Updates on Special Deduction for Reduction of Rental

To Our Valued Clients

Under the "Additional Prihatin Rakyat SME Economic Stimulus Package" unveiled by the Government on 6th April 2020, it was proposed that a special deduction be granted to landlords offering reduction of rental to tenants who are Small and Medium Enterprises ["SME"]. To provide further details relating to this, the Ministry of Finance ["MoF"] has thereafter, on 9th April 2020, posted the Frequently Asked Questions ["FAQ"] on Special Deduction to Companies and Entities other than Companies Who Offer Reduction of Rental of Business Premises to SME (in Bahasa Malaysia) on its Official Telegram Channel of "Prihatin Rakyat Economic Stimulus Package".

Some of the pertinent points clarified in the FAQ are as summarised below:-

1. Any taxpayer (companies or others i.e. individual, co-operative society or other business / non-business entity) who owns a business premises and rents it to a SME is eligible for the special deduction on reduction of rental.
2. For this purpose, the definition of SME endorsed by the National SME Development Council is used where, generally, a business can qualify as a SME if it meets either one of the 2 specified criteria, namely sales turnover or full-time employees, depending on the size of operation and classification of sectors as shown below:-
 
Category of SME Sector Sales Turnover Number of Full-Time Employees
Micro All sectors < RM300,000 < 5
Small Manufacturing RM300,000 up to less than RM15 million 5 to 74
  Services and other sectors RM300,000 up to less than RM3 million 5 to 29
Medium Manufacturing RM15 million to RM50 million 75 to 200
  Services and other sectors RM3 million to RM20 million 30 to 75
  If a business fulfils either one of the criteria across the different sizes of operation, then the smaller size will be taken into account.

The following entities shall be deemed not to be a SME:-
 
a. Public-listed companies in the main board such as Bursa Malaysia or main bourses in other countries.
b. Subsidiaries of:-
 
• Public-listed companies in the main board; and
• Large firms, multinational corporations, Government-linked companies, Syarikat Menteri Kewangan Diperbadankan and State-owned enterprises.
  Further details on the above qualifying criteria for SME are provided in the Guideline for New SME Definition issued by SME Corporation Malaysia Secretariat to the National SME Development Council in October 2013.

For the above purposes:-
 
a. sales turnover refers to the amount at the end of the basis period for the preceding year of assessment (e.g. for entities with basis period ended on 31st December 2019, the total annual sales for the period ended 31st December 2019 shall be used); and
b. full-time employees refer to number of employees at the end of the basis period for the preceding year of assessment (as at 31st December 2019 based on the above example) or as at 1st April 2020.
3. To be eligible for the special deduction, the reduction of rental given to the qualifying SME tenants must be at least 30% of the original monthly rental. The special deduction granted to the landlord is equivalent to the amount of rental reduction given for the months of April 2020 to June 2020.
4. Based on the example in the FAQ, in the case where a landlord who owns a business premises and rents it to a SME tenant at monthly rental rate of RM5,000 and offers reduction of rental of 50% i.e. RM2,500 per month for April 2020 to June 2020, the landlord will be eligible for the special deduction of RM7,500 (i.e. RM2,500 x 3 months) against the rental income for the year.
5. Taxpayers claiming the special deduction for reduction of rental are required to maintain the following supporting documents:-
 
a. Valid tenancy agreement;
b. Statement of rental income;
c. Confirmation of the SME status of the tenant; and
d. Confirmation of the reduction of rental (in the manner to be prescribed in the Income Tax Rules to be gazetted).

For further information, kindly refer to the following:-

i. FAQ on Special Deduction to Companies and Entities other than Companies Who Offer Reduction of Rental of Business Premises to SME
ii. Guideline for New SME Definition issued by SME Corporation Malaysia Secretariat to the National SME Development Council in October 2013
iii. Our email of 8th April 2020 on Latest Update on the IRB's Response to COVID-19 and MCO and Additional Measures for Prihatin Rakyat SME Economic Stimulus Package;

Please do not hesitate to contact us if you need any clarification on the foregoing.

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