Malaysia Reinstates Real Property Gains Tax

The reinstatement of tax on gains arising from disposal of real property during the tabling of the 2010 Budget in the Malaysian Parliament came as a surprise to many in the real estate industry. According to the Prime Minister of Malaysia Datuk Seri Najib Tun Razak, the rationale for the reimposition of real property gains tax (“RPGT”) after its 2 and a half years freeze since April 2007 to December 2009 via the Real Property Gains Tax (Exemption) (No.2) Order 2007 (“2007 Exemption Order”) is to put in place a fair administration of taxes and also to generate revenue for development purposes.

In Malaysia, RPGT is charged on gains arising from the disposal of real property. RPGT is also charged on disposal of shares in a real property company (“RPC”). A RPC is a controlled company holding real property or shares in another RPC of which the defined value is not less than 75% of the value of the company’s total tangible assets. The Real Property Gains Tax Act 1976 (“RPGTA”) was enacted for the very purpose of regulating the tax charge and mechanism for gains made on the disposal of real property.

RPGT (Exemption) (No.2) Order 2009 provides that 5% RPGT is imposed on properties sold within 5 years of the date of purchase. Hence gains made from the disposal of real properties which are held for more than 5 years will be exempted from RPGT of 5%.

This exemption is applicable on gains from all types of real property including shares in RPCs disposed by all categories of property owners who are individuals (citizens, permanent residents, noncitizens and non-permanent residents of Malaysia), companies, as well as other property owners.

A saving grace for individuals however, is that a tax exemption of RM10,000 or 10% of the gains (whichever is higher), will be given to individuals on gain arising from the disposal of real property. Further, the 2010 Budget also does not affect the existing exemptions under the RPGTA for gifts between parent and child, husband and wife, grandparent and grandchild as well as the once in a lifetime disposal of residential property for a Malaysian citizen or a permanent resident of Malaysia.

Additionally, the 2010 Budget also revised the RPGT collection mechanism by obligating the purchaser to withhold 2% of the purchase price and remit it to the Malaysian Inland Revenue Board (“IRB”) within 60 days after the date of disposal of the real property. This requirement is incorporated in the Finance Act 2010. Under the original provision of the RPGTA, the purchaser was required to retain 5% of the purchase price. With effect from 1 January 2010, the retention sum is reduced from 5% to 2% of the purchase price and this is considered as a more realistic apportionment of the retention amount.

Guidelines have been issued by the IRB to provide guidance in respect of the collection mechanism though some issues and certain circumstances appear to not have been addressed in totality. Certain quarters have raised these issues to seek further clarification from the IRB and dialogue is currently ensuing to obtain these clarifications. The reintroduction of RPGT has also resulted in amendments being required to be made to agreements dealing with the disposal of real property after 1 January 2010 to address the rights and obligations of both the purchaser and vendor.

Persons dealing with real property after 1 January 2010 will need to ensure that their obligations with respect to RPGT are appropriately addressed.