The Budget Hotel

1. Senai is a relatively quiet town located a good 30km away from Johor Bahru. It’s most famous landmarks are the International Airport and Industrial Zone that boasts the likes of Hitachi, Dyson, Flextronics and many others.
2. The hotel business thus makes good sense to cater to travelling salespeople as well tourists who would like to explore Johor before making their way to Singapore. With Johor Premium Outlets being set up not too far away, the potential from tourist spending just became greater for this town.
3. Sometime ago, a friend mentioned that a 20 room budget hotel was for sale in Senai and invited me to tag along to be an extra pair of eyes as he inspected the unit.
4. The price was Rm980k for a 3-storey shop fronting the main road and this figure was matched by a bank approved Valuer’s report.
5. Banks usually finance 85% of valuation and in this case, it works out to be Rm833k. Down payment will thus have to be Rm147k and this is excluding Stamp Duty, Legal Fees and other costs that could add up to another 5% of the purchase price.
6. Due to its worn-out condition, the 10 year old hotel required a further Rm250k in restoration cost. Despite haggling for a reduced price, the property agent was adamant it was not possible and the price was final and non-negotiable.
7. My friend walked away from that deal with a heavy heart as he lacked the financial muscle to make that purchase, let alone the renovation cost to restore it.
8. Months went by and one day, he received a call from a lawyer friend who was offered a budget hotel for sale and was looking for a partner to run the new business.
9. It turned out to be the exact same unit but this time, it was directly from the owner at a cut price of Rm850k. With the bank willing to loan up to Rm833k, actual down payment only amounted to Rm17k.
10. Due to direct purchase from the owner there a saving of 1% on agent fees and on top of that, all legal fees were waived by his lawyer partner. What a deal indeed!
11. The lawyer only wanted to be a passive investor by providing his share of finance and left the entire operations to my friend. With 2 parties financing the purchase and restoration, the venture became a success and is doing brisk business today.
12. The odds of this situation recurring is very slim but it just simply shows that having a network of professionals in the property chain makes absolute sense when one intends to be a serious player.
13. Invest your time in getting to know people in the right industry. Who knows, you may get that once in a lifetime deal that’s far sweeter than the one above.
14. Happy investing!

Personal Insurance FAQ - Fundamentals

1. It's that time of the year where insurance companies mail out premium certificates for tax submission purposes.

2. It's also the time when some of us also realise the amount of premiums paid and also wonder whether we have taken the correct policies?

3. In view of this, here's a quick FAQ on the subject of insurance :-

a. What must I look for when buying a Medical Card?

A good Medical Card should be acceptable by major hospitals close to where you live. It should also be Renewable at the Insured's option and not at the Insurer's.

Other matters to be considered is whether it provides uniform coverage for all illnesses or does it discriminate and provide lesser coverage for more serious one's like Cancer and Kidney Failure.

One final matter to look is whether it covers all hospitalisation expenditure or does the Insured need to share a portion of the total bill.

b. How do I choose a Critical Illness plan?

In Malaysia, this type of plan covers 36 Dreaded Diseases that in the event it occurs, can force the patient to lose his/her job. Hence why it covers serious ailments such as Stroke, Heart Attack, Cancer, etc.

When choosing a plan, the effect to inflation is the main matter to consider. Does the insured want to take a Participating plan that will grow as the years go by or take a Non-Participating Plan that remains stagnant?

Another factor to consider is whether one is looking at pure coverage only or does one want a plan that has an element of savings/investment as part of the premium?

c. Then how about Personal Accident plans?

PA plans, as the name suggests, generally cover only Accidental misfortunes that usually has external injuries such as cuts, knocks, bruises, etc.

Many take this plan as they are deemed to be cheap. However, the proper way to choose is not to look at the Death benefit, rather, one should look at the Living Benefit.

Statistically, the probability of an accident occurring for most people who are not in hazardous jobs, are very low. Even if it does occur, odds are, one is still alive.

The usual outcome of this misfortune is the MC given by the doctor. Plans that have Living Benefits will pay a weekly allowance for each completed week of the MC duration.

4. While there are many policies and providers out there in the market, the 3 plans mentioned are the first few plans one should take before moving on to others.

5. Most policies are similar and so are the providers. What makes the difference is your advisor. Get someone that you can trust to do a good job for you and your family. 

6. One of the best ways to achieve this is to ask close friends to refer their trusted advisors. The odds of making a mistake is thus, drastically reduced.

7. Here's to a wonderful day ahead.

Scope of Charge: Categories of Income

1. In our last post, we looked into the difference between Revenue and Capital Income, where an income is classified as Revenue, it would be subject to taxation under the Income Tax Act, 1967 and where it is classified as Capital, it would be exempt from tax.
   
   
2. As mentioned previously, the Act does not define what is 'Income' however, once an 'Income' is determined to be 'Revenue' in nature, the next step is to identify which category it falls within.
   
   
3. Section 4 of the Act categorises income as follows:
   
   "Subject to this Act, the income upon which tax is chargeable under this Act is income in respect of:
   (a) gains or profits from a business, for whatever period of time carried on;
   (b) gains or profits from an employment;
   (c) dividends, interests or discounts;
   (d) rents, royalties or premiums;
   (e) pensions, annuities or other periodical payments not falling under any of the forgoing paragraphs;
   (f) gains or profits not falling under any of the foregoing paragraphs.
   
   
4. Apart from the above, Section 4A sets out special classes of income on which tax is chargeable. This section applies specifically to income earned by non residents. We will consider this section in detail in our subsequent articles.
   
   
5. The question which may pop into one's mind is that why the need to categorise the income separately? Why can't we just lump it all up and apply the applicable tax rate and compute the tax liability?
   
   
6. The answer to the question above is that, by categorising the income (and expenses) separately, the tax collection is maximised. Consider the following example:
   
   Mr A has the following income in the year 2013:
   - Salary RM36,000
   - Rental RM12,000
   
   This makes a total income of RM48,000.
   
   Mr A took a loan to acquire the property he is renting. The interest expense for the year was RM15,000.
   
   What would be Mr A's tax liability assuming an average tax rate of 10%?
   
   If the 'lum sum' approach is used, then Mr A's tax liability would be:
   
   (RM48,000 - RM15,000) x 10% = RM3,300
   
   However, where the income is assessed separately, Mr A's tax liabilty would be as follows:
   
   RM36,000 + (RM12,000 - RM15,000*) x 10% = RM3,600
   
   *The 'loss' from the rental income would be deemed to be a permanent loss, therefore not allowed to be offset against the Employment Income.
   
   As it can be seen, by categorising and computing the income and their respective expenses separately, the Inland Revenue Board would be able to maximise its tax collection!
   
   
7. So, why don't we compute the tax using the 'lum sum' method? The answer to that question lies with the provisions of Section 5 of the Act, which specifies the step by step procedure in which chargeable income is ascertained.
   
   
8. The following are the steps in computing Chargeable Income as per Section 5 of the Act:
   
   (a) The Basis Period for each source of income is determined as set out in Sections 20 to 21 of the Act.
   (b) The Gross Income for each source of income is determined as set out in Sections 22 to 32 of the Act.
   (c) The Adjusted Income for each source of income (or for business source, the adjusted income or adjusted loss) is determined as set out in Sections 33 to 41 of the Act.
   (d) The Statutory Income for each source of income is determined asset out in Section 42.
   (e) The Aggregate Income is computed as set out in Sections 43 to 44. The Aggregate Income is the total of the Statutory Income computed separately above less other deductions allowed under Sections 43 and 44.
   (f) The Chargeable Income is then computed as set out in Sections 45 to 51.
   
   
9. Once the Chargeable Income is computed, the applicable tax rate (determined based on tax resident status) would be applied to determine the tax liability.
   
   
10. The following is the summary of the tax computation process:
    
    Basis Period -> Gross Income -> Adjusted Income -> Statutory Income -> Aggregate Income -> Chargeable Income
    
    
11. The most common misconception on income among tax payers is that they need not pay taxes if they have yet to receive it. However, based on the provisions of the act, the tax payer has to account for income when is it 'accrued' or 'derived' in Malaysia. The derivation of income (as categorised above) is set out in Sections 12 to 17. We will be discussing the topic of derivation of each income in our subsequent articles.
    
    
12. This concludes our article on the Categories of Income. Our next article would be on the topic of tax residence status.

Scope of Charge: Revenue vs Capital Income

1. In our previous post, we had identified 3 areas of tax which needs to be considered prior to determining the tax liability, which are "Scope of Charge", "Residence Status" and "Deductions". In this article, we will explore the concept of "Scope of Charge: Revenue and Capital Income" in detail and discuss its tax implications.
   
   
2. In order for an income to be taxed in Malaysia, it needs to fall within the ambit of Section 3 of the Act, which reads:
   
   "Subject to and in accordance to this Act, a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia."
   
   
3. Section 2 of the Act lists down the interpretation of specific terms used throughout the Act, for example, in relation to Section 3 above:
   "tax" means the tax imposed by this Act
   "year of assessment", subject to subsection (5), means calendar year.
   "person" includes a company, a body of persons and a corporation sole.
   "Malaysia" means the territories of the Federation of Malaysia, the territorial waters of Malaysia and the sea-bed and subsoil of the territorial waters, and includes any area extending beyond the limits of the territorial waters of Malaysia, and the sea-bed and subsoil of any such area, which has been or may hereafter be designated under the laws of Malaysia as an area over which Malaysia has sovereign rights for the purposes of exploring and exploiting the natural resources, whether living or non-living.
   
   
4. Therefore, as long as the conditions of Section 3 are met, the income would be subject to tax. As mentioned previously, foreign source income (except for banks, insurance, sea or air transport) repatriated back to Malaysia has been exempted from income tax with effect from year 2004 by virtue of Para 28 of Schedule 6 of the Act.
   
   
5. Since 'person' has been defined in the Act to include a company  or body of persons, which covers clubs and associations, one cannot argue that a company or association is not a 'person' since they are not natural persons.
   
   
6. As for "Malaysia" some tax payers may get creative in performing the transactions on the sea or under water and claim that the income was not performed 'in' Malaysia. Since the definition of "Malaysia" includes territorial waters, therefore, this argument is not valid.
   
   
7. This brings into question income generated in international waters. Would they be subject to Malaysian tax? On principle, if the source has been derived in international waters, therefore it is tax exempt. For example, a casino on board a ship, which picks up passengers from Malaysia and only commences casino activities in international waters. The income for the 'transportation' of passenger may be taxable. However, the casino income would not be taxable in Malaysia because the activity is carried out in international waters. Of course there are other considerations pertaining to maritime revenue, which would not be discussed in this article.
   
   
8. Some may even argue that income derived in the airspace, on board an airplane or helicopter, may not be subject to tax because Section 3 only mentions territories and territorial waters and no mention of air space! Although, logically airspace should be covered as part of 'territories of the Federation of Malaysia', Section 3 only mentions subsoil, sea bed and territorial waters. No mention of airspace! By applying the literal rule of interpretation, since there is no mention of airspace, should the income, where it could be clearly proven is derived from airspace, be liable for tax? To date, we are not aware of any case law which have been tested for this. But with commercial space tourism coming closer to reality in the near future, it is possible for 'consultancy' and 'advisory' services to be rendered in 'space' which is 100 km above Earth as defined by the Karman Line. In this case, where the income is derived in 'space' 100 km above Malaysian soil, would it still be taxed under the Act? It would be interesting to find out!
   
   
9. Please take note that the chargeable income for sea and air transport is determined by Section 54 of the Act. The above examples are to illustrate the derivation of other income at sea and air, not in relation to the rendering of transportation service as defined in Section 54.
   
   
10. From the looks of it, it seems like the Act is quite detailed in its definition and interpretation, however, despite its detailed interpretations and definitions of  the specific words used throughout, the Act does not define the most important word used within it, which is INCOME.
    
    
11. In order for a person to be taxed, there must be an element of income which falls within Section 3. If the 'income' is does not qualify to be taxed, then, the person will not be subject to income tax.
    
    
12. So, what is income? Since there is no definition of income given in the Act, one would need to look into the ordinary meaning of income and case laws to determine what is income and more importantly, what is taxable income?
    
    
13. In general, income can be classified into 2, i.e. REVENUE and CAPITAL. In Malaysia, only revenue income is subject to the Income Tax Act, 1967, whereas Capital Income is not subjected to the Act, i.e. it is tax free! (except for capital gains which are subject to the Real Properties Gains Tax Act, 1976).
    
    
14. So how does one classify income into Revenue or Capital? The general rule is that if the income arose from the day to day activity of a vocation, example, trading business, consultancy business, rental income, employment income, interest income and other frequent sources of income, this is deemed to be Revenue Income. Where the income has the characteristics of a "windfall" for example an unexpected gain, or a realisation of a long term investment, lottery winnings, gambling winnings and lucky draw prizes.
    
    
15. The preliminary tests to determine whether an income is Revenue or Capital are as follows:
    
    Frequency of the transaction
    Where there is frequency in receiving the said income, it is more likely to be Revenue than Capital.
    
    Subject matter and circumstances of the transaction
    Whether the income is received due to a vocation, i.e. employment or trading activity? If so, this would be revenue income. However, if the income is for example a lottery winning or in the form of a compensation for loss of employment, then such income may be deemed Capital.
    
    Period of ownership
    The period in which an item of trade was held prior to generating the income is also a consideration on determining whether an income is Revenue or Capital in nature. Usually, items held for a long period of time prior to disposal would indicate a realisation of investment, therefore Capital in nature. Whereas, where an item is purchased and traded within a short period of time, would indicate a trading nature, thus may be deemed as Revenue in nature.
    
    
16. Please take note that the above is not a definitive test to determine whether an Income is Capital or Revenue. In reality, the courts have applied many tests in determining whether an income is Capital or Revenue. It has been held in the case of LFY Sdn Bhd vs DGIR that whether an income is Capital or Revenue depends on the facts and circumstances of the transaction.
    
    
17. Naturally, most (if not all) tax payers would prefer to classify their income as Capital rather than Revenue in order to pay minimal (if not at all) taxes. Once, they know of the 'rules' of determining 'Capital' income, they would have the tendency to see every transaction in the light of  being Capital income!
    
    
18. For example, a "windfall income" is a characteristic of a Capital Income. A small time home renovator whose regular renovation contracts amount to less than RM200,000 would argue the big contract worth RM3 million he or she just landed is a "windfall" as it is out of the norm. Or an employee may argue that the 12 month bonus he or she received for the first time after working with the same employer for 10 years without any bonus is a "windfall". However, even though in the eyes of the tax payer, this is a "windfall" it is still an income received within their ordinary vocation, therefore it is a Revenue income.
    
    
19. The line between Capital and Revenue often gets blurred. Especially when tax payers take the route of tax planning prior to commencing a venture and in some cases, the tax payers choose to take the route of 'creative accounting' so that their income falls within the definition of Capital income.
    
    
20. Therefore, when disputes with the Inland Revenue Board cannot be resolved, the courts would look at the substance of the transaction as a whole, instead of just the 'form' of the transaction. When this happens, the tax payers who engage in 'creative accounting' to avoid taxation would be exposed, since the 'substance of the transaction' would prove that the accounting transactions were created just to avoid paying taxes.
    
    
21. Tax planning on the other hand involves structuring the business operations within the provisions of the Act, to minimise their tax exposure. It is perfectly legal and within the tax payer's rights to structure their business operations to that which would give them the most optimum tax exposure.
    
    
22. However, even though tax planning is legal, the Inland Revenue Board tends to disagree with certain tax planning exercises due to the interpretation of law. As such, when disputes arise, it is up to the courts to decide the correct interpretation and application of the law in relation to the disputed transaction.
    
    
23. So in summary, for most people, ALL income are taxable except FOREIGN SOURCE income and CAPITAL income. The Act is quite clear on what income from 'outside Malaysia' is since it has defined the meaning of "Malaysia". However, whether an income is CAPITAL or REVENUE is not defined. Therefore, one has to consider the substance of the transaction and applicable decided case laws before arriving at the conclusion that a certain income is indeed CAPITAL in nature, therefore not taxable.
    
    
24. This concludes our article on CAPITAL and REVENUE income. Kindly feel free to post your queries on Capital and Revenue income in the comments section or email us at dason@dason.com.my.

Tax Law and Interpretation

1. In this article, we will briefly discuss about the Income Tax Act, 1967 and the misconceptions about the role of the Inland Revenue Board and how the law works in Malaysia. 
   
   
2. The common misconception people have about the Income Tax Act, 1967 is that the law is actually set by the Inland Revenue Board (IRB) and therefore the IRB would have the final say in any tax disputes.
   
   
3. In reality, the laws pertaining to Income Tax are determined by Parliament and the IRB are entrusted to enforce the law. This means that the IRB officers are also bound by the provisions of the Income Tax laws and if the tax payer is unhappy with the assessment raised, there are appeal procedures available under the law.
   
   
4. Another important matter pertaining to the tax law in Malaysia is the rule of interpretation. In law, there are generally 3 rules of interpretation, namely, golden rule, mischief rule and literal rule. In short, the golden rule and mischief rule allow a certain degree of discretion in the interpretation of the wording of the law to determine the 'purpose' or 'fairness' of the application of law. However, the literal rule demands strict application of the law to the letter of the law. This means, there is no room to consider the 'purpose' or 'fairness' of the application of the law.
   
   
5. In Malaysia, tax laws are are interpreted using the literal rule. This has been determined in the case of Mamor Sdn Bhd vs Director General of Inland Revenue. So, what does this mean to the tax payer? It means that if a certain provision is not literally stated in the Act, then we cannot make presumptions about it.
   
   
6. Let's take a look at the provisions of Section 3 of the Act which reads as follows:
   
   "Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received from outside Malaysia."
   
   
7. Applying the literal rule on the above, in order for income tax to be charged, there must be an element of 'income', it must be earned by a 'person' in Malaysia or received in Malaysia from outside Malaysia.
   
   
8. If for example, in a highly unlikely scenario, a show animal is able to legally receive an income of say RM1 million a year in its own name in Malaysia, it would not be subject to tax because it is not a 'person' as defined under Section 2 of the Act. The definition of a 'person' under the Act is limited to natural individuals, companies and body corporates.
   
   
9. Even though, it would seem unfair that a natural person who earns RM80,000 would be subject to tax and the show animal in the above example which earns RM1 million is not taxed. One cannot argue that the animal must be taxed due to fairness under the literal rule of interpretation of the Income Tax Act, 1967. If the Golden rule or mischief rule of interpretation is used, then probably one can argue that the show animal needs to pay tax. However, since it has been decided in the Mamor case that the literal rule is to be applied, it is a binding precedent which will not be changed with regards to the interpretation of the Income Tax Act, 1967.
   
   
10. The above scenario is of course absurd, however it is to illustrate the point that since the literal rule is applicable, one has to read the Act to the letter when dealing with tax matters, instead of making assumptions or drawing logical conclusions.
    
    
11. Frequently we encounter clients who argue that they refuse to pay taxes because they feel it is unfair due to various reasons. Sometimes, their reasons and circumstances may even be justified given the circumstances. However, even with the best justification, one cannot be exempted from paying tax unless it is specifically allowed under the law, i.e. one cannot refuse to pay tax on the grounds of just and equity because of the literal rule of interpretation used on the Income Tax Act, 1967, which clearly states that income tax liabilities must be paid, even if the person is no longer alive!
    
    
12. This concludes our article on Tax Law and Interpretation. We hope that this article would set the foundation on the significance of the wordings of the law and its application. The next article would deal with the concept of "Scope of Charge" and how to determine whether an income is taxable in Malaysia or not. 

Introduction to Malaysian Taxation

1. In Malaysia, there are 2 types of tax systems in operation, which are, direct and indirect taxation. Direct taxation involves paying taxes on income or gains generated from a venture and indirect taxes is imposed by way of tariffs, custom duties, sales tax, services tax and the soon to be implemented Goods and Services Tax better known as GST.
   
   
2. Direct taxes come under the purview of the Inland Revenue Board whereas indirect taxes come under the purview of the Royal Malaysian Customs Department. Ultimately, both these agencies come under the Ministry of Finance.
   
   
3. The focus of these articles would be on the direct taxation system, which is legislated by the Income Tax Act, 1967 (henceforth referred to as the Act). However, we would post articles on indirect taxation and other tax related matters from time to time.
   
   
4. For many, taxation is a very complicated subject, with many rules and regulations to be adhered to. But in reality, the 'complication' actually boils down to only 3 matters. Once these 3 matters are identified, computation of the income tax can be done by applying the appropriate tax rate. The 3 matters of consideration are "Scope of Charge", "Residence Status" and "Deductions".
   
   
5. The "Scope of Charge" determines the chargeability of the income. Section 3 of the Act sets out 2 conditions for income to be taxed in Malaysia. First, the income must be accrued or derived, i.e. earned in Malaysia. The second condition is that the income must be received in Malaysia from outside Malaysia, i.e. foreign sourced income.
   
   
6. However, with effect from year 2004, foreign sourced income which are repatriated back to Malaysia is no longer subject to tax by way of the exemption granted under Para 28, Schedule 6 of the Act. As such, the second condition mentioned above is no longer applicable for everyone except, companies in the business of banking, insurance, sea or air transport.
   
   
7. The "Residence Status" would determine the applicable tax rates, whether tax reliefs are available (for individual tax) and/or whether the income derived would be subject to withholding tax and in some cases, whether income would be exempted from tax. In the context of the Act, citizenship does not determine the Tax Residence status. A person would be deemed to be a Tax Resident so long as the individual (whether citizen or not) satisfies the conditions (i.e. the number of days stay in Malaysia) as set out in Section 7 of the Act, and Section 8 for Companies.
   
   
8. The "Deductions" comprise of expenses and reliefs which may be claimed against the income to reduce the taxable income. These 'deductions' come in the form of expenses, capital allowances, double deductions, and personal reliefs which are allowed under various provisions of the Act, the specifics of which, will be discussed in future articles.
   
   
9. If there are only 3 matters of consideration to taxation, how can it get complicated? The complication arises due to the interpretation of the law. Naturally, the tax payer would like to interpret the law to his or her benefit and pay as little tax as possible whereas the Inland Revenue Board would take the view of maximising tax collection for the government coffers. This differing view ultimately leads to tax disputes, and where no resolution can be found between the tax payer and the authorities, the matter would need to be referred to the courts to interpret and resolve.
   
   
10. This concludes our Introduction to Malaysian Taxation article. Our future articles would be a further discussion on the topics of "Scope of Charge", "Residence Status" and "Deductions". If you have any queries on this article or any other tax related questions, kindly feel free to post it on the comments or email us at dason@dason.com.my. Thank you.

Property Investment Musings

1. The second half of 2013 witnessed some major changes in the areas of banking, property and taxation. Loan approval was based on net income after all deductions. In the past, it was based on gross income.
   
2. This move alone handicapped a significant number of applicants and many had their loans rejected or approved for lower amounts instead. The buyer thus had to forego the purchase or had to come out with higher down payments.
   
3. For those who poured out high down payments, the reduced disposable cash served its intended goal, which is to stifle speculation activity for those who aimed to flip it as soon as practicably possible.
   
4. However, this measure did not stop foreigners who had the benefit of higher exchange rates from making continued and sustained purchases. Very often, these foreigners made cash purchases and the tweaking of loan requirements were of no consequence to them.
   
5. Then came the next salvo. Minimum price for property purchase by foreigners was raised to RM1m and this was coupled with an upward revision of the Real Property Gains Tax (RPGT).
   
6. By referencing against the Singapore Dollar (SGD) at an exchange rate of RM2.50, the entry price thus became SGD400k. Not exactly a deterrent since HDB flats in Singapore cost way more than that.
   
7. As such, genuine foreign buyers still made a bee-line to developers doors albeit the need to fork out more in terms of entry price. This thus made the foreign quota allocated by developers, a sure sale.
   
8. The RPGT put a major halt to speculators who bought just to trade it away as a commodity. Coupled with restrictive lending, a dampener has been put in place to restrict runaway prices.
   
9. The effectiveness in the interim at least, looks promising. Only time will tell whether these cooling measures have achieved its intended outcome.
   
10. While foreigners seem to be unscathed by these revisions, the general pulse among local purchasers look a little withered these days. Those who jumped into the property bandwagon at elevated prices seem to have no spare cash to purchase another unit.
    
11. This is evident by the new banners put up by some developers. The artwork may have changed but the model is still the same. It simply indicates that these houses remain unsold even though the banner and buntings have faded due to rain and sunlight.
    
12. Usually, these are luxury units such as bungalows and semi-detached houses. Locals simply do not earn high enough to afford while foreigners who have no problem with the price, have used up their quota. The developer thus, is left with unsold units.
    
13. Locals who bought at steep prices in the past mainly did so out of fear rather than need. Many, whom we have spoken to, were willing to part with their entire savings due to the fear of not being able to afford a house in future.
    
14. Another segment bought extra units either as investments for their children or simply out of greed to capitalise on the frenzy of fear by selling it to those who missed purchasing it in the past.
    
15. Back to the unsold units. we anticipate the usage of very creative financing options by developers to get these units sold. Among the popular methods known is the rebate approach to reduce initial down payment to the popular guaranteed rental scheme.
    
16. Our thoughts are that this will continue for a while and if the “discounts” are enticing enough, there will be takers. For now, prices still seem to be at lofty heights and we don’t see them crashing down.
    
17. Otherwise, there will be pandemonium in the financial markets with banks, developers, loan borrowers and even the stock market experiencing major turbulence which can bring back memories of the 1997 financial crisis.
    
18. As we see it, either one has to increase income to stay where one wants to live, or consider moving to areas beyond city limits where it’s more affordable. Such is the price of development.
    
19. Otherwise, the government has to come out with significant number of units of affordable housing within city limits or drastically improve our badly needed public transport system to encourage migration to suburban areas. Only time will tell how this pans out.
    
20. In the meantime, here’s wishing everyone all the best in finding your property of choice. May you find it sooner rather than later.
    
21. Merry Christmas and Happy 2014!

Money Matters

1. A call came from a client who recently acquired a house in Serene Park and was re-looking at his MRTA (Mortgage Reducing Term Assurance) options.
   
2. From our previous dealings, we have suggested to take MLTA (Mortgage Level Term Assurance) instead, to which he is agreeable after balancing the pro’s and cons of the plan. He was also looking at a plan that covers Critical Illnesses (CI) rather than the basic coverage of Death & Disability.
   
3. The new loan was at RM265k. Around a year ago, he acquired an apartment which carried a RM200k loan and he took up an MLTA plan to mitigate the risk.
   
4. As our meeting went on, he informed us that the apartment has been since been sold off and was in the process of changing hands. This transaction was expected to be completed in about 3 month’s time.
   
5. The question thus is, how much should he take for the new loan in view of the soon to be completed disposal? Should he re-cycle the previous MLTA and just top up the difference of RM65k or take a plan for the full RM265k since the previous unit has yet to be disposed in its entirety?
   
6. If one is paranoid, then, the new MLTA should be at RM265k. However, this may be an overkill since the apartment is already on its way out. There is such thing as risk and then there is calculated risk.
   
7. We explained to him that, when it comes to property investment, it may not be practical to insure the entire amount of loan for all properties. In practice, one should categorise properties as core holdings and trade commodities.
   
8. The core units should be protected in full as the primary intention is for long term retention (for self use or rent collection) while the other group is held with the aim of disposal should the right situation arise.
   
9. Examples of core units are the house one resides in, the office one operates from as well as other units that are meant for portfolio building.
   
10. He thus concluded that the house is a core unit that must be protected from risk and the apartment as a trade item. We suggested that he performs this core/non-core asset exercise periodically to gauge his risk exposure and the mitigating action needed.
    
11. In the end, he decided to take an additional coverage of RM100k instead. The rationale was to have an additional RM35k for the family even after the house loan has been settled in full.
    
12. We suppose, when one is a husband/father, leaving something extra behind as a parting gift is the least one can do.
    
13. Loans are a good financial tool but just like fire, if precautions are not there, it can burn the house down. Happy investing!

Property Investment Musings

1. Property investment can be a high stakes game and sometimes when the opportunity presents itself, a fast decision, albeit with risk attached, can be very rewarding.
   
2. A case in hand relates to our client who had to make a snap decision when the situation arose. Many would have gone home to think or even sleep over it when big ticket items come by. We are of the opinion that to be extraordinary, one needs to act and live extraordinarily.
   
3. It was a Sunday afternoon in August 2010 and everyone at home was in deep slumber. Unable to join in the siesta, he dropped by SP Setia’s sales office in Bukit Indah to kill time. On display was the mock-up of the then latest offering known as Indah Walk 3 Lifestyle Offices. It was a 5-storey retail and office block with around 140 units in various sizes.
4. On enquiry, some units were still available especially inner ones that were not facing the main road. Since this was an office block with lifts, the general rule of getting ground/lower units may not apply. Higher may actually be better.
   
5. However, being a commercial entity, ground floor units are the most valuable due to ease of access, but the developer was only renting them out. This automatically made the highest floor, especially the main road facing corner unit as the most valuable.
   
6. On display was a building plan of all the units available with coloured stickers on them indicating those that have been sold and those that are still available. Naturally, he eyed the blank units and spoke to the sales staff with regards to pricing and financing matters.
   
7. This went on for a good one hour and what was supposed to be a casual visit to the developer’s office is slowly morphing into a potential unplanned purchase. With his interest piqued, he needed a second opinion from a trustworthy party.
   
8. He then phoned his business partner to drop by and join-in the enquiry. Upon arriving, the partner re-visited the display sheet and noticed that the top floor corner unit facing main road had a different coloured sticker from all other units that were already sold.
   
9. When asked, it turned out to be a previously booked unit where the purchaser failed to secure a loan. The best saleable unit was now available for the picking! However, for a 2,000 sq ft office, it was priced at a steep RM426k.
   
10. Back then, this was a relatively high number even for a commercial unit. Today, at RM213/sq ft, it’s practically a steal. Many residential condominiums are priced between RM500 – RM1,000/sqft, what more commercial lots.
    
11. Back to our case. A decision would have to be made and it has to be made fast. Just about anyone can place a booking fee as the thinking and talking process is going on.
    
12. Since it was just a casual visit, no money was brought for the RM3k booking fee. Going to the ATM machine risked the unit being intercepted by another lucky buyer.
    
13. To his surprise, the partner had the exact RM3k in his pocket. It was the prior day’s takings from their mini market that has yet to be banked in. Talk about luck. Getting a cool unit and having the exact amount of booking fee!
    
14. The transaction was done and with the loan kicking in around 3 weeks later, he was the proud owner of a nice office unit. Today, that unit is leased out to Dason & Dason and we have prominently displayed our signboards in the most elevated and advantageous position as seen from our profile picture above.
    
15. Despite our persuasion, he is unwilling to part with the unit, citing that he was destined to be its owner with such series of occurrences. We suppose so too.
    
16. When presented with an opportunity, a quick decision may sometimes be needed. We reckon, the Greek poet Homer was right when he wrote, “Fortune favours the Brave”. In this case, we suppose luck played a big part in being brave.
    
17. Always be on the lookout for such deals. Opportunity knocks on everyone’s door. The question is, are we ready to welcome it in?
    
18. Happy investing!

Money Matters

1. Every now and then, our clients and friends will enquire about savings programmes that assist in reducing taxes and building a retirement nest egg.
2. We dutifully show them the various options available and give them a projected value on maturity.
3. Most plans tend show 2 sets of Illustration, one being the most favourable and the other, the most conservative. In all reality, both will not occur as it is improbable to have a consistent set of returns every year. There will be up’s and equally, downs.
4. A mid-point would thus be the most practical value to gauge expectations. Although simplistic in approach, it is still better than relying on either extreme.
5. At this point, one in two times, we get remarks like “The plan gives back RM100k in 20 years time? What is the value of RM100k then? What can it do with inflation being so high?”
6. Usually, this remark comes from those who are highly educated and holding decent paying jobs. The "normal" ones usually just get things started and move on to other matters.
7. In our years of practice, the ones who got things done are living reasonably comfortable lives and are midway through their retirement plans. When they retire, they will cash out their EPF/CPF as well as live off the Private Pension Plans that we have helped structure.
8. They may not be wealthy, but they will have money to live, eat, go for vacation and enjoy the simpler things in life with dignity. They will not have to beg and depend on anyone else but themselves.
9. The intelligent ones however, keep talking about how inflation eats away values and are constantly seeking for plans that will beat inflation. Even after 10 years, they are still talking and talking but just never getting down to doing.
10. They are just too smart for their own good. They are procrastinators who just keep delaying and delaying. When they do get down to doing it, they will analyse it so much that in the end, they are back to square one.
11. Back to Point 5 above. we agree that RM100k can get a bungalow 20 years ago but can only be the down payment for a cluster house today. Purchasing power has deteriorated over the years due to inflation.
12. But the fact remains, RM100k is still a big sum of money back then and still is now. Just how many ordinary people can casually raise RM100k as and when needed? The sooner we take the first step towards implementing a savings plan that disciplines us, the safer we are in our greying years to come.
13. The decision made by the Young You today determines’ how the Old You will be in years to come. If you have yet to start any, get it done. If you have done one, get a second one started. If you have done an Endowment, get an Annuity started. There must be progress.
14. Here’s wishing you all the best in getting things moving. Just don’t let too much analysis lead to paralysis.
15. To quote the immortalised slogan from Nike, “Just Do It!”.

Money Matters

1. Some say debt is good. Others swear that borrowed money causes misery.
2. Debts, when used wisely and free from emotion, can yield good financial harvests. The implementation however, is not as easy as it sounds.
3. Investing is not for everyone. Many end up losing money due to greed (not cashing out when due) and fear (cashing out too early). If these twin emotions are not manageable, stay away from investments, especially, borrowed investments.
4. So back to debts. Is it good to borrow or should investments be funded with savings only?
5. Let’s analyse the case of two Accountants who are in similar earning capacity and age group but with differing opinion when it comes to creating an investment portfolio.
6. Accountant G is in his mid-30’s and has fully settled his housing loan within 5 years and his car in 2 years. He opines that settling loans as fast possible and saving on the interest via high down payment and lump sum periodical deposits are in itself good returns on investment.
7. Today, he has no loans and truly living a debt-free life. His cash savings are at a decent level equivalent to 9 months living expenses and he fully owns the house he lives in with his young family.
8. The other, Accountant A is highly geared with loans exceeding RM3m and is the owner of 10 properties. All the properties were acquired over a period of 7 years and are generating rental income over and above the respective monthly instalments.
9. When asked, Accountant G says that he is unable to purchase any new properties as prices have moved too fast and even if he could do so, his nature of borrowing as little and short as possible makes it financially untenable.
10. Accountant A has emergency funds amounting to 3 months expenses and wishes he has more liquidity. He however, has no regrets stretching his loans and cash to capture properties just before the wave came.
11. Looking at these two cases, who is better off financially?
12. From a liquidity sense, Accountant G wins hands down. There is no debts, no instalments, hence no worries. He however, is regretful for not being alert to ride on the property wave despite Accountant A’s advice years ago.
13. Accountant A has amassed great wealth via property appreciation and has made paper-profits exceeding 100% on almost all his properties. He is cock-sure that his units will continue to generate rental as they are of prime location. He does confide however, on the worry of servicing the loans should a financial crisis occur.
14. Hence the trade-off between returns and liquidity. Liquid assets generate lousy returns and vice versa. The key is striking a balance.
15. Before venturing into hard assets, ensure that there is sufficient liquidity to withstand financial shocks. Funds should be split into separate accounts, one for unforeseen circumstances and the other as seed capital to acquire assets.
16. This way, the usage of funds from one account will not affect the ability of the other. One is able to grow the Balance Sheet and still have funds for emergencies.
17. Back to our Accountants. In a rising market, the one who bought with very little debt loses out. In this case, his unwillingness to borrow. The available fund was used to finance only a single property.
18. By the time the first asset was settled, prices moved up by leaps and bounds. He could only be a mere spectator as his time has passed. The only thing is to look out for rare unappreciated gems that may or may not come. The consolation is that he is cash rich in an inflation fuelled economy.
19. The obvious winner is the one who capitalised on cheap finance and borrowed just as the market was rising. It was a gamble but as long as the asset generated returns and his income allowed such a loan, then it is a worthwhile risk.
20. In conclusion, when investing or wanting to invest, one needs to keep abreast with the pulse of the economy. Know when to leverage on loans and when not to. Experience is a good teacher but other people’s experience is a better teacher.

Money Matters

1. Not everyone saves for a rainy day. For those who do, we can distinguish them into two broad categories.
2. The first are those who save after they have allocated expenses away and only then try to set aside for a rainy day on whatever little that remains. That will be akin to the equation of Savings = Income – Expenses.
3. Unfortunately, this type of saving is flawed and sadly, most people fall into this category. Worse still are those with inconsistent income who can never save systematically.
4. The other kind employ the concept of Income – Savings = Expenses. This group live within their means. Frugality is practiced to keep within the planned expense. They save first and then decide what commitments to enter into later.
5. When people practice financial discipline, money is never a problem. However, many spend first and depending on how high that commitment is, only then decide whether they can save any money at all.
6. Back to savings. Just how much should one set aside?
7. Well, the amount depends on the following 3 accounts being Emergency Fund, Consumptive Fund and Retirement Fund.
8. Set aside between 3 – 6 months of expenses as Emergency Fund. This acts as a form of retrenchment back-up so as not be pressurised to take the first opening that comes when in-between jobs.
9. Another approach is to save enough to feel confident. If that amount is Rm10k, then that is the amount one should strive for. If RM15k makes you feel secure, then that should be the goal. Although the approach is not mathematical as Point 8 above, it still does the job.
10. Ideally, this amount should be kept separate from the regular salary/income account so as to ensure clear demarcation of funds. The Emergency Fund should be left liquid either as a Regular Savings Account or at most, a Fixed Deposit Account for tenure of no more than 12 months.
11. Next is to create the Consumptive Fund account. As the name suggests, this amount is set aside to be spent once the desired amount is achieved. Big ticket items such as a new car, house, exotic vacation, etc are just some of the things that many of us desire.
12. However, most do not set aside funds in a systematic manner and end up taking out whatever savings they have to finance these purchases. As a result, should an emergency occur, things become very sticky.
13. The savings timeline in this account can be spread between 12-36 months, depending on the quantum. Once the targeted amount is achieved, withdraw the funds and spend it on the item.
14. Due to the longer savings timeline, it is encouraged to place these funds in semi-liquid form such as Fixed Deposit or in low risk Unit Trusts such as Money Market or Bond Fund.
15. Retirement Funds should be placed in illiquid instruments that pay out better returns due to the longer savings timeline. For the majority who are employed, one such option is the EPF.
16. However, due to relatively low contribution rates, the final amount might not be sufficient for a retiree to live on comfortably. Hence why voluntary savings schemes such as Private Retirement and Annuities are additional tools towards a decent Retirement Fund.
17. In a nutshell, the 3 separate funds play different savings objectives. While an Emergency Fund focussed on liquidity, the Retirement Fund concentrated on generating returns. A compromise in the form of timeline trade-off is needed to achieve these objectives.
18. The Consumptive Fund however, is a mid-point since it focuses on various items with differing timelines. It balances returns with matching tenures.
19. In conclusion, make a decision to save an amount on a consistent basis. A starting point between 5%-10% of gross income can be the first step towards gradually setting aside a very significant 25%. It is said that practice makes perfect. That saying applies here too.
20. While it is easy to say, the same cannot be repeated when it comes to execution of a plan. This requires determination and discipline. Only when there’s extra revenue, is there room to manoeuvre for Investments.

Money Matters

1. We all want financial freedom. The question is, just what is Financial Freedom?
2. It varies from person to person. Some say it’s when passive incomes surpass living expenses. Some say, it’s when there’s no debts to pay. Others define it as when one does not have to work for a living.
3. All are correct from their perspective. To each, their own.
4. The journey to financial freedom has many routes. Just like climbing a mountain, we always start from the bottom.
5. Fundamental to a proper financial plan, is having proper protection via a suitable insurance policy. As a bare minimum, Medical and Debt Cancellation Plans are of utmost importance.
6. With so many Medical plans in the market, just how does one choose a suitable plan?
7. Well, as a general guide, these matters should be considered before a decision is firmed up :-
8. - Choose a plan that is renewable at your option. Imagine the nasty surprise where an insurer kicks you out just when you need it the most.
9. - Study the amount for Internal Limits, if any. These are restriction in usage for specified illnesses such as Outpatient Cancer and Kidney Dialysis, which could be much lower than limits for all other illnesses. Avoid policies that discriminate. If unable to, then ensure that limits are as uniform as possible.
10. - Evaluate whether a policy has any Deductible or Co-Insurance elements. In the case of the former, the insured’s liability is fixed while most Co-Insurance plans go along shared percentage on the total bill.
11. - Do you want a policy that grows to keep up with inflation or one that remains stagnant? What RM100k can do today is superior to RM100k a decade into the future.
12. The next important policy is a Debt Cancellation plan. As the name suggests, the objective of this plan is to ensure debts taken by the insurer is settled in the event of a triggering event and the family are in not burdened by the outstanding loan.
13. Most banks offer this type of protection in the form of Mortgage Reducing Term Assurance (MRTA) when borrowers take on housing loans. However, most borrowers are not aware of what is known as Mortgage Level Term Assurance (MLTA).
14. The MRTA shadows the loan value while a MLTA remains constant despite the reduction in loan with each instalment paid. For those who wish to purchase more than one property, MLTA is a better option where one policy can be tailored to cover a few loans. MRTA on the other hand, varies according to number of loans and can prove to be confusing at times.
15. A very important element when taking MRTA/MLTA is the inclusion of Critical Illness (CI) coverage. Most standard policies cover only Death and Disability as triggering events. The statistics of falling into serious illness far outweighs the odds of meeting an untimely Death.
16. With insurance policies put into place to secure the income source, the next step of Savings and Accumulation can be put into motion. We will explore that topic in the next article.

Property Investment Musings

1. An interesting situation happened some time ago to a friend whom I know very well. He had the pleasure of purchasing a semi-detached house located at Horizon Hills in late 2011 for a then princely sum of RM900k.
   
   
2. Construction was in an advanced stage when he purchased and the house was promptly delivered by the developer around mid 2012. Armed with the keys to the property, he had a change of heart and decided to sell the unit although the original intention was for own occupation.
   
   
3. The main incentive for the change of plans was the rapid rise in prices for new launches, which was only due for completion some 2 years in future. He now had a property that was ready for occupation and was in high demand.
   
   
4. By October, a buyer was found for Rm1.35m and it so happened to be a foreigner who incidentally was a Privilege Banking customer of a UK based bank. In a matter of days, a loan amounting to 60% of purchase price was secured, with the bank accepting full valuation.
   
   
5. A Conditional Sales and Purchase Agreement (SPA) was signed because State consent was needed for transactions involving foreigners.
   
   
6. The buyer placed a deposit amounting to 10% of the purchase price and the SPA was drafted such that in the event State consent was not obtained, then the SPA will be terminated with full refund of any monies exchanged between both parties.
   
   
7. However, once consent was obtained, the SPA will thus become unconditional and all parties are bound by the contract entered into. Any termination by either party at this stage will incur damages that must be compensated to the aggrieved party.
   
   
8. Due to year end and the uncertainty of the impending General Elections, State approval got delayed longer than expected and was only obtained in early March 2013. By then, 5 months has gone by since the SPA was entered into.
   
   
9. In this short time, the purchaser’s financial situation has deteriorated due to unforeseen medical expenditure incurred by a family member. He was unable to raise the remaining 30% of the purchase price amounting to RM405k.
   
   
10. Since State consent was obtained, the buyer is now caught between forfeiting the initial 10% amounting to RM135k or come out with a further 30% to complete the purchase.
    
    
11. Sadly, he had to forfeit. The SPA was aborted and in the end, everyone involved in the process got paid except the buyer and the loan officer who processed the loan.
    
    
12. The lesson learned from this misadventure for the buyer can be summarised as follows :
13. -When big ticket items are involved, conclude it as fast as possible as a change in circumstance may lead to severe losses.
14. -Segregate funds carefully so as not to mix them up when entering into legally enforceable obligations. 
15. -Always keep an extra amount of funds just in case unexpected costs come up. One can never be too prudent when anticipating expenditure.
16. -Always be careful of local laws when dealing with overseas ventures.
17. -On top of the loss of deposit, there were abortive legal costs. The final loss might be financially crippling.
    
    
18. Back to the friend. He was now RM135k richer, less legal costs incurred, which incidentally was very insignificant as the bulk of charges was incurred on the purchasers side.
    
    
19. By then, property prices have raced even higher and he now decided to stay in it as per original intention. The only difference is, he now has an extra RM135k for the renovation budget.
    
    
20. Hence concludes the tale of the boomerang property.
    
    
21. Happy reading.

Property Investment Musings

1. Is it the right time to purchase a property now? Should I delay until the price falls? Should I buy now before prices go up?
2. These are the common questions that we hear on and off. Sadly, for both the person asking and us listening, we simply just can’t see the future. If we could, well, the firm will be a very wealthy for we will be able to foresee the next 4D draw and place all funds on the winning number.
3. The questions, however, are not without answers. Let’s assume the property is for own accommodation. Then, the answer is simple. It just simply doesn’t matter when one buys.
4. Allow us to illustrate our reasoning. Let’s say a double storey house in Nusa Idaman is purchased at Rm800k for own stay. Due to persistent demand, in one year’s time, similar units are now being sold in both in the primary and secondary market at amounts in excess of Rm1m. How does this augur for the purchaser?
5. Well, for starters, there is a gain of Rm200k due to capital appreciation. The purchaser will be patting him/herself on the back for such a fantastic investment decision. Heck, he/she might even be claiming bragging rights on such foresight!
6. The glaring thing however, is that the gain is merely a paper profit where it’s only academic unless it is disposed and the value is monetised. Secretly, the purchaser may be cursing for not getting 2 units in the first place, one for dwelling and the other to flip.
7. What if the situation is reversed instead? Prices take a dive for whatever reason and the market value is now hovering at Rm700k range. What now? Did the purchaser lose RM100k?
8. Again, it’s just a paper loss. Maybe a bruised ego to boot but that’s about the damage that the buyer is going to sustain. Since he/she is occupying the house, a sale is unlikely and thus no loss will be recorded.
9. So, in the end, it really does not make sense to time the market when there is a genuine need. The only thing is the natural human behaviour of wanting a bargain where an item is procured on the lowest possible price. In essence, it’s merely to satisfy the inner ego.
10. The matter is entirely different when one purchases with the hope profiting from an anticipated price increase. Now, this is speculative and timing is of the essence. Some would call this investing but some call it time gambling.
11. If this is what one is hoping with the purchase, then, all the best as any drop in price may spell financial disaster. The final outcome will depend on one’s financial prowess and holding power.
12. To the genuine buyers out there, now is as good a time as anytime. May you find your ideal unit.