What is Property Tax in Malaysia?
Property tax is the amount of money that a property owner must pay to the government of Malaysia. It is a tax on properties and it is applicable to land, buildings, and improvements such as houses, deck, fence or swimming pool.
How are Property Tax Calculated?
Property tax is calculated based on the following factors:
The size of the land The floor area of the building The value of the building The value of the land
You can calculate property tax in Malaysia based on the assessment value. To determine the assessment value, multiply a capitalized rate by a capitalization factor. The capitalisation factor is determined by dividing a property’s capital cost by its expected future net rental income.
For example, if you bought a residential property and spent RM500,000 to acquire it, then your capital cost will be RM500,000. If you are planning to rent out this property to tenants, then your expected future net rental income will be RM10,000 per year or RM833 per month.
Assuming that there are 365 days in a year, this would mean that your capitalization factor would be:
500,000/833 x 100 = 62.5%
This means that for every 100% of your property’s value (capital cost), they will attribute 62.5% to land and 35% to the building.
How to Calculate the Property Tax Deduction Claimable?
If you own a residential property in Malaysia, then you are able to claim a minimum of RM8,000 as an annual tax deduction. This means that if you pay RM1,000 annually as property tax, then you would be able to claim a deduction of RM8,000. You can use this deduction to reduce your tax payable.
However, if you own multiple properties and pay the same amount of property tax for each property on an annual basis, then they limit the deduction to RM8,000 per year only.
In other words, no matter how many properties you own and how much property tax you have paid on them individually on an annual basis, the maximum amount you can claim is still only RM8,000 per year.
However, if your combined total property tax paid is more than RM8,000 per year, then you cannot claim this excess amount as a deduction from your taxable income and you must carry it forward until you can utilize it in future years.
If your deduction exceeds the actual tax that you will pay in a given year, the excess amount you have earned in this tax year will not carry forward automatically. It will become part of your net capital gain or loss when you sell the property at a later date. You cannot claim it as a deduction from your taxable income.
What is the Capital Cost of a Property?
The capital cost of a property is the amount that you acquire it for. We also refer to it as the acquisition cost. You can pay this acquisition cost via cash or through other forms of consideration (e.g., where you buy a property in exchange for another property or other assets).
In Malaysia, you can determine this acquisition cost by subtracting the value of any consideration given for the property from its purchase price (i.e., what you have paid for it). If there is no consideration for it (i.e., you just bought it through cash), then its capital cost will be its purchase price.
For example, if you bought a building or house worth RM100k outright without giving any consideration to the seller in exchange, then its capital cost will be RM100k and you will use this amount in your tax calculations.
What Assets Can You Use To Reduce Property Tax?
In Malaysia, there are certain assets that can reduce your property tax obligation depending on how you use them and whether they can increase the value of the land or not.
Equipment and machinery
If you use them to improve your business operations, then they may be used to reduce your property tax in Malaysia. For example, if you have bought a machinery worth RM500,000 and want to use it in your manufacturing plant in Malaysia, then you are able to reduce your property tax obligation by an amount based on its capital cost.
However if the equipment is not for the improvement of your business operations or asset value but merely for personal enjoyment (e.g., yacht), then it will not be allowable as a deduction.
If you use them to improve your business operations, then you can use them to reduce your property tax in Malaysia. For example, if you have bought a machinery worth RM500,000 and want to use it in your manufacturing plant in Malaysia, then you are able to reduce your property tax obligation by an amount based on its capital cost.
However if the equipment is for the improvement of your business operations or asset value but merely for personal enjoyment (e.g., yacht), then it will not be allowable as a deduction.
The acquisition costs of intangible assets
If you have purchased intangible assets such as intellectual property rights or patents during that year, then you can subtract their acquisition costs from the total amount that you need to pay as property tax.
The same rule applies even if you acquire these intangible assets during previous years and only utilize them after you acquire them. For example, you purchase a computer software 2 years ago which you only utilize this year).
Intangible assets which do not qualify under the first category above include goodwill, trademarks and patents for personal enjoyment purposes rather than any commercial purpose and therefore cannot attract any deductions from property taxes payable on properties owned by individuals in Malaysia unless such goodwill etc can enhance the value of a land through their commercial exploitation e.g trademarks like Coca Cola etc can add value through licensing out the right for others to sell under the licensed trademark.
What Penalties Do You Receive If You Don’t Pay Property Tax?
Property tax is not just a tax for the government of Malaysia, it is also a duty that every Malaysian property owner must perform to uphold their civic duties. You must fulfill this duty even if the amount due is very low (e.g., RM50).
Failure to fulfil this duty and pay the required amount of property tax could result in various penalties, one of which includes a fine. This fine could be as much as ten times more than what it was originally and you will not receive refund even if you happen to pay it later on (even after 1 year).
If you fail to do, it will impose a fine on your spouse and any other individuals who are responsible for paying taxes.