One Year Post – GST

Making sense of the current GST challenges with new regimes and legislation

Following numerous delays and postponements since its initial announcement back in 2009, the Goods & Services Tax (GST) regime was finally implemented in Malaysia on April 1, 2015. It affected all sectors, including the property industry.

The Royal Malaysian Customs (Customs) and Ministry of Finance have recently published a press statement comprising several key facts and figures on GST implementation. The facts and figures are as such:

406,000 companies have registered for GST as at March 2016;

GST collection for 2015 is estimated to exceed the target of RM27 billion (total amount is  yet to be finalised due to expected refunds);

RM800 million GST refunds are still pending or are being processed; the Customs Department is expected to raise RM39 billion from GST for 2016; and

1,190 GST-related cases have been investigated by the Customs Department as at 31 January 2016.

HOW DOES GST WORK?

According to the Customs Department, businesses making taxable supplies have to be GST registered if their annual sales turnover exceeds the prescribed threshold. Only a registered person can charge and collect GST on the taxable supplies of goods and services made by him. GST is charged on the value or selling price of the products. The amount of GST incurred on input (input tax) can be deducted from the amount of GST charged (output tax) by the registered person.

If the amount of output tax is more than the input tax in the relevant taxable period, the difference shall be remitted to the Government. However, if the input tax is more than the output tax, the difference will be refunded by the Government.

GST & PROPERTY INDUSTRY

So how has the property industry fared since the introduction of the tax regime? Even though a year has lapsed, confusion and misinformation are still aplenty in the minds of property investors on various aspects on the application of GST.

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 exempted from GST.

On the other hand, the supply of land and building used for commercial, administrative and industrial purpose such as shop lots, offices, retail businesses, small office home offices (SoHo), small office virtual offices (SoVo), small office flexible offices (SoFo), factories, hotels, motels, inns, hostels and warehouses are all subject to the 6% tax.

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

TY Teoh International national tax director Richard Oon says that it is a well known fact that residential property is exempted from GST, and the things that do not appear in the exemption order is all subjected to GST.

“If you are a contractor, regardless of whether you are building a residential or commercial property, you are providing a service to the developer, hence your services should include the 6% GST charge. It is the same for all the other services that are involved in buying a property. The GST is applicable to legal services, financial services and agency services,” he explains.

The Real Estate and Housing Developers’ Association (REHDA Malaysia) has recently completed a survey, and proved that the majority of developers had taken the initiative to absorb the implementation cost of GST. However, there are still several concerns regarding the implication of GST on property developers.

One of the concerns revolve around joint venture development. As stated by the Customs Department, under normal conditions, the parties involved in the joint development of land in Malaysia would not qualify as a joint venture under GST.

“Usually, a land owner will have contracts with a developer. The developer will take the power of attorney for the land owner over all aspects of the development, including constructing the buildings, marketing the project and selling the separate lots, but the title is still held by the land owner. The land owner then sells the developed lots and pays a portion of the proceeds to the developer. In this case, the land owner supplies the property while the developer provides a service to the land owner,” Customs Department explains.

Onn then questions what land owners get back in return, under such circumstances. “If it is a residential development, then it’s fine. If it’s a commercial development, then the land owner needs to charge the developer GST. But what happens if the development is a mixed development? This is why it is important for the land owner to be knowledgeable with GST implementation,” he explains.

In addition, what happens to properties that come partly- or even fully-furnished? He says, “As I mentioned earlier, only the residential unit is exempted from GST. However, some developers are providing built-in furniture with their units. That furniture is chargeable with GST. Developers often take steps to add more value to their developments, but they should be mindful that those services should be charged with GST.”

Oon believes that real estate agents should also be knowledgeable in the implication of GST. “For example, if you are putting up a banner to sell, let’s say a RM800,000 shoplot, they should be aware that the price they put up should be inclusive of GST. They can’t tell the potential buyer that the price is without GST. That’s wrong.”

Despite the numerous effort to educate Malaysians about the GST regime, many are still confused and uncertain about how it works. Within the property industry, there are many issues that need to be ironed out or clarified by the Customs Department in relation to the interpretation of the GST Act and its subsidiary legislation, the practical implementation of GST obligations, compliance requirements and GST treatment of transactions or supplies.

GST TREATMENT FOR THE INDUSTRY

• Any transfer of the whole right of ownership in land, land under an agreement for the sale of such land, land under an agreement which expressly stipulates that the ownership of such land will pass at some time in the future, any interest under Deed of Assignment or any strata title is a supply of goods.
• Any lease, tenancy, easement, license to occupy land or transfer of undivided share in land is a supply of services.
• Where there is a default in payment under security relating to land, the transfer of such land shall be treated as a supply of goods.
• Changes in the land title such as the replacement of title with strata title or subdivision is not regarded as a supply.
• The sale and disposablity of property involving a transfer of ownership or title is regarded as a supply of goods. In the case of taxable supply, GST is charged on the whole value of the property when the land is made available to the purchaser that is the date of conveyance. However, in the case of property under construction involving progressive payment, the supply is treated as separately and successively supplied, and GST is charged whenever a part of the consideration is received or whenever the developer issues a tax invoice relating to that supply, whichever is the earlier.
• Where the transaction involves a transfer of possession such as lease and rental of property, it is regarded as a supply of services. GST is imposed on each successive lease or rental payment. GST is charged whenever the consideration is received or whenever the developer issues a tax invoice relating to that lease or rental.
• All supplies where charges and fees imposed by the government related to real estate such as quit rent, premium, survey fees (conducted by Survey Department), registration of titles and other payment are regarded as out of scope. The assessment rates imposed by the local authorities is also out of scope of GST.
• The treatment of any land transaction with a building or structure attached, will depend on its usage. If a residential building is built on the commercial land title, it will be treated as residential and such transaction is exempted from GST. However, if the residential building has been used for commercial purposes, GST is charged on the sale of this building.
• Where a development project involves both residential housing and commercial building, the residual input tax that can be claimed are GST incurred on utilities, rental, office equipment’s and stationeries etc., infrastructural and recreational works such as landscaping, community hall, car park facilities, playgrounds and incidental services.
• In order to secure the purchase of the property, developers are allowed to collect deposit or booking fees. Deposit or booking fees given in respect of a supply is not regarded as payment and is not subject to GST. However, if the developer applies such deposit or booking fees as consideration or part payment, then they are subject to GST.
• Land that is under charge (mortgage), lien or caveat is not a supply. When a developer charges the land title to the lender to obtain a loan, it is regarded as security for payment of debt. The same treatment is applicable in the case of a lien where such as actions are not regarded as a supply and not subject to GST.