Goods & Services Tax (GST) and the Property Investor

In the Budget 2014, Prime Minister Datuk Seri Najib Razak announced the introduction of the Goods and Services Tax (GST) and when enacted, GST will be effective from 1 April 2015 and standard rated supplies will be subject to GST at a rate of 6%. With the introduction of GST, the current indirect taxation systems of sales tax and service tax will be abolished on the same date.

What is GST?

GST which is also known as the ‘value added tax’ (VAT) in many countries, is a multi-stage consumption tax on goods and services, which ultimately falls on the final consumer.GST is levied on the supply of goods and services at each stage of the supply chain from the supplier up to the retail stage of the distribution. Even though GST is imposed at each level of the supply chain, there is no compounding tax effect, regardless of the number of stages a product or service undergoes in the supply chain, as GST is only charged on the value added element at each stage in the supply chain. This is achieved through net of ‘output tax’ (the GST on the goods and services sold by you) minus ‘input tax’ (the GST you paid on the raw materials, equipment and services used in your business) mechanism adopted under the GSTadministrative process.

GST is a broad-based consumption tax covering all sectors of the economy i.e all goods and services made in Malaysia including imports except specific goods and services which are categorized under zero rated supply and exempt supply orders as determined by the Minister of Finance and published in the Gazette.

Scope of Charge

GST will be charged on any supply of goods and services if the following conditions are satisfied:

it is made in Malaysia;
it is a taxable supply of goods or services;
it is made by a taxable person; and
it is made in the course or furtherance of any business carried on by that taxable person.

A taxable supply is a supply which is standard rated (6% under current proposals) or zero rated, whereas exempt and out of scope supplies are not taxable supplies. GST can only be levied and charged if the business is registered under GST. A business is not liable to be registered if its annual turnover of taxable supplies does not reach the proposed prescribed threshold of RM500,000. Therefore, such businesses cannot charge and collect GST on the supply of goods and services made to their customers. Nevertheless, businesses can apply to be registered voluntarily.

Properties Acquired From Property Developers

Even though it has been proposed that residential properties are deemed to be exempt supplies (ie. the developer cannot charge housebuyers GST), you will realise that from the above diagram, the developers will still be subject to GST on the construction materials and supply of various services. As the developers will have to pay for the input tax (ie. GST) on those construction materials and other services, they are unable to claim output tax as GST is not imposed on residential properties. Consequently, the GST element of the costs of construction would eventually be passed on to the housebuyers. In the case of commercial properties, the developers will have the relief of claiming GST incurred as input tax as they are able to charge output tax (GST) on the buyers. In the case of a mixed development of both residential and commercial properties by a developer, the proportion of GST incurred in relation to the construction of residential properties cannot be passed on and absorbed by the construction of commercial properties either.

Some may argue that cost of construction may instead reduce, considering that the rate of sales tax in Malaysia which is currently 10%, will be abolished and replaced by the 6% GST come 1 April 2015 and this would in fact translate into some savings on the cost of construction materials. However, it would be worthy to note that pursuant to the Sales Tax (Rates of Tax No. 2) Order 2012, the sales tax rate on most building materials enjoy a preferential sales tax rate of either 0% or 5% as at 31 December 2013. So in fact, the tax element of construction materials would in reality, increase!

Properties Acquired From The Secondary Market

Post-GST implementation, there will be no GST implications when you buy or sell a residential property from or to the secondary market, as it is an exempt supply.

Commercial properties, however, are a separate matter altogether. Whether the commercial property transacted will be subject to GST would depend on whether you as a buyer, are buying the property from aGST-registered person or, when you sell, if you are likewise GST-registered or not. If so, the seller will need to charge 6% GST on top of the value of the property. The advantage of being GST-registered is that while you are now required to charge and collect GST on the taxable supplies, you will be able to claim theGST incurred as a deduction (as input tax credit) against any output tax that you may incur during the taxable period. If the input tax is greater than the output tax for the corresponding period, you will get a refund from the Royal Malaysian Customs.

As you can see from the above, the GST-mechanism may seem quite complicated to the layman. With the implementation of GST, property investors will have to consider another cost-factor (ie. GST) in their property investment decision-making process.

Kaygarn Tan

Kaygarn Tan is the Founder of Freemind Works, a Property Investment Coach and Property Investor. He is also Author of the best-selling book The Master Key Method to Unlock the Secrets of Property Investment.

He is a Biomedical Scientist by training and holds a Masters in Pharmacy majoring in Toxicology. He is an organized and systematic person. Applying the same principle in doing scientific research to get a desired outcome, he has the property investment system down to a science. He calls it The Master Key Method.

After accumulating a portfolio of properties that gives him passive income, he decided to quit his 9-to-5 day job and started mentoring others to invest in properties. He has since adviced and personally mentored thousands of people to buy their first, second, third and more properties at 20% below market value with 6.5% rental return, using a time-tested system.

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