by Zaina Zahir
If you are in the real estate business, you would be aware that under the Maldives Land Act1, if any dwelling or land was being sold, 15% of the sale price was paid to the government as land sales tax. However, from 1 January 2020 onwards, with the commencement of the Income Tax Act2 (ITA) the aforementioned tax has been repealed. While you may think that it is an end to the taxation on the sale of properties, it is not. Proceeds from the sale of properties will continue to be taxed, but, in accordance with the ITA – it is simply a change in the basis of taxing the sale of properties and it will have an impact on you as a domestic home seller or as an investor purchasing or selling properties.
Exemptions from tax
Seventh amendment to the Maldives Land Act exempted the seller from paying the property tax on sale of strata title flats, if it was the buyer’s first purchase. However, as land sales tax has been repealed with the commencement of the ITA, this exemption no longer applies to the sale of such flats since the ITA does not provide for such an exemption. However, GST on the sale price has to be paid unless criteria in the Section 20(o) of the Goods and Service Tax Act3 is met – that is property brought from an approved social housing scheme.
Capital Gains Tax (CGT) imposed under the ITA
Simply put, any profit/gain that arises from the sale of a capital asset is a capital gain. As such, Section 3(l) of the ITA specifies that ‘gains’ arising from the disposal of an immovable property will form a person’s taxable income – the important point to be noted here is the term ‘gain’ which is further explained below.
Now, keeping in mind that the 15% that you used to pay as land sales tax was on the sale price, while CGT is imposed on the ‘gains’, let’s ask the question, how are these gains computed and accounted for under the ITA? The general rule is, if your proceeds from selling the property exceeds your cost base at the time of its disposal, the amount by which the disposal value exceeds (the difference) will be considered as your ‘gain’ and you will need to pay CGT on that amount, in the year in which the sale took place. Hence, in a nutshell, CGT is imposed on the ‘gain’ from the disposal of assets while under the land sales tax regime, the tax was on the total proceeds. Thus, when compared, it is entirely a different mechanism of calculating the tax.
Furthermore, it must also be noted, CGT is not applicable if you inherited the property but, after inheritance, if you decide to sell it, CGT will be applicable. Also, if it is your sole or principal private residence that is being sold you will be tax exempt4. Although this is a relaxed rule for paying tax on sale of property, the requirements set under the Maldives Land Act should still be fulfilled prior to the sale of your sole residence.
Cost of the asset
The cost base of an asset is the total of the amount of expenses incurred by the person in acquiring or improving the property and the direct expenses incurred in selling the property.
- Incidental costs (i.e. agent fees and legal fees)
- Any costs incurred with respect to improvements (i.e. renovations)
- Costs paid to acquire ownership and title such as amounts paid to the State to obtain the freehold title.
If the asset being sold was acquired before 1 January 2020, for the purpose of computing your capital gains or losses, the cost of acquisition will be the open market value of the asset as at 1 January 2020. Hence, you may consider to valuing your properties with a professional valuer if you are to calculate the right amount of capital gains tax on properties which existed prior to 1 January 2020.
Effect on individuals
As gains from sale of properties are part of your total taxable income, such gains must be declared as ‘taxable income’ when submitting your annual income tax return and will be subject to the individual tax rates. As explained earlier, do note that the term ‘taxable income’ in the context of land sales refers to the gain and not sale price. The percentage you pay will depend on your tax bracket in the year in which the sale took place.
It has to be noted that although taxation provisions in the Maldives Land Act are repealed, the provisions of the Act and Regulation on the procedure and prerequisite requirements (other than taxation requirements) of sale of properties still apply. This, among other things, means that the transaction still has to be carried out at the court. It is possible, the court process of the transaction can proceed without having to pay the tax. The CGT is due at the end of the financial year.
Effect on companies
For companies, gains from the sale of properties will be deemed as part of the total business income. Companies who have been using capital assets for business purposes must already be claiming capital allowance on those assets, and hence, the disposal of such assets will result in balancing allowance (loss on disposal) or balancing charge (profit on disposal). In such cases, the balancing charge or profit on disposal will constitute part of the total income.
These changes will apply to all capital assets including dwellings and land sold on or after 1 January 2020.