In common usage, the term expatriate is used to mean any person living in a different country from where he or she is a citizen. In Malaysia, it is also often used to refer to individuals who stay in the country on the Malaysia My Second Home (MM2H) program. From a tax point of view, there is little difference between a resident expat and a resident Malaysian. Virtually all foreign income and many kinds of local income are exempt from tax. Consequently, expats are only exposed to income tax if they have employment income, directors’ fees or income from property in Malaysia.

Each property from which rents are received is treated as a separate source of income and expenses attributable to renting can be deducted but only for the period in which there is a renting, unless the property is temporarily vacant between lettings. Expenses deductible include:

+Agents fees for management and rent collection;
+Repairs and maintenance;
+Insurance premiums for fire and burglary;
+Local rates (assessment tax);
+Cost of replacing a tenant (advertising legal fees);
+Cost of replacement of worn out items of furniture and equipment;
+Interest on a loan to finance the purchase of the property.

No deduction is given for initial expenses in obtaining the first tenant such as advertising, commission and legal expenses and the cost of initial furniture and fittings.A loss is not tax deductible unless it can be offset against a profit from a similar property in the same year.

Holding properties to derive income from them is basically a passive activity so it is understandable that in most cases the income is treated as investment income. Nevertheless, investors are often aware that when rents are taxed as business income there are some potential tax advantages such as:

+More scope for expense deductions.
+Deductions for depreciation of assets such as furniture and equipment in the case of furnished rentals.
+Relief for tax losses.

Business income treatment might seem to be attractive but it is quite difficult for an individual to achieve it. A high level of personal activity is required to justify it. On the other hand, if properties are held within a company, the concessionary basis can be applied. This is available for the rents derived from a minimum of four properties of any or all of the following kinds in any combination; commercial units; shop houses; and residential properties. Except for shop houses, where each floor can be treated as one unit, only a property with a separate strata title is considered to be a unit. Property rent to or occupied by a related or connected person is disregarded unless it is rent for a rent which is not significantly less than the market rate. It also applies to a special-purpose building owned by the company and provided for a commercial purpose such as a commercial complex, an office complex or shopping complex, or as a factory or warehouse.

A resident individual is taxed at graduated rates which start from a low of 0% and rise in steps to 26% after deducting various kinds of payment or expense and claiming a range of personal allowances. However, none of these advantages can be enjoyed by a company which must pay tax at 25% on the whole of its income, except for some companies with a small paid up share capital which enjoy a rate of 20% on the first RM500,000. In considering the possible advantages of using a company to hold properties there is a trade off between these methods of taxation to be considered.

Income spreading to take advantage of lower rates is a viable tax planning technique and this is often used to advantage when spouses can divide their income between them. Owning separate properties is one way. Owning properties through a company has also produced the same kind of advantage in the past but it must now be approached with some caution because most company dividends are now tax exempt and there is no benefit to be obtained. Also, if a company is classified as an investment holding company it will not be tax efficient to spread income around by paying directors’ fees.

The writer, Richard Thornton, is the author several books in the 100 Ways to Save Tax Series.

Source: The Expat November 2011 Issue

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This article has been edited for ExpatGoMalaysia.com