When it comes to the season of income tax in Malaysia, that’s when people tend to leave things till the last minute (are you one of them?) and then make careless mistakes out of panic.
One such mistake that’s cropping up more often involves rental. It turns out that people are getting penalised under Section 113 of the Income Tax Act 1967 for under-reporting (or not reporting at all) their rental income.
There’s this misconception that rental income is classified under an investment and can therefore be exempted from any form of taxation.
But before we dive deeper, let’s take a closer look at what this Act is all about. According to the Inland Revenue Board Malaysia (LHDN), this involves:
“Any person who makes an incorrect return by omitting or understating any income or gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person.”
If that’s too much of a mouthful, let us simplify it for you: it basically means that you’re trying to avoid being taxed by not properly declaring how much you earn from renting out your property.
But before we can even begin to touch on the topic of paying income tax on rental income, let’s get back to basics.
What Is Rental Income Tax?
Rental income tax is a tax imposed upon profit that you make from renting out properties.
The rental income applies to both residential and commercial properties, and even certain machinery and ships (known as movable properties).
Rental Income vs Business Income
But there’s a difference between rental income and business income.
Rental income is filed under Section 4(d) of the Income Tax Act 1967. If you’re renting a property for business purposes, however, your rental income is filed under Section 4(a) of the Act under business income.
Generally, rental income is considered non-business income that is derived relatively passively. If your rental property is managed in a very systematic manner, it can be regarded as business income.
To be fair, that’s still very vague – so let’s see how else the two differ.
● Derived passively
● Mostly self-managed, facilities and support are not actively provided
● Ample management, facilities and support are actively provided
●Commercial letting of 4 or more commercial units, floors of shophouses residential properties
How Is Rental Income Taxed In Malaysia?
Rental income in Malaysia is taxed on a progressive tax rate from 0% to 30%. The rental income commencement date starts on the first day the property is rented out, whereas the actual rental income itself is assessed on a receipt basis.
Rental income is valued on a net basis, which means that the net rental income can be reduced with certain deductible expenses.
What Expenses Can Be Deducted From Rental Income In Malaysia?
So, what are these deductible expenses for rental income? According to LHDN, they include:
Interest on home loan
Fire insurance premium
Expenses incurred on rent collection
Expenses incurred on rent renewal
Expenses on repairs and property maintenance
Rental income expenses which are not deductible are initial expenses. These include:
Costs to advertise the property
Legal costs in preparing the rental agreement
Property agent commission
How To Calculate Your Net Rental Income?
With all that said, here’s an example of how to calculate your net rental income.
Gross rental income
Monthly rent: RM1,000
Contract term: 12 months
Assessment tax: RM500
Quit rent: RM50
Property repairs: RM5,000
Net rental income
(1,000 x 12) – (500 + 50 + 5,000)
= 12,000 – 5,550
Are There Any Tax Incentives For Rental Income?
Before you declare, surely you’d want to know if there are any rental income tax incentives you can benefit from, yes?
If you’re renting a property out commercially, good news!
Under the Economic Stimulus Package 3.0, the government is pushing for citizens to do good unto one another and offering this incentive in exchange.
From April 2020 to 31 December 2021, landlords of business premises that offer reduction or relief on rent to SME tenants can claim a special deduction equivalent to the rental reduction amount.
What are the criteria for this tax incentive?
Reduction should be at least 30% of the existing rental rate
Eligible for all taxpayers (corporate, individual, cooperative or other business and non-business entities)
The rented premises must be used by the tenant for the purpose of carrying out business.
The landlord must be a taxpayer with rental income under subsection 4(a) and subsection 4(d) Income Tax Act 1967.
How To Declare Rental Income In Malaysia?
Let’s make sure you know how to declare yours properly. Individuals who own a property in Malaysia (that isn’t used for business purposes) and receive a rental income are subject to income tax.
This is explained in greater detail under Section 4(d) of the same Act. So, the first thing you need to take note of is how the income from your property rental is calculated.
Its valuation is on a net basis, which means that the amount you earn can be reduced by permitted expenses incurred.
Some of these permitted expenses include the cost of ordinary repairs to maintain the property in its existing state, insurance premium on fire/burglary, assessment tax and quit rent, as well as mortgage interest on loan obtained.
Assessment tax is just a fancy term for a type of compulsory payment that the local authorities would charge on every home and land owner. The money that’s collected will finance the construction and maintenance of all public infrastructure.
How it’s calculated will be based on the estimated annual rental value of the property, multiplied by a set of rates determined by local authorities (so it can really vary).
Once you’ve done that, any net gain would need to be filed.
You can do so under the ‘Statutory income from rents’ when making an online submission; and part B2 (in the BE form) or part B7 (in the B form) when making a manual submission.
If, however, you come up with a rental loss, then you’re not required to disclose that in your tax filings.
How Do I File My Income Tax?
Your annual income after EPF deduction is RM34,000 and above (approx. RM2,833.33 per month)
You have been in Malaysia for at least 182 days within the year
After you’ve determined that you’re in fact, obligated to file income tax, you’ll then need to find out how much income tax you need to pay based on your chargeable income.
Filing for income tax usually begins in the first quarter of the year for the previous Year of Assessment (YA). This means that in 2022, you’ll be filing your taxes for YA 2021 that ends on 31 December 2021.
You’ll only be given a few months to file your income tax, so be sure to keep all your payslips, EA Forms, and receipts as you’ll need them to file your taxes.
If you only manage to file your income tax after the deadline, you will have to pay a penalty. The same also goes if you overstate your tax reliefs or misreport your earnings, so be honest!
How Do I Find Out My Chargeable Income?
Income tax is chargeable on most types of income, such as:
Gains from a business
Gains from employment
Dividends, interests and discounts
Royalties, premiums and rent
The amount you end up with after you’ve added together all your various incomes will then be used to determine your respective tax rate. Refer to this link for the latest tax rates (YA 2021).
As you can see – the lower your chargeable income, the lower your tax rate and the less income tax you’ll have to pay.
What Are The Tax Reliefs For YA2022?
Here’s where tax reliefs come in. Essentially, tax reliefs are certain portions of your income that don’t have to be included in the sum of your total chargeable income.
This means they help to reduce your total chargeable income – so make sure you keep those receipts and always be in the know of the latest tax relief updates!
Below is a list of personal income tax reliefs for filing in YA2022. You can also refer to the official LHDN list here.
Self and Dependents
Husband/Wife/Payment of alimony to ex-wife
Child (below 18 years old)
Child (above 18 years old)
● “A-Level”, certificate, matriculation or preparatory courses
Child (above 18 years old)
● Diploma level and above in Malaysia
● Degree level and above outside Malaysia
Medical treatment, special needs and carer expenses for parents (Medical condition certified by medical practitioner)
Disabled child (above 18 years old)
● Diploma level and above in Malaysia
● Degree level and above outside Malaysia
Basic supporting equipment for disabled self, spouse, child or parent
Insurance and Contributions
Insurance premiums for educational or medical benefits
Deferred Annuity and private retirement schemes
Life Insurance and Employee EPF contributions
Net savings in SSPN
● Serious diseases for self, spouse or child
● Fertility treatment for self or spouse
● Vaccination for self, spouse and child (Restricted to RM1,000)
Expenses (Restricted to RM1,000):
● Complete medical examination for self, spouse, or child
● COVID-19 detection test including purchase of self-detection test kit for self, spouse or child
● Mental health examination or consultation for self, spouse or child
Education and Lifestyle
Education fees (self)
● Any degree at Masters or Doctorate level
● Degree related to law, accounting, Islamic financing, technical, vocational, industrial, scientific or technological skills and qualifications
Breastfeeding equipment (Deduction allowed once in every 2 years of assessment)
Kindergarten/Child care centre fees
Purchase of books, journals, magazines, printed newspaper, personal computer, smartphone, tablet, sports equipment, gym memberships, and internet subscription monthly bill
2,500 (for self, spouse or child)
Additional: Purchase of personal computer, smartphone, or tablet and not for business use
2,500 (for self, spouse or child)
Additional lifestyle tax relief related to sports activity expended by that individual for the following:
● Purchase of sport equipment for any sports activity as defined under the Sport Development Act 1997 (excluding motorized two-wheel bicycles)
● Payment of rental or entrance fee to any sports facility
● Payment of registration fee for any sports competition where the organizer is approved and licensed by the Commissioner of Sports under the Sport Development Act 1997
Payment for accommodation at premises registered with the Commissioner of Tourism and entrance fee to a tourist attraction
What About The Tax Rebates For YA2021?
Say you’ve deducted every tax relief you’re eligible for… but the final income tax amount still comes out a hefty sum.
This is where you may be able to reduce the amount of income even further with tax rebates.
Tax relief = deducted from chargeable income. Tax rebate = deducted from total tax payable.
The list of tax rebates for YA2021 are as below:
Individual chargeable income less than RM35,000
Husband and wife (separately assessed) and each chargeable income does not exceed RM35,000
Husband and wife (jointly assessed) and joint chargeable income does not exceed RM35,000
Rebate for Zakat/Fitrah
Actual amount paid
Departure levy rebate for Umrah/religious travel
Actual amount of departure levy paid, limited to 2 trips per lifetime
How About Tax Rebates For Non-Residents Or Expats In Malaysia?
Unfortunately, non-residents and expats don’t have the luxury of any tax reliefs or rebates. Sorry!
Non-residents in Malaysia are classified as those staying less than 182 days within Malaysia, regardless of citizenship or nationality.
But not all non-residents have to pay income tax in the first place! You’re not taxable if you are:
Employed in Malaysia for less than 60 days
Employed on board a Malaysian ship
Age 55 years old and receiving pension from Malaysian employment
Receiving interest from banks
Receiving tax-exempt dividends
But let’s say these don’t apply to you and you are obliged to pay income tax.
As a non-resident, you’ll be taxed fixed rates (usually 30%) instead of the progressive tax rates that apply to residents. Those rates can be found here.
Using Your Monthly Tax Deduction (MTD/PCB) As Final Tax
The Monthly Tax Deduction (MTD) / Potongan Cukai Bulanan (PCB) is the percentage of your income that is deducted from your employment income and goes towards paying your income tax.
You’ll still need to file your tax returns though!
Since you’ll only be able to benefit from tax reliefs and rebates if you file your own returns, using your MTD as final tax can be dangerous in that you may be paying more than you’d actually need to!
There are, however, a certain percentage of people who can use their MTD as final tax. The criteria are:
Your employment income is your only source of income
You have been working with the same employer for the past 12 months
Your employer has been deducting MTD from you
Your employer is not paying any taxes for you
You have not opted to file under joint assessment
If you fulfill these criteria, you may choose not to file your returns, and simply use your MTD as final tax.
If so, remember to submit form TP1. This form will help you to claim the tax reliefs you’re eligible for and facilitate for more accurate returns by your employer.
Joint Assessment vs Separate Assessment
For married couples, you’ve probably had to ask yourself the question “Should we file separately or under joint assessment?”
In the end, the question is one that boils down to which method will give the most tax savings by leveraging on the progressive tax rates as well as reliefs. As a general rule to go by:
Separate assessment is beneficial if: Both are high-income earners
Joint assessment is beneficial if: One has a significantly higher income, while the other earns little or no income
This is because the combined income of both high-income earners may result in them being subjected to a higher tax bracket, and hence have to pay a higher tax rate.
This applies to tax reliefs as well, since filing under joint assessment means you’re essentially filing as one person – you can only claim the maximum tax reliefs of an individual.
It goes without saying then, that the best way to find out which option will result in the most tax savings for you is to simply calculate separately and compare.
Whether you agree or not with this incentive, the most important thing to remember is to declare your income tax as accurately as possible to avoid any unwanted punishment.
It’s also a good idea to compile and retain any receipts or documents for a few years, in case you’re suddenly called for a tax audit – it’s better to be safe than sorry!
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