26Tax-Saving Moves They are legal and permitted by Inland Revenue Board ( IRB )
1) Save for your Child’s Education • Since 2007 , any amount that is deposited into a savings account for your child under national Education Savinds Scheme ( Skim Simpanan Pendidikan Nasional ) allows you to claim tax deductions. • Thers is a limit of RM 3000 for this deduction but spouse who file separate tax returns can each claim this amount . • Tax Deduction : RM 3000 per individual • For Mr A : As he falls in the24% tax bracket , this deduction translates to a tax saving of RM 720 ( RM 3000@24%)
2 ) File Separate tax returns • A separate assessment allow each spouse to claim personal tax relief of RM 8000 while a joint tax return allows one spouse to claim a wife or husband relief of RM 3000 • Tax Deduction : Each spouse earning Taxable income can claim personal tax relief of RM 8000 by filling separate tax returns.
3) Ask your employer to increase your EPF contributions • Contributions to the employees Provident Fund (EPF) by employers are tax-exempt for the employees. • To reduce your taxable income , ask your employer to reduce your EPF monthly salary but increase your EPF contributions by the same amount. • Tax Deduction : The deductible amount from your taxable income is dependent on the arrangement between you and your employer. • For Mr A : Mr A agrees to takle monthly pay cut of RM 1000 for an equivalent increase in his EPF contributions by his employer.At the end of the year , he receives an additional RM 12000 in his pension fund but his taxable income is reduced by the same amount. • The tax savingthat he makes is RM 2880 ( RM12000@24%)
4) Change your cash remuneration to cash reimbursement • Fixed allowances given by your employer each month for entertainment and housing or parking fees are taxable at your tax bracket. • Change this to a “ reimbursement “ based on receipt and you are not taxed on the amount received. • Tax Deduction : The deductible amount from your taxable income is dependent on the arrangement between you and your employer • For Mr A : By Changing a yearly fixed allowance of RM 6000 to a reimbursement of the same amount and supported by receipts , Mr A makes a tax saving of RM1440 ( RM 6000@24%)
5) Ask for a company car • A car given by your employer is regarded as a benefit-in kind( BIK ) and taxable. • However , a company car is advantageous for taxpayers because the preset tax scale for cars is much lower than the actual cost of buying and maintaining a car. • According to the Public ruling for BIKs , the tax payer must pay RM 3600 in taxes every year, for a car worth RM 75000 • If the employer pays for fuel , the tax payer is taxed an additional RM 1200 for this BIK • Tax deduction : Whether you benefit from a company car depends on the value of the car and your current tax bracket. Do the calculations to ascertain your tax deduction.
6) Make charitable contributions • A gift of money to an approved charitable organisation entitles you to a tax deduction for the amount given. • From 2008 onward , this amount cannot exceed 7% of your aggregate income. • However Charitable donations that were made in 2007 are not subject to this limit. • Tax deduction : Up to 7% of your aggregate taxable income can be reduced with this deduction. • For Mr A : With his taxable income of RM 90000 , Mr A can make a donation of RM 6300 .This deduction results in a saving of RM 1512 ( RM 6300@24%)
7) Take Up postgraduate studies • A relief of RM 5000 per year for any course of study at the Master’s or doctorate level , the government announced in 2007 Budget the widening of the scope to all postgraduate studies. • The course does not have to be done full time , but “ must be in an institution or professional body in Malaysia recognised by the government or approved by Minister of Finance • Tax Deduction : RM 5000 per individual • For Mr A : As he completes his master’s degree . Mr A can enjoy tax saving RM 1200 from his taxable income ( RM 5000@24%)
8) Read , Read , Read • Starting from YA 2007 , taxpayers can claim a personal tax deduction to RM 1000 for purchase of books, journals , magazines and other publications. • To maximise this generous deduction , consider giving books as gifts. • Tax Deduction : RM 1000 per individual • For Mr A : With book purchases of RM 1000 Mr A saves RM 240 ( RM 1000@24%)
9) Get Sporty • You will get a deduction of RM 300 for each year of assessment for the purchase of sports and exercise equipment for any sports activities defined under the Sport Development Act 1997 “ • Tax Deduction : RM 300 per individual • For Mr A : By buying RM 300 worth of sports equipment , Mr A makes a saving of RM 71 ( RM 300@24%)
10) Buy Life Insurance • The maximum tax relief is RM 6000 a year for premiums paid to an insurance company for life Insurance or deferred annuity plans. • This Limit is shared with your contributions to the EPF, other employer schemes and contributions under any written law relating to widows or orphan pensions • Tax deduction : RM 6000 per individual ( shared with your EPF contributions )
11) Take out a Medical or Education policy • You can claim deductions of up to RM 3000 a year for education and medical insurance ( combined limit for both ) • This includes medical coverage that is part of life insurance policy( the limit for life insurance is in move 10 ) • A policy of this kind can be written for you , your spouse or your child. • Tax deduction : RM 3000 per individual • For Mr A :After acquiring an education policy for his children , Mr A makes a saving of RM 720 ( RM 3000@ 24%)
12) Pay your parents’ medical bills • You are able to claim up to RM 5000 for payments towards your parents’ medical bills. • Tax deduction : RM 5000 per individual • For Mr A : By paying his parents’ medical bills , Mr A makes asaving of RM 1200 ( RM5000@ 24%)
13) Medical • Claim a deduction of up to RM 500 per tax year for a full medical examination and RM 5000 for medical expenses for yourself, spouse or child for serious disease. • If you have also spent money on full medical in the same year, your claim will be reduce the RM5000 available for serious disease. • A separate tax reduction of up to RM5000 a year is given for necessary basic supporting equipment for disabilities suffered by yourself ,spouse, children or parent • Tax Deduction : RM 500 per individual for full medical check-up. RM5000 for serious diseases or basic supporting equipment • For Mr A : He claimed for a full medical check-up .The deduction give him of RM 120 ( RM 500@24%)
14) Pay Zakat • If you are a muslim ,paying any amount in zakat , fitrah or other obligation Islamic dues will entitle you to a tax rebate. • Tax deduction : The Amount of zakat that you pay
15) Buy a Computer • A deduction of up to RM 3000 can be claimed once every three years for the purchase of computers , printers and bundled software . • The similar incentive given previously in the form of a tax rebate was withdrawn with effect from 2007 • Tax deduction : RM 3000 once every three years. • For Mr A : Getting a computer for RM3000 gives him a saving of RM 720 ( RM 3000@24%)
16) Hire a Tax Consultant • Consider hiring a tax consultant to explore ways your remuneration package can be structured to maximise your tax savings. • Those who are earning at least RM5000 every month should be able to justify the cost of hiring a tax adviser with their tax savings • Tax saving : this is dependent on your personal circumstances and the deal that you negotiate with your employer.
Tax – Savvy Investments • You may be looking at some investment this year. • There are savings to be made from certain investments , from a tax point of view. • However , some moves may be advantageous if you fall into a higher tax bracket . • Besides looking for tax-exempt investment , here are four investment moves to explore
17) Buy property valued below or at RM250000 • Stamp duty must be paid on all property transactions that involve a change of legal ownership. • Last year’s budget ( 2008 ) announced a 50% stamp duty exemption for the purchase of houses that do not exceed RM250000 • The maximum tax savings that can be found here is RM2000 ( for a house worth RM250000 ) • This exemption is only given for one house per individual and applies to sale and purchase agreement signed between September 2007 and December 2010
18) Buy Similar property • Similar property can be grouped together for income tax purposes. • The IRB has indentified categories such as residential , commercial and vacant land. • If you own two property in the same category , you can reduce the taxable profit made from one property with the loss, if any incurred from the other. • Property investors are also exempt from real property gains tax for all disposals on on or after 1st April 2007. • However , taxpayers who are trading property – buying and selling in order to generate income – are liable to income tax. • “ This exemption is meant for taxpayers who invest in property for a passive income” • Tax deduction : Taxable income received from renting out a property in a particular grouping such as residential can be reduced if a loss was incurred by another property in the same group.
19) Buy shares ( page1 ) • Invest in dividend-yielding shares if your tax bracket is above 26%. • A new single-tier system was established under the national Budget for dividends received by shareholders. • Companies pay tax of 26% (YA2008) and shareholders receive a net dividend that is exempt from tax and does not need to be filed with the IRB “Shareholders who fall into higher tax brackets [higher than 26%] are essentially [getting a] saving on the difference. • “The single-tier dividends is intended to simplify the tax filing process for individuals,” says Chua Tia Guan, executive director and head of tax and financial planning at Great Vision Wealth Management Sdn Bhd. • “In the past, refunds had been slow. From now on, there is no need to declare or apply for a refund. And as corporate taxes are falling, companies will be able to pass on more profits to their shareholders [in the form of dividends],” he says.
19) Buy shares ( page2) • However, not all companies will go under the single-tier system immediately as some of them might have imputation tax credits left, which they can use till 2013. • Shareholders who receive dividends from companies using the imputation system will have to report the amount received and claim a tax refund if his personal tax rate is lower than the company’s tax rate (27% in YA2007, 26% in YA2006). • Shareholders can identify the system used by the company as it is stated in the dividend vouchers. • Tax Deduction Your tax saving is the difference between your tax bracket and 26% (the corporate tax rate). This is only applicable to dividends given out by companies using the single-tier system.
20) Invest in REITs • You can go into real estate investment trusts ( REITS )if your tax bracket above 15%. • There are 11 REITs listed on the Main Board. • The tax on dividends given out by these property-related investments are taxed at 15% as compared to tax on dividend at 26% ( under the new single –tier dividend system ) • Only tax brackets exceeding 15% would enjoy some tax savings by investing in REITs • Since the distributions received by individual taxpayers have been subject to that 15% , the taxpayers are not required to declare the amount in their tax return. • Tax deduction: Your tax saving is the difference between your personal tax bracket and 15%
Moves for Business Owners • The first rule that small-business owners should implement with regards to their taxes is to take it seriously. • Spend some time strategising for your business activities to save hundreds or thousands ringgit. • Here are six
21) Maintain books and records from Day 1 • Keep separate bank accounts for personal and business transactions and establish a basic accounting system. • The inland Revenue Board recognises business income on an accrual basis . • This means that as long as a transaction is completed, either a sale of goods or a provision of service , its value is immediately treated as business income and is taxable. • However , unpaid transaction can be reduced your taxable income. • Any expenses made fro the business can be deducted from the business income. • The General rule is that expenses can be deducted if it is wholly and exclusively incurred in earning your business income. • So Keep the receipts for all supplies that you buy for your business • However there is no deduction for capital expenditure although some assets will qualify for tax relief by way of capital allowances
22) Time the purchase and use of your fixed assets • Capital allowances are permitted for certain business assets such as equipment , machinery , vehicles computers and software. • The amount of allowances permitted each year depends on the category that asset falls into .( refer to Public Ruling No 2/2001 for the deductible rate of your assets. • The first capital allowance is given for the accounting year in which the asset was purchased and used by the business. • If you are contemplating a purchase , try to do it before the end of the accounting year, instead of just after , to claim the capital allowance against your business income. • If you are buying the asset with a hire-purchase loan, allowance can only be claimed as and when repayments are made to the lender.
23. Buys a company car • If you are a sole trader or a partner in a business, any car or vehicle that is used for business purposes can bring about tax deductions. • “The business income is reduced by the car’s financing cost if you buy the car on hire-purchase. • You are also deduct a certain amount for capital allowances every year, • Before implementing this tax-saving technique, business owners must identify a percentage of the car’s use that is for private activities. • As there is no definite ruling on how to determine this proportion for private use, business owners must apply a fair and reasonable figure that can withstand scrutiny. • “Estimating private mileage is an exercise that must be undertaken in accordance to the facts on your actual usage. • And remember to record all running expenses to make these deductions,” says Thornton.
24. Hire your spouse or family member • An effective tax-saving strategy is to hire a spouse or family member. • “For example, a husband who is a business owner can hire his wife. The wife’s salary is tax deductible but you must be able to show that she is doing something to earn it, • In this situation, you would have to contribute to your wife’s Employees Provident Fund (EPF) savings and that amount entitles her to tax relief. • Another option is to make your spouse or family member a partner in your business. • This allows you to divide the income made by the business between the both of you. • As a partnership has no tax liability, both partners are liable for tax for the respective portion of business income that each earns. • “By opting for separate tax assessments, a husband and wife who are partners in a business can each claim individual tax relief.
25. Implement a process to ‘chase after’ unpaid debts • Unfortunately, small business owners can complete a sale or service but might not receive payment, in full or in part. • At the end of an accounting year, a debt, which is estimated to be wholly or partly irrecoverable, can be deducted from your business income and this lowers your tax bill. • “Tax authorities tend to look closely at bad-debt write-offs and provisions (for debts that are expected to be partly recoverable). • So put in some effort to recover the debt before deeming it irrecoverable and you must evaluate each debt separately. • The process that you put in place to recover your unpaid debts should be documented and any conclusion that you make should be supported with documentation as well. • For example, you must show why it is not cost effective to take legal action against a customer. • However, if you eventually recover bad debts that have been written off or partially written off, you must include this amount in your taxable income for the year that you received payment.
26. Dedicate a space in your home office • Working in your own house can result in tax deductions for the costs related to your “home office”. • This includes electricity, telephone bills, quit rent and service charges of apartments. • The best way to claim for these deductions is to dedicate a room or place as the working environment. • “A dedicated area helps to identify expenses that are specifically for business purposes and can be claimed in full. • Items that are used by the business as well as personal use, such as electricity, must be apportioned. • One way to do so is on the basis of floor area. • If the business owner pays rent for the working area, this expense can be deducted from the business income. • This applies to rent that is paid to a spouse who owns the home but is not involved in the business. • However, this is strategy is only effective if the spouse who is not involved in the business is taxed at a low tax rate as rental received must be declared as taxable income. • If this is an appropriate strategy for the business owner, A tenancy agreement that specifies rental for a specific part of the house at the prevailing market rate.