If you have rental income as an individual, then this article will help you understand and navigate the income received from letting of real property to ensure you are in compliance with our Malaysian tax law and maximize your deductions.

Background

Generally, rental income generated from letting of real property in Malaysia is subject to tax under the Income Tax Act 1967 (“ITA”). The Inland Revenue Board further issued a Public Ruling No. 12/2018 (“PR No. 12/2018”) to clarify the tax treatment on income received from letting of real property.

Letting of Real Property as a business source or non-business source?

Basically, if the maintenance or support services in relation to the real property are comprehensively & actively provided for, then the letting of a real property is deemed as a business source and charged to tax under Section 4(a) of the ITA.

If you are a property owner who does not comprehensively and actively provide any maintenance and support services such as cleaning services, repair services to both structural elements and exterior parts of the real property, then your rental income is treated as a non-business source and charged under Section 4(d) of the ITA. By actively, it simply means providing any maintenance and support services yourself or hiring another person/firm to provide the maintenance services or support services.

Differences between chargeability of Section 4(a) and (4d) of the ITA 

For business income under Section 4(a):-  

• Direct and indirect expenses incurred wholly and exclusively in the production of rental income [Sec 33 (1) of ITA] are deductible expenses.
• Any business loss in the current year can be set off against aggregate income in the year and can also be carried forward.
• Capital allowances can be claimed. 

For non-business income under Section 4(d):- 

• Only direct expenses incurred are deductible expenses.
• Any loss in the current year is disregarded e.g. rental loss for Property A cannot be offset against net income from Property B.
• No capital allowances can be claimed. 

What are the direct expenses allowable to be deducted from rental income under Section 4(d)? 

Below are examples of direct expenses eligible for deductions against rental income:- 

• Property loan interest
• Fire insurance premium
• Quit rent and assessment
• Rental renewal stamp duty
• Property agent commission
• Renewal of tenancy agreement expense
• Repair and maintenance expenses
• Replacement cost of furnishings
• Enforce rent collection fees including legal expenses
• Property service charge, maintenance fees, sinking fund and Indah Water bills 

Direct expenses incurred initially to create a source of rental income are however NOT eligible for deductions against rental income such as:- 

• Advertising cost to get the first tenant
• Property agent fees/commissions to obtain first tenant
• Legal cost and stamp duty for first tenancy agreement 

Summary

There is a clear guideline in the form of PR No. 12/2018 to determine if income from letting of real property was chargeable as business source or non-business source and also the deductibility of expenses incurred thereafter.