The taxation of capital gains in Malta has lately been a much-debated topic. The reason for this is the introduction of new and very complex rules (especially those related to the transfer of company shares) to replace the already complex rules.
In addition, the fact that inherited immovable property is now subject to capital gains tax has caused considerable controversy – a change that has certainly irked the public in general.
In Malta’s taxation legislation we do not have a specific law on capital gains. Rules and regulations relating to capital gains are found in the Income Tax Act (Cap. 123) under Article 5 and part of the regulations are also found in a legal notice. In fact, any capital gain made is added to a taxpayer’s income and liable for tax.
This article will focus on the taxation of capital gains on immovable property since, in my opinion, this is the area that most interests Maltese citizens.
Computing the
chargeable gain
The chargeable gain is computed by taking the consideration of the transfer (the selling price of the immovable property) and deducting the allowable deductions, which are the following:
the cost of the property declared in a deed of purchase and any expenses directly related to such deed, including duty, agents’ and legal and notarial fees proved to the satisfaction of the Commissioner;
where the immovable property in question was acquired causa mortis (deed of inheritance) , the value of that property established in the causa mortis deed and, where it was acquired by means of a donation, the value as declared in the deed of the donation;
any expenditure proved to the satisfaction of the Commissioner to have been wholly and exclusively incurred in developing the property being transferred;
duty paid in terms of the DDTA on the transfer causa mortis of the immovable property in question, including duty paid on a deed of adjustment relating to that property made in terms of the adjustments to declared value of immovable property rules, 2004;
Duty paid on the donation to the transferor of the immovable property in question in terms of the Duty on Documents and Transfers Act, the Death and Donation Duty Act or any law replaced by any of those acts;
an allowance for inflation (see below);
improvements made to the immovable property, including the inflation element of the improvements;
a maintenance allowance calculated at 0.4 per cent of the value of the building, cost price or cost of completion for every year between the year of acquisition or completion and disposal;
other expenses duly received and directly related to the transfer and not exceeding five per cent of the sale price.
One should note that this chargeable gain is added to a person’s income for the year of assessment in question and taxed accordingly in relation to the normal tax rates. A very important factor to note is that all expenses incurred relating to the immovable property must be evidenced by a fiscal receipt and such receipt must be in the possession of the seller of the immovable property in order to claim such expense as a deduction for capital gains purposes. I therefore recommend that you ensure you are given a fiscal receipt when paying any expenses and that you keep such receipts.
A capital loss may also result in a situation where the transfer price is less than the cost of the property and the allowable deductions. A capital loss can be offset against future capital gains.
Calculation of the
inflation element
An allowance for the increase in inflation based on the index of the Housing (Decontrol) Ordinance Cap. 158 from the date when the immovable property was acquired up to the date of transfer is given. This means that the cost of the property will be inflated and thus this should reduce the capital gain. The figure is derived from a simple formula which is shown below. An allowance for inflation is also given in respect of any improvements made to the immovable property.
Cost of acquisition/improvements x index (yd) – index (ya)/ index (ya)
(yd) = year of disposal (transfer)
(ya) = year of acquisition (purchase)
Exemptions
Basically, like most taxation laws and regulations, even under the capital gains rules some exemptions from tax are to be found. The main exemption, and the one that is of most interest, relates to the transfer of one’s main residence. However the law defines what the main residence is. The definition found in the law is as follows:
One’s main residence: When an individual transfers his own residence and the Commissioner is satisfied that the property has been owned and occupied for a period of at least three years and provided that the property is disposed of within twelve months of vacating the premises.
Own residence means the principal residence owned by the taxpayer or his spouse, being a dwelling house that has been the owner’s only or main residence. A garage attached to/or underlying a house or a block of flats, or a garage of not more than thirty square metres situated within 500m of the dwelling house and transferred through the same deed with the principal residence will be deemed to be included as part of the residence.
If any part of the house was used exclusively for commercial purposes for any time within two years of the transfer, it shall not be considered as “own residence” and this part shall be apportioned on the basis of the area occupied for this purpose as a proportion of the whole area of the relative dwelling house.
Other exemptions include:
where the property was taken over by Government and in respect of which a declaration by the President of Malta has been issued in terms of the Land Acquisition Ordinance before the 25 November 1992;
where the property is assigned between spouses consequent to a judicial or consensual separation;
where the property formed part of the community of acquisitions between the spouses or was otherwise owned in common between them and is assigned to one of the spouses on dissolution of the community or is partitioned between the spouses, or the surviving spouse and the heirs of the deceased;
where the property is assigned on emphyteusis for 50 years or less.
Payment of tax
Upon the contract of sale, the notary is obliged to withhold a seven per cent provisional tax from the seller on the contract price. Upon the filing of the tax return in the following year, the computation of the capital gains will be calculated, with the gain being added to one’s income and the total tax due will be calculated. The seven per cent provisional tax paid on the signing of the contract will be deducted from the total tax charge as computed in the tax return. For instance, if a property is sold in July 2005, then the capital gains computation will be included with the tax return that is due by June 2006 (individuals). The balance due will have to be paid by June 2006.
In an instance where the transfer of immovable property is subject to an exemption (eg the sale of the taxpayer’s main residence), then no provisional tax will be paid on the date of the contract of the transfer of the immovable property.
Donations
Special mention and regard must be given to donations of immovable property. In our Income Tax Act, a donation is considered to be a sale made at the market value of the immovable property at the time of the transfer. However, no tax shall be payable where the donation is made by a person to:
his spouse, descendants and ascendants in the direct line and their relative spouses or, in the absence of descendants, to his brothers or sisters and their descendants, or approved philanthropic institutions.
Provided that where the property is disposed of by the recipient (the person to whom the property was donated) within five years of the donation, the recipient will be charged on the gain ascertained by taking into account the difference between the transfer value of the property and the cost of acquisition of the immovable property at the time it was acquired by the donor (going back to the original cost to the donor). The date of acquisition to be taken into account is the date of the donation. The normal deductions mentioned previously above will be allowed.
If the property is sold after five years has elapsed, the cost of acquisition will be the market value of the property as declared in the deed of the donation.
The way in which the legislation was drafted is quite complex and highly technical. However, in the case of immovable property, the changes made to the legislation have resulted in simpler and more straightforward calculations, since previously one had the option of making two types of calculations, namely the time-apportionment method and the inflation method, and subsequently choosing the option that resulted in the lowest gain.
The last point I would like to mention is that anyone who decides to sell his immovable property should be fully aware of what constitutes a capital gain, how such a gain is computed and what can be claimed as deductions in order to avoid any surprises in the future that result in a tax liability that the person has not taken into consideration when stipulating the selling price.