Rental income is generally regarded as a non-business source of income which is assessed under Section 4(d) of the Income Tax Act, 1967 ITA. In the case where rent is a section 4(d) source, rent from each property is treated as a separate source of income. However, as a concession, in computing the adjusted income from rent, the properties of the person can be grouped into the following categories: •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.
Furthermore, rental income can also be assessed as Section 4 (a) Business Income under certain situations. This is evident in The case of Per Lord Diplock in the American Leaf Blending Co Sdn Bhd v DGIR (1950-1985) MTSC 28 ( Privy Council ) is the issue of whether rent is assessable under Section 4(a) or Section 4(d) of Income Tax Act 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. 1. 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 complex, then the rental income from these premises can be assessed as business income even if the company is only renting out one premise. This is supported by the case of American Leaf Blending Co. Sdn. Bhd v Director General of Inland Revenue where it was held that an individual who receives rental income may not necessarily be doing a business.
However, a company is created with the aim of making a profit for its shareholders and anything that a company does with its assets with the purpose of making a profit would amount to carrying on a business even though it is not the core operation of the company. 2. Active ancillary or support services are being provided to the tenants by the owner. This term specifically applies to non-company taxpayers without regard to the number of units of property they rent out.
The taxpayer who is the owner of the premise is required to actively provide services such as security guard, air conditioning system, and supply of hot water, escalator, lift, recreational facilities and cleaning and maintenance of common property. It is important that these services are procured, managed or supplied by the taxpayer and not passively or incidentally derived from the lease of the property where the management corporation of the premise provides such services and not the owner.
In the event that rental income is assessed as 4(a) business income, it will be aggregated for all properties as one source of income. Capital allowance or industrial building allowance will be given to be set off against the total rental income from all premises. In the case of River Estates Sdn Bhd v Director-General of Inland Revenue it was held that ‘The statute recognises the existence of a source consisting of a business and the situation that a taxpayer can have more than one source consisting of a business’.
It establishes that a business can have more than one source of income that will be grouped together and will be given capital allowance. Expenses that are incurred wholly and exclusively can also be deducted from the income. If a loss is sustained in the current year of assessment, it can be carried forward to the next year of assessment to be set off from that year’s income or be set off against other income in the current year if there are any. The date of commencement will be the date the premise is available for letting.