DISCUSSION of cash trusts has been brought up by the media recently since the amount of money flowing into these trusts runs into billions of ringgit. The promoters of these trusts normally promise high returns, and one of the requirements is that the management of the fund is entirely left to the promoters who will be the trustees of such trusts.
Although the operating model can change from one cash trust to another, generally it involves the investor leaving a sum of money in a trust created by the individual and managed by an external trustee who in most cases will be related to the promoter. The trust then invests in a special purpose vehicle (SPV) which then can either directly invest or loan the monies to other vehicles such as moneylending companies or in other vehicles such as pre-initial public offering companies, etc.
These arrangements are not monitored or governed by the Securities Commission Malaysia or Bank Negara Malaysia. The trust products that are being sold are registered with the Companies Commission of Malaysia.
What are the taxation issues?
All the parties involved in the transaction are subjected to taxation in Malaysia: the trust body, trustee, beneficiaries, agents selling the products. In simple terms, the cash comes into the trust and it is thereafter invested through an SPV and the income generated in the process should be reported to the Inland Revenue Board (IRB) and brought to tax.
The funds transferred by the investor or settlor into the trust will not be taxable at that point. The income earned by the trust (dividends, interest, or rental) will be taxable with the exception of single-tier dividends. Foreign dividends will be subject to tax on remittance into Malaysia. The trustee fees will not be tax deductible, and any distributions to beneficiaries will be deductible to the trust level and will be taxable in the hands of the beneficiaries. The SPV will also be taxed in the normal tax rate of 24% on its profits.
The trust will be taxed at the rate of 24% just like a company is, and the beneficiary will be taxed at the slab rate applicable to the individual. If the trust does not deduct the distribution to the shareholders and pays tax on the full amount, the beneficiary can claim a proportion of the tax as a tax credit against the tax payable.
In this arrangement, the agents selling the product will receive commissions. The trust is unlikely to be paying the agents the commission. It is likely that the commissions are paid by the SPV, or another entity involved in the promotion of this product. Whichever organisation that pays the agents must declare the payments must deduct a 2% withholding tax provided the agent is a Malaysian individual who has earned more than RM100,000 from the organisation in the previous year. The paying organisation has to prepare a return called CP58 if the payment exceeds RM5,000 annually.
The trust will also be caught within the e-invoicing regime where the trust is earning more than RM500,000 income. The funds entering the cash trust should be explainable without infringing the Anti-Money Laundering Act. The source of the funds should be available if the authorities require an explanation.
All the parties involved in the arrangement must file a tax return within the stipulated time frame: individuals by April 30 or June 30 if you are in business; the trust, SPV and trustee – within seven months from the financial year end.
If any of the parties involved here want to shelter the income on the basis the money received by them is capital in nature, please prepare the support and arguments to face a challenge from the IRB.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
