Lecture 4

Trust

Dr Nakha Ratnam Somasundaram

Nov 2015 Dr Nakha Ratnam Somasundaram 1

General contents
Chargeable person
Trust resident status
Tax treatment of trust body and beneficiaries
Sources ordinary and further source
Total income
Trustee remuneration deductibility
Distribution to beneficiary

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General contents ...
Tax rates
Trust and the beneficiary
Application of section 61(2)
Discretionary trust
Non-discretionary trust
Distributable income
Trust for accumulation
Annuities
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Trust an introduction
A trust body, in relation to a trust, means the
trust body provided for by section 61.
Essentially it is an equitable obligation in law
binding a trustee to deal with the trust
property for the benefit of the beneficiaries
A trustee may himself or herself be a
beneficiary.
Under law, any one of the beneficiaries may
enforce the obligation.

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 Deceased Individual, trust,
executor and beneficiaries

Wealth = Estate
Will Executor

Manage estate
Deceased Individual
Beneficiaries

B1 B2

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Chargeable person
So long as a trust subsists the trustees for the time
being shall be known as the trust body and the trust
body shall be treated as a person for the purposes of
all the provisions of this Act except Part VIII (other than
section 122);
The trust therefore can suffer penalties under section
122 but cannot be liable for serious offences under
Part VIII like incorrect returns and wilful evasion

Law: Section 61
Case law: X & Co v Comptroller of Income Tax
re: issue of exemption, a trust and a charitable trust are distinguished for
income tax purposes

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Trust resident status
Section 61 (3)
Notwithstanding any other provision of this Act, a trust body shall be
regarded as resident for the basis year for a year of assessment if, but only
if, any trustee member of that body is resident for that basis year:
Provided that where
(a) the trust was created outside Malaysia by a person or persons who
were not citizens;
(b) the income of that trust body for that basis year is wholly derived from
outside Malaysia;
(c) the trust is administered for the whole of that basis year outside
Malaysia; and
(d) at least one-half of the number of the member trustees are not
resident in Malaysia for that basis year,
that trust body shall not be regarded as resident in Malaysia for that basis
year.

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Tax treatment of trust body
The trust is subject to tax on the income
accruing in or derived from Malaysia.
Foreign income from a source outside
Malaysia is exempted
The trust would be subject to tax as a person
at 25%

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 In arriving at the chargeable income, revenue
expenses must comply with section 33 and
section 39 provisions to be deductible
Generally administrative expenses of
managing the trust or expenses incurred after
the receipt of the income would not be
allowed
Example
Trustee remuneration

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Format of tax computation
The format follows the tax computation for
any tax entity under section 3 and 4, with the
following additional deductions :
annuities paid to beneficiaries under section
63(3)(b)
Distribution of income to the beneficiaries if
section 61(2) is applied
The trust body total income is the chargeable
income.

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 Computation of trust income
Year of assessment 2014

Business RM
Gross income 747,600
Less: Allowable expenses 224,280
Adjusted income 523,320
Add: Balancing charge 26,680
550,000
Less:
Balancing allowance 21,360
Capital allowance 48,640 70,000
Statutory income 480,000

Other income
Rent 20,000
Interest 70,000
Dividend (Australia)(exempted Para 28 Sch 6) 0 90,000
Aggregate income 570,000
Less: Annuity 50,000
520,000
Less: Approved donation 30,000
490,000
Less: Payment to beneficiaries
First child 90,000
Second child 60,000
Third child 30,000 180,000
Total income / Chargeable income 310,000
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Beneficiary
Share of trust income
A beneficiary would be subjected to tax on his
share of the trust income under section 4(e)
The share is computed on the gross amount i.e. share
of income where section 61(2) has applied
Or share of income + tax paid by the trust where 61(2)
was not applied
Personal relief would allowed to the
beneficiary

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 Accumulation
Where the beneficiarys income is accumulated
then the sum received as a lump sum would be a
capital receipt and no tax is chargeable on that
sum.

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Source ordinary and further source
The income of the beneficiary can be two
types:
Ordinary source
Further source

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Ordinary source
This is the entitlement of the beneficiary to
the total income of the trust
This would be his statutory income from the
trust from an ordinary source

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Further source
A further source arises if the beneficiary
received a share of the trust income from
outside Malaysia
Further source is deemed to be derived from
outside Malaysia.
A beneficiary will not be assessed on the
further source [exempted under Schedule 6
Para 28 ]

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Trustee remuneration
Fees and charges for the administration of the
trust is not deductible
Payments to the trustee for the carrying on of
the business of trust as manager[e.g. salary] is
deductible but must fulfill conditions of
section 33
Such sum is taxable in the hands of the trustee
Case law
X as Trustee of the estate of Y v CIT

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Distribution to the beneficiary
The distribution is not a deductible sum in
arriving at the total income of the trust
It is also not taxable in the hands of the
beneficiary
Distribution has to be distinguished as
between trust income distribution (deductible
for the trust under sec 61(2) and taxable in the
hands of the beneficiary) and trust residue
distribution which is capital
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Tax rates
The trust is charged to tax at 25%

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Trust and the beneficiaries
The income after tax could be distributed to
the beneficiaries net of tax.
Beneficiaries could be charged to tax on the
gross and the tax suffered by the trust would
be allowed a credit by under section 110

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Application of section 61(2)
The distribution to a beneficiary is not
deductible in arriving at the total income of
the trust
However the DGIR may allow a deduction for
the share of the beneficiary under section
61(2)
In that case the beneficiary would be taxed on
the full sum received i.e. without re-grossing

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Discretionary trust
A trust where full powers is given to the
trustee to distribute the income to the
beneficiary is a discretionary trust
Discretion includes the power to pay all or
part of the income

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Trust for accumulation
Where the trust income is retained and
accumulated, to be paid at a point in time
several years later, such a trust is a trust for
accumulation
Example
Sum accumulated for a minor aged 2 years till he attains 18 years of age

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Full discretionary trust
Full discretionary trust empowers the trustee
to pay to the beneficiary a sum as the trustee
deems fit
Such a trust can have one single beneficiary or
several beneficiaries
The income of the beneficiary would be
ascertained under section 62(2)

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Single beneficiary
The income of the beneficiary would be the
lower of the following:
Total of all sums received in Malaysia ; or
The trust total income
Where the sum received exceeds the total
income of the trust, the excess is not taxed
Example
Trust total income: RM10,000 Trust total income: RM10,000
Sum received : RM12,000 Sum received : RM8,000
Amount to be taxed : RM10,000 Amount to be taxed : RM8,000

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Several beneficiaries
If the discretionary trust has several
beneficiaries, and if the aggregate of the sum
received exceed the trust total income, the
statutory income of the beneficiary is
determined using a formula:

SI of Total of all sums received by beneficiary

beneficiary = Trust total income X -----------------------------------------------------
Aggregate of sums received by all
beneficiaries

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 Example
Several beneficiaries Sec 62(2)(b) RM
Anand received 12,000
Total sum received by all beneficiaries 48,000
Trust total income 24,000

Deemed statutory income of Anand

24,000 x 12,000 / 48,000 6,000

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Non-discretionary trust
This trust would spell out the entitlement of
each of the beneficiary and therefore the
trustee has no discretion
The beneficiaries would be taxed on their
entitlement on a receivable basis
Example
Anand is entitled to of the trust total income
Trust total income is RM100,000
Anands statutory income from the trust would be: x RM100,000 = RM50,000

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Distributable income
This is an accounting derived figure,
deducting from the gross income all expenses
and represents the cash available for
distribution tax law is not applied in arriving
at the income
The distributable income therefore differs
from the trust total income an income
arrived at by applying the tax law

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 Distributable and total income
Distributable income Total income

Distributable income 2,500

Gross income 9,000
Less
Add:
Depreciation 1,000
Depreciation 1,000
Renovation 2,000
Renovation 2,000 3,000
Salaries 3,000
5,500
Utilities 500 6,500
Less: Capital allowance 500
Net/Distributable income 2,500
Statutory/Total income 5,000

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Mixed trust
Some trust have both discretionary and non-
discretionary elements
In such cases the income must be apportioned
between the elements using a formula under
section 62(3)(a).

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 Discretionary part

Discretionary portion of
Trust total x distributable income
income Distributable income of trust

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 Discretionary part

Non-Discretionary portion of
Trust total x distributable income
income Distributable income of trust

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 If the trust includes an accumulation element,
the sum accumulated must be excluded and
the balance apportioned to the beneficiaries
accordingly:

Distributable income less

Trust total X accumulation
income Distributable income of trust

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 The sum accumulated for the beneficiaries
does not affect the total chargeable income of
the trust.

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 Example
Trust for accumulation
Distributable income 102,000
Less: Accumulation 3,000
Distibutable income after accumulation 99,000

Total income of trust 51,000

Deemed trust total income

51,000 x 99,000 x 102,000 49,500

Discretionary portion 1/3

Non-discretionary portion 2/3

Allocation
Discretionary portion 1/3 x 49,500 16,500
Non-discretionary portion 2/3 x 49,500 33,000
Total 49,500

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Trust annuities
The trust deed may provide for annuity
payment to a beneficiary
This annuity is deducted from the aggregate
income
Annuities paid are deemed derived from
Malaysia but in the case of a foreign trust, the
annuity would be deemed derived from
Malaysia only if any part of the annuity is
deducted in arriving at the Malaysian total
income
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 End of trust

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