Using taxes as a catalyst to go forward

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Taxing gains from properties

KUCHING: In the property sector, capital gains are not generally subjected to tax in Malaysia.

In its place, real property gains tax (RPGT) is imposed on gains that arise from the disposal of real property situated in Malaysia or of interest, options or other rights in or over such land as well as the disposal of shares in real property companies.

Foo Su Yin, acting chief operating officer or RAM Rating Services Bhd

“The property sector is typically tied to the general health of the country’s economy,” said RAM Ratings’ Foo.

“On this note, consumer confidence is highly correlated to the general economic cycles, and remains a strong influence on demand for property.

“Government policies such as the RPGT, regulations on banks’ lending policies, incentives for selected groups of buyers, and changes to interest rates as well as liquidity measures will have an impact on the availability of financing.

“These policies may also influence demand to a certain extent.”  The original rate of five per cent for RPGT was believed to ne not effective in curbing real estate speculative activities, as outlined during Budget 2012 last year.

If not controlled, it will put pressure on the price of real estate.

In the long run, it will jeaopardise the ability of low and middle income groups to buy houses.

To counter this, the government revised the RPGT.

Under the proposed new regime, this tax would be increased to 10 per cent for properties disposed of within the first two years while the five per cent rate was maintained for properties disposed of in the third, fourth and fifth years.

“The increase from five per cent to 10 per cent on properties sold within two years is expected to have a negative impact on both buyers and developers but the impact is only expected to be temporary,” explained Foo from RAM Ratings.

“Demand for properties, particularly among investors, will be affected.

The cooling down effect on speculative demand may see reduced sales for developers, in particular those into high-rise properties.

“However, fundamental demand will continue to be sustained by still-accommodative interest rates (the current overnight policy rate of 3 per cent is still lower than the pre-crisis levels of 3.5 per cent), domestic economic growth, the nation’s healthy demographics (54 per cent below the age of 30), rural-urban migration (urbanites as a  per cent of total population increased from 68 per cent in 2005 to 72 per cent in 2010) and low unemployment rates (3 per cent in October 2011).

“As such, genuine buyers will continue to benefit from the government’s push for affordable housing and the various incentives being rolled out to encourage home ownership,” Foo added.

KPMG Malaysia’s executive director Regina Lau revealed that the general sentiment behind property purchases was that properties were a good hedge against inflation amidst the current environment of decreasing purchasing power.

“The general revision in RPGT is generally not viewed by investors as a major factor in their property investment decisions,” said Lau.

“Any dampening of the property sector is more attributable to investors treading cautiously amidst pessimism in the global and local economic outlook, as well as tighter lending policies by banks.”  OSK Research Sdn Bhd (OSK Research) in its research note believed the increase in RPGT should have a mildly negative impact on sales although the availability of cheap financing in the country should ensure that the sector does not suffer too much for the time being.

“Overall, we believe the impact of this revision on the sector will be rather muted as it is aimed specifically at curbing inflation in the government’s efforts to ensure sustainable property value appreciation.”  Having said that, OSK Research believed the new regime might not deter some speculators from continuing to invest in Malaysian properties, given the currently low interest rates and the fact that many developers were still offering attractive discounts and easy financing schemes to potential buyers.

RAM Ratings’ Foo revealed the fact that Malaysia’s RPGT could be considered moderate when compared with measures undertaken by other countries in the region such as Singapore, China or Hong Kong.

Having said that, the demand drivers in these countries might be different, particularly in relation to its strong reliance on foreign purchases, property purchases in Malaysia are largely domestic driven.

“While there is no widespread property price escalation, such measure may to a certain extent help contribute to a more stable property market in terms of house price appreciation.

“Nevertheless, the RPGT when combined with the tighter bank lending policies (loan-to-value cap, lending based on net income) and uncertainties in the global economy are expected to weigh down on sentiments within the residential property sector this year,” Foo believed.

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