In order to address one of the main sectors affected by tax evasion, a relatively recent provision governing the taxation of rental income derived from the letting of residential tenements has been enacted under the Income Tax Act.
The law allows for persons who are in receipt of such rental income to opt for the application of a 15 per cent withholding tax treatment as opposed to being taxed at the standard rates of tax going up to 35 per cent.
This beneficial tax treatment serves as an incentive so as to encourage more compliance when it comes to the declaring of rental income. It applies only to rental income arising from residential property, including garages, with the property in question being such that it is not required to be licensed under the Malta Travel and Tourism Services Act. Commercial premises therefore, including garages being used as shops or stores for instance, are excluded from the 15 per cent tax regime.
The 15 per cent withholding tax is applicable to individuals and companies, residents and non-residents alike, in receipt of such rental income. This tax is final and no setoffs or refunds are granted in respect of its final charge.
This beneficial tax treatment serves as an incentive so as to encourage more compliance
Once the option to be taxed at the 15 per cent tax rate is exercised, its treatment would apply to the total rental income received in the year in question from all the tenements let out by such person – provided of course that such tenements in fact qualify for this rate. Having said that, the choice whether to exercise this option or not is made annually. One may have the rental income taxed at 15 per cent one year and then decide to declare it in the tax return and have it taxed at the normal applicable tax rates the following year.
The rental income in question, taxed at 15 per cent, is considered to be separate chargeable income which need not be declared in the income tax return in the case of individuals who opt for the flat rate’s application. Companies, however, have to in any case declare this income in their tax returns and the distributable profits resulting from said income shall be allocated to the Final Tax Account with no further tax being payable upon a distribution of same.
The relevant form to be completed by property owners opting for the 15 per cent tax regime is to be filed, together with payment, by June 30 of the year following the year in which the rental income is derived.
Concurrently, the government is giving an opportunity to individuals to regularise their position with regard to past years’ undeclared rental income.
Individuals who have failed to declare rental income, from a tenement leased as residence or garage, are now being given a window of opportunity through which they may rectify their tax position.
To benefit from this amnesty, individuals need to declare, what was previously undeclared in their income tax returns for the relevant period, being the eight years preceding the basis year 2013.
In the case of an omission to declare rental income for more than one year, the 15 per cent tax is payable on the average annual rental income multiplied by two.
Once the total rental income subject to tax is determined, this is charged at the rate of 15 per cent as a final withholding tax. Following payment of the final withholding tax, it shall be deemed that the individual has received said rental income during the basis year 2014 and no penalties or interest shall be charged.
Relevant forms and payment must be all submitted to the Inland Revenue Department by no later than June 30, 2015, following which – it was announced – no other remedy shall be granted by the government in this regard.
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This article is not intended to offer professional advice and you should not act upon the matters referred to in it without seeking specific advice.
Sarah Scicluna is an associate with Fenech & Fenech Advocates specialising in tax law.