UNTIL Jan 1 2024, taxpayers were very clear that only income that is accrued in or derived from Malaysia or received in Malaysia from outside the country was subject to tax under the Income Tax Act, 1967. The only exception was the capital gains arising from the disposal of real estate in Malaysia which is subject to tax under the Real Property Gains Tax (RPGT) from 1976.
With the introduction of Capital Gains Tax (CGT) on Jan 1 2024, albeit on a limited basis, taxpayers are now faced with two distinct concepts under the Income Tax Act – income and capital gains.
Prior to this, capital gains were confined to real property and this was dealt with under separate legislation, namely the RPGT Act. The coexistence of these two regimes has understandably created confusion, particularly for taxpayers who are not familiar with the intricacies of Malaysian tax legislation.
Added to this potpourri of legislation is the interaction between the capital gains regime and the implications of the foreign sourced income received in Malayia which came into the picture from 2022. The irony here is capital gains arising to taxpayers outside Malaysia from the sale of real estate or other property, can be subject to tax in Malaysia from Jan 1 2024 because it falls within the definition of “capital asset”.
Unless you are a tax-savvy person and you have taken pains to understand that there is an exemption order, an ordinary taxpayer may not be aware that the gains from disposal of capital assets, subject to certain condition, remitted into Malaysia will be exempt from tax. This exemption is only available to a company, limited liability partnership (LLP), trust body and cooperative society. Individuals are also exempt from tax on remittance of such capital gains on the grounds that CGT is not applicable to them.
How does it work?
Companies, LLP, trust body and cooperative society: Any disposals of “real property” in Malaysia will be subject to RPGT. Real property in simple terms relates to landed property. Disposal of shares in public listed company, mutual funds, bonds, etc will not attract CGT. However, disposal of shares in private unlisted companies, will attract CGT.
The issue of “real property company” shares is not applicable since RPGT does not come into play here. Disposal of shares in foreign company which holds real properties in Malaysia may attract CGT, subject to certain conditions.
Individuals: Individuals will still be subject to RPGT on any disposals of “real property” in Malaysia which include “real property company” shares. However, disposal of real estate overseas and remittance of such capital gains will not be subject to tax in Malaysia.
The CGT regime introduced in 2024 is not applicable to individuals. In the event you have made any form of capital gains either from the sale of shares or sale of any other capital asset remitted back to Malaysia will not be subject to tax since it is a capital gain.
Suggestion
Malaysia’s Inland Revenue Board (IRB) has issued excellent, comprehensive guidance to help taxpayers understand the distinction between RPGT and CGT, as well as the interaction between the CGT regime and the foreign-sourced income rules.
Taxpayers who derive capital gains, particularly from the disposal of assets outside Malaysia and intend to remit the proceeds to Malaysia, should familiarise themselves with these guidelines to better understand their tax obligations and the available exemptions.
The key guidance issued by the IRB includes: (i) Tax Treatment on Gains from the Disposal of Foreign Capital Assets Received from Outside Malaysia; (ii) Capital Gains Tax for Unlisted Shares; and (iii) the Real Property Gains Tax Guidelines.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
