INLAND REVENUE BOARD OF MALAYSIA

UNIT TRUST FUNDS

PART II - TAXATION OF UNIT TRUSTS

PUBLIC RULING NO. 7/2014

Translation from the original Bahasa Malaysia text.

DATE OF PUBLICATION: 4 NOVEMBER 2014

 UNIT TRUST FUNDS
PART II - TAXATION OF UNIT TRUSTS

Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Published by
Inland Revenue Board of Malaysia

First edition on 23 May 2013

Second edition on 4 November 2014

© 2014 by Inland Revenue Board of Malaysia

All rights reserved on this Public Ruling are

owned by Inland Revenue Board of Malaysia.
One print or electronic copy may be made for
personal use. Professional firms and
associations are permitted to use the Public
Ruling for training purposes only. Systemic or
multiple reproduction, distribution to multiple
location via electronic or other means,
duplication of any material in this Public Ruling
for a fee or commercial purposes, or
modification of the content of the Public Ruling
are prohibited.
 UNIT TRUST FUNDS
PART II - TAXATION OF UNIT TRUSTS

Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

CONTENTS Page

1. Objective 1
2. Relevant Provisions Of The Law 1
3. Interpretation 1
4. Basis Of Assessment Of Unit Trusts 1
5. Residence Status 2
6. Deductibility Of Expenses 2
7. Taxation Of Unit Trusts 4
8. Taxation Of Property Trusts Other Than Real Estate Investment 10
Trust Or Property Trust Fund
9. Updates And Amendments 14

DIRECTOR GENERAL'S PUBLIC RULING

Section 138A of the Income Tax Act 1967 [ITA] provides that the Director
General is empowered to make a Public Ruling in relation to the application of
any provisions of the ITA.

A Public Ruling is issued as a guide for the public and officers of the Inland
Revenue Board of Malaysia. It sets out the interpretation of the Director General
of Inland Revenue in respect of the particular tax law and the policy as well as the
procedure applicable to it.

The Director General may withdraw either wholly or in part, by notice of

withdrawal or by publication of a new ruling.

Director General of Inland Revenue,

Inland Revenue Board of Malaysia.
 UNIT TRUST FUNDS
PART II - TAXATION OF UNIT TRUSTS

Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

1. Objective

The objective of this Public Ruling (PR) is to explain the taxation of unit trust
funds and property trusts other than a real estate investment trust or property
trust fund (REIT / PTF) regulated by the Securities Commission (SC).

2. Relevant Provisions Of The Law

2.1 This PR takes into account laws which are in force as at the date this PR
is published.

2.2 The provisions of the Income Tax Act 1967 (ITA) related to this PR are
sections 2, 8, 21A, 33, 43, 44, 61, 63A, 63B, 63D, 110, paragraphs 4(a)
and 4(d), Part I of Schedule 1, paragraphs 28, 35 and 35A of Schedule 6.

3. Interpretation

The words used in this PR have the following meaning:

3.1 “Individual” means a natural person.

3.2 “Director General” (DG) means the Director General of Inland Revenue
Board of Malaysia referred to in section 134 of the ITA.

3.3 “Person” includes a company, a body of persons, a limited liability

partnership and a corporation sole.

3.4 “Securities Commission” means the Securities Commission established

under section 3 of the Securities Commission Act 1993 [Act 498].

4. Basis Of Assessment Of Unit Trusts

Under section 21A of the ITA, the basis year for a year of assessment of a unit
trust will be either the basis year for a year of assessment or the financial
accounting period (for a period of 12 months not ending on 31 December). All the
subsections of section 21A are applicable except for subsection 21A(5) of the
ITA.

Example 1

ABC Unit Trust commenced operations on 1.11.2010 and made up its 1st set of
accounts to 30.6.2011 and subsequent accounts to 30 June every year.

The basis periods for the years of assessment are as follows:

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Year Of Assessment Basis Period

2010 1.11.2010 to 31.12.2010
2011 1.01.2011 to 31.12.2011
2012 1.07.2011 to 30.06.2012
2013 1.07.2012 to 30.06.2013

5. Residence Status

A unit trust is a trust body. Pursuant to subsection 61(3) of the ITA, a trust body
is resident in Malaysia for the basis year for a year of assessment if any trustee
member of the trust body is resident in Malaysia for that basis year.

6. Deductibility Of Expenses

6.1 Pursuant to subsection 33(1) of the ITA, deductions for expenses wholly
and exclusively incurred in the production of gross income are allowable
against each source of the fund. Examples of deductions for expenses
wholly and exclusively incurred in the production of gross income include –

(a) interest on monies borrowed by the unit trust to finance the

purchase of investments; and
(b) direct expenses incurred in the letting of real property by unit trusts
other than REIT / PTF where the income from the letting of property
is charged to tax under paragraph 4(d) of the ITA.

6.2 The following expenses incurred by a unit trust are not allowable as they
are regarded as not being wholly and exclusively incurred in the
production of the investment income:

(a) manager’s remuneration;

(b) maintenance of register of unit holders;
(c) share registration expenses; and
(d) secretarial, audit and accounting fees, telephone charges, printing
and stationery costs; and
(e) postage.

However, pursuant to section 63B of the ITA, in ascertaining the total

income of a unit trust for the basis period for a year of assessment, a
special deduction is allowed in respect of the above expenses which are
referred to as permitted expenses. The special deduction is determined in
accordance with the formula:

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

B
A X
4C

where

A - is the total permitted expenses incurred for that basis period;

B - is the gross income consisting of dividend, interest and rent

chargeable to tax for that basis period;

C - is the aggregate gross income consisting of dividend and interest

(whether such dividend or interest is exempt or not), and rent
and gains made from the realisation of investments (whether
chargeable to tax or not) for that basis period.

This special deduction of expenses is subject to a minimum of 10% of the

total permitted expenses incurred for the basis period. The allowable
portion of the permitted expenses will be deducted from the aggregate
income. If the aggregate income is insufficient or there is no aggregate
income, the unabsorbed portion of the special deduction is not allowed to
be carried forward to subsequent years of assessment.

6.3 Prior to the year of assessment 2014 the special deduction for the
permitted expenses was determined in accordance with the formula:

B
A X
4C

where

A - is the total permitted expenses incurred for that basis period;

B - is the gross income consisting of dividend, interest and rent
chargeable to tax for that basis period;
C - is the aggregate gross income consisting of dividend (whether
exempt or not), interest, rent and gains made from the realization
of investments (whether chargeable to tax or not) for that basis
period.

This special deduction of expenses was also subject to a minimum of 10%

of the total permitted expenses incurred for the basis period. The
allowable portion of the permitted expenses was to be deducted from the
aggregate income. If the aggregate income was insufficient or there was

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

no aggregate income, the unabsorbed portion of the special deduction

was not allowed to be carried forward to subsequent years of assessment.

7. Taxation Of Unit Trusts

7.1 The fund is treated as a trust body and the taxation of the fund is
governed principally by sections 61 and 63B of the ITA.

7.2 The tax rate applicable to a unit trust is as specified in paragraph 2, Part I
of Schedule 1 of the ITA.

7.3 The following examples illustrate the determination of a unit trust’s

chargeable income and tax payable.

Example 2

XYZ Unit Trust Fund, established in 2001 invests in shares and bonds.
The profit and loss account for the year ended 31.12.2014 is as follows:

Income RM
Malaysian dividend (single-tier) 400,000
Dividend (pioneer company - tax exempt) 100,000
Dividend from overseas (tax exempt) 100,000
Interest 30,000
Interest (tax exempt) 5,000
Gains on disposal of investments 300,000
Gross income 935,000
Less: Expenses
Trustee’s fee 24,000
Manager’s remuneration 24,000
Share registration expenses 20,000
Audit, accounting and secretarial fees 12,000
Telephone and stationary expenses 6,000
Printing and postage 5,000 91,000
Net profit 844,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Computation of Tax Payable For The Year of Assessment 2014

Income RM
Interest 30,000
Gross income 30,000

Less:
Special deduction for permitted expenses1

Formula:

B
A X
4C

30,000
67,000 X = 537
4 X 935,000

Or 10% of 67,000 = 6,700

Whichever is the greater 6,700

Chargeable income 23,300

Tax on RM23,300 @ 25% 5,825.00

Tax payable 5,825.00

1
Note
Permitted expenses
Total permitted expenses incurred for the basis period (A):
Manager’s remuneration 24,000
Share registration expenses 20,000
Audit, accounting and secretarial fees 12,000
Telephone and stationery 6,000
Printing and postage _5,000
67,000

Gross income consisting of interest chargeable to tax (B):

Interest 30,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Aggregate of the gross income (whether chargeable to tax

or not)( C)
Malaysian dividend (single-tier) 400,000
Dividend (pioneer company) 100,000
Dividend from overseas 100,000
Interest 35,000
Gains on disposal of investments 300,000
935,000

Example 3

ABC Unit Trust Fund was established to invest in shares, bonds and fixed
deposits. The profit and loss account of ABC Unit Trust for the year ended
31.12.2014 is as follows:

Income RM
Malaysian dividend (single-tier) 200,000
Exempt dividend 50,000
Interest (tax exempt) 100,000
Gains from disposal of shares 500,000
Gross income 850,000
Less: Expenses
Manager’s remuneration 30,000
Share registration expenses 10,000
Telephone and stationery 6,000
Trustee’s fee 24,000
Secretarial and accounting fee 12,000
Interest on loan to purchase shares 6,000 88,000
Net profit 762,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Computation of Tax Payable For The Year of Assessment 2014

Income RM RM
Dividend 200,000
Less: interest on loan __6,000
Tax exempt 194,000 NIL
Dividend (tax exempt) NIL
Interest (tax exempt) NIL
Gains from disposal of shares NIL
Aggregate income NIL
Less:
Special deduction for permitted expenses2

Formula:
B
A X
4C

0
58,000 X = 0
4 X 850,000

or 10% of 58,000 = 5,800

whichever is the greater 5,800 NIL

Chargeable income NIL

Tax payable NIL

2
Note
Permitted expenses
Total permitted expenses incurred for the basis period (A):
Manager’s remuneration 30,000
Share registration expenses 10,000
Telephone and stationery 6,000
Secretarial and accounting fee 12,000
58,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Gross income chargeable to tax (B):

NIL NIL

Aggregate of the gross income (whether chargeable or

not)( C)
Malaysian dividend 200,000
Exempt dividend 50,000
Interest (tax exempt) 100,000
Gains from disposal of shares 500,000
850,000

Example 4

DEF Islamic Unit Trust Fund is an Islamic fixed income fund that invests in
Islamic money market instruments, short term bonds (sukuk) and
government bonds (sukuk) in Malaysia and other foreign countries
approved for investments by the SC and Syariah Advisory Council. The
profit and loss account of DEF Islamic Unit Trust Fund for the year ended
30.9.2014 is as follows:

Income RM
Gross dividend income (date of payment 900,000
28.12.2013)
Profits from short term deposits, bank 3,000,000
balances and government sukuks
Net realized gain on sale of investments 1,100,000
Gross income 5,000,000
Less: Expenses
Manager’s remuneration 300,000
Trustee’s fee 24,000
Auditors’ remuneration 6,000
Tax agent’s fee 5,000
Administration expenses 20,000 355,000
Net profit 4,645,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Computation of Tax Payable For Year of Assessment 2014

Income RM
Dividend 900,000
Profits from short term deposits, bank balances and
government sukuks (tax exempt) NIL
Gross income 900,000
Less:
Special deduction for permitted expenses3

Formula:

B
A X
4C

900,000
326,000 X = 14,670
4 X 5,000,000

or 10% of 326,000 = 32,600

whichever is the greater 32,600

Chargeable income 867,400

Tax on RM867,400 @ 25% 216,850

Less: section 110 set-off (RM900,000 X 25%) 225,000
Tax repayable (8,150)

3
Note
Permitted expenses
Total permitted expenses incurred for the basis period (A):
Manager’s remuneration 300,000
Auditors’ remuneration 6,000
Administration expenses 20,000
326,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Gross income consisting of dividend chargeable to tax

(B):
Dividend 900,000

Aggregate of the gross income (whether chargeable or

not)(C)
Dividend income 900,000
Profits from short term deposits, bank balances and 3,000,000
government sukuks
Net realized gain on sale of investments 1,100,000
5,000,000

8. Taxation Of Property Trusts Other Than Real Estate Investment Trust Or

Property Trust Fund

8.1 Property Trusts that invest primarily in income generating real estate but
do not qualify as REIT / PTF under the SC guidelines will continue to have
their rental income taxed under paragraph 4(d) of the ITA.

8.2 As rental income from the rental of properties is treated as income under
paragraph 4(d) of the ITA, property trusts are not eligible to claim capital
allowances on fixed assets pursuant to paragraph 2 of Schedule 3 of the
ITA. However a property trust other than a REIT / PTF that receives rental
income from its properties is entitled to claim a special deduction for
qualifying capital expenditure under section 63A of the ITA apart from the
special deduction for expenses under section 63B of the ITA. This special
deduction for qualifying capital expenditure is deductible against the
adjusted income from the rental source of the unit trust.

8.3 Qualifying capital expenditure means capital expenditure incurred on the

provision of machinery or plant used for the purposes of deriving rent from
the letting of property, including -

(a) expenditure incurred on the alteration of an existing building for the

purpose of installing that machinery or plant and other expenditure
incurred incidentally to the installation thereof provided that such
expenditure does not exceed 75% of the aggregate of itself and any
other qualifying capital expenditure; and
(b) expenditure incurred on preparing or levelling land in order to
prepare a site for the installation of the machinery or plant provided
that such expenditure does not exceed 10% of the aggregate of
itself and any other qualifying capital expenditure.

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

8.4 The following conditions must be fulfilled in order to qualify for the special
deduction:

(a) the qualifying capital expenditure must be incurred by the unit trust;
(b) the unit trust must be the owner of the asset; and
(c) the asset must be in use by the unit trust for the purposes of
deriving rent from the letting of real property.

8.5 The special deduction will be in the form of an allowance equal to 10% of
the qualifying capital expenditure made against the adjusted income from
the source relating to the derivation of rental from the letting of real
property. Any unabsorbed allowances will not be allowed to be carried
forward to subsequent years of assessment.

8.6 Where at the end of the basis period for any year of assessment,

(a) the residual expenditure in relation to an asset in respect of which

qualifying capital expenditure has been incurred is zero;
(b) the asset is no longer owned by the unit trust; or
(c) the asset is no longer in use by the unit trust
no allowance is to be made to the unit trust for that year of assessment or
subsequent years.

8.7 The special deduction for qualifying capital expenditure of a unit trust is
given in ascertaining statutory income from the rental source. It is not a
capital allowance in the normal sense and there is no carry forward if the
adjusted income is insufficient. Neither is there any balancing charge or
balancing allowance.

8.8 This special deduction is not applicable to unit trusts which are REIT /
PTF.

8.9 To ensure that only REIT / PTF enjoy the special tax treatment where
rental income from the letting of property is treated as a business source,
a new provision under section 63D of the ITA was introduced to state that
rental income received by unit trusts (other than REIT / PTF) shall not be
treated as a business source.

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

8.10 The following example illustrates the tax treatment of a property trust
other than REIT / PTF:

Example 5

A property trust (not a REIT / PTF), established in 2001 invests primarily in

real estate besides investing in shares and bonds. A building was acquired
in 2014 and was rented out from 1.6.2014. Before the building was rented
out, additional elevators were installed. The capital expenditure on the
elevator amounted to RM900,000 and the alteration cost was RM600,000.
The profit and loss account for the year ended 31.12.2014 is as follows:

Income RM
Malaysian dividend (single-tier) 400,000
Dividend (pioneer company - tax exempt) 100,000
Dividend from overseas company 100,000
Interest (tax exempt) 5,000
Rent (gross) 700,000
Gains on disposal of investments 300,000
Gross income 1,605,000
Less: Expenses
Trustee’s fee 24,000
Management fee for fund 24,000
Property management fee 12,000
Share registration expenses 20,000
Audit, accounting and secretarial fees 12,000
Office rent 18,000
Telephone and stationary expenses 6,000
Printing and postage 5,000
Assessment and quit rent 10,000
136,000
Fire insurance 5,000
Net profit 1,469,000

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Computation of Tax Payable For The Year of Assessment 2014

Income RM
Rent 700,000
Less:
Property management fee 12,000
Assessment and quit rent 10,000
Fire insurance 5,000 27,000
673,000
Less:
Special deduction for qualifying capital
expenditure:

Qualifying capital expenditure is:

Cost of elevator 900,000
Cost of alteration 600,000
1,500,000

Allowance = 10% of 1,500,000 = 150,000 150,000

523,000
Dividend (tax exempt) NIL
Interest (tax exempt) NIL

Aggregate income 523,000

Less:
Special deduction for permitted expenses6

Formula:

B
A X
4C

700,000
67,000 X = 7,305
4 X 1,605,000

or 10% of 67,000 = 6,700

whichever is the greater 7,305
Chargeable income 515,695

Tax on RM515,695 @ 25% 128,923.75

Tax payable 128,923.75

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

6
Note:
Permitted expenses
Total permitted expenses incurred for the basis period (A):
Management fee for fund 24,000
Share registration expenses 20,000
Audit, accounting & secretarial fees 12,000
Telephone and stationery 6,000
Printing and postage 5,000
67,000

Gross income consisting of rent chargeable to tax (B):

Rent 700,000

Aggregate of the gross income (whether chargeable or

not)(C)

Malaysian dividend (single-tier) 400,000

Dividend (pioneer company) 100,000
Dividend from overseas 100,000
Interest (tax exempt) 5,000
Rent (gross) 700,000
Gains on disposal of investments _300,000
1,605,000

9. Updates and Amendments

Amendments
This PR replaces This PR has incorporated the contents of Public Ruling
Public Ruling No. 6/2013 with the following changes:
No.6/2013 published
on 23 May 2013. Paragraph Explanation
6.2 Amended to explain the Budget 2014
amendment in the formula for the
special deduction for expenses
6.3 New paragraph inserted for
clarification

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Public Ruling No. 7/2014

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 4 November 2014

Paragraph Explanation
7.3 Examples 2, 3 and 4 of the previous
PR replaced.
8.10 Example 5 of the previous PR
replaced.
Paragraph 9 of the previous PR
deleted.

Director General of Inland Revenue,

Inland Revenue Board of Malaysia.

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