What Is The Capital Gains Tax In Budget 2024?

Budget 2024 was announced and serves up an ambitious plan to steer the nation’s businesses, ministries, and people. This is all driving towards the common goal of economic growth and helping the country’s economy recover as soon as possible.

While there were quite a few huge announcements during the tabling of the budget, one of the stand out unveilings was the implementation of a 10 percent capital gains tax (CGT) on the disposal of unlisted shares from 1 March 2024. 

Some of you might be rolling your eyes at another tax that you have to account for, but others might be raising an eyebrow at this announcement, asking: “What even is a capital gains tax and how does it affect me?” To answer this question, we must first understand how CGTs work.

What does ‘capital gains’ mean?

Those who are not big into investments may not even know what capital gain is. To put it simply, the term capital gain refers to the increase in the value of a capital asset when it is sold.

In other words, a capital gain occurs when you sell an asset for more than what you originally paid for it. In essence, any type of asset you own is a capital asset. For example, stocks, bonds, shares, real estate, or even a boat for leisure are all capital assets.

How does capital gains work?

As mentioned previously, capital gains represent the increase in value of an asset. When an asset is sold and you make a profit, these gains become realised. While any asset can benefit from capital gains, it is most commonly associated with investments such as stocks and property. However, capital gains can also be realised on any possession that is sold for a price higher than the original purchasing price.

Generally speaking capital gains 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

Hopefully, the explanation above clears up the first part of the question on capital gains. Now comes the second part – unlisted shares.

What are unlisted shares?

Unlisted shares are defined as the equities or financial securities of the companies. These can be startups or businesses that are not listed in the stock market. As they are equity that are not listed on the markets, they are not tightly bound to the rules of public traded companies (like having to disclose their accounts annually)the stock exchange. They are also not very liquid and you also risk losing all your capital invested should the company fold.

Despite this, unlisted shares are still bought by investors who are seeking to diversify their risks,  or gain equity in potentially profitable businesses, highly negotiable prices, and the potential of massive profits. Examples of this are startups offering shares of the company in exchange for seed funding.

While it is not a guarantee, unlisted shares of a company hold the potential to rise in value dramatically, especially if the company goes through an initial public offering (IPO). As such, some investors are willing to take the risk for these big payouts.

Is this really a new tax?

When looking from a Malaysian perspective, CGTs have not really played a big part until recently. Generally speaking any sale made from your investments is not subject to the capital gains tax. Your capital assets are also not subject to this tax system. In summary, capital gains in the country are not subject to income tax.

The closest equivalent that you actually need to pay is the Real Property Gains Tax (RPGT). RPGT typically only applies to gains on disposal of real property in the country or shares in a real property company where the Real Property Gains Tax is applicable.

However, with the tabling of Budget 2024, it has been proposed that companies will be subject to CGT at a rate of 10 percent on net gains from the disposal of unlisted shares, from 1 March 2024.  If the shares were acquired before 1 March 2024, the taxpayer can instead elect to pay CGT on two percent of the gross sale value.

With regards to the new CGT proposal, exemptions will be available for disposals in connection with IPOs or internal group restructuring.  Based on the Tax Act 1967, capital gains will likely fall under income. Additionally, where CGT is imposed, RPGT will no longer apply.

We will have to wait and see what the final legislation will state regarding this issue and whether or not companies which are deemed to be trading in shares will still be subject to the usual higher 24 percent income tax rate.

Will you be affected by this tax?

For the most part, it seems like most individuals will be spared from the new CGT. However, individuals would definitely be tax-disadvantaged from using investment holding companies to hold unlisted shares, even though a corporate holding entity has other desired features such as continuity and governance. 

On the other hand, the new CGT will likely affect those investors who are involved with private equity funds. Generally speaking, private equity investors tend to buy a stake in a private company and hold it on a long-term basis. Private equity funds would typically help such private companies grow their business and eventually dispose of their stake to other investors.

Because private equity funds typically have a lifecycle, investors need to dispose of their investments eventually before the lifecycle is over. Gains from disposal of shares are generally seen as capital gains from long-term investments. The introduction of the new CGT will mean that private equity funds who invest in Malaysian unlisted companies will now be burdened with additional and unexpected costs on their investments.

This covers the basics of how the CGT will affect individuals and investors. We will have to wait and see until legislation for the new CGT is finalised before we can get a full picture.