Image courtesy of renjith krishnan/ FreeDigitalPhotos.net

I have given numerous talks on the tax implications of property investments/transactions in the past and one of the most common misconception of property investors is that the disposal of properties can only be subject to Real Property Gains Tax (“RPGT”). Boy, were they surprised when I told the participants that the Inland Revenue Board (“IRB”) can charge the gain on the disposals to Income Tax!

Many are still unaware of the laws governing the taxation of property transactions and the tests adopted by the Inland Revenue Board (IRB) to determine whether the gains on disposals of property transactions are subject to Income Tax or RPGT.

I was delighted when I was invited by NST: Real Estate & Decor (RED) to contribute an article to their papers. So I thought that this would be the most ideal topic to touch on so that I can create some awareness on this subjective issue of taxation of property transactions to the public.

You can read the newsprint version here:

Read more about this interesting topic in my article which was published in NST: RED on  7th December.

The post Taxation of Property Transactions: RPGT or Income Tax? appeared first on Malaysian Taxation 101.

Further to my post and my article in NST: RED on “Taxation of Property Transactions: Income Tax or RPGT?“, I brought up the topic of ‘badges of trade’ and gave a few examples of how the badges of trade apply. In this post, I will elaborate in further detail how to analyse each badge of trade.

Below is a simplified table of the badges of trade and a summary of the conditions which will point whether the transaction is more of an adventure in the nature of trade (Income Tax) or mere realisation of investments (RPGT):

I’ll explain each badge of trade in more details:

1. Profit-seeking motive: If there is evidence that the sole object of acquiring an asset was to re-sell it at a profit, without any intention of holding it as an investment, it will be concluded that a trade is being carried on. One of the evidence of this badge is the holding period of the property, ie. the shorter the holding period, the more obvious the intention to re-sell the property at a profit.

2. Nature of the property: Properties that yield rental income will provide supporting evidence that the property was intended to be held for investment purposes.

3. Mode of finance: Short-term borrowings such as bank overdraft are meant for short-term financing. Therefore purchase of properties that are financed by short-term borrowings will give the impression that the buyer intends to make a quick buck from the property transaction.

4. Subject matter of the transaction: The subject matter here is obviously the property and it is a kind of subject matter that is generally traded with and could readily be turned to profits. Mitigating factors against this badge of trade is if the property is held for own residence or yields rental income.

5. Modification or additional work: Additional work to the propert such as submission of building plans, conversion of title or even renovation and refurbishment works (see the example in my article published in NST: RED) may point to the fact that you are getting the property ready for resale at a higher value.

6. Frequency of transactions: Many, repetitive transactions will point to the fact that you’re carrying on a trade. One of my students recently shared with me that his friend who sold 6 properties over a period of 2 years was assessed to Income Tax on ALL 6 transactions by the IRB.

7. Classification in the accounts: Classification of the property in the balance sheet of a company will give an indication of what the property is intended to be used for. For example, calling the property ‘investment property’ will give an impression that the property is meant to be held as an investment while classifying it as ‘trading stock’ will give the impression that the property is held for resale as stocks.

8. Organisation/special skills: Does the seller have special skills in connection with property transactions? For example, a developer or real estate agent would be assumed to have special skills in view that dealing in properties is part of their daily business.

9. Holding period: The longer the holding period before the property is sold, the more it will be perceived that the property was held for investment.

10. Circumstances surrounding the sale: Was the sale of the property due to financial constraints or compulsory acquired by the government? These situations will point to the fact that the sale was not-initiated by the property owner hence unlikely to be an adventure in the nature of trade, ie. Income Tax.

11. Location: The sale of a property situated in a prime location was held by the courts to be one of the badges of trade, in a local court case.

12. Method of disposal: Was the intended sale of the property done using a systematic marketing strategy, ie utilisation of property brokers, printing of brochure and pamphlets, etc?

13. Formation of a company:  In the case of American Leaf Blending Co. Sdn Bhd v DGIR, it was held by the court that where a company is incorporated for the purpose of making profits for its shareholders, any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business. Therefore, by having a company to hold your property investment is in itself, a badge of trade.

14. Objects clause in the Memorandum & Articles of Association of a company: The objects clause specify the types of activities that a company is authorised to carry out. By having objects clause such as property development. dealing in properties or even general trading activities may be detrimental to the company, for properties which are intended to be held for investments.

The more badges of trade that the IRB can pin on a property transaction, the more likely that the transaction will be subject to Income Tax.

The post The Badges of Trade – Advance Aspects appeared first on Malaysian Taxation 101.

This is a presentation which I made on whether the sale of a property would attract Income Tax or Real Property Gains Tax. This presentation is an excerpt from my recent webinar for KC Lau.

Watch the video here:

To recap, you may also read my article here.

The post Sale of Property: Income Tax or Real Property Gains Tax appeared first on Malaysian Taxation 101.

After many years in the pipeline, my book on property taxation in Malaysia will soon be out! After obtaining the necessary approvals from the authorities, my manuscript has been sent to the printers and the book is expected to be published the middle of this coming September.

Property investment can be a lucrative way to accumulate wealth. Indeed, with the right real estate portfolio you could have sufficient rental income to achieve real financial freedom early in life. It can also secure you a comfortable retirement, as well as a financial legacy to pass onto your children.

While investors busily focus on finding the right property, with the best capital appreciation potential, as well as negotiating the greatest rental returns, many pay scant attention to the largest and surest cost of any real estate investment: TAXATION. As the law currently stands in Malaysia, taxation can account for up to 26% of the income earned by any taxpayer, and that includes property investors!

Under the self-assessment system (SAS) practised in Malaysia, the responsibility for filing tax returns correctly falls on the taxpayer. They are responsible for making the correct declaration of income, as well as the right claims for tax deductions. Getting things right is a daunting task, especially as many taxpayers – especially individuals – do not seek the assistance of a qualified tax agent or accountant, when filing their returns.

Many taxpayers are known to have resorted to ‘creative’ ways to reduce their tax bills. When discovered by the Inland Revenue Board (IRB), which is just a matter of time, they will be slapped with a hefty penalty (as much as 100% of the tax undercharged), through civil action.

During my many years of professional practice, I have come across numerous instances where companies and individuals pay unnecessary taxes and penalties, in other words they give ‛tips’ to the government. I am often asked when the right time is to seek the advice of a qualified tax agent or consultant, in order to best minimise the exposure of a property investment to taxation. And my answer is always the same: right from the very start!

Property investors should realise that there are tax implications at every stage of  the way. Tax planning should not be left until you sell your property; it needs to start even before you buy it. That way you can develop a plan that best suits your investment strategy, saving you the most taxes in the process.

In my book, we will explore how taxation – notably Income Tax and Real Property Gains Tax (RPGT) – affects each area of real estate investment in Malaysia. Light will be shed on the complexities of the laws governing property investments, and you will be advised how to minimise your tax exposure LEGALLY, so that you don’t give ‘tips’ to the government.

We will look at the self-assessment system (SAS) and how taxpayers unknowingly contribute to their own unnecessarily large tax bills. Next, we will discuss how income from your properties are taxed and how you can maximise your claims for deductions, as well as avoiding the common mistakes made by most taxpayers. Then come the implications when you sell your property and what expenses you can legitimately claim to reduce your tax bill.

The biggest question in an active real estate market is whether your property disposal is subject to Income Tax or RPGT. We will explore how the IRB will attempt to ‛capture’ a property disposal under Income Tax, and what you should do to minimise the risk of this happening.

We will also look at using business vehicles such as private limited companies and the newly introduced limited liability partnerships (LLPs), to acquire and manage your real estate investments. Owning property through these vehicles has both advantages and disadvantages in tax terms. We will discuss these positives and negatives in detail, as well as providing lots of advice about how to reduce your eventual tax bill.

Do check out my blog often for more updates and as to how you can obtain your own copy of my book on property taxation!

The post My Book on Property Taxation appeared first on Malaysian Taxation 101.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

In view that the Real Property Gains Tax rates will be increased substantially due to the Budget 2014 proposals, perhaps it’s time for the property speculator to rethink his strategy.

On 25 October 2013, our Prime Minister cum Finance Minister, Datuk Seri Najib Tun Razak, tabled the much-anticipated Budget 2014 proposals. Much-anticipated by many due to the expected adverse changes to the Real Property Gains Tax (RPGT) laws to curb property speculation and the announcement of the introduction of Goods and Services Tax (GST) in Malaysia.

Along that front, our PM didn’t disappoint us, as among other proposals, those changes were among the major highlights of revenue collection measures that became the talk of the town of late.

The proposed changes to the RPGT rates announced during the Budget 2014, which are to take effect from 1 January 2014 for disposal of real properties and shares in real property companies, are as follows:

Many, especially property speculators, complained that the RPGT rates doubling from its current position is very high and will adversely affect their property investment decisions.

There’s no need to press the panic button!

In my humble opinion, RPGT is only part of the equation as far as any property investment decision is concerned. No matter how high the RPGT rate is, speculation in properties will still occur so long as the return on investment is attractive enough. After all, real estate investment, after deducting RPGT at its highest rate of 30%, can still give attractive returns compared to any other form of investments which are available in the market.

Then again, are the proposed RPGT rates really that high?

It is interesting to note that the proposed changes to the RPGT rates are nothing more than, to a great extent, reverting the RPGT rates to its prior position in 1997. In 1997, the RPGT rate was 30% for disposal within two years after the date of acquisition of a property, which will now be extended to three years. A comparison of the RPGT rates for individuals (citizens and permanent residents) then and moving forward in 2014, is illustrated below:

The proposed RPGT rates don’t even come close to the highest RPGT rates that the country, in the history of the Real Property Gains Tax Act 1976, (RPGT Act), has experienced. When the RPGT Act was first introduced, the disposal of a property which occurred within two years after the date of its acquisition was subject to RPGT at a hefty rate of 50%!

So now that we are faced with the RPGT regime in 2014, property investors, especially the speculators, will have to better plan their taxation strategy in order to reduce their tax exposure on their property investments as best as they can, legally.

It must be remembered that there are TWO laws that govern property transactions in Malaysia and they are:

• The Income Tax Act 1967; and
• The Real Property Gains Tax Act 1976.

Under certain situations, where the badges of trade test is fulfilled (refer to my earlier article on ‘Taxation of Property Transactions: Income Tax or Real Property Gains Tax?’), a disposal of a property may be subject to Income Tax instead of RPGT.

So all I can say to the property speculators/flippers is this: you have to better plan your investment strategies now. You may have to own up to the fact that you are trading in properties and consider putting such properties in a Sdn Bhd or a LLP where the tax is lower, when assessed as a trading activity under income tax. By setting up a separate entity such as the Sdn Bhd or LLP, you will also shield the other properties legitimately held for long-term investments, from being exposed to income tax implications as well.u

Tax planning therefore starts even before you buy your property and not only when you decide to sell your property as you stand to save the most taxes when you develop a tax plan that best suits your investment strategies. With proper planning, property investors and speculators, can save themselves a considerable amount of money in taxes.

For my former students, you will soon have access to the graphical illustration of the income tax versus RPGT rates and the rationale on how to determine which properties should be included as a ‘trading activity’.

Do look out for my next article, which is strictly for members (ie. my students) only!

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