By Tang Chee Meng
General overview
The tabling of Budget 2023 was more anxiously awaited compared to other years basically because everyone expected parliament to be dissolved immediately after the budget has been tabled.
The first hint came when the tabling was brought forward from the originally scheduled date of 28 October to 7 October, presumably so that the elections can be held before the usual flooding season begins in mid-November. Rumours swirling around the dissolution of parliament and GE15 overshadowed the budget and became the main focus rather than the budget itself. True enough, three days after the presentation of the budget proposals by the Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz on 10 October which incidentally was a public holiday in Malaysia, Prime Minister Datuk Seri Ismail Sabri Yaakob announced that he has received the consent of the Agong to dissolve parliament. This means that the 15th General Elections (GE15) is likely to be held sometime in November despite the warning by the meteorological authorities that the flooding season which usually starts in November may cause a lot of inconveniences and disrupt the balloting process. The dissolution of parliament also means that the budget proposals will just remain that; as it will not be able to go through a debate and be approved by parliament and will have to be retabled by the new Finance Minister, with or without any modifications, after the cabinet has been formed by the new government voted in after GE15. Notwithstanding that the budget will likely only be approved early next year, we have studied the budget proposals and assessed how some of these proposals will impact the property sector. The following are the key points noted by us.
Projected improvement in GDP growth
Based on the statistics presented by the Finance Minister, Malaysia's economy is projected to have grown by 5% in Q1 2022 and further improved by 8.9% in Q2. As such, the government has revised the growth forecast for full year 2022 from the previous projection of between 5.3% to 6.3% to now between 6.5% to 7%. Nevertheless, as Covid 19 has not completely been eradicated, and given the anticipated global economic slowdown resulting partly from the Russia-Ukraine war and the ensuing trade sanctions imposed by Western countries on Russia as well as inflationary pressures amidst tightening monetary policies, the country's GDP growth for 2023 is expected to moderate to between 4% and 5%.
With an eye on GE15, the proposals in Budget 2023 are expansionary in their thrust, with total government expenditure projected to jump from RM332 billion to RM372.3 billion, despite government revenue projected to decline from RM285.2 billion to RM272.6 billion in 2023.
Budget 2023 has been described as people-centric which is to be expected given that it is an election year budget but the major concern expressed by some experts is that it is lacking in structural reforms which are much needed to move the country to the next level of growth.
A stronger and stable economy that continues to expand is crucial for the well-being of the property sector. Although economic growth in 2023 is expected to moderate to a slower pace, the projected growth of between 4% to 5% is still a commendable growth rate and this will help to support investment and buying interest in the property sector although it is foreseeable that the sector will continue to face a challenging market environment.
Feel-good measures introduced by way of handouts and tax cuts
In addition to goodies traditionally handed out to the B40 group, this time round, the M40 group which has also been badly hit by the pandemic-induced economic slowdown over the past two years, has not been ignored. Taxpayers in the income bracket of between RM50,000 to RM100,000 will benefit from a tax reduction of two percent in personal tax for YA2023 and this, according to estimates by tax consultants, will result in tax cash savings of up to RM1,000 for those in this income bracket. However, those in the income bracket of between RM250,000 to RM400,000 will now be placed together with those in the higher income bracket of between RM400,000 to RM600,000 which means that their maximum tax rate will go up slightly from 24.5% to 25%.
On the corporate front, a tax reduction of two percentage points will be accorded to SMEs with annual chargeable income of up to RM100,000. This means that their income will now be taxed at 15% instead of 17%.
Under the Bantuan Keluarga Malaysia (BKM) scheme, households earning less than RM2,500 per month with at least five children will receive BKM assistance of RM2,500 whilst those with up to four children will receive between RM1,000 and RM2,000.
Senior citizens and singles will continue to receive BKM assistance of RM600 and RM350 respectively, subject to them meeting the specified income thresholds.
The government will continue to provide additional assistance of RM500 to single parents with children in that they will be eligible to receive a maximum of RM3,000 in YA2023, up from RM2,500 this year.
All these cash handouts, as well as personal and corporate cuts, will lead to an increase in the spending power of the taxpayers and this in turn, will likely benefit the retail and perhaps the local tourism sectors as well. However, the tax savings is not substantial enough to result in any significant boost to the purchase of homes or other properties.
Proposals directly impacting the property sector
The budget proposals which directly impact the real estate sector are summarised below:
Residential sector
Stamp Duty Remission for Transfer of Property By Way of Love and Affection
Currently, a 100% stamp duty exemption is given on the instrument of transfer of real property between husband and wife by way of love and affection but in the case of transfer between parents and children and vice versa (applicable to Malaysian citizens only) a stamp duty remission of only 50% is given on the instrument of transfer of real property.
To streamline the stamp duty treatment, it has been proposed in Budget 2023 that stamp duty of only RM10 be charged on the instrument of transfer of real property between the following parties by way of love and affection on the condition that the recipient of the property is a Malaysian citizen for such instruments executed from 1 January 2023:
a)between husband and wife;
b)between parents and children; and
c)between grandparents and grandchildren.
(i)Stamp Duty Exemption for the Purchase of First Residential Home(i)
Currently, full stamp duty exemption is given on the instrument of transfer and loan agreement for the purchase of the first residential home priced up to RM500,000 by Malaysian citizens for sale and purchase agreements executed from 1 January 2019 to 31 December 2025.
For residential homes priced between RM500,000 and up to RM1 million, a stamp duty exemption of 50% is currently given. It has now been proposed that the stamp duty exemption be increased to 75% for this category of residential homes and applicable for first time home buyers and for sale and purchase agreements executed until 31 December 2023.
(i)Stamp Duty Exemption for Instruments Relating to Restructuring or Rescheduling of Loan or Financing Agreements(i)
Currently, a 100% stamp duty exemption is given on the instrument of loan/financing agreement relating to the structuring or rescheduling of a loan/financing agreement between a borrower and the financial institution executed from 1 January 2022 to 31 December 2022. It has been proposed in Budget 2023 that this exemption be extended for another two years for loans or financing agreements executed from 1 January 2023 to 31 December 2024.
(i)Funding allocation for Government Housing Programmes(i)
Budget 2023 has proposed to increase the funding allocation for the building of new homes and home renovations in rural areas from RM361 million to RM460 million.
In Sabah and Sarawak, the financial assistance for the construction of new homes has been increased from RM68,000 to RM79,000 per unit. This is expected to result in the building of 3,000 new homes with Sabah and Sarawak being the main beneficiaries.
An allocation of RM367 million will be channeled to the People's Housing Programme in urban areas including new developments in Marang, Terengganu and Arau in Perlis and this is expected to benefit 12,400 people.
The Employees Provident Fund (EPF) will continue the development of its flagship township, Kwasa Damansara in Sungai Buloh with a total investment of RM3 billion until 2025 and this is expected to create more than 6,000 jobs.
(i)Housing Credit Guarantee Scheme(i)
The Budget includes a proposal to provide RM3 billion in guarantees under the Housing Credit Guarantee Scheme.
(i)Infrastructural Spending(i)
The government has proposed to increase the budget allocation for development expenditure in YA 2023 to RM 95 billion from RM 75.6 billion in 2022 and RM 64 billion in 2021. Amongst some of the projects that will benefit from this increased allocation are major transport infrastructure projects such as the Pan-Borneo Highway, the Gemas-Johor Baru Twin Highway, the East Coast Rail Link Project (ECRL), the Johor Baru-Singapore Rapid Transit system (RTS), the Central Spine Expressway as well as the MRT 2 and 3 projects.
(b)Comments(b)
Budget 2023 did not contain many proposals which have a direct impact on the property sector. The raising of the stamp duty exemption from 50% to 75% for residential properties priced between RM 500,000 and RM1 million will be welcomed by house buyers of such properties and this is expected to provide a boost to buying interest in homes in this sub-segment of the residential sector.
However, as only first-time homebuyers are eligible for this stamp duty reduction, there may not be a big boost to property sales as not many first-time home buyers would have achieved the financial capability to buy a property of more than RM500,000. It would provide a more effective boost to the market if this incentive is open up to all buyers and not just those buying a home for the first time. Some quarters in the property industry felt that this incentive should also be made available to those buying properties in the secondary market instead of just being limited to property purchases from property developers in the primary market. The reduction of the stamp duty to only RM10 for transfers between parents and children and between husbands and wives for love and affection will provide good reasons for Malaysians to take advantage of this incentive and carry out the transfers before the government reverts to the previous tax structure. Nevertheless, some quarters are suggesting that since the theme of the budget is Malaysian Family, Prospering Together, this reduction in stamp duty should also be extended to include transfers between siblings.
The increase in funding for the building of new affordable homes under the various government programmes is a positive step and this will help the targeted groups to own homes or to improve their current accommodation. The allocation of RM3 billion for the housing credit scheme is a positive step as it will help those in the lower income groups and those without fixed incomes like workers in the gig economy to buy and own their homes as they will then, with the guarantee provided under the scheme, be able to qualify for and take up loans to finance their house purchases. The infrastructural spending will augur well for the areas which stand to benefit from the improved accessibility that the highways and rail links will bring about. This will spur new developments in the vicinity and may also lead to an increase in demand for residential and commercial properties in this area, leading to possible future increases in property and rental values.
Overall, it is clear that the property sector is not a priority of the government in this budget as there are not many measures proposed to boost the property market. As such, we do not think that the proposals contained in Budget 2023 will have a very significant impact on boosting the property sector.
The property market has shown some signs of recovery as indicated by the growth in the volume and value of property transactions in the first half of 2022 and should continue on its recovery path. The overall volume of property transactions in the country increased by 34.5% in 1H 2022 compared to the corresponding period the year before whilst the value of the transactions jumped by 36.1%. Nevertheless, property developers are still adopting a cautious stand as building material costs have gone up substantially and the market has not yet recovered sufficiently to allow them to recover the increase in costs from the buyers. Based on the results of a survey carried out by the Real Estate and Housing Developers Association (REHDA) and released recently, property developers in Peninsular Malaysia reported a 26% decline in unit launches and a 5% drop in sales in 1H 2022 compared to the same period last year. The survey revealed that a total of 7,843 units were launched in 1H 2022, of which 45% or 3,549 units were sold in the same period. The sales performance has trended downwards because 50% or 5,303 units were sold in 2H2021 from the 10,665 launched units during then.
Additionally, there is still a multitude of challenges ahead for the property market going into 2023 given a possible global economic slowdown and even recession as predicted by some economists. The forming of a strong and stable government after GE15 is also key to a sustainable recovery of the property market.
(b)The Tourism Sector(b)
Presently, only companies involved in manufacturing and selected agricultural activities are entitled to claim Reinvestment Allowances (RA) under the Income Tax Act, 1967. In Budget 2023, it is proposed that the RA be also extended to hotels and selected tourism projects relating to the renovation, expansion, or modernisation of the properties.
The hotels/projects which will benefit from this move include 1 to 5-star hotels registered with the Ministry of Tourism, Art and Culture (MOTAC); and selected tourism projects viz., theme parks and convention centres with a capacity of at least 3,000 participants and registered with MOTAC.
The RA is set at 60% on the qualifying capital expenditure for 5 consecutive years from YA2023 to 2027 and will be set off against 70% of the statutory income. This move is aimed at reviving the tourism sector which was badly affected by the business closures and slowdowns caused by the SOPs implemented by the government during the height of the Covid-19 pandemic.
In addition to that, to boost domestic tourism activities, it has been proposed that tour operators who are currently eligible for tax exemption on statutory income derived from domestic tour packages to and within Malaysia for YA2022 will continue to enjoy this benefit for another year, applicable to the following:
a)tourism packages within Malaysia with the participation of at least 400 local tourists per year; or
b)tourism packages to Malaysia with the participation of at least 200 inbound tourists per year.
As it is the government's objective to encourage the growth of quality private healthcare services and turn Malaysia into a major destination for medical tourism, it has been proposed in Budget 2023 that private healthcare companies undertaking new investments or engaging in expansion, modernisation or refurbishment activities be eligible for income tax exemption equivalent to an Investment Tax Allowance of 100% of qualifying capital expenditure for 5 years and this can be set-off against up to 100% of statutory income.
Further, it has also been proposed that the above tax incentive for the export of private healthcare services be extended for 3 years. This will apply to applications received by the Malaysian Investment Development Authority (MIDA) from 1 January 2023 until 31 December 2025. On a similar note, the Malaysian Healthcare Travel Council will be allocated a sum of RM20 million to strengthen the country's position as a destination for foreigners seeking/undergoing medical treatment in Malaysia.
The government has also proposed to allocate a sum of RM1 billion under the Tourism Infrastructure Scheme as part of its efforts to aid the recovery of the tourism sector. It also expects an increase in the number of foreign tourists in 2023 and proposes to spend RM200 million on promotions and marketing the country as a tourism destination.
The tourism sector was very badly affected by the Covid-19 pandemic which scuttled the government's plans for Visit Malaysia 2020 (VM2020) and this resulted in a drastic drop in tourist arrivals and spending for the past two years. Total tourist arrivals for 2020 came up to only 4.3 million which was about 14% of the 30 million target set under VM2020 and more than 83% lower than the 26.1 million tourist arrivals achieved in 2019. Tourist expenditure on the other hand came up to only RM12.688 billion or about 12% of the RM100 billion targeted under VM2020.
With travel restrictions in place for most of the year, domestic tourism also took a hit with only 131.7 million local tourists travelling compared to 239.1 million in 2019. At the same time, domestic tourism expenditure came down by 60.8% from RM103.2 billion in 2019 to RM40.4 billion in 2020. The poor performance of the sector continued into 2021 when tourist arrivals dropped further to only 134,728 arrivals (down 98%) with tourism spending amounting to RM238.73 million (down 98.1%.)
The lifting of the various curbs and relaxation of the strict SOPs implemented by the government to prevent the spread of the Covid-19 virus including allowing the entry of foreign tourists into the country has helped in the recovery of the industry and this can be seen in the improvement of hotel occupancy rates as well as achieved room rates, increase in ticket sales at theme parks and entertainment centres, and increase in footfalls in shopping malls since the country exited the pandemic phase in April 2022. The various measures proposed by the government under Budget 2023 augur well for the industry and will further help in the recovery of the tourism sector.
(b)Conclusion(b)
Budget 2023 is an election-year budget as it contains several goodies aimed at appeasing the B40 and M40 groups. The irony is that all these proposals may not be retabled and approved in their current form if the new government formed after GE15 comprises parties that are not part of the mix of the government which tabled the original budget proposals. We can only now wait and see what happens after the dust has settled down after the elections and hope that whatever happens is for the long-term good of the country and the property market in particular.