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The new tax regime is causing headaches for property investors, with April 1st fast approaching

With the implementation of Goods and Services Tax (GST) merely days away, those especially in the property industry remain baffled with details of the impending enforcement.

Effective from 1 April, 2015, the new tax regime GST – a multi-stage consumption tax – will be charged on any taxable supply of goods and services made in Malaysia by a taxable person with threshold of annual turnover is more than RM500,000 in the course or furtherance of any business. GST is also charged on importation of goods and services into Malaysia.

GST would affect all sectors, including the property industry, yet confusion and misinformation are still aplenty in the minds of property investors on many different aspects in the applications of GST.

“Some property investors are confused with the type of property that attracts GST,” KPMG Tax Services executive director Soh Lian Seng told Property Insight, “and buyers are still perplexed on the purchase of land or property during the transitional prior to the implementation of GST.”

For example, if a property is sold before April 1, 2015, but the handover of vacant possession or key to the buyer is after April 1, 2015, the property is not subject to any GST if the full payment before the effective date of GST is made based on the agreement, according to Soh.

“However if, according to the agreement, the full payment should be made on May 1, 2015 (post GST) but the buyer has made the final payment on March 1, 2015 (pre GST), the final payment will still be subject to GST. The GST is chargeable as if the payment or invoice is received or is issued on the effective date,” Soh explained.

There are still some uncertainties that have not been resolved yet with the Government authorities, Soh indicated, and one of it is the stamp duty. “The Real Estate and Housing Developers Association (REHDA) has proposed that the stamp duty should be imposed on the consideration exclusive of GST. This is because if stamp duty is imposed on the consideration inclusive of GST, it would represent a tax on tax,” Soh said.

To date, there is no clarification on this matter, he shared.

Based on the GST Guide for Property Developer issued by the Royal Malaysian Customs, the supply of land used for agriculture, residential or general purpose such as burial, playground and religious are exempt from GST. Whereas, supply of land and building used for commercial, administrative and industrial purpose such as shop lots, office, retail business, small office home office (SoHo), small office virtual office (SoVo), small office flexible office (SoFo), factories, hotel, motel, inn, hostel and warehouses are all subject to GST at 6%.

Individuals or companies who have an accumulated rental income of more than RM500,000 per year have to be GST registered and subject to charge their tenants the 6% GST.

Those who are GST-registered will then need to prepare themselves with the coming of the GST, for the pitfalls are many and the sting from a misstep will be sharp.

“Are you ready for GST?” Asked BDO senior advisor (Advisory & GST) Ng Swee Weng. “If you are not ready for GST, it could become an expense to you,” he said, “because all the expenses that you are going to incur will have GST called the input tax and that will increase your cost of doing business. If you cannot pass the cost to your customers, it will again become an expense in the cost of doing business.”

In Ng’s opinion, the majority of people will have GST as a contingent liability because, due to ignorance, they don’t correctly reflect GST on their returns. “They could overclaim or underclaim GST. As a result, when they get audited, it will crystallize to become a huge liability,” Ng said in his GST presentation during PEPS’ 8th Malaysian Property Summit.

“So long as you are a GST-registrant, you must comply with the rules. If you don’t, the fines and the penalties can be quite heavy. Any general offence can get you a jail sentence of up to two years and a fine of RM30,000 maximum,” Ng emphasised.

“But the one I am more concerned with is the incorrect return,” he shared. “An incorrect return can attract a jail sentence of three years and a fine of RM50,000 maximum. The return we are talking about is the monthly return that you need to submit to the Customs. So if the errors are caused by computer or are clerical error, the chance of your following months having repeating the same error is very high. Imagine if for the whole year you submitted 12 returns and all 12 returns have errors; RM50,000 times 12 will be the maximum fines.”

In a group of companies, every company has to submit its return. So if a group of five companies, and all five have similar errors, the fines can escalate to five times more, emphasised Ng.

“It’s quite a serious matter. So I advise that, for all companies that are already registered, make sure your systems are in place so that your returns are accurate,” he said. “It’s only a three-page return, very easy to complete, but very easy to make an error, and very easy to get penalized.”

His other advice is to seek help from GST consultants.

“GST is going to be challenging as we move ahead because of the auditors. The auditors can come at any time to audit you and they have the know-how and the know-why and the know-where to audit. As a result, they can be very fast. And they do it because it is a requirement because you must give them a GST audit file,” Ng said.

The worst is that Customs could give a short notice and ask for transactions from one month ago to six years ago. “They can audit you anytime in the last seven years. So it’s very important that all your records are easily available for them to inspect,” Ng told.

He pointed to a report on GST audit in Australia over the period 2002-2013 where there is a significant increase in revenue collected by the country’s Customs purely on GST alone, hence Ng cautioned that the Royal Malaysian Customs will not be lax in enforcing its GST audit.

According to author and lawyer Chris Tan, who co-wrote the book ‘The Most Wanted Series: GST’, said that property investors are struggling to figure out which types of supply are subject to GST.  For instance, he told Property Insight, “If you’re landlord, you also concerned about the maintenance charges, etc., and whether they are subject to GST.”

Tan added, “When something is new, everyone will have some elements of uncertainty. So I think, most of the time it is because a lot of these rules are not clear enough, and we’re getting mixed responses from the authorities, and from the consultants, and from the experts. A lot of time everyone will be very much confused by the feedbacks they received. No one can give you a certain answer. I think we are also perplexed because the government is making a distinction between types of real estate. If only everything is the same.”

Tan recommended asking the right questions. “The first question is whether the person who is GST-registered or not,” he said. “Because if you are not registered, notwithstanding you’re dealing with commercial property that attracts GST, it doesn’t apply. Because if you’re not registered with GST, you cannot collect GST.”

Secondly, Tan said, commercial property investors have to be aware that all purchase price are inclusive of GST. “So if I am selling a RM1mil property, after 1st of April, you as a buyer still pay me RM1mil. The only different is the seller would then take the RM1mil and divide into 106, and the 6% goes to the Customs. So this effectively means is that seller actually only keeping 940k,” he explained.

The impact is that the seller now has to rethink the pricing. In addition, Tan said, “The other effect is on financing if you buy a property that’s subject to GST. If the selling price is RM1mil, are you taking RM800k loans? The answer is no, because it’s 80% out of 940k, which means cashflow-wise you have to get yourself ready for RM50K+.”

As a result, in Tan’s opinion, there will be two types of people in the property market after the 1st of April: people who are GST-registered, and those who are not.

“Now why is that having impact on the market? Simply because if you are a buyer of a commercial property that is subject to GST, would you buy from a seller who is registered, or would you buy from a seller who is not registered?” Tan asked.

“Therefore it gives rise to a new concept of buying subsales because not all the subsales sellers are GST register. If you are buyer, you look for those people who are not GST-registered.”

Tan added, “And then we have the landlord-tenant situation: Can you imagine having units and you are not registered, but your neighbour is GST-registered.” If both ask for RM1k rent, Tan said, “You earn more because you don’t have to take the 6% GST.”

According to TY Teoh International national tax director Richard Oon, who co-authored ‘The Most Wanted Series: GST’ book with Tan, remarked, “People are unsure as to how it with impact them. The GST model itself I wouldn’t say is complicated, but for the layman it’s a little difficult to understand – for example, the difference between exempt supply and zero-rated supply. Even the media sometimes gets confused over these terminologies, what more the members of the public.”

Oon illustrated a common misperception with an example of whether a developer, via a typical signed agreement, can charge GST on a residential home. “An agreement could be worded that a developer can charge GST. The question often asked of me is that, ‘The agreement says that the developer has the right to charge GST, but why, since I am buying a residential property?’”

Oon answered, “The clause is just there – it’s a protection clause for the developers. They have no right to charge GST.”

With buyers unsure about the mechanism of the GST and how it impacts the property transaction, in Oon’s experience he noticed that a lot of people adopting a wait-and-see attitude.

“They would see what other people do, and then follow.” So, Oon’s advice to the investors is to educate themselves to gain advantage. “Knowledge is King,” he said. “If you know the [GST] mechanics, you will know how it will impact you. So you know how to take action first, as compared to the others who just prefer to follow. So a continuous education is important,” he urged.

His other advice for commercial property investors: “There is still room to maneuver, room to plan and strategise, that for some period of time moving forward there would be some people selling properties by charging GST because they are registered, and there would be another group of people who will not charge GST because they are not registered,” he said. “So, there’re opportunities to buy properties at 6% cheaper.”

Oon furthered, “Also, in buying a commercial property now, so long as the property is transacted and the SPA is concluded before 31st March, essentially and indirectly you’ve bought the property at 6% cheaper as compared to another person who buys a similar property next door to you on 1st April onwards. So immediately by virtue of GST, you’ve made a 6% capital appreciation.”

As for the secondary market, there are no crystal clear guidelines for the market playes yet, and they are left assessing themselves in deciding whether they should register for GST or not.

The director of TST Consultants Sdn Bhd KP Bose Dasan said that the guidelines from the Royal Malaysian Customs Department has not taken the investment community and given them a good clear understanding. The main confusion of the investors, according to him, is whether investment is a business.

This is because one of the elements that are subjected to GST is that one must be in the course of business. According to Bose, an investor has an investments holding, hence it is not on the course of business. It does not satisfy one element of GST. “A lot of individual holds investment. So that doesn’t mean they are trading, that doesn’t mean they are in business, because we clearly understand investment income is for a long term – you buy the property, you rent it out, collect the rent, and it’s meeting all your need. It’s an investment property,” he said.

Bose added that the secondary market is full of investment community. They had invested in the property so that they can derive rental income, and then they can dispose the property and derive capital gain. Yet, the Customs Department has been quite silent on giving explanation whether investors are “doing business.”

GST is only looked from the perspective of the sellers. Bose elaborated by asking, “Is the seller in business? A lot of these property owners, they are not in business of selling properties, they just invested it. The seller doesn’t own this property for business, no. It’s only as an investment.”

Another concern of the secondary market on GST would be the transitional provision. As stated by Bose, “There’s a transitional provision in the Act. Section 183 of the GST Act says that if the actual supply doesn’t take place, but you’ve already collected the money yet the delivery doesn’t take place…and this happens after 1st April, then it’s deemed that your transaction has taken place on 1st April. This means it is subject to GST.”

A lot of people are under the impression that if they just sign the S&P agreement before the 1st of April 2015, they will escape GST. But, according to Bose, if they look at this transitional provision, they will be slightly mistaken.

“I understand from the professional, some lawyers are giving opinion that the actual time of the supply is when the transfer form is signed,” he said. This creates confusion because under the Real Property Gains Tax (RGPT), the date of transfer is when the S&P agreement was signed.

The secondary market needs a clarification from the Customs Department regarding this issue, because in the transitional provision, the physical supply deemed to be when the transfer takes place.

Malaysian Institute of Estate Agents (MIEA) president Siva Shanker agreed to Bose’ opinion. “Technically they gain possession when the service is delivered. So if you complete your sell in middle of April, even though you signed the agreement on the 1st of January, you are subject to GST. It is because of this transitional rule,” Shanker said.

Other than the issue of transitional provision, there is also the issue of property usage. When the property use is purely residential, there will be no GST involved. Yet, once you change the use to commercial, administration, or industrial, it becomes taxable supply.

Bose exemplified, “Let’s say that you are going to sell your property. To enhance your investment, you remodel it to commercial, and you sell it. Now, if I’m using my thinking from income tax point of view, that would be an enterprise. That would be a badge of trade. Now you’re increasing the value of your property by converting it for commercial use. So there’s an element of business intention here. If you sell it, it becomes business in nature.”

Shanker opined that “there are many instances that residential premises are used for commercial purposes but it remains residential per say – for example, all the bungalows in Jalan Maarof, where every single one of them is a business. They are all zoned residential. They just go to DBKL, to earn a permit for business, and that’s renewable for every year.”

Bose asserted that although the land is residential, but the design is now commercial use, hence according to GST it is taxable. He added that “under the GST law, once you changed the use of the property, it now qualifies you as having taxable supply. So the key consideration is: what is it being used as?”

The secondary market has been asking the Customs to provide the investors some clear guidelines on GST. “To this day, since there is no clarification from the Customs, the interpretation on GST is up to us,” Bose said.

The peril is that, as he put it, “Whoever read the Acts, interpreted it.” While confusion reigns, investors in the property industry still struggle to make sense of the different interpretations of GST from different sources. It may behoove the Customs to further clarify the matter, hopefully sooner, with days remaining before the enforcement of GST.

GST Mythbusters

1. My rental income for commercial property is less than RM500,000 so I don’t have to register and I don’t have to charge GST to my renter. I also don’t have to charge GST when I sell my commercial property.

Registration is mandatory for person who makes a taxable supply for business purposes (in the furtherance of business) and the taxable turnover of that supply exceeds the threshold of RM500,000 is required to be registered for GST.

Lets put it this way: It’s not just rental income. When you talk about the registration, they said that it’s your annual income. It must be RM500k and above in order to register. That’s mandatory. However, this person seems to suggest rental income. They could be other income, that actually can add up to 500k. If your annual income is more than 500k, you may need GST registration.

2. My total rental income is slightly more than RM500,000 but rental income from my commercial properties is very little. Therefore, I don’t have to register for GST.

There is a need to have two separate accounts for the rental collected. If commercial rental below RM500,000 no registration is required.

If you are not sure, seek clarification from Customs. If they cannot give you any written answer, because most of them cannot, put it in a letter. At least there is a letter for them.  In the meanwhile, you should just register anyway.

3. My friend and I have our own different shoplots and we decided to share ownership in one shoplot. His annual turnover is less than RM500,000, same as mine. We both don’t have to register for GST. (Or, same scenario, but my friend’s turnover is over RM500,000 but mine is not.)

You may share ownership in one shoplot but you cannot share the turnovers to determine whether you shall register GST. Each company stand on its own account, unless both of you are companies within a group of companies and your turnover is above RM500,000. You shall opt for Group Registration.

4. I bought a shop lot for RM1 million, but my annual rental income will not exceed RM500,000 so I don’t have to register for GST.

Yes, you don’t have to. You see the first part “bought a shop lot for 1 mil”, there is no bearing on this. Because how much you buy, you are not making any income. You buy anything, does not matter. It’s only when you sell or rent it out.

5. I have to pay GST on my bank loans and interests.

False. Interests charged on loans and financing is exempted from GST.

6. For my commercial property purchase, I signed my S&P and paid the down payment before April 1, 2015. Therefore I don’t have to pay GST on the down payment and the rest of the payment.

Down payment is not subjected to GST. However, whatever balance purchase price is subjected to GST irrespective of the date of SPA. Anything that you are collecting after 1st of April this year, is subject to GST. It’s about the date of making the full payment. Let’s say 31st of March, you pay everything. Then there’s no GST.

7. I bought a SOHO for residential purpose, so I don’t have to pay GST on the purchase even if I decide to use it as for commercial purpose later on.

Generally GST is imposed on commercial property such as SOHO, however Royal Malaysian Customs will look into the usage of the said premises. Residential usage of the property will not attract GST.

Officially in black and white, the Customs said that SOHO is considered commercial. However you can appeal and tell them that it’s looking at the usage. So if you use for residential, it will not attract GST. If you buy a SOHO, let’s say from developers, the price includes GST already. So, therefore, even if you use it for commercial purpose later on, there’s no issue.

8. Last year, I signed a 12-year business contract with a supplier with review opportunity every two years on my commercial property. The next review will be done in May 2015, and I don’t have to pay GST on the contract if it remains the same.

If there is review opportunity, the supply is subjected to GST when the first review opportunity arises.

9. The Royal Customs will levy a huge fine on my erroneous quarterly GST reporting even though I am not yet familiar with the accounting method.

Pursuant to Section 88 of the GST Act, any incorrect return, on conviction, will be liable:-

a)      Fine not exceeding RM50,000 or imprisonment for not exceeding 3 (three) years or both; and

b)      Penalty equal to the amount of tax which has been undercharged.

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