Not sure whether you need to declare your rental income? The answer is yes! In Malaysia, residential or non-business properties incomes are considered taxable incomes.
So if you’re a landlord with a property being rented out, you might want to read more. That said, bear in mind that this information will come especially handy during tax season. Here we have compiled the 7 things you should know to declare your income rental to LHDN.
- What do we mean by Rental Income Tax?
- Do you need to pay tax if you declare Rental Income?
- How to determine the tax rate
- What happens if you don’t declare Rental Income
- What to do if you are an expatriate or non-resident
- Available tax incentives for rental properties and landlords in 2021
- Tax exemptions in 2021
What Do We Mean by Rental Income Tax
Did you know that owning a property in Malaysia and renting it out will mean you have to declare it under rental income? Generating profit from the rental means that you have to pay a certain amount of tax. But before that, there are 2 ways you can classify your rental income.
According to section 4(d) of the Income Tax Act 1967, “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 Income Tax Act 1967 if a person lets out the real property without providing maintenance services or support services (such as cleaning services and repairs services) comprehensively and actively.”
This means that to declare your rental income, you need to decide whether your rental property comes with maintenance and support services or not.
- If yes, then it’s considered as a business income.
- If no, then it’s considered as a non-business income. You can file this along with your individual income.
Bear in mind that you need to provide receipts in your filing to offset your tax amount if you did provide such service. Aside from that, if you experienced rental loss, you are not obligated to include rental income in your tax filing. Exciting right? Let’s go through the next thing on the list.
Do You Need to Pay Tax if You Declare Rental Income?
If your rental income is considered as a non-business income, you will need to add the amount you’ve generated from the rental to your total income. You will only need to pay tax if:
- The amount of income you earn exceeds RM34,000 per Annum, and if you break it down to per month, around RM2,833.33. This is after EPF deductions.
- Without EPF deductions, your income exceeds RM38,202.5 per Annum or RM3183.52 per month.
So, the income depends on how much you earn per annum or monthly. You can refer to LHDN’s official website to see the chargeable income and tax imposed. The current tax rate is from 0% to 30% of your income according to the budget of 2020.
How To Determine The Tax Rate
Residents of Malaysia pay tax based on a progressive tax rate that means the tax will get higher when your income gets higher. So, this means you will be charged according to the income you earn from the following modes:
- Profits you get from a business
- The profit you earn for employing people
- Dividends, Interests, and discounts you get throughout the year
- Royalties, premiums, and rent
- Tax is also applicable on pensions, annuities, and other payments that are not mentioned above.
You would essentially want to list all of your commitments or expenditure because this justifies that you have a lower net annual income, which will lower your overall tax charges.
What Happens If You Don’t Declare Rental Income
Many landlords make the mistake of not declaring rental income by under-reporting their income as they see rental income more as an investment than a taxable income. Section 113 of the Income Tax Act states:
(1) Any person who—
a) makes an incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or
b) gives any incorrect information concerning any matter affecting his own chargeability to tax or the chargeability to a tax of any other person, shall…be guilty of an offence and shall, on conviction, be liable to a fine of not less than one thousand ringgit and not more than ten thousand ringgit and shall pay a special penalty of double the amount of tax which has been undercharged…
In short, you are obligated to report your income amount as accurately as possible. If you fail or evade to do so, you will be penalised under Section 113 of the Income Tax Act 1967, which impose a fine between RM1,000-RM10,000 and 200% of the tax you undercharge.
So, if you don’t declare or under-declare your rental income then, we think it’s time for you to know how to do it. You can file the tax via the online portal of LHDN or physically.
What To Do If You are an Expatriate or Non-Resident?
As an expatriate, depending on how long you’ve stayed in Malaysia and the type of work you do, you will be charged either progressively or with a flat rate. The key thing to note here is that only incomes with a source in Malaysia are taxable. Other profits are not subject to the personal income tax rates,
Next, you need to determine whether you’re a tax resident or non-resident. Based on this, you will be charged differently. Here are the differences:
- Non-residents: expatriates working in Malaysia for less than 182 days a year. They subject to a 30% flat rate and are not usually given reliefs and discounts on income tax but,
- Tax residents: Those who have stayed in the country for 182 days consecutively in one calendar year. They will pay tax progressively depending on their income (ranging from 0% to 30%).
So if you’re an expatriate, your income tax may be charged progressive or flat rate. You can do your income filing online or offline.
Available Tax Incentives for Rental Property Landlords In 2021
LHDN has stated that landlords are entitled to various tax incentives as allowed deductible expenses. Here are the expenses allowed to be deducted from the rental income.
- Expenses related to ordinary repairs to help maintain the property in its existing state.
- Fire/ Burglary insurance
- Quit rent as well as assessment tax
- Mortgage interest on loans obtained
- Rent collection charge and legal costs caused to implement rent collection.
- Cost caused to restore tenancy or to replace the tenant.
- Maintenance expense for various properties
If you wish to claim these expenses, then you must have a legal rental agreement and also the original receipts of the expenses you want the claim for.
Tax exemptions in 2021
In the wake of the pandemic and to boost Malaysia’s economy, the government took the initiative known as Economic Stimulus Package 3.0, in which landlords with business premises are exempted from a reduction of relief.
The relief or reduction in the rental payment to SME tenants starting from April 2020 to September 2020. The condition here is that the reduction should be at least 30% of the existing rental rates.
Now that you know how you can declare your rental income, you don’t have to worry about the tax season! Just carry out your due diligence, and who knows, you might be able to get a tax deduction.