Proposed Stamp Act changes cause a stir

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This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.

SOME proposed amendments to the Stamp Act 1949, which seek to impose stricter requirements on the  stamping of contracts, have caused a stir among property developers who worry that the amendments will push up their cost of doing business.

Several developers The Edge spoke to expect to be materially affected by the amendments. While the actual scope of the impact remains unclear, they expect costs to rise substantially due to the sheer volume of contracts signed in the sector.

“This is something we will protest against,” says one developer who declines to be named, adding the changes could be gazetted within a year, going by due process.

The amendments are contained in the Stamp (Amendment) Bill 2016, which has already gone through the first reading in Parliament but has yet to be passed. The next parliamentary sitting begins in early March 2017.

Key amendments include strengthening the wording of Section 4 of the Stamp Act to provide that the chargeability of stamp duty — and exemption from it — shall be subject to the Stamp Act only, rather than multiple pieces of legislation.

A construction player says one concern from this change is that existing stamp duty exemptions provided for under various Acts will be taken away, meaning stamp duty will be payable on more instruments than before.

The wording of the section will also be amended to stress that all instruments chargeable with stamp duty “shall be duly stamped”, implying that there will be a stricter requirement for contracts to be stamped.

This, in particular, will affect businesses that sign a big volume of service contracts such as property developers and construction firms, say lawyers familiar with the subject matter.

“In practice, stamping is [currently] done selectively. People pick and choose what to stamp,” says one lawyer who declines to be identified. “In the worst case, not stamping your document means it will be inadmissible in court as evidence.”

Even then, a common practice is for an affected party to simply pay late stamping penalties to admit such documents to court, says another lawyer. The current penalty for executing and signing documents not duly stamped is currently RM1,500. The amendments seek to increase this to RM6,000.

As for late stamping penalties, the fines currently go up to RM100 or 20% of the deficient duty, whichever is greater, for stamping done more than six months late. The bill seeks to increase the penalties to be as high as RM100 or four times the deficient duty if more than six months late, whichever is greater.

In its current form, the penalties for non-stamping are not seen as prohibitive. Not stamping a contract does not render the contract invalid, the lawyers say.

Rather, the current consequences of not stamping an agreement are more administrative in nature. While some stamp duties are fixed, others are levied on an ad valorem basis, meaning they are calculated in proportion to the contract value.

If the bill is passed by Parliament and gazetted without changes, a main concern for affected businesses is the possibility that a blanket stamping requirement will mean paying stamp duties on each contract signed.

“Our cost of doing business will go up,” says one developer. “There is a huge number of smaller contracts in each project.”

In addition, for developers especially, there is concern about a proposed amendment whereby ad valorem stamp duty would be imposed on the contract or agreement instead of the memorandum of transfer for property.

Essentially, this may imply that the stamp duty is payable when a homebuyer executes the sales and purchase agreement — even before obtaining a housing loan — instead of upon vacant possession of the property in question.

“This raises the entry bar for aspiring homebuyers as there will be more upfront costs,” says one developer. “If developers pay on their behalf at that point, to whom is the duty refunded to if the sale is later aborted?”

The bill also contains clauses that increase the Inland Revenue Board’s (IRB) power of collection vis-a-vis stamp duty. Among others, the IRB will be empowered to make an assessment if it finds that a chargeable instrument is not duly stamped.

The IRB’s powers are also expanded so that it may conduct an audit, whereby it will be empowered to require relevant documents to be produced as well as search properties and other places for auditing purposes.

This comes alongside a new requirement for every duty payer to keep the relevant instruments and documents for a period of seven years from the payable date.

Non-cooperation with such requests will be deemed an offence under the amendments. The bill seeks to increase the maximum fine for non-compliance from RM250 to RM10,000.

Also worth noting is a proposed new power that allows the IRB to appoint any person to be an agent of a duty payer. Such an agent will be required to pay any duty or penalty due under the Stamp Act on behalf of the duty payer. Such an appointment can be objected to by notice in writing to the IRB within 14 days from the date of appointment.

In addition, the Bill also proposes to allow the IRB to recover unpaid duty or penalty from a deceased party, whose estate shall not be distributed unless the owed sum is provided for.

From the taxation and legal perspectives, however, the Stamp Act amendments are seen as collectively necessary given the age of the Act. One tax consultant described parts of the Act as “archaic”.

“Currently, the Stamp Act can be quite confusing,” the lawyer says, adding that the amendments will simplify and update the Stamp Act, which was originally modelled after 19th-century legislation from the UK.

However, the main benefit for the government would be on the revenue collection side, the lawyer says, given stricter stamping requirements alongside increased collection and enforcement powers.

While relatively small compared with the government’s annual revenue, total stamp duty collection represents a sizeable contribution annually.

In 2015, the government collected RM5.974 billion in stamp duty against RM219.09 billion in total revenue, based on Putrajaya’s financial statements for 2015. This was a 7.5% drop year on year from the RM6.46 billion collected in 2014, whereas total revenue in 2014 was slightly higher at RM220.63 billion.

The 2016 financial statements are not yet available.

From the IRB perspective, the amendments as a whole are seen to rebalance the scope of its enforcement powers, says the first lawyer. This would bring its powers to be more in line with its powers on other types of taxes such as income tax, which is more strictly enforced with more well-defined powers.

“Stamp duty has been like a [neglected] stepchild all these years, but it is coming to the fore now,” opines the lawyer.