Wednesday April 14, 2010

Tips on how to file your income tax and claim exemptions

By Dr Choong Kwan Fatt

EVERY employee when filing the tax return (Form BE) for year of assessment (YA) 2009 on April 30 has to understand the concept of income exemption, deduction and relief in order to maximise the tax benefits available under the Income Tax Act 1967 prior to paying the legally required amount of income tax.

Income Exemption: Generally, any amount paid by the employer to the employee in relation to having or exercising an employment will be taxed. This refers to employment income such as salary, bonus, gratuity, commission, allowance, director fees and many other forms of remunerations as stated in section 13(1) of the Act.

The Government, however, would from time to time legislate through the Act or gazette order (PU(A) Orders) on the category of income paid by the employer where tax exemption will be granted. This means that such income will be excluded from the income tax computation.

In short, the phrase “income exemption” refers to employment income that is excluded from taxability.

Deduction: Employee can only deduct expenses incurred in carrying out the employee’s duties provided allowance has been received from the employer. This generally refers to travelling allowance, entertainment allowance and meal allowance.

Income tax only imposes tax on net income, ie. after deduction of the required expenses incurred in discharging the performance of the employee’s duties. The amount to be taxed is mathematically computed as follows:

With effect from YA 2008, payments by the employer to the employee in the form of child care allowance, payment of traditional medicine and maternity expenses constitute tax exempt income to the employee. The amount paid in relation to these expenses by the employer is tax deductible against his business income and yet not taxable in the hands of employees.

The relationship between the employer and the employee is illustrated in the above table.

If the employee incurred on his/her own child care, medical expenses on traditional medicine or maternity expenses, these expenses are not deductible from the employment income due to the followings:

● no allowance has been received from the employer on these items;

● it is not related to the carrying on of the employee’s work;

● it represents personal expenses which are not permissible under the Act.

The Act only permits the deduction of expenses provided it is incurred “wholly and exclusively” (the sole objective test) in discharging the performance of employees duties as stated in section 33 of the Act.

Tax Planning: Since the expenses are tax deductible to employer, it would be tax efficient for the employee to forgo their bonus in exchange for these benefits as child care allowance, medical expenses on traditional medicine and maternity expenses that are given by the employer to the employee are tax exempt on the employee’s hand.

Alternatively, employer may consider providing these benefits to the employee at the additional cost to the business but it gives employee loyalty to the firm in long run.

Tax relief: The Act provides a list of items deductible from any income earned by a resident individual in order to relief him/her from tax burden. These expenses are essential to provide welfare to an individual and are given to any resident individual irrespective whether he/she is earning business income, employment income or investment income. The resident individual refers to an individual who has been staying in Malaysia for at least six months.

Click
here for the complete article by tax consultant Dr Choong Kwai Fatt from the Faculty of Business, Universiti Malaya, as he takes you through the basic issues on how to file your tax returns before the April 30 deadline.

http://biz.thestar.com.my/news/story.asp?file=/2010/4/14/business/6027384&sec=business

By Michael Tan | Mar 29, 2010

How to squeeze your housing loans to maximize your returns?

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First things first, decide. Are you planning to make money or save money in properties? If you answered “Saving money from properties”, this article may not be suitable for you. I’m here to share with you how you can use your property loan to make money for yourself. In fact, I know some people who have such proficiency at earning via this method, that they have retired within 5 years of starting!

With the information I am about to share with you, doubtless some will disagree. And to take all potential variables into consideration would be an endless task, however, should you use this method with care, you should be able to maximize your returns from your loans and make tons of money from your property while still keeping it!

To understand how this works, let’s go through a couple of basics. In general, does a property appreciate or depreciate in price? Now, how about a property loan? The answers are quite obvious; a property should, one hopes, appreciate in value whilst your regular monthly payments will reduce the amount outstanding on the loan secured against it.

So looking at the diagram above, how can you make money from your loan? As your property appreciates in price, and your loan reduces, the amount of equity (in other words, cash) in your property increases. In this situation, there is an easy way to access that tied-up capital: refinancing. The banks will also be aware if your property has increased in value, and the majority will be more than happy to increase the loan amount on it for you, assuming that you can demonstrate you can afford the increased loan, and there is sufficient equity in the property. This way, you still own the property and are able to cash out some money from it. Ideally, it would be best not to increase the loan tenure whilst refinancing, even if the new monthly payments are a little higher, as this will end up costing you more in the long run.

Here’s an example of how this works. Let’s take a property worth RM300K, with a loan of RM270K. We assume that the property does NOT appreciate with time. The illustration below is with a fix loan of 6% p.a.

Looking at the table below, you can easily take out RM20,000 every 5 years. However, you should only do this for your investment properties which are bringing you good rental yields. If you are able to rent your property out for 7% and above, you can be rest assured that your tenants will be paying for your profits while you are cashing out on your property at least every 5 years.

However, there is never a guarantee that property prices will ALWAYS go up, so it is never wise to overextend yourself completely. The clever investor will always keep a rainy day fund to ride out dips in the markets.

With that in mind, Happy Investing!

Property Details 0 yrs 5 yrs 10yrs 15yrs 20yrs 25yrs 30yrs A. Property Value 300,000 300,000 300,000 300,000 300,000 300,000 300,000 B. Down Payment (10%) 30,000 30,000 30,000 30,000 30,000 30,000 30,000 C. Balance (A – B) 270,000 270,000 270,000 270,000 270,000 270,000 270,000 Financing Details D. 25yrs Loan 270,000 243,000 206,000 157,000 90,000 0 - Unrealized Capital (C – D) 0 27,000 64,000 113,000 180,000 270,000 - E. 30yrs Loan 270,000 251,000 226,000 192,000 146,000 84,000

Thursday March 25, 2010

Investment income – is it taxable?

By PAULINE TAM

KPMG CHAT

talkback@kpmg.com.my

IT IS the time of the year when some of us may feel uneasy as the deadline for filing our personal income tax return gets nearer. You may drag your feet when having to complete the return form (Form B or Form BE as the case may be) and procrastinate till the last minute as obviously paying taxes is not as exciting as receiving money from your investments.

After having received money from your investments in say, shares and property, have you considered whether the receipts are taxable?

Dividend income

In general, people are under the impression that dividend income is not required to be reported in the tax return. This is only true provided the dividend income is tax exempt as in the case where the dividend that is received is either a single tier dividend or is paid out of the exempt profits of the dividend-paying company. In the case where you received dividends where income tax has been deducted at source, such dividend income is taxable and consequently has to be declared in your income tax return.

Depending on your level of taxable income, you may actually obtain a tax refund from the Inland Revenue Board (IRB) if your tax bracket is at 24% or below.

Generally, the tax deducted by the company on the taxable dividend is at the rate of 25%. On the other hand, if your tax bracket is at 27%, then you are required to pay the 2% differential to the IRB.

In order to determine whether your dividend income is taxable or otherwise, you can look at the dividend vouchers. However, one common mistake in the reporting of taxable dividend income is where the actual amount received is declared as opposed to the gross dividend income, as stated in the dividend voucher.

Rental income

The other common investment income is rental income. Reporting of rental income would be simple if only the gross rental received without claiming deduction for expenses incurred in deriving the rental income was reported. As a smart investor with diversified investments, every penny saved or earned would be additional funding for your next investment.

Therefore, you should claim all the permissible expenses against the gross rental income. The permissible expenses would include assessment, quit rent, service charges, sinking fund contributions, fire insurance and property loan interest. In the case of a bank loan taken to finance a property which generated rental income, one has to remember that it is only the loan interest that is deductible and not the entire loan repayment amount.

Other rental-related expenses such as property agent’s commission and repairs may be deductible against the rental income. However, you would need to scrutinise such expenses in detail to establish if they are indeed deductible.

In the case of the property agent’s commission, where the property owned is being rented out for the first time, the commission paid for securing the first tenant would not qualify for a tax deduction. Subsequent commission paid to the property agent for securing tenants for the same property (after the first tenancy) would be deductible. Likewise, not all repair expenses incurred on the property could be deducted against the rental income.

If you were to repair a leaking roof and install a canopy at the verandah of the house at the request of the tenant, the expense incurred on the canopy would not be deductible as it would not be regarded as repairs and maintenance expense although the repair of the roof should qualify for a deduction.

Some points to take note of

Bearing in mind the penalty that can be imposed by the IRB in the event of an understatement of income in the tax return, you would have to be careful when determining the types of expenses to claim against your investment income. It is important that you do not make a claim for otherwise eligible expenses if you do not have the supporting documents to justify your claims.

If you have a property jointly owned with your spouse, the rental income will be taxed based on your share in the property. Correspondingly, your spouse would have to report the rental income based on his or her share in the property.

Where you and your spouse have investment income, you may be thinking of whether you should be filing for separate assessments or opting for a combined assessment. For most couples, a combined assessment is not beneficial as the combined income would push the tax rate to a higher bracket.

Further, a separate assessment would allow each person to claim the personal relief of RM8,000 whereas a combined assessment would only allow the person to claim either a wife or husband relief of RM3,000 in addition to the personal relief of RM8,000.

This would mean a loss of relief of RM5,000.

■ Pauline Tam is executive director, KPMG Tax Services Sdn Bhd.