During the Budget 2024 Speech, the Minister of Finance announced the introduction of capital gains tax (CGT) in Malaysia with the view of broadening the tax base. CGT is a new form of tax, to be imposed on the disposal of unlisted shares. The Finance Act (No.2) 2023 which was gazetted on 29.12.2023 sets out the legal provisions related to CGT in the Income Tax Act 1967.
Overview Of CGT
Based on the Budget 2024 announcement, the domestic component (domestic gains) of the CGT will come into effect from 1.3.2024. The exemptions in respect of the Malaysian CGT are expected to cover gains or profits from the disposal of unlisted shares in relation to the Initial Public Offering approved by Bursa Malaysia and intragroup exercises.
Via the newly introduced Section 4(aa) of the Income Tax Act 1967 (ITA), gains or profits from capital assets are now taxable income. The phrase “capital asset” refers to movable or immovable property including any rights or interest whilst “immovable property” includes shares. The statutory meaning of “shares” means:
(i)Stock and shares in a company.
(ii)Loan stock and debentures issued by a company or any other corporate body incorporated in Malaysia.
(iii)Members’ interest in a company not limited by shares whether or not it has a share capital.
(iv)Any option or other right in, over or relating to shares as defined in paragraphs (i) to (iii).
Scope
The scope of CGT is applicable to gains from the disposal of the following assets:
(i)Unlisted shares of a company incorporated in Malaysia which are disposed of by a company, limited liability partnership (LLP), trust body or cooperative society. The gains derived by individuals from the disposal of unlisted shares are excluded from the scope of CGT.
(ii)Shares of a controlled company incorporated outside Malaysia that owns real property situated in Malaysia or shares of another controlled company or both.
Profits or gains arising from the sale of shares in a foreign company are deemed derived from Malaysia if, at the time of acquiring the foreign company's shares, the combined value of real estate located in Malaysia (along with any associated rights or interests) and/or shares of a "another controlled company" owned by the foreign company is equal to or exceeds 75% of the total tangible assets of the foreign company.
In this context, "another controlled company" denotes a separate controlled entity that possesses real estate in Malaysia (including associated rights or interests), and the defined value of such Malaysian real estate constitutes at least 75% of the total tangible assets of that controlled company. The term "defined value" refers to either the market value of the real estate or the acquisition price of shares in another controlled company[1].
(iii)All types of capital assets that are situated outside Malaysia.
Determination of disposal and disposal date
The term "disposal" is defined to encompass actions such as selling, conveying, transferring, assigning, settling, or alienating, whether through agreement or by force of law. It also includes a reduction in share capital and share buyback.
In the context of capital asset disposal, if there is a written agreement for the disposal, the deemed date of disposal is the agreement date. In the absence of a written agreement, the disposal is considered to occur on the date of completion.
Where a contract for the disposal of a capital asset is conditional and the condition is satisfied (by the exercise of a right under an option or otherwise), the acquisition and disposal of the capital asset are treated as occurring at the time the contract was executed. However, circumstances may change in the following situations:
(i)The acquisition or disposal requires the approval by the Government or a State Government (of Malaysia), the date of disposal shall be the date of such approval.
(ii)The approval referred to in subparagraph (i) is conditional, the date of disposal shall be the date when the last of all such conditions is satisfied.
Implementation date
Following the gazette of the Income Tax (Exemption) (No.7) Order 2023 on 29.12.2023, the CGT is exempted from 1.1.2024 until 29.2.2024. In other words, the implementation of CGT is only effective from 1.3.2024.
Rate of CGT
For disposal of capital assets situated in Malaysia being acquired before 1.1.2024, the taxpayer has the option to pay CGT at either 2% of gross disposal price or 10% of chargeable gain. The CGT rate will be 10% on the chargeable gain from the disposal of such assets if they are acquired after 1.1.2024.
The prevailing income tax rate of 24% will be imposed on the chargeable income for the disposal of all types of capital assets received in Malaysia from outside Malaysia.
In calculating gains or profit from the disposal of capital assets, the following formula should be applied:
The allowable deductions against the disposal price are summarised as follows:
(i)The amount of any expenditure wholly and exclusively incurred on the capital asset at any time after its acquisition by or on behalf of the disposer for the purpose of enhancing or preserving the value of the capital asset, being expenditure reflected in the state or nature of the capital asset at the time of the disposal.
(ii)The amount of any expenditure wholly and exclusively incurred at any time after the acquisition of the capital asset by the disposer in establishing, preserving or defending its title to, or to a right over, the capital asset.
(iii) The incidental costs of making the disposal.
The acquisition consideration refers to the value of the consideration for the acquisition of the capital asset (together with the incidental costs) by deducting the following items:
i)Compensation for any kind of damage / injury to the asset / for the destruction or dissipation of the asset / for the depreciation or risk of depreciation of the asset.
ii)Any sum received under an insurance policy for any kind of damage or injury to the loss, destruction or depreciation of the asset.
iii)Deposit forfeited on intended transfer of capital asset.
Treatment of capital losses
Capital losses arise when the total of acquisition consideration and associated costs exceeds the disposal consideration. The said capital losses may be used to offset against the gains from the disposal of other capital assets.
Any unutilized capital losses are eligible for carryforward up to 10 consecutive years of assessment to be offset against future gains from the disposal of capital assets.
Treatment of business income and business expenses
It should be noted that one should not treat capital gains as business income under Section 4(a) unless it falls within the exception stated under Section 24(1) where the capital assets are, amongst others:
(i)Any stock in trade sold in the course of business.
(ii)Any services rendered in the course of business.
(iii)Any use or enjoyment of any property.
Gains or profits from the disposal of capital must be ascertained by reference to each disposal separately and treated as a separate source of gains or profits from the disposal of capital asset for that year of assessment.
It is also clear from the Finance Act that Sections 33 and 34 of the ITA are not applicable to gains or profits from the disposal of a capital asset.
Amendment made to RPC regime
Interestingly, through the Finance Act (No.2) 2023, gains from the disposal of shares by the companies, LLPs, trust bodies and cooperative societies are no longer subject to the Real Property Gains Tax (RPGT) from 1.1.2024. However, the scope of Real Property Company (RPC) shares is only applicable to individuals and Labuan entities.
CGT Exemption
During the Budget 2024 speech, it was announced that an exemption will be given to the disposal of unlisted shares in relation to the Initial Public Offering approved by Bursa Malaysia and restructuring within the same group. However, such an exemption was not stipulated in the Finance (No.2) Act 2023. As such, it is expected that a gazette order will be issued to address the exemption.
Recently, the Minister of Finance II announced that CGT exemption would be given to unit trusts and foreign-sourced income. It was further added that the exemption on CGT for unit trusts will be effective from 1.1.2024 until 31.12.2028 whilst the exemption for FSI takes effect from 1.1.2024 until 31.12.2026. This timely relief may alleviate concerns for taxpayers and investors.
[1] Section 15C(2) of the ITA
26 January 2024