Tax Treatment of Rental Relief Measures (2021)

Rental Relief

Government Rental Waiver Framework

To support businesses with rental costs during the Phase 2 (Heightened Alert) (“P2(HA)”) and the Stabilisation Phase, the Government will provide rental waiver of up to 3 months to qualifying Small and Medium Enterprises (“SMEs”) and specified Non-Profit Organisations (“NPOs”) tenants of Government-owned commercial properties.

Tenants are required to pass down the rental relief received to their qualifying sub-tenants, if any. For example, these tenants can reduce the future rentals or make monetary payments to their qualifying sub-tenants, within the prescribed timeframes.

Rental Waiver Framework

The Rental Waiver Framework complements the suite of support measures introduced by the Government to alleviate the economic impact on businesses due to the tightened safe management measures imposed during the P2(HA) periods, including the Rental Support Scheme introduced by the Ministry of Finance.

The Rental Waiver Framework will ensure the fair co-sharing of rental obligations over the P2(HA) periods between the Government, landlords and eligible tenants.

Under the Rental Waiver Framework, landlords/intermediary landlords are required to provide a rental waiver of 2 weeks of gross rent to their eligible SMEs and specified NPOs tenants of qualifying commercial properties.

Where the landlords/intermediary landlords have provided direct monetary assistance or rental waivers to their tenants/sub-tenants from 16 May 2021 up to when the rental waiver takes effect (i.e. once the tenant has sent the copy of Notice of Rental Waiver and documents to the landlords/intermediary landlords), such rental assistance can be offset from their rental waiver obligations under the Rental Waiver Framework.

For more information on the Rental Waiver Framework, please refer to Ministry of Law's website.

Provision of Additional Support

At the same time, all landlords/intermediary landlords are encouraged to provide rental support to their tenants/sub-tenants through this difficult time, and go beyond their minimum obligations under the frameworks (referred to as “additional support”).

For Landlords/Intermediary Landlords: Tax Deductions for Rental Waiver Obligations or Provision of Additional Support

Rental relief or additional support provided in the form of rental waiver

For landlords/intermediary landlords who have provided rental relief or additional support to their tenants/sub-tenants in the form of rental waiver, only the reduced amount of rental income derived will be brought to tax in the hands of the landlords/intermediary landlords.

Rental relief or additional support provided in the form of monetary payments

For landlords/intermediary landlords who have satisfied (in part or in full) their rental waiver obligations or provided additional support to their tenants/sub-tenants in the form of monetary payments, such monetary payments would ordinarily not be deductible, under Section 14(1) of the Income Tax Act 1947 (ITA), as they are not regarded as expenses incurred in the production of the rental income.

The Ministry of Finance has introduced Section 14ZD(2A) in the ITA to allow a tax deduction on such monetary payments. The deduction will apply to monetary payments made during the calendar year 2021, subject to a cap. The cap will be the lower of:

(i) the contractual rental amount as stipulated in the relevant tenancy agreement; or

(ii) the actual amount of rental income receivable from the tenant/sub-tenant during the calendar year 2021, that falls within the basis period of the Year of Assessment (“YA”) 2022 or YA 2023 respectively.

Consequently, landlords/intermediary landlords will not be allowed tax deductions on any monetary payments that are over and above the contractual rental amount or the actual amount of rental income, whichever is lower.

Example 1: Provision of rental relief in the form of monetary payments

Property owner (Company A) rents out a qualifying commercial property to an eligible SME tenant (Company B) from 1 January 2021 to 31 December 2021 at a contractual rental amount of $5,000 per month.

For the year 2021, Company A:

Paid Property tax of $6,000 for the period 1 January 2021 to 31 December 2021.
Made a monetary payment equivalent to 2 weeks’ rent (i.e. $2,500) to Company B in end May 2021;
Had to provide rental waiver of 2 weeks to Company B under the Rental Waiver Framework. Company A uses the monetary payment made earlier to offset the rental waiver obligations for 2 weeks. After using the monetary payment to offset against its rental waiver obligation, no further rental waiver (rental for 2 weeks – rental for 2 weeks) is necessary under the Rental Waiver Framework.

Assuming Company A’s financial year end is 31 December 2021, the amount of net rental income that Company A will be subject to tax in YA 2022 will be:

	$
Gross rental income ($5,000 x 12 months)	60,000
Less: Property Tax	(6,000)
Monetary payment used to offset rental waiver	(2,500)
Net rental income	51,500

Example 2: Provision of rental relief and additional support in the form of monetary payments

Continuing from Example 1, in addition to the rental waiver obligation under the Rental Waiver Framework, Company A also provided additional support to Company B through a monetary payment in October 2021, which is equivalent to 1 month of the contractual rental amount for 2021.

The amount of net rental income that Company A will be subject to tax in YA 2022 will be:

	$
Gross rental income ($5,000 x 12 months)	60,000
Less: Property Tax	(6,000)
Monetary payment used to offset rental waiver	(2,500)
Additional support provided to tenant ($5,000 x 1 month)	(5,000)
Net rental income	46,500

For Tenants/Sub-Tenants: Tax Deductions for Rental Expenses Incurred

Rental relief or additional support received in the form of rental waiver

For tenants/sub-tenants who have received rental relief or additional support from their landlords/intermediary landlords in the form of rental waivers, the reduced amount of rental expenses incurred by the tenants/sub-tenants will be allowed for tax deduction, if such rental expenses are incurred in the production of income and not prohibited for deduction under Section 15(1) of the ITA.

Rental relief or additional support received in the form of monetary payments

For tenants/sub-tenants who have received rental relief or additional support from their landlords/intermediary landlords in the form of monetary payments, they too have benefitted from reduced rental expenses.

The Ministry of Finance has introduced Section 15B in the ITA to restrict the amount of allowable rental expenses, to the amount of rental expenses net of the monetary payments given by their landlords/intermediary landlords. Correspondingly, such monetary payments received by the tenants/sub-tenants will not be brought to tax under Section 13X(5A) of the ITA.

Example 3: Rental relief received in the form of monetary payments

Continuing from Example 1 above, assuming Company B’s financial year end is 31 December 2021, the amount of net rental expense that Company B can claim as tax deductions in YA 2022 will be:

	$
Gross rental expenses ($5,000 x 12 months)	60,000
Less: Rental waiver (received via monetary payment)	(2,500)
Net rental expenses	57,500

Company B is effectively given 2 weeks of rental waiver ($2,500) by the property owner under the Rental Waiver Framework.

Example 4: Rental relief and additional support received in the form of monetary payments

Continuing from Example 2 above, assuming Company B’s financial year end is 31 December 2021, the amount of net rental expense that Company B can claim as tax deductions in YA 2022 will be:

	$
Gross rental expenses ($5,000 x 12 months)	60,000
Less: Rental waiver (received via monetary payment)	(2,500)
Additional support received via monetary payment	(5,000)
Net rental expenses	52,500

Company B is effectively given 1.5 months rental waiver ($7,500) by the property owner (2 weeks of rental waiver under the Rental Waiver Framework + 1 month of additional support).