MALAYSIA does not tax capital gains other than on gains from disposal of real property. The idea of shares being taxed under Real Property Gains Tax (RPGT) may not come up in the minds of any ordinary individual. Real property means land situated in Malaysia and any interest, option or any right in or over such land.
There is a unique provision – Paragraph 34A of Schedule 2 of the RPGT Act – which can bring capital gains from disposals of shares in “real property companies” (RPCs) within RPGT. The disposals referred here do not include disposals undertaken by individuals or companies who regularly trade in shares which will be subject to income tax.
This provision was introduced in 1988 to replace the Share Transfer Tax. The objective here was to prevent individuals from avoiding RPGT by incorporating a company to acquire real property and thereafter disposing the shares of the company instead of the real property.
An RPC is a controlled company where the real property or the shareholding in another RPC represents at least 75% of the total tangible assets of that company. Tangible assets include plant and machinery, debtors, cash, land, buildings, motor vehicles, etc. Controlled company is a company having not more than 50 members and controlled by not more than five persons. This will exclude public listed companies.
Implications of holding RPC shares
Whenever an individual or a company disposes RPC shares, the gains on such disposals will be taxable. There is a second level of taxation when the company that holds the real property sells the property. Once a share is classified as an RPC share, it shall always remain an RPC share for the shareholder despite the company relinquishing its RPC status.
The disposal of such shares will be subject to RPGT at a step-down rate from 30% for the first three years to 5% (individuals) or 10% (companies) after five years from the date of acquisition.
Problems associated with RPC shares
Although this provision Paragraph 34A of Schedule 2 dealing with RPC shares is nicely tucked away inside the RPGT Act, it gives rise to a whole set of disputes between the IRB and the taxpayer.
The common problems in dealing with RPC shares are issues surrounding the date of acquisition and disposal, the acquisition cost and the disposal price.
Generally, the acquisition date is determined on the date of the sale and purchase. However, problem arises when there is no written agreement or the transfer of shares is as a consequence of a direction of the courts.
You can have an instance where the seller is disposing of RPC shares whilst the buyer may be buying non-RPC shares on the grounds that at the time of the purchase, the company holding the real property may not be an RPC any longer.
Acquisition price gives rise to many headaches to taxpayers as the law is silent on the determination of the acquisition price relating to bonus issues, rights issues and additional issuance of shares unrelated to the purchase of the property.
The allocation of the disposal price between the different tranches of purchase by the different shareholders is another headache.
Advice to taxpayers
To avoid future disputes with the IRB, it is advisable that from the incorporation of such companies, issuance of shares and further purchases should be timed correctly, and the necessary valuations carried out at the time of purchase are in accordance with the understanding of the law.
It is important that the taxpayer keeps proper records of transactions surrounding the purchase and sale of the shares in the RPCs and the underlying records supporting the RPC’s status.
Be careful before you purchase RPC shares.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.