Due to Malaysian Government's efforts to promote unit trusts, most of the income received by unit trusts will be exempt from income tax. Basically, the income of unit trust may consist of dividends, interest or profit and gain from sale of investments and returns on bonds. Then, the income is assessed and charged to tax separately from the income of unit holders, which was governed by the Income Tax Act
Gains on disposal of investments by unit trust will not be subject to income tax. The only exception is where the investments represent real properties which could be subject to real property gains tax (RPGT).
Interest and discount derived by unit trusts from the following types of investments is exempt from income tax:
- Securities or bonds issued or guaranteed by the Government
- Debentures, other than convertible loan stocks, approved by the Securities Commission
- Bon Simpanan Malaysia issued by Bank Negara Malaysia
- Interest paid or credited by any bank or financial institution
- Income from overseas investment is also exempted from Malaysian tax
Such dividends would already have tax credits attached to them and can be used to offset against the unit trust's tax liabilities. Therefore, either of the following will happen:-
- NO further tax applicable
- If the unit trust's tax liability is less than the tax credits, the tax credits attached to dividends can be refunded to unit trust
Example, a corporate investor were to deposit funds in a fixed deposit, the interest will be subjected to corporate tax of 25% currently. But, unit trusts are specifically tax exempted on interest on fixed deposits. In other words, fixed income and money market funds should be an 'Angel Fund' for corporate investors.