Tax Implications on Property rental under the new provisions of Article 31D

The Income Tax Act provides for the taxation of rental income derived from the letting of residential tenement under Article 31D which was introduced during year 2014 but came into force with retrospective effect from 1st January 2014.

The term tenement refers to a dwelling house which is occupied as a home or residence or a garage. Letting of tenements requiring a Malta Tourism Authority (MTA) Licence are considered as a commercial tenement and thus excluded from the definition of a tenement for the purposes of these provisions. Such MTA licence is required when the occupier is defined as a tourist. The Malta Travel and Tourism Services Act defines a tourist as a person who travels to a place other than that of his usual environment for less than twelve months and who stays at least one night in the place visited..

A person (including companies and resident/non-resident individuals) owning a tenement which is rented to an individual for residential purposes may opt to be taxed at the flat rate of 15% on the gross rental income and no deductions are allowed against such income. Such tax is final and the income derived from such rental should be allocated to the Final Tax Account if derived by a company. If the income is earned by an individual, it shall not be declared in the individual’s personal tax return.

Where an election to apply the provisions of this article is exercised, the tax treatment for rental income derived from all tenements for that particular year should be the same. Therefore property owners may either opt to be taxed at the flat rate of 15% or else taxed on the net rental income under the normal provisions of the Income Tax Act. If the latter option is exercised, the Deduction of Expenses in Respect of Immovable Property Rules (Subsidiary Legislation 123.26) allows only specific expenses to be deducted. These include interest on loan directly related to the rental income, rent and ground rent paid, licence fees paid and a further 20% deduction on rental income net of rents and licences paid.

Persons opting for the standard 15% tax rate need to prepare the Form TA24. Such form together with payment has to be submitted by 30th June of the year following the year in which the rental income was derived. Individuals who have not declared rental income between years 2005 and 2012 can complete Form TA24A and submit the form by 30th June 2015. In this case, the 15% tax rate is charged on the average annual rental income and multiplied by two. If rental income is determined through a tax enquiry to have been overstated in order to take advantage of this provision, the whole rental income will be taxed at 15%.  Additionally, if rental income is not declared as determined by a tax enquiry, such income will be taxed at the rate of 35% without the possibility of refund or set-offs and also subject to interest and additional tax.

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