Rental and leasing services in Malaysia are subject to service tax at 6%, effective 1 January 2026. The tax applies to commercial rental and leasing of tangible assets — including commercial premises, machinery and equipment — provided by businesses whose taxable rental turnover exceeds RM1 million in a 12-month period. Residential property rental remains outside the scope, and tenants who qualify as micro, small and medium enterprises (MSMEs) may be exempted from paying the tax.

This article explains who must charge service tax on rent, how the rate change from 8% to 6% works, the exemptions available, and the compliance traps we are already seeing Customs pursue in audits.

When did rental become taxable, and why did the rate change?

Rental or leasing services became a prescribed taxable service on 1 July 2025, as part of the Government’s major expansion of the service tax scope. The rate was initially 8%.

Following sustained industry feedback about cost pressure on businesses, the Government reduced the effective rate on rental and leasing services to 6% with effect from 1 January 2026. RMCD implemented the reduction through Service Tax Policy No. 2/2025 (Amendment No. 3), issued on 23 January 2026, followed by a procedural guide on invoicing and reporting issued on 27 January 2026. Registered persons must ensure their billing systems, tax codes and SST-02 reporting reflect the current 6% treatment — invoices issued in 2026 that still charge 8% expose the lessor to disputes with tenants and to compliance queries from Customs.

Who must register and charge service tax on rental?

Any person providing taxable rental or leasing services must register for service tax once the total value of those services exceeds RM1 million in any rolling 12-month period. This threshold was deliberately set higher than the general RM500,000 threshold — it was raised before implementation specifically to keep micro and small landlords out of the net.

Two calculation points matter in practice:

1. The historical and future methods both apply. You must register within 30 days of the month in which your past-12-month rental revenue exceeded RM1 million, or in which you have reasonable grounds to believe the next 12 months will exceed it.
2. Exempt rental revenue still counts toward the threshold. Revenue from supplies that are themselves exempt (for example, rental to MSME tenants) is generally still included when measuring whether you have crossed RM1 million. Landlords who ignored exempt streams when self-assessing their threshold are a recurring audit target.

What rental income is taxable — and what is excluded?

The taxable category covers rental or leasing of tangible assets: commercial and industrial premises, retail lots, office space, machinery, equipment, and vehicles leased in the course of business.

The main exclusions are:

• Residential property rental — renting out houses, apartments and residential units is not a taxable service;
• Reading materials;
• Tangible assets situated outside Malaysia;
• Financial leases — leasing arrangements that are in substance financing (financial leasing) fall under a different treatment;
• Rentals within Special Areas and Designated Areas (e.g. Langkawi, Labuan, Tioman, and licensed zones), subject to conditions.

Mixed-use situations require care. A landlord letting a shophouse where the ground floor is commercial and the upper floor is residential must apportion; getting the apportionment wrong in either direction creates exposure — undercharging attracts assessments, overcharging creates tenant disputes and potential claims for wrongly collected tax.

What exemptions can landlords and tenants rely on?

The MSME tenant exemption. With effect from 1 July 2025, RMCD exempted service tax on rental or leasing services provided to tenants who qualify as small businesses — broadly, tenants whose annual sales do not exceed RM1 million based on their latest declared income. The exemption relieves the tenant of the tax, but the landlord must obtain and retain evidence of the tenant’s eligibility. In an audit, a landlord who applied the exemption without documentation will be assessed for the tax it failed to charge.

The B2B exemption. Where a registered lessor rents a tangible asset to another registered person who sublets it in the course of business — the classic example being an event organiser renting a hall to sub-let booth space — the intermediate supply may be exempt, so the tax is charged only once at the final stage. The conditions are technical, and both parties’ registration status must be verified at the time of supply.

Non-reviewable contracts. Certain long-term leases signed before the taxing provisions took effect benefited from transitional relief. If you hold a pre-July 2025 lease with fixed rental that made no provision for tax, take advice on whether transitional exemptions apply and how any tax clause (or the absence of one) allocates the burden between landlord and tenant.

Who actually bears the tax — landlord or tenant?

Legally, the registered lessor is the taxable person: it must charge, collect and remit the tax. Commercially, whether the 6% can be passed on depends on the lease. Many pre-2025 leases are silent on indirect tax, and we have advised on numerous disputes over whether “rental” in a fixed-sum clause is inclusive or exclusive of service tax. Newer leases should contain an express tax clause entitling the landlord to add any applicable indirect tax to the rent — and tenants should negotiate the corollary: an obligation on the landlord to apply available exemptions and pass on any rate reductions, as happened in January 2026.

What are the penalties for getting it wrong?

Late registration means registration is backdated to the month after the threshold was crossed, with tax assessable from that date. Failure to file SST-02 returns or pay tax due is an offence carrying a fine of up to RM50,000, imprisonment of up to three years, or both, and unpaid tax attracts escalating late-payment penalties. The penalty-free grace period for the newly-taxed sectors ended on 31 December 2025 — from 2026, Customs is auditing rental and leasing businesses as a priority sector.

Practical checklist for lessors in 2026

Review your rolling 12-month rental revenue monthly against the RM1 million threshold, including exempt streams. Confirm your invoicing applies 6% (not 8%) from 1 January 2026. Collect and file MSME status declarations from tenants before applying the exemption. Check every lease for a tax clause before invoicing tax on top of rent. And retain all supporting documents for at least seven years — SST is enforced through audit, and documentation is your only defence.

Frequently Asked Questions

Is there SST on residential rental in Malaysia? No. Rental of residential property is excluded from the taxable rental or leasing category. Only commercial rental and leasing of tangible assets is taxable.

What is the service tax rate on commercial rent in 2026? 6%, effective 1 January 2026. The rate was 8% when rental first became taxable on 1 July 2025.

Do small landlords have to charge SST on rent? Only landlords whose taxable rental/leasing turnover exceeds RM1 million in 12 months must register and charge service tax.

Can my tenant refuse to pay the 6% service tax? It depends on the lease. If the lease permits the landlord to add applicable taxes, the tenant must pay. If the lease is silent, the position is contractual and may need legal advice — the landlord remains liable to Customs either way.Are MSME tenants exempt from service tax on rental? Yes — tenants qualifying as small businesses (annual sales not exceeding RM1 million) may be exempted, but the landlord must verify and document eligibility.