Raise Real Property Gains Tax to curb speculation

Taxes on the disposal of property within five years must be raised if we are going to have any hope of curbing speculation.

Since 1976, Malaysia had a RPGT rate of 30 per cent for the disposal of property within two years. But in 2003 things changed and it was reduced to zero. When the government realised its mistake, it gradually raised the tax rate to 15 per cent for disposals within two years – but is that enough to curb speculation?

Before the RPGT in 1976, we had a Land Speculation Tax of 50 per cent for disposal within two years. Did we have property speculation back then? Certainly not on the scale we are seeing now! So that tax must have played a part in putting a lid on speculation.

When did property speculation begin with earnest? When RPGT was lifted in 2003? Is that when the seeds of speculation began to sprout?

Instead of GST, why not raise RPGT? It would be a lot easier to implement. And it won’t burden the lower-income group.

Some other countries followed the pattern of reducing the capital gains tax rates over the years. For instance, Australia reduced its top rate from 47 per cent in 2000 to 22.5 per cent in 2012. No wonder property prices doubled in Australia in the space of four years, creating what is speculated to be the largest property bubble in the world.

In contrast, the average top Capital Gains Tax rate in EU countries was raised from 13.7 per cent in 2000 to 23.3 per cent. For example, the UK raised its top rate from 24 per cent to 28 per cent over the same period.

And oh, India and Greece, both facing economic crises, had a top capital gains tax rate of zero per cent in 2012. (India’s was 10 per cent in 2000.) That says something, doesn’t it?

Goh Ban Lee wrote this column in theSun.

Make property speculation costly
Posted on 26 August 2013 – 08:35pm

Goh Ban Lee

PROPERTY prices have increased rapidly in the last few years. More specifically, properties catering to the middle class have increased by 60-80% in Penang Island and the Klang Valley.

As a result, not only the lower income groups have problems in finding shelter, those with university degrees are also finding it very difficult to buy houses.

While there is no doubt that the increasing costs of materials and labour have made housing development more expensive in the past few years, these do not justify the huge leap in property prices. The culprits are the speculators. Property owners, especially those with multiple houses, just ride along.

While housing developers and multiple-property owners are satisfied with the property market lately, those who speculate in properties, especially members of investors’ clubs and have done nothing positive in building houses, are laughing all the way to the bank.

There is no shortage of houses or living quarters. There has been no sudden increase in the population. In fact, even to casual observers, there are many housing units that are not occupied. In the 2010 Housing and Population Census, several states, including Penang, had more than 20% vacant housing units!

The federal government has been aware of the rapid rise in property prices. It has set up statutory bodies to build houses not only for the poor but also the middle class. An example is Perumahan Rakyat 1 Malaysia (PR1MA) Berhad which is charged to build affordable houses.

Apart from requiring private developers to build low-cost and low medium-cost houses, the federal government has also provided assistance to state governments and local authorities to build Projek Perumahan Rakyat Termiskin (PPRT). These living quarters are rented to the very poor at minimal cost.

The federal government has also reintroduced the Real Property Gains Tax in the 2010 Budget. It has also increased the rate of taxation in the 2013 Budget.

Today, those who dispose houses within two years of purchase are subjected to a 15% tax on the profits and those who dispose their properties within three to five years are subject to 10% tax.

So far, the efforts to curb the rapid increase in property prices have not been successful. Prime Minister Datuk Seri Najib Razak recently organised a workshop to seek ideas and proposals to ensure that the poor and young middle-income families are adequately housed.

According to Urban Wellbeing, Housing and Local Government Minister Datuk Abdul Rahman Dahlan, the proposals would likely be incorporated in the 2014 budget speech.

Although it is heartening that the government is searching for new ways to ease the building of new houses, the problem is not the shortage of houses, but speculative buying.

The introduction of “Developers’ Interest Bearing Scheme” (DIBS) only makes the situation worse. As pointed out in this column on July 2, it has facilitated speculators to make huge financial gains with comparatively low costs. A profit of 200% within three years is common.

DIBS should be banned if the government is serious in reducing speculation in property.

Furthermore, according to Chang Kim Loong, the secretary-general of the House Buyers Association (HBA), the tax rates are inadequate. He practically calls for the doubling of current tax rates for those who sell their properties within two years of purchase.

He also advocates that those who sell their third or more properties within 10 years of purchase should be taxed 30% of the profits.

Although Chang’s proposals are double that imposed by the RPGT, they are not as drastic as the taxes imposed on house speculators when these were first imposed in 1974.

The Land Speculation Tax 1974 imposed a 50% tax on the profits on the sale of a property within the first two years. This was later changed to 40%. This law was replaced by RPGT in 1976.

Hopefully, the federal government will see it fit to endorse the proposals of Chang and the HBA in imposing higher taxes.

Those who think that HBA’s proposals are too extreme should read Progress and Poverty by Henry George (1839-1897), a prominent political economist. His advocacy of single tax on land states that all unearned income from land ownership should be taxed 100%.

Datuk Dr Goh Ban Lee is interested in urban governance, housing and urban planning. Comments: letters@thesundaily.com

Ban Lee is spot on. What do you think?