The recent tax reforms and budget changes have implications for the real estate industry, particularly for property developers, real estate investors and small-to-medium real estate businesses. 

On the surface, they do not seem to make much impact but as BizProperty deep dives into the implications, the ramifications may be far worse than one first imagines. Here is how each of the main changes might impact real estate:

2% dividend tax 

The introduction of a 2% tax on dividends affects SME owners who draw profits in the form of dividends, said Syarikat Ong managing partner Agnes Wong. In real estate, many property development companies and family-owned real estate businesses rely on dividends to pay its shareholders after the company has been taxed on profits. 

The fear is that this tax introduces double taxation, meaning that after a property development company pays corporate tax, shareholders will now pay an additional 2% on their dividends that exceeded RM100,000 received annually, she explained.

This could lead property owners and developers to rethink their strategies for profit distribution, which might include:

• Reinvesting in properties instead of taking dividends to avoid the double-tax effect.
• Increasing reinvestment in property improvements or new developments, which could sustain or increase property values.
• Exploring different compensation structures that balance between dividends and salary, as dividends will now be slightly less attractive.

Ultimately, the dividend tax may push smaller real estate firms to focus more on growth within the business, possibly expanding their holdings or improving properties instead of paying out profits.

Foreign source income exemption

The foreign source income exemption extension benefits individual investors in real estate who have income from properties outside of Malaysia. For high-net-worth individuals and real estate investors with overseas holdings, the exemption allows them to retain rental income or property sale gains from foreign properties without facing Malaysian tax liabilities.

"The 10-year extension of the foreign source income tax exemption for individuals may appear to offer short-term benefits. This exemption allows individuals to remit back their foreign income without contributing to the Malaysian tax base, which could mean lost opportunities for bolstering national revenue via tax collection," said Wong. 

While this benefits individuals with overseas investments, questions remain about whether the exemption might create imbalances by diverting income outside the country, potentially limiting support for domestic economic growth since there will be a loss of tax collection opportunity for the government for nation building purposes.

While this is positive for those with international portfolios, it could impact the Malaysian real estate market by:

• Potentially decreasing the appeal of local real estate investments among Malaysian investors who might find better returns abroad with this exemption.
• Encouraging Malaysian investors to diversify geographically, possibly diverting capital that could otherwise bolster the local real estate sector.
• Creating a potential imbalance in the local property market, as local investments may see less individual investor activity than global markets, where there’s the added benefit of tax exemptions.

However, it could also mean that more investors with foreign holdings may choose to bring profits back into the Malaysian economy indirectly, especially if foreign returns are reinvested locally.

Government grants and financing for SMEs

The budget's RM18.6bil allocation to SMEs across various financing programmes provides substantial support for real estate-related businesses. Through grants and loans provided by agencies like SME Bank and BSN, property development firms, especially small-to-medium-sized ones, can access capital that might otherwise be difficult to secure through traditional bank loans.

This funding could have several potential impacts:

• Easing the financial burden of development costs for smaller property developers, who may struggle with liquidity but want to undertake new projects or expand.
• Encouraging investment in property innovations, like sustainable building practices, green technology, or digital infrastructure, which align with modern property market demands.
• Increasing competition in the real estate market, as smaller developers with fresh capital can now compete more effectively with larger companies.
• Supporting diversification in property projects, particularly in underdeveloped or suburban areas where financing challenges often limit new construction. This could stimulate growth and bring new opportunities to these areas.

For property investors, the availability of government-backed financing for SMEs could signal a coming wave of new developments and projects, which may provide a greater selection of properties and potential investment opportunities in previously underserved markets.

Strategic implications for real estate investors

The budget’s tax changes and financing provisions together encourage strategic growth in Malaysia’s real estate sector but require firms and investors to adapt quickly. Here is how real estate players could strategically respond:

• Rethink financial and tax strategies: Real estate companies, especially family-owned SMEs, may need to explore balanced strategies between reinvestment, dividend distributions and alternative tax-efficient compensation to maximise profits without overpaying on taxes.
• Expand portfolios using new financing avenues: With increased financing options, real estate companies might find it easier to expand into new property segments or locations, particularly if government funds can supplement financing for sustainable or tech-driven projects.
• Focus on long-term growth: The dividend tax incentivises holding and reinvesting profits into real estate holdings or new developments, which could strengthen market stability as companies focus on building long-term value rather than extracting profits.
• Embrace technological and environmental upgrades: Many grants and financing initiatives are targeted at innovation, giving developers and property management companies the opportunity to make upgrades that align with current market trends, such as energy-efficient systems, smart technology and sustainable construction practices.

While the recent tax reforms and budget updates add some financial strain to real estate players, they also offer a variety of opportunities, Wong pointed out during a recent talk on taxation at the recent Malaysia Property Expo (Mapex). Property developers and real estate SMEs who adjust their tax planning, leverage new financing options and take a long-term investment perspective stand to benefit most from these changes. For investors, the mix of new taxes and expanded exemptions presents both risks and rewards but staying adaptive and strategically investing in growth could turn these reforms into profitable outcomes.

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