In Malaysia, the Income Tax Act 1967 taxes income from real property as either a business source under Section 4(a) or a non-business source under Section 4(d). This classification determines the commencement date, property grouping, and the types of expenses and allowances you can claim.
1. Determining the Source of Income
The primary factor in deciding if rental income is a business source is whether maintenance or support services are provided comprehensively and actively.
- Business Source (Section 4(a)): Rental income is regarded as business income when the owner is actively involved in managing and maintaining the property. This includes situations where the owner:
- Provides regular cleaning, repair, or maintenance services
- Manages security, lifts, car parks, landscaping, or common facilities
- Engages third-party service providers to carry out these services on their behalf
The presence of continuous, organised, and active management indicates a business operation rather than passive letting.
- Non-Business Source (Section 4(d)): Rental income is treated as non-business income when the owner:
- Merely rents out the property without providing active services, and
- Relies on facilities or services maintained by a Management Corporation (MC), such as security, swimming pools, or gyms in strata properties
These circumstances classify the owner as a passive investor, even when tenants enjoy shared facilities.
2. Differences in Tax Treatment
The classification of rental income has important tax implications:
- Business Rental Income
- Broader range of deductible expenses
- Business losses can be set off against other income and carried forward
- Capital allowances may be claimed on qualifying assets
- Non-Business Rental Income
- Only direct expenses related to the rental are deductible
- Rental losses can only be offset against rental income in the same year
- Capital allowances are generally not allowed
3. Grouping of Real Properties
Owners with multiple properties can group them for tax assessment:
- Single Source Grouping: Multiple business sources can be grouped as one business source, and multiple non-business sources can be grouped as one non-business source.
- Separate Assessment: If an owner has both business and non-business rental sources, they must be assessed and calculated separately.
4. Allowable Deductions and Expenses
Expenses are deductible only if they are wholly and exclusively incurred in producing rental income.
- Deductible Operating Expenses:
- Quit rent and assessment
- Insurance premiums
- Interest on loans used to acquire the property
- Repairs and maintenance
- Management fees
- Utilities borne by the owner
- Initial Expenses (Non-Deductible): Initial costs to secure the first tenant, such as:
- Advertising fees
- Legal fees for the first tenancy agreement
- Replacement of Furnishings (Non-Business Source): For furnished properties under Section 4(d), the cost of replacing furnishings (e.g. furniture, air-conditioners, curtains) is deductible as a revenue expense.
5. Why Proper Classification Matters
Incorrectly treating rental income as business or non-business may lead to:
- Over claiming of expenses or allowances
- Disallowed deductions during tax audits
- Penalties and additional tax assessments by LHDN
Proper classification ensures compliance while optimising allowable tax relief.
Need more help? Determining if your services qualify as “comprehensive and active” can be complex and may require a detailed review of your service agreements. If you need assistance in classifying your rental income or calculating your adjusted income, please reach out to our support team or consult with a tax professional.
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