As at 31 March 2024
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 III discusses the provisions relating to special aspects of the Real Property Gains Tax Act 1976 (RPGT Act) as at 31 March 2024.
All references are to the RPGT Act.
When an individual dies, their real properties may be left under a will to a specific legatee. If not, the property is deemed to devolve to the deceased’s estate.
The devolution of the chargeable assets of a deceased person to his executor or legatee under a will or intestacy or to the trustees of a trust created under a will takes place at no-gain-no-loss (NGNL). This is because the deceased person is deemed to have disposed of the asset, upon death, to the executor/administrator/legatee for a price equal to the original acquisition price. Therefore, there is a disposal at this point but no RPGT liability will arise at this juncture.
Tabulated below are the bases for determining the acquisition date and the corresponding acquisition price of such real properties.
Situation |
Acquisition date |
Acquisition price [note] |
Disposals to a legatee [Schedule 2, Para 15A] A disposal of a chargeable asset – ie: |
Acquisition shall be deemed to take place: | [Schedule 2, Para 19] |
(a) A gift of an asset on death. |
On the date of transfer of ownership of the asset to the recipient. |
Market value of the asset on the date of transfer. |
(b) Where a legatee accepts an asset in place of a money legacy. |
On the date of transfer of ownership of the asset to the legatee. |
Lower of the money legacy or market value on date of transfer. |
(c) Where an asset of a deceased person is transferred to a legatee by his executor (irrespective of whether he himself is the legatee or not). |
On the date of transfer of ownership of the asset to the legatee. | Market value on date of transfer. |
Disposals other than to a legatee [Schedule 2, Para 19(3)] |
|
[Schedule 2, Para 19(3)] |
Where an asset of a deceased person is disposed of (otherwise than to a legatee) by his executor. |
Such executor or trustee is deemed to have acquired it on date of death of the deceased person. |
Market value as at date of death. |
Note
The references to 'market value' in the table above refer to market value less any expenses relating to compensation/insurance for the damage or destruction of the chargeable asset or any sums forfeited as a deposit [paragraph 4 (1) (a), (b) and (c) of Schedule 2].
It can be understood from the table above that if the executor subsequently disposes of a chargeable asset of the deceased’s estate to a third party, the asset is deemed to have been acquired by the executor on the date of death at the prevailing market price at that date.
So there is a disposal here, but the executor is in a somewhat favourable position because there has been a tax free uplift of his allowable cost for RPGT purposes to the market value as at the deceased’s death.
ILLUSTRATION 1
Facts
Mr Dee died on 13 March 2023, leaving four real properties:
After the disposal of the four properties and settling all Mr Dee’s debts and liabilities, the executor has determined the residue of the deceased estate, which is cash, of RM1.8 million. The executor, then distributed the cash according to the terms of Mr Dee’s will, which left an equal share to the widow and the son, who therefore each received RM900,000 in cash.
The executor has thus discharged all responsibilities under the will. The deceased’s estate ceases to exist as all its assets and liabilities have been accounted for.
RPGT treatment
First property: the land
The deceased person, Mr Dee, is deemed to have disposed of his property to the executor on 13 March 2023 for RM100,000. There is no exposure to RPGT at this point as this is a NGNL transfer.
The executor, Mr Ee, is deemed to have acquired the real property on 13 March 2023 for RM350,000. Mr Ee then disposed of the property on 5 June 2023 for RM375,000. His gain is therefore RM25,000 (375,000 – 350,000) and the disposal occurred in the first year.
Second property: the family home
The deceased individual, Mr Dee, is deemed to have disposed of the family home to the legatee (his widow) at NGNL, thereby not attracting any RPGT liability.
His widow is deemed to have acquired the property on the actual date of transfer of the property – ie 15 July 2023, for RM2 million. If she subsequently disposes of the family home, her acquisition date and acquisition price for RPGT purposes are respectively 15 July 2023 and RM2 million.
Third property: holiday home
Again, the deceased individual, Mr Dee, is deemed to have transferred the family home to the son at NGNL, hence not giving rise to any RPGT exposure.
The son was supposed to receive cash of RM300,000 under the terms of the will. As he agreed to accept the holiday home in place of the cash legacy, the acquisition price is RM280,000 (the lower of the cash legacy of RM300,000 and the market value of the holiday home). His acquisition date is 2 September 2023.
Fourth property: shophouse
The deceased individual, Mr Dee, is deemed to have sold the shophouse to the executor at NGNL at the date of death (13 March 2023). Hence, no RPGT liability arose at this juncture.
The executor, Mr Ee, is deemed to have acquired the property on 13 March 2023 (the date of death) at the prevailing market value of RM2.5 million. As he sold it for RM3 million, his gain is RM500,000. His holding period is less than one year (13 March 2023 to 1 October 2023). The RPGT chargeable on this disposal will fall due to the executor but only in his capacity as the executor, and he will be able to pay the RPGT liability from the resources of the deceased estate.
RM900,000 each to the widow and the son
The cash distribution of RM900,000 to each beneficiary has no RPGT implications because no real properties are involved. The sums also do not constitute income to the beneficiaries, not being revenue in nature, and are therefore not subject to income tax in their hands.
Under paragraph 17 of Schedule 2, three types of transfer of assets between companies are deemed at NGNL. Such transfers must have prior approval of the Director General to avail themselves of the NGNL treatment.
|
To achieve greater efficiency in group operation Para 17(1)(a) |
In compliance with Government’s participation polic | |
|
Liquidation pursuant to a scheme of reorganisation, reconstruction or amalgamation Para 17(1)(c) |
||
| Transfer of assets | Transfer between companies in the same group of companies | Transfer between any two companies | Distribution on liquidation |
| Consideration | 75% – 100% in shares | Consideration in any form | No consideration |
| Transferee | Resident company | Resident company | Resident company |
| Acquisition date of transferee | Actual date of transfer | Acquisition date of the transferor | Actual date of transfer |
| Condition for transferee | Must remain in the same group as transferor for three years after approval | Must remain resident in Malaysia for three years after approval | Must remain resident in Malaysia for three years after approval |
| Asset is subsequently taken in as trading stock by transferee |
At the date of taking in as trading stock, the asset is deemed disposed of and any excess is the chargeable gain of the transferee duly subject to RPGT provisions. | ||
Withdrawal of approval
The Director General may withdraw any approval given within three years of giving it if:
(i) There was misrepresentation of the purpose of the transfer;
(ii) The transferee company ceases to be in the same group of companies as the transferor company; or
(iii) The transferee company ceases to be resident in Malaysia.
The withdrawal will mean that the NGNL treatment will cease to apply. The transfer of asset will be treated under normal circumstances and RPGT will be raised accordingly.
Transfer of assets into stock [paragrapg 17A, Schedule 2]
Under this provision, where an asset held by a person as fixed capital is taken into the trading stock of the person, the transfer is deemed to be a disposal of chargeable asset. The disposal price of the chargeable asset shall be equal to the market value at the date the asset is reclassified into stock.
ILLUSTRATION 2
Facts
ABC Sdn Bhd (ABC), a retail company, acquired a shophouse for RM2.5 million on 1 March 2016. On 13 January 2023, ABC transferred the shophouse to its subsidiary DEF Sdn Bhd for RM3.1 million, satisfied by DEF issuing one million ordinary shares of RM2.50 each and cash of RM600,000. This transfer was part of a group corporate restructuring exercise (for greater efficiency in operations) which had been granted real property gains tax (RPGT) on 1 December 2022 by the Director General of Inland Revenue. DEF is a manufacturing company. Accordingly, the transfer of the shophouse was deemed to be a no-gain-no-loss transaction for RPGT purposes.
In January 2020, DEF invested in a 5-acre piece of land at a very reasonable price of RM780,000 in a forced sale. The board of directors decided to develop the land into a gated residential enclave. The land was reclassified as inventory on its financial year-end on 31 March 2024 when the market value was RM2.7 million.
A well-established property developer has since expressed interest in taking over 100% of DEF’s share capital from ABC.
Tax treatment
ABC Sdn Bhd
On 1 December 2022, the DGIR granted the approval to ABC for the corporate restructuring exercise and RPGT relief of no-gain-no-loss was obtained for the transfer of the shophouse to DEF. The three-year moratorium will end on 30 November 2025.
With the proposed sale of shares in DEF to the property developer, DEF will cease to be part of the ABC group before the three-year period is reached.
The DGIR can withdraw the approval and the NGNL treatment ceases to apply. The transfer of the shophouse will be subject to RPGT based on the circumstances. DGIR will issue an RPGT assessment on the transfer as follows:
|
RM’000 |
|
Disposal price |
3,100 |
|
Less: Acquisition price |
(2,500) |
|
Chargeable gain |
600 |
|
Acquisition date 1 March 2016 Disposal date 13 January 2023 RPGT at 10% (disposal after 5 years of acquisition) |
60 |
|
DEF Sdn Bhd
The 5-acre piece of land was reclassified from fixed asset to inventory on 31 March 2024. This constitutes a deemed disposal [paragraph 17A, Schedule 2]. The market value of RM2.7 million will constitute the disposal price, which will yield a chargeable gain of RM 1,920,000 (RM2.7 million – RM780,000). The disposal occurred in the fifth year, therefore the RPGT is leviable at 15%, and RPGT is RM288,000.
The upside to this treatment is, the land cost for the development project of the gated residential enclave gets an uplift to RM2.7 million
General
Paragraph 34A was introduced as an anti-avoidance measure. Take note that paragraphs 34 and 34A are mutually exclusive.
Definition of an RPC
A company is an RPC if it is:
When does one determine whether a controlled company is an RPC?
The answer is:
When does one re-examine whether a controlled company continues to be an RPC?
Once a controlled company is determined to be an RPC on a given date, it remains an RPC. There is no necessity to re-examine its RPC status thereafter until the company:
When an RPC ceases to be a controlled company[2], it ceases to be an RPC on that date.
When an RPC disposes of a real property or RPC shares, it is necessary to ascertain whether the remaining real property and/or RPC shares continue to make up at least 75% of TTA.
If the percentage falls below 75%, the company ceases to be an RPC on the date of disposal of the real property and/or RPC shares. Thereafter, there will be no need to review the percentage to establish its RPC status until the next time it acquires a real property or RPC shares.
If the percentage is 75% or more, the company will remain an RPC. Thereafter, there will be no need to review the percentage and its RPC status until the next time it disposes of a real property or RPC shares.
Once RPC shares, always RPC shares
When an RPC ceases to be an RPC, a shareholder who acquires shares after that date will acquire non-RPC shares.
However, existing shareholders who held shares while the company was an RPC would hold RPC shares and continue to hold RPC shares, even after the company had ceased to be an RPC. The RPC shares will not shed their RPC shares nature even though the company had ceased to be an RPC.
When such shares are disposed of (ie after the company has shed its RPC status because it ceased to be a controlled company or it disposed of real property or RPC shares and the percentage falls below 75%), it constitutes a disposal of RPC shares and is duly subject to RPGT provisions. Hence the quote: ‘Once RPC shares, always RPC shares’[3].
Therefore, it is possible that, in a single and the same transaction, RPC shares are disposed of by the disposer, but the shares acquired by the acquirer are not RPC shares.
Acquisition date
If a company was already in existence before 21 October 1988, and on 21 October 1988, it was determined to be an RPC, the shareholders are deemed to have acquired RPC shares on 21 October 1988.
If the shares are acquired at a time when the company is not an RPC, the shares are deemed to be acquired on the date when the company subsequently becomes an RPC.
ILLUSTRATION 3
Facts
XYZ Sdn Bhd was not an RPC when it was incorporated on 1 February 2015 with Mr X, Mr Y and Mr Z each holding 100,000 shares. The shares were, therefore, not RPC shares.
On 31 March 2016, the company acquired its first and only real property (defined value: RM1.2 million) when its total tangible assets (including the said real property) stood at RM1.5m.
XYZ Sdn Bhd did not dispose of its real property and it remains an RPC. Mr X disposed of his 100,000 shares on 10 October 2019 for RM1 million to Mr D.
RPGT treatment
Mr X, Mr Y and Mr Z are deemed to have each acquired 100,000 RPC shares on 31 March 2016 when the company became an RPC.
Therefore, the disposal of the RPC shares by Mr X occurred in the fourth year (31 March 2016 to 10 October 2019).
As for Mr D, he acquired RPC shares on 10 October 2019 [paragraph 34A(2)(b)].
Acquisition price
The acquisition price of RPC shares is either:
What is the acquisition price of the RPC shares by Mr X in Illustration 3?
This is dealt with in paragraph 34A(3)(a) of Schedule 2 and it is computed as follows:
A/B x C
where:
A is the number of shares held by the shareholder
B is the total issued shares of the company, and
C is the defined value of the real property at the date of acquisition of the chargeable asset.
The deemed acquisition price of Mr X’s 100,000 shares = 100,000/300,000 x RM1,200,000 = RM400,000 even though Mr X had only paid RM100,000 for the shares.
The disposal price being RM1 million, Mr X’s chargeable gain is, therefore RM600,000 (1,000,000 – 400,000).
Mr D’s acquisition price is the price he paid for the shares – ie RM1 million. [paragraph 34A(3)(b)].
Non-application
With effect from 1 January 2024, a new provision of paragraph 34A(5A) is introduced to Schedule 2 of the RPGT Act, to the effect that provisions relating to RPC shares shall not apply to an acquisition or disposal of any shares by a company, LLP, trust body or co-operative society (CLTC), other than a Labuan entity.
This non-application is necessary because CLTC is subject to income tax as income under section 4(aa) with effect from 1 March 2024
Written by a member of the ATX-MYS examining team
References:
(1). Total tangible assets include real property, stock-in-trade, property plant and equipment, trade receivables, cash at bank and cash in hand, investment in shares etc stated at gross (rather than net) value.
(2). A controlled company, as defined under the Income Tax Act 1967 – The reader is assumed to have a full understanding of the controlled company concept. Refer to sections 2 and 139.
(3). It has often been erroneously stated as 'once RPC, always RPC'. Note that the correct quote is 'once RPC shares, always RPC shares'.
Written by a member of the ATX-MYS examining team