Every end of the year, tax payers scramble to boost their tax exemptions by making certain purchases or investments before the clock strikes 12 on December 31st. Come the month of April, Malaysians will be busy filing for their personal income taxes and claiming their tax rebates. Seasoned pros treat it as a yearly routine that goes by in a blur, while others find the process daunting, especially if it is the first time they’re doing it.
Essentially, income tax is imposed by governments on financial income generated by all entities within their jurisdiction. By law, individuals and businesses are required to file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund.
All this is calculated based on your “taxable income,” a term that is used to describe the amount of income you have to pay tax on. It is the amount that you get after you have deducted all the expenses you are allowed to claim from your total (assessable) income in a tax year.
The Government has been progressively introducing tax rebates and reliefs to promote the capital market, which is reflected in the fact that most incomes earned from unit trusts and Real Estate Investment Units (REITs) are exempted from tax charges. Besides that, direct expenses that contribute to rental income are also deductible.
Read on to find out how you can potentially save on taxes with the income tax reliefs and rebates that come with the following investments:
1. Unit trusts
Unit trusts are one of the most popular methods of investment. They comprise portfolios of assets such as bonds, equities, cash and listed property, in which investors can buy units. This allows investors to spread their risks, while getting the benefits of professional fund management.
Unit trust investments can potentially generate higher returns when compared to fixed deposits or Employees Provident Fund (EPF) savings. Income from your unit trust investment may consist of dividends, interest or profit, and gains from sale of investments and returns on bonds.
Under the Income Tax Act, income of unit trust investments is assessed and charged to tax separately from the income of unit holders, which means that whatever interests and monetary gains you make from unit trusts will not be subject to personal income tax charges.
Some unit trust funds can potentially generate up to 8% to 10% returns per annum. This means if you contribute RM10,000 to a unit trust fund with an average rate of 10% per annum, you stand to gain a cool RM1,000 that is tax-free.
2. Real Estate Investment Units (REITs)
Real Estate Investment Units or REITs are a collective investment vehicle that pools money from various investors to raise capital to buy and manage real estate assets ranging from office and apartment buildings to shopping centres and warehouses.
In a move to increase the liquidity of the real estate sector and enhance its contribution to the economy, the Government introduced attractive tax incentives to promote the growth of Real Estate Investment Trusts (REITs) under Budget 2005.
One of the biggest benefits that came with this is that most of the income earned from REITs are exempted from tax, provided that the REIT distributes at least 90% of its taxable income to its unit-holders in a particular year.
REITs typically provide an average of 6% to 10% annually, plus the potential capital appreciation.
Malaysian REITs do not have to pay stamp duty, which are normally fixed at a maximum of 3% of the property purchase price. Likewise, sellers of such properties do not have to pay real property gains tax (RPGT). The RPGT levy is usually 10% on gains from the disposal of the property sold within two years of purchase and 5% if sold within two to five years. This represents huge savings to the REIT as well as to the seller of the properties.
3. Private Retirement Scheme (PRS)
Private Retirement Scheme (PRS) is a voluntary long-term investment scheme designed to help individuals supplement their retirement savings. Each PRS provider offers a choice of retirement funds from which individuals may choose to invest in based on their own retirement needs, goals and risk appetite.
Members who contribute to the PRS funds are allowed to claim for tax relief of up to RM3,000 per annum for the first 10 years from assessment year 2012 (together with any deferred annuity payment).
Income distributed from the PRS funds to members will also be exempted from income tax.
To boost youth participation in the long-term savings scheme, a one-off incentive of RM500 will be given to PRS contributors aged between 20 and 30. However, only those who have accumulated a minimum gross contribution of RM1,000 in the first year will qualify for the incentive, which will be available until 2018.
For example, if you are 25-years-old and you have invested RM1,000 and 10% is charged as processing fee, you will still qualify for the RM500 incentive based on the gross amount of your contribution.
Meanwhile, employers who contribute to PRS on behalf of their employees are eligible for tax reduction of up to 19% on their contributions.
4. Property rental
Property ownership has become one of the most profitable investments in recent years. Property owners who lease their units out will have to declare rental income.
There are several deductions that property owners can claim from rental income. They include direct expenses that are wholly and exclusively incurred in the production of their rental income, such as assessment and quit rent, interest on loan, insurance premium, and expenses on rent collection, rent renewal, and even on repair works.
However, only expenses that are incurred after a unit has been rented out are deductible from rental income. Initial expenses that were incurred prior to the tenant moving in, such as advertising costs, legal costs, stamp duty and commission for a real estate agent are not deductible from rental income.
Preparing for your tax returns can often feel overwhelming, but it can also be empowering and rewarding. If you plan your finances well, and make the right move before the year ends, you may just see youself getting hundreds to thousands of tax rebates come April. Investing your money in some of these avenues can help boost your passive income, as well as help you save on your yearly income tax with the various tax incentives they come with.
