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 As such, the second condition mentioned above is no longer applicable for everyone except, companies in the business of banking, insurance, sea or air transport.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.