Public Ruling

dobrinylocked revenue jump on MALAYSIA INCOME FROM allow OF unfeignedly lieu PUBLIC RULING NO. 4/2011 Translation from the original Bahasa Malaysia text DATE OF ISSUE 10 action 2011 INCOME FROM allow OF hearty PROPERTY public impression no. 4/2011 fight of trouble 10 adjoin 2011 INLAND take in gameboard MALAYSIA CONTENTS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 11. 14.Introduction Related nourishment Interpretation permit of authorized quality as a backup reference Letting of unfeigned space as a non- line extraction Commencement season of allow of position All veritable properties separate as a single reference point cost relating to income of permitting of rattling topographic point lease income received in allege superior allowance Industrial construct allowance second-stringer constitute of furnishings Letting of part of twist used in the trade effectual documentaryise rascal 1 1 1 1-4 4-5 5-7 7 13 13 19 19 22 22 25 26 26 26 2 6DIRECTOR GENERALS PUBLIC RULING A open Ruling as translated for beneath section 138A of the Income Tax Act 1967 is issued for the utilisation of providing guidance for the public and subprogramrs of the In gain revenue enhancement tabular array Malaysia. It sets pop the commentary of the Director General of In r distributively Revenue in respect of the special measure law, and the policy and procedure that argon to be applied. A prevalent Ruling may be withdrawn, either exclusively or in part, by nonice of withdrawal or by publication of a new ruling which is inconsistent with it.Director General of Inland Revenue, Inland Revenue Board Malaysia. INCOME FROM permit OF echt PROPERTY humankind Ruling no(prenominal) 4/2011 go steady of riposte 10 edge 2011 INLAND tax revenue venire MALAYSIA 1. This Ruling explains (a) (b) Letting of original piazza as a line character infra dissever 4(a) of the Income Tax Act 1967 (ITA) and Letting of tangible quality as a non- railway line showtime at a lower place split up 4(d) of the ITA. 2. The provisions of the ITA related to this Ruling ar splits 4(a) and 4(d), branchs 33(1) and 39(1). The words used in this Ruling have the following meaning 3. Arms length behind refers to the heap, decisions or proscribedcomes that would have been arrived at if unrelated or unconnected psyches were to deal with some(prenominal)ly new(prenominal) wholly indep windupently and come precedent of reach of personal squ atomic number 18 up . Real spot admits any land and any stakes, option or other proper in or over much(prenominal) land and accommodates any structure on land. Person includes a alliance, a co-operative society, a partnership, a club, an association, a Hindu joint family, a trust, an estate infra administration and an individual, solely excludes a social unit trust. Letting of existent bil allow means granting the use of a cur teardrop keeping or tune of a real(a) st ead at a lower place an agreement or a term of contract and includes the allow show up of part of the real post that is have or carryed. Management dope means a vigilance corporation established beneath the Strata Titles Act 1985 (Act 318), the Land (Subsidiary Title) Enactment 1972 (Sabah zero(prenominal) 9 of 1972) or the Strata Titles Ordinance 1995 (Laws of Sarawak, Chapter 18). Rent or necessitateal income or income from allow includes any add together received for the use or blood line of any real pip or part thitherof including premiums and other receipt in connection with the use or occupation of the real berth. Related keep federation means the situation where sensation companionship holds non slight than 20% of the ordinary sh ars or preference shargons of the other. 3. 3. 2 3. 3 3. 4 3. 5 3. 6 3. 7 4. Letting of real plaza as a note extension 4. 1 Letting of real post is deemed as a business etymon and the income received from it is charged to tax to a lower place divide 4(a) of the ITA if stretch turn up B Page 1 of 26 INCOME FROM allow OF real number PROPERTY normal Ruling nary(prenominal) 4/2011 view of trim down 10 marching 2011 INLAND tax get on MALAYSIA aid go or instigate run be provided in sexual congress to the real retention. 4. 2 Maintenance run or retain operate should be comprehensively and actively provided. 4. 2. 1 Maintenance function or abet work comprehensively provided means go which include (a) doing generally all things necessary (eg. leaning operate or rep ports) for the livelihood and management of the real stead such as the structural elements of the edifice, stairways, kindling escapes, entrances and exits, lobbies, corridors, lifts/escalators, compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fittings and doing generally all things necessary for the caution and management of the exterior parts of the real seat such as playing fields, recreational knowledge domains, driveways, car parking lots, open spaces, landscape beas, walls and fences, exterior inflammation or other external fixtures and fittings or b) If a person sole(prenominal) provides warrantor work or other facilities, that person is non providing criminal fear service or support services comprehensively. 4. 2. 2 Services actively provided means the person who owns or permits forbidden the real station (a) (b) provides himself or hires other person or other firm to provide the attention services or support services as mentioned below separate 4. 2. 1 of this Ruling. employment 1 Suai Sdn Bhd owns three closures of condominium consisting of 324 units and allows place those units to tenants.Suai Sdn Bhd provides maintenance services of lift, cleaning services, security services, centralized air coacher and maintenance services of playing fields and car parks. The let of the condominium units is treated as a business line o f Suai Sdn Bhd since maintenance services and support services atomic number 18 comprehensively and actively provided by Suai Sdn Bhd. grapple B Page 2 of 26 INCOME FROM let OF real PROPERTY earth Ruling zero(prenominal) 4/2011 Date of skip 10 process 2011 INLAND REVENUE card MALAYSIA typeface 2 Wahida owns a 4-storey twist consisting of 32 units that jackpot be used as pieces and shop lots.All the units are let appear to some(prenominal) tenants. Wahida hires Ali Enterprise to provide maintenance services of the construction of the build, maintenance of lift and cleaning services of the make and area away(p) the grammatical construction. The allow of the units in the edifice is treated as a business book of facts of Wahida since maintenance services and support services are comprehensively and actively provided by Wahida. display case 3 Yes post Sdn Bhd deals one block of office building consisting of 42 units from Zura Sdn Bhd. All the units are let out to a few tenants.Yes berth Sdn Bhd provides cleaning services of the building and area outside the building, centralized air conditioner, maintenance of car park and security services. The let of the office units is treated as a business theme of Yes office Sdn Bhd since maintenance services and support services are comprehensively and actively provided by Yes Property Sdn Bhd. 4. 3 As long as maintenance services or support services are comprehensively and actively provided in similitude to the real property which is let out, the let is a business ancestor under separate 4(a) of the ITA even though the allow is between related parties. moreover, if term of a contract charged to the tenant is non at arms length groundwork, the Inland Revenue Board Malaysia would adjust the crosscurrental payment accordingly. For the use of goods and services of this Ruling, related parties in relation to (a) (b) (c) individuals, mean twain individuals are related companies, mean both compa nies are related companies a company and an individual, mean one of the parties is in a position to influence or be influenced by the other party, or to control or be controlled by the other party. . 4 picky treatment for permit of a building to an approve multimedia tops(p) Corridor (MSC) status company Under the Income Tax (Industrial Building Allowance) (Approved Multimedia superint mop upent Corridor (MSC) Status Company) Rules 2006 P. U. (A) 202/2006, effective from the socio-economic class of discernment 2006, the let of building in the cope B Page 3 of 26 INCOME FROM LETTING OF accepted PROPERTY Public Ruling no(prenominal) 4/2011 Date of sequel 10 March 2011 INLAND REVENUE BOARD MALAYSIACyberjaya Flagship Zone to an approved MSC status company is regarded as carrying on a business and the income received from it is charged to tax under divide 4(a) of the ITA. The building let out has to be a new building that provides a world-class physical and information infra structure as determined by the Multimedia Development Corporation Sdn Bhd must non have been occupied by any company prior to the yr of opinion 2006 and does non include building for the purpose of living accommodation. 5. Letting of real property as a non-business artificial lake 5. The permit of real property is treated as a non-business seminal fluid and income received from it is charged to tax under separate 4(d) of the ITA if a person lets out the real property without providing maintenance services or support services comprehensively and actively. congresswoman 4 Unggas Property Sdn Bhd lets out one block of office building to a company. Unggas Property Sdn Bhd wholly provides security services. The let of the office building is treated as non-business inception since Unggas Property lonesome(prenominal) provides security services.Unggas Property Sdn Bhd does non provide maintenance services or support services comprehensively. grammatical case 5 Azran Sdn Bhd l ets out a 5-storey building to Aloy Sdn Bhd without providing any maintenance services or support services. The allow of the building is a non-business source since there are no maintenance services or support services provided by Azran Sdn Bhd. Income received from the permit is charged to tax as rental income under dissever 4(d) of the ITA. practice 6 Facts are the said(prenominal) as in example 3 but maintenance services and support services are provided by Zura Property Sdn Bhd.The allow of the office units is treated as a non-business source of Yes Property Sdn Bhd since maintenance services and support services are not provided by Yes Property Sdn Bhd but are provided by Zura Sdn Bhd. write up B Page 4 of 26 INCOME FROM LETTING OF veritable PROPERTY Public Ruling No. 4/2011 Date of incommode 10 March 2011 INLAND REVENUE BOARD MALAYSIA 5. 2 The permit of real property is also treated as a non-business source if a person lets out the real property and maintenance servi ces or support services are passively derived from the ownership of the real property.Income received from the letting of the real property is charged to tax as rental income under divide 4(d) of the ITA. illustration 7 Azrie owns 2 units of flatcar and lets out those units to 2 tenants. The tenants are entitled to use the swimming pool, lawn tennis court and other facilities that are provided in the apartment. All the facilities are provided and watch over by the management corporation of the apartment. Azrie only pays maintenance presents to the management corporation of the apartment. Services enjoyed by the tenants are merely an extension of Azries right as proprietor of the apartment units and are not actively provided by Azrie.Therefore, the letting of the apartment units is a non-business source and the income received from it is charged to tax as rental income under separate 4(d) of the ITA. 6. Commencement date of letting of real property 6. 1 The date of low of le tting of real property treated as a source of rental income under paragraph 4(d) of the ITA is on the date the real property is rented out for the basic time. modeling 8 Nora buys one unit of apartment on 1. 10. 2009. She renovates and pushs the letting of the apartment on 1. 1. 2010. The apartment is only let out on 1. . 2010. The letting of the apartment commences on 1. 7. 2010 i. e on the date it is rented out for the setoff time. 6. 2 The date of commencement of letting of real property treated as a business source under paragraph 4(a) of the ITA is on the date the real property is made available for letting. A real property is made available for letting when the real property is ready to be occupied by tenants and steps to let out the real property have been taken such as advertizement the real property for letting or appointing a real property agent to facilitate the letting.Example 9 Muhibbah Sdn Bhd purchases a 12-storey office building on 1. 1. 2010. The company advert ises the letting of that building on 1. 4. 2010. The Company provides maintenance services of lift, cleaning services of the building and bribe B Page 5 of 26 INCOME FROM LETTING OF square PROPERTY Public Ruling No. 4/2011 Date of replication 10 March 2011 INLAND REVENUE BOARD MALAYSIA area outside the building, maintenance services of car park for that building and centralized air conditioner. The building is made available for letting on 1. 6. 2010 after(prenominal) renovation is completed. The building is only let out on 1. 8. 010. The company closes its notice on 31 December any socio-economic class. The letting of the building commences on 1. 6. 2010 i. e on the date the building is made available for letting. Example 10 Facts are the same as in example 9 but the building is only let out on 1. 1. 2011. The letting of the building commences on 1. 6. 2010 that is on the date the building is available for letting. Therefore write downs incurred in the production of rental income for the class of judgment 2010 are deductible and understructure be carried forward to the division of judgement 2011 (assuming that the company only has this rental business income).However advertisement expenses incurred on 1. 4. 2010 are not allowable since the expenses are incurred to obtain the first tenant. Example 11 Syazril Property Sdn Bhd owns a complex consisting of an office building in scarf out A and a shopping warmheartedness in Block B. The company provides comprehensively and actively maintenance services and support services in relation to the complex. The company advertises the letting of that complex on 1. 6. 2010. The office building in Block A is made available for letting and is let out on the same date i. 1. 7. 2010. Whereas the shopping centre in Block B is made available for letting on 1. 1. 2011 but is only let out on 1. 2. 2011. The company closes its cypher on 31 December every twelvemonth. The letting of the office building commences on 1. 7. 2010. Whereas the letting of the shopping complex commences on 1. 1. 2011 i. e on the date it is made available for letting. Example 12 Kengo Sdn Bhd purchases a 10-storey office building in Kuala Lumpur, a shopping complex in Johor Bahru and 5 units of shop class in Kota Bharu in the stratum 2010.Both buildings in Kuala Lumpur and Johor Bahru are let out and maintenance services and support services are comprehensively and actively provided in relation to those buildings. Whereas the shop marks are let out without maintenance services and support services. The date of advertisement, the date the real properties are made available for letting and the real properties are let out are as follows effect B Page 6 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 Advertisement date 1. . 2010 1. 8. 2010 1. 9. 2010 Date available for letting 1. 9. 2010 1. 11. 2010 1. 11. 2010 Date of letting 1. 12. 2010 1. 1. 2011 1. 2. 2011 INLAND RE VENUE BOARD MALAYSIA Real property Building in Kuala Lumpur Building in Johor Bahru Shop foretokens in Kota Bharu The commencement date of letting of the building is as follows Real properties Rental business paragraph 4(a) Building in Kuala Lumpur Building in Johor Bahru Rental paragraph 4(d) Shop houses in Kota Bharu 7. All real properties grouped as a single source 7. Several real properties which are let out evict be grouped as one source whether as a business source under paragraph 4(a) of the ITA or a nonbusiness source under paragraph 4(d) of the ITA. If a person lets out several real properties in a socio-economic class of judgment and the letting of (a) (b) all real properties is a business source, all the real properties potentiometer be grouped as one business source under paragraph 4(a) of the ITA. all real properties is a non-business source, all the real properties can be grouped as one non-business source under paragraph 4(d) of the ITA. ome of the real propertie s is a business source and some is a nonbusiness source, income from both sources shall be assessed separately. The income from the business source and the nonbusiness source is assessed under paragraphs 4(a) and 4(d) of the ITA respectively. 1. 2. 2011 1. 9. 2010 1. 11. 2010 Date of commencement of letting (c) Issue B Page 7 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA Example 13 AJ Sdn Bhd owns a 4-storey building in Damansara and a 6-storey building in Bangsar.Both buildings are let out since 2008 and the letting of the buildings is treated as a business source under paragraph 4(a) of the ITA. The revenue income, allowable expenses and dandy allowances on the article of piece of furniture in each building for the twelvemonth of opinion 2010 are as follows Real property everlasting(a) income (RM) 60,000 10,000 70,000 permissible expenses (RM) 14,000 12,000 26,000 enceinte allowances (furniture) (RM) 7,000 3,000 10,000 Building in Damansara Building in Bangsar Total The letting of both real properties is a business source.Therefore, both real properties can be grouped as one business source under paragraph 4(a) of the ITA. The statutory income of AJ Sdn Bhd from the business of letting of real property for the division of appraisal 2010 is calculated as follows (RM) uncouth income from rental less(prenominal) Allowable expenses familiarised income Less outstanding allowances (furniture) statutory income from rental Example 14 Margaret owns several real properties which are let out since 2008 and the letting of the real properties is a non-business source under paragraph 4(d) of the ITA.The tax income income and allowable expenses for each real property for the class of appraisal 2010 are as follows 70,000 26,000 44,000 10,000 34,000 Issue B Page 8 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 Gross income (RM) 12,000 9, 000 24,000 1,500 46,500 Allowable expenses (RM) 3,000 11,000 8,000 1,800 23,800 INLAND REVENUE BOARD MALAYSIA Real property Terrace house Apartment Shop house Vacant land Totalstatutory income of Margaret from the letting of real property for the course of assessment 2010 is calculated as follows (RM) Gross income from rental Less Allowable expenses Statutory income from rental Example 15 Theodore Lim buys an office building and a business building in Taman Anggerik, Ampang in August 2009. The purchases of both buildings are financed by a swear contribute. The office building is rented out commencing from 1. 1. 2010 whereas the business building is only rented out on 1. 2. 2011. Income from the letting of both buildings is assessed as a business source under paragraph 4(a) of the ITA.The gross income and interest expense on give for each building for the long time of assessment 2010 and 2011 are as follows Gross income (RM) socio-economic class of assessment 2010 Office buildin g Business building 120,000 family of assessment 2011 120,000 165,000 please expense (RM) Year of assessment 2010 45,000 55,000 Year of assessment 2011 40,000 50,000 46,500 23,800 22,700 Real property Issue B Page 9 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIAIn the year of assessment 2010, the business building has not commenced as a source because no income has been generated yet. As such, the business building and office building cannot be aggregated as one source. Interest expense in relation to the business building amounting to RM55,000 is not allowed a entailment against the gross income from the letting of office building. The statutory income from rent for the year of assessment 2010 is computed as follows (RM) Gross income from rental paragraph 4(a) Less Interest expense Statutory income from rental 120,000 45,000 75,000Note If rental income from office building and business building is as sessed as a non-business source under paragraph 4(d) of the ITA, the same tax treatment applies. In the year of assessment 2011, the business building can be grouped with the office building as one source as the business building constitutes a source once it has generated income. Although the business building is only rented out on 1. 2. 2011, the whole interest expense amounting to RM50,000 is allowed a synthetic thinking since the rental business source for the year of assessment 2011 exists from 1. . 2011. The statutory income from rent for the year of assessment 2011 is computed as follows (RM) Gross income from rental (paragraph 4(a)) Less Interest expense Statutory income from rental 285,000 90,000 195,000 Note If rental income from office building and business building is assessed as a non-business source under paragraph 4(d) of the ITA, interest expenses in respect of the business building has to be set according to the power point the building is let out. Therefore inter est expense in respect of the period from 1. 1. 011 to 31. 1. 2011 is not allowable. Example 16 Facts are the same as in example 13 with an additional information i. e AJ Sdn Bhd owns and lets out a residential house and one unit of apartment. The Issue B Page 10 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA letting of the residential house and the apartment unit is a non-business source since maintenance services or support services are not provided. The company is not an investment holding company.The gross income, allowable expenses and enceinte allowances on the furniture in each building for the year of assessment 2010 are as follows Real property paragraph 4(a) source Gross income (RM) 60,000 10,000 70,000 Gross income (RM) 8,000 6,000 14,000 Allowable expenses (RM) 14,000 12,000 26,000 Allowable expenses (RM) 11,000 4,000 15,000 groovy allowances (furniture) (RM) 7,000 3,000 10,000 Capital all owances (RM) Building in Damansara Building in Bangsar Total Real property paragraph 4(d) source Residential house Apartment Total The letting of buildings in Damansara and Bangsar is a business source.Therefore, those buildings can be grouped as one business source under paragraph 4(a) of the ITA. Whereas the letting of residential house and apartment is a non-business source and can be grouped as one non-business source under paragraph 4(d) of the ITA. The total income of AJ Sdn Bhd for the year of assessment 2010 is computed as follows (RM) (i) Statutory income from rental paragraph 4(a) 70,000 26,000 10,000 (ii) Statutory income from rental paragraph 4(d) 14,000 15,000 Aggregate income/Total income Issue B nil 34,000 Page 11 of 26 34,000INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA The adjust red from non-business source amounting to RM1,000 cannot be deducted against statutory income from busine ss of letting and is not allowed to be carried forward to later(prenominal) age of assessment. 7. 2 If a person has a business source of letting of real property under paragraph 4(a) of the ITA and a business source from other businesses in the same year of assessment, the business source of letting of real property has to be obscure from the other business sources.Example 17 Syarikat MJ Sdn Bhd (SMSB) is carrying on a business of hardware wholesaler. SMSB owns a 4-storey building which is let out and provides maintenance services and support services comprehensively and actively. SMSB also owns a work bench house which is let out without providing maintenance services and support services. Income from letting of the 4storey building qualifies to be assessed as a business source (paragraph 4(a) of the ITA) whereas rental income from the terrace house is assessed as a non-business source (paragraph 4(d) of the ITA) for the year of assessment 2010.The gross income, allowable expe nses and capital allowances on works and machinery for each source of income of SMSB for the year of assessment 2010 are as follows Source of income familiarised income (RM) Adjusted loss (RM) Capital allowances (plant and machinery) (RM) Business of wholesale Letting of 4-storey building (paragraph 4(a) of the ITA) Letting of terrace house (paragraph 4(d) of the ITA) 100,000 10,000 15,000 5,000 3,000 Issue B Page 12 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIAThe total income of SMSB for the year of assessment 2010 is computed as follows (RM) (RM) (i) Business of wholesale (paragraph 4(a) of the ITA) Adjusted income Less Capital allowances (plant and machinery) Statutory income (ii) Letting of real property (paragraph 4(a) of the ITA) Adjusted loss Capital allowances (plant and machinery) Statutory income (iii) Letting of real property (paragraph 4(d) of the ITA) Adjusted loss Statutory income Aggr egate income Less Current year loss Total income (3,000) Nil 85,000 10,000 75,000 (10,000) 5,000 Nil 100,000 15,000 85,000Capital Allowances of RM5,000 in relation to the letting of real property under paragraph 4(a) of the ITA which cannot be absorbed in the year of assessment 2010 is carried forward to subsequent days of assessment. Adjusted loss from the letting of real property under paragraph 4(d) of the ITA amounting to RM3,000 cannot be deducted against the aggregate income and cannot be carried forward to subsequent years of assessment. 8. Expense relating to income of letting of real property 8. An expense wholly and exclusively incurred in the production of income under subsection 33(1) of the ITA and which does not conk under subsection 39(1) of the ITA is allowed as a deduction from income of business of letting of real property charged to tax under paragraph 4(a) of the ITA. Issue B Page 13 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Is sue 10 March 2011 INLAND REVENUE BOARD MALAYSIA 8. 2Expense which is allowed a deduction from income of letting of real property charged to tax under paragraph 4(d) of the ITA is the control expense that is wholly and exclusively incurred in the production of income under subsection 33(1) of the ITA. Examples of direct expenses which are deductible from gross income of letting of real property are as follows (a) perspicacity and quit rent Annual assessment paid to the local authority and quit rent paid to the land office. b) Interest on give Interest paid on loan taken to finance the purchase of real property which is rented out. (c) Fire redress premium Fire insurance premium paid in relation to fire insurance policy taken on the real property which is rented out. (d) Expense on rent collection Rent collection fee and legal expense incurred to enforce rent collection. (e) Expense on rent renewal Expense incurred to renew tenancy or to remove tenant. (f) Expense on repair Exp ense on ordinary repair to maintain the real property in its existing state. 8. initial expense Initial expense is not allowed a deduction from income of letting of real property assessed under paragraph 4(a) or paragraph 4(d) of the ITA since that expense is incurred to create a source of rental income and not incurred in the production of rental income. Examples of such expense are cost to obtain the first tenant such as advertising cost, legal cost to prepare rental agreement, seal of approval duty and commission for real property agent. Example 18 Sarah Property Sdn Bhd buys an office building on 1. 9. 2009 to be let out.The company incurs RM600 to advertise the letting of the building on 1. 1. 2010 and legal cost amounting to RM1,800 paid to Reganathan & Co on 12. 2. 2010 for preparing rental agreement. The building is let out commencing from Issue B Page 14 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MAL AYSIA 1. 3. 2010 without providing maintenance services or support services. The letting of the office building is a non-business source and the rental income is rateable under paragraph 4(d) of the ITA.The advertising cost amounting to RM600 and the legal cost of RM1,800 are not allowed a deduction from income of letting of office building for the year of assessment 2010 as the expenses are incurred to obtain the first tenant. Example 19 Facts are the same as in example 18 move out the building is made available for letting on 1. 2. 2010 and Sarah Property Sdn Bhd provides maintenance services of lift, security services, cleaning services and maintenance of centralized air conditioner.The letting of the office building is a business source and the rental income is assessable under paragraph 4(a) of the ITA. The advertising cost amounting to RM600 and the legal cost of RM1,800 are not allowed a deduction from income of letting of office building for the year of assessment 2010 as the expenses are incurred to obtain the first tenant. 8. 4 Expenses during a period the real property is not rented out 8. 4. 1 Expenses incurred in relation to a real property during a period it is not rented out are not allowable in astute the modify income from the letting of the real property.However, if the period the real property is not rented out occurs after it has been let out and it is clear that it is ready to be let out, then expenses during that period are allowable subject to subsections 33(1) and 39(1) of the ITA. Example 20 Farhan lets out a double-storey terrace house on 1. 1. 2010 for RM1,000 a month. On 1. 9. 2010 the tenant moves out and the house is let out to another tenant on 1. 12. 2010 for the same amount of rental. Assessment for a year is RM500 while quit rent is RM50 a year.The letting of the house is a non-business source and the rental income is taxable under paragraph 4(d) of the ITA. The adjusted income from rent for the year of assessment 2010 i s computed as follows (RM) Rental income (gross) stop of 1. 1. 2010 31. 8. 2010 (8 x RM1,000) Period of 1. 12. 2010 31. 12. 2010 8,000 1,000 9,000 (RM) Issue B Page 15 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA Less Assessment Quit rent Adjusted income from rent 00 50 550 8,450 As a concession, assessment and quit rent expenses are allowable in mount even though the house is not rented out for the period of 1. 9. 2010 to 30. 11. 2010. 8. 4. 2 If the letting ceases temporarily due to the following circumstances (a) (b) (c) (d) repair or renovation of the building absence of tenants for a period of 2 years after termination of tenancy legal injuction or other appointed sanction or other circumstances beyond the control of the person who lets out the real property xpenses for the period the real property is not let out are allowable provided that the real property is maintain in good condition and i s ready to be let out. Example 21 Sinar Ria Sdn Bhd owns a 4-storey building which is let out to Deena Holding Bhd since 2008. The letting of the real property is treated as a business source. Sinar Ria Sdn Bhd closes its account on 31 December every year. On 31. 12. 2010, the letting of the building ends. The company makes an effort to obtain a new tenant but only manages to let out the building to another company on 1. 4. 013 (absence of tenants for a period of 27 months). Expenses during the absence of tenants deductible. Therefore the expenses for 31. 12. 2012 are allowable. However the 1. 1. 2013 to 31. 3. 2013 are not allowed a exceeds the specified period of 2 years. for a period of 2 years are the period of 1. 1. 2011 to expenses for the period of deduction since that period Issue B Page 16 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA Example 22 Syarafina owns 2 houses which are let out since 20 09.The rental income is assessed as a non-business source under paragraph 4(d) of the ITA. The gross income and allowable expenses for each real property for the years of assessment 2010 and 2011 are as follows Gross income (RM) Assessment , quit rent and interest expense (RM) Year of assessment 2010 3,550 2,500 Year of assessment 2011 3,550 2,500 Real property Year of assessment 2010 kinfolk I preindication II 1 Year of assessment 2011 12,000 -1 12,000 9,600 House II was not rented out as the local authorities had given up an instruction to vacate the house from 1. 1. 2011 to 31. 12. 011 so that the hill slopes could be monitored after a landslide had occurred at a nearby area. The house was rented out again on 1. 1. 2012. The statutory income from rent for the year of assessment 2010 is computed as follows (RM) Rental income (paragraph 4(d)) Less Allowable expenses Statutory income from rental 21,600 6,050 15,550 The statutory income from rent for the year of assessment 2011 is computed as follows (RM) Rental income (paragraph 4(d)) Less Allowable expenses Statutory income from rental Issue B 12,000 6,050 5,950 Page 17 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. /2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA 8. 5 Expenses originally real property is let out Expenses in respect of a period before the real property is let out is not deductible and have to be adjusted proportionately. Example 23 Michael lets out a shop house commencing from 1. 5. 2010 for RM2,500 a month. He pays annual assessment amounting to RM1,200, annual quit rent amounting to RM120 and fire insurance premium of RM600 for year 2010. The letting of the shop house is a non-business source and the rental income is taxable under paragraph 4(d) of the ITA.The adjusted income from rent for the year of assessment 2010 is computed as follows (RM) Rental income (gross) Period of 1. 5. 2010 31. 12. 2010 (8 x RM2,500) Less Expenses for period of 1. 5. 2010 31. 12. 2010 Assessment (8/12 x RM1,200) Quit rent (8/12 x RM120) Fire insurance premium (8/12 x RM600) Adjusted income from rent 8. 6 parturiency on interest expense If a person takes a loan for business purposes and to finance the purchase of real property that is let out, interest expense allowable against the business source has to be restricted under subsection 33(2) of the ITA.Interest expense on loan to finance the purchase of real property that is let out is deductible from rental income. Example 24 Azalea Property Sdn Bhd, a property development company closes its account on 31 December every year. On 9. 6. 2009 the company takes a loan of RM2 million from a bank for business purposes and to finance the purchase of a bungalow costing RM450,000. The company films an interest expense of RM120,000 in the bring in and loss account for the year assessment 800 80 400 1,280 18,720 20,000 Issue B Page 18 of 26INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Iss ue 10 March 2011 INLAND REVENUE BOARD MALAYSIA 2010. The bungalow is let out commencing from 1. 1. 2010 and income from letting of the bungalow is taxable under paragraph 4(d) of the ITA. Interest restriction is computed as follow RM450,000 - x RM 120,000 RM2,000,000 = RM27,000 The amount of RM27,000 is added back in arriving at the adjusted income from business of the company. However the company can claim interest expense of RM27,000 against income from the letting of the bungalow.Note Since the cost of the bungalow does not exceed RM500,000, interest restriction under subsection 33(2) of the ITA is calculated based on the end-of-year balance in the balance sheets. 9. Rental income received in advance 9. 1 9. 2 Rental received in advance is treated as gross income for the basis period in which it is received. Where rental income received in advance is assessed in the basis period in which it is received, any expense incurred in relation to that rental income after that basis perio d is allowable in the basis period in which the income is assessed.Therefore amendment has to be done to the assessment for the year of assessment concerned. Example 25 Kelvin Ong lets out a double-storey terrace house for the period of 1. 1. 2010 to 31. 12. 2012. Rental for the three years amounting to RM36,000 is received in the year 2010. Expenses incurred on that house are as follows Year stop Income/expenses 31. 12. 2010 (RM) Rental income Expenses 36,000 4,000 31. 12. 2011 (RM) 5,000 31. 12. 2012 (RM) 3,000 Issue B Page 19 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIAThe adjusted income from rent for the year of assessment 2010 is computed as follows Year of Assessment 2010 (RM) Rental income Less Expenses Adjusted income Less Expenses for a period ending 31. 12. 2011 revise adjusted income Less Expenses for a period ending 31. 12. 2012 Amended adjusted income 36,000 4,000 32,000 5,000 27,000 3,0 00 24,000 Expenses incurred in 2011 and 2012 are allowable against the rental income which is assessed in the year of assessment 2010. Therefore the assessment for the year of assessment 2010 has to be revise when the expenses are incurred in 2011 and 2012. . 3 In the case where there is more than one real property and rental income from one or several real properties is received in advance, expenses related to that source is deductible from other rental income in the basis period in which the expenses are incurred. This treatment is only applicable to rental income from real properties which are assessed as one source. Example 26 Fortune Sdn Bhd lets out 2 buildings commencing from 1. 1. 2010. The company receives rental for 3 years amounting to RM300,000 in 2010 in relation to the first building.The second building is let out for RM10,000 a month. The letting of both buildings is treated as a rental source under paragraph 4(d) of the ITA. Income received and the allowable expense s for the building are as follows Issue B Page 20 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA Year ended First building Income (RM) Expenses (RM) 20,000 15,000 18,000 Second building Income (RM) 120,000 120,000 120,000 Expenses (RM) 30,000 30,000 30,000 31. 12. 2010 31. 12. 011 31. 12. 2012 300,000 The adjusted income from rental for the years of assessment 2010 to 2012 is computed as follows Year of assessment 2010 (RM) Rental income Less Expenses Adjusted Income 420,000 50,000 370,000 2011 (RM) 120,000 45,000 75,000 2012 (RM) 120,000 48,000 72,000 Example 27 Facts are the same as in example 26 but the letting of the first building is treated as a business source under paragraph 4(a) of the ITA whereas the letting of the second building is treated as non-business source under paragraph 4(d) of the ITA.The adjusted income from rental for the years of assessment 2010 to 2012 is computed as follows Issu e B Page 21 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA Rental source under paragraph 4(a) of the ITA Year of assessment 2010 (RM) Rental income Less Expenses Adjusted income Less Expenses for a period ending 31. 12. 2011 Amended adjusted income Less Expenses for a period ending 31. 12. 2012 Amended adjusted income 300,000 20,000 280,000 15,000 265,000 18,000 247,000Expenses incurred in the years of assessment 2011 and 2012 are allowed a deduction from rental income which is assessed in the year of assessment 2010. Therefore the assessment for the year of assessment 2010 has to be amended when the expenses are incurred in 2011 and 2012. Rental source under paragraph 4(d) of the ITA Year of assessment 2010 (RM) Rental income Less Expenses Adjusted income 120,000 30,000 90,000 2011 (RM) 120,000 30,000 90,000 2012 (RM) 120,000 30,000 90,000 10. Capital allowances 10. If the letting of real property is tre ated as a business source, capital allowances can be claimed on capital disbursal incurred on plant and machinery. The provisions in Schedule 3 of the ITA relating to capital allowances shall apply to the business of letting of real property. Issue B Page 22 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA 10. 2 If the letting of real property is treated as a business source and the letting of real property ceases temporarily due to the circumstances mentioned in paragraph 8. . 2 of this Ruling, capital allowances can still be claimed in respect of the period the real property is not let out provided the real property is maintained in good condition and is made available for letting. Example 28 Saravanan Sdn Bhd let out a shop lots building since 2008. The letting is treated as business source. On 1. 4. 2010 the building is repaired and cannot be occupied until 31. 5. 2010. The building is only let out aga in on 1. 6. 2010. Capital allowances claimed for the year of assessment 2010 is RM30,000. eventide though the letting of shop lot building ceases from 1. . 2010 to 31. 5. 2010, the whole amount of capital allowances of RM30,000 can be claimed in the year of assessment 2010 since the letting ceases temporarily due to the repair of the building. Example 29 Harris Property Sdn Bhd owns a 5-storey building which is let out to Fetty Holding Bhd since 2007. The letting of the real property is treated as business source. Harris Property Sdn Bhd closes its account on 31 December every year. On 1. 3. 2010, the tenancy of the building ceases and Fetty Holding Bhd does not renew the tenancy. The building is left vacant until 31. 2. 2011 despite the efforts of the company to dumbfound a new tenant (including advertising the letting in several newspapers). Harris Property Sdn Bhd only manages to let out the building to another company on 1. 1. 2012 (absence of tenants for a period of 22 months ). Capital allowances have been claimed since 2007. purge though the letting of building ceases from 1. 3. 2010 to 31. 12. 2011, capital allowances can be claimed in the years of assessment 2010 and 2011 since the letting ceases temporarily due to the absence of tenants for a period of less than 2 years.Example 30 Facts are the same as in example 29 except that the building is not let out until 31. 3. 2012. Harris Property Sdn Bhd only manages to let out the building to another company on 1. 4. 2012 (absence of tenants for a period of 25 months). Harris Property Sdn Bhd is entitled to claim capital allowances for the years of assessment 2010 and 2011. Harris Property Sdn Bhd is also bailable to claim capital allowance for the year of assessment 2012 if the letting of the building is treated as a business source for that year of assessment.Issue B Page 23 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA 1 0. 3 If there is a heighten in tax treatment of the letting of a real property from a business source under paragraph 4(a) of the ITA to a non-business source under paragraph 4(d) of the ITA in the basis period for a year of assessment, the person who lets out the real property has two sources of income from the same real property in that basis period, i. a business source under paragraph 4(a) of the ITA and a non-business source under paragraph 4(d) of the ITA. If as a result of the change 10. 3. 1 a company becomes an investment holding company (IHC), the rental income (business source) would be assessed as income under paragraph 4(d) of the ITA. Therefore, the company is not entitled to claim for capital allowances on plant and machinery since they are not used for the purpose of a business at the end of the basis period for that year of assessment. 0. 3. 2 a company does not become an IHC, the company still derives rental income under paragraph 4(a) and 4(d) of the ITA in respe ct of the real property. Even though the company is not an IHC, the company would not be entitled to claim for capital allowances on plant and machinery since they are not used for the purpose of a business at the end of the basis period for that year of assessment. Note The determination of whether a company is an IHC or not is explained in the Public Ruling No. /2011 (Investment Holding Company). 10. 4 If a company has a business source and a rental source (not necessary to determine whether an IHC or not since its main activity is not the holding of investments) and there is a change in tax treatment of the letting of a real property from a business source under paragraph 4(a) of the ITA to a nonbusiness source under paragraph 4(d) of the ITA in the basis period for a year of assessment, the company still derives rental income under paragraph 4(a) and 4(d) of the ITA.The company would not be entitled to claim for capital allowances on plant and machinery since they are not used f or the purpose of a business at the end of the basis period for that year of assessment. Note In the case where capital allowances cannot be claimed, the residual expenditure of the plant and machinery forget be decreased by notional allowances for that year of assessment and subsequent years of assessment. Example 31 Menara Sdn Bhd owns an office building consisting of 20 units and lets out all the units in full furnished since 2006.The letting is treated as a business source since maintenance services and support services are comprehensively and actively provided by Menara Sdn Bhd. Capital allowance have been claimed on the furnitures in the office building. Issue B Page 24 of 26 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA However from June 2010, Menara Sdn Bhd did not provide maintenance services and support services.Menara Sdn Bhd closes its account on 31 December every year. Menara Sdn Bhd is not ent itled to claim capital allowances on the furnitures in the office building for the year of assessment 2010 since the furnitures are not used for the purpose of a business at the end of the basis period for that year of assessment. Notional allowances will be deducted to arrive at the residual expenditure of the furnitures for the year of assessment 2010 and subsequent years of assessment. 0. 5 If more than one real property is let out and there is a change in tax treatment of any of the real properties from a business source under paragraph 4(a) of the ITA to a non-business source under paragraph 4(d) of the ITA in the basis period for a year of assessment, capital allowances can be claimed on plant and machinery for the real property which remains as a business source under paragraph 4(a) of the ITA.If there is a change in tax treatment of the letting of a real property from a non-business source under paragraph 4(d) of the ITA to a business source under paragraph 4(a) of the ITA i n the basis period for a year of assessment, the person who lets out the real property has two sources of income from the same real property in that basis period, i. e a non-business source under paragraph 4(d) of the ITA and a business source under paragraph 4(a) of the ITA.Capital allowances can be claimed on plant and machinery in the real property since they are used for the purpose of a business at the end of the basis period for that year of assessment. For the purpose of cipher capital allowances, the qualifying expenditure for the plant and machinery is the market value on the first day they are used in the business. Example 32 Teguh Sdn Bhd closes its account on 31 December every year and its main activity is the holding of investments. The company owns and lets out a fullyfurnished 10-storey office building.The letting is treated as a rental source under paragraph 4(d) of the ITA. From 1. 3. 2010 the company provides maintenance services and support services comprehensive ly and actively. The company is not an IHC in the year of assessment 2010 since the income from holding of investment is less than 80% of its gross income. Teguh Sdn Bhd is entitled to claim capital allowances on the furnitures in the office building for the year of assessment 2010 since they are used for the purpose of a business at the end of the basis period for that year of assessment.For the purpose of computing capital allowances for the year of assessment 2010, the qualifying expenditure for the furnitures is the market value on 1. 3. 2010. No initial allowance will be given. Issue B Page 25 of 26 10. 6 INCOME FROM LETTING OF REAL PROPERTY Public Ruling No. 4/2011 Date of Issue 10 March 2011 INLAND REVENUE BOARD MALAYSIA 11. Industrial building allowance 11. 1 If a person owns a building lets out the building and the building is in used as an industrial building, industrial building allowance can be claimed by the owner of the building even though the letting is a non-busines s source.If the letting of real property is given a special treatment as explained in paragraph 4. 4 of this Ruling, the owner of the building is eligible to claim industrial building allowances on the qualifying building expenditure incurred. 11. 2 12. Replacement cost of furnishings If the letting of a furnished real property is treated as non-business source, cost of replacing furnishings such as furniture and air conditioner can be claimed as a deduction from gross income from that letting. 13.Letting of part of building used in the business If a building, whether owned or rented, is used for business purposes and part of the building is let out, the rent arising from the letting is treated as part of income from the existing business source. 14. Effective date This Ruling is effective for the year of assessment 2011 and subsequent years of assessment. This Ruling supersedes Public Ruling No. 1/2004 issued on 30 June 2004. Director General of Inland Revenue, Inland Revenue Board Malaysia. Issue B Page 26 of 26