Personal Tax Planning - Part 1

By Tan Thai Soon

Updated on 30 March 2011 to include Budget 2011

A)Introduction
Tax planning, whether personal or company, are interrelated and integrate part of the planning process. In general, personal tax planning involves the following areas:

• Personal relief
• personal rebate
• tax deduction
• tax exemption

B)Personal Relief
The main intention of the personal reliefs and rebates is to help the lower and middle income group.In addition, the senior citizens and the disabled persons have been included for further relief.

Individual taxpayer who is a tax resident in Malaysia is entitled to claim personal tax relief to derive a personal chargeable income. The following personal relief are available in the Year of Assessment 2010 and 2011.

1.Personal tax relief for individual is RM9,000.

Comment:
a)For Husband & wife who elect for separate assessment, the tax relief includes Husband (RM9,000) and wife (RM9,000), therefore the total personal relief for a couple is RM18,000.
b) If a couple elect for combine assessment the total tax relief is RM12,000 (Individual=RM9,000, Husband/wife=RM3,000). Therefore, it is more beneficial to the couple to elect for separate assessment. The combined assessment is only beneficial, if either husband or wife does not have a total income.

2.Disable individual is entitle, in additional to (1) above, a sum of RM6,000.

Comment:
a) This is an additional personal relief given to those disable individual but having chargeable income.

3. Wife or husband tax relief is RM3,000.

Comment:
a) The tax relief is only apply to individual who elect under combined assessment. It is only beneficial if the wife or husband have no total income which can be aggregated with that of his wife or husband.

4.Disable wife/Husband tax relief is RM3,500

Comment:
a)This is an additional tax relief given to individual who elect a combined assessment and having a disable wife or husband.

5. Medical expenses for own parents certified by medical practitioner for up to RM5,000.

Comment:
a) The tax relief only given to individual taxpayer for medical expenses incurred on their own parents (not parents in law), certified by medical practitioner. The medical expenses for parents is for: treatment in clinics and hospitals; treatment in nursing homes; and dental treatment excluding cosmetic dental treatment.

Under the budget 2011 the existing tax relief has been extended to include expenses to care for parents, who suffer from diseases or with physical or  mental disabilities and who need regular treatment certified by a qualified medical practitioner. Such treatment and care provided include treatment and care at home, day care centres or home care centres.



Qualifying expenses related to the treatment and cares are as follows:

• treatment and medical expenses supported with receipts issued by registered medical centres, pharmacies or licensed medical stores; or
• expenses for the care of parents supported with receipts or written certification by carers, certifying that the care was provided and the total payment involved. Foreign hired carers are required to processes valid visa/special work permit for the care of parents of taxpayers; or
• expenses on special needs for parents certified by qualified medical practitioner and supported by receipts as proof purchase.

6.Cost of basic supporting equipment for disabled self, spouse, child or parent given to individual taxpayer for up to RM5,000.

Comment:
a) The tax relief only apply to disabled self, spouse, child or parent. In other word, it does not apply to taxpayer brother, sister or close relative.

7. Medical expenses for serious diseases (and full medical examination up to RM500) for self, wife and child of up to RM5,000.

Comment:
a) The medical expenses is only for serious diseases.
b) Serious diseases include AIDS, parkinson's, cancer, renal failure, leukaemia, heart diseases and related diseases.

8. Tax relief for fees expended at a recognized institutions of higher learning by individual taxpayer of up to RM5,000.

Comment:
a) For acquiring skills or qualification on technical, vocational, industrial, scientific, ICT, accountancy, Islamic finance and law.
b) Masters or Doctorate level of any course of study.

9. Purchase of books, journals or magazines and other similar publications for self, wife or child of up to RM1,000.

Comment:
a) The above specifically exclude newspapers and any prohibited publication.
b) It include cost of purchase of school textbooks for primary, secondary and higher institution.
c) Taxpayer must keep the original receipts. IRD randomly issue letter to the taxpayer to show proof of the purchase.

10. Purchase of personal computer for individual of up to RM3,000 (allow once in 3 years)

Comment:
a) Purchase of personal computer include both hardware and software.

11. Net deposit in skim simpanan pendidikan national (SSPN) of up to RM3,000.

Comment:
a) The above deduction is for the net amount deposited. For example, in any basis period, total deposit is RM4,000 and total withdrawal is RM1,500, the allowable deduction is RM2,500. The balance brought forward is not taken into account.

12. Purchase of sports equipment for any sports activity for up to RM300

Comment:
a) It is deducted in respect of expenses expended by the individual for the purchase of spots equipment for any sports activity as defined under the Sports Development Act 1997.
b) Sports equipment includes equipment with short lifespan e.g. golf balls and shuttlecocks but excluding sports attire e.g. swimsuits and sports shoes.
c) Taxpayer should keep the official receipt from the respective stationery or sport shop.

13. Child relief of RM1,000 per child for the maintenance of each unmarried child under the age 18 years.

14. Child relief for unmarried child of 18 and above:

• receiving full-time education at school (e.g. STPM or A-level) of RM1,000 per child;
• receiving further education in Malaysia in respect of an award of diploma or higher of RM4,000 per child;
• receiving further education outside Malaysia in respect of award of degree, master and doctorate of RM4,000.

15.Physically or mentally disable child

• Child relief for the maintenance of each unmarried child with physical or mentally disable, a sum of RM5,000; and
• a further sum of RM4,000, if the child is receiving further education.

Comment:
a) The child must be an unmarried child. The "child" includes a legitimate child or step-child of his or his wife, or a adopted child by the individual or his wife in accordance with any law.
b) The instruction and education establishment shall be an approved or recognized by the government authority

16. EPF contribution and life insurance premium of up to RM6,000 and an insurance annuity of RM1,000.

Comment:
a) Insurance premiums paid for policies taken on the life of an individual, husband or wife are allowable deductions.
b) Insurance premiums on the life of the child do not qualify.

17. Education and medical insurance premium of up to RM3,000.

Comment:
a) The insurance premiums in respect of education or medical benefits for individual, husband, wife, or child are available for the above tax relief.

C) Tax Rebate
Under S6A of the Act, if the chargeable income of an individual does not more than RM35,000, he or she shall be allowed a tax rebate of RM400 or a rebate of a zakat, or fitrah for the amount paid in the basis year.

D) Summary
The above tax relief is available for individual taxpayer who is a resident in Malaysia. Individual can claims the tax relief in their tax Form BE/B -Part D. In case of doubt, taxpayer should make reference to explanatory notes enclose together with the tax form or to the latest IRD Tax Guide Book (BE05 or B05) or visit IRD website at http://www.hasil.gov.my


Reference
Tan, T.S. (2011) Malaysian Personal Taxation - A Practical Approach,  First Edn, TST Consulting Group, Kuala Lumpur.

Dividend Income received

By Tan Thai Soon

Section 4(c)
Dividend income received is chargeable under the Income Tax Act.

Comment:-
1) Under Imputation System
1.1. Dividend received under imputation system, tax paid by companies are not final tax.Tax paid by companies are passed on to shareholders as tax credit (S110).

1.2. Where shareholders received dividends have been tax deducted as source (e.g.25%) and received a net dividend (e.g. 75%)

1.3.Tax payer is require to declare gross dividend income (100%) in the income tax return. If the Tax payer is in the lower tax bracket (e.g.19%), then the tax payer is entitle for a refund of 6%. On the other hand, if the tax payer is in the tax bracket of 27%, the tax payer is require to pay 2% additional tax on the gross dividend received.

2) Under Single Tier System
2.1. Dividend received under Single Tier System.

2.2. Tax paid (e.g.25%) by companies is final tax. The dividend income (100%) received by shareholders are tax exemption.

2.3. Tax payer is not required to declare the dividend income in the tax return.

Historical Developments of Real Property Gains Tax

Introduction - Part 1

1. Real Property Gains Tax Act, 1976, was introduced effective from 7-11-1975.

2. Effective from 21-10-1988, RPGT Act 1976, impose liability on gains on the disposal of shares in controlled companies holding directly or indirectly real property as a major asset - refers to "Real property Companies".

3. In Budget 2004, the Minister provides exemption to the RPGT on disposal of chargeable assets for a limited period from 1-06-2003 to 31-5-2004.

4. Effective from 1-4-2007, the Minister exempts all persons from the provisions of the RPGT Act 1976 in respect of any disposal of chargeable assets.

5. In Budget 2010, the Minister reinstated the RPGT. Effective from 1-1-2010, all individuals are subject to RPGT gains on disposal of chargeable assets within 5 years period.

Dividend received from foreign source

By Tan Thai Soon

Section 127 (1) - Exemptions from tax
Any income specified in Part 1 of Schedule 6 shall be exempt from tax

Part 1 Schedule 6, para 28 (1)
Income of any person, other than a resident company carrying on the business of banking, insurance or sea or air transport, for the basis year of assessment derived from sources outside Malaysia and received in Malaysia.

Comment:
1. Section 2(1)
Provides that "person" includes a company, a body of persons and a corporation sole.
In other words, its cover individual, company or holding company incorporated in Malaysia, & business enterprise.

2. This section has specifically excludes a resident company carrying on the business of banking, insurance or sea or air transport. In other words, except from the above four type of business, all other types of business can enjoy the tax exemption from dividend received from foreign source.

3. The tax exemption is based on the principle that the income is not derived in Malaysia.

4. The rationale for the exemption is to encourage Malaysian individuals or companies to remit back their income from oversea investment.

Tax Deductions - Section 33 (Part 1)

Tax Deductions from Gross Income - Section 33
By Tan Thai Soon

Section 33 (1)
The adjusted income of a person from a source for the basis period by deducting from the gross income of that person from that source for that period all out goings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source, including:-
(a) Interest expense on money borrowed;
(b) Rent;
(c) Repairs and renewals.

Comment:
(1) Allowable expenses must be revenue expenses and not capital in nature. For example, goodwill. fixed asset purchase, purchase of license and franchising fees are capital in nature, therefore not deductible;

(2) Allowable expenses must be wholly and exclusively to derive gross income. It follows that the "motive and object" must be incurred in the production of income in order to meet the deductibility test;

(3) The allowable expenses must "incurred" in the year concerned and "incurred" means expenses paid and payable. Similarly, the liability must be real and not "anticipated losses or contingent liabilities" (Edward Collins & Sons Ltd vs. CIR); and

(4) It must be allowable by common law or a provision in the law. Section 34 provides a special provisions on tax deductions. On the other hand, Section 39 provides special provisions where expenses are not allowed as a deduction against the gross income.

IMPUTATION SYSTEM-S108 Credit Balance Account

Deduction of Tax from Dividends
By Tan Thai Soon

Section 108(1)
Where a dividend is paid or credited by a company to its shareholders, the company shall be entitled to deduct tax therefrom at the rate applicable to the company on the chargeable income for the year of assessment.

Comment:
a) The dividend is deemed to be derived from Malaysia:Section 14

b) Company will deduct a tax from the dividends and shareholders would received a net dividends.

c) Company will maintains S 108 credit balance account.
S 108 account increases when company paid corporate tax or has credits (s110) from dividend income. On the other hand, S108 account reduced when there is a tax refunded and/or a dividends has been paid in the basis period.

d) S108 credit balance account is carried forward into the following year

e) Company need to maintains it S108 account by submitting From R to Inland Revenue Department (IRD).

f) With effect from YA2008:i) no additional credit balance to be added to the existing s108 account; ii) company can elect to disregard s108 account balance by filing Form 50 with IRD; or iii) continue to maintain S108 balance (as at 31.12.07) until nil balance or end of the transitional period (as at 31.12.2013).

g) With effect from YA2014: i) all unutilized S108 credit balance will be forfeited; ii) company does not need to maintain S108 account; and iii) all company will move from the existing imputation system to single tier tax system (STS).

Gross Income From An Employment

Gross Income from an Employment
By Tan Thai Soon

The following shall be treated as gross income from an employment.

Section 25 (1)
Where gross income from an employment:-
(a) is not receivable in respect of any particular period; and
(b) first becomes receivable in the relevant period,
it shall when received be treated as gross income of the relevant person for the relevant period.

Comment
The assessability of employment income is on receipt basis, and "received" means legal entitlement of the income or is able to obtain the receipt on demand e.g. Salary. However, any bonus proposed in 2008 but not receive in the same year will not be assessed as gross income in that particular year.

Section 25(2)
Where gross income from an employment is receivable in respect of the whole of the relevant period it shall when received be treated as gross income of the relevant person for the relevant period.

Section 25(3)
Where gross income fails to be treated under subsection (1) and (2) as gross income for the relevant period, then if its receipt first becomes known to the DG on a day more than 5 years after the end of the relevant period, it shall be treated for the year of assessment which begin 5 years before the beginning og the year of assessment which includes that day.

Comment
This section serves as an anti avoidance provision to prevent loss of revenue, if the DG discovers the receipt of employment income is time barred.