If you are interested to know more about how income tax works in Malaysia, you should definitely check out this guide.
The Guide will mainly be separated into 2 parts: (1) Foreign Nationals and (2) Nationals.
Foreign National (Rental Income Tax in Malaysia)
If you are a foreign national living in Malaysia, you do not want to skip this section. Currently, non-residents must pay tax on Malaysian-sourced income. Also, it is important to note that personal reliefs which are also known as tax allowances, which are not granted to non-residents.
Here are a few things to know about taxation for a foreign national:
a) Rental Income
For non-residents, you will be taxed a flat rate of 26% for your rental income.
You can deduct income generating expenses from the percentage of amount you will be taxed. Income-generating expenses include your cost of repairs, quit rent, the commission for the agent and interest expense.
However, depreciation cannot be considered as an income-generating expense, and cannot be deducted when calculating the amount of tax to be paid.
b) Capital Gains Tax
When you dispose of a Malaysian property, you will be subjected to Real Property Gains Tax (RPGT). Usually, the RPGT is levied at progressive rates, which often depends on how long you have held the property prior to the sale.
As of now, if you held the property less than 5 years, you will be subjected to a tax of 30% of the chargeable gain (which is basically: New sale price – allowable deductions – initial purchase price = chargeable gain). If you sell the property only after you have held it for more than 5 years, you will be subjected to a 10% tax.
c) Assessment Tax on Residential Property
The assessment tax is a local tax that is based on the annual rental value of the property. This tax is usually assessed by the local authorities. Generally, the assessment tax is levied at 6% and you can pay them in 2 installments.
Malaysians (Rental Income Tax in Malaysia)
As for Malaysians, we will view the different types of taxation according to their categories as well (for better understanding).
a) Rental Income
Most people think that the Rental Income is considered as their passive income and it is not taxable. That is actually wrong. In fact, some taxpayers were penalized for not reporting their rental income under Section 113 of the Income Tax Act 1967.
Let us understand the implications of it.
1) Basics on Rental Income
Individuals who own property in Malaysia and receive a rental income will be subjected to income tax. This is provided for in Section 4(d) of the Income Tax Act 1967.
Rental Income is calculated using the ‘net’ amount. To get the ‘net amount’, you have to deduct permitted expenses incurred from the gross rental income. By law, individuals have to disclose their net rental gain in either BE form or B form respectively.
So, where is it reported?
If you are reporting it through online submission, it can be reported under the field of ‘Statutory income from rents’.
For manual submission, it will be part B2 (BE form)/B7 (B form).
2) Income Tax Exemption for Rental Income
In this section, we will be covering the expenses that can be deducted from the gross rental income to get the net rental income.
Here are some examples of ‘permitted expenses’ that you can deduct from the gross rental income:
(a) Cost of repair;
(b) Cost of maintenance;
(c) Security Charges;
(d) Fire and Burglary Insurance;
(e) Fees paid to the agent for supervision and rental collection;
(f) Cost to obtain a new tenant (when replacing a former tenant);
(g) Legal fees for Tenancy Agreement;
(h) Quit Rent and Assessment;
(i) Loan Interest.
3) Why is this significant?
Most people do not know about this because the income tax exemption on rental income is relatively new.
The new exemption order was only gazetted on 27th February 2019 and it has retrospective effect from 1st January 2018.
Before 1st January 2018, all rental income was calculated on a progressive tax rate, which ranges from 0 percent to 28 percent WITHOUT any tax exemptions.
The government wanted to promote affordable accommodation to those who need it and has decided to provide tax exemption of 50 percent on the rental income received by Malaysian citizens.
4) How can you be eligible for this exemption?
There are 4 conditions that must be fulfilled:
(a) The property has to be a residential property;
(b) The monthly rental received for each property must be equal or less than RM 2,000;
(c) The tenancy agreement has to be stamped and executed, on or after 1st January 2018;
(d) The tenure for the rental is for any period during the calendar year of 2018.
Important Things to Note: Residential Property – are properties such as house, condominium or apartment. The properties must be used for dwelling.
Monthly Rental Received – note that the ‘Monthly Rental’ is calculated by including the TOTAL sum paid by the tenant, including the fees for the parking space, furniture or any facilities provided.
5) Expenses that are not deductible
Based on the new law enforced, initial expenses which are spent in getting your first tenant will not be deductible. Here are some examples:
(a) Advertising cost for getting your first tenant;
(b) The fees paid to the property agent to obtain your first tenant;
(c) The legal cost and stamp duty paid for your initial tenancy agreement;
(d) The expenses on renovation for getting higher rental rates.