4.0 REAL PROPERTY GAIN TAX

By the end of the lesson, student should be able:4.1 Understand the meaning of RPGT4.2 Understand chargeability of RPGT4.3 Understand the treatment of gift4.4 Explain date of disposal and date of acquisition

What is RPGT?

RPGT is a tax on capital gains imposed onthe disposal of a chargeable asset and thisincludes real property. It is governed bythe Real Property Gains Tax Act 1976.

• The Real Property Gain Tax (exemption) Order 2007 exempted all persons from the provisions of RPGT Act 1976 with regards to any disposal of chargeable assets from 1 April 2007 to 31 December 2009.

• Real Property Gains Tax (RPGT) was reintroduced effective 1 January 2010 after a lapse of 2 years and 9 months.

Who is covered?

• It applies to both tax resident and non-resident persons who transact in real property situated in Malaysia and shares in real property companies.

• Person includes a company, a partnership, a body of person and corporation sole.

What is real property?

• It is land situated in Malaysia or any interest, option or right in or such land situated in Malaysia.

What is the definition of land?

• Section 2 of RPGTA defines land as:

i. The surface of the earth all substances forming that surface.

ii. The earth below the surface and substances therein.

iii. Building on land and anything attached to land or permanently fastened to anything attached to land.

iv. Standing timber, trees, crops and vegetarian grown on land.

v. Land covered with water.

The real property include:

• Any landed property in Malaysia such asresidential properties (apartments,condominium and houses), commercialproperties (factories, office buildings, shophouses) and land.

How is RPGT computed?

• In simple terms, RPGT is computed on the capital gains on the disposal of a chargeable asset, that is, the differential between the disposal price and the acquisition price of the real property.

(Disposal price – Acquisition price) x RPGT rate = RPGT

How is the disposal price determined?

• Disposal Price (Paragraph 5 schedule 2):

Amount of sale consideration in money or money’s worth.

LESS:

i. The amount of any expenditure wholly andexclusively incurred on the asset at any timeafter its acquisition for the purpose ofenhancing or preserving the value of theasset.

ii. The amount of any expenditure wholly and exclusively incurred on the asset at any time after its acquisition in establishing, preserving or defending the owner’s title to, or a right over the asset.

iii. The incidental costs to the person of making the disposal of the chargeable asset.

• Incidental cost (Paragraph 6(1) & (2) schedule 2 consist of:

i. Fees, commission or remuneration paid for the professional services of any surveyor, valuer, accountant, agent or legal adviser.

ii. Cost of transfer. Eg: stamp duty.

iii. Cost of advertising to find a buyer.

CALCULATION FOR DISPOSAL PRICE

RM

Consideration received xx

Less: Permitted expenses:

Enhancement cost (x)

Legal fess in defending title

(x)

Less: Incidental cost:

Commission (x)

Legal fees (x)

Advertisement (x)

Disposal price xx

Permitted expenses refer to any expenses incurred wholly and exclusively on the asset after its acquisition for the purpose of enhancing or preserving its value and expenses incurred in established and defending title or right over the asset.

Melly Sdn Bhd disposed of an asset in 2010 for consideration of RM1 million. The disposal price is arrived as follows:

RM RM

Consideration received 1,000,000

Deduct:

Cost of renovation 200,000

Legal expenses 30,000

Incidental expenses 10,000 (240,000)

Disposal price 760,000

Exercise 1:

Winner Sdn Bhd disposed of an asset in 2011 for a consideration of RM850,000. The company incurred expenses as follows:

Alteration and extensions RM85,000Legal expenses for protection RM25,000of title of assetIncidental expenses RM 6,000Quit rent and assessment year RM 2,500 2010 & 2011

Answer:

RM RM

Consideration received 850,000

Deduct:

Alteration & extension 85,000

Legal expenses 25,000

Incidental expenses 6,000 (116,000)

Disposal price 734,000

How is the acquisition price determined?

Acquisition price (Paragraph 4 Schedule 2)

Acquisition of an asset is the purchase consideration plus any incidental costs (or permitted expenses) which include:

i. Fees, commission or remuneration paid for the professional services of any surveyor, valuer, accountant, agent, architect or legal adviser

ii. Cost of transfer (eg: stamp duty)

iii. Other incidental costs (example advertising cost to find a seller)

iv. Interest paid on capital employed to acquire the asset where a claim for such an expenses has not been made under the ITA

From 1 January 2010, the interest paid to finance the acquisition of a chargeable asset will no longer be regarded as an incidental cost to the acquisition price of chargeable asset.

In addition, the following may be deducted in arriving at the acquisition price:

i. Compensation for damages, injury, destruction, risk of depreciation

ii. Receipt under a policy of insurance for damages to the property

iii. Deposit forfeited in respect of the property

CALCULATION FOR ACQUISITION PRICE

RM

Consideration paid xx

Plus: Incidental costs:

Interest(applicable only prior to 1 January 2010

x

Stamp duty x

Legal fees and professional fess x

Advertisement x

Commission x

Less: Recoveries:

Insurance compensation (x)

Compensation for damages (x)

Deposit forfeited (x)

Acquisition price xx

Example 2:

Biji Saga Sdn Bhd acquired an asset in 2010 for a consideration of RM6,000,000. The acquisition price, taking into consideration incidental costs anddeductions, is computed as follows:

RM RM

Consideration paid 6,000,000

Add:

Incidental costs 24,000

Professional fee 108,000

6,132,000

Deduct : Capital receipt

Compensation damages 72,500

Insurance 143,000

Deposit forfeited 300,000 (515,500)

Acquisition price 5,616,500

Exercise 2:

Pn Hartini bought the terrace house for RM450,000 at Bandar Baru Bangi. Payment was paid on 20 August 2009. The house was transferred to her on 10 February 2010. Purchase of agreement made on 1 October 2010. Other cost incurred by Pn Hartiniwere as follows:

Stamp duty 4,500Legal fees 20,000Cost of extension 60,000

On January 2010 Pn Hartini received RM40,600 from developer as compensation for damages and received RM10,200 from insurance company for that damages. On September 2012, Pn Hartini received RM5,000 from an intended buyer who called off deal, thus forfeiting her deposit.

Answer:

RM RM

Consideration paid 450,000

Add:

Legal fees 20,000

Stamp duty 4,500

474,500

Deduct : Capital receipt

Compensation for damages 40,600

Insurance 10,200

Deposits forfeited 5,000 (55,800)

Acquisition price 418,700

How is the RPGT rate determined?

The rate of tax on RPGT is based on the holding period of the chargeable asset.

The rate ranges from 30 per cent down to 5 per cent. There is an in-built exemption mechanism in the legislation which effectively brings the rate down to 5 per cent for all current disposal chargeable to RPGT.

Effective from 1 January 2012, gains from the disposal of residential and commercial properties are taxed between 0% and 10% depending on the holding period of real properties as follows:

Holding Period RPGT Rates

Companies Individual(Citizen & PR)

Individual(Non-Citizen)

Up to 2 years 10% 10% 10%

Exceeding 2 until 5 years

5% 5% 5%

Exceeding 5 years 0% 0% 0%

RPGT Rates as per the RPGTA since the year 1995 has been as follows :

Disposal in the 1st year 30%

Disposal in the 2nd year 30%

Disposal in the 3rd year 20%

Disposal in the 4rd year 15%

Disposal in the 5th year 5%

Disposal in the 6th year and beyond 0%

Evolution of RPGT

A tax on property was introduced in 1974 under the Land Speculation Tax Act. This was subsequently replaced with the Real Property Gains Tax Act in November 1975. Although in existence since the mid-70s, the Government pro-actively adjusted the rates of the RPGT through the years to cater to the property market conditions.

It’s natural for the most people to react to the reintroduction of RPGT, having enjoyed full exemption for a few years previously, however, compared to the original rates of RPGT which range up to 30%, the recent hike of up to 10% is actually quite mild.

Exemption from RPGT

RPGT exemptions currently available are asfollows:

-Gain in respect of any disposal of a chargeableasset from 1 April 2007 until 31 December 2009.

-Gain in respect of any disposal of a chargeableasset on or after 1 January 2010 where thedisposal is made after 5 years from the date ofthe acquisition of the chargeable asset;

RM10,000 or 10% of the chargeable gain,whichever is greater accruing to an individualin respect of a disposal of a chargeable asset;

- Gain accruing to an individual who is acitizen or permanent resident of Malaysia inrespect of the disposal of one privateresidence;

- Gain accruing to a wife who is a citizen orpermanent resident of Malaysia but whosehusband is neither a citizen nor a permanentresident, in respect of the disposal of oneprivate residence owned by the wife; and

- Gain accruing to the Government, StateGovernment or a local authority.

How to determine the acquisition date?

Generally, the acquisition date of the acquirer coincides with the disposal date of the disposer.

When is the disposal date?

Disposal date is the date of the agreement for disposal of the asset. Where there is no agreement, disposal date is the date of completion of the disposal, i.e. the earlier of:

• Date of transfer of ownership of the asset by the disposer, or

• Date when the whole amount of consideration

is received by the disposer

Treatment of losses on disposal

Unutilized losses can be carried forward indefinitely except losses arising from the disposal of shares in a real property company.

Transactions in which the disposal price isdeemed equal to acquisition price (i.e. “Nogain no loss” transaction) – per Para 3 Sch 2 ofthe RPGT Act 1976:

a) Devolution of a deceased person’s assetsto his trustee or legatee.

b) Transfer between spouses.

c) Transfer of assets owned by an individual, his wifeor by an individual jointly with his wife or with aconnected person to a company controlled by theindividual, his wife or by an individual jointly with hiswife or with a connected person, for a considerationconsisting substantially (more than 75%) of shares inthat company.

d) Transfer between an individual and a nominee whohas no vested interest in the assets.

e) Transfer by way of security in or over anasset.

f) Gift to the Government, local authority orcharity exempt from income tax.

g) Disposal due to compulsory acquisition.

h) Disposal of chargeable assets pursuant toan approved financing scheme which is inaccordance with Syariah principle, where suchdisposal will not be required for conventionalfinancing schemes.

Gifts – per Sch Para 12 of the RPGT Act 1976

Gifts between husband and wife, parent and child or grandparent and grandchild are deemed to be “No gain no loss” transaction.

Example:

Mr Tan transferred a house to his daughterSusan on 25 Feb 2008 when its market pricewas RM650,000. The incidental costs for thetransferred amounted to RM5,000 the housewas acquired by Mr Tan on 1 Mac 2004 forRM300,000.

Answer:

Disposal price by Mr Tan is

deemed (300,000 + 5,000) 305,000

Less: acquisition price +

incidental expenses

(300,000 + 5,000) (305,000)

Chargeable gain NIL

Susan’s acquisition price is RM305,000. Thissum is the disposal price of Mr Tan.

Where the asset is acquired as a gift ondeath, the recipient is deemed to acquire theasset at its market value as at the date oftransfer or ownership of the asset to therecipient.

Private residence exemption

Malaysian citizens or permanent residentindividuals are given RPGT exemption ondisposal of one residential property. This is a“once in a life time” exemption and must befulfilled in order to get the exemption:

1) Individual must be a citizen or permanentresident of Malaysia.

2) Real property must be a residentialproperty or part of the building is used forresidence (eg : shophouse)

3) Residential building is occupied or rentedor fit for occupation

4) Residential property is owned by suchindividual or spouse of the individual; or

5) Disposer had not elected for theexemption prior to this as the exemption isonly available once in a lifetime.

EXERCISE:

On 12 Mac 2009, Tiffany signed a sale andpurchase agreement to acquire a piece of landfor RM250,000. She made full payment of thepurchase price on 10 June 2009 and tookpossession of the land on 11 June 2009, thetitle to the land was transferred to her on 10September 2009.

She then set up an organic farm on this pieceof land. Her expenditure was as follows:

Stamp duty 4,000

Legal fees on acquisition 1,980

Drainage and irrigation system 13,500

Farm building 22,800

Fencing 5,600

Legal fees to defend his title to 27,000

the land

On 8 February 2011, she disposed of the organic farm for RM677,000. Her expenditure on disposal was as follows:

Real estate agent’s fees 16,500Advertisement for sale 2,500Valuation fees 1,000

Tiffany informed you that she has a RPGT loss relief brought forward from 31 Mac 2007 amounting to RM4,945

You are required to compute the RPGT liabilityof Tiffany in respect of the disposal of organicfarm.