How Will GST Impact The Malaysia Property Market
The introduction of the Goods and Service Tax (GST) is a delicate issue. It is often a subject that bring about debates as it affects almost everyone from the business community to the general public. This is a broad based consumption tax covering all sectors of the economy for all goods and services made in Malaysia including imports with some exceptions determined by the Government.
According to the Government, the introduction of GST is part of the reformed tax system to enhance the efficiency and effectiveness of the existing taxation system and to generate a more stable source of revenue to the nation which should bring more benefits to everyone.
As we write this article, the screen on the Royal Malaysian Customer website interestingly showed a countdown timeline that moves by the second. Probably all this while we have been previously informed by the Government about GST implementation for the last few years but it has been delayed. Thus, this time round the Government has shown its seriousness by displaying the timeline . From the countdown screen, we have only 11 more months of Goods and Services Tax (GST) “free time”. Since 15th, April 2015，a 6% GST is imposed on most goods and services supplied. That means we only have less than a year to get prepared.
GST’S GENERAL CONCEPT
GST is a broad-based consumption tax (input tax) applied at each stage of supply chain where GST registered business can offset the GST incurred when making supplies against GST charged (output tax) to supplies made. Under the standard rated supplies, the burden of the GST falls onto the final consumers. In other words, it can be a neutral effect for business on their tax payment as the input tax can be offset with output tax.
However, not all goods and services are imposed with GST without some exceptions. Some supplies are zero rated which means the GST incurred on the supply can be recovered and consumers will not be charged of any GST. Certain agricultural products, foodstuff, water to domestic consumers, electricity supply (with limits) to domestic users, export of goods and international services fall under this zero rated category.
Lastly some supplies are considered exempt supplies which it is not subject to GST and businesses are not eligible to claim input tax credit. Some of the items falls under this category are private medical services and residential properties. We take a case of how GST works for property development business, firstly all suppliers (goods and service providers) will charge GST onto supplies to the developers and eventually this will be passed on to the purchasers. For all the businesses or suppliers of goods and services, they entitled to offset the GST incurred onto them against the GST that they have charged their clients when goods and services are sold. Thus, GST is only incurred onto the consumers which in this case are the purchasers. The diagram below illustrates how the flow of GST on a standard rated basis.
WHAT WILL HAPPEN WHEN GST IS IMPOSED?
Business that fall under the general business turnover threshold of more than RM500，000 in 12 months period will need to account for GST on their business activities.
Generally everyone who consumes the goods and services will be charged an additional 6 per cent GST which means additional, RM60 for a RM 1,000, RM600 for a RM10，000, RM6,000 for RM 100,000 and RM60，000 for RM1 million purchase.
Specifically for the real estate industry, GST will directly affect the market as the supply of land and building used for commercial, administrative and industrial purpose as shop lots, office, retail business, (SOFO)small office virtual office, (SOHO)small office home office, , small office flexible , motel, hostel , inn, hotel, warehouse and factories is subject to GST.
However, the supply of land used for agricultural, residential (residential house such as semi-detached house , link house, detached house, apartment including condominium and serviced apartment) is exempt from GST. Thus, general consumers of residential properties will not see an obvious impact of GST, as least not on their bill when it comes to purchase or rental of residential property as it is tax exempt.
Tax exempt means GST is not charged on the supply but doesn’t mean it is GST-free. For businesses such as property developers, it means there is no entitlement to recover GST incurred which translate to cost to their business.
This means the developers will need to pay for GST for all supply of materials and services from contractors, building materials, professional service, thus residential properties are not free from GST after all. In fact, developers have voiced concern of upward cost pressure on residential property prices.
While residential property is considered an exempt supply, sales and rental of residential properties such as condominiums, apartments, houses are not subjected to GST tax. However, all commercial properties such as shops, offices, factories will be subjected to GST. For example, a sale of a RM3,000,000 shop office will be subject to GST of RM 180,000 GST to be borne by purchasers. When the same property is rented out, an additional 6 per cent GST will be imposed on the tenant. For example, a RM 10,000 rental will have an additional RM600 GST tax on the rent payable.
1)REDUCED PROFIT MARGIN OR INCREASE OF SELLING PRICE.
Residential property developers might expect a reduced margin of profit or push to increase the selling price to make up for the GST incurred that is tax exempt which is not recoverable. As GST will drive their cost up, the developers will have to make a choice of either absorbing the increase cost or reduce their profit margin to remain competitive in the market. We believe this very much depends on the market condition at that point of time when GST is being implemented. If the market is favourable and robust, the cost will be passed onto the property buyers while they may absorb it if the market condition toughens. Chances are the developers will adjust according to the market condition and will try to maximize profit by shifting the burden of cost of the property buyers.
2) PROPERTY OWNERS MIGHT EXPECT TO HAVE COMPRESSED YIELD.
As the cost of purchasing commercial and industrial property expected to increase with imposition of GST that adds into the cost of acquisition, yield will be slightly compressed unless the rental rate can be absorbed by the market.
3) MINOR SURGE OF COMMERCIAL PROPERTY TRANSACTIONS BEFORE GST IMPLEMENTATION.
There will possibly be a minor surge of commercial and industrial property transactions when coming to near dateline of April 15th, 2015 as some business will pull forward their purchase decision. Six per cent GST is a rather big amount when it comes to property prices. However, the market may react much earlier with expectation of vendors asking for higher price anticipating the price surge after GST implementation. After the date of implementation of the GST, which will be an additional 6 per cent GST imposed onto the goods or services, it makes sense to make the purchase before the date. For example if one would like to purchase a commercial property, it is better to purchase before it GST is being implemented. Six per cent may seem small in percentage but substantial in value. Such percentage out of a RM2 million shop-office is equivalent to RM120，000 which needs to be paid in cash.
4) ADMINISTRATIVE COST AND ADDITIONAL CASH FLOW REQUIREMENT.
For investors that hold commercial & industrial properties, they will need to set up an administrative process to collect GST when selling and renting their properties. So, it is important that they monitor their cash flow as GST is payable when billed or incurred but not when collected. In a scenario where a tenant pays up late, the landlord is still subjected to the GST payment. For investment holding entities that deal mainly with rental or leasing of properties, it should be GST- ready to impose GST onto client as rent/lease of property is considered as supply of goods that is subject to GST tax. They should also evaluate whether they should register their business as if the sales turnover exceeding RM500，000 and they can also choose to register under voluntary registration scheme. Even before the implementation of GST, they should review terms to include relevant GST clause into the tenancy agreement as the GST 6 per cent may be a deal breaker in negotiating a tenancy term.
5) ADDITIONAL CASH FOR TRANSITIONAL CONTRACT.
For commercial and industrial property purchased off the plan or under construction from developers before the GST implementation, the buyers will be subject to additional 6 per cent GST when it is implemented. As properties under construction is billed according to stages of progress, the GST will be imposed onto the billing when the completion by stages of the construction of the buildings.
6) PREFERENCE OF RESIDENTIAL PROPERTY.
Since commercial and industrial properties will be subjected to GST with additional capital required when acquiring the property, investors may be tempted to move to the option of residential properties especially the secondary market, since acquisition cost will be slightly lower and therefore ease the cash flow for purchaser.
All above possible scenarios will very much depends on the market condition when we move closer to the implementation date of GST and also the dynamic of the market forces inclusive of the supply and demand of the properties, interest rate, supply of money and other key economic factors. The GST implementation seems to be a significant event for Malaysia, however, the market will find its level of comfort once things get settled down just like any other policies that come into force in the market, we just need to be prepared and adjust accordingly.