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Thursday, November 7, 2013

Imminent GST implementation to leave nominal impact on property prices

by Jonathan Wong, 
Posted on November 7, 2013, Thursday

Fennie Lim
KUCHING: There is a strong sense of confusion among property buyers that the implementation of the real property gains tax (RPGT) and the goods and services tax (GST) cancels each other out in terms of its intended effect.

The original idea for the increment of the RPGT was to deter an increase in property prices driven by market speculation, but there was also a strong notion that material prices would increase due to the implementation of the GST – thus nullifying the effect of lowering property prices.

Fennie Lim, tax executive director for Crowe Horwath explained, “There is a popular misconception that somehow, the implementation of the GST would lead to an increase in material cost which would indirectly lead to an increase in property prices for consumers.

“But if you look at it closely, the opposite should be true. For example, a contractor obtains raw material from a supplier, there is a 10 per cent sales tax involved in that transaction.

“When the implementation of the GST takes place, it is then reduced to six per cent so by right, there should be a reduction in material cost.”

However, the way that the GST is structured, in the context of commercial properties, prices by right would stay or reduce due to the cost of the material prices. On the other hand, all residential units are under exempt, which means that developers are unable to impose GST on the prices of residential properties.

This is where in the hands of the property developer, all these taxes would be in their sunk cost, Lim explained.

“So if you even out the two, prices should even itself out. Thus, I encourage businesses to do a real cost impact assessment and not just increase prices blindly.”

The tax director elaborated that, “My personal view is that, as our government is trying to control market speculation, the only type of investors that would be impacted by the policy changes are the speculators themselves.

“Otherwise if you look at it in general, to obtain the properties, it would take at least three years from the signing of the sales and purchase agreements to the completion of the project.

“Most people who really invest, they would not sell so soon but speculators do. So even with the slight increase in RPGT rate, it would not really affect the property market per se.

“At the end of the day, the market will adjust itself to the forces of demand and supply,” she said, adding that in Kuala Lumpur for example, the market continued to see strong investments despite the news of GST and RPGT coming forth.

Concurring with Lim on the matter is Yip Phooi Leng, director at CH Williams Talhar Wong and Yeo, who noted that general market opinion was still positive.

“In the short term, the volume of transactions may decrease due to the change in mechanism but if you study the trend for the past six years, the government have changed the mechanisms five times. So it really is nothing new and further changes is still expected in the future.”

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