Do you have to charge GST on your rental income?
Crowe Horwath
Property Tax Vistas
BY FENNIE LIM
Property Tax Vistas
BY FENNIE LIM
ON Monday, April 7, 2014, the Government passed the GST (Goods and Services Tax) Bill.
With it, the Government has finally drawn the line in the sand after two earlier attempts at introducing this new tax. There is therefore no turning back now.
As for the man on the street, what are you doing to prepare yourself for the implementation of GST? This depends on which of the two groups of persons you fall under the ones who pay GST on the goods and services that they buy or the group which is also allowed to charge GST on the goods and services that they sell.
Leasing out a property for rental is a service for GST purposes and may be chargeable to GST.
However, if you are a buyer of property for your own use, then you only need to pay GST when you buy non-residential properties as there is no rental income to declare.
What if you are a property owner with at least one property for rent?
If so, you may need to start thinking about whether you have to charge GST on your rental income and pay it to the Government.
Most individuals who are casual property owners may not be required to charge GST. Why?
This is because you only need to charge GST if you are in business.
If you are not in business, you do not have to. Even if you are in business, you do not have to charge GST if you are receiving rental from residential properties which are exempted from GST.
In addition, you need to have more than RM500,000 in your annual turnover, that is, RM500,000 of rental income from non-residential properties.
Other conditions that need to be met are that you need to be “making taxable supplies in Malaysia”, which is another way of saying that you are receiving rental income from properties in Malaysia.
However, this condition can only be met if your principal business activity of earning more than RM500,000 in annual turnover is from the rental of non-residential properties.
So, are you involved in business and need to be registered for the purpose of GST? This is a perplexing question.
To be technical, the GST Bill says that a business “includes any trade, commerce, profession, vocation… whether or not it is for a pecuniary profit”. The GST Bill also deems certain activities to be a “business”. For all other cases, we have to apply the “business test”.
Do you have to charge GST on your rental income?
Applying the “business test”
So, what is the “business test”? The “business test” became famous in the court case of Lord Fisher when the judge reiterated the six principles of determining a business laid down in the Scottish case of Morrison’s Academy Boarding Association.
Lord Fisher lived in the United Kingdom and had a hobby of shooting wild birds on his 3,000-acre (1,214 hectares) estate.
He would invite his friends and relatives to join the shoot but they were not charged. Instead, they had to make contributions towards the cost of the shoot.
Lord Fisher himself contributed towards the cost from his own pocket.
The question for the court was whether he had to charge VAT (Value-Added Tax) which is similar to GST on the contributions.
The conclusion was that he would have to charge if he is carrying on a business.
The court held in favour of Lord Fisher because “the sharing of the costs of a sporting or other pleasure activity did not by itself turn such an activity into a business”.
So, there lies a grey area when a person is on the borderline of whether he is in business.
Hobbies are generally not treated as a business.
So are those activities that are not substantial or serious enough to constitute a business.
As such, there is difficulty in deciding whether a person is in business for certain cases.
Basically, there are the six tests of a business laid out in the Lord Fisher case. Please refer to the table.
Do you have to charge GST on your rental income?
These include the following considerations:-
1) Is the activity a serious undertaking, work earnestly pursued or a serious occupation not necessarily confined to commercial or profit making undertakings?
2) Is the activity actively pursued with reasonable or recognisable continuity?
3) Does the activity have a certain measure of substance as measured by the quarterly or annual value of taxable supplies made (supplies generally mean sales of goods or services)?
4) Is the activity conducted in a regular manner and on sound and recognised business principles (business like nature)?
5) Is the activity concerned with the making of supplies for a consideration (consideration generally means price)?
6) Is the activity concerned with the making of supplies of a kind commonly made by commercial organisations?
Generally, individuals may not pass this test and therefore do not have to charge GST unless they own and manage properties like a serious business.
Companies on the other hand, may be presumed to be in business.
They therefore, have to charge GST on the rental income, if they meet the conditions.
This evaluation has to be done for each and every potential “taxable person” including every company in a group of companies.
Moving on, if your company has to charge GST, are you or your company ready? We term this as “GST implementation”. This involves a wide variety of matters such as transactions, paperwork, processes, systems, touchpoints and strategy. The larger and more complex the organisation, the more important it will be in tackling this issue.
Many consultants have their own methodology in assisting organisations to implement this tax.
At Crowe Horwath, we have adopted a 12-step process which covers all the steps in reaching a successful implementation.
For example, one has to examine all the sales of an organisation and ensure that the correct rates of GST are being applied.
If the GST rate used is higher than the correct rate, it will involve disputes with the customers.
On the other hand, if the rate is lower than the correct rate, the organisation has to pay the GST out of its own pocket together with the penalties thereon if this is discovered by the Customs authorities.
As a result, there is now a flurry of activity in the market as organisations rush to get themselves ready for the new tax.
Are you ready? If you are not, it may be time to seek the help of professionals since the Government has made it clear that there is no turning back when it comes to GST.
Please note that the information contained in this article is for general use only and should be seen just as a rough guide.
Readers are advised to seek independent professional tax advice for their GST affairs.
>> Fennie Lim heads the Crowe Horwath KL Tax Division and has been in the tax profession for the last 22 years. She has a wide range of experience in tax compliance, tax advisory and indirect taxes, and has advised many large local and multinational clients on complex tax engagements.
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