Introduction

Malaysia income tax leasing vs non-leasing activities is a critical issue for businesses under the Income Tax Act (ITA). Section 36(1) and Section 33(1) require that leasing transactions be treated separately from non-leasing business sources. This article explains how leasing income is computed, the apportionment of expenses and capital allowances (CA), and the landmark case law that clarified the correct tax treatment under Malaysian law.

Distinct Business Sources

Leasing activities are recognized as a separate source of business income under Malaysia income tax law.

• Leasing business → Gross income and lease rentals.
• Non-leasing business → Finance income and other related income.

👉 This separation ensures accurate reporting and compliance with ITA requirements.

Separate Computations Required

A lessor must prepare two sets of computations:

1. Leasing Business → Lease rentals (principal + interest) are taxable.
2. Non-Leasing Business → Finance income (interest only).

This distinction affects how gross income, expenses, and capital allowances are reported.

Apportionment of Expenses and CA

When assets or expenses are used in both leasing and non-leasing activities, apportionment is required. This ensures fairness and compliance with ITA.

Basis of Apportionment

Three common methods are used:

1. Ratio of lease rental receivable (principal + interest) to gross income from other sources.
2. Ratio of lease debtors/assets to loans or advances.
3. Ratio of lease income (interest only) to gross income from other business sources.

⚠️ Different ratios may lead to very different tax outcomes.

Court Case: KPHDN v Daya Leasing Sdn Bhd

High Court Ruling

Initially, the High Court held that apportionment should be based only on non-capital income (interest + incidental income).

Court of Appeal Ruling

The Court of Appeal reversed this, deciding:

• Leasing income = principal + interest + incidental income.
• Non-leasing income = interest + incidental income only.

Legal Basis

• Section 33(1) ITA → Expenses must be deducted from the gross income of each source.
• Regulation 3, ITLR 1986 → Principal element cannot be excluded in leasing gross income.

👉 Excluding the principal portion would violate the ITA.

Key Takeaways

• Leasing vs non-leasing are distinct sources under Malaysia income tax.
• Separate computations must be done for leasing and finance income.
• Apportionment of common expenses follows Section 33(1) ITA.
• Daya Leasing case clarified that leasing income includes principal + interest.
• Incorrect apportionment may result in tax underpayment and penalties.

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.

Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.

ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.

We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.

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.