Public Ruling (PR) No. 4/2021: Taxation of Income Arising from Settlements

The IRB has published Public Ruling (PR) No. 4/2021: Taxation of Income Arising from Settlements, dated 13 August 2021.

The objective of Public Ruling 4/2021

The PR explains the taxation of income arising from a settlement created by a person for the benefit of another person.

* Clarify who constitutes a “settlor” and what constitute “settlements” for income tax purposes

• Explain the circumstances where income arising from a settlement is deemed to be the income of a settlor and hence assessable on him/her.

• Explain how the amount of income of a settlor from settlements is determined

• Explain the tax treatment in a settlement where there are two or more settlors

Example

Mr Rich transferred a shophouse to his unmarried son as a gift for his 18 years old birthday. The shophouse will generate RM10,000 of rental income every month.

The rental income should be assessable under Mr Rich or his son?

The rental income would be deemed to be Mr Rich’s income, as his son is below 18 years old and unmarried.

When his son attains 21 years old, the rental income would be assessable under his son.

But why?

Because there is a “settlement” for an unmarried relative under 21 years of age.

Definition of settlement in tax ruling

In a settlement, there must be an element of giving or getting something for nothing or less than the open market value.

The shophouse is treated as a birthday gift to his son without any consideration.

Tax treatment on income from the settlement

In subsection 65 of ITA mentions that the settlement for an unmarried relative under 21 years’ old, income would be deemed to be the income of settlor (Mr Rich) where a settlement is created either directly or indirectly for the benefit of a relative.

However, in subsection 65(1) of ITA, the income would be deemed as income of the relative when:

1. in the event of the death of the settlor;

2. a relative under 21 years old who is married;

3. a relative who is 21 years old and above whether married or unmarried.

In this case, his son is unmarried and 18 years old.

Source:

PR4/2021 – Taxation of income arising from settlements: https://phl.hasil.gov.my/pdf/pdfam/PR_04_2021.pdf

Section 65 of Income Tax Act 1967 - https://phl.hasil.gov.my/pdf/pdfam/Act_53.pdf

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