Introduction

Malaysia income tax lease vs hire purchase treatment is a crucial topic for businesses acquiring assets through financing. Under Section 36(1) of the Income Tax Act (ITA), the Director General of Inland Revenue (DGIR) issues regulations that provide specific tax treatments for leasing and hire purchase transactions. This guide explains how lease and hire purchase are taxed, including gross income, deductions, capital allowances, and key compliance points under Malaysian law.

Taxation of a Lease Transaction

Gross Income: Lessor

• Lease payments received or receivable are taxable.
• Uneven payments are spread evenly across the lease period.

Formula:

Taxable Lease Rental = (Days in basis period ÷ Days in agreement) × Total Lease Rental

Lease Payment: Lessee

• Tax deductible if incurred wholly for generating business income.
• Non-commercial vehicles: capped at RM50,000 per vehicle.
• Commercial vehicles: fully deductible (lorries, trucks, buses, vans, taxis).

Capital Allowances (CA)

• Lessor: eligible for CA as legal owner who incurred qualifying expenditure.
• Lessee: not eligible for CA, as they are not the owner.

Taxation of a Hire Purchase (HP) Transaction

Gross Income: Seller

• Deposit: Non-taxable.
• Instalments:
  • Capital portion → Non-taxable.
  • Interest portion → Taxable.

HP Payments: Buyer

• Deposit: Non-deductible.
• Instalments:
  • Capital portion → Non-deductible.
  • Interest portion → Deductible.

Qualifying Expenditure (QE)

• Based on capital repayments made during the Year of Assessment (YA).
• Early settlement: QE = total repayments made.
• Unpaid instalments: not treated as QE.

Capital Allowances (CA)

• Seller: Not eligible, no longer owner.
• Buyer: Eligible, treated as owner.
  • Deposit & capital instalments qualify as QE.
  • IA (Initial Allowance) and AA (Annual Allowance) computed based on QE.

Refinancing

If an asset with CA is refinanced under HP, hirer can continue CA claim as long as the asset remains in use for business.

Key Takeaways

• Lease vs HP are treated separately under Malaysian tax law.
• Lease: deductions for payments, CA for lessor only.
• Hire Purchase: buyer can claim CA, but only interest is deductible.
• DGIR regulations (ITLR 1986 & HP Act 1967) define the scope and compliance.
• Capital Allowances: depends on asset ownership and QE incurred.

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.