Higher property tax for foreigners in Johor?

Newspapers in Malaysia and Singapore have reported that the new Johor Mentri Besar (Prime Minister) Mohamed Khaled Nordin wants to raise property taxes for foreign property owners in Johor. See i.a. this The Star article.

For foreign owners in Johor this sounds like bad news. However, how bad will be to be seen.

All property owners in Johor have to pay two types of taxes:
- Cukai Harta (Property Tax), paid once every year to the state of Johor;
- Cukai Taksiran (Quit rent / Assessment tax / Cukai Tanah), paid in advance 6 monthly to the local authority;

The Quit rent (Cukai Taksiran) is based on the (theoretical) rental value of a property. The local authority has a list of rental values which it updates at least every 5 years and the tax is 6% of this value (at least in KL, we failed to find out the Johor Bahru rate, but we assume it is the same).  

Property Tax (Cukai Harta) on the other hand is being levied as a percentage of the property value (in Johor 0.14% for residential houses). The property value is being determined by a special department within the administration - and the last valuation of properties had been done in the 80s according to the Mentri Besar. This means currently the basis of the property tax are house values from 30 years ago. Needless to say that house prices have since risen.

To give an example, a friend (a local Malay, but that makes no difference in this respect) bought a semiD in East Ledang. He bought it off plan in 2008 or so and paid around RM950,000 for it. The house was completed in 2010. His 2012 Cukai Harta bill of RM 767.20 per annum shows that the value for the purpose of the Property Tax was RM548,000 - so below what he paid for the house. The current market value is around RM2m. Consequently, if the value for tax purposes would follow the market price, he would have had to pay:
> In 2010 when his house was completed: RM 1,330 (house value: RM950,000).
> In 2013 when the market value reached more than double the purchase price (RM2m): RM 2,800.

This shows that if the Property Tax valuation would follow the market value, the tax would be double or quadruple the current tax amount.

However, there is one problem: prices can go up and down and it seems quite unlikely that the city council is in a position to track changes in property values immediately. Every valuation is a bureaucratic act and citizen have rights of appeal or at least the right to be heard about the assessed values. It is therefore quite likely that the valuation of properties for tax purposes will increase to the lower end of the market value. Our guess is that the tax amount may triple. In our example above a reasonable tax valuation for our friend’s semiD would in our opinion be RM1.5m which would result in RM 2,100 annual Property Tax, i.e. three times the current level.  But naturally this is only an educated guess. Most people would see such an increase as understandable and long overdue, since the current property tax is very low.

The second option for the administration (option one is the just mentioned higher assessment of house values for tax purposes) would be to increase the percentage rate of tax charged, which stands for regular residential houses currently at 1.4% of the property value.

Currently, there is a difference in rate for certain housing sectors. Low cost houses pay surprisingly a higher tax rate than ‘normal’ residential houses.
image

The city council (with the approval of the State of Johor) could adjust the tax rate for regular residential houses and increase it from 0.14% to a higher amount.

But how would this fit into the Mentri Besar Khaled Nordin’s plan to tax foreigners more tax and not locals? An increased rate would hit every property owner in the ‘regular’ residential category whether local or foreign.

An idea would be to add to the above list a new ‘sector’ of ‘foreign owned residential’. This however would change the logic behind the property tax: the point of reference for the tax is the nature of the property such as ‘residential’, ‘business’, ‘industry’, ‘agriculture’ and not the person of the owner (‘local’ or ‘foreign’). Arguably the only reference in the above list to the owner himself (and not just the legally defined use) is ‘Malay Reserve Residental’ since ‘Malay’ would indicate a reference to the owner. However, this is not the case since the status of ‘Malay Reserve Land’ is actually fixed on the title deeds which restricts ownership to that group of people (‘Malays’). So the list does not make reference to the current owner, it just makes reference to another category in the land laws.

This means that in our opinion the city council can only do two things: firstly increase the taxable value of properties and secondly increase the tax rate for ‘regular’ residential houses whilst leaving the tax rate for low cost housing untouched or lowering it. This exercise will result in higher property taxes for everyone in the ‘regular’ residential housing category - whether local or foreign.

So it’s higher taxes, especially in the high value housing estates where prices have risen significantly. Such a move would most likely find the support of most owners, and the beneficiaries of increased house values might be ready to share their good fortune by paying higher but not prohibitive property taxes.

But there is another point of interest in this story: the angle from which the Mentri Besar announced the higher property taxation of higher value properties - the foreigners were blamed for higher property prices in Johor which were unaffordable for locals. Is this correct? Only 5% of properties in Johor are foreign owned, so it is dubious whether foreign property purchases have increased the house prices throughout the board? It has admittedly led to localised ‘bubbles’, where property prices have indeed increased a lot, such as Nusajaya, Medini, Danga Bay and Puteri Harbour. The beneficiaries and drivers of this increase have been Malaysian companies who build and sell residences and who are with every launch increasing the prices significantly. Also, it was the plan from the outset to have Iskandar as an area to attract foreign money and foreign businesses. And to create jobs, technology and knowledge transfer - by bringing foreign companies and universities into this area to learn and profit from them. And it is these foreigners, who are coming to Johor to run businesses or to participate in the school offerings of Marlborough College, Raffles American School or one of the international universities, who are buying the expensive housing. The profits go into Malaysian coffers (such as UEM’s, Gamuda’s, SP Setia’s and Kazanah’s).

The above mentioned newspaper article in The Star quoted the Mentri Besar:image

This quote ignores the fact that a lot of foreigners in this area do pay tax to the Malaysian government: if you run your business in Malaysia or you are employed here, then you do pay income tax and PCB and your business pays Malaysian corporation tax, you pay road tax for driving your car and service tax for using local services.

One Australian expat we spoke to, felt discriminated against and said that should an Australian or an UK politician say something like this in respect to Malaysians or other foreigners living in Australia or the UK, he would immediately be scolded for being a racist. A tax payer can be local or foreign.

In a nutshell, the announcement by the Mentri Besar is in our estimate less then what it seems - just a simple property valuation exercise, but it caused a lot of uneasiness for foreigners in this area. If the blame for the first problem the new state government encounters (higher house prices) goes without reason to ‘the foreigners’, who will be blamed for the next bigger problem?