TAX667

ADVANCED TAXATION
Chapter 2

TRUSTS
Section 61 ITA 1967
 Learning Outcomes

• At the end of this chapter, students should be able to:

– Determine the resident status of a trust body

– Compute the distributable and total income of a trust body
– Distinguish the different between types of trusts
(accumulation, discretionary, non-discretionary and mixed
trust)
– Compute the statutory income of beneficiary from trust body
– Apply or not to apply s 61(2) and its implication on tax liability
– Compute the income tax payable for the trust body and the
beneficiaries

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 Chapter’s Outline
Relationship between
Resident Status of a
Deceased Person,
Trust Body
Executor & Trust

Trust’s Total Income (TI) &

Distributable Income (DI)
Types of Trusts

Distribution to Statutory Income of

Beneficiaries Beneficiaries from
(Section 61(2)) Trust Body

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 Relationship between Deceased Person,
Executor & Trust

Individual

Deceased
A (date of death)
Person
B (end of period of
administration)
Executor

Beneficiary Creation of trust

Trust Body
Beneficiary 1 Beneficiary 2 / Trustee
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 Trusts
A trust is a relationship (not a legal entity by itself) where
property, be it real, personal, tangible or intangible,
is transferred by one party (the settlor)
to be held by another party (the trustee/s)
for the benefit of a third party (the beneficiaries).

• Trust is created by a trust deed where an individual

transfers his property (e.g shares, bonds, cash,
immovable properties) for the benefit of his
beneficiaries.
• A trust can be created by will or during the life time of
the settlor.
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 Trustees / Trust Body
The trustees are the legal owners of the trust property and
they are responsible for administering the affairs of the trust
such as investing the trust assets, accounting for transactions
related to trust assets and reporting to the beneficiaries, and
filing tax returns on behalf of the trust.

• The trustees are also known as a ‘trust body’ and would be

treated as a chargeable person under the Act.
– The trust body is only liable for penalty or tax under Section 122 and
would not be subject to offences and penalty set out in Part 8 of the Act.
– Part 8 deals with offences and penalties, which include incorrect return,
willful evasion, failure to furnish tax return and etc.
– This would certainly safeguard the trust from being liable for severe
offence like tax evasion or tax understatement or jail imprisonment.
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 Residence Status of Trust Body
• Any trustee member of the trust is
RESIDENT resident

• The trust was created outside Malaysia

by an individual who at that time was
not a Malaysian citizen
• Its income for the relevant basis year is
derived entirely from sources outside
NON-RESIDENT Malaysia
• It is administered for the whole of the
basis year outside Malaysia
• At least half of the trustees are not
resident in Malaysia

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 Tax Treatment for Trust Body
The trust body is subject to tax on any income accruing in
or derived from Malaysia
Wef YA 2004, foreign source income received by trust
(resident/not resident) is tax exempted

A trust is subject to income tax at 24% (w.e.f YA 2016)

Revenue expenses that are Expenses of an administrative nature

DEDUCTIBLE in computing the (ex: remuneration of trustees) or that
chargeable income of a trust are those were incurred after the receipt of
expenses wholly and exclusively incurred income are NOT DEDUCTIBLE, in
in the production of income arriving at the adjusted income.

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 Computation of Trust’s Total Income

• A trust body is treated as deriving income from

sources of income such as business, rents,
interest, dividends, other income.
• The ascertainment of statutory income under the
Act is the same as other chargeable person, that
is by reference to s3 and s4 of the ITA 1967.

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 Computation of Trust’s Total Income

• Deductibility of trustee’s remuneration

Where trustee is paid for the administration of the

trust, such remuneration is NOT DEDUCTIBLE
in arriving at the trust total income.

If the trustee involves directly in carrying on a

business of the trust, the remuneration would be
DEDUCTIBLE if it satisfies s33 wholly and
exclusively test, or incidental to the production
of business income.

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 Computation of Trust’s Total Income

• Distribution to beneficiary

The distribution of income to the beneficiary by

the trust is NOT DEDUCTIBLE in arriving at the
trust total income as such distribution is not
revenue expenses
**(Section 61(2) is not to be applied)

However, any annuity payable by the trust is

DEDUCTIBLE in arriving at the total income of
the trust

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 Computation of Distributable Income

• DISTRIBUTABLE INCOME IS AN ACCOUNTING CONCEPT,

which is arrived by deducting all expenses against all
income.
• It is the amount of cash available to the trust for distribution
to the beneficiaries.
• The amount of distributable income is always differ from the
total income of the trust.
• When there exist more than one beneficiary, the
distributable income is used as a ratio to allocate / apportion
the total income of the trust to the respective beneficiaries.

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Total Income vs Distributable Income

TI DI

COMPUTATION OF COMPUTATION OF
INCOME FROM INCOME FROM
TAXATION ACCOUNTING
POINT OF VIEW POINT OF VIEW

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 Beneficiary
Beneficiaries are the beneficial or equitable owners
of the trust property

• Depending on the terms of the trust, beneficiaries will receive

the income and/or the property itself at the appointed time
• A beneficiary is subject to tax on his/her share of income of
the trust
– The share of income receive from trust is the net income (after tax
payable by the trust).
– The beneficiary nonetheless would be assessed on gross amount
under s4(e).
– The tax payable by the trust is available as a tax credit to the
beneficiary upon income distribution by the trust body.
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 Income of a Beneficiary

Ordinary source Further source

Further source of income

The entitlement exists where the beneficiary
of a beneficiary to the receives a share of the trust
total income of the income from overseas
trust shall be deemed
to be his statutory W.e.f YA 2004, individual (R/NR)
income from the will not be assessed to tax on
ordinary source further source, as it is exempted.

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 Relationship between Trust & Beneficiary

• The trust would be assessed to income tax on its chargeable

income at the rate of 24%.
• Thereafter, the net income after tax would be distributed to
beneficiaries.
• The beneficiaries who received the net income would
nevertheless be assessed to tax at the gross amount, under
Section 4(e).
– To avoid double taxation, the tax payable by the trust body would be
given as a tax credit to the beneficiaries upon income distribution.
– The tax credit received from the trust body would be allowed as a set-
off against its income tax payable.

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 S 61(2) – Distribution to Beneficiary
• Generally, the distribution by the trust to the beneficiaries is
NOT DEDUCTIBLE in arriving at total income of the trust.
• However, the proviso to s 61(2) permits an exception.

If the trust body and the beneficiary are resident for

the basis year for the YA, the DG may at his
discretion, allow the beneficiary’s share of income
as a deduction from the trust total income in
ascertaining the chargeable income of the trust body

• The total income and tax payable remain the same.

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 S 61(2) – Distribution to Beneficiary

Section 61(2) is Section 61(2) is

to be applied NOT to be applied

Distribution to the Distribution to the

beneficiaries beneficiaries
= DEDUCTIBLE = NON DEDUCTIBLE

Tax payable by the trust is Tax payable by the trust

not available as tax credit is available as tax credit
to the beneficiaries to the beneficiaries

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 Types of Trusts

Non
Discretionary Discretionary
Trust Trust

Trust for
Accumulation

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 1.Discretionary Trusts

• Discretionary trust is a trust whereby the trustee is

given powers to decide on the amount of trust
income (not capital) to be distributed to the
beneficiary.
• The trustee’s discretion as to the time or mode of
payment is not tantamount to a discretionary trust.

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 1.Discretionary Trusts

Single beneficiary
The income of the beneficiary would be the lower of:

The total of all sums received in Msia

by the beneficiary of the trust

The trust total income

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 1. Discretionary Trust

• Illustration 1
– Dragon Ball Trust is a resident for the YA 2012. Ai Lee is the
beneficiary of the trust and the distribution of income is
based on the trustee’s sole discretion.
– The total income of the trust for the YA 2012 is RM 20,000.
– In 2012, Ai Lee received RM 28,000 from the trust.

– The statutory income of Ai Lee =

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 1.Discretionary Trusts

Several beneficiaries
Where there are several beneficiaries, and the aggregate of all
sums received by the beneficiaries in Msia exceeds the total
income of the trust body for a YA, the statutory income of a
beneficiary is derived as follows:

Total Income X Total of all sums received by beneficiary

of Trust Body Aggregate sums received by all beneficiaries

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 1. Discretionary Trust

• Illustration 2
– Mei Ying received from the trust body RM 10,000
– All beneficiaries received from the trust body RM 40,000
– Trust total income in YA 2012 RM 20,000

– The statutory income of Mei Ying =

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 2.Non-Discretionary Trusts

• Where trust deed spelt out the ratio or the entitlement of

each beneficiary, such trust is said to be a non-discretionary
trust.
• In a non-discretionary trust, beneficiaries would be assessed
to tax based on their entitlement irrespective of whether
they receive such income from the trust body during the year.
• The ordinary source is determined by reference to the ration
of entitlement, not the amount of distribution made by the
trust.

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 Part Discretionary Trusts
• Where the trust consists of discretionary and non-
discretionary beneficiaries, the trust total income have to be
apportioned based on the following formula:

D TI of Trust X Discretionary portion of DI

DI of Trust

ND TI of Trust X Non Discretionary portion of DI

DI of Trust

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 Part Discretionary Trusts

• Illustration 3
– A trust was created in 2001 and the total income for YA
2012 amounts to RM 150,000. 1/3 was related to the
discretionary portion, which relates to Liang Heui.
– Hock Chye is entitled to the balance of trust total income
under the trust deed.
– In 2012, Liang Huei received RM 40,000 from the trust
body while Hock Chye received RM 80,000.
– Required: Compute statutory income for Liang Huei and
Hock Chye

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 3. Trust for Accumulation

• The amount subject to accumulation is excluded from the trust

total income, which is to be apportioned to the beneficiaries
based on the formula:

TI of Trust X DI less Accumulation

DI of Trust

• The trust for accumulation merely affects the tax liability of

beneficiaries. The tax payable by the trust would remain the
same even with the existence of trust for accumulation.
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 3. Trust for Accumulation

• Illustration 4
– A trust is resident for year ended 2012. The following are
the beneficiaries and their entitlements:
• Cheng Hooi – 2/3 of distributable income. Received RM 33,000 for
year ended 2012.
• Shwo Yee – As the trustees deem fit. Received RM 20,000 for year
ended 2012.
• Siew Hong – RM 2,000 per year to be accumulated and paid to her
when she reaches 21 years
– Distributable income of trust is RM 68,000 and total income
of trust is RM 34,000.
– Required: Compute statutory income of each beneficiaries.
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 Chapter 2 Tutorial

• TAX667 JUNE 2018,Q1

• TAX667 DEC 2016,Q1
• TAX 490 DEC 2015,Q1
• TAX490 DEC2014, Q1

Work for your worldly life as if you are living forever,

and work for your Hereafter as if you are dying tomorrow

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