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The Impact of Real Property Gains Tax in Real Estate Secondary Market : A Malaysian Case Study

The Impact of Real Property Gains Tax in Real Estate Secondary Market : A Malaysian Case Study. KHUZAIMAH ABDULLAH National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia khuzaimah@inspen.gov.my.

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The Impact of Real Property Gains Tax in Real Estate Secondary Market : A Malaysian Case Study

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  1. The Impact of Real Property Gains Tax in Real Estate Secondary Market : A Malaysian Case Study KHUZAIMAH ABDULLAH National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia khuzaimah@inspen.gov.my European Real Estate Society (ERES) Conference 2010 23 – 26 June 2010, Milan, Italy

  2. INTRODUCTION • This is a preliminary study, looking into the impact of tax exemption on capital gains (RPGT) in real estate transaction. • In March 2007, Prime Minister announced the exemption of RPGT with effect from April 1, 2007 • The exemption was intended to “inject more excitement and dynamism into both the property and the financial sectors” in boosting the economic activities • The RPGT exemption however was re-imposed in January 1, 2010, following the PM’s announcement on 23 October 2009 National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  3. BACKGROUND • The first legislation to tax gains from the disposal of real estate was introduced by the enactment of Land Speculation Tax Act 1974 (LST), which came into force on December 6, 1973 • LST was introduced to curb speculative activities in property as such activities were rampant then and has triggered artificial market demand in the real estate market • It was meant more for government policy tool to deter speculation in land and land-based activities than a revenue raising measures. LST provided for a single tax rate of 50% on chargeable gains in properties disposed within two years from the date of acquisition and if the disposal consideration was more than RM 200,000. • LST was then repealed in 1975 and replaced by RPGT Act 1976, effective from 7th November, 1975 National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  4. BACKGROUND • Choong (2007) observed that the high tax rate under LST has deterred not only speculative activities but also genuine disposal of property. Thus, the RPGT Act was seen as an instrument to correct limitations to LST • RPGT has since then, gone through several amendments since its inception. The amendments to RPGT rates were made to keep abreast of the changes in the economic conditions of the country • In the light to boost the property market following recession period (1986), RPGT rates were dropped by 50%. Whilst during boom time (1994 to 1996), when property prices rose dramatically, RPGT was implemented to stabilize prices and to curtail undue speculation in property dealings National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  5. BACKGROUND • The tax rate was then increased by 5% to 10% in 1995 to 1997 • The latest amendment of RPGT rate came into effect from 1 January 2010 with imposition of a flat rate of 5% within 5 years of ownership. The re-imposition was announced during 2010 Budget speech by the Prime Minister on 23 October 2009 • The lifting of exemption was a measure in the efforts to increase government revenue. • Table 1 and Diagram 1 below tracked the changes in the rates of tax. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  6. RPGT RATES Table 1: RPGT Rates From 1975-2007 Source: Choong (2007) & Author National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  7. RPGT RATES TIMELINE Diagram 1: RPGT Rates Timeline Economic recession Asian Financial Crisis Global Financial Crisis Source: Choong (2007) & Author National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  8. METHODOLOGY • The research employed a frequency analysis of transactions recorded during the exemption period for the entire country. • Data obtained from Property Market Report produced annually by National Property Information centre (NAPIC). Property data were categorized into five subsectors, namely residential, commercial, industrial, agriculture and development land • The study focuses upon two key research questions: • (i)Did the RPGT exemption boost up the property market? • (ii)How has the exemption impact upon the property prices? National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  9. RESEARCH QUESTIONS • Research question (i) focus upon test of change in demand in the specific time , i.e. ‘before , during and after’ exemption period. • Announcement date on the exemption as well as re-imposition of RPGT is also imperative to observe due to time lag in property transaction. • Research question (ii) called for tracking of price change. • In tracking the price change resulted from the exemption, ‘matched pair analysis’ were conducted. • The technique employed identifying properties that were transacted before and after the exemption • Repeat sales occurred within five years of ownership form the criteria of samples chosen in the analysis. • The difference in price between the matched pairs were then evaluated to indicate the price change. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  10. DATA ANALYSIS • SOURCE OF DATA • PROPERTY MARKET REPORT • NATIONAL PROPERTY INFORMATION CENTRE (NAPIC) • DATA ANALYSIS • Impact on Volume of Transaction • Repeat sales data for pre, during and post exemption dates tabulated in Table 2 and the line graph indicating the trend in Diagram 2. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  11. Source: NAPIC & Property Market Report DATA ANALYSIS National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  12. DATA ANALYSIS Pre-exemption During exemption Post National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  13. DATA ANALYSIS • During the exemption period, which was from Q2 of 2007 to Q4 of 2009, the total number of transactions showed a significant increase • The increased occurred despite of the global financial crisis that began to surface in the Q3 2007. All subsectors were showing the positive impact towards the exemption • The highest number of transaction recorded in Q4 2009 the government announcement on re-imposition of RPGT that was made in October. • Upon re-imposition of RPGT, transaction of properties declined by almost 3%. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  14. DATA ANALYSIS Impact on Value of Transactions Pre During Post The total value of transaction was in tandem with the total volume. Sharp increase in the total value detected during the exemption period. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  15. Tracking of Price Change • In tracking the effect of exemption on property price, this study relied on transaction price of properties in Federal Territory of Kuala Lumpur (FTKL) • It was chosen as the case study due to its active market activities and the availability of data. FTKL consisted of five districts and in this case study, transactions in the district of Batu were chosen as sample for the study • Transactions recorded from year 2002 to October 2009 were sorted to get repeat sales Contents INTRODUCTION LITERATURE REVIEW METHODOLOGY FINDINGS & DISCUSSION CONCLUSION & RECOMMENDATION National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  16. There were a total of 10,835 transaction data from 2002 to 2009 • Samples taken from 20% of the total transaction were analysed and it was observed that less than 5% indicated repeat sales occurred within 5 years of holding period • Results from ‘matched pair analysis’ are shown in Appendix A and B Contents INTRODUCTION LITERATURE REVIEW METHODOLOGY FINDINGS & DISCUSSION CONCLUSION & RECOMMENDATION National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  17. Impact on Value of Transactions Contents INTRODUCTION LITERATURE REVIEW METHODOLOGY FINDINGS & DISCUSSION CONCLUSION & RECOMMENDATION Source: Valuation & Property Services Department, FTKL National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  18. DATA ANALYSIS APPENDIX B Source: Valuation & Property Services Department, FTKL National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  19. APPENDIX B Contents INTRODUCTION LITERATURE REVIEW METHODOLOGY FINDINGS & DISCUSSION CONCLUSION & RECOMMENDATION Source: Valuation & Property Services Department, FTKL National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  20. APPENDIX B Contents INTRODUCTION LITERATURE REVIEW METHODOLOGY FINDINGS & DISCUSSION CONCLUSION & RECOMMENDATION Source: Valuation & Property Services Department, FTKL National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  21. APPENDIX B Contents INTRODUCTION LITERATURE REVIEW METHODOLOGY FINDINGS & DISCUSSION CONCLUSION & RECOMMENDATION Source: Valuation & Property Services Department, FTKL National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  22. DATA ANALYSIS APPENDIX B Source: Valuation & Property Services Department, FTKL National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  23. DISCUSSION • The real estate market responded positively to the exemption of RPGT. Transaction data has shown that volume of transactions and value of all sub-sectors has increased. • The announcement made on 23 October 2009 on re-imposition of RPGT with effect from 1 January, 2010 showed a decline in the value and volume of transaction of properties. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  24. FUTURE RESEARCH • Study on implications of RPGT exemption on other financial/revenue resources e.g. income tax, stamp duty. • For price change, to widen the sample size to include nationwide data. National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

  25. The Impact of Real Property Gains Tax in Real Estate Secondary Market : A Malaysian Case Study QUESTION AND ANSWER THANK YOU Comments and feedbacks are welcome. khuzaimah@inspen.gov.my European Real Estate Society (ERES) Conference 2010 23 – 26 June 2010, Milan, Italy National Institute of Valuation (INSPEN) Valuation and Property Services Department (JPPH) Ministry of Finance Malaysia

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