Tax Matters – How are individual unit trust holders taxed?
TTCS Virtual Sharing Session on Indirect Tax

11 July 2021

THE unit trust industry is huge in Malaysia and the Securities Commission Malaysia Annual Report 2020 states that funds under the management of unit trusts in 2020 totalled RM519 billion. It is important to understand the tax position of the individuals investing in this instrument.

Why do individuals invest in unit trusts rather than invest themselves? The basic answer is unit trusts are managed by professionals who are in a better position to identify opportunities for your investments to grow.

What is a unit trust?

The unit trust arrangement is a tripartite relationship between the unit holders, trustee and the fund management company/fund manager. The fund manager runs the trust for a profit. The trustee ensures and oversees that the fund manager keeps to the fund’s objective and safeguards the fund’s assets. The unit holders have the rights to trust assets and are effectively the beneficial owners of the assets.

Under the Income Tax Act 1967, the unit trust will pay tax on the income earned during the tax year at the rate of 24%.

Taxation of income received by unit holders

Unit holders will receive taxable and non-taxable income in the form of distributions which may either be in the form of cash or additional units. Unit holders who sell their units other than dealers in securities will not be taxable on the sale or redemption of the units on the grounds that it is a capital gain.

Unit holders are subject to tax on an amount equivalent to their share of the total taxable income of the unit trust for a year of assessment distributed to them by way of distributions in that year.

Unit holders receive the distributions net of tax. The attached tax credit will be available for set-off against the tax chargeable on the unit holders. The taxpayer only pays additional taxes if his tax rate is higher than the tax rate applied on the unit trust. However, the taxpayer should be entitled to a refund if his tax rate is below the tax rate applied on the unit trust.

Unit holders will be exempt from tax if the unit trust distributes income that is exempt from tax such as certain types of interest income and foreign sourced income or gains from disposal of investments.

Bonus issues arising from the split of existing units or distribution of unrealised gains will not be taxable. However, if the bonus issue of units represents distribution of income derived from investments of the unit trust, it will be subject to tax.

The individuals would be taxed on scaled rates ranging from 0% to 30% depending on their income. Non-resident individuals are not subject to withholding tax on the distribution of income from the unit trust, but they will be tax at a flat rate of 30%.

Filing of tax returns

Unit holders need to declare their taxable distributions from unit trusts together with their income from other sources in the relevant Income Tax Return Forms.

Next week, we will set out the taxation of unit holders of real estate investment trusts and property trust funds.

This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.

This article was originally published on the Sun daily.

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