Minimising the tax exposure on the income you earn will definitely mean you ending up with more money in your pockets. To develop a game-plan on how you can minimise your tax exposure, you must first have an understanding of what the law allows you to do legally.
Practically all tax strategies involve structuring a transaction to obtain the lowest exposure to tax by using one or more of the following overlapping strategies, which I’d like to call the 4 D’s:
The 4 D’s are elaborated as follows:
Duck – No, I don’t mean a waterbird with a broad flat bill and webbed feet, neither do I mean ducking away from declaring your income! ‘Duck’ in this context, refers to avoiding unnecessary penalties by understanding your responsibilities as a taxpayer under the Self-Assessment System. Filing your tax returns incorrectly or making your tax payments late will result in penalties. Ducking penalties therefore will save you a lot of your hard-earned money.
Deduct – Maximise your claims for tax deductions and reliefs which are due to you. Many are unaware of what expenses that they can legally claim to reduce their taxable income.
In addition, do not overlook or under-estimate the power of your personal reliefs. Many may have maxed out on their claims for personal reliefs such as life insurance, medical and education insurance, but you still have an opportunity to take advantage of newer personal reliefs such as contributions to the deferred annuity and private retirement scheme of RM3,000 and the increase in contribution to the Skim Simpanan Pendidikan Nasional of RM3,000 to RM6,000 which took effect lately. Remember, besides the product benefits, your investment in those products can potentially give you a first-year return of up to 26% of the amount invested, which is reflected in the reduction of your annual tax bill!
Defer – A tax-deferral strategy means putting off the taxes you need to pay now to a later year. Tax-deferral would have the following advantages:
- Using the financial concept of ‘time value of money’, it is better to pay a ringgit of tax tomorrow than it is to pay it today. This is because the money saved on taxes today would have an opportunity to earn interest and due to inflation, the same amount of money would worth less tomorrow.
- As Malaysia moves toward becoming a developed country and in order to remain competitive with other countries in the region, the general opinion of many is that the tax rates in Malaysia will reduce gradually in the upcoming years and hence, one would end up paying less tax in future years as compared to now, on the same amount of income.
Divide – This strategy involves ‘income-splitting’ ie. where situation permits, dividing income among several parties in order to reduce the overall tax incidence.
As you know, tax rates at lower bands of chargeable income are lower and progressively increases as the bands of chargeable income increase. So, if a person is paying tax on a net rental income of RM70,000, he will be subject to a tax rate of 19%. However, if there were 2 persons (eg. husband and wife) paying tax on RM35,000 income each, each person would be subject to a tax rate of only 6%!
The same ‘income-splitting’ strategy may also be achieved by using a special purpose vehicle such as a private limited company (company) or a limited liability partnership (LLP). These vehicles, being separate legal entities, will be taxed on their own right, distinct from the income of that of the owners. A company with a paid-up capital (or in the case of a LLP, capital contribution) of not exceeding RM2.5 million at the beginning of a basis period for a year of assessment will be subject to an income tax rate of 20% on the first RM500,000 of its chargeable income while the balance taxed at 25%. while an individual will already be subject to income tax at a rate of 24% or 26% on his chargeable income exceeding RM70,000, which is higher than that of a company or a LLP.
Do look out for my upcoming book which will share the strategies in more detail!