The Finance Act 2025, Act 874, introduces several important amendments to the Income Tax Act 1967, affecting individual taxpayers, LLP partners, companies and taxpayers involved in capital asset transactions.
The key changes are summarised below for general client awareness.
1. Tax on profit distributions by Limited Liability Partnerships to individual partners.
A significant amendment has been made to section 6 of the Income Tax Act 1967. A new paragraph 6(1)(s) provides that income tax shall be charged on income of an individual who is a partner of a Limited Liability Partnership, LLP, where the income consists of profits derived from Malaysia and paid, credited or distributed, whether in cash or in kind, to the individual by the LLP.
A new section 54C has also been introduced. Where an individual partner receives Malaysian-derived LLP profits in excess of RM100,000, the amount is deemed to be the statutory income of that individual for that year of assessment. Where the profit is distributed in kind, the amount is valued based on the market value at the time of distribution.
The new Part XXIII of Schedule 1 provides that tax is charged at 2% on every ringgit of chargeable income in respect of such LLP profits exceeding RM100,000. At the same time, Schedule 6 has been amended to exempt LLP profit distributions to individual partners up to RM100,000, and to exempt distributions to partners other than individuals.
Effective from: Year of Assessment 2026 and subsequent years of assessment.
Impact: LLPs and individual partners should review their profit distribution arrangements, particularly where annual distributions to individual partners exceed RM100,000.
2. Clarification on acquisition price for Real Property Company shares
Section 15C(4A) has been amended to clarify that the acquisition price of a real property company refers to the acquisition price of the shares of the real property company.
Effective from: 1 January 2026.
Impact: This clarification is relevant when determining gains arising from the disposal of shares in real property companies.
3. Amendments to individual tax reliefs under section 46
Several changes have been made to individual tax reliefs under section 46.
i. Vaccination-related deductions for parents, grandparents, the individual, spouse or child are now restricted to vaccines registered with the National Pharmaceutical Requlatory Agency, NPRA.
ii. The maximum deduction under paragraph 46(1)(ha) has been increased from RM6,000 to RM10,000
iii. The child care relief of up to RM3,000 has been expanded. The relief now covers fees paid to a registere child care centre or kindergarten for a child aged six years and below, and also fees paid to a regsitered care centre for a child aged twelve years and below. The claim must be supported by a receipt, and the maximum amount applies even where the taxpayer has more than one child.
iv. A new relief of up to RM1,000 has been introduced for entrance fees to a tourist attraction, or for cultural and arts programmes, supported by receipt.
v. The relief category has also been expanded to include household food waste compost machines, food waste grinder machines and CCTV used for household purposes, subject to prescribed conditions and an overall maximum deduction of RM2,500
4. Insurance relief extended to policies on the life of a child
Section 49 has been amended to allow deduction where an insurance policy is contracted by an individual on the life of the individual’s child.
The Act also specifies the categories of child for this purpose, including an unmarried child below 18 years old, an unmarried child receiving full-time education, an unmarried child serving under articles or indentures to qualify in a trade or profession, or an unmarried child who is physically or mentally disabled in accordance with written law.
Effective from: YA 2026 and subsequent years of assessment.
Impact: Taxpayers claiming child-related insurance relief should ensure the child falls within the prescribed statutory category and that supporting policy documents are retained.
5. Expanded definition of "disposal" for capital gains tax purposes
Section 65C has been amended to expand the definition of “disposal”. The definition now includes sale, conveyance, transfer, assignment, settlement or alienation, whether by agreement or written law. It also includes extinguishment of rights due to dissolution or winding up of a company, reduction of share capital, conversion of shares, redemption of shares, purchase by a company of its own shares, or where ownership of a capital asset ends.
Effective from: 1 January 2026.
Impact: Companies, LLPs, trust bodies and co-operative societies should carefully assess capital gains tax implications for corporate exercises such as share redemption, capital reduction, share conversion, buy-back arrangements and winding up.
6. Scope of capital gains tax clarified
Section 65D has been amended to clarify that the capital gains tax provisions apply to the disposal of a capital asset situated in Malaysia, or the disposal of shares referred to in section 15C.
Effective from: 1 January 2026.
Impact: Taxpayers should determine whether the asset disposed of falls within the Malaysian capital gains tax framework before concluding the tax position.
7. Date of completion for disposal of capital assets
Section 65F has been amended to clarify the date of completion for disposal of a capital asset. The completion date is the earlier of:
i. The date ownership of the capital asset is transferred, ownership ends, or rights are extinguished due to dissolution or winding up of a company, or
ii. The date the whole amount or value of consideration for the disposal, whether in cash or in kind, is received by the disposer.
A further clarification provides that the transfer of ownership, ending of ownership, or extinguishment of rights is deemed to take place when all requirements under written law have been complied with.
Effective from: 1 January 2026.
Impact: The completion date is important as it affects the relevant tax filing and payment timelines for capital gains tax purposes.
8. New nominee provisions for capital assets
A new section 76A has been introduced. Where a capital asset is held by a nominee for a company, LLP, trust body or co-operative society, the Income Tax Act 1967 applies as if the asset is vested in that company, LLP, trust body or co-operative society. Any act of the nominee is treated as the act of the beneficial entity.
Where the capital asset is acquired from or disposed of to the nominee by the beneficial entity, the acquisition or disposal is disregarded for purposes of the Act.
Effective from: 1 January 2026.
Impact: Taxpayers using nominee arrangements should maintain proper documentation to support beneficial ownership and tax treatment.
9. Earlier commencement of estimated ta instalments under section 107C
Section 107C(5) has been amended so that instalment payments of estimated tax payable will commence from the first month of the basis period, instead of the second month.
However, a special transitional provision applies for YA 2027. For YA 2027, the estimated tax payable is to be paid in equal monthly instalments based on the number of months in the basis period less one month, with instalments payable from the second month.
Effective from:
YA 2027, transitional rule.
YA 2028 and subsequent years, instalments start from the first month.
Impact: Companies should review tax cash flow planning, as tax instalment payments will commence earlier from YA 2028.
10. Wider power to set off tax refund against other taxes and stamp duty
Section 111 has been amended to allow the Director General to utilise an excess income tax amount refundable to a person to settle other amounts due and payable by that person. This includes tax payable under the Income Tax Act 1967, Petroleum Income Tax Act 1967, Real Property Gains Tax Act 1976, Labuan Business Activity Tax Act 1990, and duty payable under the Stamp Act 1949.
The amendment also allows excess amounts under the Stamp Act 1949 or Labuan Business Activity Tax Act 1990 to be utilised to settle income tax payable.
Effective from: 1 January 2026.
Impact: Taxpayers expecting tax refunds should be aware that refunds may first be used to settle outstanding tax or stamp duty liabilities before any balance is refunded.
Conclusion
The Finance Act 2025 introduces important changes to the Income Tax Act 1967, particularly in relation to LLP profit distributions, personal tax reliefs, capital gains tax administration, nominee arrangements and tax refund set-off powers.
Taxpayers should review their existing arrangements and maintain proper supporting documentation to ensure compliance from YA 2026 and the relevant effective dates.
Click here for Finance Act 2025 PDF file: