Letting of real property, whether treat as business source or non business source?
Income from letting of real property, can be separately classify either a business source or a non-business source. What are the difference between this separate sources of income toward the taxpayer?
Determine source of income
If the taxpayer who provide a maintenance and support services such as cleaning service, repair and maintenance and air conditioner service, then it should classify as business source. Meanwhile, if the merely provide of security service, then it should be classify as non-business source.
The date of commencement of letting property
If a business source – the date of commencement of letting of real property For non business source – the date the real property is actual rented out for the first time.
Taxability of rental income
The rental will be taxed in the basis period when it is received, meanwhile, when the rental is refund, the refund can be claim a deductible expenses in the period when the refund occurs.
Deductibility of rental expense
When the expenses is wholly and exclusively incurred for production of income, then those expenses shall be eligible for deduction.
Example : assessment & quit rent, fire insurance premium, interest on loan, expenses of rent renewal or expense on rent collection.
Meanwhile, for those expenses which is related to the first tenant are prohibited from deduction.
Example : advertising cost, legal cost for tenancy agreement, stamp duty paid or commission paid to the real estate broker.
If the real property was vacant but ready to rent out, due to the uncontrollable circumstances, such as natural disaster, legal injunction, then this expenses are also eligible for the deduction.
Capital allowance entitlement
Only business source of real property are entitle to claim for capital allowances. If the property was vacant for 2 years, as long as such property are ready to let. The taxpayer entitle to claim a capital allowances.
For those real property reclassified from business source to non-business source, the taxpayer will cease to claim for capital allowance, and compute the notional allowance.
Meanwhile if the real property reclassified from non-business source to business source. The taxpayer should be compute the capital allowance from the market value of an asset from the first day they are used in the business, however no initial allowance will be required to compute.
Conclusion
Determination of business source or non-business source will have impact to the taxpayer. Therefore, the taxpayer should determine whether to provide the maintenance and supportive activities in order the property will fall on particular category.
