What Are the Types of Tax Treatment Imposed on Rental Income?
The IRB has issued a Public Ruling No 12/2018 (“PR12/2018”)
to clarify the tax treatment on rental income received from the letting of real property.
Generally, rental income generated from the letting of real property in Malaysia is subject to tax under the Income Tax Act 1967 (ITA). It is crucial to determine whether the rental income is a business source under paragraph 4 (a) or a non-business source under paragraph 4 (d) of the ITA.
The reason for this is because rental income under paragraph 4 (a) and paragraph 4 (d) of ITA receives different tax treatment.
Letting of Real Property as Business Source
Basically, if the maintenance or support services in relation to the real property are comprehensively & actively provided, then the letting of a real property is deemed as a business source and charged to tax under paragraph 4 (a) of the ITA.
Comprehensive services
Based on the information given in PR 12/2018, maintenance or support services comprehensively provided means services which include:
✅ Doing generally all things necessary (e.g. cleaning services or repairs) for the maintenance and management of the real property such as the structural elements of the building: stairways, fire escapes, entrances and exits, lobbies, corridors, lifts/escalators, compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fittings; and
✅ Doing generally all things necessary for the maintenance and management of the exterior parts of the real property such as playing fields, recreational areas, driveways, car parks, open spaces, landscaped areas, walls and fences, exterior lighting, or other external fixtures and fittings.
If a person only provides security services or other facilities, that person is not providing maintenance services or support services comprehensively.
Actively provided
Services actively provided means the person who owns or lets out the real property:
(a) Provides himself; or
(b) Hires another person or another firm to provide maintenance services or support services.
Letting of Real Property as Non-Business Source
The letting of real property is treated as a non-business source and charged to tax under paragraph 4 (d) of the ITA if a person lets out the real property without providing maintenance services or support services comprehensively and actively.
Tax Treatment on Rental IncomeUnder Paragraph 4 (a) & Paragraph 4 (d) of ITA
Direct Expenses Allowable To Be Deducted From Rental Income
⚠️Take note!⚠️
The expenses as follows are NOT tax-deductible as these are initial expenses incurred to create a source of rental income and not incurred in the production of rental income:
a) Advertising cost to get the first tenant
b) Property agent fees/commission to obtain the first tenant
c) Legal cost and stamp duty for the first tenancy agreement
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