Introduction

The taxation of property trusts in Malaysia is governed by the Income Tax Act 1967 (ITA). Property trusts that do not qualify as Real Estate Investment Trusts (REITs) or Property Trust Funds (PTFs) are subject to specific rules on rental income, capital allowances, and special deductions. This guide explains the tax treatment and deductions available.

Tax Treatment of Property Trusts (Non-REITs/PTFs)

Property trusts that mainly invest in income-generating real estate but are not classified as REITs/PTFs under Securities Commission guidelines:

• Their rental income is always taxed under paragraph 4(d) of the ITA.
• This applies regardless of whether maintenance or support services are actively provided.

Capital Allowance on Fixed Assets

• Since rental income from properties is treated as income under paragraph 4(d) ITA, property trusts cannot claim capital allowances on fixed assets under Schedule 3, paragraph 2 of the ITA.

Special Deduction for Qualifying Capital Expenditure (s63A)

Property trusts (excluding REITs/PTFs) earning rental income may claim:

1. Special Deduction under s63B (permitted expenses), and
2. Special Deduction for Qualifying Capital Expenditure (s63A).

What Counts as Qualifying Capital Expenditure (QCE)?

• Expenditure on providing machinery or plant used to derive rental income.
• Examples include:
  • Altering a building for installation of plant/machinery (≤75% of total QCE).
  • Land preparation or levelling for plant/machinery installation (≤10% of total QCE).

Qualifying Criteria (s63A)

To claim the deduction, a property trust must:

1. Incur the qualifying capital expenditure.
2. Be the legal owner of the asset.
3. Use the asset to generate rental income from letting property.

Rate of Special Deduction

• Deduction = 10% of qualifying capital expenditure.
• Applied against adjusted rental income from property letting.
• No carry forward of unabsorbed allowances.
• No balancing charge or allowance on disposal.

Cessation of Deduction (s63A)

The deduction stops if, by the end of a basis period for a year of assessment:

• The residual expenditure on an asset becomes zero.
• The asset is no longer owned by the property trust.
• The asset is no longer in use.

Key Takeaways

• Rental income of property trusts (non-REITs/PTFs) is taxed under para 4(d), ITA.
• No capital allowance claims are permitted on fixed assets.
• Property trusts may enjoy special deduction under s63A for certain capital expenditures.
• Deductions are limited, non-transferable, and stop once the asset is fully written off, sold, or no longer used.

ANC Group – Your Personal Tax Advisor

Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.

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If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.