The impact of GST on property

Yee: Pricing is a function of demand and supply.

Of late, there has been concern on how the impending Goods and Services Tax (GST), effective April 1, 2015, will impact the property sector.

Broadly, property buyers can be divided into two groups - those who want to buy before April 1 and those who want to buy post-GST.

There is an explanation for both groups for their decision. The main concern is the GST effect on prices.

According to three tax consultants, GST will result in an overall price increase, less on the residential sub-segment, but more on the commercial sub-segment.

The margin of increase will be about 3% for residential properties, although developers cannot charge house buyers GST for properties build on residential land as they are exempt-rated. Two of them have also brought up an important point, that property prices are a function of market forces.

Poon Yew Hoe, tax partner at Crowe Horwath says the market is a bit soft. It is uncertain how the market will be the first half of next year.

Although a developer cannot impose GST on the residentials, he would have paid GST on building materials and services. A RM1mil house would have a tax element of about RM30,000. He may absorb it and make less profit, if the market is soft, says Poon.

Tax Advisory and Management Services Sdn Bhd (TAMS) executive director Yong Poh Chye says there are some thoughts to make residential properties zero-rated. The government will then return to the developer the input tax incurred on raw materials/services. But the government will lose a source of revenue.

To strike a balance, there is a proposal to have properties RM500,000 and below to be zero-rated. “This will be a policy decision and will be made known later,” says Yong.

Deloitte Malaysia country tax leader Yee Wing Peng relates the Australian situation when it imposed GST in 2000.

Anticipating property prices to go up, the people rushed to buy and developers rushed to complete their project pre-GST. They ended up paying a premium for materials and services, which resulted in higher prices. Six to nine months post-GST, less transactions led to a price drop.

“Pricing is a function of demand and supply,” says Yee.

While the Australian experience has been brought up by both tax and property consultants, it is not an apple to apple comparison as there are differences, says the tax men.

Rush to buy

Yee says five out of 10 are “in a rush to buy”. Developers are aware of that. Yee says some developers have already imputed their costs into the selling price today.

“The pricing of new launches today would have priced in GST,” he says. They also highlight the GST effect on financing structure, particularly for commercial properties. A buyer signs an agreement to buy a shop lot priced at RM1mil.

On April 1, he has paid only RM400,000 because it is 40% complete. The remaining 60% will be subject to GST because it is a commercial property. Yong of TAMS concludes there is “no point in rushing to buy now.”

The buyer will resist the extra payment. Who will bear the extra cost depends will on how the Sales and Purchase Agreement is structured.

All three tax men also highlighted the complexities of certain properties built on commercial titles. Commercial properties include offices, shops, retail, hotel, malls, factories, hospitals, SoHos (small offices, home offices) and the like.

While malls and offices are pretty clear cut in that they are subject to GST, residential units on commercial land and hybrid units such as SoHos are may complicated.

If a property is built on commercial title, the buyer will have to pay GST, theoretically speaking. The Government is currently looking at the usage rather than the land title the property is built on. There will be more clarity later on.

Says Yong: “If you have a property where levels 1 and 2 are shops but the level three is used as a residential, hopefully the government will not impose GST on level 3.”

Other GST-related issues include car parking lots and their taxability. The current trend of fitting out properties with additional features like kitchen will have a GST element.

While there is much dissecting and scrutiny on residential units on commercial land, there is a greater element forgotten by property buyers. The quit rent, assessment and utilities will be substantially higher. These charges must be a consideration.

View from valuer

VPC Alliance (KL) Sdn Bhd’s chartered surveyor James Wong says in most countries, the trend is a rally due to the expectation of future price increase with more buyers pre- than post-GST.

However, with the current cooling measures, there seems to be no rally. There are buyers but they do not qualify for loans under the current stringent lending measures.

Therefore, the GST will not have a great impact on prices as it has been over taken by the government’s cooling measures and tighter lending by the banks, Wong says.

As for tax men saying that prices will go up, Wong is of the opinion that residential prices will not go up post-GST but commercial properties may.

“Developers will include the GST element into pricing. Whether the inclusion will result in overpricing - leading to less sales - will depend on the supply and demand situation. If there is a demand for that particular type of property, the developer may try to include the GST cost into its pricing,” he says.

Wong says developers will have no choice but to absorb the GST for those which are in over supply. Cost does not equate value, he says.

“Most developers will say they have to increase prices. However, market value is not cost, so there is no guarantee that prices will definitely go up. We anticipate the property market in the first half of next year will still be quiet and slow with less transactions and may be a minor price correction,” he says. - The Star