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1. Brief history of RPGT Act 1976

The Speculation Tax Act 1974 was introduced on 6 December 1973 to restrain speculative activities. It was replaced by the Real Property Gains Tax Act 1976 (RPGT Act) on 7 November 1975. From 21 October 1988, the real property gains tax was extended to cover “real property companies”.

On 1-4-2007, the Minister of Finance, by Real Property Gains Tax (Exemption) Order 2007 [PU(A) 146/2007], granted full exemption of any disposal of real property from payment of gains tax. In other words, for about 2 ½ years (1.4.2007 - 31.12.2009), no gains tax was payable on any disposal of real property. The tax-free period ended on 31-12-2009. [See Real Property Gains Tax (Exemption) Order 2009 [PU(A) 376]].

The latest Real Property Gains Tax (Exemption) (No.2) Order 2009 [PU(A) 486] provides that, any disposal after 5 years of purchase/acquisition is exempt from payment of RPGT. The Order takes effect this year, that is, from 1 January 2010. In other words, gains tax at the flat rated of 5% is payable for the first 5 years of purchase, but after 5 years of purchase, no gains tax is payable for any disposal of real property.

One will note that since 2007, 4 pieces of legislation relating to the amendments of the RPGT Act 1976 have been enacted, namely:

(1) RPGT (Exemption) Order 2007 [PU(A) 146/2007 (2) Finance (No.2) Act 2010

(3) RPGT (Exemption) Order 2009 [PU(A) 376/2009]]

(4) RPGT (Exemption) (No.2) Order 2009 [PU(A) 486/2009] 2. Purpose of the 2010 Guidelines

Much confusion has been created by the recent amendments to the RPGT Act . The purpose of the 2010 Guidelines is to clarify the effects of the various amendments made to the RPGT Act with effect from 1-1-2010.

The most significant change is that a flat rate of 5% gains tax is payable on the chargeable gain for any disposal within 5 years of purchase/acquisition. A further development is that no gains tax is payable after 5 years of purchase. [See RPGT (Exemption) (No.2) Order 2009 [PU(A) 486]

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It is now clear that, commencing from 1 January 2010, a fixed rate of 5% gains tax is only payable for any disposal within the first 5 years of purchase/acquisition. The latest exemption of payment of gains tax for any disposal after 5 years of purchase is an outcome of an appeal by civil society, particularly the umbrella organization of the Chinese Associations Hua Zong. Cumbersome formula for calculating gains tax payable

It was before the end of last year 2009 that the Prime Minister announced full exemption of any disposal after 5 years of purchase/acquisition from payment of gains tax.

Any disposal within 5 years of purchase/acquisition attracts a flat rate of 5% gains tax, but not the sliding scale of rates ranging from 30% to 0% under Schedule 5 (Rates of Tax) of the RPGT Act.

A special formula A/B x C is introduced to calculate the amount of “chargeable gain exempt from tax”. The formula applies to any disposal on or after 1-1-2010

“A” stands for the result of “full amount of gains tax payable on the chargeable gain” calculated according to Schedule 5 of the RPGT Act 1976, reduced by the “amount of 5% gains tax payable on the chargeable gain”. “A” stands for “gain exempt from tax” under Schedule 5. For example, if the rate of tax payable is 30% under Schedule 5, gain exempt from tax is: chargeable gain x 30% - chargeable gain x 5%]. “B” stands for the “full amount of gains tax payable on the chargeable gain” under Schedule 5 . For example, if the rate of tax is 30%, the full gains tax payable under Schedule 5 is: chargeable gain x 30%. “C” stands for the “full amount of chargeable gain” . The full chargeable gain is the result of “disposal price – acquisition price”. For example, disposal price 300,000 – acquisition price 100,000 = full chargeable gain 200,000] The formula A/B x C therefore amounts to : A (gain exempt from tax) x C (chargeable gain)

B(gains tax payable under Schedule 5) If the disposal is in the 3rd year, the rate of tax is 20% under Schedule 5, the formula for Chargeable gain exempt from tax operates as follows:

chargeable gain x 20% – chargeable gain x 5% x chargeable gain chargeable gain x 20%

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Using the example given above, the full chargeable gain is 200,000 [that is, disposal price 300,000 – acquisition100,000 = gain 200,000]. If the chargeable gain is 200,000, and the tax rate is 20%, the formula works out in the following manner: Step 1: Gain exempt from tax :

200,000 x 20% - 200,000 x 5% x 200,000 200,000 x 20% = 15 X 200,000 20 = 150,000 [gain exempt from tax] Step 2: Taxable gain : total gain 200,000 - gain exempt from tax 150,000 = 50,000 Step 3: Gains tax payable under Schedule 5 = 50,000 x 20%

= 10,000

The cumbersome formula is rather long-winded and confusing. Instead of such cumbersome process, the simple formula: “chargeable gain x 5% ” will serve the purpose. If you use the simple formula, you will get the same result (RM10,000) as shown above:

Using the simple formula for flat rate of 5% gains tax: Full chargeable gain 200,000 x 5%

= 10,000

3. 15 examples are given as illustrations With a view to illustrating the working of the cumbersome formula, the Guidelines provide 15 examples, basically to illustrate the operation of the cumbersome formula as well as furnishing the relevant information about the real property gains tax applicable in 2010, such as new CKHT forms to be used; how to pay gains tax, etc.

Example 1 : Disposal after 3 years of purchase

ZZ Sdn Bhd bought a shophouse on 24.2.2007 at RM240,000. It was sold on 4.2.2010 at RM300,000 [that is, within 3 years of purchase (2010 - 2007)].

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For a disposal within 3 years of purchase, the gains tax payable under Schedule 5 (Rates of Tax) is 20%. The steps for calculating the chargeable gain exempt from tax, and the gains tax payable under Schedule 5, are as follows:

Chargeable gain: Disposal price RM300,000 - Acquisition price 240,000 = 60,000

chargeable gain exempt from tax: = (60,000 gain x 20%) - (60,000 x 5%) x 60,000 (60,000 x 20%) = 20 – 5 x 60,000 = 15 x 60,000 20 20

= 45,000 (gain exempt from tax) Taxable gain: Chargeable gain 60,000 – gain exempt from tax 45,000 = 15,000 Gains tax payable under Schedule 5 = 15,000 x 20% = 3,000 (Note: The same result can be arrived at by using the simple formula: chargeable gain 60,000 x 5% = 3,000) The simple formula should be used A simple formula for arriving at the 5% gains tax is “chargeable gain x 5%” It requires only 2 steps: (1). Just find out the chargeable gain; and (2). multiply it by 5%. The 5% gains tax payable in Example 1 given above is arrived at as follows: Chargeable gain = disposal price 300,000 – acquisition price 240,000 = 60,000 Gains tax payable = 60,000 x 5% = 3,000 It is mind-boggling why the authorities concerned recommend the cumbersome formula, instead of the simple formula, and why go about the circuitous way of arriving at the flat rate of 5% gains tax, when a simple formula serves the purpose well.

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Example 2 : Disposal after 5 years of purchase The Owner bought a shophouse on 24.2.2007 and sold it on 1-6-2013. This is a disposal more than 5 years (2013 - 2007) after the purchase, and no gains tax is payable. The amount of chargeable gains is arrived at as follows: Sale price 300,000 – purchase price 240,000 = chargeable gain 60,000 Chargeable gain exempt from tax: 60,000 x 5% = RM3,000. Comment: Though no gains tax is payable, in the eyes of IRB, there is a loss in revenue of RM3,000 in the disposal, which is the “gain exempt from tax”. (Note: the minimum rate of gains tax payable by a company for any disposal is 5% in the 5th year and thereafter under original Schedule 5.) In actual practice, the amount of RM3,000 being the “gain exempt from tax” does not concern conveyancing practitioners or the seller/disposer. For all practical purposes, the seller/ disposer is only concerned with the amount of “5% gains tax payable”. In the present case, no gains tax is payable since the disposal is more than 5 years after purchase. This is because the latest RPGT (Exemption)(No.2) Order 2009 [PU(A) 486] provides that no gains tax is payable after 5 years of purchase/ acquisition. Paragraph 2(1) says:

“The Minister exempts any person from the application of Schedule 5 of the Act on the payment of tax on the chargeable gain in respect of any disposal of a chargeable asset on or after 1 January 2010 where the disposal is made after five years from the date of the acquisition of such chargeable asset.”

Example 3(a) : Joint venture agreement The Owner bought a piece of vacant land on 20-6-2008 at RM1million. After the purchase, he entered into a joint venture agreement with a developer on 2-8-2011, that is, after 3 years of the purchase (8.2011 – 6.2008). The gains tax payable under Schedule 5 is 15%. The consideration for transferring the property to the developer is that the Owner will get 8 terraced houses, and 2 corner terraced houses. Selling price for 8 terraced houses: 300,000 each. Selling price for 2 corner terraced houses: 450,000 each Market value of the vacant land as at 2-8-2011 is RM 3million.

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The date of the joint venture agreement (2-8-2011) is deemed to be the disposal date. Chargeable gain: Disposal price 3 million - acquisition price 1 million: = chargeable gain 2 million – 10% exemption 200,000 = 1,800,000 Gains tax payable : 1,800,000 x 5% gains tax = 90,000 [If you use the cumbersome formula you will arrive at the same result.] Note: 1. Disposal date = the date of joint venture agreement. 2. Disposal price = the market value of vacant land at date of agreement 3. If part of consideration consists of cash, then remit to IRB either –

(a) 2% of the purchase price; or (b) total amount of cash received (if it is less than 2% of the purchase price). 4. In the present case, the purchaser need not remit 2% of the purchase price to IRB since the sale does not involve cash.

Example 3(b): Disposal on 5-9-2014 at RM350,000 of a terraced house by the owner after entering into a joint venture agreement with a developer . Disposal after 5 years (2014 - 2008). See facts given in Example 3(a).

Acquisition price of the unit sold:

300,000 x 3,000,000 = 3/33 x 3,000,000 = 272,727 ] 3,300,000 Chargeable gain: disposal price 350,000 - acquisition price 272,727 = chargeable gain 77,273 Chargeable gain 77,273 – minimum exemption 10,000 = 67,273 Using the cumbersome formula: Gain exempt from tax : 67,273 x 15% - 67,273 x 5% x 67,273 67,273 x 15% = 10 x 67,273 15 = 44,846 Taxable gain: chargeable gain 67,273 – gain exempt from tax 44,846 = 22,427

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Gains tax payable under Shedule 5 = 22,427 x 15% = 3364.05 (Using the simple formula = chargeable gain 67,273 x 5% = 3,363.65) Note: 1. Total market value of 8 terraced houses x 300,000 each + 2 corner lots x 450,000 each = 2,400,000 + 900,000 = 3,300,000

2. * Formula for working out acquisition price of the unit sold:

market value of unit sold x Market value of vacant land Market value of all units received (on 2-8-2011)

= 300,000 x 3,000,000 = 3/33 x 3,000,000 = 272,727

3,300,000 3. Using the cumbersome formula, the gain arrived at is 3,364.05. The answer arrived at by using the simple formula is 3,363.65. [There is only a minor difference (40 sen) between the 2 figures, because of the fraction produced by the cumbersome formula.] Example 3(c) : Based on similar facts in Example 3(a) under the joint venture agreement, if the owner received 10 terraced houses and RM50,000 in cash, the calculation of gains tax payable using the simple formula is as follows: Chargeable gain: disposal price 3 million - acquisition price 1 million = chargeable gain 2 million – 10% exemption 200,000 = taxable gain 1,800,000 Using the cumbersome formula: gain exempt from tax: 1.8 million x 15% - 1.8 million x 5% x 1.8million 1.8million x 15% = 10 x 1.8 million = 2/3 x 1.8 million 15 = 1.2 million Taxable gain: chargeable gain 1.8 million - gain exempt from tax 1.2million = 600,000 Gains tax payable under Schedule 5: taxable gain 600,000 x 15% = 90,000

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Simple formula: Gains tax payable: 1,800,000 x 5% = 90,000 Note: 1. The developer must remit to IRB 2% of the total consideration , or total cash paid (if cash paid is less than 2% of total consideration). 2% of total consideration = 3 million x 2% = RM60,000. 2. Part of consideration is in the form of cash. The total cash paid is 50,000, which is less than 2% of total consideration. Therefore, the total cash paid is to be remitted to IRB. 3. Gains tax payable remains at RM90,000 as shown in example 3(a). It is immaterial that the consideration is in cash and kind. Example 3(d) : Disposal of only 1 of the 10 terraced houses under a joint venture agreement On 5-9-2014, the owner under the joint venture agreement is to dispose of 1 terraced house at RM350,000. Gains tax payable is as follows: Chargeable gain: disposal price 350,000 - acquisition price 295,000 = chargeable gain 55,000 - minimum exemption 10,000 = 45,000 Gains tax payable: 45,000 x 5% = 2,250 What is the acquisition price in a joint venture agreement? The agreement date (i.e. 2-8-2011) is deemed to be the acquisition date. Acquisition price is calculated in the following manner: market value of 1 unit sold x market value of vacant land market value of all units as at 2-8-2011 [less cash received] [developer’s price] Acquisition price = 300,000 x (3000,000 – 50,000 cash) 3000,000 = 1/10 x 2.95 million = 295,000

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Using the cumbersome formula to arrive at the gains tax payable after 3 years of purchase (2014 – 2011) :

Gain exempt from tax: 45,000 x 15% - 45,000 x 5% x 45,000 = 10 x 45,000

45,000 x 15% 15 = 30,000

Taxable gain: Total chargeable gain 45,000 – gain exempt from tax 30,000 = 15,000

Gains tax payable under Schedule 5 = 15,000 x 15% = 2,250 Using the simple formula: 45,000 x 5% = 2250 3.2 The Rates of Tax under Schedule 5 after the amendment The original Schedule 5 (Rates of Tax) has been adopted with a slight amendment. The slight amendment is that, after 5 years of purchase, 5% gains tax is still payable by citizens and permanent residents. (Note: under the original Schedule 5, no gains tax was payable by citizens and permanent residents after 5 years of purchase.)

For individuals: citizens and permanent residents Year of disposal rate of tax Within the lst and 2nd years 30% Within the 3rd year 20% Within the 4th year 15% Within the 5th year and thereafter 5% For companies Within the 1st and 2nd years 30% Within the 3rd year 20% Within the 4th year 15% Within the 5th year and thereafter 5% For individuals who are non-citizens and not permanent residents

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Within 5 years … … 30% After 5 years … … 5%

Comment: The Schedule of Rates of Gains Tax given above is the amended Schedule 5 of the RPGT 1976. It is slightly different from the original Schedule 5. After the amendment, with effect from 1 January 2010, any disposal after 5 years by a citizen or permanent resident still attracts 5% gains tax, whereas in the original Schedule 5, no gains tax was payable for such disposal. After the amendment, every disposal, without exception, attracts gains tax regardless of the withholding period. This is the result of the amendments made by the Finance Act (No.2) 2010. But, under the pressure of public opinion, the Minister introduced the latest Real Property Gains Tax (Exemption) (No.2) Order 2009 [PU(A) 486]. As a result, any disposal after 5 years of purchase is granted exemption from gains tax. A flat rate of 5% gains tax is payable for the first 5 years only, disregarding the sliding scale of rates of tax shown in Schedule 5. No gains tax is payable after 5 years of purchase/acquisition. The said Exemption Order applies to any disposal by any person. There is no distinction between individuals (whether citizens, non-citizens or permanent residents) and companies (whether local or foreign). No one is liable to pay gains tax after 5 years of purchase/ acquisition. The Exemption Order [PU(A) 486] prevails over the amended Schedule 5.

3.3 Purchaser to remit 2% of purchase price: s 21B amended S21B has been amended by the Finance Act (No.2) Act 2010: s46. The amended s21B relating to “Duty of acquirer to retain and pay part of the consideration” provides that 2% of the purchase price is to be withheld by the purchaser, and must be remitted to the IRB within 60 days of the date of disposal. But IRB may grant extension of time for remitting the sum: proviso to s21B. If the purchaser fails to pay any amount due, a penalty of 10% will be imposed. But IRB may, in his discretion for any good cause shown, grant remission of the increased amount, and refund the amount if it has already been paid: s21B(4). Before the amendment, 5% of the purchase price was to be retained by the purchaser until the issuance of Certificate of Clearance by IRB. This practice of retaining 5% is no longer applicable: the amended s21B.

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Example 4: 10% penalty for failure to remit in time A simple example is given showing how the penalty of 10% is imposed for failure to remit in time the retention sum of 2% of the purchase price. Amount to be remitted: If the disposal price is RM100,000, 2% of the purchase price to be remitted will be: 100,000 x 2% = 2,000. 10% penalty: If the sum of 2,000 is not remitted in time, 10% penalty will be imposed. 2% of purchase price 2,000 x 10% = RM200. Example 5 - where consideration includes cash + shares If the disposal price is RM100,000, comprising both cash and kind (e.g. RM1,000 cash + RM99,000 shares) the disposer need not remit 2% of the purchase price. He has to remit only the total cash paid, if the amount of cash paid is less than 2% of the purchase price. For instance, if 2% of the purchase price is 2,000 (i.e. 100,000 x 2% = 2000), and the total cash paid is 1,000 only, the amount to be remitted is the cash amount of RM1,000, since it is less than 2% of the purchase price. 3.4 Allowable losses deductible from gains from disposal of other

properties: ss7,14,17,20, para 31 Schedule 2 Example 6 Loss in disposal1 deductible from gain in disposal2?

a. Disposal1 - Loss in disposal1 incurred within 5 years is deductible from disposal2.

Aishah bought a piece of land in Alor Star on 2-1-2008 at RM350,000, to be sold subsequently on 21-3-2011 for RM300,000. (sale after 3 years: 2011 – 2008) Disposal price: selling price RM300,000 - legal fees etc.2,000 = 298,000. Acquisition price: purchase price 350,000 + costs of transfer 4,500 = 354,500 Loss: disposal price 298,000 - acquisition price 354,000* = (56,500)

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b. Disposal2 - On 29-4-2002, Aishah bought another piece of land in Kulim for RM255,000, to be sold on 1-3-2012 for RM500,000. [i.e. sale after nearly 10 years of purchase (2012 - 2002)]

Disposal price = selling price RM500,000 - legal fee, etc. 3,000 = 497,000. Acquisition price = purchase price 255,000 + costs of transfer 5000 = 300,000 Gain: disposal price 487,000 – acquisition price 300,000 =197,000 – 10% exemption 19,700 = 177,300. Taxable gain after deduction of loss: chargeable gain 177,300 - allowable loss (56,500) = 120,800 Exemption of tax payable under Schedule 5: 120,800 x 5% = RM6,040 Note: 1. The loss in disposal1 is deductible from gain from disposal2, because the loss was incurred within 5 years of purchase. Disposal2 was more than 5 years [in fact nearly 10 years] after purchase is irrelevant. 2. The gain from disposal2 is regarded as gain in disposal1. But a loss was incurred in disposal1, and therefore, 5% gains tax under Schedule 5 is deemed exempt from the gain in disposal2 after 10 years of purchase.]

Example 7: If loss in disposal1 is incurred after 5 years of purchase - not deductible from disposal2

Example 7(a). Loss incurred in disposal1 after 5 years of purchase On 15,4.2002, Nabil bought a piece of land in Seremban for RM1 million, to be sold on 10.2.2010 at the same price of RM1,million. [Disposal after nearly 8 years (2010 - 2002)] (Incidental costs: renovation expenses 250,000 + legal fees etc.11,400 = 261,400) Disposal price : selling price 1,000,000 – incidental costs 261,400 = 738,600

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Acquisition price : purchase price 1,000,000 + costs of transfer 24,000 - fire insurance compensation 52,600 = 961,400 Loss: acquisition price 961,400 - disposal price 738,600 = (22,800)

[Note : The loss of RM22,800 cannot be carried forward, because the loss is incurred in a disposal more than 5 years after the purchase. The loss is not deductible from the gain in the subsequent year.]

Example 7(b). Gain in Disposal2 more than 5 years after purchase On 15.4.2006, Nabil bought a piece of land in Port Dickson at RM585,000, and sold it on 10.8.2010 for RM800,000. [Disposal in the 5th year (2010.8 – 2006.4)] Disposal price: Selling price 800,000 - legal fee etc 10,000 = 790,000 Acquisition price: purchase price 585,000 + expenditure 15,000 = 600,000 Chargeable gain: disposal price790,000 – acquisition price 600,000 = 190,000

Note: The disposal1 in example 7(a) above was nearly 8 years after purchase (2010 - 2002). The sale incurred a loss. This loss is not deductible from the subsequent disposal2 in example 7(b), because the loss in disposal1 was incurred more than 5 years after purchase.

Example 8: Loss in disposal2 may be deductible from the gain in earlier disposal1 8(a). (Disposal1) Asmah bought one house on 1-3-2008 at RM78,000, and sold it on 2-5-2011 for RM101,000 at a gain. [Disposal in the 4th year (2011.5 – 2008.3)] Disposal price: selling price 101,000 – legal fee etc 1,000 = 100,000 Acquisition price: purchase price 78,000 + costs of transfer 2,000 = 80,000 Chargeable gain: 100,000 – 80,000 = (20,000 - minimum exemption 10,000) = 10,000

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Gain exempt from tax: 10,000 x 15% - 10,000 x 5% x 10,000 10,000 x 15

= 10/15 x10,000 = 6,667 Taxable gain: chargeable gain 10,000 – gain exempt from tax 6,667 = 3,333 Gains tax payable under Schedule 5 = 3,333 x 15% = 499.95 (Simple formula: chargeable gain x 5% = 10,000 x 5% = RM 500) Example 8(b): (Disposal2) - where loss in disposal2 is deductible from the gain in disposal1. Asmah bought one house on 16.7.2009 at RM150,000, and sold it on 12.8.2011 at a loss for RM125,000. [Disposal in the 3rd year (2011.8 – 2009.7) - liable to tax if there is gain.] Disposal price: selling price125,000 – legal fee etc. 5000 = 120,000 Acquisition price: purchase price 150,000 + cost of transfer 10,000 = 160,000 Loss: Disposal price 120,000 – acquisition price 160,00 = (40,000) Note: The loss in disposal2 [in example 8(b)] is deductible from the gain in disposal1 [see example 8(a)]. Calculation of revised assessment for disposal 1 is as follows: Chargeable gain in disposal1 10,000 - loss in disposal2 (limited to 10,000 only) = chargeable gain “0” Note: 1. The loss in disposal2 is in fact (40,000) much more than the gain in disposal1, but deduction is only limited to the loss of 10,000. 2. The remaining amount of loss of 30,000 (40,000 – 10,000 = 30,000) can be carried forward. 3. The revised assessment will be issued. 4. The seller may claim refund if he has paid gains tax under the original assessment in disposal1.

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Example 9: Gain in the disposal within 2 years Example 9(a). (Disposal1) DEF Sdn Bhd sold a piece of land on 1.11.2010 at RM1,300,000. It was bought on 1.9.2009 at RM800,000. (Disposal within 2 years = 30% gains tax) Disposal price: selling price 1,300,000 – legal fees etc. 50,000 = 1,250,000 Acquisition price: purchase price 800,000 + costs of transfer 20,000 = 820,000 Chargeable gain: disposal price 1,250,000 – acquisition price 820,000 = 430,000 Gain exempt from tax: 430,000 x 30% - 430,000 x 5% x 430,000 430,000 x 30% = 25/30 x 430,000 = 5/6 x 430,000 = 358,333 Taxable gain: chargeable gain 430,000 - gain exempt from tax 358,333 = 71,667 Gains tax payable under Schedule 5: taxable gain 71,667 x 30% = 21,500.10 (Simple formula: chargeable gain x 5% gains tax = 430,000 x 5% = 21,500) Example 9(b): Loss in disposal1 after 5 years is not deductible from gain in disposal2) DEF Sdn Bhd bought a factory on 14.9.2003 at 1,000,000, and subsequently sold it at a loss on 10.12.2010 at RM700,000. [Loss incurred after 7 years of disposal (2010 -2003)]. Disposal price: selling price 700,000 – legal fees etc. 25,000 = 675,000 Acquisition price: purchase price 1,000,000 + costs of transfer 50,000 = 1,050,000 Loss: disposal price 675,000 – acquisition price 1,050,000 = (375,000)

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Note: 1. The loss in disposal2 (375,000) is not deductible from the gain in disposal1 [430,000] because disposal2 is more than 5 years (2010 – 2003) after purchase. 2. To be deductible, the deciding factor is that the loss in disposal must be within 5 years of purchase. 3.5 Bank loan interest – not deductible Any bank loan interest paid in acquiring the property is no longer a deductible item. This is the amount of interest which you have to pay your bank for partial releases (e.g progress payments of 15%, 10% etc. towards the purchase price) when you buy a house under construction. It does not refer to the bank interest you pay on monthly instalments to the bank after the full release of your loan. This portion of interest is deductible as an income tax item only, but not as a gains tax item. 3.6 Minimum Exemption of 10,000 or 10% of the gain: Schedule 4, para 2 Every individual enjoys minimum exemption of RM10,000 of the gain, or 10% of the gain from the disposal of real property. It applies to any disposal of real property (but not disposal of “real property company shares”). Exemption does not apply to any disposal of real property company shares. Example 10: Selling part of the land – 10% exemption is not allowed Shamsul bought 10 acres of land at RM600,000. (Purchase price of 4 acres: 4/10 x 600,000 = 240,000) He sold 4 acres first on 1.8.2007 at RM800,000. He then sold 6 acres on 1.9.2009. Chargeable gain in the sale of 4 acres out of 10 acres Disposal price RM800,000 – purchase price 240,000 = 560,000 Less: 10% exemption 56,000: 560,000 – 56,000 = 504,000 Note : 10% exemption of chargeable gain is not deductible from the gain in the sale of only part of the land (disposal1), but it is deductible from the gain in the sale of the remaining 6 acres of land (disposal2), that is, when eventually the whole piece of the land has been sold).

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3.7 Transitional provision –Tax relief for loss incurred previously: s.7 Tax relief for loss incurred before 1-4-2007 (i.e. loss incurred before the recent amendment under the previous provision of the RPGT Act) is allowed to be carried forward. The loss is deductible from the gain from the disposal in the year of assessment 2010 or thereafter, until the total amount of loss is covered. Example 11: Loss incurred in any disposal before 1-4-2007 (under the old provision of RPGT Act) is deductible from the gain on or after 1.1.2010 Example 11(a). Latif bought a double-storey terraced house on 1.6.2004 at RM120,000. On 1.5.2006 (before the full exemption), he sold it at RM100,000, incurring a loss of 20,000. [Disposal within 2 years (2006 - 2004), 30% gains tax payable] Loss: sale price RM100,000 – purchase price 120,000 = (20,000) . Tax relief for loss carried forward = 20,000 x 30% = 6,000 Example 11(b). On 1.8.2010 (after the latest amendment), Latif sold a piece of land at RM200,000. He bought it on 2.9.2007 at RM150,000. [Disposal within 3 years: (2010 – 2007), 20% gains tax payable] Chargeable gain: disposal price 200,000 – acquisition price 150,000 = 50,000 Less minimum exemption: gain 50,000 – exemption10,000 = 40,000 Gain exempt from tax: 40,000 x 20% - 40,000 x 5% x 40,000 40,000 x 20% = 15/20 x 40,000 = 30,000 (gain exempt from tax) Taxable gain: total gain 40,000 – gain exempt from tax 30,000 = 10,000

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Gains tax payable under Schedule 5 = 10,000 x 20% = 2,000 (Simple formula: chargeable gain x 5% = 40,000 x 5% = 2,000) Tax relief: gains tax payable 2,000 – tax relief for loss incurred in 2006 (limited to 2000 only) = 0 (gains tax payable for disposal2) The remaining amount of loss incurred in 2006 is 4,000 (i.e. 6,000 – 2,000). The tax relief for this sum will be carried forward, and deductible from any gain in other disposals in the future, until the total amount of loss is covered. 3.8 Certificate of non-chargeability Certificate of non-chargeability [Perakuan tidak dikenakan cukai ] will be issued to the disposer if there is no chargeable gain. This seems to be a new certificate in addition to other certificates issued when the gains tax payable has been paid in full. 4. What is a “Real Property Company”? A real property company (RPC) [Syarikat Harta Tanah – SHT] is a controlled company where Specific Value (Nilai Tertentu - NT) is at least 75% of the net tangible asset (Jumlah Aset Ketara – JAK) Specific value (NT) is: the market value of the real property; or the acquisition price of shares in the real property company; or the market value of the property plus the acquisition price of shares in the RPC. Net tangible asset [Jumlah Aset Ketara (JAK)] is the aggregate of both – (a) the specific value of real property and shares in the RPC; and (b) other value of land, such as a factory and machinery, business stocks, shares (other than shares in RPC), cash in bank and debtors. All this is based on the book value for ascertaining whether or not a controlled company is an RPC. (Note: For the sake of brevity, specific value is described as NT, and the net tangible asset is described as ‘total asset JAK’) Example 12: A real property company must have at least 75% NT An example of a real property company: where a limited company acquires real property worth RM350,000, whereas the total asset JAK of the company is RM430,000.

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The NT of the company is 81% (350,000 : 430,000). It is more than 75% of the total asset (JAK). Example 13: not a real property company: if less than 75% NT Company H acquired 100,000 shares in the real property company X at RM1 per share. The total asset JAK of company H is 200,000. The NT is 50% (100,000 : 200,000). This is not a real property company, because NT is less than 75% of the total asset JAK. If Company H bought additional 150,000 shares in the real property company X, His total RPC shares would increase to 250,000 shares (150,000 + 100,000). If the total asset JAK of company H is 300,000, the NT is 83% (250,000 RPC shares : 300,000 total asset JAK). Company H has become a real property company. Example 14: Sale of real property company shares Company XYZ was a controlled company formed on 1-1-2005 with paid up capital of 100,000 ordinary shares at RM1 per share. Shareholder M owned 20,000 shares. On 1-1-2007, Company XYZ acquired real property worth RM350,000. The total asset JAK of the company was RM430,000. The NT was more than 75% (350,000 : 430,000) of the total asset JAK. Company XYZ is a real property company. On 1-9-2008, shareholder M acquired additional 10,000 shares from shareholder T at RM19,000. His investment in company XYZ to 30,000 shares (20,000 + 10,000). Company XYZ re-valued its real property because it was near the new business centre. Its paid up capital was increased to 150,000 shares. 50,000 shares were issued in the form of bonus shares (from the excess reserve by reason of re-valuation), and distributed the bonus shares to existing shareholders. M is to be given 10,000 bonus shares by a director’s resolution on 1.1.2012. As a result, M had a total of 40,000 shares (20,000 + 10,000 + 10,000) in Company XYZ. On 1.11.2010, M sold 20,000 shares at RM86,000,

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Then he sold 5,000 shares on 1-1-2016 at RM21,500. Subsequently he sold 10,000 shares at RM45,000 on 1-5-2016. He had sold a total number of 35,000 shares (20,000 + 5000 + 10,000) leaving only 5,000 shares. Shareholder M owns 20,000 + 10,000 + 10,000 = 40,000 shares M sold [from 1-1-2007 to 1-5-2016] - 35,000 shares Balance … … … 5,000 shares re disposal1: 20,000 shares on 1-11-2010 M was deemed to have acquired 20,000 shares (chargeable asset) on 1-1-2007, as at the date when Company XYZ became a real property company [see para 34(A)(2)(a)]. The acquisition price is to be determined according to the formula: A/B x C. A = the number of shares deemed to be chargeable asset. B = the number of shares raised in the company concerned on the acquisition date of the shares deemed to be chargeable asset. C = NT of the real property or RPC shares, or both, owned by the company concerned on the acquisition date of chargeable asset. Acquisition price of 20,000 shares is as follows: 20,000 x RM350,000 = = 1/5 x 350,000 = RM70,000 100,000 Chargeable gain: disposal price 86,000 - acquisition price 70,000 = 16,000. Gain exempt from tax: 16,000 x 15% - 16,000 x 5% x 16,000 = 10/15 x 16,000 16,000 x 15% = RM10,667 Taxable gain: chargeable gain 16,000 - gain exempt from tax 10,667 = 5,333 Gains tax payable under Schedule 5: 5,333 x 15% = 799.95 (Simple formula: Chargeable gain 16,000 x 5% = 800)

re disposal2: 5,000 shares on 1-1-2016

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Shareholder M was deemed to have acquired 5,000 shares on 1-9-2014 (on the date M acquired them from Shareholder T ) : para 34A(2)(b). The acquisition price of shares is determined according to para 4 or 9, Schedule 2, that is, the value in the form of cash or cash value for acquiring the shares; or at market value as provided under para 34A(3)(b). Therefore, the acquisition of 5,000 shares was RM9,500 (1/2 of purchase price19,000), that is, the total cash or value in the form of cash paid by M to T (incidental expenses not taken into account). Chargeable gain: disposal price 21,500 – acquisition price 9,500 = 12,000 Note: The disposal was more than 5 years after acquisition. It is not subject to gains tax [1.1.2016 – 1.9.2008]. re disposal3: 10,000 bonus shares The 10,000 bonus shares are deemed to have been acquired on 1-1-2012 on the date of acquisition [see para 34(9)(b)]. The acquisition price for the additional shares in the real property company is ascertained pursuant to para 4 or 9, Schedule 2. It is the total cash value or market value for acquiring the shares [see para 34(9)(b)]. The acquisition price of bonus shares was deemed “0” because M did not make any payment for acquiring the additional shares. Chargeable gain: disposal price 45,000 – acquisition price 0 = 45,000 Gain exempt from tax: 45,000 x 5% - 45,000 x 5% x 45,000 = 0 x 45,000 = 0 45,000 x 5% Taxable gain: chargeable gain 45,000 – gain exempt from tax 0 = 45,000 Gains tax payable under Schedule 5 : 45,000 x 5% = RM2250

[Simple formula: chargeable gain x 5% = RM2250]

4.1 Loss in the disposal of real property company shares - not deductible

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Any loss in the disposal of real property company shares is not deductible from the gain in the disposal of RPC shares and real property in the same year. It cannot be carried forward for deduction from the gain from the disposal of RPC shares and real property in the ensuing years [see para 33(d), Schedule 2, RPGT Act 1976] Examples 15: Loss in the disposal of RPC shares – not deductible from gain from the sale of other RPC shares Example 15(a): (Disposal1) Loss in the sale of ABC Company shares On 15.6.2009, Abu bought 30,000 shares in ABC company (a real property company) at RM60,000. On 1-1-2010, he is to sell all his shares at RM50,000. Loss: disposal price 50,000 – acquisition price 60,000 = (10,000). [Note: For the acquisition price of 60,000, see para 34A(3)(b)] Example 15(b): (Disposal2) Gain in the sale of XYZ Company after 5 years On 15.6.2003, Abu bought 30,000 shares in XYZ Company at RM30,000. (XYZ Company is a real property company) On 1-11-2011 he is to sell all his shares at RM70,000. Chargeable gain: disposal price 70,000 – acquisition price 30,000 = 40,000 Less minimum exemption: 40,000 – 10,000 = 30,000 Gains tax payable: 30,000 x 5% = RM1,500 Note: The loss incurred by Abu in the sale of ABC company shares is not deductible from his gain from the sale of XYZ company shares. 5. Procedure for submitting gains tax forms 5.1 Old and new CKHT forms Old forms to be used for disposal before 1- 4 - 2007:

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CKHT1 (for seller) and CKHT2 (for buyer) New CKHT forms to be used for disposal on or after 1-1-2010: CKHT 1A [seller/ disposer ] - for selling real property only CKHT 1B [seller /disposer] - for selling Real Property Company shares CKHT 2A [buyer/ acquirer] - for buying real property or RPC shares - use 5.2 CKHT Forms CKHT forms are available from IRB Branch; or you may download and print from IRB website – http://www.hasil.gov.my The use of PDF form is allowed. Comment: What about photocopies of CKHT forms? It is unthinkable that photocopies of CKHT forms are not allowed. Now the taxpayers are compelled to print the forms from their computers. There is no valid reason why photocopies of the forms cannot be used, bearing in mind that modern technology is so advanced that photocopies can be of the same quality as the orginals. They may even be of better quality than the originals. The new forms should have been supplied by the IRB as were done previously. As a matter of principle, the cost of printing CKHT forms ought to be borne by the IRB, and not the taxpayers. In fact, the old forms were supplied by the IRB to the taxpayers. There is no valid reason why IRB does not supply the new forms to the taxpayers, especially when more forms are required to be submitted when more than 1 purchaser or vendor are involved. Complaints from members of the Bar about the cumbersome process are mounting. Red tape and bureaucracy are evident. Would the Bar Council consider taking up the matter with the authorities concerned? 5.3 Submitting CKHT forms i. Every disposer or acquirer has to complete the CKHT form, and submit

together with relevant documents to the nearest IRB office. ii. To expedite the processing of CKHT forms, it is advisable to submit forms

to the IRB Branch handling the disposer’s income tax file. iii. If the disposal comes under Income Tax Act 1967, do not file CKHT forms.

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6. Seller’s obligations 6.1 For any disposal before 1-4-2007 [before the full exemption under the

previous provision of the RPGT Act ] – i. Use old CKHT 1 form.

ii. Enclose copy of evidence of disposal and acquisition. For sale of real property – attach stamped SPA/ stamped Transfer form 14A/ stamped memo of transfer.

iii. Enclose documents supporting allowable expenditure incurred.

iii. Submit CKHT within 1 month [old law] from the disposal date.

iv. Complete Election for Exemption Form for the disposal of private residential house [RPGT Act 1976, para 9, schedule 3]

6.2 Disposal on or after 1-1-2010

i. Use new form CKHT 1A [for sale of real property]; or new form CKHT 1B [for sale of real property company shares].

ii. Attach evidence of sale and purchase.

For sale of real property – attach stamped SPA,stamped Form 14A (Transfer form)/ stamped memo of transfer. For sale of real property company shares – attach stamped SPA, stamped Form 32A, Directors’ resolution/ Form 24 or share certificates.

iii. Attach documents supporting allowable expenditure incurred.

iv. Submit CKHT 1A [or CKHT 1B] within 60 days from the date of

disposal.

v. Submit Election for Exemption Form re private residence – if disposer intends to apply for exemption.

[Comment: The original provision of the RPGT Act does not stipulate the time for submitting the Election for Exemption. The seller may submit it at any time, i.e. either before or after receiving

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the assessment of gains tax payable. But now, IRB requires the seller to submit CKHT 3 together with CKHT 1A or CKHT 1B within 60 days.]

vi. Use CKHT 3 in the following cases where no gains tax is payable:

a. Disposal after 5 years of purchase; or b. Election for Exemption re private residence. c. Gifts (with no consideration) [RPGT Act 1976, para 12,

schedule 12]

CKHT3 is the Notice calling for information by Director General of IRB (issued under s27 of the RPGT Act) when the purchaser/ acquirer does not withhold and remit 2% of the purchase price.

vii. Must attach CKHT 3 to CKHT 1A or CKHT 1B.

CKHT 3 will not be processed if not submitted within 60 days of disposal. [Comment: This is a new requirement. It is inconsistent with the existing law, unless the relevant provision regarding Election for Exemption has been duly amended.]

viii. Must furnish the buyer with a copy of CKHT 3. Otherwise, the buyer has to remit the 2% of the purchase price to the IRB. 7 Buyer’s obligations

7.1 For buying property before 1-4-2007, the buyer’s obligations are

similar to those of the seller.

7.2 Buyer is to use new CKHT 2A within 60 days if the purchase is on or after 1.1.2010.

8 How does IRB handle CKHT forms?

8.1 Forms CKHT 1, CKHT 1A or CKHT 1B (for sale of real property company shares) may be rejected under certain circumstances, e.g. if the forms are not signed, supporting documents not furnished, etc.

8.2 Penalty will be imposed for late submission of the forms.

8.3 Notice or Certificate of Acknowledgement will be issued –

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a. Form K (Notice of Assessment) b. CKHT 5A (or old CKHT 5) (Certificate to the effect that no

gains tax is payable) c. For disposal before 1-4-2007 (Certificate to the effect that gains

tax has been paid in full). 9 Parties’ obligations

9.1 Buyer’s obligations

i. Sale before 1-4-2007 – to retain 5% of the purchase price.

Sale on or after 1-1-2010 – to retain 2% of the purchase price only.

ii(a). To remit within 60 days of disposal -

If the buyer receives CKHT 3 [for non-retention of 2% of the purchase price] from the seller within 60 days of disposal together with CKHT 2A, the buyer need not withhold and remit the 2%. But if the seller does not submit CKHT 3 within 60 days of disposal, the buyer must remit the 2% to IRB.

ii(b). Attach payment slip [CKHT 502] together with payment.

CKHT502 is available from IRB; or one may download from IRB website.

9.2 Seller’s obligations

i. The seller must submit CKHT 3 (for non-retention of 2%) for any case which is not liable to gains tax.

If the information furnished is found to be false, it can be an offence under s30 of the RPGT Act. If convicted – the seller is liable to a maximum fine of RM5,000.

CKHT 3 can be downloaded.

ii. The seller is to pay tax within 30 days of the notice of assessment

(if the amount payable exceeds the sum retained, even if an appeal has been filed). The 2% retention sum will be deemed part

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payment of the gains tax payable. Payment may be made by using CKHT 501 (issued together with the Notice of Assessment). CKHT 501 may also be downloaded.

9.3 How to pay gains tax?

The buyer - can only pay at the IRB counter or IRB Branch by way of crossed cheque, money order or bankdraft, issued in the name of Ketua Pengarah Hasil Dalam Negeri together with the payment slip CKHT 502 (for the buyer).

The seller - can pay at IRB counter or pay by post, accompanied by the payment slip CKHT 501 (seller).

The seller may choose to pay by way of e-payment through FPX [Financial Process Exchange]. See website http://www.hasil,gov.my/. FPX member banks are: CIMB, PBB, MBB, RHB, BIMB and Hong Leong Bank.

Internet banking is available at : CIMB, PBB, MBB and EON bank. (but Citibank - for companies only).

In MBB – payment may be made at the counter by ATM, cash deposit machine, internet banking or telephone banking.

Conclusion The procedure for taxpayers to pay gains tax, instead of being simplified, has been made more cumbersome. The forms used are more detailed and complex, akin to the income tax returns. A cumbersome formula is introduced. It is a roundabout way of arriving at the 5% gains tax payable. The taxpayers are compelled to work out the amount of gains exempt from tax under Schedule 5 of the RPGT 1976 for any disposal on or after 1-1-2010. This is contrary to the modern trend of making efforts to simplify the process for payment of tax by taxpayers in many countries (e.g. Australia, Singapore, etc.). When the authorities concerned prepared the forms and laid down the cumbersome procedure for calculation of tax payable, they do not have the interests of taxpayers at heart. They seem to have their own interests in mind. A good example is the introduction of the cumbersome formula for working

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out the amount of chargeable gain exempt from tax. This is solely for the benefit of the authorities concerned, but it is at the expense of the taxpayers. The IRB is compelling the taxpayers to print their own CKHT forms, which ought to have been supplied by the authorities concerned. It has come to light that the use of photocopies of the forms are not allowed. This is a decision that defies logic in view of the advanced modern technology available. The consumer-unfriendly approach (which is akin to hostile approach) adopted by the authorities concerned towards taxpayers is uncalled for. It causes unnecessary inconvenience to the taxpayers. It certainly does not facilitate easy payment by taxpayers towards public coffers. It is inconsistent with the taxpayer-friendly policy usually adopted by most of the countries claimed to be subscribing to democracy. It is time for the authorities concerned to change their unfriendly attitude towards taxpayers who are in fact making an invaluable contribution to the well-being of the national economy.

Instead of the cumbersome formula for finding out the “gain exempt from tax” for any disposal of real property, one wonders why a much simpler formula is not suggested for calculating the flat rate of 5% gains tax payable for disposal of real property. The cumbersome formula is a circuitous way of arriving at the 5% gains tax payable. It starts with the calculation of the “gain exempt from tax” under Schedule 5 of the RPGT Act. Then the “taxable gain” is worked out. Only at the last stage, that the “gains tax payable under Schedule 5” is arrived at. The same result can be easily arrived at by a simple formula: “chargeable gain multiplied by 5%” The “gain exempt from tax” is not the concern of a seller or buyer. He is only concerned with the flat rate of 5% gains tax payable on the disposal of the property. Therefore, the simple formula would have served their purpose. The authorities concerned should seriously consider the fact that they are public servants serving the needs of the public at large (including the taxpayers making contribution to the well-being of the national economy). They are not the erstwhile colonial masters. They should refrain from having the undesirable mindset of the erstwhile colonial masters in devising inconsiderate ways and means of achieving their own interests, or furthering their ulterior motive, at the same time showing total disregard for the unnecessary heavy load of burden imposed on the citizenry.

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In the circumstances, in the interests of the taxpayers, it is incumbent upon the authorities concerned to simplify the CKHT forms as soon as possible, discard the cumbersome formula and permit the use of the simple and straightforward formula to work out the 5% gains tax payable for any disposal of real property.