By Datuk Chang Kim Loong
THE issue of inheritance tax has resurfaced again and we cannot in good conscience remain silent to such atrocious proposal purportedly “for revenue-enhancing measures” to swell the Government’s coffers.
The largest component of the wealth or estate of the average rakyat will be in the form of properties. As there are no details yet on the proposed inheritance tax, we assume that it will capture all classes of assets to be bequeathed to the beneficiaries’ including properties.
Inheritance tax is effectively imposing a tax on inflation
In the long run, property prices are expected to increase due to factors such as inflation, increased demand and scarcity of new properties as land is a limited resource.
By imposing an inheritance tax on properties, the Government is effectively imposing a tax on the inflation suffered by the house buyer. Consider the following example of Tan who bought a property in 1977 for about RM20,000.
He subsequently got married and stayed in the same property until his demise in 2020. At the time of his death, the value of the property is estimated to be RM380,000 and Tan had left a will for the property to be bequeathed to his wife.
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Acquisition Price of Property in 1977 |
Current Property value in 2020 |
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RM |
RM |
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Property Price / Value |
20,000 |
380,000 |
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Increase in Property Price |
360,000 |
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Increase in Property Price over original acquisition price (times) |
18.0 |
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Compounded annual increase in Property Price (%) |
7.09% |
While it may seem impressive that the said property has increased in value from RM20,000 in 1977 to an estimated RM380,000 in 2020 for an increase of RM360,000 (or 18.5 times), we must remember that this increase was over a span of 43 years.
We have worked out that the compounded annual increase for this property from 1977 to 2020 is 7.09%.
However, a large factor for this increase is due to inflation and when we talk about inflation, there is always the “official inflation rate” and the “real inflation rate’ suffered by the rakyat.
We do not have the actual inflation figure of Malaysia from 1977 to 2020 but for argument’s sake, we will use a prudent rate of 3.5%.
By compounding this 3.5% rate annually for 43 years, the minimum value of the property from RM20,000 in 1977 would have increased to RM87,794 in 2020.
But is this “official inflation rate” of 3.5% an accurate representation of what is actually experienced by the people?
Most people would say a range from at least 5% to 6% and we will use 5.5% as a mid-point.
Now, by compounding an annual ‘real inflation rate’ of 5.5% from 1977 until 2020, the minimum price of the property should have increased from RM20,000 in 1977 to RM199,934 in 2017.
Hence, the net increase in property price after adjusting for this “real inflation rate” has been reduced from RM360,000 to only RM160,066 and the “real inflation rate” accounted for about 55.5% of the increase in the property price.
It is envisaged that any inheritance tax would be imposed on the estimated current market value of the estate, including property. Thus, the beneficiary of such properties are effectively paying a tax on the inflation rate since acquiring the said property.
Inheritance tax will be imposed even if there is no economic gain
It would be envisaged that any form of inheritance tax will be imposed for the transfer of the legal ownership of the assets (including properties) of the deceased to the beneficiaries.
However, in many instances, the beneficiaries may be still residing in the bequeathed property and did not realise any economic gain (such as disposal) from the said property.
Using our example of the property bought by the late Tan, who bequeathed the property to his wife, Mrs Tan would have to pay an inheritance tax in order to inherit the property of her late husband and this would add to the financial burden of Mrs Tan who is already retired and just lost her husband.
If Mrs Tan is unable to pay the inheritance tax, she risks having the said property seized by the Government and ending up being homeless.
Inheritance tax is imposing double taxation and punishing “years of hard work”
Parents make many sacrifices for their children to have surplus savings from their income after paying taxes and other living expenses in order to invest in assets (including properties) that can yield returns in the future and these assets are often accumulated over a long period of time.
By imposing an inheritance tax on all the assets to be bequeathed to their beneficiaries, the Government is effectively punishing this segment of society by taxing them a second time, since these people are just using their surplus savings which was derived from income that has already been subject to income tax.
GST: The way forward
One of the biggest problem in Malaysia is that the actual percentage of people who pay personal income tax is too small.
It was reported that in 2017, only 2.27 million people paid income tax out of our population of 31.11 million.
Assuming that only 50% of the population fall within the working age, this is only 13.6% of the working population compared to the UK, where 56% of the working population pay income tax.
We would recommend that the Government reintroduce the Goods and Service Tax (GST) as it is broad-based and a transparent consumption tax.
What made the GST so unpopular was because it started off at a high 6% threshold and not enough basis necessities were exempted from it.
We would recommend that the Government to reintroduce the GST at a lower rate of say, 3% (which can be gradually increased) and to exempt more basic necessities especially food items.
The spirit of a consumption tax such as GST is good as it increases Government’s revenue and enables them to tax everyone in the country, including foreign workers who pay no income tax but also enjoy the resources of the country.
To ensure that the people’s disposable income would not be significantly eroded, the Government also needs to impose gradual reduction in income tax.
Conclusion
Although we have gauged through real properties as a type of asset to be subject to inheritance tax, the same argument is applicable for any type of asset subjected to it.
If a taxpayer has worked hard, paid his taxes and used the remaining money to invest in various assets such as property, commodities and equities, it would be utterly unfair for these assets to be subject to an inheritance tax, on the demise of the taxpayer.
It is everyone’s aspiration to improve his economic condition and ensure that his future generation has a better start in life.
Imposing an inheritance tax is akin to punishing those who managed to succeed. This will only demoralise the future generations and will reduce their motivation to succeed in life.
As a developing country moving towards becoming a developed nation, Malaysia must reward its citizens for improving their own economic condition as this will ultimately boost the economy further.
And imposing an inheritance tax would reduce the incentive to succeed and only encourage capital flight and migration of those who can and will succeed economically.
Datuk Chang Kim Loong is the honorary secretary-general of the National House Buyers Association (HBA)
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
