By Samuel Lai, Director of StanleyCo Tax Consultants Sdn. Bhd. Written on 13 October 2023 As announced in Budget 2024, the government will implement the Capital Gain Tax on the sale of unlisted local shares, commencing on 1 March 2024.
Prior to the introduction of Capital Gain Tax (CGT)
Capital gain refers to the increase in the value of an investment held for a long time, which is realized when the investment is sold. Currently, Malaysia does not have a capital gains tax, so individuals can sell their long-term investments without being taxed, unless it involves a real property company (RPC).
This unique tax system has made Malaysia an attractive jurisdiction to hold assets and investments amongst multinational and institutional investors.
Are we ready for CGT? The implications of implementing a CGT on unlisted local shares can be multifaceted and potentially impact various aspects of business and investment practices. Here are some key considerations:
1. Increased Costs in Mergers and Acquisitions:
The imposition of CGT on unlisted shares could invariably elevate the financial burden
associated with mergers and acquisitions, as the tax implications would add an
additional layer of cost to these transactions.
2. Exemptions on Approved Restructuring Cases:
When CGT was first brought up in Budget 2023, one of the pivotal questions arose
regarding whether exemptions would be accorded to approved restructuring scenarios,
particularly where shares of entities within a conglomerate are transferred to enhance
business and operational efficacy. The potential tax liability could influence the
strategic approach to corporate restructuring and necessitate a thorough evaluation of
the financial implications. The call for exemption has been answered favorably in the
Budget 2024.
3. Impact on Employee Share Schemes:
Companies contemplating the initiation of employee share schemes may need to
reassess the viability and attractiveness of such programs in light of CGT. The tax
implications for both the company and the employees, particularly in relation to the
acquisition and eventual sale of shares, will need to be meticulously evaluated to
ensure the scheme remains beneficial.
4. Interplay between CGT and Real Property Gains Tax (RPGT) for Real Property
Companies:
The interaction between CGT and RPGT, especially for Real Property Companies,
warrants close scrutiny. The simultaneous application of both tax regimes could
potentially amplify the tax burden on companies dealing with real property,
influencing investment strategies and operational decision-making.
5. Impact on Malaysia’s goal to become a financial hub
Calls are being made to exempt IPOs, private equity funds, venture capital firms, angel investors, and trustees who manage assets for non-corporate clients from Capital Gains Tax (CGT), as they collectively serve as catalysts for Malaysia's development into a regional financial hub. The plea for exemption was positively addressed in the Budget 2024, with the finer details anticipated to be released shortly.
What measures might the IRB Implement?
As we await formal guidance from the Inland Revenue Board (IRB), let us examine Australia’s regulations concerning capital gains tax on share sales, which may offer valuable insights into potential implementations by the Malaysian government.
In Australia, the computation of Capital Gain Tax (CGT) on the sale of shares requires the seller to ascertain:
a. the cost base,
b. the capital proceeds (share sale price), and
c. which parcel of shares has been sold.
a. Cost Base
This is the cost of the shares, which should include:
The purchase price of the shares,
Incidental costs related to the acquisition of the shares, e.g. fees paid to lawyers, brokers/agents, and financial advisors,
Expenses associated with holding the shares, like interest on loans used to buy them, and
Costs of preserving and defending the rights to the shares.
b. Sale Proceeds
The amount received by the seller, or the market value of what should have been received upon the disposal of the shares.
c. Share Parcels
The seller may have acquired different parcels of shares in the same company at
different times and at different prices. And, as one share is functionally identical to all
others of the same share class in that company, it is difficult to identify which shares
were disposed of. The shares that are disposed of need to be identified to work out the
cost base when calculating CGT.
There are three common methods for parcel allocation when calculating CGT on
shares:
FIFO (First-in, First Out), selling the shares that were bought first regardless of cost
LIFO (Last-in, First Out), selling the shares that were bought last regardless of cost
HIFO (High-in, First Out), selling the most expensive shares first regardless of timing
** FIFO is the most used method as it is the easiest to keep track
Other relevant rules
a. The capital gain will form part of the taxpayer’s taxable income and will be subject to
tax.
b. Capital losses may only be offset against present or future capital gains and cannot be offset against other forms of income, such as salary or business income.
c. Capital gains may be reduced by 50% if the asset (share) has been held for 12 months or
more prior to its sale.
d. Specific regulations apply to inherited shares (for instance, shares inherited from a
deceased parent).
Record Keeping is Essential
In closing, the imperative of diligent record-keeping cannot be overstated. Ensuring that all transactions related to the acquisition, holding, and disposal of shares are thoroughly documented is crucial. Relevant records might include:
Detailed receipts of purchase, sale, or transfer, specifying price, date, and quantity,
Interest accrued on borrowed funds associated with the asset, and
Legal and other incidental expenses.