The annual tabling of the Budget serves to help the country’s economy recover and uplift the Rakyat’s standard of living. It is a blueprint that provides direction for the government, businesses and people to work together to achieve the goals mentioned.
Among the new tax policies announced during the tabling of Malaysia’s Budget 2024, one that caught a lot of attention was the implementation of a 10% capital gains tax (CGT) on the disposal of unlisted shares. This announcement has been met with mixed responses thus far: SMEs have voiced their discouragement with introduction while economist welcomed the move as a step in the right direction.
Update: The government has agreed to exempt the imposition of capital gains tax (CGT) as well as taxes on foreign-sourced income (FSI) on unit trusts. Exemption on CGT is until Dec 31, 2028, while FSI is until Dec 31, 2026. The gains from the disposal of unlisted shares by companies are still subject to taxes.
Whether you currently agree with the experts or stand in the shoes of small business owners, it’s beneficial to understand how CGT works and whether this is another tax you’ll have to account for moving forward.
Understanding capital gains
FIrst, let’s unpack how capital gains works.
By Investopedia’s definition, capital gains refers to “the increase in value of an asset relative to the price it was originally paid for”. In other words, a capital gain occurs when you profit from the sale of a capital asset by selling it for more than the original price you paid.
Capital gains represent an increase in the value of an asset. Because you were able to profit from the sale of that asset, those gains become realised. Almost any type of asset you own can be defined as a capital asset. This can range from investment vehicles such as stocks, bonds or real estate, to items purchased for personal use or pleasure, like watches or furniture.
While any asset can benefit from capital gains, it is still most commonly associated with investments such as stocks and property. Capital gains generally fall into two categories:
Short-term capital gains: Gains realised on assets that you’ve sold after holding them for one year or less
Long-term capital gains: Gains realised on assets that you’ve sold after holding them for more than one year
Next, we’ll dive into the other part of the equation – unlisted shares.
Understanding unlisted shares
Unlisted shares refer to shares of a company that are not traded on a public stock exchange. Unlike their listed counterparts, which are bought and sold on stock markets, unlisted shares are typically transacted in private markets through direct negotiations between the buyer and the seller.
Despite their lack of public market exposure, unlisted shares are a popular form of investment for several reasons. Firstly, investing in unlisted shares often provides investors with an opportunity to access companies in their early stages of growth, offering the potential for significant returns as the business expands. Additionally, unlisted shares offer a level of exclusivity and control that may be appealing to investors seeking a more hands-on approach to their investments. Furthermore, the absence of daily market fluctuations, characteristic of publicly traded stocks, can contribute to a more stable and patient investment environment.
While unlisted shares come with their own set of risks, the appeal lies in the potential for substantial gains and the ability to participate in the success of promising private companies.
Proposed terms of the capital gains tax
During the tabling of Budget 2024, it has been proposed for the CGT rate to be imposed effective 1 March 2024 as follows:
Exemptions will be given to disposals related to IPOs approved by Bursa Malaysia or internal group restructurings.
Based on the Tax Act 1967, capital gains will likely be categorized as income. It’s also important to note that real property gains tax (RPGT) won’t apply where CGT is imposed.
How does this tax affect me?
All in all, you’d likely be unaffected by the new capital gains tax as an individual. However, you would no longer be tax-advantaged if you continue to hold unlisted shares via investment holding companies. This is something you’d have to weigh against the benefits of having accountability and business stability from said companies.
On the other hand, if you’re an investor with private equity funds or are a business owner / have a percentage of shareholding in a business, it’s likely that you’ll be impacted by the capital gains tax.
That’s because investors will, at some point, eventually dispose of their investments due to the typical lifecycle of private equity funds. Profit from the sale of these investments will be considered as capital gains.
Start your capital gains tax planning early
As we wait and observe further developments for CGT to be finalised, you can start taking steps to manage potential impact you might face as a result of its introduction.
Speak to us at Bispoint Group to help design a strategic approach to your investments and tax planning. Our comprehensive financial and business solutions, including accounting, tax compliance, company incorporation and financial due diligence, are designed to support your business at every stage. Currently, we have over 70 dedicated teams, including tax consultants, managers, supervisors, and junior associates in our offices serving over 1,000 private companies.