Yesterday we talked about why landlords fight to have their rental income recognised as business income under paragraph 4(a) instead of paragraph 4(d), and why most fail to qualify. Today, let us look at a High Court case that puts this question to the test for investment holding companies. The court had to decide whether rental income qualifies as business income or passive income under the Income Tax Act 1967, and how that classification changes your tax position.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐚𝐬𝐞: Glenmarie Estates Sdn Bhd is an unlisted investment holding company that owns 14 properties which were rented out to tenants. LHDN raised additional tax assessments for financial years 2015, 2016, and 2017, classifying the rental income as passive income under paragraph 4(d) of the Income Tax Act 1967 (ITA 1967) rather than business income under paragraph 4(a). The company appealed to the Special Commissioners of Income Tax (SCIT), which dismissed the appeal in July 2023, prompting a further appeal to the High Court. The central issue was whether the rental income qualifies as business income or passive rental income under the ITA 1967.

𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐭𝐚𝐱𝐩𝐚𝐲𝐞𝐫: The company argued it was not a passive landlord but an active operator that maintained the properties in tenantable condition, engaged third party contractors for maintenance and security, and had employees attending to tenants' general needs. It contended that its income should therefore be classified as business income under paragraph 4(a). The company also challenged LHDN's use of Public Ruling No. 12/2018 (PR 12/2018), arguing it should not apply retrospectively to years 2015 to 2017 as it only came into force in December 2018.

𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐋𝐇𝐃𝐍: LHDN maintained that Section 60F of the ITA 1967 applied to the company as an unlisted investment holding company, making its rental income non-business in nature. The tenancy agreements did not require comprehensive maintenance, and no evidence showed services were actively and consistently provided beyond responding to tenant complaints. On the retrospectivity point, LHDN clarified that PR 12/2018 replaced the earlier Public Ruling No. 4/2011 in force since March 2011, covering the same subject matter and making its application appropriate for all years assessed.

𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐨𝐮𝐫𝐭: On 22 April 2026, the High Court dismissed the appeal with costs, affirming that rental income of an unlisted investment holding company is passive income under paragraph 4(d) and Section 60F of the ITA 1967, unless substantive and active services are clearly evidenced. The company retains the right to appeal to the Court of Appeal within 30 days from the date of the decision.

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