In our last article, we talked about some of the costs involved in becoming a landlord which is primarily about prepping your property and yourself for the next tenancy. If you are new to this, read our “Landlord 101: 5 Questions First-Time Landlords Should Ask”. In this article, we will talk about the expenses that are part of your contributions to the country - the taxes.
When you own a property in Malaysia, you are obligated to pay Land Tax, which comprises quit rent (or parcel rent) and assessment tax. These charges are a form of tax levied against all alienated land in the country and are mandatory for homeowners. When you’re paying the land tax, you’re doing yourself a favor as you will be entitled to some deductions in rental income tax, which will be further elaborated later on.
For many landlords, rental income from residential properties is often mistaken as an investment, thus wrongly assuming that tax is not applicable. In reality, rental income is taxable by the LHDN as generating profit from the property means that you have to pay a certain amount of tax. Therefore, similar to Land Tax, you have to pay your Rental Income Tax. In fact, failure to declare your rental income is counted as an offense.
But how do you determine the rental income tax and land tax for your property? Continue reading to understand how Land Tax and Rental Income Tax work so you can avoid being in trouble when the tax season comes knocking on your door!
If you’re falling behind on the payments of Land Tax, your local government will be in charge of implementing the law. According to Sections 147 and 148 of the Local Government Act 1976, any unpaid tax is considered "arrears" (outstanding balance).
147 (1) If any sum payable in respect of any rate remains unpaid at the end of February or August, as the case may be, the owner or owners shall be liable to pay the same together with such fee as the local authority may fix from time to time.
148. (1) For the recovery of an arrear the local authority may… seize by virtue thereof any movable property, belonging to the owner or occupier liable to pay the same, which is found within the local authority area and may also seize any
movable property, to whomsoever belonging,
148. (2) The warrant shall be executed by an officer of the local authority who shall make an inventory of the property attached thereunder…
First, a payment notice will be given. If you do not pay, you will most likely face a penalty charge on your arrears. Then, an arrest warrant may be issued if you still do not pay the penalty and the original tax. The Council can then seize your things and charge you an extra 10% fee for the warrant.
Rental Income Tax
Income Tax Act 1967 section 113 imposes penalties for failure to declare your rental income.
According to Section 113 of the Income Tax Act:
(1) Any person who—
(a) makes an incorrect return by omitting or understating any income of which he is required by this Act to make a return on behalf of himself or another person; or
(b) gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person, shall...be guilty of an offence and shall, on conviction, be liable to a fine of not less than one thousand ringgit and not more than ten thousand ringgit and shall pay a special penalty of double the amount of tax which has been undercharged
To reiterate, you’ll be fined anywhere between RM1,000-RM10,000, on top of paying twice the amount of tax that you had failed to pay if you don’t declare the accurate amount of income you’re receiving. If you’re going to have pay double of what you intend to skip, might as well not skip at all!
In Malaysia, income (including rental income) is taxed at a progressive rate that ranges from 0% - 30%. After subtracting the permitted incurred expenses, rental revenue is calculated on a net basis, which results in the final rental earnings amount. We will elaborate further on this so keep reading.
So whether it is rental income tax or land tax, it’s important for landlords to keep up with these properties related taxes as they are strictly regulated by Malaysia’s law.
How to Calculate Land Tax
Okay, so before we delve into the income tax, there are other payments that play important roles in the charges related to properties. These taxes are Quit Rent and Assessment Tax, famously known as 'cukai tanah' and ‘cukai taksiran’ respectively.
1. Quit rent (Cukai Tanah)
What is it?
It is a land tax imposed by the different state governments on the owners of qualified properties. Owners of the property would be billed annually by the state government's Land Office or Pejabat Tanah Dan Galian (PTG). For as long as you own the property, you'll have to pay your annual quit rent, which is calculated per square foot (PSF).
You can check your quit rent status and pay it online. If your property is in Kuala Lumpur, log onto the PTGWP website here.
How is Quit Rent Calculated?
It is calculated by multiplying the size of an owned property in square foot (sq. ft.) by a fixed rental rate. Landed properties in Kuala Lumpur are often taxed at the rate of RM0.035 per square foot.
For example, if the size of your property in KL is 2,300 sq. ft., your quit rent would be RM80.50. Here’s how it is calculated:
Square foot of property x Price per square foot = Quit rent
2,300 sq ft x RM0.035 psf = RM80.50
As the rates vary across different states, make sure to verify with your local land office to see your state's exact rate.
When it comes to land assets, this system would work perfectly. But how do you calculate the quit rent for stratified properties like condominiums, flats, and townhouses?
Introducing… the parcel rent (a.k.a cukai petak)!
2. Parcel rent (Cukai Petak)
In the past, the quit rent for stratified properties was traditionally charged to the Joint Management Bodies (JMB), who would then split it amongst the parcel owners and bill it to them individually, along with their maintenance expenses.
For example, if an apartment block consists of 10 parcel units and is situated on top of a 5,000 sq. ft. plot of land with the quit rent at the rate of RM0.05 PSF, each owner would have to pay RM25 annually as quit rent.
Square foot of property x Price per sq. ft.
Number of parcel unit
= Quit rent
So, 5,000 sq. ft. x RM0.05 psf = RM25.
What is it?
In 2018, a new land tax was created in Selangor for strata properties thus, quit rent was replaced with the parcel rent. Under the parcel rent system, each parcel owner would be charged for the total square footage of the building, instead of being taxed for a fraction of their quit rent.
How is Parcel Rent Calculated?
Based on the previous example, each parcel owner, therefore, would have to pay the entire amount of RM250 annual quit rent to the Land Office, which is now 25x more than the previous one.
Justification for the change
To facilitate the transfer of ownership of strata properties, the previous method was replaced with the parcel rent. If the Land Office records show that the other parcel owners have not paid their quit rent, it used to be extremely difficult for other parcel owners.
The new parcel rent system allows the Land Office to monitor individual defaulters, and this would not impede the process of any parcel owners who intend to sell it or transfer ownership.
As a result, Kuala Lumpur has also introduced the parcel rent system in 2020.
3. Assessment Tax (Cukai Taksiran)
What is it?
As discussed before, quit rent is an annual land tax imposed on private properties while parcel rent is its equivalent for stratified properties, and both are to be paid to the state authority. On the other hand, Assessment Tax is collected by local authorities to pay for the construction and upkeep of public infrastructure. This includes:
- Cleaning and maintenance of public parks
- Garbage collection
- Public infrastructure construction and upkeep, among other things
Similar to quit rent / parcel rent, all residential and commercial property owners must pay assessment tax as long as you own a property, regardless of whether it is inhabited or not.
Fortunately, if your property is inhabited, you can apply to your local government for a refund and remission rate. However, you must notify the local authorities within seven days of the vacancy date.
How is Assessment Tax Calculated?
Assessment tax may be calculated using your property's estimated annual rental value. Depending on the type and size of your house, the annual rental value of residential property ranges from 2% – 7%. So, between a low-cost apartment and a large semi-detached house, the former is charged less than the latter.
Take this as an example. The monthly rent of your landed double-storey semi-detached house is RM 5,000. Therefore, the annual rental would be RM60,000.
So, let’s say, the rate for your property is 4%. Thus, the amount you need to pay annually to the local council is RM2,400. Here’s how to calculate it:
4% x RM60,000
However, they collect assessment rates twice a year, so each payment would be RM1,200.
But what if your property is a low-cost apartment and the monthly rental is only RM1,000? In that case, your annual rental would be RM1,000 x 12 = RM12,000. With the rate of 2% for low-cost properties, you would be paying a total of RM240 annually, or RM120 twice a year.
How to Calculate Rental Income Tax
Firstly, let's start off by determining if you are an eligible taxpayer. In Malaysia, you must pay income taxes if you:
- Your income is above RM34,000 per annum (after EPF deductions) or RM2,833.33 per month (after EPF deductions); or alternatively
- Your income is above RM38,202.25 per annum (before EPF deductions) or RM3,183.52 per month (before EPF deductions).
Secondly, your tax rate. Malaysians pay tax at a progressive rate, which means that if your income rises, your tax will rise as well. As a result, you will be charged based on the money you generate from the following:
- Profits from businesses
- Profits from employments
- Dividends, interests and discounts
- Royalties, premiums and rent
The current tax rate as of 2021 starts from 0% and goes all the way up to 30%.
Tax Incentives: Deductible expenses
According to LHDN, landlords are eligible for deductible expenses. The following are the expenses that can be deducted from rental income:
- Expenses related to ordinary repairs to help maintain the property in its existing state.
- Fire/burglary insurance
- Quit rent/parcel rent and assessment tax
- Interest on home loan
- Expenses incurred on rent collection and renewal
To claim these costs, you are required to have a legally binding tenancy agreement as well as original receipts for the expenses, so never misplace or lose these important documents!
Net rental income calculation
Now that you have made it this far, you are more likely to understand better the preceding steps. With all that said, now let’s take a look at how to calculate your rental income along with an example:
- You own a beautiful landed house and turned it into a rental property. You rented it out to a tenant for a period of one year (12 months), and with a monthly rent of RM3,000. So your gross rental income would be RM36,000.
- Let’s say that the property’s annual assessment tax is RM1,400, while the quit rent is RM100.
- Unfortunately, you found out later that your tenant caused some damages the property and to fix it, the repairs cost amount to a total of RM5,000.
In this case, your net rental income would be RM29,500 by this calculation:
Gross Rental income - Permitted expenses (Assessment Tax + Quit Rent + Repairs Cost)
= Net rental income
(RM3,000 x 12) - (RM1,400 + RM100 + RM5,000)
= RM36,000 - RM6,500
Owning and renting out homes may look simple at first, but the calculations involved when it comes to paying the taxes get increasingly complicated as you go further into the specifics. So now that you know that, among other costs involved in becoming a landlord are Land Tax (quit rent/parcel rent) and Rental Income Tax, and how to calculate these taxes, you are one step closer to becoming a landlord!
While investing in real estate can help you increase your financial stability and move toward financial independence, it comes with obligations, such as finding an agent and acquiring essential maintenance services. Not to mention securing suitable tenants. With all the tasks piling up, why don’t you get someone to help you?
You can start with Instahome! We can advise you on matters related to your rental properties, while we take care of finding you good tenants and services needed for your properties.