INCOME FROM LETTING OF REAL PROPERTY

1. Letting of real property as a business source

Letting of real property is deemed as a business source and the income received from it is charged to tax under paragraph 4(a) of the ITA if maintenance services or support services are provided in relation to the real property.

Maintenance services or support services should be comprehensively and actively provided.

Example:

Suai Sdn Bhd owns three blocks of condominium consisting of 324 units and lets out those units to tenants. Suai Sdn Bhd provides maintenance services of lift, cleaning services, security services, centralized air conditioner and maintenance services of playing fields and car parks.

The letting of the condominium units is treated as a business source of Suai Sdn Bhd since maintenance services and support services are comprehensively and actively provided by Suai Sdn Bhd.

2. Letting of real property as a non-business source

The letting of real property is treated as a non-business source and income received from it is charged to tax under paragraph 4(d) of the ITA if a person lets out the real property without providing maintenance services or support services comprehensively and actively.

Example:

Unggas Property Sdn Bhd lets out one block of office building to a company. Unggas Property Sdn Bhd only provides security services.

The letting of the office building is treated as non-business source since Unggas Property only provides security services. Unggas Property Sdn Bhd does not provide maintenance services or support services comprehensively.

3. All real properties grouped as a single source

Several real properties which are let out can be grouped as one source whether as a business source under paragraph 4(a) of the ITA or a nonbusiness source under paragraph 4(d) of the ITA. If a person lets out several real properties in a year of assessment and the letting of -

a. all real properties is a business source, all the real properties can be grouped as one business source under paragraph 4(a) of the ITA.

b. all real properties is a non-business source, all the real properties can be grouped as one non-business source under paragraph 4(d) of the ITA.

c. some of the real properties is a business source and some is a nonbusiness source, income from both sources shall be assessed separately. The income from the business source and the nonbusiness source is assessed under paragraphs 4(a) and 4(d) of the ITA respectively.

4. 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.

5. Initial expense

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. Examples of such expense are cost to obtain the first tenant such as advertising cost, legal cost to prepare rental agreement, stamp duty and commission for real property agent.

Example:

Sarah Property Sdn Bhd buys an office building on 1.9.2009 to be let out. The company incurs RM600 to advertise the letting of the building on 1.1.2010 and legal cost amounting to RM1,800 paid to Reganathan & Co on 12.2.2010 for preparing rental agreement. The building is let out commencing from 1.3.2010 without providing maintenance services or support services. The letting of the office building is a non-business source and the rental income is taxable under paragraph 4(d) of the ITA.

The advertising cost amounting to RM600 and the legal cost of RM1,800 are not allowed a deduction from income of letting of office building for the year of assessment 2010 as the expenses are incurred to obtain the first tenant.

6. 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.

Need to apportional to the month of let out.

7. 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. The provisions in Schedule 3 of the ITA relating to capital allowances shall apply to the business of letting of real property.

If there is a change in tax treatment of the letting of a real property from a business source under paragraph 4(a) of the ITA to a non-business source under paragraph 4(d) of the ITA in the basis period for a year of assessment, 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 business source under paragraph 4(a) of the ITA and a non-business source under paragraph 4(d) of the ITA. If as a result of the change:

a. 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.

b. 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.

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 under paragraph 4(a) of the ITA to a non-business source under paragraph 4(d) of the ITA in the basis period for a year of assessment, 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.

8. Industrial building allowance

a. 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.

9. 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.

For more updated information, please refer to your tax consultant.

Secretarial fee and tax filling fee

From YA 2006 - YA2014, secretarial fee and tax fee disallowed for a claim of the tax deduction.

Tax deduction allowed for:

a. YA 2015 onwards, secretarial fee incurred and paid in respect of secretarial services provided by a registered company secretary to comply with statutory requirements under the Companies Act 1965 (up to RM5,000 per year);

b. YA 2016 onwards, tax fee incurred and paid for preparation and submission of return in the prescribed forms for the purposes of S. 77, S.77A, S. 77B, S.83 and S.86 of the ITA 1967.

c. YA 2015 onwards, tax fee incurred and paid for preparation and submission of forms prescribed for the purposes of S. 41 of the Goods and Services Tax Act 2014 (GST Act 2014).

Note: The combined deduction limit for (b) and (c) is up to RM10,000 per YA.

For more detail, kindly refer to your tax agent or LHDN website.

Exemptions of Real Property Gains Tax (RPGT)

RGPT Rates

With effect from 1 Jan 2019, a. Company - 10% will be imposed for a holding period exceeding 5 years.

b. Individual (Malaysian citizens or PR) - 5% for a holding period exceeding 5 years.

c. Individual (not Malaysian or PR) - 10% for a holding period exceeding 5 years.

RPGT exemptions are available in the following circumstances which under the RPGT Act 1976:

1. An individual will be given an exemption equal to RM10,000 or 10% of the chargeable gain, whichever is greater.

2. An individual who is a Malaysian citizen or a PR will be given a once in a lifetime exemption on any chargeable gain arising from the disposal of his private residence if he elects in writing for the exemption to apply to that private residence.

3. Transaction in which the disposal price is deemed equal to acquisition print (No gain no loss transaction).

a. Devolution of a deceased person's assets to his trustee or legatee.

b. Transfer between spouse provided that the disposer is a citizen.

c. Transfer of assets owned by an individual, his wife or by an individual jointly with his wife or with a connected person to a company controlled by the individual, his wife or by an individual jointly with his wife or with a connected person, for a consideration consisting substantially (more than 75%) of shares in that company, provided that thew disposers are citizen.

d. Transfer between an individual and a nominee who has no vested interest in the assets.

e. Transfer by way of security in or over an asset.

f. Gifts to the Government, local authority or charity exempt from income tax.

g. Disposal due to compulsory acquisition.

h. Disposal of chargeable assets pursuant to an approved financing scheme which is in accordance with Syariah principles.

4. Gifts between husband and wife, parent and child or grandparent and grandchild are deemed to be "No gain no loss" transaction, provided that the donor is a citizen of Malaysia.

5. Transfer between companies

a. Transfer within the same group to bring about greater efficiency and for a consideration consisting substantially of shares in the transferee company.

b. Transfer between companies for the purposes of reorganisation, reconstruction or amalgamation where the transfer company is being restructured to comply with the Government's policy on capital participation in the industry.

c. Assets distributed by a liquidator under a scheme of reorganisation, reconstruction or amalgamation where the transfer company is being restructured to comply with the Government's policy on capital participation in the industry.

For more detail, please refer to LHDN Malaysia website.

RPGT: Situation whereby the disposal price deemed at Market Value

Sch 2, paragraph 5 provides the rules for determining the disposal price. However, there are certain circumstances where the disposal price shall be deemed at market value.

Under Sch 2, Paragraph 9, the consideration in the following transactions is equal to market value:

a. Where the assets are disposed other than at bargain made at arm's length or by way of gift,

b. The disposal of the asset for a consideration that cannot be valued,

c. The disposal of the asset for ma consideration with loss of employment or for recognition of past services,

d. Transfer of real property for satisfaction of the debt,

e. Lump sum disposal of chargeable asserts or

f. Where the transaction has the direct or indirect effect of altering the incidence of tax, relieving any person from any liability, evading or avoiding any duty or liability and hindering the operation of the RPGT Act.

RPGT: Treatments of gifts

The gift of a chargeable asset by any person and the corresponding acquisition is deemed to be disposed at the market value of the asset.

In a situation where a gift is made and the donor and the done are related, i.e husband and wife, parent and child, or grandparent and grandchild, and the gift is made within 5 years after the date of acquisition of the asset by the donor, the donor is deemed to have received no gain and suffered no loss and therefore any gains will be exempted from RPGT. The donee is deemed to acquire the asset at the donor's acquisition price plus the permitted expenses incurred by the donor.

If the asset is transferred after 5 years from the date of acquisition, the donor is deemed to have disposed of the asset at market value on the date of transfer. As a result, the done is deemed to have acquired the chargeable asset at market value on the date of transfer.

However, if the chargeable asset is acquired as a gift upon the death of the donor, the recipient (done) is deemed to acquire the asset at its market value as on the date of transfer of ownership of the asset to the recipient.

Example 1:

On 31.05.2013, Encik Ali gave his daughter, Cik Nain one of his house which he purchased on 01.09.2009 for RM190,000. The permitted expenses amounted to RM4,000. The market value of the house on 31.05.2011 was RM210,000.

Since it was a gift from the parent to his child, there is no chargeable gain or allowable loss from the transfer of the above property.

Disposal price deemed to be (RM190,000 + RM4,000) = RM194,000

Less: Acquisition price = RM190,000

Add: Permitted expenses = RM4,000

Chargeable gain = NIl

The acquisition price to Cik Nain is, therefore, RM194,000, which is the disposal price to Encil Ali.

Example 2:

a) On the occasion of her daughter's ACCA graduation on 31.03.2019, Mr. Kim gave her a flat which he purchases on 02.08.2005 for RM215,000. The market value on 31.03.2019 was RM450,000.

Ans: The graduation gift is deemed to be disposal (after 5 years) and Mr. Kim is deemed to have disposed of the flat at market value. Mr. Kim would be liable for RPGT as the rate of RPGT after 5 years is 5% (subject to change, depending on Government policy). His daughter is deemed to have acquired the flat at market value (i.e. RM450,000).

b) For the wedding on 02.04.2014, Mr. Kim gave her an apartment which he purchased in 2010 for RM380,000.

Ans: The wedding gift falls within the provision as it was a gift from parent to child made within 5 years after acquisition. Therefore, Mr. Kim is deemed to be in a "no gain no loss" situation in respect of the apartment. She is deemed to have outside the stipulated at the acquisition price paid by her father (RM380,000).

In conclusion, both transactions are gift from parent to child. The distinction between them lies in the holding period of the asset before parting as gift. It is the distinction that results in a different tax treatment in the hands of the daughter, if she disposes of the asset in the future.

Injecting properties into a Company

The properties investor, having considered all of the angles, may conclude that the best vehicle for holding his properties, whether for renting as a business or as an investment, is a company.

At that point, he has a whole range of other decisions to take.

a. What is the company to be called?

b. How much share capital should it have?

c. Who will the shareholders be?

d. Which bank to use?

e. Which firm of an accountant to appoint as auditors?

Some serious tax implications:

1. Transfer of properties from an individual to a company is a disposal for purposes of real property gains tax.

2. When transferor and his close family retain control of the transferee company, the market value of the property at that time of transfer is treated as the disposal value, regardless of the figurer put upon it by the parties.

3. Imposition of stamp duty on the transfer of property. The basis for the charge to stamp duty is the amount of the consideration paid or the market value of the property at the time of transfer if that is higher.

Generally, it is better to inject properties into a company at the time of their acquire as that will not attract any real property gains tax. There is no double charge to stamp duty.

Stamp duty exemption to revive abandoned housing projects

Presently, instruments of transfer and loan agreement executed by rescuing contractors or developers and original house purchases for the purpose of reviving an abandoned housing project are exempted from stamp duty. A revised residential property means a house, a condominium unit, an apartment or a flat of the abandoned project that has been revived and built as a dwelling house by the rescuing contractor or developer who is appointed or approved by the Minister of Housing and Local Government to carry out rehabilitation works for the abandoned project.

Based on the Budget 2018, it is proposed that these exemptions be extended to instruments of transfer and loan agreements executed by rescuing contractors and original house purchases from 1 Jan 2018 to 31 Dec 2020 for abandoned housing projects certified by the Ministry of Urban Wellbeing, Housing and Local Government.

For the loan agreements and instruments of transfer executed from 1 Jan 2018 to 31 Dec 2020 in relation to certified abandoned housing projects.

*Kindly refer to Budget 2018 for more detail information.