Real Property Gain Tax: Flip-Flop Flux

On 1st of April 2007, without any prank intended, the former Prime Minister Abdullah Badawi announced the full exemption of the sliding 30% to 5% of the Real Property Gains Tax (RPGT) rate. The headlines trumpeted “No RPGT” rule. Builders, property agents, property owners and foreign investors celebrated. To quote the former Prime Minister, “… this is an incentive to drive the property market…”

Fast forward to October 2009, a mere 18 months later, our new Prime Minister cum Finance Minister in his Budget 2010 speech proposed a fixed rate of 5% on gains from the disposal of real property irrespective of the holding period. It looks like those who relied on the words of the former Prime Minister and purchased properties after 1st April 2007 were fooled.

There was actually a great deal of skepticism from foreign investors when the “No RPGT” rule was announced in 2007. This tweak from 0% to 5% – though small in absolute terms – in psychological terms is like a chill down the spine of skittish property investors in the Malaysian market.

They just don’t get it, do they? Investors hate abrupt changes because it creates uncertainty. Though they are prepared to make a loss on their investment they certainly do not want to be taken for a ride. The budget planners seem to have lost their way too. The RPGT Act 1976 was introduced as an anti-speculation and not a revenue-raising legislation. If the intention is to curb speculation, then it begs the question: where is the speculation in the abyss of a recession?

A launch of a luxury condominium project a stone’s throw away from the KLCC Twin Tower in KL has an average asking price of RM 1,100 per square foot received only a lukewarm response. I went there to check it out but made the mistake of leaving my name and mobile number. The persistend annoying follow-up calls commenced. This is hardly a property market frothing in speculation.

If the intention of this 5% RPGT proposal is to raise revenue, then it’s rather silly because studies have shown that more revenue can be collected through stamp duty, registration fee and etc. on transfers in a buoyant property market. To impose a flat rate of 5% is nonsensical because to the rich the value of a RM 50,000 gain is less but to the poor the value is more. This is the philosophy underpinning the progressive taxation of Income Tax – tax the rich more than the poor.

So, what’s the truth here? Is it revenue raising or anti-speculation? It seems the Treasury boys are attempting to defy the 2nd Law of Logic – The law of Non-Contradiction, that is: No statement can be both true and false at the same time. I am scratching my head. Maybe you guys can figure out what they were thinking.

At the ground zero, a retiree bemoaned, “I purchased my house 36 years ago and am now thinking of disposing it because my ailing wife, who is need of medical care, want to downsize to a 2-bedroom apartment. Many years ago I had already claimed the once-in-a-lifetime exemption of a gain from the disposal of my first house. I have only bought two houses in my lifetime. Based on the new proposal of 5% RPGT I have to pay an estimated sum of RM15,000. In my twilight years, with no income, through no fault of mine, I now have to pay this extortionate sum in RPGT regardless of the fact that I have owned this house for the last 36 years. Dear Prime Minister, this is: Unfair. Unethical. Unconscionable.”

It is unfortunate that the high priests in Treasury have forgotten the maxims of taxation expounded by one of the greatest classical economists of all times – Adam Smith. In his magnum opus “The Wealth of Nations” the entire philosophy of taxation hangs on this holy trinity: EQUITY, CERTAINTY AND SIMPLICITY.