In Budget 2018, the government introduced a new limited time tax exemption designed to control home rental prices. Now, in 2019, the time has come for property owners to begin claiming that exemption on their income tax forms.
The idea is that income from the renting of residential properties would receive a 50% exemption from income tax. This was introduced in Section 4(d) of the Income Tax Act 1967 (ITA).
The legalese gets complicated, so let’s break down what this all means and how it affects you.
What is rental income tax?
At the core, this refers to any money you make from renting out properties. Some Malaysians have been mistakenly reporting this as investment income (and claiming it as tax exempt), and have been penalised by the Inland Revenue Board for doing so.
In other words, it’s listed on your income tax forms under “Statutory income from rents” for e-filing and part B2 (BE form)/B7 (B form) for manual filing.
For simplicity, just remember that rental is in its own category and has its own progressive tax rate that ranges between 0 and 28%. Foreigners and those not residing within Malaysia are also charged a flat 28% tax on rental income.
What about the income tax exemption?
To take advantage of this, there are some requirements to meet:
The property is of the residential type. Apartment, flat, landed, or anything otherwise legally designated as residential.
- The monthly rental for each property is RM2,000 or less.
- The tenancy agreement has to have been stamped and executed on or after January 1 2018.
- Tenancy takes place in the year of assessment 2018 to 2020.
This exemption applies to any income from the rental of residential properties between the year 2018 and 2020 (reported between 2019 and 2021).
Can tax deductions still be made?
Yes, you may still make your deductions from rental tax as normal. Deductions on taxes from Section 4(d) of the ITA can be made from direct expenses related to the renting of the property.
In simple English, it means that you can claim some of your costs for the upkeep and renting of the property as deductions. The full list of these deductions are spelled out in the IRB ruling on income from letting of real property published in December 2018 and reproduced here:
- Assessment and quit rent
- Interest on loan
- Fire insurance premium
- Expense on rent collection
- Expense on rent renewal
- Expense on repair
A non-exhaustive list includes repairs costs for keeping the home in its existing state, maintenance fees paid for strata properties, interest on the loan taken to purchase the property, quit rent, and any fees you incur while collecting rent.
Finally, remember that if you intend to claim this exemption, there must be a legal tenancy agreement for the rental property as well as accompany original receipts of the claimable expenses.
Example:
Andy owns a flat in Petaling Jaya that he rents out for RM1,500 per month. His tenancy agreement only began in February 2018, which means he only has 10 months of rental income in 2018 (February to December). However, during this time he paid for fire insurance on the property (worth RM120 annually) and had to pay RM200 for repairs on the house due to regular wear and tear.
| Total income in 2018 (RM1,500 x 10) | RM15,000 |
|---|---|
| Deductions: | |
| Fire insurance | RM120 |
| Normal repairs | RM200 |
| Total deduction | RM320 |
| Total taxable income | RM15,000 - RM320 = RM14,680 |
Tax exemption is only for three years
As mentioned earlier, this tax exemption only covers three years of assessment. It’s a relatively small window so don’t forget to include it as part of your income tax filing this year.
It should be noted that statutory income from rents also applies to those residing outside of Malaysia. Indicating that they should not forget to declare their income to the IRB. On the bright side, this exemption also applies to that declaration.
So if you’re renting out homes for a little side income, please remember to claim your exemption this year; and for the next two years.
