The recent tax reforms and budget changes have implications for the real estate industry, particularly for property developers, investors and small-to- medium businesses. On the surface, their impact may seem minimal, but the ramifications may be far worse.
For example, the introduction of a 2% tax on dividends affects small and medium enterprises (SMEs). Owners who draw profits in the form of dividends are now impacted. Many property developments companies and family-owned real estate businesses rely on dividends to pay its shareholders after the company has been taxed on profits. The fear is that this tax introduces double taxation, meaning that after a property development company pays corporate tax, shareholders will now pay an additional 2% on the dividends received that exceed RM100,000 annually.
Source: https://en.wikipedia.org
This could lead property owners and developers to rethink their strategies for profit distribution, which may include:
• Reinvest in properties instead of taking dividends to avoid the double-tax effect.
• Increase reinvestment in property improvements or new developments, which could sustain or increase property values.
• Explore different compensation structures that balance between dividends and salary.
The foreign source income exemption extension benefits individual investors in real estate who have income from properties outside of Malaysia. For high-net-worth individuals and real estate investors with overseas holdings, the exemption allows them to retain rental income or property sale gains from foreign properties without facing Malaysian tax liabilities. The 10-year extension of the foreign source income tax exemption for individuals may appear to offer short-term benefits. This exemption allows individuals to remit back their foreign income without contributing to the Malaysian tax base.
While this is positive for those with international portfolios, it could impact the Malaysian real estate market by:
• Potentially decreasing the appeal of local real estate investments among Malaysian investors who might find better returns abroad with this exemption.
• Encourage Malaysian investors to diversify geographically, possibly diverting capital that could otherwise bolster the local real estate sector.
• Create a potential imbalance in the local property market, as local investments may see less individual investor activity than global markets, where there’s the added benefit of tax exemptions.
However, it could also mean that more investors with foreign holdings may choose to bring profits back into the Malaysian economy indirectly, especially if foreign returns are reinvested locally.
The budget’s RM18.6bil allocation to SMEs across various financing programmes provides substantial support for real estate-related businesses. Through grants and loans provided by agencies like SME Bank and BSN, property development firms, especially small- to medium-sized ones, can access capital that might otherwise be difficult to secure through traditional bank loans.
While the recent tax reforms and budget updates add some financial strain to real estate players, they also offer a variety of opportunities.
Property developers and real estate SMEs that adjust their tax planning, leverage new financing options and adopt a long-term investment perspective are likely to benefit most from these changes.
For investors, the combination of new taxes and expanded exemptions presents both risks and opportunities. By staying adaptive and strategically focusing on growth, these reforms could be turned into profitable outcomes.
Reference:
Beware the tax, Joseph Wong, The Star, 17 November 2024
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