds realised from the tax should be ploughed back into real estate but not into low-cost housing as we do not have a sustainable low-cost housing programme that does not eventually produce slums. We need to rearrange that model. What needs greater attention is a grant for young people to buy homes. The funds from the tax could provide that and possibly subsidise the interest payments on the purchase for a set number of years. These are your young voters. It pays to look after them.
That could be the real benefit of this tax — the money recycled into property.
Finally, the collection of the tax should be seamless and transparent, like in Australia or Singapore, where a checklist is issued and signed off by the solicitor. If all the boxes are ticked and the tax sent in, there should be no delay in the usual time frame for transactions. Maybe then, the reimposition of RPGT will not be seen as doom and gloom for the property sector.
Kumar Tharmalingam is the chairman of Hall Chadwick Asia, a property advisory company that provides corporations with solutions on branding
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 779, Nov 2-8, 2009
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