1.

To eliminate incidence of tax where possible. For example, one could invest in tax exempt companies or an offshore tax shelter vehicle that provides non-taxable income.

2.

To reduce tax where possible. For example, an employee whose remuneration is already at the highest tax rate bracket may structure his total compensation to include items that are non-taxable or that lower the overall taxation impact. Such items may cover medical and dental benefits, child care benefit, computer and software purchase, leave passage, living accommodation, provision of car/petrol/maintenance/driver, travel and entertainment allowances, low interest loans, higher than statutory EPF contributions and share schemes. To make the package tax effective, one has to be familiar with the various qualifying conditions and restrictions imposed by the Inland Revenue for each of these items.

3.

To defer incidence of tax (and therefore payment) to a later period where possible. This could, for example, be through swapping of income with capital gain or using own company income to purchase a key man endowment policy.

Financial planning would not be complete without tax planning. Besides risk and other considerations, tax influence how an investment is selected and structured. One would not select investments merely looking at the gross return but would need to consider the tax impact. Thus, in the case of an investor who pays a high rate of personal income tax, a tax-exempt investment yield of 5% would be considered better than a gross yield of 6% in an investment with equivalent risk and marketability.

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1.

Choice of filing status

If married, the choice of filing separately or jointly with spouse can make a significant difference depending on the reliefs and claims each can make and which tax rate brackets the individual and combined taxable income levels fall into.

Choice of business structure

The choice of business structure, i.e. whether as a sole proprietorship, partnership or company, can make a difference from a tax perspective. Depending on income size, a company with a small paid up capital (of RM 2.5 million and below) may have a tax rate advantage. If a company has brought forward losses, there may be an advantage in offsetting the loss if there is income from the same business source as the loss.

Maximising employment benefits

If under employment, one can structure an employment contract to be advantageous for tax purposes to the employee, by introducing benefits that are non-taxable or that would result in lowering of tax, without affecting the overall cost to the employer. Examples of the various types of possible benefits have been covered earlier. Some benefits, such as health, term life and personal accident, when arranged as group insurance plans, may be non-taxable.

Income that attracts tax can be deferred to the next assessment period if it is anticipated that taxable income for that period will be less than for the current assessment period. Tax on an incentive based on sales is deferred if a sale, or the booking of the sale, towards the end of the current period could be deferred to the beginning of the next period.

On the other hand, the incurrence of a significant expense could be deferred to the next assessment period if it is anticipated that taxable income for that is higher than the taxable income for the current period. This would make sense only if the deferment causes taxable income to fall into lower tax brackets such that the saving in tax in the following period exceeds the interest cost of foregoing a lower tax payment in the current year.

Acceleration

This would be the converse of the deferral technique. Recognition of income for tax purposes is accelerated, i.e. taken to the current assessment period instead of the next assessment period, if it is anticipated that the taxable income for the current period is less than for the next period and the result is to cause taxable income to fall into lower tax brackets and cause savings that exceed the interest cost of accelerating the tax payment.

Similarly, a significant expense may be accelerated to take advantage of shifting taxable income to a lower tax bracket.

Entity shifting

A portion of income may be shifted to another taxable entity such as a family member whose taxable status is in a lower tax bracket.
This could be through a variety of techniques such as appointing the family member as director or employee and paying him/her remuneration so that a portion of business income has effectively shifted from a high rate of tax to a lower rate of tax.

Another way is to donate an income producing asset, say a property with rental income, through a gift or a trust. This way, income could be moved from a person with a high rate of tax to another with a lower rate of tax. A discretionary trust would be the most ideal because the asset (and therefore the related taxation) moves to beneficiaries who can include the taxpayer who wants to retain control of the asset and enjoy the bulk of the income.

Managing timing of investment transactions

This applies to those who deal in shares as a trade and therefore pay income tax on investment income and gains. For such taxpayers, the timing of investment sales to generate gains can be managed so that these fall in the period of choice.

This can also apply to timing of sales for a share deal, say in the case of investments which are below cost, to realise loss so that such loss can be used to offset gains for the period.

Tax free structures

Tax free structures can be in a variety of forms. A common one is to have an income producing business or asset in a company that is a subsidiary of another company that does not pay tax because it has large accumulated losses or enjoys a tax free status (e.g. a pioneer status company). Many types of tax shelters using capital write-offs or special tax concessions have been marketed especially offshore but one has to be careful about the use of these structures which tend to be scrutinised by the Inland Revenue and may be challenged.

Avoidance of taxable income through investment selections

In selecting types of investments, one may consider tax free investments (such as unit trusts, government guaranteed securities and bonds) or investment into companies with tax exempt status (such as domestic shipping companies). Of course, the tax aspect is not the only consideration for investment selection. Factors such as risk, liquidity and, in the case of equity, growth prospects would need to be considered.

Tax deferred investing

This is investing in something that allows investment income to be shifted to a later date. The most common ones are retirement plans and stock option schemes. Certain structured financial products also fulfill the same objective. Note that such investments do not eliminate tax at all but simply postpone the tax payable until a later date. This is good for cash flow since the outflow for tax payment is delayed. It is also advantageous if the rate of tax payable in the future is expected to be lower than currently.

The detailed strategies, techniques and structures on how to meet tax planning objectives are beyond the scope of WealthBox. Get a good tax consultant who can provide guidance as to the various intricacies of tax laws, the types of reliefs and tax breaks available, the tax-advantageous structures available, etc. The tax savings that can be achieved should more than justify the fee payable to him.

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1.

What is tax planning?

A:

It is a planning process by which one aims to achieve avoidance, reduction or deferment of tax through legitimate means.

2.

What are the differences between tax avoidance and tax evasion?

A:

Avoiding tax by taking advantage of strategies and techniques that comply with tax rules is tax avoidance. So long as no provision of the law is violated and transactions are bona fide, tax avoidance is perfectly acceptable. There are cases however where a tax plan may not appear to have violated tax rules but if the Inland Revenue regards the underlying transactions as a sham, it has the right to disregard the transactions as reported, and impose back taxes as well as penalty. Consult a tax specialist when in doubt.
Evasion of tax is when one avoids tax without complying with the law and tax rules.

3.

Is tax planning for individuals or for businesses?

A:

Tax planning is both for the individual as well as for business since both can incur taxes.

4.

What is the difference between year of assessment and basis year?

A:

These terms, together with other terms such as statutory total income, tax residence, etc. are explained in the glossary.

Approaches: Estate Planning > Introduction >>