How Will GST Impact the Malaysia Property Market?
Apr 03, 2015
The government of Malaysia recently rolled out the new Goods & Services Tax (GST) on 1 April 2015. But many people are still in the dark as to its actual impact on the country’s property market, especially the housing sector.
To inform and help prospective real estate buyers, PropertyGuru Malaysia has compiled its effects and compared the new tax regime with the old one to give home hunters 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 fall under the 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 the Second Schedule Goods.
In comparison, the GST imposes a higher rate of 6 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 the final buyers, while the tax of 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 Residential Prices Up
Specifically, residential properties fall under Exempt-Rated goods, meaning they are not subject to GST tax. However, prices of houses would still be affected as the construction materials used to build them 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 the prices of their products in a bid to offset the higher cost.
According to experts, if the market is healthy and favourable, developers could pass on the cost to home buyers, while they could be willing to absorb if the residential 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 that the new tax regime could increase home prices by about five to 10 percent.
In addition, the GST could compound the woes plaguing the country’s housing market such as pricey land cost 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 the cost of houses.
Commercial & Industrial Property Sector 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 rental yield for the investor would decrease unless he can find tenants willing to pay a higher rent.
When the same property is leased out, an additional 6 percent GST will be imposed on the tenant. For example, a RM10,000 monthly will include an additional RM600 tax.
Given this situation, landlords are advised to review their leasing agreement so that it will include relevant GST clauses. More importantly, their monthly rental mustn’t be too much as it will include a 6 percent GST. If it’s too high, they could discourage potential tenants.
For upcoming commercial and industrial properties purchased before they are ready, buyers are subjected to an additional 6 percent GST. As the price of the building is billed based on the extent of completion, the tax is similarly billed in stages.
Additionally, property investors would face higher cost as they need to set up an administrative process to collect GST when leasing or renting out commercial & industrial space.
They also need to carefully monitor their cash flow as GST must be paid when incurred or billed not when collected. Given this mandate, landlords are required to pay their taxes on time even if a tenant’s payment is late.
Conclusion
Looking ahead, a one-time increase in property prices across 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 would suffer a heftier increase in cost as compared to the residential segment, investors may divert their capital into the latter, especially into second-hand houses. This is because not only is this sector cheaper than commercial and industrial properties as well as new houses, they are also exempt from the new tax system.
Nevertheless, prices in the secondary residential market could also trend upward to mirror the higher cost of new houses.
Farah Wahida, Editor of PropertyGuru, wrote this story. To contact her about this or other stories email
[email protected]
http://www.propertyguru.com.my/prop...-will-gst-impact-the-malaysia-property-market
