Special deduction on rental discounts given to tenants

Special deduction on rental discounts given to tenants

As highlighted in earlier tax alerts, it has been proposed that a special deduction be given to property owners who provide at least 30% rental discounts to tenants (see Special Tax Alert No. 6/2020, Special Tax Alert No. 9/2020, Take 5: COVID-19: Short-term Economic Recovery Plan, Tax Alert No. 22/2020, Special Tax Alert No. 1/2021 and Special Tax Alert No. 4/2021). The deduction applies to rental of premises for business premises only.

To legislate the proposals, the following Rules were gazetted on 8 September 2021:

•       Income Tax (Special Deduction for Reduction of Rental to a Small and Medium Enterprise) Rules 2021 [P.U.(A) 353/2021]

•       Income Tax (Special Deduction for Reduction of Rental to a Tenant other than a Small and Medium Enterprise) Rules 2021 [P.U.(A) 354/2021]

The Rules provide that in ascertaining the adjusted income of a landlord from his rental income under Paragraph 4(a) or 4(d) of the Income Tax Act 1967 (ITA) in the basis period for a YA, a deduction shall be allowed equivalent to the total amount of reduction in rental given. The reduction must not be less than 30% of the original rental amount for each qualifying month under the existing tenancy agreement for the business premise. 

The term “business premise” has been defined in the Rules to mean premises used by a tenant only for the purpose of his business, including bazaar lots, stalls, vehicle parks, storage warehouses or any other place used only for business purposes.

To qualify for the deduction, the landlord is required to retain:

•       The tenancy agreement which has been stamped under the Stamp Act 1949

•       A separate statement of income in relation to the reduced rental income for the qualifying months

•       Confirmations from both parties on the offer and acceptance of the reduced rental amount 

The Rules also provide that the landlord remains eligible for the deduction in cases where the rental for the qualifying months have been paid in advance, on condition that the relevant supporting documents (e.g., whether the reduced rental was processed by way of refund or by any other means agreed between both parties) are retained.

These Rules apply to landlords who rent out business premises to tenants that are small and medium enterprises (SMEs).

The following terms have been defined in the Rules:

(a)  Qualifying months

April 2020 to December 2021

(b)  Small and medium enterprise (SME)

A Malaysian-resident and certified as an SME by SME Corporation Malaysia (SME Corp)

To qualify for the deduction, the landlord is also required to retain the certificate by SME Corp confirming the status of the tenant as an SME.Note

Note:

Based on the latest Frequently Asked Questions (FAQs) document in Bahasa Malaysia, titled “Potongan Khas Kepada Pembayar Cukai Yang Memberi Pengurangan Sewa Premis Perniagaan Kepada Perusahaan Kecil Dan Sederhana (PKS) Dan Bukan PKS” dated 3 September 2021, for the period between January 2021 and December 2021, the certificate is no longer required as a supporting document in cases where the certification has not yet been issued by SME Corp (see Tax Alert No. 18/2021).

The Rules are deemed to be effective from YA 2020.

These Rules apply to landlords who rent out business premises to any tenant who is a Malaysian-resident carrying on his business at the business premise. The qualifying months for the purpose of these Rules are January 2021 to December 2021.

The non-application proviso stipulates that these Rules will not apply to a landlord who has made a claim for deduction under P.U.(A) 353/2021 (discussed above).

The Rules are effective from YA 2021.