How Will GST Impact The Malaysia Property Market

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.

THE EFFECTS

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.

Women Property Investment

Women play a vital role in the workforce in Malaysia. According to The Grant Thornton International Business Report (IBR), women recorded 40% of the total workforce. This makes us the highest one in Asean.

On the other hand, in terms of salary received, women take home a lesser income than men. According to Household Income and Basic Amenities Survey Report 2012 published by Ministry of Statistics, men in town receive a monthly average pay of RM 6,010 while women only receive RM 4,239.

Although the average salary is lower than what men have, it is still at a level of eligibility to get a loan to buy a property, with the condition that they meet the banks requirement.

Women have a bigger buying power nowadays. However, women involvement in property investment is still comparably smaller than men.

Most women are still interested in investing money for a collection of handbags and shoes; the stereotype.
In this 21st century, women are no longer a regular mom and housewife. Life is challenging as more women now are employers, professionals or mothers with careers.

The cost of living is also rising. This causes sole dependency on the husband for the household income and future financial planning not a good decision. Women have to play an important role or have a solid backup plan.

LEVERAGE

If let say one payslip may enable someone to have at least two 90% housing loan, two payslip will result a four 90% housing loan for four properties. Obviously, four properties are better than two. It means, there is more passive income stream and more asset for retirement.

This is why the most successful property investors are normally those who have financial planning and act together with their spouse. They are like-minded couples with the same objectives. A team will make it easier and therefore provide better leverage.

HAPPILY EVER AFTER?

Most women feel very comfortable being dependant on the husband. They are of the opinion that, having one nice house to stay in is good enough. As long as they have just enough money to survive, they are doing well.
However, according to the Minister of Women, Family and Community Development, from January to June 2012,there are 22,306 divorce cases filed and recorded by National Registration Department. Muslims’ case is 22,306 that is more than 95% of the total figure while for non-Muslims’ it is 1,062 cases.
This is shocking figure shows us that marriage is not a happily ever after story. Women should be ready to equip themselves with mental strength, a good career, enough saving and a financial plan for themselves and their children should this sad situation occur.

WHEN TO START

Therefore, though property investment is a guy-thing. Women should learn, to break mens monopoly. But, when to start?

Looking at the divorce rate and to safeguard women’s welfare after divorce, they must act and think ahead of time. They should start to buy property while they are still single.
This is due to the fact that Malaysian law treats any property acquired during the marriage as matrimonial property. Even if the property is bought under one name, bought under joint-effort or single effort, his or her spouse has the right to claim his or her share on the property. This applies to Muslims and non-Muslim marriages.
The ex-spouse may file a claim to the High Court, if the couple is non-Muslims, or to Syariah High Court, if the couple is Muslims. They have to prove that the property is acquired while they were still a valid husband and wife and to prove their contribution to the property or to the marriage. Then the court will decide how much the share the claimant deserves.

Their ex-spouse will not be able to claim any share on this property because it is bought before the marriage. However, the woman must manage the property itself and ensure that the there is no contribution, either monetary or non-monetary from the ex-spouse to the house.
Women seek security. Therefore, having a 100% ownership house is the most secure thing they should think and plan when they begin their career.

TOO MUCH PHYSICAL WORK?

It is true that managing a house will require physical work. Pipes may break. Electricity wiring may have problems. Tenants may cause broken doors and it needs to be replaced. These are among the issues owners have to handle when renting their house.

Thus, for some pretty ladies out there, they think these issues and rectification are not suited for them. That is why they ignore the potential of property investment and let it be conquered by men. They forget that they do not need to do all these things on their own? There is some people out there called as handyman, plumber or electrical technician that can help them anytime.

TEDIOUS HANDLING TENANTS

Some women feel that it is tedious to manage tenants. The process of letting a house itself needs some effort. They as a career women and a mother could not cope to add one more things-to-do in their already hectic days.
Do not worry. As I mentioned above, you can get a professional real estate agent to help you find a tenant and take care of your house. Plus, there are individuals who do sublet business. You may rent out your house to them for a longer period of term. They will then furnish it and re-rent it for a profit margin.

As long as you get your rental consistently banked in into your bank account every month, you will be happy enough. It is for them to bare the risk if the tenants move out and the house is vacant for a certain period of time. They also will take care of the house and maintain it so it is always in a tenantable condition as they need to attract tenants.

JOINT LOAN

After marriage, most women tend to do joint loan with their husband to buy a decent house to stay. If the husbands salary is only eligible for a loan of RM 200,000, joining with the wifes income may enable them to buy a bigger house. Maybe they are able to secure a loan to buy a RM 400,000 house, if for example the wife’s salary is about the same as the husband.

This is a popular and good strategy to own a more comfortable house for a big family. However, this may end up not a very brilliant plan.

Refer back to the story about matrimonial home. If anything happens to the marriage, the husband will have 50% share of the house. Imagine,this is the only house this couple have. Of course, after the divorce, both will fight for their right.

Therefore, it is better for women to have a backup. Buy at least one property before marriage.
Then do not do joint loan. It is better to buy two property with the total price of RM400, 000 rather than buy one property at the price of RM 400,000. Worst case, the divorced couple can have one property each. Another reason why a joint loan is not a very good idea is because of the 70% loan-to-value restriction for the third property onwards. Joint loan causes both buyers to have one housing loan record in the CCRIS, the credit record kept by Bank Negara.

If there is two joint loan applications, means this couple can only buy two properties with the loan of 90%. The third house will be 70% loan, either under one name or also under joint-application.
In comparison, if the wife does not agree to do joint loan application, the couple may buy four properties with 90% loan. There will be two properties under the name of the husband and two others under the name of the wife.
Again, obviously four properties is way better than two.

NO MORE MEN MONOPOLY

Every year, the number of women who enrol to a higher institution is increasing. Hence, the number of them entering the workforce is increasing too. Women are brilliant. They are hardworking. They have the courage and are able to face challenges.As there is no longer a job identification by gender, women can enter and perform almost all jobs out there. They can be a great engineer, an architect or even a ships crew.Therefore, there are no excuses that women cannot do property investment and generate a handsome profit out of it. At the end, this is for their own good and their children’s future.

For Iskandar property investment , please contact us at http://www.malaysiapropertyiskandar.com/