TAX planning is a legitimate way of reducing your tax liabilities in any given financial year. It helps you utilise the tax exemptions, deductions, and benefits offered by the legislations in the best possible way to minimise your liability.
Basically, the intention behind tax planning is to ensure that the taxpayer pays the correct amount of tax, and no more. When one refers to the correct amount of tax it effectively is the minimum amount of tax required under the law.
The borderline between the phrase “tax planning” and “tax avoidance” is often blurred in the eyes of the ordinary man. However, in legal terms, unacceptable tax avoidance would be where the taxpayer enters into an arrangement which is fictitious, sham or a transaction that is wholly intended to obtain a tax benefit without incurring a cost or suffering a loss. There is no commercial rationale or a family reason for undertaking the transaction.
Every individual or corporation subject to tax should consider planning your taxes as there are choices available within the tax rules. For example, you can donate and claim a deduction under Section 44(6) of the Income Tax Act 1967, or you can give a gift without claiming a tax deduction. The other common opportunity to consider is whether a capital expenditure which is not deductible can be legitimately reorganised to become a tax-deductible expenditure.
You should also not forget to take advantage of the provisions in the legislation especially Schedule 6 of the Income Tax Act 1967 which specifically exempts income from taxation. An example would be retirement gratuities received after the age of 55, or certain types of interest income.
What are the general principles?
Converting income into capital. An example would be to let out a property on a long-term basis and receive two types of payments: a lump sum amount as a premium, and an ongoing rental payment. The premium being the right to rent the property for a long term is capital in nature.
The next principle is to accelerate expenditure into the earlier tax period. This will include capital expenditure qualifying for tax depreciation, an example would be to buy machinery and use it just before the financial year-end and claim tax depreciation for the whole year instead of incurring the expenditure in the following year.
Take advantage of all the tax incentives and tax exemptions accorded under the law. Enlarge the tax deductions by taking advantage of the provisions in the law. An example would be the reinvestment allowance which gives you an additional 60% to 100% of the expenditure incurred on certain types of capital expenditure. Another example would be to take advantage of all double deductions available in the Income Tax Act 1967.
You can defer the taxation of income to a later period provided it is commercially and legitimately justifiable. This can occur on transactions which are undertaken close to the year end. For example, the proposed withdrawal of Real Property Gains Tax (RPGT) on individuals for disposal of real property after six years should enable individuals to avoid RPGT by deferring their sales from late 2021 to early 2022.
Although remittance of foreign sourced income will be taxed in Malaysia from 2022 onwards, there is still room for offshoring your business income through legitimate and commercially justifiable structures.
Individuals should also not forget to take advantage of the reliefs, deductions, and rebates in each tax year.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd
managing director SM Thanneermalai.
Source: The Sun Daily
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