Benjamin Franklin said only two things are certain in this life… death and taxes.
Now although it’s not all doom and gloom in the world of property investing, unfortunately there’s no escaping tax.
One of the most important taxes any property buyer or investor in Malaysia should understand is Real Property Gains Tax, or RPGT.
Now, I’ve got to admit, RGPT can be pretty confusing, particularly because the Malaysian government has tinkered around with the rates a few times over the years.
So when does RPGT apply? Who does it apply to? Which RGPT rate applies to you? Does it matter if you’re a foreigner or a local?
I’ll take you through it step-by-step so by the end of this article you’ll have a clear idea of how it all works - so you can factor it into your property buying (and selling) decisions.
So, what is Real Property Gains Tax?
RPGT is a ‘capital gains’ tax that the Malaysian government levies when a property is disposed of (sold).
It was first introduced in 1975 under the Real Property Gains Tax Act 1976 with the following "mandate":
“An Act to provide for the imposition, assessment and collection of a tax on gains derived from the disposal of real property and matters incidental thereto.”
In its simplest form, it’s basically a tax charged on the capital gain (or net profit) a seller makes when he or she sells a property.
The tax is payable by the seller of the property, and it’s payable to Malaysia's Inland Revenue Board, or Lembaga Hasil Dalam Negeri in Malay (frequently abbreviated to LHDN).
Whether you are a Malaysian citizen, a foreign resident, a retiree on an MM2H visa or anything in between - if you sell a property in Malaysia at a profit, RPGT will apply to you!
There are certain exemptions you can benefit from, however, which I’ll get to later.
How do you calculate RPGT?
Although it all sounds rather fancy and complicated, the math behind it is pretty basic.
In short, a flat rate percentage (the RPGT Rate) is applied to the net profit (or chargeable gain) that arises when you sell the property, as follows:
RPGT = Chargeable Gain x RPGT Rate
And how do we get the chargeable gain? You simply take the price the property is sold for, and deduct the amount that it was originally bought for.
Here’s the formula:
Chargeable Gain Formula
Chargeable gain = Sale Price - Purchase Price
To bring this concept to light, here’s a simple example.
Say you want to sell a property that you purchased for RM600,000 a couple of years ago. After a short while of marketing the property, you sell it successfully for RM 850,000 (nice one!).
Your chargeable gain in this case would be RM250,000 (RM850,000 - RM600,000).
The RPGT would then be calculated by taking the chargeable gain, and multiplying it by the RPGT Rate:
RPGT = RM 250,000 x RPGT Rate
The RPGT rate that applies depends on a number of factors which I'll elaborate on below.
RPGT rates in 2016 and 2017
As mentioned earlier, the Government has tinkered around with RPGT rates a few times over the last decade or so, largely in an effort to curb speculation and property flipping.
Since 2014 though, RPGT rates have remained the same.
The main factors that determine which RPGT rate apply to you are:
How long you have owned the property for when you sell it
Whether you are a citizen or non-citizen.
The RPGT rates as at 2016/17 are as follows
So, if you’re a Malaysian citizen and you sell a property after holding it for four years, you would be liable to pay RPGT at 20% of the chargeable gain.
In the above example, where your gain was RM250,000, the RPGT payable would be RM 50,000.
RM 50,000 = RM 250,000 x 20%
If, however, you decided to sell in the fifth year, it would only be RM 37,500 as the RGPT drops down to 15%.
If you’ve held it for six years, you wouldn’t have to pay any RPGT at all, as the rate for citizens selling beyond five years is 0%.
The RPGT exemptions you should know about
Even though tax is one of life’s few certainties, that doesn’t mean everyone is happy to pay it!
Luckily there are a few exemptions and tax deductions available to property owners.
Firstly, everyone can benefit from a once-in-a-lifetime exemption on RPGT when they dispose of their private residence.
For those of you worried because you have an ancestral home that’s going to be passed down the generations, you have nothing to fear. There’s an exemption on gains when a property is transferred within the family. For instance between a husband and wife, father and child, or even grandparents.
Third exemption is a relief of either RM10,000 or 10% (whichever amounts to a higher sum) on every transaction.
How to file to pay RPGT: the steps you need to take
The easiest way to get this done is via your lawyer. But if you like to take the path less travelled, then the following steps should be helpful.
Fill out a CKHT 1A (Disposal of Real Property) form. Along with this, you have to include the sale and purchase agreement. You may also include any other documentation to help evidence any deductions you intend to make from the RPGT.
If you’re applying for one of the RGPT exemptions, then you should also fill out the CKHT 3 (Notification under Section 27 RPGTA 1976) form.
Make sure your buyer fills out the CKHT 2A (Acquisition of Real Property) form and include a copy of the sale and purchase agreement as well.
Lastly, submit these forms and any other supporting documentation to the nearest IRB branch within 60 days, and - voila - you’re done!
These forms can be obtained at any IRB branch or you can download them off IRB’s website.
Soon enough the IRB will process your request, and you should receive confirmation notice.
Actually paying for RPGT (and what happens when you don’t)
So now that you know how to file for RPGT, when do you actually have to pay RPGT?
Well, when you sell a property, your lawyers will retain 3% of the selling price, by law.
This 3% is sent to the IRB within 60 days of when your sale and purchase agreement (SPA) was executed.
After two months, if the RPGT is less than the 3% first remitted, IRB will automatically refund the excess according to our friends at HasilNet.
So, RPGT isn’t as taxing as it sounds, to use a terrible pun. Though it’s an important component of buying and selling property in Malaysia and one that should weigh in to everyone’s buying and selling decisions.