Q.
a) Real Property Gains Tax is imposed on conditional contract. Explain:-
The meaning of conditional contract. (5 marks)
How acquisition and disposal of asset is determined under conditional contract. (8 marks)
b) Mr Dollah intends to give a single storey bungalow located at Rawang as a present to his grand daughter Mona who has just competed her study at University of Sunderland, UK. Explain to Mr Dollah the situations where gifts are not subjected to tax whereby the scenario of "no gain no loss" is applicable. (12 marks)
(25 marks, 2014 Q5)
A.
a) The meaning of conditional contract was posted earlier here.
From RPGT 1976, it is defined by S.16:
"Conditional contracts
16. Where—
(a) a contract for the disposal of an asset is conditional; and
(b) the condition is satisfied (by the exercise of a right under an option or otherwise),
the acquisition and disposal of the asset shall be regarded as taking place at the time the contract was made, unless the amount of the consideration depends wholly or mainly on the value of the asset at the time when the condition is satisfied in which case the acquisition and disposal shall be regarded as taking place when the condition is satisfied."
How acquisition and disposal of asset is determined is based on the date of the disposal and acquisition. These dates are used in the calculation of the RPGT imposed where different rates are used for different duration of holding period of the real property.
In certain condition, the conditional contract is based on approval by the Local Authority, or Land and Survey Office. In case of Strata Title Property, it is also subjected to the conditions of the Master Title Holder (The Developer) if the Strata Title has not been issued. Thus, the successful transaction of the sale is dependent on the satisfaction of the various conditions imposed by the authorities. Therefore, the date of acquisition (buyer) and disposal (seller) is based on the approval date of the authorities.
Only when all the processes of transaction is completed it is considered the effective date of transfer for calculation of RPGT - like Income Tax, it is incurred!
Ref:
Own Account and earlier posts.
b) "No gain no loss"
Para 3, Sch 2 of the Real Property Gains Tax Act 1976 provides for the "No gain no loss" transaction in which the disposal price is deemed to be equal to the acquisition price. Under this provision, various conditions are listed:
(a) Devolution of a deceased person’s assets to his trustee or legatee.
(b) Transfer between spouses.
(c) Transfer of assets owned by an individual, his wife or by an individual jointly with his wife or with a connected person to a company controlled by the individual, his wife or by an individual jointly with his wife or with a connected person, for a consideration consisting substantially (more than 75%) of shares in that company.
(d) Transfer between an individual and a nominee who has no vested interest in the assets.
(e) Transfer by way of security in or over an asset.
(f) Gifts to the Government, local authority or charity exempt from income tax.
(g) Disposal due to compulsory acquisition.
(h) Disposal of chargeable assets pursuant to an approved financing scheme which is in accordance with Syariah principles, where such disposal will not be required for conventional financing schemes.
On the other hand, there is another section of RPGT 1976 which governs on Gifts — per Para 12 Sch 2 of the RPGT Act 1976:
Gifts between husband and wife, parent and children or grand parent and grand children are deemed to be "No gain no loss" transactions.
In such conditions, disposal price is deemed to be equal to the acquisition price. However, the date of disposal is the recent date of transaction, not the earlier date of ownership of the property. Eg. father give the house to the son, the house was purchased in 1998 at RM250k, now the transfer to the son was 2014, as gift.
The acquisition date for the son is 2014, and the disposal price is the same as the acquisition price of RM250K. Thus, the son has acquired the property at RM250K in the year 2014.
So, in the above case of Mr Dollah giving the bungalow at Rawang to his grand daughter Mona, it is considered "No gain no loss" from grand father to grand daughter, as provided by Sch2 Para 12 of the RPGT Act 1976.
The acquisition date for Mona is the recent transaction date, and the price is considered the price of Mr Dollah first acquired the bungalow years before.
Ref:
Exemption on RPGT (No RPGT for Gains on Disposal of Properties), Feb 2012. NBC Blog, Malaysia Business News and Tax, available from,
Exemptions on RPGT (No RPGT for Gains on Disposal of Property)
C3 Real Property Gains Tax Rates and Exemptions by MIA publication: available at,
http://www.mia.org.my/new/downloads/circularsandresources/budget/2014/C3.pdf