VAT Planning is a legitimate way to reduce your tax debt in any given fiscal year. It will help you make the best possible use of the tax exemptions, deductions and benefits provided by the law in order to minimize your liability.
Basically, tax planning is about ensuring that the taxpayer pays the correct amount of tax and nothing more. When referring to the correct amount of tax, it is effectively the legally required minimum tax amount.
The line between the terms “tax planning” and “tax avoidance” is often blurred in the eyes of the common man. From a legal point of view, however, tax avoidance is unacceptable if the taxpayer enters into a fictitious, feigned or a transaction that is solely aimed at obtaining a tax advantage without incurring costs or losses. There are no commercial or family reasons for completing the transaction.
Any taxable individual or legal entity should consider planning their taxes as there are choices within tax laws. 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 way to check is whether a non-deductible investment expense can lawfully be converted into a tax-deductible expense.
You should also remember to make use of the provisions of the legislation, in particular Annex 6 of the Income Tax Act 1967, which expressly exempts income from taxation. An example is pension grants that are received after the age of 55 or certain types of interest income.
What are the general principles?
Convert income into capital. An example would be to rent a property long-term and receive two types of payments: a lump sum as a premium and an ongoing rent payment. The premium that represents the right to long-term rental of the property is capital in nature.
The next principle is to speed up spending into the earlier tax period. This also includes tax-deductible investments, for example the purchase of machines and their use shortly before the end of the financial year and tax depreciation for the whole year instead of spending the following year.
Take advantage of all statutory tax incentives and tax exemptions. Extend tax deductions by taking advantage of legal requirements. An example would be the reinvestment allowance, which gives you an additional 60% to 100% of the cost of certain types of investments. Another example would be the use of all double deductions available in the 1967 Income Tax Act.
You can defer the taxation of income to a later period if it is economically and legitimately justifiable. This can occur in transactions that are made shortly before the end of the year. For example, the proposed elimination of Real Property Gains Tax (RPGT) for individuals on real estate sales after six years should allow individuals to avoid RPGT by moving their sales from late 2021 to early 2022.
Although remittance of income from overseas sources will be taxed in Malaysia from 2022, there is still scope for outsourcing your business income through legitimate and economically feasible structures.
Individuals should also remember to take advantage of the perks, deductions, and discounts each tax year.
This article was published by Thannees Tax Consulting Services Sdn Bhd. contributed
Managing Director SM Thanneermalai.