Avoiding rental pitfalls

Landlords must be aware of declarations in tax assessments

IT’S income tax season again.

For individuals who derive rental income from real property, it can certainly be a time of confusion and needless stress.

We’ve all heard the horror stories of individuals who fail or forget to file their taxes, only to be slapped with back-taxes so high that their only recourse is to have a one-onone appointment with their family psychiatrist; or to make a run for the border and disappear forever.

As extreme and ridiculous as that might sound, it’s actually a common misconception amongst landlords that they are not required to report their rental income, says Tricor Taxand executive director Thang Mee Lee.

“Even if they are aware, some of them are not so well versed with the procedures,” she tells Starbizweek.

In fact, one can be penalised under Section 113 of the Income Tax Act 1967 for under-declaring or not declaring their rental income.

When in doubt, seek advice from a professional, says Thang.

“Today, one can get plenty of information from the web. If you’re still unsure about what to do, consult a specialist, such as a certified tax consultant, to advise you.”

Types of rental income

Rental income in Malaysia is taxed on a progressive tax rate from 0% to 30%.

According to Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai, there are two types of rental income, namely passive and business income.

“Passive rental income is filed under Section 4(d) of the Income Tax Act 1967 (ITA).

“These are individuals who derive rental income from real property such as houses, apartments, shophouses, office spaces or even factory buildings, for the sole purpose of renting it out and earning rents from it.”

Under this category, Thanneermalai says the landlord does not manage the rented property, nor will he provide comprehensive maintenance and support services, such as engaging staff or third parties to conduct the relevant work needed to upkeep the property.

“They may carry out repairs or refurbishment when there are structural damages but will not provide day-to-day active maintenance of the property,” he says.

Business rental income, meanwhile, is filed under Section 4(a) of the ITA.

“If you provide comprehensive maintenance, such as security, cleaning and structural repairs essentially all services related to the upkeep of the building, then you will be regarded as a business,” says Thanneermalai.

When rent is taxable

According to the Inland Revenue Board (IRB), rent is taxable for passive rental income earners from the date the property is rented out.

“Nora purchases an apartment on Oct 1, 2009. She renovates and advertises the letting of the apartment on Jan 1, 2010.

The apartment is only let out on July 1, 2010. The letting of the apartment commences on July 1, 2010, that is on the date it is rented out for the first time,” it says.

To elaborate further, Thanneermalai explains that the rent is taxable when it is received.

“For example, let’s say a person delays paying you rent for a whole year. You are supposed to receive the rent in 2020, but the tenant only pays you in 2021. For your 2020 tax returns, it is considered a receivable, but it is not received.

“But in 2021, when you do receive the money, you actually reopen your 2020 tax returns. You go back to that year. So that’s how you tax passive rental income. It is taxable when it is receivable, but is only taxed when it is received.”

Additionally, there will be circumstances when the landlord may get an advanced payment on his rents.

“Sometimes, a landlord might give the tenant a discount if the tenant pays the rent in advance.

“If they give you a three-year advance rental, the money is already received. The rents that you received for those three years will be taxed in one year, in the year that you received it,” says Thanneermalai.

For business rental income, it is taxable when the property is let and it is on an accrued basis,” Thanneermalai adds.

Losses

Individuals who do not carry on a business of letting properties can offset the loss from any rented property against profits from another rented property in the same year, says Thanneermalai. However, they are not allowed to carry forward any unutilised losses, he adds.

“If you are earning passive rental income and you have a loss in the property, you cannot carry forward the losses.”

Nevertheless, Thanneermalai says if the person who is earning passive income has multiple properties and suffers a loss, he can offset that loss against another property that makes a profit.

“For example, Property A, you suffer a RM100,000 loss, while for Property B, you make a RM50,000 profit. Only RM50,000 can be used and the remaining RM50,000 will be lost.”

Landlords that operate businesses, however, are allowed to carry forward those losses to the following year.

“For example, Property A suffers a loss of RM100,000, while Property B registers a RM50,000 profit. The landlord here can carry forward the RM50,000 loss to the following year,” says Thanneermalai.

Capital allowances

Another advantage to business owners is that they can claim capital allowances, says Thanneermalai.

“Essentially, you can claim allowances on the machinery, the air conditioning and all that but you cannot claim it on the building, because it’s a residential property.

“Unless, if the property is an industrial building. Even if you are a passive rental income earner, the landlord is able to claim for the industrial building, provided that the tenant is using the property as an industrial building,” he says.

Other incentives

From April 2020 to June 2021, landlords that offer a minimum of 30% reduction in rental of properties used by small and medium enterprises (SMES) will be eligible to claim a special deduction equivalent to the amount of the reduction, says Thanneermalai.

“Let’s say your rent is RM100 and you receive RM70. You declare that RM70 in your income tax, but you get an additional deduction of up to 30%. So, you only pay RM40.”

This benefit was extended to non-smes from January 2021 to June 2021.

Individuals need to file their tax returns by April 30, with an extension given to e-filers until May 15.