RPGT 1976 - RPGT 1976 PDF

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Tuesday 11.8 – Wednesday 12.REAL PROPERTY GAINS TAX 1976 In Malaysia, we don’t have capital gains tax regime except for real property gains tax (RPGT). RPGT is imposed on gains on disposals of real property located in Malaysia or shares in a real property company (RPC). What is capital gains tax? Ca...

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Tuesday 11.8.2020 – Wednesday 12.8.2020 REAL PROPERTY GAINS TAX 1976 1.

In Malaysia, we don’t have capital gains tax regime except for real property gains tax (RPGT). RPGT is imposed on gains on disposals of real property located in Malaysia or shares in a real property company (RPC).

2.

What is capital gains tax? Capital gains are gains obtained from the sale of shares, stocks, bonds. However, there is an exception for the disposal of properties. This imposition is to prevent the “flip and sell” scenario, where the purchaser purchased a property at a discount price. Then they will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price. This scenario will render to flood of properties in the market. It is also to reduce the real estate speculation where it involves the purchaser buying property with the hopes of reselling it at a higher price in the near future.

3.

Real Property Gains Tax 1976 Chargeable gains upon disposal of real property or disposal of shares in a real property company. Real property company? A controlled company that owns real property or shares in real property companies or both, whereby the market value of the real property or shares in real property companies or both is not less than 75% of the value of the company’s total tangible assets. A “controlled company” is a company having not more than 50 members and controlled by not more than five persons. Gain? For a gain to fall under the definition of RPGT 1976: -

para 34A, Schedule 2: The company must be a real property company

Section 7: “Chargeable gains and allowable losses”

(1) - if the disposal price exceeds the acquisition price, there is a chargeable gain; - if the disposal price is less than the acquisition price, there is an allowable loss; and - if the disposal price is equal to the acquisition price, there is neither a chargeable gain nor an allowable loss.

(2) - an allowable loss = a loss suffered on the disposal of a chargeable asset which, if it had been a gain, would have been chargeable with the tax.

Section 9: “Exemptions”

4.

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gains specified in schedule 4 shall be exempt from the tax.

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subject to dewan rakyat’s resolution / minister’s statutory order

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schedule 2

Income Tax Act 1967 (tax on the income of any person) Section 4: Classes of income subject to tax (a) gains or profits from a business, for whatever period of time carried on; (b) gains or profits from an employment; (c) dividends, interest or discounts; (d) rents, royalties or premiums; (e) pensions, annuities or other periodical payments not falling under any of the foregoing paragraphs; (f) gains or profits not falling under any of the foregoing paragraphs

Section 2: “business” includes profession, vocation and trade and every manufacture, adventure or concern in the nature of trade, but excludes employment;

5.

No double taxation Section 2 of the RPGT 1976 defines “gain” as: “…gain other than gain or profits chargeable with or exempted from income tax under the income tax…” If the gains from selling the property are already subjected to income tax OR exempted under the Income Tax Act 1967, then it is not considered as “gains” within the RPGT 1976. There is also no double taxation treaty between the countries to avoid the citizen paying taxes twice.

6.

7.

It is important to distinguish between income tax and RPGT: -

The rate differs

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Wrongly declare is an offence, will get fined.

To distinguish whether real property transaction falls under ITA or RPGT: Badges of trade (ACCA): i)

Ownership Yield rental income = Capital Nature does not yield rental income = Income Nature

ii)

Alteration / Modification Sub-division of land, building plans = Income Nature

iii)

Nature of Subject Matter Acquired in the ordinary course of business = Income Nature Acquired through market = Income Nature Inherited/ gift = Capital Nature For personal enjoyment = Capital Nature Income-producing asset = Capital Nature

iv)

Start up Activities 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. v)

Intention / Motive Property developer, property dealing = Income Nature Property investment, investment holding = Capital Nature

vi)

Finance Long-term borrowings = Capital Nature Short-term borrowings = Income Nature

vii)

Frequency Many= Income nature Isolated= Capital nature

viii)

Reason for disposal Developer = Income Nature Forced sale = Capital Nature Acquisition by government = Capital Nature Initiated by buyer = Capital Nature

ix)

Methods of disposal Use marketing strategy or advertisement = Income Nature

8.

Rate & Calculation: RPGT rates- schedule 5 RPGT 1976 https://www.pwc.com/my/en/publications/2019/2019-2020-mtb/real-propertygains-tax.html *Chargeable Gain = Disposal price – purchase price

Net chargeable gain = chargeable gain – exemption waiver (if any) – allowable costs exemption waiver: schedule 3, section 8 RPGT 1976 (private residence) RPGT payable = RPGT rate (based on years holding) x Net chargeable gain Income tax rates- schedule 1 ITA 1967 9.

COVID-19 - Short-Term Economic Recovery Plan (Penjana) Individuals who are citizens of Malaysia will be eligible for ROGT exemption on the disposal of residential properties during the period from 1 June 2020 to 31 December 2021. This exemption is limited to the disposal of 3 residential properties per individual.

REAL PROPERTY GAINS TAX 1976 (Case reading- the court will always look at the intention in determining whether the party will be subjected to ITA or RPGT) 1.

Binastra Holdings Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2001] 5 MLJ 481 Facts of the case: Appellant: acquired shares in Sukma Pesona Sdn Bhd (“the Company”). The appellant later sold the shares to “Sin Heap”. The company is the property developer and is the registered owner of the land. The land was alienated to the Company by Selangor State Government (for the purposes of development and sale as housing units). The appellant was charged under ITA 1967. Respondent: raised a notice of assessment under para 34A, sch 2 of the RPGT 1976.

Issue: Whether the gains made by the appellant should be assessed under RPGT 1976 or Income Tax Act 1967?

Gain? Para 34A of Schedule 2 of the RPGT 1976- deeming provision. There must be a chargeable asset before we look at what is deemed to be a chargeable asset. Once a gain is found to be a gain under the Income Tax act, an assessment to real property gains tax becomes invalid.

Held: -

The appellant is not an individual who had used a company to acquire land and dispose of shares in that company.

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In the present case, the property has been acquired by the Company prior to the appellant’s acquisition of shares of the Company. Therefore, the gains made under the disposal of shares had placed it out of the ambit of para 34A of Schedule 2 of the Act.

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If the stock in trade of the Company does not fall as a chargeable asset, the question of the share of the appellant being deemed to be chargeable asset

does not arise. -

The appellant is not a real property company within the meaning of para 34A of the Schedule 2 of the RPGT 1976.

2.

Therefore, the appellant’s gain is assessed under the income tax act.

Teruntum Theatre Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2006] 4 MLJ 685 Facts of the case: The executors of the estate agreed to sells their properties in undivided shares to the nominees of the appellant. In the sale and purchase agreement, it was mentioned that if the land could not be used to build a cinema hall, then the covenant shall be null and void. Failure to obtain approval to convert the land to a cinema hall from the DBKL, the appellant therefore disposed the property. -

The appellant was assessed to real property gains tax under RPGT 1976.

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The respondent took the position that the gains from sales by the appellant should be subjected to income tax under ITA 1967.

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Therefore, the Revenue took the position that the gains from the sales by the appellant should be subjected to income tax under ITA 1967.

Issue: Whether the appellant should be subjected to RPGT 1976 or Income Tax Act 1967?

Held: -

the subject properties were not investment is essentially a question of fact. In arriving at their decision, the special commissioners adopted the established principles relating to intention, namely:

(i)

the intention alone is not the paramount consideration in deciding whether the subject properties were acquired for investment purposes;

(ii)

the intention must be judged against the background of the acts and conduct of the appellant and the circumstances of the case;

(iii)

the intention must be shown to have existed at the time of acquisition of the asset; and

(iv)

the intention must amount to intention in law.

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Since no approval from the DBKL was obtained, the sales and purchase agreement became null and void and the appellant can no longer rely on it in support of its argument that the subject properties were acquired as an investment.

3.

MR Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2005] 7 MLJ 260 (Court of Appeal) Facts of the case: The appellant carried on business as a property developer. On 10 April 1984, the appellant acquired land, then he sold part of the acquired land on 10 August 1990. The respondent raised an assessment to real property gains tax under RPGT 1976 on the disposal of the said land. Later on, through a notice of assessment, the appellant was informed by the respondent that the transaction should be subjected to income tax, and not real property gains tax. The appellant also claimed that the subject lands were purchased for purposes of investment and the subsequent disposal was a realisation of capital asset and thus any gain should be charged to the RGPT and not to the ITA.

Issues: (1) whether an assessment could be raised under the Income Tax Act to replace an assessment raised earlier under the RPGT? (2) whether the proceeds from the sale of the land constituted capital gain or income?

Held: The appeal is dismissed.

The appellants have absolutely no evidence to establish that the subject lands were purchased as a capital asset. The Special Commissioner also found that the alteration made to the subject lands was significant to indicate a trading transaction.

The gain from the sale of an asset of the appellant is found to be of an income nature, then the assessment cannot be under RPGT because such gain should be taxed under the ITA. Thus, there is no possibility of a tax payer being liable to both taxes on the same gain.

The Special Commissioners found the appellant to be a property developer and a dealer in land and the subject lands form part of its stock in trade and the disposal of the subject lands was its normal business activity and thus the gains are chargeable to income tax and not to real property gains tax. Where an assessment for RPGT was made and subsequently it was discovered that there was no chargeable gain within the meaning of the RPGT and thus no real property gain tax is payable, the respondent can and must discharge the assessment. 4.

Bukit Yew Sdn Bhd v Director General of Inland Revenue [1987] 2 MLJ 379 (High Court) Facts of the case: The appellant was assessed to RPGT on the gain for his disposal of land. The respondent subsequently raised an assessment in respect of income tax. The appellant contends that the said gain is a capital and is not assessable to ITA.

Issue: Whether the appellant should be subjected to ITA 1967 or RPGT 1976?

Held: Appeal allowed.

The company’s accounts may be evidence of the company’s intention. But such evidence must be weighed against other evidence to decide the nature of the transaction.

In this case, the appellant bought the land to develop it, however, 14 years later, the appellant did nothing to the land. Thus, the Special Commissioner claimed that

there is a change of intention, therefore, the special commissioner assessed the disposal of land to be subjected under income tax. The court set aside the Commissioners’ decision, the fact that the appellant merely considered but did not proceed with developing the land should not have been held to be a change of 5.

intention. Hamdan bin Abdul Hamid v Ketua Pengarah Hasil Dalam Negeri [2010] 4 MLJ 556 (High Court) – exemption schedule 2

Facts of the case: The appellant, a Singaporean citizen, had acquired a property. The appellant disposed a share in the property to his daughter on consideration of love and affection. The respondent issued a notice of assessment imposing RPGT. The Special Commissioners of Income Tax confirmed the assessment made by the respondent and determined that the disposal of 1/4 share in the property by the appellant was liable for assessment of RPGT.

Issue: whether the appellant was liable to tax under the Real Property Gains Tax Act 1976?

Held: Appeal dismissed.

The ‘tax exemption’ in para 12 Schedule 2 can only arise if the asset disposed of by way of a gift: (i) where the donor and recipient are husband and wife, parent and child or grandparent and grandchild; and (ii) the gift is made within five years after the date of acquisition of the asset by the donor

The appellant is a Singaporean who acquired the said property in 1950 and 1/4 of the said property was by way of a gift to his daughter on 2 April 1997 which is more than five years after the date of acquisition. The SCIT stated ‘Thus we find that the

disposal of the said property by way of gift by the appellant does fall within the purview of paragraph 12 (Schedule 2) of the Act. There is therefore, a chargeable gain on the disposal of the said property.

Friday-Monday (14.8.2020-17.8.2020) History of RPGT in Malaysia? The rationale of imposing RPGT? The Central Bank of Malaysia (Bank Negara) has classified house prices in several cities in Malaysia as “severely and moderately unaffordable” in regards to the increase of house price which does not coincide with the average of household income. RPGT 1976, which previously known as Land Speculation Tax 1974 was introduced to regulate the economy. At that time, there were excessive spiraling of property prices and signs of overheating in the property market a result of speculation in 1973. Speculation? Speculation is the practice of purchasing any property, commodity or security with the motive of merely to resale at later time in short holding to obtain a quick profit or capital gain by anticipating the price change (short term gain) by high risktaking from the financial trading. Fake and artificial demand created by speculators leads to uneven supply and demand in the property market. As a result, the property price in Malaysia is on its all-time high, resulting in difficulties even for young home buyers and growing families to afford to own property, even more so for the low-income group. Before RPGT, there was Land Speculation Tax act 1974. Based on the LHDN official website, Land Speculation Tax was introduced with the objective of curbing speculation in land. It was considered that such speculative activities were one of the main factors contributing to the rise in land prices. Based on Hansard-6 November 1975: “disposal of lands and buildings situated in Malaysia and any interest, option or other rights in or over such lands and buildings are liable to tax at the rate of 50% if such a disposal is made within two years after the date of the acquisition of the property. However, if the amount or value of the consideration for the disposal does not exceed $100,000, it is exempted from the tax. This tax is provided in the Land Speculation Tax Act 1974, and it is intended to discourage speculative activities in such property which, among other factors, had contributed to an alarming rise in the prices of immovable property. Therefore, a gain

made from a disposal of immovable property beyond the period of two years after its acquisition is beyond the scope of this land speculation tax. Nor is it liable to income tax under the income tax legislation since a gain on realisation is not normally regarded as income.”

Therefore, RPGT was introduced. Land speculation tax act 1974 is repealed.

RPGT exemptions:...