Tax Planning On Rental Income From Letting Of Real Property

Tax planning on rental income from letting of real property is important in order to attract lesser tax obligation. There are mainly 3 sections of the Income Tax Act, 1967 (“ITA”) that will attract taxes on rental income as explained:

  1. S.4(a) Business Income – letting of real property as a business source under paragraph 4(a) of ITA;
  2. S.4(d) Rental Income – letting of real property as a non-business source under paragraph 4(d) of ITA; and
  3. S.60F(2) Investment holding company – letting of real property as investment holding under S.60F(2) of ITA.

TAX PLANNING 1 – WHICH SECTION OF ITA WILL ATTRACT LESSER TAX ON LETTING OF REAL PROPERTY

ABC Property Management Sdn. Bhd. (“ABC”) purchased 1 unit of apartment in Penang on 3 January 2012. On the same day, ABC installed 3 units of air-conditioner with a cost of RM3,300 and is being let out for RM4,500 per month. ABC has paid expenses during the year as follows:

Which section of ITA will attract lesser tax?

From the computation above, tax derived on letting of real property as a business source under S.4(a) Business Income of ITA will result in best tax advantage.

Recommendation:
We recommend buyer to plan real property purchase that fall letting of real property as a business source under S.4(a) Business Income of ITA.

TAX PLANNING 2 – HOW TO FALL RENTAL INCOME UNDER S.4(a) BUSINESS INCOME OF ITA

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 and support services are provided comprehensively and actively.

Example 1:
DHZ Sdn Bhd owns three blocks of condominium consisting 338 units and lets out those units to tenants. DHZ 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 DHZ Sdn Bhd since maintenance and support services are comprehensively and actively provided by DHZ Sdn Bhd.

Example 2:
There are few examples on letting of real property as business source under paragraph 4(a) of the ITA as follows:

S.4(a) Business Income Maintenance and services provided
4-storey building with 32 units Maintenance of structure building, life, cleaning and area outside the building.
Office building with 42 units Cleaning inside and outside of building, centralized air conditioner, maintenance of car park and security services
1 unit bungalow with 15 rooms Maintenance of structure building, cleaning and area outside the building, maintenance of garden and security services

 

TAX PLANNING 3 – PROPERTY MANAGEMENT COMPANY

TCH Property Management Sdn. Bhd. provides cleaning services, maintenance of car park and security services to Unit A, B and C and receives rental income from 3 tenants respectively.

The letting of the 3 units of real property are treated as a business source under paragraph 4(a) of the ITA since maintenance and support services are comprehensively and actively provided by TCH Property Management Sdn. Bhd.

Recommendation:
Incorporate a property management company to provide maintenance and support services of real property.

TAX PLANNING 4 – CURRENT YEAR TRADING LOSS CAN BE SET-OFF AGAINST RENTAL INCOME

From the computation below, rental income with trading loss can be set-off against net rental income and enjoy a lower tax payable.

Recommendation:
Company with trading activity has tax privilege to set-off against net rental income if the Company suffer a trading loss during the financial year.

CONCLUSION

Good tax planning on letting of real property is important and will result in a lower tax obligation and improve the profit of the Company. Reorganisation of company structure on tax perspective can be considered by the management of the Company if tax planning will result in a lower tax obligation.