Real Property Gains Tax, Part 2

This three-part article is relevant to candidates preparing for the ATX-MYS exam and the laws referred to are those in force at 31 March 2024. The target readers are expected to already have a comprehensive understanding of real property gains tax. The three parts are organised as follows:

Part I

A.   Background
B.   Scope of charge
C.   Chargeable persons and the rates of tax
D.   Date of disposal and date of acquisition

Part II

E.  Exemptions, no-gain-no-loss and zero-rating
F.   Allowable losses
G.  Computation of RPGT
H.  Administrative aspects of RPGT

Part III

I.  RPGT implications on death of an individual
J.  Intra-group transfers and reliefs
K.  Real property company shares

Part II discusses the provisions in the Real Property Gains Tax Act 1976 (RPGT Act) as at 31 March 2024 that directly impact the RPGT liability as well as compliance requirements.

All references are to the RPGT Act.

Part II

E.  Exemptions, no-gain-no-loss and zero-rating      

Although all three concepts lead to a 'nil’ RPGT liability, in fact, they involve three distinct and different applications.

Zero-rating
A real property transaction subject to zero-rating means it is properly subject to RPGT, but is subject to tax at the rate of zero if the requisite conditions are satisfied.

Up to 31 December 2018, persons subject to tax under Part I of Schedule 5 enjoyed a zero-rate if they disposed of chargeable assets after a minimum holding period of five complete years.

With effect from 1 January 2019, the zero-rating in Part I was replaced with a 5% rate. This meant that individuals who were citizens or Permanent Residents (PR) no longer enjoyed the zero-rating after holding for five complete years.

At the same time, the minimum rate in Part II for a company incorporated in Malaysia, trust, or society, and under Part III for non-citizens and non-PRs, non-citizen or non-PR executors of a deceased estate, and a company not incorporated in Malaysia was raised from 5% to 10% for a disposal after the fifth year.

On 1 January 2022, the zero-rating was reinstated: persons subject to RPGT under Part I will be subject to nil RPGT if the disposal takes place in the sixth year et seq.

The 10% minimum rate is RETAINED for persons subject to RPGT under Parts II and III.

Exemptions
When a real property transaction is subject to RPGT under normal circumstances, but, as a matter of policy,  is afforded a specific exemption, it is said to be exempt from RPGT. While there are specific RPGT exemptions applicable to specific named person(s), below are the general exemptions available to certain classes of persons:
 

No-gain-no-loss transactions (NGNL)
This feature is peculiar to RPGT. It yields a nil-tax effect by deeming the disposal price to be the same as the acquisition price of the disposer. But this represents a tax deferral of the RPGT liability, not an outright exemption. It suspends the imposition of RPGT at the time of the transaction. The acquirer is thus deemed to have acquired the real property at an acquisition price equal to that of the disposer.

The downside is the acquirer’s acquisition date is not similarly deemed to be that of the disposer, but moved to the actual transaction date, as seen in Illustration 1 below:

ILLUSTRATION 1

Facts
Mr A, a citizen, acquired a piece of land on 1 February 2018 for RM100,000. He transferred the land to A Sdn Bhd on 1 March 2024 in return for 200,000 shares in A Sdn Bhd, a company wholly-owned by him. A Sdn Bhd disposed of the land on 1 September 2024 to a third party for RM500,000.

RPGT treatment
Mr A’s transfer of the land to A Sdn Bhd is a NGNL transaction. A Sdn Bhd is deemed to have acquired the land for RM100,000 on 1 March 2024.

When A Sdn Bhd subsequently disposes of the land on 1 September 2024 for RM500,000, the holding period is less than one year (1 March 2024 – 1 September 2024) while the chargeable gain of A Sdn Bhd is RM400,000 (RM500,000 – RM100,000). The RPGT liability is RM120,000 (RM400,000 at 30%).

This produces an impact where the acquirer is deemed to acquire the land at the historical price paid by the disposer but on the current transaction day, thus re-setting the clock for the holding period.

Had Mr A not transferred the land to A Sdn Bhd, but sold it under his own name on 1 March 2024, the chargeable gain would have been RM360,000 (RM400,000 – 40,000) and the RPGT liability would have been nil (RM360,000 at 0%).                                                                                                  

Examples of NGNL transactions

1. Transfer of assets between spouses, or former spouses, where the asset is owned by a citizen.
2. Transfer of assets owned by an individual and/or his wife or a connected person, to a company (incorporated in Malaysia) controlled by the individual, and/or his wife, or the connected person, for a consideration wholly or substantially (75% or more) in shares. The asset must be owned by a citizen.
3. Gifts made to the Government, State Government, a local authority or a charity exempt from income tax.
4. Assets disposed under compulsory acquisition pursuant to any law.
5. Where a donor, a citizen, disposes an asset by way of gift to a recipient, who is a spouse, parent, child, grandparent, or grandchild.
6. Intra-group transfer of assets, with prior approval from the Director General, for greater efficiency in operation wholly or substantially (75% or more) in shares.
7. Transfer of assets in any consideration between companies in any scheme of reorganisation, reconstruction or amalgamation in compliance with the Government’s policy on capital participation in industry.
8. Distribution of assets by a liquidator of a company and the liquidation was made under a scheme of reorganisation, reconstruction and amalgamation in compliance with the Government’s policy on capital participation in industry.
9. The devolution of the assets of a deceased person on:

- his executor/legatee under a will or intestacy; or
- on the trustees of a trust created under his will.

Tax planning
Each of the above, except item 7, produces a NGNL transaction, where the date of acquisition moves from the original date to the current date while the acquisition price remains at the original amount. This may prove to be disadvantageous in certain circumstances.

Therefore, the disposer and acquirer should be mindful of future plans for the property before proceeding with a NGNL transaction. It may be expedient to pre-empt a NGNL transaction by not fulfilling one or more conditions to be a NGNL transaction. For instance, to avoid being a NGNL under item 2 above, the consideration may be set at less than 75% in shares, with the balance in cash.

F.  Allowable losses

Where a chargeable asset is disposed of, and the disposal price is less than the acquisition price, there is an allowable loss. An allowable loss means a loss suffered on the disposal of a chargeable asset which, if it had been a gain, would have been chargeable with RPGT.

Year of assessment (YA)
Pursuant to section 10 of the RPGT Act, a YA is based on the corresponding calendar year. Therefore YA 2024 refers to the calendar year 2024 (1 January 2024 to 31 December 2024).

The concept and meaning of YA is important when considering the absorption of allowable loss.

Where there is more than one transaction of real property in a YA, the allowable loss from one transaction may be set-off against another transaction that yields a chargeable gain.

Question: Must the loss-making transaction be after the profitable one in the same YA?

Section 7(4) reads:

‘Where there is an allowable loss in respect of a disposal, such allowable loss shall be allowed as a reduction to reduce the total chargeable gain of a person for a year of assessment in which the disposal was made.’

The provision enables the deduction of an allowable loss from a transaction against the total chargeable gain of the person from other transaction(s) in the same YA, regardless of whether the loss transaction occurred before or after the profitable transaction/s during that YA.

Section 7(4)(b) goes on to state that any unabsorbed loss may be carried forward to the subsequent year(s) of assessment until it is absorbed.

Do be mindful that, for an individual, any allowable loss is absorbed after the exemption under Schedule 4 – ie the greater of 10% or RM10,000. This is provided for in section 7(5) of the RPGT Act.

G.  Computation of chargeable gain

Section 7 of the RPGT Act states that ‘if the disposal price exceeds the acquisition price, there is a chargeable gain’.

Disposal price
Disposal price is defined in paragraph 6 of Schedule 2, and is summarised below:

Disposal price is:

Sale consideration for the disposal of the asset less  

(a) expenditure incurred on the asset after its acquisition … for the purpose of enhancing or preserving the value of the asset

(b)expenditure incurred by the disposer after its acquisition in establishing, preserving or defending his title to, or to a right over the asset; and

(c) the incidental costs to the disposer of making the disposal.

Note that the manner of arriving at the disposal price is by deducting any enhancement, preservation expenses etc. incurred after the acquisition, from the sale consideration.

The quirk here is that the expenses [ie items (a) and (b) above] are deducted from the sale price rather than the normal accounting approach of adding the additional cost to the purchase cost of the asset.

Enhancement/preservation expenses
If a property comprising land and building is acquired, the total cost is the acquisition cost. However, if the land is acquired, then subsequently a building is erected on it, or renovations are carried out on a land-with-building, the enhancement or preservation costs must be reflected in the state of the asset at the time of disposal.

Paragraph 5(1), Schedule 2 reads:

‘… (a) the amount of any expenditure wholly and exclusively incurred on the asset at any time after its acquisition … for the purpose of enhancing or preserving the value of the asset, being expenditure reflected in the state of nature of the asset at the time of the disposal; …’

Note the difference in RPGT treatment in Illustrations 2 and 3 below, where the only factual difference is the demolition of the house erected after the purchase of the land. Illustration 4 is included to highlight the difference in treatment where the building (or any form of enhancement cost) constitutes part of the real property at the time of purchase.

ILLUSTRATION 2

Facts
A piece of land was acquired at RM100,000 on 1 February 2021, with legal fees and stamp duty of RM2,500. A house was constructed on the land in 2022 at a cost of RM300,000. On 15 September 2023, the land-with-building was disposed of for RM500,000. The disposer paid RM30,000 to the real estate agent for the successful sale.

RPGT treatment
Chargeable gain is computed as follows:

ILLUSTRATION 3

Facts
A piece of land was acquired at RM100,000 on 1 February 2021, with legal fees and stamp duty of RM2,500. A house was constructed on the land in 2022 at a cost of RM300,000. On 1 May 2022, the house was demolished. On 15 September 2023, the land (now vacant) was disposed of for RM500,000. The disposer paid RM30,000 to the real estate agent for the successful sale.

RPGT treatment
Chargeable gain is computed as follows:

ILLUSTRATION 4

Facts
A piece of land (RM100,000) with a house constructed on it (RM300,000) was acquired on 1 February 2021 for RM400,000, Legal fees and stamp duty totaled RM2,500. On 1 May 2022, the house was demolished. On 15 September 2023, the land (now vacant) was disposed of for RM500,000. The disposer paid RM30,000 to the real estate agent for the successful sale.  

RPGT treatment
Chargeable gain is computed as follows:

Acquisition price
Paragraph 4 of Schedule 2 defines acquisition price to be:

Consideration for the acquisition of the asset (Purchase consideration)      

Add   Incidental cost of acquisition, ie

fee, commission or remuneration paid for professional services of surveyor, valuer, accountant, agent or legal adviser;
cost of transfer, including stamp duty; and
cost of advertising to find a seller.

Less   

(a) compensation received for any damage or injury to the asset, destruction, dissipation, or depreciation of the asset;
(b) insurance recovery for damage/injury/loss, destruction/depreciation of the asset; and
(c) deposit (for an intended transfer) forfeited.

It should be noted that where the sum received under items a, b and c above exceeds the purchase consideration plus incidental cost, the amount of the excess shall constitute a chargeable gain accruing to the owner at the time he receives the sum.

ILLUSTRATION 5

Facts
Madam X acquired a piece of land in 2005 for RM160,000 and incidental cost of RM25,000. The owner of the adjacent land carried out excavations in 2020 and caused damage to her land. In 2022, the court awarded her compensation of RM450,000 for this damage. This sum was received on 12 August 2023. 

RPGT treatment
The excess of RM265,000 [RM450,000 – (RM160,000 + RM25,000)] is deemed to be a chargeable gain for RPGT purposes on 12 August 2023.

H.  Aspects of RPGT administration

Returns
Section 13(1) says where a chargeable person disposes of a chargeable asset, both the disposer and the acquirer have the responsibility to make a return within 60 days of the date of disposal.

A property developer who sells properties is not required to file a RPGT return because he is not disposing of a chargeable asset as the properties are his trading inventory.

Withholding of tax at source
Where the consideration consists wholly or partly of money, the acquirer has a duty to retain the whole of the cash consideration or 3% of the cash consideration, whichever is lower. The acquirer is then required to pay the amount retained to the Director General of Inland Revenue (DGIR) within 60 days after the date of disposal.

If the disposer is a non-citizen and non-PR, the acquirer is required to retain the whole of the cash consideration or 7% of the consideration, whichever is lower.

Notification of death of disposer [section 14(4)]
Where a disposer dies, the DGIR is authorised to serve the notice of assessment on the executor of the deceased disposer. However, where the executor has informed the DGIR of the death of the disposer in the prescribed form, the DGIR has three years after the end of that year (ie the year of notification of death of the disposer) to raise any posthumous RPGT assessment.

ILLUSTRATION 6

Mr X died testate on 1 December 2023. His executor informed the DGIR of his demise by submitting the relevant prescribed form on 30 December 2023.

Under section 14(4), the DGIR has until 31 December 2026 (three years after the end of the year 2023) to raise any posthumous RPGT assessment (relating to any disposal by Mr X before his demise), if any, and serve on the executor.

If the executor had furnished the prescribed form on 2 January 2024, the DGIR will have until 31 December 2027 (three years after the end of year 2024) to do so.

Extension of the self-assessment system (SAS) to RPGT
With effect from 1 January 2025, the SAS will be implemented for RPGT. Provisions relating to the key features of the SAS are emplaced in the RPGT Act 1976 as follows:

1. A disposer is required to calculate the RPGT payable for each disposal in the prescribed RPGT return. The due date for submission of the RPGT return remains at 60 days of the date of disposal. The RPGT return may be filed electronically.
2. The DGIR is deemed to raise the RPGT assessment based on the return furnished by the disposer.
3. A disposer may furnish an amended RPGT return within six months of the due date (for the submission of the RPGT return).
4. The five-year time bar applies for additional assessment by DGIR, except where there is fraud, wilful default or negligence.
5. The seven-year record keeping requirement (from the end of the YA in which the deemed assessment is made) applies to RPGT.        

Written by a member of the ATX-MYS examining team