Thursday, March 21, 2013

Why are you over paying your tax?

By now, many of you would have seen the below youtube on how Malaysians (and Sarawakians in particular) could be cheated off transactions with state land being sold at very low price and further flipped at market price. If you haven't, do watch this as it is part and parcel of how sometimes transactions could be happening. This is how some of the rich gets richer (by cheating) and in this case evading tax (and beyond).

(Note, this article I am not a proponent of evading tax - you should not - but rather an advise on how one should not be over eager to over pay your tax). Note again, that there is a BIG difference between evading tax and avoiding tax!

A segment of the video shows basically how a lawyer proposed creating 2 separate agreements. One with transactions at nominal value (meaning a value that is acceptable to the government - most of the time lower), then another with all transacted premium on it. The one with nominal value, the transaction will be paid in Malaysia - the one with add-ons, it would be transacted in Singapore to evade tax. Why are they doing this? See the S&P Stamp Duty Rates below on property.

S&P Stamp Duty Rates:
First RM 100,000.00 = 1%
Next RM 100,000.01 - RM 500,000.00 = 2%
Next RM 500,000.01 - RM 2,000,000.00 = 3%
Above RM 2,000,000.00 = 4%

Imagine if a land is being transacted at say RM100 million. How much tax would that be? Besides the stamp duty on S&P, there is a Real Property Gains Tax of up to 15% in Malaysia currently. If the land was bought cheap say just less than 2 years ago, a flip of 100% gain would have attracted a RPGT of 15% on the profits. Again a RM100 million transaction of 100% gain would have attracted a tax of as high as RM7.5 million. Hence, all in all the tax alone could be more than RM10 million.
(Note that I am giving assumptions on above numbers)

Now that you can see that there is a high chance of these kind of transactions to evade taxes happening in Malaysia, why are we Malaysians over eager to pay our taxes especially involving ourselves in these kinds of transactions...

  1. lots of trading - buy and sell stocks almost every day in large quantities. There are still clearing fees of 0.03% today and stamp duty of RM1 per RM1,000 of transactions. Seldom, do I see benefits out of doing lots of trading - unless you have the tendencies to beat Uncle Lim in Genting Casino...hmm perhaps;
  2. flipping properties - again, if you are one of insiders whom are able to get apartment lots or houses direct from well known developers - one must always remember of the costs of transactions involved in properties;
  3. spending all you hard earned money. You are actually working harder in order to pay more taxes. Even if you are able to earn a lot say more than RM150,000 per annum, do you know how much taxes are you paying? And what would your take home income be? With income as such, you could be paying more than RM25,000 tax per annum - you should pay them as this is one of the ways how the government is able to earn enough to implement its policies, and the higher you make, the more one should pay. It's fair. However, one should know that there is a limit to how long one can be in employment. Additionally, deducting travelling expenses, the additional wardrobe you need to have etc., your net takeaway could be the same as a person who makes RM100,000 from home. Without savings, one could not build enough warchest for passive income. And the beauty in Malaysia is that, there is no tax in capital gains from stocks. There is very little difference between a person who has RM1 million and able to gain 10% annually (on average) from stocks (by right rental income from properties should be declared as well) AND one who earns RM150,000 and spends all his money. The investor is taking home a non-taxable income of RM100,000 investing comfortably from the sofa or study room of his / her house and compare that to a person who has to beat the jam daily, know nothing about investing, spends all his money and earns RM150,000 annually.
So start building your retirement war chest. Learn about investing and start saving as well...

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