CAPITAL gains tax (CGT) was introduced in Malaysia through the Income Tax Act on Jan 1, 2024, and it is confined to companies, limited liability partnerships, cooperatives and trusts selling unlisted shares in a private company.
The CGT rate is either 2% of the selling price or 10% of the gains if the shares were acquired before Jan 1, 2024. For shares acquired after that, the rate will only be 10% of the gains.
Most economies in the world have CGT, and the only significant exceptions in this region are Singapore and Hong Kong. Introducing CGT into the system to collect tax from a segment of society that is making gains on the sale of assets is neither unreasonable nor excessive as it is only bringing all taxpayers into a level playing field.
At the moment, tax is borne by taxpayers who are generating income, while taxpayers who are generating capital gains from the sale of assets are excluded and benefitting from non-taxation.
Generally, taxpayers benefiting from the capital gains are usually high-net-worth individuals who can afford to pay the taxes. In any CGT regime, exemptions or exclusions will be given to protect the lower- and middle-income groups from the imposition of CGT on their personal assets, such as their homes and cars.
Benefits of widening CGT
This will provide an opportunity to bring high-net-worth individuals to share the burden of taxation with normal taxpayers paying income tax and paying daily consumption taxes (sales and service tax). Up to now, high-net-worth individuals have used the gap in taxation to plan their way out of income tax.
Malaysia’s tax-to-gross domestic product ratio is below the World Bank’s recommendation of 15%. Our tax collection compared to our neighbours’ is low. Widening CGT would help fill this gap and narrow the budget deficit.
What should be done
The main category of taxpayers that have been excluded is individuals, and earlier this year mutual funds were exempted. If there is an expansion of taxpayers to be brought into the CGT net, the law must be carefully drafted such that it is confined to those who can afford the tax which will inevitably be high-net-worth individuals. If tax collection is to be increased, then exempting classes of taxpayers should be kept to the minimum.
What will be subject to CGT?
The coverage must be extensive, and it should include all assets, collectibles such as artwork, jewellery, antiques, crypto assets, intangible assets such as goodwill, licences, contractual rights, leases, private assets, forex gains, etc. This can be done by widening the assets that will be subject to CGT gradually over a period of time. The drawback of widening CGT over a period of time is that it will allow taxpayers to move their movable assets out of the country. However, this will only be a short-term impact because moving assets to other countries will also bring them to CGT in those countries. The only time they can get away with taxation is if they move the assets into tax havens, which are currently being scrutinised by many countries.
Expect pushbacks
The rich and powerful have enjoyed this benefit and will be reluctant to be brought to tax, and they are likely to resist such measures. There will be significant lobbying against such a move, but if the government needs the money, this is a good measure to raise taxes from taxpayers who can afford to pay it.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
