In the realm of tax planning and compliance, the concept of income splitting often arises when dealing with family-owned assets. Section 90 of the Income Tax Ordinance, 2001 of Pakistan governs the rules related to the transfer of assets, particularly among spouses and minor children. This article aims to decode this provision for both laypersons and professionals, highlighting its implications, exceptions, and practical illustrations.
What Is Income Splitting?
H3: Definition and Purpose
Income splitting is a strategy where an individual distributes their income or assets to family members in lower tax brackets to reduce the overall tax burden. However, the law in Pakistan restricts such practices when they are not made at arm’s length or for adequate consideration.
Legal Framework
Section 90 addresses this strategy by ensuring that income arising from certain types of transfers remains taxable in the hands of the transferor to prevent tax avoidance.
Revocable Transfers of Assets (Sub-section 1)
Basic Rule
If an asset is transferred in a manner that allows the transferor to reclaim or benefit from it in the future, it is considered a revocable transfer. Any income arising from such an asset remains taxable in the hands of the transferor.
Example:
If Mr. A transfers a rental property to his wife with an agreement that it can be returned anytime, the rental income will be taxed in Mr. A’s name, not his wife’s.
Irrevocable Transfers (Sub-section 2)
Conditions for Exemption
The rule under sub-section (1) does not apply where:
The transfer is irrevocable during the transferor’s lifetime, and
The transferor derives no direct or indirect benefit from the income.
Illustration:
If Mr. B gifts property to his adult son through a legal deed, with no control or benefit retained, the income belongs to the son for tax purposes.
Beneficial Ownership Without Legal Transfer (Sub-section 3)
Even if the legal title is transferred but the beneficial ownership remains with the transferor, the income will still be taxed in the name of the original owner.
Transfer to Spouse or Minor Child (Sub-section 4)
H3: Rule
Any income from an asset transferred to:
Spouse, or
Minor child,
Or to someone for their benefit, will be treated as the income of the transferor.
Key Exception (Sub-section 5)
These rules will not apply if:
The transfer is for adequate consideration, or
Made under a mutual agreement to live apart (typically due to divorce or separation).
What Constitutes Adequate Consideration? (Sub-section 6)
If the transferor funds the asset given to the transferee, such as giving money to a spouse to buy property, it is not considered a transfer for adequate consideration.
Example:
Mr. C provides his wife a loan to purchase a shop. Although the shop is registered in her name, the income from that shop will be taxed in Mr. C’s hands.
Requirement for Documented Transfer (Sub-section 7)
If the transferor fails to register or mutate the transfer in official records, the income shall continue to be assessed in the name of the transferor.
Definitions (Sub-section 8)
Revocable Transfer
A transfer is revocable if:
There is any clause allowing re-transfer of the asset.
The transferor retains the right to resume control of the asset.
Minor Child
A minor child does not include a married daughter.
Transfer
Includes any disposition, settlement, trust, covenant, agreement, or arrangement.
Practical Implications for Taxpayers
Avoiding Unintentional Non-Compliance
Families should be cautious when transferring assets to spouses or minor children. If the transfer lacks proper documentation or consideration, the income will still be attributed to the transferor.
Documentation and Legal Evidence
To avoid future disputes with the Federal Board of Revenue (FBR), ensure:
Property is properly registered or mutated.
Any agreements are legally executed and notarized.
Strategic Tax Planning
Legal asset transfers with proper planning can help families optimize taxation, especially when dealing with:
Inter-generational wealth transfers
Spouse-owned businesses
Real estate investment income
Section 90 is a vital anti-avoidance provision under Pakistani tax law. It ensures that income from family-based transfers isn’t used as a loophole for tax evasion. Taxpayers must remain vigilant, document all transfers meticulously, and seek legal advice when planning intra-family asset arrangements.
Frequently Asked Questions (FAQs)
What is income splitting in tax law? Income splitting involves distributing income among family members to reduce the total tax liability.
Is income splitting legal in Pakistan? Only under certain conditions—where transfers are irrevocable and without benefit to the transferor.
What is a revocable transfer? A transfer where the transferor retains the right to reclaim or benefit from the asset.
Is income from a gifted property to a spouse taxable? Yes, unless it is an irrevocable transfer with adequate consideration.
What is adequate consideration? A fair value exchange for the asset. Mere funding doesn’t qualify.
How does FBR treat gifts to minor children? Income from assets gifted to minor children is attributed to the transferor.
What if the asset is in the wife’s name but husband paid for it? The income will be taxed in the husband’s hands.
Can a transfer to a married daughter be taxed back to me? No, married daughters are not considered minor children under Section 90.
Is registration of transfer necessary? Yes, otherwise the transfer may not be legally recognized for tax purposes.
What is considered a benefit to the transferor? Any direct or indirect gain, control, or access to income from the asset.
How can I prove that a transfer is irrevocable? Through legally binding agreements and absence of control or re-transfer clauses.
Are loans to family members considered transfers? Not in the sense of adequate consideration under this section.
Can business income be split this way? If assets (e.g., business shares) are involved, Section 90 applies.
What are the risks of violating Section 90? Misattributed income can lead to penalties, back taxes, and audits.
Does this apply to all assets? Yes, including real estate, investments, and movable assets.
What about foreign assets? Section 90 applies to worldwide income of resident taxpayers.
Can I transfer an asset just before retirement to save tax? Only if it is properly documented and meets the irreversibility test.
Does FBR verify these transfers? Yes, especially in wealth reconciliation and audit proceedings.
Can trusts be used to split income? Only if structured to avoid revocability and transferor benefit.
Where can I get legal help for this? Consult a tax lawyer or an FBR-approved tax consultant.
Disclaimer: This blog is for educational and informational purposes only and does not constitute legal or tax advice. For personalized guidance, consult a qualified tax advisor or legal practitioner in Pakistan.
Full Text of Section 90 of the Income Tax Ordinance, 2001
Chapter V – Provisions Governing Persons
Division III – Income Splitting
Section 90: Transfers of assets(1) For the purposes of this Ordinance and subject to sub-section (2), where there has been a revocable transfer of an asset, any income arising from the asset shall be treated as the income of the transferor and not of the transferee.
(2) Sub-section (1) shall not apply to any income derived by a person by virtue of a transfer that is not revocable during the lifetime of the person and the transferor derives no direct or indirect benefit from such income.
(3) For the purposes of this Ordinance, where there has been a transfer of an asset but the asset remains the property of the transferor, any income arising from the asset shall be treated as the income of the transferor.
(4) For the purposes of this Ordinance and subject to sub-section (5), any income arising from any asset transferred by a person directly or indirectly to—
(a) the person’s spouse or minor child; or
(b) any other person for the benefit of a person or persons referred to in clause (a),
shall be treated as the income of the transferor.
(5) Sub-section (4) shall not apply to any transfer made —
(a) for adequate consideration; or
(b) in connection with an agreement to live apart.
(6) For the purposes of clause (a) of sub-section (5), a transfer shall not be treated as made for adequate consideration if the transferor has provided, by way of loan or otherwise, to the transferee, directly or indirectly, with the funds for the acquisition of the asset.
(7) Sub-section (5) does not apply where the transferor fails to produce evidence of the transfer of the asset by way of its registration or mutation in the relevant record and the income arising from the asset shall be treated as the income of the transferor for the purposes of this Ordinance.
(8) For the purposes of this section, —
(a) a transfer of an asset shall be treated as revocable if —
(i) there is any provision for the re-transfer, directly or indirectly, of the whole or any part of the asset to the transferor; or
(ii) the transferor has, in any way, the right to resume power, directly or indirectly, over the whole or any part of the asset;
(b) “minor child” shall not include a married daughter; and
(c) “transfer” includes any disposition, settlement, trust, covenant, agreement or arrangement.
