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Valuation and taxation in real property transactions

09 January 2023

REAL property transactions are subject to various taxes such as income tax, real property gains tax, and stamp duty. In the past, goods and services tax (GST) was also applicable on transactions involving commercial properties.

To bring the real property transactions to tax, valuation is the key in determining the amount of tax to be paid. Valuation is very often the heart of disputes and negotiations with the tax authorities. Valuation of property is equally important for determining municipal taxes such as local authority assessments and to determine the state land taxes (i.e. quit rent).

Normally, when transactions take place between two independent persons, the valuation used is the open market pricing where the buyer and seller looks at the best option available to themselves. Effectively, there are two sides to the pricing: The demand side and the supply side.

One would expect that in such cases, the government valuation should be no different from the valuation adopted between the buyer and the seller in the open market. However, this is not the case. Very often, the tax authorities relying on the government valuation’s department come up with prices which are either lower or higher such that it ultimately results in higher taxes.

The tax authorities will prefer a lower valuation for acquisition prices, and a higher valuation for disposal prices, ultimately giving rise to bigger profits which could be subject to income tax or RPGT, or higher stamp duties.

Why do disputes arise?

Valuation is not an exact science, and it is subjective. Valuation of real property can be affected by age, location, size, layout, usage, surroundings, demand and supply in that location, connectivity, etc. The interpretation by different professionals taking into account the various factors can result in different valuations by different parties.

The methodologies adopted by the parties can also be subject to interpretation. The most common method used for real property valuation is the comparison method where properties of the same type in the same location within the same time period are compared to arrive at the reasonable comparable market values. However, even this method is subject to dispute, and this can, for example, be centered on the choice of the property used as a comparable.

The other methods such as the residual method, investment method, profit method, or costing methods used by valuers can be subject to more disputes.

Parties to the transaction sometimes deliberately underprice the transactions on the legal documentation to pay lower taxes. It is not uncommon for parties in such transactions to pay the balance from undeclared monies or “black money”. The intention of such parties to underprice such transactions to pay lower income tax or real property gains tax and stamp duty. This tantamount to evasion of taxes. Since such transactions are not uncommon in Malaysia, tax authorities do not place entire reliance on valuations provided by independent valuers and they tend to rely on the valuations provided by the government valuers.

In practice, the Inland Revenue Board’s (IRB) overreliance on the government’s valuation department results in the pendulum shifting too far, thus giving rise to unnecessary disputes over valuation. It appears that taxpayers and IRB are constantly on a collision course as both parties are only looking at it from their respective perspectives.

Valuation disputes are not confined only to transactions between related parties. The tax authorities have the right to interfere with transactions between third parties where they have grounds to believe that the transaction has not used the open market basis of valuation.

 What is the solution?

An ideal solution to avoid taking such disputes to the courts could be a separate body established to arbitrate and resolve the valuation disputes. This is important because valuation is key when determining the real property gains tax, income tax, stamp duties, quit rent, local authority assessments, and perhaps in the future, GST, inheritance taxes, etc.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).

This article was originally published on the Sun daily.

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