Taxation and GST Planning for Investment Property in Malaysia
Tax Planning for Investment Property is important in Malaysia. Also, the development of the LRT/MRT lines which enhances connectivity to Greater Klang Valley including Seremban, Rawang and Klang will bode well for the residential and commercial property market. Malaysia generally has a young population where 80% of Malaysians are below the age of 50, which means the demand for houses is only going to increase as more young adults come into the workforce and are looking to settle down.
Note: GST has been repealed with effect from 1 September 2018.
Do I have to register for GST for sales of property?
The sale of a residential property is an exempt supply. If you are not required to register for GST, and you are selling a residential property, you do not need to register even if the price exceeds RM500,000.
The sale of a non-residential property (commercial property) is a taxable supply. If you are not registered for GST, you may have to register for GST as a result of the sale, if you are treated as carrying out a business. How to consider you are in treated as carrying out a business? Please see the following DG’s Decision for the guideline.
Custom Malaysia has updated the DG’s Decision 4/2014 Item 6 and the amendments were effective from 28 October 2015. This DG’s decision clarifies the GST treatments for Individual supplies commercial properties i.e. whether an individual has to charge GST when making a supply of his commercial property?
According to the DG decision 4/2014 (amended 28 October 2015),
(1) GST shall be charged by a taxable person in the course or furtherance of business on any taxable supply of goods or services made in Malaysia (section 9 GSTA).
(2) Taxable person means any person who is or is liable to be registered under section 2 GSTA. A person is liable to be registered if his total taxable supply of the current month and the next eleven months exceeds RM500,000.
(3) Any individual who is not a GST registered person is treated as carrying out a business if he at any one time owns – (wef 28/10/2015)
- more than 2 commercial properties;
- more than one acre of commercial land; OR
- commercial property or commercial land worth more than 2 million ringgit at market price;
(4) Any individual mentioned in paragraph (3) is liable to be registered as a GST registered person if – (wef 28/10/2015)
- he has the intention to supply any of his commercial properties or commercial land; AND
- the total value of such supply exceeds the prescribed threshold (RM 500,000) in 12 months periods.
(5) ‘at any one time’ mentioned in paragraph (3) means at any point of time in his lifetime commencing after the effective date. (wef 28/10/2015)
(6) Any individual is treated as carrying out a business and making a supply of taxable service if: (wef 28/10/2015)
- he is supplying any lease, tenancy, easement, licence to occupy or rent ; AND
- his annual turnover for such supply has exceeded the prescribed threshold in the period of 12 months.
In summary, if you at any one time owns more than 2 commercial properties; more than one acre of commercial land; OR commercial property or commercial land worth more than 2 million ringgit at market price, and the total taxable supply of the current month and the next eleven months are expected to exceed RM500,000, then you are oblige to register GST and charge GST for the sales of property or rental of the property.
For illustration of scenario, you can see table below
For more information, please refer to Commercial Property More Than RM2 Million have to Registered for GST in Malaysia.
GST on Commercial Property
Commercial property is subjected to GST in Malaysia.
You can setup a Malaysia Company to purchase the commercial property and claim back the GST from Custom. Once the company is GST-registered, monthly rental income and the sales proceeds of the property will subject to GST as well.
In order to claim back the GST, you will need to register the company as GST-Voluntary or Compulsory before the commercial property be sold off.
Company can apply for voluntary registration even though the value of its taxable supplies does not exceed the prescribed threshold of RM500,000.
For voluntary registration, the company must remain registered for not less than 2 years.
In general, the GST registration will be approved if one of the following criteria is fulfilled:
1) First taxable rental income will be made in next 2 years, or
2) The property is to be actively marketed and will be ready for sale once a buyer is found (purchase the property with intention of trading), or
3) The company is generating other types of taxable income (like service income or trading income)
Kindly take note that the GST on commercial property can normally be claimed and refunded when the first taxable income of the property is certain — when the rental agreement or sales and purchase agreement is signed.
We are highly recommending not to registering GST with the option 2 as your gain on disposal of the investment property will have high chances be subject to income tax when you sold it.
Generally, it is compulsory for businesses to come forward to register for GST when their turnover exceeds RM500,000 per year. Businesses that do not exceed RM500,000 in turnover may register for GST voluntarily.
The steps for registration GST is as follows:
1) Setup of company and open bank account
2) Commence your business and Submit documents to Custom for GST registration
3) Exercise the Option to purchase under Company name
4) Claim your GST from Custom
It is advisable all payments related to purchase of property to be made by Company bank account.
Can I purchase the property and register for GST thereafter and claim back my GST?
*NEW amended on 25 January 2017* Custom has given guideline in “GST General Guide” that, in the case of goods including capital goods (such as property), the registered person may be allowed to claim input tax on the goods he holds at the time of registration based on the approved amount by the Director General. The registered person must obtain an approval from the Director General before a claim for input tax can be made under Regulation 46 of GST Regulations 2014. In summary, you must obtain Director General approval before you can submit your pre-registration GST claim. Therefore, it is advisable to get your Company register for GST before you purchase the property under the Company.
*OLD and no longer applicable* Custom has given guideline in “Guide on Input Tax Credit” that, Input tax on any asset held on hand can be claimed on the book value within 6 years from the date of registration irrespective of when the asset is acquired. In the case of land and building, input tax claim is on the open market value of the assets or book value whichever is the lower.
Taxable Rental Income
Generally, rental income is regarded as non-business income and is charged to income tax under Section 4(d) of the Income Tax Act, 1967. However, where maintenance services and support services are comprehensively provided, the income from the letting of real property could be deemed as a business source and charged to tax under Section 4(a) of the Income Tax Act, 1967.
As mentioned in the Public Ruling No 4/2011 Income from Letting of Real Property, maintenance services or support services comprehensively provided means services which include:
(a) doing generally all things necessary (e.g. cleaning services or repairs) for the maintenance and management of the real property such as the structural elements of the building, stairways, fire escapes, entrances and exits, lobbies, corridors, lifts/escalators, compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fittings; and
(b) doing generally all things necessary for the maintenance and management of the exterior parts of the real property such as playing fields, recreational areas, driveways, car parks, open spaces, landscape areas, walls and fences, exterior lighting or other external fixtures and fittings.
A person would not be viewed as providing comprehensive maintenance services if that person only provides security or other facilities. Services are actively provided if the services are provided by the person who owns or lets out the real property or where that person hires a third party to provide the services.
If the letting of real property is treated as a non-business source, any excess of expenditure over income, which in the case of a business is available for carrying forward as a loss, is disregarded. Similarly, no capital allowance are given. Nevertheless, cost of replacing furnishings such as furniture and air conditioner can still be claimed as a deduction if the letting of a furnished real property is treated as non-business source.
Expenses directly incurred in relation to the letting of property are deductible, e.g. assessment and quit rent, interest, fire insurance premiums, expenses on rent collection, expenses on rent renewal and expenses on repairs. Initial expenses will not be deductible since they are incurred to create a source of rental income and not incurred in the production of rental income. Such expenses include the costs to obtain the first tenant (advertising cost, legal cost to prepare the rental agreement, stamp duty and real estate agent fees/commission).
With effect from YA 2016, the income tax for resident individual taxpayer is calculated based on scale rates ranging from 0% to 28% with the maximum rate of 28% on chargeable income exceeding RM1,000,000. For non-resident individuals, the income tax rate is 28%. Meanwhile, the tax rate for company is 24%. For resident company with paid up capital of RM2.5 million and below at the beginning of the basis period, the tax rate for first RM500,000 chargeable income is 19% (reduced to 18% in YA 2017). It may be viable to invest in investment property under company as the income tax rate is lower when compared to the individual.
Investment holding company
A company whose activity consists mainly in the holding of investment properties and derives rental income may fall into the definition of investment holding company pursuant to Section 60F of the Income Tax Act, 1967.
An investment holding company is one which has been incorporated with the object of holding investments and to derive income from the holding of such investments. Investment holding company is not allowed to have its income from the holding of investment as business income. As such, the deductible expenses are normally restricted to interest incurred on loans obtained to finance income-producing investments and other direct expenses. In the event expenses exceeded income, the difference is a permanent loss. In the absence of a business source, the company would not be able to claim capital allowance on the qualifying capital expenditure (fixed assets).
The implication of being regarded as an investment holding company under the Income Tax Act, 1967, is that certain portion of permitted expenses are allowed (which are normally not allowable for tax purposes). Such expenses include:-
i. directors’ fees;
ii. wages, salaries and allowances;
iii. management fees;
iv. secretarial, audit and accounting fees, telephone charges, printing and stationery costs and postage; and
v. rent and other expenses incidental to the maintenance of an office.
Another advantage of investment holding company is that it gives the presumption that its investment would be for long term. As such, the gain from realisation of such investment would be capital gain and not subject to income tax. Nevertheless, this presumption is not legislated nor valid for an indefinite period. In the event the frequency of disposal of investment is too high or the holding period of investment is short, the tax authorities can deem the company to be an investment dealing company and the gain will be assessed as business income. Please refer paragraph below for more details of disposal of property.
Sales of the Property
Generally, gains derived from the disposal of property which is capital in nature (where property constitutes fixed asset/investment) will be subject to RPGT whereas disposal of property which is revenue in nature will be subject to income tax. RPGT and income tax are mutually exclusive and hence, depending on the nature of the transaction, only RPGT or income tax is chargeable, not both.
In determining whether RPGT or income tax is applicable, the IRB would usually take into account the following badges of trade in their assessment:-
– Frequency of transactions (buying and selling of properties)
> The more similar transactions, the higher the probability that he is carrying on a trade.
– Reasons for acquiring and selling of property (we will recommend to document down via board resolution always to avoid dispute in future)
> For trading purpose to make profit (revenue gain)
> For long term investment purposes and receive rental income (capital gain)
– Financial means to hold the property for long term (you should have the capability to service your loan for investment purposes)
– Holding period (more than five years will be advisable)
– Subject matter and circumstances for sale
> Sell to make profit (revenue gain)
> Sale is occasioned by sudden emergency or unanticipated need for funds (capital gain)
– Profit motive (revenue gain)
– Supplementary work done on the asset
Real Property Gain Tax
RPGT is charged on gains arising from the disposal of real property, which is defined as any land situated in Malaysia and any interest, option or other right in or over such land. RPGT is also charged on the disposal of shares in a real property company (RPC). A RPC is a controlled company holding real property of 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 following are the rates of RPGT for the following 3 categories:
|Companies||Individuals (citizens and permanent residents)||Individuals (non-citizens)|
|Within 3 years from date of acquisition||30%||30%||30%|
|In the 4th year||20%||20%||30%|
|In the 5th year||15%||15%||30%|
|In the 6th and subsequent years||10%||5%||10%|
In summary, most people will setup Company in Malaysia to purchase commercial property if they plan to hold for long term for investment purposes and gain the rental income, as the tax saving is more when more permitted expenses allowed and the maximum tax rate is also lower for corporate tax compared to personal tax. Since company is a separate entity, it is easier to register GST for company and report GST which is clear cut. If anything happen to the company and the property, it will not affect and risk your personal assets. Likewise, if you buy under personal name, you will need to get yourself register GST and be a taxable person. So end up you may need to charge GST even for the old commercial property which you have bought long time ago and no GST is apply which will make your property much expensive and harder to market and sold it off.
Hence, by setting up company, you can manage the GST of each properties separately and may not necessary to charge GST to all of your commercial properties are you can do a better GST planning and tax planning to save your tax in legal way.
Lastly, still have other question in mind? No worry, 3E Accounting has the best expertise in the market industry which can solve all your problem easily. Contact Us today to engage our services.