Many landlords are under the mistaken impression that rental income from residential properties or non-business sources is classified as an investment and therefore can be exempted from taxation. In truth, you could be penalised under Section 113 of the Income Tax Act 1967 for under-declaring or not declaring your rental income at all.
Income tax season is finally here and it is time to break out the calculator and dust off all the receipts you have accumulated throughout the year. Many people find tax filing a hassle and tend to leave it to the very last minute. And when the panic of missing the tax deadline kicks in, they tend to make careless mistakes!
One such mistake is rental income from non-business sources. It doesn’t matter if you own just one rental property or if the property is an inheritance and not purchased by you. As mentioned above, many property owners are being penalised by the Inland Revenue Board of Malaysia (LHDN) for not reporting income earned from renting out their property.
If you are wondering how to determine whether you qualify as a taxpayer and whether is it necessary for you to pay income tax for any rental income you receive, fret not as we have compiled a step-by-step guide to help you figure this out and file your taxes properly.
1. First of all – is your income taxable?
Before even thinking about filing your income tax, let’s determine if you are an eligible taxpayer in the first place. In Malaysia, you are required to pay income taxes if:
a) Your income is above RM34,000 per annum (after EPF deductions) or RM2,833.33 per month (after EPF deductions); or alternatively
b) Your income is above RM38,202.25 per annum (before EPF deductions) or RM3,183.52 per month (before EPF deductions).
Next, you need to determine if you are a tax resident or non-resident. Why is this important? Well, tax residents are taxed at a progressive tax rate and can enjoy tax reliefs and rebates that would help reduce the amount of income taxes paid to LHDN. You are classified as a tax resident if you meet the following criteria:
(a) You have been in Malaysia for at least 182 consecutive days within the calendar year; or
(b) You have been in Malaysia for a period of less than 182 consecutive days during the calendar year but your stay continues for a period of at least 182 consecutive days or more in the following calendar year (e.g. you’ve stayed for 50 days in 2019 but your stay continues for another 182 days in 2020).
If you have to be away from Malaysia due to the following reasons;
i. Business trips
ii. Health treatment
iii. Social visits not exceeding 14 days
..the absence will still be counted as part of the 182 consecutive days.
2. What is chargeable income and how do you determine your tax rate?
In Malaysia, tax residents are taxed based on a progressive tax rate (i.e. the tax rate increase as your income increases) and the tax rate is based on their chargeable income. Under S.4 of the Income Tax Act 1967, the following are classes of chargeable income:
• Gains or profits from a business
• Gains or profits from an employment
• Dividends, interests and discounts
• Royalties, premiums and rent
• Pensions, annuities or other periodical payments not falling under the above classes
• Gains or profits not falling under the above classes
Therefore, by adding up your income from the various classes, you can determine your tax rate. Basically, the lower your income, the lower your tax rate is and the less tax you will have to pay. The current tax rate as announced under Budget 2020 starts from 0% and goes all the way up to 30%.
Do take note that tax residents enjoy certain tax reliefs and rebates. Generally, tax reliefs are portions of your income that do not need to be included in the calculation of your taxes. You can learn how to file your income tax in Malaysia using LHDN e-filing with our complete guide, and get the latest list of official tax reliefs for YA2021
3. What are the income tax rates for expatriates and non-residents?
So, we have covered tax residents and the perks they are entitled to, but what about expatriates working in Malaysia? Do they receive the same tax reliefs and rebates as tax residents?
The answer is fairly simple. Have they been working in Malaysia for at least 182 consecutive days within the calendar year? If yes, they would be considered as tax residents. They are to pay tax based on the progressive tax rates and are eligible for the tax reliefs and rebates. If not, they are considered non-residents and are ineligible for the tax reliefs.
Non-residents are those who, regardless of citizenship and nationality, have been working in Malaysia for a period of more than 60 calendar days but less than 182 calendar days. As non-residents, they will be taxed at a fixed rate of 30% instead of a progressive tax rate.
However, non-residents who fall under these categories will not be taxed:
• Employed in Malaysia for less than 60 days
• Employed on board a Malaysian ship
• Age 55 years old and receiving a pension from Malaysian employment
• Receiving interest from banks
• Receiving tax-exempt dividends
4. What is rental income tax?
Now back to the main agenda – You might be surprised to know that if you own a property in Malaysia (that isn’t used for business purposes) and you receive rental income, you are required to pay income tax for it. While explained in detail under Section 4d of the Income Tax Act 1967, the summary of it as according to LHDN is, “The letting of real property is treated as a non-business source and income received from it is charged to tax under paragraph 4(d) of the Income Tax Act 1967 if a person lets out the real property without providing maintenance services or support services (such as cleaning services and repairs services) comprehensively and actively“.
The letting of real property is also treated as a non-business source if an individual rents out a property, where the tenant enjoys maintenance services or support services that are passively derived (not actively provided by the property owner). This would include tenants of strata properties who enjoy the usage of the building’s facilities such as swimming pools, gym, etc.
Beginning 1 January 2018, rental income received in Malaysia is evaluated on a progressive tax rate which ranges from 0% to 30%. Rental income is calculated on a net basis, which means the final rental earnings amount is derived after deducting the permitted incurred expenses.
5. What are the available 2021 tax incentives for landlords with rental properties?
As stated in LHDN, landlords are entitled to several tax incentives in the form of allowed deductible expenses.
The following expenses are allowed to be deducted from rental income and must be direct expenses wholly and exclusively incurred in the production of income:
- cost of ordinary repairs to maintain the property in its existing state
- insurance premium on fire/burglary
- assessment tax and quit rent
- mortgage interest on loans obtained
- rent collection fee and legal expense incurred to enforce rent collection.
- the expense incurred to renew tenancy or to change tenant.
- the maintenance fee for strata properties
NOTE: In order to claim these exemptions, you must have a legal tenancy agreement for said rental property as well as the original receipts of the claimable expenses.
Initial expenses such as costs to obtain your first tenant including advertising costs, legal fees, stamp duties and real estate agent commission fees are not allowed for deduction. These expenses are necessary to create a source of rental income and are not incurred in the production of rental income.
6. How to calculate your net rental income?
Let’s say you receive RM2,000 per month from renting out a double-storey bungalow you own to a tenant for a period of one year.
The property’s annual assessment tax is RM1,000 while the quit rent is RM100.
Unfortunately, you discover that your tenant has damaged the property and your bungalow requires repairs costing a total of RM7,000.
Your net rental income would be:
= Rental income – Permitted expenses (Assessment Tax + Quit Rent + Repairs for Damages)
= (2,000 x 12) – (1,000 + 100 + 7,000)
= 24,000 – 8,100
You will have to file any net rental income under ‘Statutory income from rents’ when doing your e-filing online. For manual tax submissions, net rental income is filed under part B2 (in the BE form) or part B7 (in the B form).
Having said that, if you suffer a rental loss, you are not required to declare the rental loss during your tax filing.
7. Are there any tax exemptions on rental income in YA 2021 (2022)?
Many landlords believe that they are entitled to the 50% tax exemption proposed by the government a few years ago, where an exemption of 50% on the statutory income of rental received by Malaysian resident individuals was provided to encourage Malaysian homeowners to rent out their residential homes. HOWEVER, the tax exemption which was gazetted as the Income Tax (Exemption) (No. 2) Order 2019, was only for a period of one year from 1 January 2018 to 31 December 2018 and has now expired.
So does this mean there are no rental income tax exemptions in 2022 (YA2021)? Unfortunately, yes.
Special Income Tax Deduction for landlords in 2021
Nevertheless, that does not mean there are no other tax exemptions property owners can take advantage of. In an effort to boost the flailing economy during the COVID-19 period, the government gazetted a Special Income Tax Deduction for Reduction of Rental to a Tenant other than an SME (Rules 2021 [P.U.(A) 354/2021]) in September 2021. Under this Rule, a special deduction will be given to residential property owners who provide at least 30% rental discounts to tenants (for each qualifying month).
The qualifying month here is applicable from January to December 2o21
The conditions of this income tax deduction are:
- the rental reduction should be at least 30% of the existing rental rate
- The tenancy agreements must be stamped under the Stamp Act 1949
- A separate statement of income in relation to the reduced rental income for the qualifying months in YA 2021
- Confirmations from both parties on the offer and acceptance of the reduced rental amount
- The special deduction for a rent reduction granted to non-SMEs is not available to a landlord that has claimed the deduction for the same rent reduction provided to SMEs under P.U.(A) 353/2021.
- The landlord must be a taxpayer with rental income under subsection 4(a) and subsection 4(d) Income Tax Act 1967.
The supporting documents required to be kept by the taxpayers (landlords) who claim this special deduction are:
- Stamped tenancy agreement;
- Rental income statement;
Advance rental paid in 2021
Where rental for the qualifying months (January to December 2021) is paid in advance, the landlord is eligible for the deduction under P.U.(A) 354/2021, as applicable, provided that the landlord keeps the supporting documents stating the reduction of monthly rent given by way of refund or by any other means agreed between the landlord and tenant. The documentation requirements set out in the above conditions apply to any claim for deduction in relation to the reduction of advance rental paid.
To learn more about how to file your taxes through LHDN’s e-filing, check out our guide here. Also, find out the latest Stamp duty, administration & legal fees for a tenancy agreement in Malaysia.
Edited by Reena Kaur Bhatt