The Malaysian Government has introduced two exemption orders under the Income Tax Act 1967 (“ITA”) to provide relief to eligible unit trusts from capital gains tax (“CGT”) and taxes on foreign-sourced income (“FSI”).
 
The following orders were gazetted on 19 September 2024:
 

Income Tax (Unit Trust) Exemption Order 2024
 
The Income Tax (Unit Trust) Exemption Order 2024 (“CGT-EO”) has effect from 1 January 2024 to 31 December 2028. Under this exemption, unit trusts resident in Malaysia will no longer be subject to income tax on gains or profits arising from the disposal of shares in unlisted companies incorporated in Malaysia. The exemption also applies to gains or profits from shares disposed of under section 15C of the ITA, i.e. shares of a controlled company incorporated outside Malaysia that owns, directly or indirectly, real property situated in Malaysia.
 
It is crucial to note that the CGT-EO does not apply to unit trusts classified as Real Estate Investment Trusts (“REITs”) or Property Trust Funds (“PTFs”) listed on Bursa Malaysia, thereby limiting its application to traditional unit trusts managed by local management companies.
 
Any losses incurred from the disposal of shares will be deductible under subsections 65E(5) and 65E(6) of the ITA. This means that a unit trust that incurs a loss from the disposal of a capital asset (such as unlisted shares) can use this loss to offset gains from the disposal of other capital assets in the same year. Additionally, any unutilised losses can be carried forward for up to ten consecutive years and be deducted against future gains of the unit trust. These provisions ensure that while unit trusts are exempt from paying CGT on gains, they can still benefit from tax relief on losses.
 
In addition, the CGT-EO also stipulates that it does not apply to gains or profits from the disposal of shares that are chargeable as business income under paragraph 4(a) of the ITA. In such cases, normal business income rules will apply. Despite the relief from CGT, unit trusts benefiting from this exemption are required to comply with all existing filing and reporting requirements under the ITA, including the submission of returns and statements of accounts.
 
Income Tax (Unit Trust in Relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024
 
The second order, the Income Tax (Unit Trust in Relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024 (“FSI-EO”) addresses FSI. The FSI-EO applies from 1 January 2024 until 31 December 2026 and exempts qualifying unit trusts from paying income tax on gross income from all sources of income that is received in Malaysia from outside Malaysia. The exemption applies to all sources of income defined under section 4 of the ITA, including dividends, interest, and profits from the disposal of assets.
 
As in the case of the CGT-EO, the FSI-EO does not apply to unit trusts classified as REITs or PTFs listed on Bursa Malaysia. The FSI-EO also does not apply to unit trusts that carries on banking, insurance, sea transport or air transport business.
 
The exemption under the FSI-EO is also limited to a “qualifying unit trust”, that is, a unit trust resident in Malaysia managed by a management company which is licensed by the Securities Commission Malaysia by which or on whose behalf a unit of a qualifying unit trust:
 

and includes any person for the time being exercising the functions of the management company.
 
Further, to qualify for this exemption:
 

It is to be noted that any deductions related to tax-exempted FSI are disregarded when calculating the unit trust’s chargeable income.
 
The unit trusts benefiting from this FSI relief, as with the CGT exemption, must comply with the reporting requirements under the ITA. They are obligated to submit necessary returns and provide statements of accounts or any other information under the ITA.
 
Comments
 
These exemption orders are a positive development for Malaysia’s investment sector, particularly for individual unit trust investors. The CGT-EO addresses concerns arising from the introduction of CGT on the disposal of unlisted shares by entities such as companies and trust bodies. While individuals are generally exempt from CGT on such disposals, unit trusts—whose investors are predominantly individuals—were inadvertently affected due to their structure as trust bodies. The CGT-EO ensures that gains from the disposal of unlisted shares by qualifying unit trusts are not subject to income tax, thereby preventing the unintended taxation of individual investors through their unit trust investments.
 
On the other hand, the FSI-EO provides relief from taxation of FSI received in Malaysia by unit trusts. Following the removal of the blanket tax exemption on FSI from 1 January 2022, unit trusts faced potential taxation on such income. By alleviating the tax burdens related to capital gains and FSI, the Government is ensuring that unit trust investors are not unduly impacted by recent legislative changes while aligning with global tax standards, particularly in light of increasing scrutiny on FSI taxation by international bodies like the OECD.
 
These exemptions reflect the Malaysian Government’s commitment to enhancing the competitiveness of the domestic investment market while providing clarity and certainty to investors. Unit trusts, which pool funds from a broad base of investors, including individuals, are an important vehicle for wealth accumulation and investment growth. By easing the tax liabilities for these trusts, the Government is helping to foster a more favourable investment climate.
 
Alert by Victoria Low (Associate) of the Tax Practice of Skrine.

 

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