Malaysia’s government recently rolled out the new Goods & Services Tax (GST) on 1 April 2015. But many people are still unsure as to its full impact on the country’s property market, especially the housing sector. To help prospective buyers, PropertyGuru Malaysia has compared the new tax regime with the old one to give consumers an idea of its potential effects.
Difference with old tax system
Based on the previous tax system (Sales Tax Act of 1972), basic building materials likes bricks, cement and floor tiles come under First Schedule Goods. This means they are not subject to a sales tax, while all other construction materials incur a sales tax of five percent as they fall under Second Schedule Goods.
In comparison, the GST imposes a higher rate of 6.0 percent for all building materials and input services such as those provided by contractors and engineers, leading to higher cost for home builders.
Basically, the new tax regime passes the cost of Standard-Rated goods to end buyers while the tax for Zero-Rated goods is refunded by the government. As for Exempt-Rated items, the input tax is solely shouldered by the seller and they are entitled to refunds from the input taxes.
GST to push up residential prices
Specifically, residential properties fall under Exempt-Rated goods, meaning they are not subject to GST tax. However, home prices are still affected as construction materials are not exempted. Additionally, developers cannot get a refund for the input taxes as houses are not Zero-Rated items.
Consequently, home builders would be forced to accept a lower profit margin by absorbing a higher cost or raise prices in a bid to offset such costs.
According to experts, if the market is healthy and favourable, developers could pass the cost on to home buyers while they may be willing to absorb it if the housing market deteriorates. Nevertheless, profit making is still their main objective. Why would they build and sell houses if it doesn’t make any financial sense? Even market observers believe the new tax regime could increase home prices by about five to 10 percent.
Furthermore, the GST could compound woes plaguing the housing market such as expensive land costs which includes conversion charges, premium cost and development charges, as well as stamp duty and quit rent. Another problem is the shortage of land in urban areas like Penang and Klang Valley, which is exacerbating housing costs.
Commercial & industrial property most affected
Given that commercial and industrial properties are not ‘Exempt Rated’ goods but falls under ‘Standard Rated’ items, the GST will have a greater impact on these segments.
For instance, a shop sold for RM3 million will be subject to GST of RM180,000, which will be borne by the buyer. As a result, the investor’s rental yield would decrease unless he can find tenants willing to pay a higher rent.
When the same property is leased out, an additional 6.0 percent GST will be imposed on the tenant. For instance, RM10,000 monthly will include an additional RM600 tax.
Given the situation, landlords are advised to review their leasing agreement so that it includes relevant GST clauses. More importantly, their monthly rent mustn’t be too high as it will include a 6.0 percent GST. If it’s too high, that could discourage potential tenants.
For upcoming commercial and industrial properties purchased before completion, buyers are subject to an additional 6.0 percent GST. As the property’s price is billed based on the extent of completion, the tax is similarly billed in stages.
Additionally, property investors face higher cost as they need to set up an administrative process to collect GST when leasing or renting out commercial and industrial space.
They also need to carefully monitor their cash flow as GST must be paid when incurred and not billed when collected. Given this mandate, landlords are required to pay their taxes on time even if a tenant’s payment is late.
Looking ahead, a one-time increase in property prices is expected across all sectors once the GST has been factored in by developers in light of the higher cost of construction materials and necessary building services.
But because the commercial real estate sector is expected to suffer a heftier increase in cost as compared to residential, investors may divert their capital into the latter, especially into resale homes. Not only is this sector cheaper than commercial properties and new homes, they are also exempt from the new tax system.
Nevertheless, prices in the secondary residential market may also trend upward to mirror the higher cost of new homes.