Looking for tax clarity Petikan TheStar Saturday October 31, 2009

OPTIMISTICALLY CAUTIOUS
By ERROL OH


BUDGET speeches are not the kind of reading material that you can just breeze through. They talk about important matters that affect many people and businesses.

The business community and plenty of others pore over these documents to better understand the thinking behind the Government’s fiscal moves. Budget 2010 was no different.


Soon after Prime Minister Datuk Seri Najib Tun Razak began reading his speech in Dewan Rakyat on Oct 23, thousands of copies of the text were distributed and read around the country. As usual, there was much to digest.

This time around, though, there was some confusion over a change in real property gains tax (RPGT).

This was what Najib announced in his speech: “The Government needs to ensure that the Malaysian tax system is equitable and able to generate revenue for development purposes. In line with this, the Government proposes that a tax of 5% be imposed on gains from the disposal of real property from Jan 1, 2010.”

Appendix 15 of the speech provided more details. It states that gains from the disposal of real property are subject to tax under the RPGT Act 1976 to curb speculative activities in the property market.

The tax rates are progressive from 0% to 30%, depending on the holding period of the property. No tax is imposed on the disposal of a property that takes place more than five years after its acquisition.

To broaden the tax base, it is proposed that tax at “a fixed rate of 5%” be imposed on gains from the disposal of real property.

Based on Najib’s speech and the appendix, just about everybody has understood the same thing – that the RPGT net has been widened to capture practically every sale of property (no matter how long ago you bought it), and that the gains from the disposals will be subject to a 5% tax.

This alone has made quite a number of people unhappy (see Angie Ng’s The Real Estate column on page 24), but what has muddied things was that it was not made immediately clear that the Government was putting through this change in two steps.

First, via the Finance Bill, it has proposed to raise the minimum RPGT rate (for property held for more than five years) from 0% to 5%. So far so good. That’s in keeping with what’s stated in the speech and Appendix 15. However, the higher rates (30%, 20% and 15% for disposals within two years, in the third year and in the fourth year after the acquisition) are kept intact. Several of those who had compared the Budget speech and the Finance Bill quickly spotted what they saw as a discrepancy.

If the higher rates are still maintained in the Act, doesn’t it contradict the Budget proposal of imposing RPGT at “a fixed rate of 5%”? It’s a fair question to ask because at that point, few people knew about the Government’s second step in changing the RPGT regime.

That only came out on Oct 25, when Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah issued a statement to confirm that the RPGT rate would be fixed at 5%, irrespective of the holding period of the property.

He said the 5% rate would be implemented through the Real Property Gains Tax (Exemption) Order 2009, a ministerial order that effects a rule change without requiring Parliamentary approval.

So that eliminates the Budget day confusion. However, the use of the order leads to a few interesting points to discuss.

This is not the first time that the Government has issued a ministerial order relating to RPGT. In 2003, it waived RPGT for a year to boost the property sector and to encourage corporate restructuring.

At the opening of the Invest Malaysia 2007, then Prime Minister Tun Abdullah Ahmad Badawi announced that “the Government has decided not to impose RPGT throughout the country commencing April 1”. That will stand until January next year, when the Budget 2010 proposal kicks in.

Some people misconstrued the 2007 move as a scrapping of the RPGT Act. We all certainly know now that this was not the case.

Such a ministerial order usually has a finite life. It gives the Government the flexibility of speedily switching tax strategy when circumstances change. If the Budget 2010 aim was to restructure the RPGT rates for the long haul so that there would only be the 5% rate, this could have been done by amending the RPGT Act only.

Instead, the Government retains the option of being able to charge higher RPGT rates to discourage people from buying property and selling within a year or two in a hot market to make a quick buck. That’s just planning ahead.

However, it would have been good if this aspect was communicated as well in the Budget. Benjamin Franklin wrote that nothing in this world can be said to be certain, except death and taxes. He may be right, but certainty is not necessarily the same as clarity and transparency.

l Although he doesn’t quite share the frustration and resentment that must have been stewing inside George Harrison when writing The Beatles’ Taxman, deputy business editor Errol Oh understands well the sentiments.