Generally, letting your property on rent could be a lucrative venture. However, this type of investment also comes with a variety of responsibilities and rental income tax Malaysia is one of them. Hence, it is essential to understand and manage your key tax obligations.
To assist you in navigating through your journey towards filing rental income tax in Malaysia, we have created a comprehensive guide. By simply going through this guide, you can learn about the key aspects associated with rental income taxation in Malaysia.
So, let’s start without any further delay!
Table of Content
- Why is this Guide So Important?
- Understanding Rental Income Tax Malaysia
- Calculating the Rental Income Tax Rate Malaysia
- Types of Rental Income
- Things to Consider when Filing Income Tax for Rental Income Malaysia
- Income Tax Malaysia Rental Income: Deductible Expenses
- Tax Exemption on Renting the Residential Houses
- Income Tax Malaysia Rental Income: Non-Deductible Expenses
- Drawbacks of not Declaring Rental Income
- Final Thoughts
Why is this Guide So Important?
Knowing and understanding the rental income tax and its implications is essential. It not only helps with tax compliance but also prevents you from paying excessive income tax and even saves you from penalties. The Malaysian tax system consists of various rules, deductions, and exemptions, which can either increase or lighten your tax burden.
On the other hand, the lack of understanding of the Malaysia tax rental income could lead to costly penalties or missed opportunities. However, this guide can help you avoid such scenarios. It gives you a clear idea about the taxable rental income and helps you discover legitimate deductions.
Understanding Rental Income Tax Malaysia
To put it simply, rental income tax is a tax imposed on profit made by the landlord by renting out his/her property. The term rental income applies to both commercial and residential properties.
The Malaysia income tax for rental income is subject to the rules mentioned in the Income Tax Act 1967 (ITA). The types of rental income tax are also described in the following sections:
- Paragraph 4 (a) for Rental income through business source
- Paragraph 4 (d) for rental income through a non-business source
Both these types of rental incomes are dealt with separately as they receive different tax treatments. So, if you own a rented property in Malaysia, it is imperative to declare it a source of income to LHDN.
Calculating the Rental Income Tax Rate Malaysia
Residents of Malaysia pay a progressive rental income tax. This means the tax rate will get higher as the rental income increases. So, a landlord is bound to pay rental income tax depending on earning mode.
In addition, the tax rate applicable to the taxable rental income relies on the tax residency status of the landlord.
Rental Income Tax Payable by Malaysian Tax Residents
The rental income of a tax resident is included in the total income of a person. Usually, the rate for rental income tax in Malaysia is charged at a rate of 0% to 30%. The tax payable depends on the tax bracket of an individual.
Rental Income Tax Payable by Non-resident individuals
Non-resident individuals need to pay a fixed rental income tax rate of 30%. On the other hand, non-tax residents are not eligible for tax relief.
Below is an example of calculating your net rental income.
Gross Rental Income
Monthly Rent = RM2,000
Contract Term = 12 months
Assessment Tax = RM1000
Quit Rent = RM100
Property Repairs = RM6,000
Net Rental Income
(2,000 x 12) – (1000 + 100 + 6,000)
= 24,000 – 7,100
In this example, the net income for the purpose of rental income tax is 17000.
Types of Rental Income
Listed below are two types of Malaysia income tax rental income including:
- Commercial rental income: Section 4 of The Income Tax Act 1967 (ITA)
- Business rental income: Section 5 of The Income Tax Act 1967 (ITA)
Commercial Rental Income
A Malaysia income tax rental income is said to be a commercial rental income if it falls under the ambit of paragraph 4(a) of the ITA. Basically, rental income from a business source is when the owner offers support or maintenance services with reference to the rented property.
Section four of ITA further explains what is meant by maintenance or support services. It is worth noting that all such services should be provided actively and comprehensively.
Below are some of the most prominent maintenance services:
- Cleaning services
- Maintenance and repairs of structural elements
- Replacement of fixtures and fittings
- Maintenance of exterior parts of the property
- Installation of security systems within and outside the rented property
Residential Rental Income
The letting of real property is considered as a residential or a non-business rental income if the owner doesn’t provide support or maintenance services. The relevant aspects associated with residential rental income are provided under paragraph 4(d) of the ITA.
Things to Consider when Filing Income Tax for Rental Income Malaysia
When it comes to income tax rental income Malaysia, you need to be vigilant and consider the following aspects when declaring your rental income.
- Determine whether your Rental Income is Residential or Commercial
- Know the start date
- Make sure to find deductible expenses
- Interest on property mortgages
Determine whether your Rental Income is Residential or Commercial
It is also necessary to understand whether the rental income is commercial or residential. Doing this can allow you to pay only the tax that you are liable to pay.
Know the Start Date
The commencement date of the letting of a property is clearly described in section 6 of the ITA. The start date or commencement date is the date when a property is rented out as per the rent agreements.
So, it is essential to know the start date when your property was rented. It can help you calculate the right amount of payable rental tax.
Make Sure to Find Deductible Expenses
When calculating the rental income, it is also essential to know the deductible expenses from a rental income. These are the allowable expenses that are incurred while renting out a property. The following are the most prominent deductible expenses:
- Air-conditioner installation
- Minor renovation
- Agent’s commission to find a tenant
Interest on Property Mortgages
The interest paid on a mortgaged property is also referred to as a deductible expense. The principal amount is excluded when considering the allowable expense.
Income Tax Malaysia Rental Income: Deductible Expenses
Section 8 of ITA offers a clear insight into the deductible expenses. These expenses are deducted from your total rental income. As a result, the tax on the income generated through renting a property is also lowered.
Here are some of the most common deductible expenses:
- Assessment tax
- Interest on home loan
- Fire insurance premium
- Quit rent
- Expenses incurred on rent collection
- Expenses on property maintenance and repairs
- Expenses incurred on the renewal of the rent agreement
- Maintenance fee (Strata properties)
It is essential to note that the deductible expenses mentioned above are only claimable if there is a legal tenancy agreement. Besides, the landlord is eligible to seek the advantage of these deductible expenses if the original receipts of such expenses are available.
Apart from this, the tax residents of Malaysia are entitled to take advantage of personal relief, rebates, and deductions on rental income. On the other hand, non-tax residents who stay in Malaysia for a period of less than 182 days are taxed at a fixed rate of 30%.
Note: Non-residents are not allowed to claim deductions, reliefs, and rebates.
Tax Exemption on Renting the Residential Houses
The Malaysian government is trying to encourage Malaysian resident individuals to rent out their residential homes at affordable rates. According to the Malaysia budget 2018, resident individuals could receive a tax exemption of 50% income tax on rental income by renting their residential homes.
However, these landlords must comply with the following conditions:
- Rental income shouldn’t exceed RM2,000/month for a residential home
- The residential home should be rented by following the legal terms and conditions and creating a tenancy agreement between the tenant and landlord.
- This particular exemption is available for a period of 3 consecutive years of assessment.
Income Tax Malaysia Rental Income: Non-Deductible Expenses
On the contrary, there are certain expenses that are non-deductible. This is so, as these expenses are considered the initial expenses that are incurred to prepare a property for using it as a source of rental income.
A few of the non-deductible expenses include:
- Advertising costs incurred while finding a tenant
- Fees and commission of property agent to find the first tenant
- Stamp duty and legal cost of creating a tenancy agreement
Drawbacks of not Declaring Rental Income
Mostly, landlords make the biggest mistake of not declaring rental income. Besides, some landlords try to save on rental income tax by under-reporting their income.
On the contrary, declaring rental income is a wise decision. By doing so, you can take advantage of your rental income as an investment rather than a tax liability.
According to Section 113 of the ITA, a person fails to declare his rental income if he/she:
- Files an incorrect return by simply understating or omitting the income obtained through renting a property
- Provides incorrect information related to the matters associated with the tax charged
Once guilty of not declaring taxable income, such a person should be liable to a fine of not less than 1000 ringgit. In addition, that person might have to face a special penalty (Double the amount of undercharged tax).
So, it is advised to declare your rental income in your tax returns.
Do I Need to Pay Tax if I Have Declared Rental Income?
If your rental income is a non-business income, you need to add the rental income to the total income generated under the following circumstances.
- The income generated through renting a property exceeding RM34,000 per Annum is taxable. This amount should be after the deduction of EPF.
- Without EPF deductions, the income generated should exceed RM38,202.5 per Annum for being taxed.
So, the landlord is liable to pay tax on rental income depending on the monthly or annual income generated through renting a property. To understand more about the tax imposed and chargeable rental income, just feel free to contact our experts.
Are Rental Deposits Taxable?
Rental deposits and utility deposits are refunded to the tenant once the tenancy period ends. Hence, both these types of deposits are not taxable.
Can a Landlord Claim Capital Allowance regarding Rental Income?
It is possible to claim capital allowance if the rental income is taxed on business income. This is helpful if the landlord has spent a considerable amount on the refurbishment of his/her property to improve its worth.
Can I Claim Deductible Expenses if the Property is Temporarily Not Rented Out?
The expenses incurred during the time when the property is vacant and not rented can be treated as deductible expenses. However, these expenses could be incurred for the maintenance of the property and preparing to rent it out soon.
Following are the circumstances under which such expenses can be deducted from rental income tax:
- Renovation or repair of the property
- The tenant was absent 2 years after the termination of the tenancy agreement
- Legal injunction or official sanction
- Some other circumstances that are beyond the control of the landlord
Is Overseas Rental Income Taxable in Malaysia?
All types of foreign income received in Malaysia are subjected to tax. Hence, a Malaysian resident receiving overseas rental income is liable to pay rental income tax Malaysia.
Things can be pretty tough when you are trying to learn about the Malaysia property rental income tax. This is so, as calculating the rental income tax in Malaysia could prove to be a daunting task. However, with the guidance and authentic information provided in this guide, you can learn the basics of Malaysia tax on rental income.
To make things simple and easy to understand, we have tried to cover a range of relevant topics. So, you can take advantage of a comprehensive overview of the things associated with rental income taxable Malaysia. Since the financial situation of every person differs, it would be best to consult a qualified tax professional.
Having said that, our team of experts is always there to assist and guide you through your journey to becoming a responsible taxpayer. So, feel free to contact us now!