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Cross-subsidisation: The Biggest Problem in the Malaysian Housing Development Industry

April 2, 2024

The Implications of Tax Cases  

In the tax case on Director General of Inland Revenue (DGIR) v Ehsan Armada Sdn. Bhd., the Court of Appeal (COA) allowed the DGIR’s appeal and set aside the High Court’s (HC) order, which ruled that the payment of the exemption sum made by the taxpayer to the Lembaga Perumahan dan Hartanah Selangor (LPHS) to exempt itself from building low-cost housing in the Mutiara Indah Housing Project was deductible under Section 33(1) of the Income Tax Act (ITA).  

The COA’s decision was based on the ground that the contribution payment made to LPHS was a one-off capital outlay to enable the taxpayer to exempt itself from the social responsibility and low-cost housing elements ordinarily in place within the project. Since the taxpayer chose to disregard its original source of income from building the low-cost flats by creating a new source of income that was more profitable; the exemption sum paid cannot be considered an ordinary recurring business expense; and hence, is not deductible under Section 33 of the ITA.

On the contrary, the COA held that payments for Bumi lot exemption were tax-deductible in the case of Ketua Pengarah Hasil Dalam Negeri Malaysia v Mitraland Kota Damansara Sdn Bhd. The exemption was not a one-off capital injection to enable the developer to work outside the confines of the Bumiputera Quota Policy. Instead, it is recurring costs expended as and when contingency arises when the developer has to sell the unsold reserved Bumiputera units to non-Bumiputera purchasers.  

The different outcomes in these two tax cases highlight the complex approach of the court in determining the nature of payments (capital or revenue). Both decisions have significant implications for businesses engaged in property development, as they suggest that payments to state authorities, which are linked to long-term benefits or alterations in the capital structure of a business, might be considered capital in nature and thus not eligible for tax deductions.  

Following the notable distinction made by the COA upon the interpretation of what constitutes a deductible expense under Section 33 of the ITA, the issue of the private sector-led cross-subsidy model in building price-controlled affordable housing has once again attracted widespread attention from industry players. Firstly, building price-controlled affordable housing – in which the selling price is capped below RM300k as stipulated in the National Affordable Housing Policy – has become a social obligation for the private sector, regardless of the financial feasibility of building such housing. Secondly, the impact of cross-subsidy on the real estate market is not fully aware by many, and hence has not been given thorough assessment based on facts and commercial substance.

The Mechanism of Cross-Subsidy and its Impact on the Housing Industry  

Constructing social housing for the poor and low-income groups presents an ongoing challenge for private developers. It has been prevalent in the Malaysian housing industry since 1981 when private developers are made mandatory to allocate thirty percent of their free-market residential development to low-cost housing units. Given the development cost of low-cost housing often exceeds the capped selling price set by the government, the fulfillment of this requirement can only be made possible through cost subsidies, where free-market housing is priced at a relatively higher selling price, in such a way that bridges the gap between ceiling prices and the actual costs of developing price-controlled units (Figure 1).

Source: REHDA Institute
Figure 1: The mechanism of cross-subsidisation

While the imposed obligation to the private sector has helped to ease the burden of the government in providing low-cost housing units, the main concern is the continuously increasing costs of doing business, which has made the cross-subsidisation model for the provision of low-cost housing units not sustainable. More importantly, private developers assumed an even more challenging task following a discernible shift in the target group for social housing provision; whereby the social housing program that once targeted for the poor and lower-income group (with a gross monthly household income of less than RM3,000) has been expanded to encompass the middle-income group.  

In other words, the current social housing program – which is better known as a “price-controlled affordable housing programme” – covers 80% of the total number of households in the country, mainly the B40 and M40 income groups with a monthly household income less than RM15,000 (Table 1). This is contrary to other countries where social housing is provided by government agencies or non-profit organisations, and is mainly aimed at people on a low income or with particular needs.

Table 1: The development of house prices for social housing in Malaysia
Category Period House Price (RM)
Low-cost housing Before 1981 8,500 – 12,500
1981 – 1998 Not more than 25,000
1998 – present Not more than 42,000
Low-medium-cost housing Before 1998 25,001 – 60,000
1998 – present 42,001 – 60,000
Medium-cost housing 1998 – present 60,001 – 100,000
Affordable housing Since 2010 42,000 – 400,000

(Source: REHDA)

The impact of cross-subsidisation on the overall housing industry is significant, as it can skew the free housing market towards the development of high-end properties. This is because the construction of price-controlled affordable housing is only viable through cross-subsidisation by taxing on free-market houses. For example, the building of RSKU affordable housing in Selangor with a capped selling price of RM170,000 per unit will result in a deficit to the project, given that the per-square-foot development cost (RM248) is higher than the per-square-foot selling price (RM200) (Table 2). The deficit of the project will increase in tandem with the rising building cost, though other costs remain constant.

Table 2:Case study on cross-subsidy in building price-controlled social housing (RSKU)
Item Cost (RM/ft2)
A Building cost
136 143 150 156 163
B Other cost
Earthwork, preliminaries
Piling, pile cap, ground beams
Other ancillary buildings
Statutory contribution
Road, sanitary, plumbing, infrastructure


Assumption: Other cost remains constant
A+B = Total construction cost
234 241 248 254 261
C Land cost
Conversion premium
Development charges


Assumption: Land cost remains constant
D A+B+C = Total development cost
248 255 262 268 275
E Controlled selling price at RM170,000
Developer profit margin = Selling price (E) – Total development cost (D)
-48 -55 -62 -68 -75

(RENDA Institute)

Since the development of price-controlled affordable housing is imposed on all projects, regardless of land suitability and the selling price of free market housing., the commercially rational response by private developers is to build high-end houses (RM500,000 and above) rather than providing mid-range housing which is affordable to the middle-class families (RM300,000 to RM500,000). As a result, over-priced houses dominate the free-market housing segment.  

Subsidising price-controlled affordable housing for the lower- and moderate-income groups may be defended on the grounds of social justice, but the impact of the implicit tax on the free-market houses is inequitable. Not only that, the perception of a skewed market that is in favour of profit-seeking developers building expensive houses has led many to call for stricter requirements to regulate the construction of affordable houses. This could inadvertently exacerbate the existing distortions in the housing market in the long run, because imposing more restrictions can ultimately lead to higher compliance costs, which in turn can increase the overall cost of doing business, a cost that will be transferred to the end users, eventually.  

Compliance Cost and its Impact on Project Feasibility

A pilot survey conducted by REHDA Institute among its members to inquire the developers on the increased cost of doing business over a period of 10 years (2008 to 2019) reveals that other than land cost and construction cost (including labour and building materials cost), compliance cost, which is referred to as an expenditure derived from complying with set regulations, is also a major contributor to today’s higher cost of doing business.  

Nearly half of the survey respondents (47%) indicated that the overall costs of doing business have increased by 30% to 50% over the past 10 years (Figure 2). Other than the land cost, compliance costs had recorded the sharpest rise, which was perceived to have experienced an increase of 72% compared to the one in a decade ago (Figure 3).  

These compliance costs can come in different forms, not only incurred from land conversion premiums and contribution charges paid to utility companies, but also derived from the reduction of net sellable land due to planning requirements, namely land surrender for public facilitates, infrastructure, open space, stormwater management etc., as well as other government regulatory barriers due mainly to zoning, planning, and restrictions on building.

Source: REHDA Institute
Figure 2: Respondents’ perception on the increase of costs of doing business
Source: REHDA Institute
Figure 3: Respondents’ perception on the increase of compliance costs

What is most concerning is that compliances due to housing policies are deemed as the biggest challenge that has significantly impacted the feasibility of the projects. According to the REHDA Institute survey, as high as 83% of the survey respondents perceived that “housing policies” are the major root cause of the increasing compliance costs; and a majority of them (60%) indicated that “price-controlled affordable housing” quota is the main contributor to the reduction of project feasibility (Table 3).    

Other than the affordable housing quota, the accumulation of regulatory barriers, such as Bumiputera quota, rigid planning requirements, one-size-fits-all housing standard, etc. are all the main causes of growing compliance costs. As these artificial limits on housing development increase or tighten, so, too, does the cost and the time required to efficiently produce houses that really match the housing demand of society.  

Unfortunately, there is little recognition from the government and public that the housing industry is heavily regulated by various laws, policies, guidelines, and standards. These regulations are imposed by federal, state, as well as local governments, and have been ever-tightening and served only to increase the challenges confronted by industry players to maintain their survivability. These costs will have flow-on implications for investment decisions. If the cumulative costs are too high, it will have long-term negative impacts on housing affordability as well as availability.  

Based on the case study conducted by REHDA Institute, it was found that compliance costs constitute about 21.8% to 32.5% of the project’s gross development value (GDV), though the proportion of compliance costs may vary from project to project due to factors like location, types, sizes, and other applicable policies. Cross-subsidies due to the affordable housing quota, alone, contribute 8% to 10% of the projects’ GDV (Table 4). 

Table 3: The impact of increasing compliance costs on project feasibility
Compliance Category % Respondents Sub-category % Respondents
Housing Policies 83% Affordable Housing Quota 60%
Bumiputera Housing Quota & Discounts 49%
Land Matters 81% Development Charges 55%
Conversion Premium 53%
Substation Premium 6%
Holding Cost/Deposits/ Bank Guarantee 72% Holding Cost for Unsold Quota Units 53%
Deposit for APDL 30%
Approvals Timeline 28%
Service Charges for Quota of Unsold Units 15%
Upfront Payments 15%
Others 2%
Statutory Contributions 70% Sewerage 47%
Water 40%
TNB 34%
ISF 21%
Drainage 19%
Telecommunication 9%
Graveyard 6%
Land Surrender 57% Open Space 36%
Retention Pond 28%
Schools 19%
Mosque/Place of Worship 19%
TNB Reserves 19%
Drainage Reserves 15%
Other Land Reserves 13%
Hawkers Area 11%
Kindergarten 9%
Community Halls 9%
Police/Bomba etc 2%
Planning Requirements/ Planning Guidelines 45% Parking 32%
Road Widths 15%
Safety/Fire Safety 11%
Drains 11%
Space parts 6%
Other Changes 15%
Other Upgrading Works 40% PPU, Treatment Plants, Reservoirs etc 40%

(Source: REHDA Institute)

Table 4: Breakdown of compliance costs and their contribution to project’s GDV
Elements of Compliance Costs % to GDV
Conversion Premium 1% to 2%
Development Charges 1% to 2%
Capital Contribution 1.5% to 2%
Other Utilities Costs 1.5% to 2%
Loss of Sellable Land 6% to 9%
Cross-Subsidies – Bumiputera Quota Discounts 1.5% to 2%
Holding Costs – Unsold Bumiputera Quota Units 0.5% to 1.5%
Holding Costs – Delays in Approvals 0.5% to 1.5%
Submission Fees, Titles etc 0.3% to 0.5%
Cross-Subsidies – Affordable Housing Quota 8% to 10%
Total 21.8% to 32.5%

(Source: REHDA Institute)

Contribution Sum in Lieu of Price-controlled Affordable Housing Provision

Recognising the significant impact of cross subsidies on the country’s housing industry, it is essential for the government to replace the currently adopted private sector-led cross-subsidy model with a more sustainable affordable housing provision approach. For example, instead of persistently pushing for the construction of "financially unviable" price-controlled affordable housing by simply strengthening affordable housing requirement quotas, the option of making a financial contribution to a housing trust fund, instead of allocating 30 percent of units in any major project to price-controlled affordable housing should be permitted.  

Noteworthy, the Sarawak State Government is embarking on a similar housing policy, in which private property developers are required to contribute to a housing trust fund, in lieu of building affordable housing. This approach not only can eliminate the impact of cross-subsidy model, but also can serve as an alternative means to consistently generate funds for the development of such housing or to cushion the financial impact of constructing these units.  

Viability plays an important role in housing development. In principle, the contribution sum serves as an alternative to generate funds that can be used to develop affordable housing in other sites, when the size or scale of a development triggers a requirement for affordable housing, but is not possible to be achieved on the original site. Unfortunately, there is currently no standardization on contributions in-lieu for affordable housing provision among states, and thus, is unlikely to arrive at a common formula that can be applied to all sites; not to mention the appropriate assessment process to judge if it is acceptable to forego on-site provision of affordable housing and accept a commuted sum which is less than the cost of providing the units on site.

For example, in Selangor, the amount of the contribution sum (per unit of the total number of RSKU to be built) is equivalent to the capped selling price of the RSKU unit – ranging from RM114,750 to RM250,000 – Assuming 30% of the apartment units to be built on a 10-acre land located in Zone 2 Selangor have to be allocated for RSKU units, whereas a total housing unit of the development is 1,000 with a development density of 100 unit/acre, the total amount of contribution sum is RM59,287,500 should the developer intended to be exempted from building these RSKU units. If the free-market houses are to be built and sold at an average price of RM300k per unit, the contribution sum is equivalent to 19.8% of GDV of the project. This is an “indirect cost” to the whole development and is likely to be transferred to the free-market house buyers, ultimately.      

In Penang, the state’s housing rules dictate that the Penang-based developer must build 45 affordable homes for every 150 normal housing units in urban areas. An amount of RM150,000 is required to be paid by the developers for not building a unit of affordable house. Again, if the developer would like to build 1,000 free-market houses in urban areas with a selling price of RM300k per unit, the contribution in lieu amounts to RM45,000,000 which is equivalent to 15% of GDV of the project.  

In Perak, 40% of the housing development has to be allocated for Rumah PerakKu (10% low-cost at RM90k per unit, 10% medium-cost at RM160k per unit, and 20% affordable housing at RM250k per unit). Assuming the developer would like to build 1,000 free-market houses with a selling price of RM300k per unit, the contribution in-lieu amounts to RM26,000,000 which is equivalent to 8.7% of GDV of the project.    

In Pahang, based on the Dasar Penyediaan Rumah Kos Sederhana Rendah, 30% of the housing development has to be allocated for low-to-medium-cost affordable housing. The contribution in-lieu of building price-controlled social housing ranges from RM30,000 to RM35,000. If the developer would like to be exempted from building price-controlled social housing in the 1,000 free-market housing development selling at RM300k per unit, the contribution sum amounted to RM10,500,000 which is equivalent to 3.5% of GDV of the project.      

In Melaka, based on the Dasar Perumahan Negeri Melaka, as high as 60% of the housing development is allocated for price-controlled social housing, ranging from low-cost housing at RM70,000 per unit to affordable housing at RM250,000 per unit. Assuming the developer wants to be exempted from building 10% Rumah Bahagia priced at RM70,000; 10% Rumah Sejahtera priced at RM120,000; and 15% Rumah Impian (Jenis A) priced at RM180,000; in a 10-acre housing development with a total number of 1,000 approved units, the contribution sum amounted to RM24,500,000. However, the developer cannot maximize the land value by building 1,000 free-market houses priced at RM400k per unit, because the developer is still mandated to build price-controlled social housing, which is Rumah Impian (Jenis B) priced at RM250,000 per unit for replacement. As such, the project’s GDV will only amount to RM325,000,000 and the contribution sum is equivalent to 7.5% of GDV of the project.    

From the above examples, one can find that the contribution sum set in states like Pahang is rather lenient while it is considered moderate in states like Perak and Melaka (Figure 4). All in all, cross-subsidisation is unavoidable in all the above cases as a higher contribution sum set by the councils will serve as an indirect cost to be passed on to the free-market house buyers. It is crucial that the contribution amount is not be set excessively high, such as fully compensating for the selling prices of exempted price-controlled units (like in Selangor and Penang). Should the government aim to eliminate the negative impact of cross-subsidisation on the housing industry, the rationale behind setting the amount of contribution sum is not to create any additional barrier that could increase the compliance cost of housing development.

Source: MKH
Figure 4: Case study on the cost impact of contribution sum on project’s GDV

Instead, the contribution sum can be set at 2% to 3% of the GDV for every approved free-market high-end housing development priced at RM500k and above. This contribution in lieu would then be pooled into a fund known as the "Affordable Housing Contribution Fund Program" to finance the construction of "99-year lease price-controlled units". Within this program, a collaborative effort between the private and public sectors will be fostered, with both entities contributing resources – namely funding from the private sector and land from the public sector – for the construction of these price-controlled units.  

Private developers aiming to construct free-market housing with a price tag of RM500k and above will bear the responsibility of contributing to the Affordable Housing Contribution Fund, which will facilitate the construction of physical affordable housing units. This is to prevent the skewed market that is oversupplied with high-end residences in the free-market sector, simultaneously encouraging developers to prioritize the creation of "mid-range affordable housing" priced between RM300k and RM500k, primarily for the M40 income group.  

Besides, under the Affordable Housing Contribution Fund Program, the government would no longer be burdened with unsustainable financial losses from selling social housing or the risk of wasting resources on unsold or incomplete units. This shift would be made possible by consistent funding, a more committed and transparent fund allocation process, and improved monitoring and control of the affordable housing supply-demand system.  

Consequently, the government could accumulate a sustainable and substantial nationwide portfolio through the Affordable Housing Contribution Fund Program without depleting its valuable land bank. Furthermore, by relieving private developers of mandatory affordable housing quotas, they would be better positioned to supply high-quality free-market housing in line with current market demands. This program could be seen as a win-win solution for all parties involved: the government, homeowners, and developers.

Disclaimer: Any opinions expressed are entirely the author’s own and do not necessarily reflect the views of PropertyGuru and its entities.

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