One of the measures taken in Budget 2014 is a hike in RPGT, effective January 1, 2014:
|Within 2 years||15%|
|Within 3 years||10%||30%||30%||30%|
|in the 4th year||10%||20%||20%||30%|
|in the 5th year||10%||15%||15%||30%|
|in the 6th and subsequent years||0%||5%||0%||5%|
The idea is to limit speculative activity by imposing an additional charge on profits made on disposal of property assets.
But I think the change won’t really be all that effective against speculation because RPGT is a tax on profits, not a tax on chargeable income. If I can still make a profit on a property over my cost of capital and transaction costs, it’s still worthwhile doing. RPGT just raises the bar on what that breakeven point might be, but doesn’t eliminate it entirely.
In fact the impact might be somewhat perverse for new property developments, because it makes flipping properties more worthwhile than keeping it for a few of years in hopes of a lower tax rate – I’d only be paying interest on progress payments, rather than the whole sum of a loan. Even better if I get by just paying a deposit.
At bottom, the issue is this: RPGT doesn’t mitigate escalating house prices, because it will vary with the profits on speculation. In fact, it provides an incentive for boosters to pile on prices even more, as that ensures profits exceed the breakeven point.
What you need to have is an instrument that essentially taxes higher house prices, not just taxing higher profits on house prices.
If we’re serious about house price speculation, we should be looking at raising the stamp duty as well. This is currently 1% for the first RM100k, 2% for RM100k-RM500k, and 3% for RM500k and above. A house valued at RM1 million attracts stamp duty charges of RM24,000 – effectively a 2.4% tax.
We can change the brackets and the rates to be more progressive e.g. 2% for RM100k-RM250k, 3% for RM250k-RM500k, and 5% for RM500k+. That raises the effective tax rate on the same house to 3.65%. Note that this is over the whole value of the house, not just on the margin on disposal.
Of course, the empirical experience with measures such as these – even the stamp duty – suggests at best a short term effect on house price escalation. Even stamp duty has limitations – because it is at heart a tax on transactions, that should in theory reduce the number of transactions in any given period. But house valuations are set at the margin – just one transaction could set a benchmark for every other property in the area. Reducing the number of transactions limits liquidity and efficiency of the property market, which means the task of figuring out whether house prices are truly reflective of underlying fundamentals even harder.
But even in this context, RPGT is probably the least useful measure we can take.