What is rent and when is it declared as income? The answer to this may not be as straightforward as you think. 

This article is extracted from the book “How to Pay Less Tax Legally” by Richard Oon.

Rent is defined by the Income Tax Act (ITA) 1967 as including any sum paid for the use or occupation of any premises (or part of any premises), or for the hire of anything.

This means that renting out a room in your apartment still constitutes as rent and should be declared accordingly. It does not matter whether the property is furnished or not. All money received constitutes rental income and is subject to tax.

A deposit that is collected at the start of a tenancy, however, is not considered income to the landlord as the money is refundable. Should the deposit be forfeited for certain reasons, only then it is taxable. 

Investment or business source?

According to Malaysian tax regulations, rental income can be taxed either as an ‘investment source’ (Section 4(d) of the ITA), or a ‘business source’ (section 4(A) of the ITA). 

There are several advantages to categorise rental income as a business source, however, the situations where this can happen are limited. It can only qualify as such if you ‘actively and comprehensively’ provide maintenance and support services for the property rented out.

Basis of Taxation

As long as the rental income is received from properties in Malaysia, it is said to be derived from Malaysia and is taxable as such. It does not matter if you live abroad or if you are a foreigner. In fact, you may well end up paying more if you do not qualify as a resident for tax purposes. 

The commencement date of rental 

The rental ‘commencement date’ is calculated differently depending on whether the property is categorised as a business source or as an investment source.

Business source: When it is first made available for letting (when it is ready to be occupied/has been advertised)

Investment source: Start of the first tenancy

Rental received in advance

If a tenant pays you rent upfront to cover a period of his tenancy, the whole of the rental is taxable in the year of assessment (YA) in which it is received (regardless whether or not the rent paid in advance is for the following year or years).

The expenses which are incurred after the YA that the advanced rental is received is still money claimable by tax according to the IRB’s Public Ruling (PR) 4/2011 (Income from Letting of Property). However, you will have to submit an amended assessment in the following year or years to include your claim for these expenses. 

Grouping of rental properties as a single source

In 2011, the IRB issued PR 4/2011 which allowed several rental properties (regardless of type) to be grouped as one source. 

Prior to this, there was a major disadvantage for taxpayers as rental income which did not qualify as the business source had to be grouped into three distinct categories: residential, commercial and vacant land. This caused a loss for taxpayers when one type of rental property could not be offset against a profit from another category. 

With effect from YA 2011, if you let out several properties:

a. If all the properties are categorised as a business source, then they can be grouped as one business source;

b. If all the properties are an investment source, then they can be grouped as a non-business source;

c. If some of the properties are a business source and some are an investment source, then income from the two sources will be assessed separately.