In the first article of a two-part serieson goods and services tax (GST) inrelation to the property industry, BDOBinder Tax Services Sdn Bhd tax directorCHAN KEE HOONG focuses on GST's possible impact on a property developer. He shares the experiences from Singapore and Australia, countries that have implemented GST.
THE Malaysian Government has decided to postpone the implementation of the goods and services tax (GST), a broad-based consumption tax to replace the current single-stage sales and services tax, from Jan 1, 2007, to a new date to be announced later.
This deferral should be viewed positively, as it will provide Malaysian businesses more time to plan for the readiness to implement GST within their organisations. Having limited resources and manpower, such business organisations can now take time to properly initiate the review of their internal business systems as the review process is fairly lengthy and it involves not just the accounts but all other departments as well.
Another important area to take note is that the final implementation would depend on the law passed and the Royal Malaysian Customs should take at least 18 to 24 months to fully educate and create further awareness to the public.
GST on property transactions: The introduction of GST will have a significant transitional and ongoing effect on Malaysia’s building and construction industry. It will not just affect the day-to-day running of the business but also on the industry and economy as a whole.
In attempting to understand the economic impact of GST on the industry, it is important to look at the GST treatment on property transactions.
The impact of GST on property transactions will depend on a host of circumstances, such as whether:
·THE seller and purchaser are registered persons;
·THE transactions are of a residential or commercial nature; and
·THE property is agriculture land or land for general use, land granted by the State, part of a going concern or otherwise.
GST treatments in relation to the above for Malaysia will depend also on which of the different models of GST-implemented countries will be adopted by the Royal Malaysian Customs when the date of implementation is finally announced.
In Australia, for example, GST impacts on almost every property transaction, particularly on residential and commercial developments. Even straightforward arrangements, such as lease incentives provided to commercial tenants and refurbishment of existing buildings, often have complex GST consequences.
No GST should be payable by the buyer when the land is sold by private individuals or if an existing family home is disposed of. This makes sense as most owners will not be selling in the course of an enterprise and accordingly will not be registered. Therefore, no taxable supply would occur.
In Singapore, residential properties are also exempt from GST; thus no GST will apply. The developer will not be able to claim input tax credits relating to the property, as it is exempt. However, certain exceptions like payment for the supply of design and construction activities, including the costs of sub-contractors, sales commissions and property services, will be taxable.
In this connection, there is a need for specific industry-related concessions and transitional rules to be decided by the Royal Malaysian Customs when moving towards the implementation of GST in Malaysia.
Residential and non–residential properties for developers: Let us look at what happens in a GST environment for the developer.
All transactions involving the sale and lease of non-residential properties will be subjected to GST. When you are registered for GST as a property developer, you have to charge GST on the sale and lease of such properties and account for it as output tax in your GST returns.
For GST purposes in Malaysia, taking say Singapore as our model, a residential property may be referred to as:
·A piece of vacant land considered as a residential land if it is zoned “residential” or “rural centre and settlement” in the master plan by the land authority;
·A piece of vacant land sold or leased by a public authority for residential, flat or condominium housing development (for example, police or army personnel barracks); or
·Land with a building, flat or dwelling approved by the land authority for residential use.
Examples of buildings approved for residential use are dwelling house (e.g. terrace house, semi-detached house, bungalow); residential flat/apartment; serviced apartment; upper floors of a shophouse if the floors are approved for dwelling purposes; hall of residence, hostel or boarding school; and workers’ quarters/dormitory.
Examples of buildings not approved for residential purposes are hotel; guest house, boarding house or motel; chalet; and holiday bungalow or resort.
All other types of properties that do not fall within the above definition will be regarded as non- residential properties.
Hence when you are dealing with residential properties, you cannot charge nor collect GST on the sale or lease, as they are exempt from GST. And being GST registered, you are to report this supply as an exempt supply when you make the submission of your GST return.
You can claim GST incurred on the purchase of non-residential properties as your input tax. Next week, we will look at some of these examples in greater detail and draw some conclusion for the developer in relation to the implementation being postponed.
l Chan Kee Hoong can be contacted at firstname.lastname@example.org. The views expressed in this article are the writer’s and do not necessarily represent those of BDO Binder Tax Services.
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