TAX - Income From Letting Of Real Property (PR NO. 4/2011)

 

Income From Letting Of Real Property

Notes:-

- Letting of real property (business sources) - 4(a) ITA 1967

- Letting of real property (non business sources) - 4(d) ITA 1967

Letting of real property (business sources) - 4(a) ITA 1967

- Deemed as a business sources and income received under 4(a) ITA if maintenance services or support services are comprehensive and actively provided. 

Maintenance services or support services (comprehensively) should include:-

Doing generally all things necessary:-

(a) Interior: cleaning services, structural elements maintenance, water tanks, sewers, pipe and etc.

(b) Exterior: playing fields, recreational areas, car parks, open spaces, landscape areas, security services

As long as maintenance services or support services are comprehensively and actively provided in relation to the real property which is let out, the letting is a business source under paragraph 4(a) of the ITA even though the letting is between related parties. However, if rental charged to the tenant is not at arm’s length basis, the Inland Revenue Board Malaysia would adjust the rental payment accordingly.

“Related parties” in relation to:-

- individuals, mean both individuals are related

- companies, mean both companies are related companies;

- a company and an individual, mean one of the parties is in a position to influence or be influenced by the other party, or to control or be controlled by the other party.

Letting of real property (non-business sources) - 4(d) ITA 1967

- Deemed as non-business sources and income received 4(d) ITA if lets out the real property without provide maintenance services or support services are comprehensive and actively.

Example: only provide security services, without provide maintenance and support services or done by others, only pays maintenance fees to management corporation.

* The letting of real property is also treated as a non-business source if a person lets out the real property and maintenance services or support services are passively derived from the ownership of the real property.

Commencement date of letting of real property:-
- Rental (non-business source): date the real property is rented out for the first time
- Rental (business source): date the real property is made available for letting (ready to occupied by tenants)

Expense relating to income of letting of real property:-

- An expense wholly and exclusively incurred in the production of income under subsection 33(1) of the ITA and which does not fall under subsection 39(1) of the ITA is allowed as a deduction from income of business of letting of real property charged to tax under paragraph 4(a) of the ITA.

- Expense which is allowed a deduction from income of letting of real property charged to tax under paragraph 4(d) of the ITA is the direct expense that is wholly and exclusively incurred in the production of income under subsection 33(1) of the ITA.

Direct expenses:- 

- Assessment and quit rent

- Interest on loan

- Fire insurance premium

- Expense on rent collection

- Expense on rent renewal

- Expense on repair

Initial expenses:-

Initial expense is not allowed a deduction from income of letting of real property assessed under paragraph 4(a) OR paragraph 4(d) of the ITA since that expense is incurred to create a source of rental income and not incurred in the production of rental income.

Expenses during a period the real property is not rented out:-

- Expenses incurred in relation to a real property during a period it is not rented out are not allowable in calculating the adjusted income from the letting of the real property.

- However, if the period the real property is not rented out occurs after it has been let out and it is clear that it is ready to be let out, then expenses during that period are allowable subject to subsections 33(1) and 39(1) of the ITA.

Restriction on interest expense:-

- If a person takes a loan for business purposes and to finance the purchase of real property that is let out, interest expense allowable against the business source has to be restricted under subsection 33(2) of the ITA. 

- Interest expense on loan to finance the purchase of real property that is let out is deductible from rental income.

Capital allowances:-

- If the letting of real property is treated as a business source, capital allowances can be claimed on capital expenditure incurred on plant and machinery.

- If there is a change in tax treatment from a business source to non-business source:- 

• a company becomes an investment holding company (IHC), the rental income (business source) would be assessed as income under paragraph 4(d) of the ITA. Therefore, the company is not entitled to claim for capital allowances on plant and machinery since they are not used for the purpose of a business at the end of the basis period for that year of assessment.
• a company does not become an IHC, the company still derives rental income under paragraph 4(a) and 4(d) of the ITA in respect of the real property. Even though the company is not an IHC, the company would not be entitled to claim for capital allowances on plant and machinery since they are not used for the purpose of a business at the end of the basis period for that year of assessment. Note: The determination of whether a company is an IHC or not is explained in the Public Ruling No. 3/2011 (Investment Holding Company).

If more than one real property is let out and there is a change in tax treatment of any of the real properties from a business source to a non-business source, capital allowances can be claimed on plant and machinery for the real property which remains as a business source under paragraph 4(a) of the ITA.

If there is a change in tax treatment of the letting of a real property from a non-business to a business source, the person who lets out the real property has two sources of income from the same real property in that basis period, i.e a non-business source under paragraph 4(d) of the ITA and a business source under paragraph 4(a) of the ITA. Capital allowances can be claimed on plant and machinery in the real property since they are used for the purpose of a business at the end of the basis period for that year of assessment. For the purpose of computing capital allowances, the qualifying expenditure for the plant and machinery is the market value on the first day they are used in the business.

Industrial building allowance:-

- If a person owns a building lets out the building and the building is in used as an industrial building, industrial building allowance can be claimed by the owner of the building even though the letting is a non-business source.

- If the letting of real property is given a special treatment as explained in paragraph 4.4 of this Ruling, the owner of the building is eligible to claim industrial building allowances on the qualifying building expenditure incurred.

Replacement cost of furnishings:-

If the letting of a furnished real property is treated as non-business source, cost of replacing furnishings such as furniture and air conditioner can be claimed as a deduction from gross income from that letting.

Letting of part of building used in the business:-

If a building, whether owned or rented, is used for business purposes and part of the building is let out, the rent arising from the letting is treated as part of income from the existing business source.

Information from:

LHDN websiteIncome Tax Act 1967

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