Property sector still grappling with GST issues

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Property sector still grappling with GST issues

By 9 July 2015, we usher 100 days on from the start of GST, one of the major pieces of tax reform the country has seen. As one of the most sophisticated sectors, undoubtedly property and construction industry faced greater challenges in complying with GST rules. This article looks at some of the significant impacts GST has brought.

By Tan Eng Yew and Senthuran Elalingam (Featured in Focus Malaysia on 1 August 2015)

By 9 July 2015, we usher 100 days on from the start of GST, one of the major pieces of tax reform the country has seen. As one of the most sophisticated sectors, undoubtedly property and construction industry faced greater challenges in complying with GST rules. This article looks at some of the significant impacts GST has brought.

There will always be some uncertainty when new laws are introduced and there is no practical experience on how it will work. It will take some time for businesses, the authorities and, in some cases, the courts to decide how these rules will operate. Nevertheless, in this initial period, when everyone is feeling their way on how the tax will work there will be different views and interpretations. This has been the case for a number of different property transactions where interpretations and views have changed and continue to change.

Delivery Spanning Post-and-Pre GST Era

One area of uncertainty had been for commercial property developments where work had commenced prior to the start of GST and either the works had completed after GST or some of all the payments had been made after GST. In many of these developments the developer had already agreed a fixed price with the buyer and the inclusion of GST in the price would have left them with an additional 6% cost. Fortunately, Customs have taken a pragmatic approach and are only requiring the developer to pay GST on any progress payments received after GST, and none at all, where vacant possession of the property was delivered before GST.

Add-ons Supply

Another area where confusion exists is in the treatment of ‘fixtures and fittings’. When you buy a condo or a landed property it is not subject to GST. However, it is a lot more complicated in relation to any ‘add-ons’ that come with the property. It is common practice for developers to offer ‘add-on’ items with the sale of properties such as air conditioners, kitchen cabinets, furniture packages etc. These are often sold for no additional cost or factored into the cost of the property, as a buyer we simply pay the negotiated price for the property. In terms of GST, the view of Customs have been that some of these items are actually gifts of free goods which is considered as a deemed supply subject to GST, a cost the developer needs to bear. Customs separates fixtures between ‘basic fixtures’ (which forms part of the property not taxed) and non-basic (which does not form part of the property and hence is subject to 6% GST), but the dividing line between the two continues to remain confusing and uncertain. From a Buyer perspective, it may not seem to make a significant difference as the developer bears the cost, but ultimately such costs would need to be passed on through higher pricing.

A third area that is causing uncertainty is the GST treatment of services by the Residence Associations for Landed Properties. Just before the start of GST, the Government brought into a change to exempt from GST the services performed by a Joint Management Body (JMB) for tenants in a strata titled buildings. Initially it was thought this concession would also extend to the services provided by Residence Associations for strata-titled landed properties, but recent guidance from the authorities suggests that 6% GST would apply. It is unclear why there would be a different treatment for landed and non-landed properties and by doing so it clearly disadvantages landed property owners by imposing an additional cost to them. The hope is that this may have been an unintended consequence and that the rules can changed over time to accommodate both owners and residents of landed and non-landed properties.

Cash Flow issues

Aside from some of the technical and legal issues, the major challenge for the industry is managing cash flow. The industry as a whole from subcontractors through to the developers operate on very tight time frames in terms of managing money coming in and the need to pay bills going out. The introduction of GST is putting additional challenges as there is now an additional creditor each month being Customs. The GST on sales made in a month need to be paid to Customs by the end of the following month and as GST operates on an invoice or payment basis, often you need to pay Customs before you receive the money from your customer. Due to the prevalent poor credit terms or a late paying customers in the construction industry, a business can find itself needing to borrow funds in order to meet the payment deadline. This additional pressure has forced many businesses in the industry to look more closely at how they structure their payment terms to reduce some of the headaches.

In some cases, businesses are also entitled to a GST Refund from Customs. This can happen when a there is a purchase of commercial land or a completed commercial building and the buyer is eligible to claim back the GST. Although a refund is available, there is still a significant cash flow cost as the 6% GST may need to be paid upfront by the buyer and the refund would only be payable, at the earliest, within 14 businesses days of the end of the month following the month in which the purchase was made (e.g. a refund of GST on a property bought in April would only be paid at the latest in late June). This time period can be extended even further if customs undertakes an audit or review of the refund claim. These delays create additional costs that the industry needs to factor in or look at alternative strategies to reduce these costs.

Conclusion

GST has brought a new set challenges for the property industry prompting a re-think on how the industry conducts its business. These changes won’t happen overnight and it will take time to work through issues, and it may even help the industry operate more efficiently in a very tight market. Only time will tell. However, at least our experience from elsewhere suggests that the initial uncertainty and confusion with GST will settle over time and it is simply a case of getting used to the new way of life.

Tan Eng Yew and Senthuran Elalingam are GST Partner and Director of Deloitte Malaysia respectively. The views expressed in this article are the personal views of the writers and do not necessarily represent the views of Deloitte.

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