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> How GST affect on Residential Property's Price

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Anon_1986
post Apr 24 2014, 02:59 PM

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QUOTE(woody33 @ Apr 23 2014, 09:51 PM)
do you know that every layer of the supply chain need to be paid 6% GST.
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True but yet false, a result of the widespread misinformation about GST, partly by politicians, and partly by interested parties seeking to profiteer.

GST is a type of VAT (Value Added Tax), and is therefore ultimately taxed only ONCE based on the final price.

For example,

A sells construction materials to B for RM 106,000 per house. GST is ~RM 6,000. A pays this ~RM 6,000 to customs.

B sells construction materials to C, the developer for RM 212,000 per house. GST is RM 12,000. However, B gets to claim back ~RM 6,000 as tax paid by A. Total tax paid by B is RM 6,000.

The total tax paid along this supply chain is fixed at RM 12,000 no matter how many suppliers, as each intermediate supplier gets to claim back tax paid by the preceding supplier.

So how should this affect property prices?

Assuming C spends RM 50,000 per house on outsourced services (e.g. rental of equipment, subcontracted services, professional services, architectural design etc), GST paid on services is RM 3,000.

Assuming C spends RM 100,000 on salaries of construction workers and other skilled labourers, no GST is chargeable.

C then spends RM 300,000 purchasing the land. No GST is chargeable.

Total cost for C to produce the house is therefore RM 212,000 on construction materials, RM 53,000 on services, RM 100,000 on salaries and RM 300,000 on land, being RM 665,000.

C sells the house to an investor with a ~30% profit margin, i.e. for RM 850,000. No GST is chargeable.

Total GST paid by C on the house is RM 12,000 on construction materials, and RM 3,000 on services. Total is ~RM 15,000.

C convinces property buyers that costs have increased by 6% due to GST, and therefore the house should appreciate 6% more, and increases the price to RM 900,000 even though only RM 15,000 was spent on GST. Property investors believe the hype and pay up. Prices therefore appreciate 6%.

Magic. cool2.gif

PS: I think GST is good policy and by right it shouldn't affect property prices significantly. However the general lack of understanding and education among Malaysian investors means that prices may still appreciate because people believe they will.
propusers
post Apr 24 2014, 03:46 PM

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How GST Will Impact Home Prices & The Property Market

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With the coming implementation of Goods & Service Tax (GST) in April 2015, many Malaysians are concerned with what this bodes for prices in general. It is inevitable that home prices will also be affected. In this article, we explain how home and property prices will be affected moving forward.

To properly appreciate how GST will affect home prices, it is necessary to first understand how GST works. (Click here for a detailed but simple-to-understand explanation of how GST in Malaysia works).

Aside from GST, one must also have an understanding of the Sales Tax, which is the existing tax scheme affecting the property sector. GST will supplant the Sales Tax come April 2015.

Tax Scheme on Residential Property – The Similarities
In comparing both tax schemes, we have to first identify their similarities.

One similarity between GST and the existing Sales Tax scheme is that no taxes are charged or will be charged to the consumer on the purchase of a home / residential property. For GST, residential properties fall under the “Exempt Rated” basket of goods. (But do take note that GST will be charged to the consumer for commercial property purchases as commercial properties are “Standard Rated”).

However, during the creation of the final product (also known as the input stage in tax parlance), under both tax schemes, developers would incur taxes during procurement of their inputs and materials. And this is where the differences start to become apparent between both tax schemes. The tax rate for inputs and materials vary between GST and Sales Tax.

Sales Tax VS GST for Residential Properties – The Differences
Based on the Sales Tax Act of 1972, basic building materials such as bricks, cement and floor tiles fall inside First Schedule Goods, in which all the goods in this category will not be subjected to sales tax. Meanwhile, other building materials fall inside Second Schedule Goods, in which all the goods in this category will only be charged sales tax of 5%.

Under the new GST implementation, all building materials and services (E.g. Contractors, engineers) will be subject to GST with a standard rate of 6%. This will invariably raise the production cost for developers.

If you understand how GST works, you will notice that in most cases, the additional tax cost is simply passed on to the final consumer (Standard-Rated goods), or is claimed back from the government (Zero-Rated goods). But in this case (Exempt-Rated), the additional tax cost is borne by the party before the final consumer – The developer.
The developer does not have a next “victim” in the supply chain.

This seems like good news for home buyers as they do not have to pay GST when purchasing a home. However, one should not be too happy about this. It is no stretch of the imagination to think that developers would try to build in the additional tax costs into the final sale price implicitly.

Before & After GST – A Comparison
The tables below show a comparison between the cost of a new property before and after GST. Certain taxes and costs leading up to the sale to the final consumer have been simplified for this purpose.
Also, an assumption is made that developers are able to transfer 100% of all incurred tax costs over to the consumer via the sale price.

user posted image

user posted image

The example above shows a price increase of 3.41% for new residential properties post-GST implementation. But there is a plus point to this.

Overall, new residential properties may register a lower overall increase in tax burden compared to Commercial Properties that are Standard-Rated. This is because there still is the chance that developers may only transfer some and not all of their tax cost increases into the final retail price.

The downside to this is that where pricing for new commercial properties will be cleaner (Sales Price + GST), pricing for new residential homes would look inflated. This, in turn, will undoubtedly have a knock on effect on prices in the secondary house market.

Conclusion
As a home buyer, it pays to know what the implementation of GST might bode for home prices moving forward. If you skipped the entire article, here are all the key insights in a nutshell:

- With GST, there should be a once-off increase in property prices across the board
- While developers may not bill home buyers for GST, they could transfer the costs implicitly via the sale price
- The overall price increase for new residential properties could be marginally lower than that for new commercial properties
- The secondary home market should see a knock on effect in prices
- Armed with this knowledge, you can make a better decision on when to purchase your home.

- See more at: http://loanstreet.com.my/learning-centre/H...h.m5OMzmwF.dpuf
Anon_1986
post Apr 25 2014, 12:40 PM

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QUOTE(woody33 @ Apr 24 2014, 09:21 PM)
TLDR
you seronok sendiri yo
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Damn right smile.gif As a consumer I dislike GST, but in principle it is good policy.

Anyway the article posted by propusers assumes that construction materials are the only inputs, and that developers calculate profit margins solely on the price of construction materials? That's ridiculous. He/She totally ignores land cost (the bulk of the cost in high value areas) and salaries for labour which are not subject to GST.

Which goes to show that even purported experts posting in a "learning sector" don't really understand what's going on.
propusers
post Apr 25 2014, 01:24 PM

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Simple...

demand > supply = price increase
demand < supply = price decrease

a lot demand suddenly > supply = price increase substantially


GST will push up demand? Push up a lot or only a little? I don't know... only time will tell.

After said that, a few of my frens new couples (not married yet) plan to buy house by the end of this year to avoid GST. Lack of education? hmm... maybe... sweat.gif

This post has been edited by propusers: Apr 25 2014, 01:26 PM
Anon_1986
post Apr 28 2014, 02:00 PM

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QUOTE(propusers @ Apr 25 2014, 01:24 PM)
Simple...

demand > supply = price increase
demand < supply = price decrease

a lot demand suddenly > supply = price increase substantially
GST will push up demand? Push up a lot or only a little? I don't know... only time will tell.

After said that, a few of my frens new couples (not married yet) plan to buy house by the end of this year to avoid GST. Lack of education? hmm... maybe...  sweat.gif
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Amen to that brother.

As long as enough people like your friends believe that they must rush to buy before the end of the year to avoid GST, we will see a spike in demand nearing the end of the year, and prices will rise correspondingly.

It really doesn't matter how GST impacts property. GST will cause prices to rise.

Funny, in a sad kind of way.
Showtime747
post Apr 28 2014, 03:11 PM

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QUOTE(Anon_1986 @ Apr 25 2014, 12:40 PM)
Damn right smile.gif As a consumer I dislike GST, but in principle it is good policy.

Anyway the article posted by propusers assumes that construction materials are the only inputs, and that developers calculate profit margins solely on the price of construction materials? That's ridiculous. He/She totally ignores land cost (the bulk of the cost in high value areas) and salaries for labour which are not subject to GST.

Which goes to show that even purported experts posting in a "learning sector" don't really understand what's going on.
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Labour cost not subjected to GST ? Most labour cost are sub-contracted out. Is that zero-rated ? Labour cost is a significant cost in total construction cost

Or are you referring to "kong si kong" which is like employee ?
Showtime747
post Apr 28 2014, 03:16 PM

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QUOTE(propusers @ Apr 25 2014, 01:24 PM)
Simple...

demand > supply = price increase
demand < supply = price decrease

a lot demand suddenly > supply = price increase substantially
GST will push up demand? Push up a lot or only a little? I don't know... only time will tell.

After said that, a few of my frens new couples (not married yet) plan to buy house by the end of this year to avoid GST. Lack of education? hmm... maybe...  sweat.gif
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Malaysian market is a weird market. Economic theory does not apply 100% here tongue.gif Just like teh tarik case, the businessmen all waiting for some government policy changes like RM0.10/kg increase in sugar price, and the businessmen will take advantage of it. When all suppliers increase price together, consumers can only curse and swear initially, and accept the new price after 1 week. And authorities can't do anything because there is no law for uncontrolled items
Anon_1986
post Apr 28 2014, 03:52 PM

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QUOTE(Showtime747 @ Apr 28 2014, 03:11 PM)
Labour cost not subjected to GST ? Most labour cost are sub-contracted out. Is that zero-rated ? Labour cost is a significant cost in total construction cost

Or are you referring to "kong si kong" which is like employee ?
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Well I referred to labour in the more general sense, not just manual labour. I referred to salaries, bonuses and commissions for internal staff like the CEO, clerks, sales staff, HR, accounts, in house engineers and architects etc.

Under the pre-GST regime, all subcontracted professional services like accountancy, legal, engineering, valuation, architecture are already subject to 6% Service Tax, so no change there.

On the other hand, there is a possibility that developers will start hiring their own foreign workers to do the work right?

Please see: http://gst.customs.gov.my/en/rg/SiteAssets...mber%202013.pdf

"If the foreign worker works for you under contract of employment, it is not subject to GST."

"GST is chargeable if you supply the foreign worker under your employment to another company."

If you see the current regulations, supplying foreign workers is currently subject to Service Tax, but I'm not sure what % of people actually pay that tax. The idea behind GST is that it is harder to evade.
Showtime747
post Apr 28 2014, 04:17 PM

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QUOTE(Anon_1986 @ Apr 28 2014, 03:52 PM)

On the other hand, there is a possibility that developers will start hiring their own foreign workers to do the work right?
If you are in the industry, you will appreciate how difficult it is to employ skilled labour currently. Contractors are hard-pressed to find skilled labour for the past 2-3 years. Especially when the immigration tighten their grip on illegal workers and impose hefty fines on employer. And recently the 6-P foreign workers' permit is up and many of them have been sent back. But some stayed back to become illegal workers again because it is just too difficult to find workers.

It is not just a snap of your fingers and the foreign construction worker will be at the construction site. You can ask any contractors, it is damn damn hard to employ foreign workers. And it is 10x harder to find skilled labour

QUOTE(Anon_1986 @ Apr 28 2014, 03:52 PM)
"GST is chargeable if you supply the foreign worker under your employment to another company."

If you see the current regulations, supplying foreign workers is currently subject to Service Tax, but I'm not sure what % of people actually pay that tax. The idea behind GST is that it is harder to evade.
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FYI, in the construction industry, the sub-con seldom just supply labour. They provide specialised services such as earthwork, piling, supply cranes, structural, brick laying+plastering, wiring, plumber, painting, laying floor + wall tiles, floor carpenter, roofing, road and drainage etc etc.

Anyway, do you have the link to service tax act which says supplying foreign workers is subject to service tax ?

Anon_1986
post Apr 28 2014, 05:54 PM

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QUOTE(Showtime747 @ Apr 28 2014, 04:17 PM)
If you are in the industry, you will appreciate how difficult it is to employ skilled labour currently. Contractors are hard-pressed to find skilled labour for the past 2-3 years. Especially when the immigration tighten their grip on illegal workers and impose hefty fines on employer. And recently the 6-P foreign workers' permit is up and many of them have been sent back. But some stayed back to become illegal workers again because it is just too difficult to find workers.

It is not just a snap of your fingers and the foreign construction worker will be at the construction site. You can ask any contractors, it is damn damn hard to employ foreign workers. And it is 10x harder to find skilled labour 
FYI, in the construction industry, the sub-con seldom just supply labour. They provide specialised services such as earthwork, piling, supply cranes, structural, brick laying+plastering, wiring, plumber, painting, laying floor + wall tiles, floor carpenter, roofing, road and drainage etc etc. 

Anyway, do you have the link to service tax act which says supplying foreign workers is subject to service tax ?
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Employment agencies which help to source foreign employees are taxed, but it seems that sub cons which rent out their own salaried employees to developers for a fee are not subject to Service Tax.

These sub cons will be taxed under GST, so this will be an additional tax under the GST regime.

Sub-con providing specialised services like wiring are not currently subject to service tax. This will be a substantial part of the cost increase caused by GST.

I'm just pointing out that developers will have the option to either hire sub cons and pay GST, or to hire the skilled workers of sub cons as salaried employees and avoid GST. Certainly it is the duty of in-house accountants and lawyers to explore this possibility.

Whether this is feasible in the current employment climate, I suppose you know better than me. What % of labour and specialised services is supplied by sub con at the moment?
Showtime747
post Apr 28 2014, 08:15 PM

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QUOTE(Anon_1986 @ Apr 28 2014, 05:54 PM)

Whether this is feasible in the current employment climate, I suppose you know better than me. What % of labour and specialised services is supplied by sub con at the moment?
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The % of labour you talking about that falls under "staff" category which would not be taxed under GST is very very low. We call it "kong si kong" (literally shared worker). Basically some foreign labour paid by day rate and they will do whatever non-skilled works required by site agents (like cleaning, moving stuff, directing traffic etc etc). The majority of the labour are from sub-con with specialised service. I would say 90%

There are some developer who are also main contractor themselves (names that come to mind is UOA and PJD). Maybe they will have more own foreign workers that is considered their own staff. But still they required sub-con with most specialised service

I can't remember currently there is any SST being charged by the contractors including those providing just labour service. That's why I would predict GST will have almost full impact on the cost to be born by developer

This post has been edited by Showtime747: Apr 28 2014, 08:15 PM
simplesmile
post Dec 6 2014, 01:03 AM

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Anybody heard Dr Choong Kwai Fatt talk about GST and property on radio 988 this morning? Is it about property prices dropping?

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