IN THE Malaysian marketplace, total assets under management (AUM) by unit trusts or mutual funds amount to more than RM1 trillion.
There are various types of mutual funds: equity funds, bond/fixed income funds, money market funds, property funds, REIT funds, Islamic or syariah-compliant funds, etc. The type and amount of income earned by each fund will generally depend on the investments made with the money received from its unitholders.
Depending on the nature of these investments, principally, the source of income of the funds will consist of dividends received from the investment, interest/coupon income from the bonds and loans, interest from short-term deposits and capital gains from the realisation of the investment.
This income, after deduction of all the expenses such as management fees, trustee expenses and any administration costs, may be distributed to the unitholders. These distributions may be paid to unitholders in cash or, more commonly, reinvested into additional units in the fund. The tax treatment generally depends on the nature and taxability of the underlying income of the unit trust rather than simply on how the distribution is received.
Individual taxation of the distributions
Individuals who hold units in a unit trust fund are generally subject to tax on their share of the fund’s taxable income that is distributed to them during the relevant basis year. The distribution is made after tax has been taken into account at the fund level. The tax attributable to the distributed income may generally be claimed by the unitholder as a tax credit against their Malaysian income tax liability.
For resident individuals, the taxable distribution is subject to the applicable individual scale rates, while non-resident individuals are subject to the rate applicable to non-resident individuals.
However, distributions arising from certain tax-exempt income, such as qualifying interest income, foreign-sourced income and gains from the disposal of investments that are not subject to tax at the unit trust level, are not taxable in the hands of the unit holder. In addition, unitholders are not taxed on income or gains that remain undistributed by the fund.
Recently, Malaysia’s Inland Revenue Board (IRB) clarified the tax treatment of unitholders of Retail Money Market Funds profit distributions. It has confirmed that individuals receiving such distributions will not be taxable.
From YA 2026, the tax treatment of distributions from REITs and property trust funds (PTF) has changed.
Previously, distributions to individual unitholders were generally subject to a 10% final withholding tax. From YA 2026 onwards, resident individual unitholders are no longer subject to withholding tax. Instead, the distribution must be reported in their income tax return and is taxed at the applicable individual graduated tax rates.
Non-resident individual unitholders are also not subject to withholding tax from YA 2026, but their REIT/PTF distributions are subject to tax at the 30% non-resident individual rate.
Reporting responsibility
It is important for unitholders to obtain and keep their distribution tax vouchers, as these documents provide the information needed to determine the taxable income to be reported in their tax returns. The tax voucher typically sets out details such as taxable income, Malaysian tax paid, foreign tax paid, non-allowable expenses, non-taxable income, and the net distribution before withholding tax.
Unit holders should carefully review these details and ensure that the appropriate amounts are reported in their tax returns. Failure to correctly report the taxable income may result in additional tax being imposed, together with applicable penalties under the Income Tax Act 1967.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).