Introduction
Under Malaysia settlement taxation, a settlor may create a settlement to transfer income or assets for the benefit of another person, while retaining certain control or the power to revoke it.
Such arrangements may be used for estate or wealth planning. However, under Section 65(11) of the Income Tax Act 1967, a “settlement” and “settlor” have specific definitions that determine when these arrangements fall under Malaysian tax rules.
What Is a Settlement? (Definition under s.65(11))
A “settlement” under Section 65(11) ITA includes:
- Any disposition, trust, covenant, arrangement, or agreement; and
- Any transfer of assets or income to another person.
However, the following are excluded:
a) A settlement made for valuable and adequate consideration (commercial transaction).
b) A settlement resulting from a court order.
c) An employer’s agreement to pay remuneration, pension, or lump sum to an employee’s dependants after death — if deemed fair and reasonable by the Director General of Inland Revenue (DGIR).
Who Is a Settlor?
A settlor is any person who creates or contributes to a settlement. Under Section 65(11) ITA, this includes:
1️⃣ A person who creates or enters into a settlement.
2️⃣ A person who transfers money or assets into a settlement for another’s benefit (the beneficiary).
3️⃣ A person who makes a reciprocal arrangement for another to enter into a settlement.
Essentially, the settlor is the originator of the arrangement — whether done directly, indirectly, formally, or informally.
Nature of a Settlement
A settlement may be written or unwritten, formal or informal.
It can include a simple gift, covenant, or transfer of property, as long as there is an arrangement to benefit another person.
Key features:
- A transfer of income or property from one person to another.
- The settlor may still retain certain powers or access.
- It may exist without a formal deed, if the intention to benefit another is clear.
The substance of the arrangement, rather than its legal form, determines whether it qualifies as a settlement under Malaysian tax law.
Exclusions from a Settlement
Not all arrangements are treated as “settlements.”
Under the ITA, the following do not qualify:
- a) Commercial transactions made for full and adequate consideration.
b) Court-ordered arrangements, such as divorce or estate distributions.
c) Employer–employee post-death agreements, such as pensions or gratuities, deemed fair and reasonable by the DGIR.
These exclusions ensure that only genuine non-commercial transfers or income-diversion arrangements are covered under settlement taxation.
Key Takeaways
- A “settlement” includes any arrangement or transfer of income or assets.
- A “settlor” is the person who creates or contributes to the settlement.
- Certain arrangements (commercial, court-ordered, or employment-related) are excluded.
- Section 65(11) of the ITA defines what qualifies as a settlement in Malaysia.
- The substance of the arrangement determines its tax treatment.
ANC Group – Your Personal Tax Advisor
Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.
Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.
ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.
We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.
If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.
