Contrary to popular belief, there are very limited situations that rental income derived from letting of properties can be taxed as a business source.
According to the Inland Revenue Board’s (IRB) Public Ruling (PR) 4/2011, 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 Income Tax Act (ITA) IF maintenance services or support services are provided in relation to the real property.
The PR 4/2011 goes on to explain that maintenance services or support services should be COMPREHENSIVELY and ACTIVELY provided.Maintenance services or support services comprehensively provided means services which include:
- doing generally all things necessary (eg. cleaning services or repairs) for the maintenance and management of the real property such as the structural elements of the building, stairways, fire escapes, entrances and exits, lobbies, corridors, lifts/escalators,compounds, drains, water tanks, sewers, pipes, wires, cables orother fixtures and fittings; and
- doing generally all things necessary for the maintenance and management of the exterior parts of the real property such as playing fields, recreational areas, driveways, car parks, open spaces, landscape areas, walls and fences, exterior lighting or other external fixtures and fittings; or
If a person only provides security services or other facilities, that person is NOT providing maintenance services or support services comprehensively.
Services actively provided means the person who owns or lets out the real property:
- provides himself; or
- hires another person or another firm to provide the maintenance services or support services as mentioned above.
From the above, unless a property investor owns a whole building, then the definition of ‘comprehensively and actively’ providing maintenance services or support services clearly disqualifies property investors who invest in individual, scattered units of properties from treating rental income as a business source. In the latter scenario, the rental income received will be treated as a non-business source.
What happens if rental income cannot be treated as a business source? Well, rental income as a business source has the following advantages:
- You are allowed to claim capital allowances on the capital expenditure employed to generate the rental income from your properties, eg. furniture and fittings, electrical appliances and equipment, instead of claiming them as a deduction on a replacement basis;
- Any current year shortfall of income over expenses (ie. losses) can be utilised to set off against other aggregate sources of income. Any unabosorbed losses can then be carried forward to future Years of Assessment to be utilised against the future years’ all sources of business income;
- In the case of a company, the tax treatment of permitted expenses as defined by Section 60F of the Income Tax Act 1967 (ITA 1967) will not apply, which means that the company will be eligible to claim all expenses wholly and exclusively incurred in the production of the company’s income for the year. Otherwise, a deduction for permitted expenses with regard to an investment holding company as defined by the ITA 1967, is given for only a proportion of specified expenses including directors’ fees, wages and salaries, management fees and various other professional fees as well as rent and expenses of maintaining an office. In addition, the proportion can never exceed 5% of the gross income from dividends, interest and rent which is chargeable to tax.