Covid-19: Special Tax Deductions on Rental Reduction to SMEs
05 May 2020
The Government had announced an economic stimulus package (Prihatin SME+) to offer some assistance to Small Medium Enterprises (“SMEs
”). Our summary of Prihatin SME+
is available here
. One of these measures is a special tax deduction for landlords who offer a rental reduction to their tenants which are SMEs.
The Inland Revenue Board of Malaysia (“IRB
”) has recently issued a FAQ
to address the special tax deduction on rental reduction offered to SMEs for the period between April 2020 to June 2020.
We summarise here the conditions of the said special tax deduction:
- The business premises (excluding machines, parking spaces, telecommunication towers, residential houses which are used for both residential and business etc) which are rented out, must be used by the SMEs for the purposes of carrying out their business.
- ‘SMEs’ are defined under the Guideline For New SME Definition which is endorsed by the National SME Development Council. The summary of the definition of an SME* is as follows:
*A tenant is regarded as an SME if it fulfils either the annual sales amount or the number of the full-time employees.
- The income arising from the premises which are rented out must be either a business income under Section 4(a) of the Income Tax Act 1967 (“ITA”) or a rental income under Section 4(d) of the ITA of the Landlord.
We highlight that item 1(iii) of the IRB’s FAQ stated that “the landlord must be a taxpayer with rental income under Section 4(a) and Section 4(d) of the ITA”. We believe the word “and” to be a clerical error as a taxpayer’s rental income cannot be regarded at the same time as being derived from two different sources of income under the ITA. We anticipate that the IRB will clarify this matter.
- The Landlord must give at least a 30% reduction for each month of the rental charged to the SMEs.
- The Landlord can only claim the special tax deduction in the amount equivalent to the rental reduction offered to the SMEs.
The required supporting documents that must be kept by the Landlord are as follows:
- Valid tenancy agreement;
- Rental income statement;
- Details of the tenant as an SME (e.g. the tenant’s business registration number, tax file number etc); and
- Details of the rental reduction.
The burden is on the Landlord who seeks to claim the special tax deduction on the rental reduction offered to the SMEs. Therefore, it will be ideal if the Landlord can obtain all supporting documents which are required to ensure that all prescribed conditions are met, the SMEs’ full and frank disclosure in writing (e.g. a letter or a statutory declaration) and ensure all supporting documents are in order before granting a reduction. This would facilitate the claiming of the said special tax deduction.
The Landlord must ensure that all conditions and requirements laid down by the IRB are strictly complied with. Otherwise, the Landlord is exposed to the double jeopardy of declaring an incorrect tax return and claiming a non-deductible deduction resulting in a penalty, should the IRB disallow the special tax deduction claimed.
The IRB’s FAQ is very similar to an earlier FAQ
issued by the Ministry of Finance (“MOF
”). It remains to be seen whether there will be new conditions introduced when Parliament gazettes this special tax deduction (see item 9 of the MOF’s FAQ) and/or when this special tax deduction is granted under the Income Tax Rules (see item 11 of the IRB’s FAQ).
As stated in our earlier alert
, we welcome the measures concerning rental reliefs under Prihatin SME+. It would be a positive development if the MOF and IRB will consider extending the special tax deduction period for a further 6 months (i.e. until December 2020) in order to help SMEs weather, the almost certain economic challenges ahead.
If you have any queries, please contact Preetha Pillai (firstname.lastname@example.org) or Desmond Liew (email@example.com).