taxation malaysia: rent- section 4 (a) or 4 (d) income?
Rent: Section 4 (a) or Section (d) income?
Rental income is generally assessed under Section 4(d) Rental Income of the Income Tax Act and is seen as income from investment. When rental income is assessed under section 4 (d), it has to be grouped into three sources namely residential properties, commercial properties and vacant land. The date of commencement of renting is on the first day the property is rented out. In the event a rental loss occurs, it becomes a permanent loss because it cannot be set off against other income sources or even other rental income sources. The loss also cannot be carried forward to the subsequent year of assessment. No capital allowance is given for the premise or assets provided to earn the rent. However, expenses incurred wholly and exclusively in earning the rental income are deductible against the rental income. This includes the replacement or repair or maintenance cost related to the premise and other assets used to earn the rent.
However, rental income can also be assessed as Section 4 (a) Business Income under certain circumstances. This is evident in the case of American Leaf Blending Co. Sdn. Bhd v Director General of Inland Revenue where it was held that although rent is assed under section 4(a) income it can be a business source of income if it is received in the course of carrying on a business of renting out the taxpayer’s property. In order for rental income to be assessed as business income and not investment income, two aspects need to be considered.
The first is the number of units of property owned. This consideration however applies only to companies. A company can have its rental income assessed as Section 4(a) business income if it is letting at least 4 units of commercial buildings, 4 floors of shop houses, 4 units of residential properties or any combinations of 4 units of the type of premises mentioned. If the premise is a special purpose commercial building like a factory, warehouse, office or shopping
Rental income is generally assessed under Section 4(d) Rental Income of the Income Tax Act and is seen as income from investment. When rental income is assessed under section 4 (d), it has to be grouped into three sources namely residential properties, commercial properties and vacant land. The date of commencement of renting is on the first day the property is rented out. In the event a rental loss occurs, it becomes a permanent loss because it cannot be set off against other income sources or even other rental income sources. The loss also cannot be carried forward to the subsequent year of assessment. No capital allowance is given for the premise or assets provided to earn the rent. However, expenses incurred wholly and exclusively in earning the rental income are deductible against the rental income. This includes the replacement or repair or maintenance cost related to the premise and other assets used to earn the rent.
However, rental income can also be assessed as Section 4 (a) Business Income under certain circumstances. This is evident in the case of American Leaf Blending Co. Sdn. Bhd v Director General of Inland Revenue where it was held that although rent is assed under section 4(a) income it can be a business source of income if it is received in the course of carrying on a business of renting out the taxpayer’s property. In order for rental income to be assessed as business income and not investment income, two aspects need to be considered.
The first is the number of units of property owned. This consideration however applies only to companies. A company can have its rental income assessed as Section 4(a) business income if it is letting at least 4 units of commercial buildings, 4 floors of shop houses, 4 units of residential properties or any combinations of 4 units of the type of premises mentioned. If the premise is a special purpose commercial building like a factory, warehouse, office or shopping