GST GUIDE FOR PROPERTY OWNERS AND PROPERTY HOLDING COMPANIES

21 October 2014

Created: 21 October 2014

This article provides some insights on the application of GST for property transactions following the issuance of the Guide on Property Developer

(the Guide1).

REAL estate for this purpose refers to land and everything attached to it, whether on or below the surface. Land includes buildings, trees, vegetation and other structures and objects in, under or over it. Real property is the right to use real estate and includes activities concerned with ownership, use and

transfers of immovable property.

WHAT IS DEFINED AS SUPPLY IN PROPERTY DEVELOPMENT?

The GST Bill 2014 provides that the tax "shall be charged and levied on (a) any supply of goods and services made in Malaysia, including anything treated as a supply under this Act and (b) any importation of goods into Malaysia."

Land that is under charge (mortgage), lien or caveat is not a supply. Likewise, entering or lifting of caveat is not a supply by lender or borrower. A land title charged to the lender by the developer to obtain a loan is regarded as security for payment of debt and thus is not regarded as a supply, and hence is not subject to GST. However, when the lender sells land under power of sale in satisfaction of debt or foreclosures on the land of the developer, the developer

is regarded as making a supply and the tax will be accounted for by the lender. Converting an inventory to investment property per se is not a supply as it is not considered as disposal. The supply of land and buildings used for commercial, administrative and industrial purposes such as shop lots, offices, retail business, small office home office (SoHo), small office virtual office (SoVo), small office flexible office (SoFo), factories, hotels, motels, inns, hostels and warehouses is subject to GST.

Whereas land used for agricultural, residential (such as link houses, semi-detached houses, detached houses, apartments including serviced apartments and condominiums) or general purposes such as burial grounds, playgrounds and religious purposes is exempt from GST i.e. exempt supply.

Note :

1. The Guide on Property Developer provides GST treatment that involves activities of property developers, including housing developers licensed under Housing Developers (Control and Licensing) Act 1966, and any person engaged in or undertaking a property development. As the GST Guides are still being revised or fine-tuned by the Royal Malaysian Customs Department (RMCD), information contained herein may be subject to changes. Readers are advised to look up the GST Guides at the RMCD's website regularly for latest updates.

DO I HAVE TO REGISTER FOR GST?

A person is required to be registered for GST if he makes taxable supplies where the annual taxable turnover2 exceeds RM500,000 in the previous 12 months. Alternatively, if a person is currently making taxable supplies and expects to make taxable supplies exceeding RM500.000 in the next 12 months, he is also required to be registered.

Note :

2.  Taxable turnover means the total value of taxable supplies excluding GST. Taxable supplies here include the sale, lease, disposal and rental of non-residential property.

CALCULATION OF TAXABLE SUPPLIES FOR GST REGISTRATION

The value of taxable supplies should be calculated on all taxable supplies3 (standard-rated and zero-rated supplies) made by any person, for a period of twelve months excluding the value of

a)            capital assets4 disposed;

b)            imported services; and

c)            disregarded supplies made in relation to warehousing scheme or disregarded supplies made within or between designated areas.

All supplies in respect of charges and fees imposed by the Government related to real estate such as quit rent, premium, survey fees (by the Survey Department), registration of titles and other payment are regarded as out of scope. The same goes for assessment rates imposed by the local authorities, the conversion premium and all other premiums and fees imposed by the Federal and State Authority related to real estate. Interest on late payment is regarded as a penalty and is considered to be out of scope and hence, not subject to GST.

DO I HAVE TO CHARGE AND ACCOUNT FOR GST?

Generally, the treatment of sale, purchase and rental of residential properties is an exempt supply5. On the other hand, all transactions involving sale and lease of non-residential properties are subject to GST. Hence, if a person is GST-registered, he will have to charge GST on the sale and lease of such properties and account for the GST as output tax in the GST returns.

For GST purposes, whether the property is a residential or non-residential property depends on the approved usage of the building or structure i.e. the usage stated in the document of title. The zoning of land is disregarded in this instance. This means if a residential building is built on the commercial land title, it will be treated as residential and such transaction is exempted from GST. Conversely, if the residential building has been used for commercial purposes, GST is chargeable on the sale of this building.

For instance, shophouses will be treated as partially commercial and residential if one floor is used for commercial and the other floor is for residential. Apportionment is required between the commercial and the residential usage as the former is subject to GST while the latter is not.

Note :

3. For property under construction, the total value of taxable supplies and exempt supplies refers to the Gross Development Value of the whole project.

4. Capital assets may refer to a property that is used for conducting the business or held in the name or recorded in the books of the business for rental purposes.

5. This means you can neither charge nor collect GST on the sale or lease of these properties. Thus, if you are a GST registrant, you will have to report this supply as an exempt supply in the GST return.

 

 Note :

 6. If the lease agreement contains clauses which will transfer the title of the asset to the lessee at the end of the leasing period, it is a supply of goods. If there is no transfer of title at any time of the leasing period, then it is a supply of services. * In the event a lease spans the start date of GST, tax will need to be levied on the rent payable from the start date. The impact and pricing implication of the GST needs to be considered in relation to these contracts.

7 Reimbursements are expenses incurred in relation to goods and services consumed to enable the performance of services to clients such as printing, photocopying, and telephone charges. These expenses are deemed to form part of the cost of supplying services to clients, thus GST is chargeable. If GST is incurred by the property manager on the original expenses, this will be recoverable as an input tax credit provided a tax invoice is obtained from the supplier.

HOW TO CLAIM INPUT TAX

Any input tax incurred on the purchase of land and development of non-residential properties is claimable, provided the person is GST registered and the property is used for

•             furtherance of his business;

•             leased out for the purpose of business; or

•             developed into non-residential properties for the purpose of sale or lease.

Property developers are generally involved in making mixed supply9. Hence, developers will only be allowed to claim input tax that is directly attributable in making taxable supplies. Input tax on goods and services which are not directly attributable to making taxable and exempt supply is regarded as residual input that needs to be apportioned i.e. partial exemption. This concept will be discussed in the next Accountants Today issue.

For property under construction, the property developer will have to make adjustment on the input tax claim if there is a change in the value of taxable and exempt supplies over time based on the Gross Development Value of the whole project .

Where a development project involves both residential housing and a commercial building, the residual input tax that can be claimed are GST incurred on utilities, rental, office equipment and stationeries etc., infrastructural and recreational works such as landscaping, community hall, car park facilities, playgrounds and incidental services. As provided in the Guide, while the supply of a residential condominium is an exempt supply, sales of extra car park lots, air conditioners and refrigerators are standard rated supplies and hence is subject to GST. Giving a free car park lot is a supply of goods and it is deemed to be a supply even though there is no consideration. Input tax incurred on clubhouse and car park building cost, air conditioner and refrigerator can be claimed as these are used for making a taxable supply. However, input tax incurred on overhead expenses (site office rental, utilities) for making of residential property is not claimable.

Property used for business without consideration is not a supply but input tax can be claimed because the property is used for the purpose of business. Conversely, if the property is used for private purposes, it will constitute a deemed supply and the developer will have to account for output tax. Where the property is used by a developer who makes mixed supply, the developer will have to payback the input tax earlier claimed by making the necessary adjustments.

CONCLUSION

By designating residential land as an exempt supply, the government aims to reduce the GST burden on buyers of residential properties- a well-intended move. However, property developers who supply a mixture of residential and commercial properties will face the difficult challenge of splitting the direct input taxes and apportioning the residual input taxes between residential (exempt) and commercial (standard-rated) properties as required by the GST rules.

In view of the fact that most developers are involved in mixed projects, property developers need to familiarise themselves with such mechanisms i.e. the rules on Partial Exemption and Capital Goods Adjustment; arguably some of the most complex aspects of the GST system. For deeper understanding, it is essential to refer to the Guide covering such topics.

Note :

8.            The recovery of expenses will be treated as disbursement and will not be subject to GST only if it satisfies the following conditions:

a)            customer is responsible for paying the third party;

b)            customer knows that the goods or services would be provided by a third party;

c)            customer authorised you to make the payment on his behalf; i.e. you acted as an agent of the customer when paying the third party;

d)            customer received and used the goods or services provided by the third party;

e)            payment is separately itemised when you invoice the customer;

f)             You recover only the exact amount you paid to the third party; and

g)            The goods or services paid for are clearly additional to the supplies which you make to the customer.

9.            Mixed supply refers to developers who make both taxable and exempt supplies.

SOURCE : MIA CCOUNTANTS TODAY | MAY/JUNE 2014