How much will GST impact property prices?

BY FENNIE LIM

THE predictable announcement by Prime Minister Datuk Seri Najib Tun Razak on Oct 25, 2013 that the Goods and Services Tax (GST) will take effect from April 1, 2015, bundled with several other measures will certainly have an impact on the property market.

Most property developers have started to feel the slowdown in their sales recently and I anticipate that the property market may need at least two years to digest and recover from the various cooling measures that came into effect from this January. After this, I believe that “water will find its own level”.

Nevertheless, the interest in properties by investors is undoubtedly maintained. Apart from the above factors which have caused a pause to investors’ inclination to invest, the other important driving factor is the concern on how GST will impact property prices moving forward.

To understand the effect that GST will have on real estate, it is worthwhile to review the prices of suppliers in the existing supply chain of real estate versus the expected prices moving forward, come April 1, 2015.

It is a given that with the introduction of GST for the first time in Malaysia, there are bound to be uncertainties. Nevertheless, the direction from the Government in treating residential properties as an “exempt supply” and non-residential properties as a “standard rate supply” with GST at 6%, is firm.

As a result, you may be surprised to hear that tax-exempt items such as residential properties will get more expensive even though they fall under exempt supplies.

The reality is that tax-exempt goods are only exempted from GST at the point of sale, that is when residential properties are sold by the developers.

The goods and services which are used by the developers in the making of these tax-exempt goods are not exempt from GST.

For example, residential property is tax-exempt but the materials such as marble, concrete, steel, roof tiles, bricks, sand, cement, wood, electricity and so on are not tax-exempt, which means that developers will almost certainly pass these cost increases to the consumers.

In this regard, I have done a quick simulation on how GST will impact property prices moving forward and have arrived at the following results for non-residential and residential properties.

The following summary of the simulation results is based on three different possible scenarios as follows:

(i) Assuming that the sub-contractor, main contractor as well as the property developer will maintain their original selling prices but will add on a 6% GST to arrive at their final selling price to their customers wherever GST is applicable;

(ii) Assuming that the sub-contractor, main contractor and the property developer will adjust their selling prices according to the actual costs incurred but retain the original profit margin percentage which they used to achieve

In addition to this, they will add on 6% GST to arrive at the final selling price to their customers wherever GST is applicable; and

(iii) Assuming that the sub-contractor, main contractor as well as the property developer will adjust their selling prices according to the actual costs incurred but retain the actual profit which they used to achieve (as opposed to profit margin in [ii] above).

In addition to this, they will add on 6% GST to arrive at their final selling price to their customers, wherever GST is applicable.

Based on the simulation above, you will note that, with the implementation of GST come April 1, 2015, the estimated final selling price of residential properties as well as non-residential properties will increase accordingly.

However, do note that the above simulation is done with the assumption that all the supply chain entities have the same mind-set when it comes to adjusting their prices according to the scenarios mentioned above. In the event of any party adopting a different approach, the percentage of increase in prices should be changed accordingly.

In a nutshell, given the above GST outcomes for the supply of residential and commercial properties, we can almost be sure that the chances of property prices coming down in the near future should be close to zero.

Hence, will it be worthwhile to invest now rather than later if the opportunities permit?

>> Fennie Lim heads the Crowe Horwath KL Tax Division and has been in the tax profession for the last 22 years. She has a wide range of experience in tax compliance, tax advisory and indirect taxes, and has advised many large local and multinational clients on complex tax engagements.

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