Understanding how Malaysia's taxation system works for individuals and businesses lets you plan your taxes more effectively.
It's commonly said that nothing in life is certain except death and taxes.
In taxation planning, we analyse a financial plan to make it more tax efficient. By optimising the tax that we pay on our income, we maximise the amount of money available for investment.
"So, how can I be more tax efficient?"
As a Malaysian citizen, we should feel proud to contribute back to society through paying our taxes, as a form of charity or social responsibility for public welfare. Yet, whether you're an employee or a businessman, it is smart to master tax planning because taxes may cost up to 17-25% of your take-home income!
Personal
As an employee, here are some ways to maximise your personal tax entitlements.
Get insured
Medical insurance and premium life insurance are tax-deductible expenses, up to RM3,000 each.
Invest in a private retirement scheme (PRS) or deferred annuity
These expenses are tax-deductible up to RM3,000 annually.
Declare your lifestyle expenses
Lifestyle expenses include purchases of a smartphone, tablet, or PC; books and reading subscriptions; sports equipment; and more, up to a maximum of RM2,500.
Save with Skim Simpanan Pendidikan Nasional (SSPN)
Whether you have a child or not, setting aside savings in SSPN can net you up to RM8,000 in tax relief.
Donate generously
Donations to approved bodies are tax deductible up to 7% of your aggregate income.
Declare parental care expenses
Medical expenses incurred in caring for your parents are also entitled for tax deduction, up to RM5,000.
Small and medium businesses
As the owner of a small or medium-sized business, you may have better tax efficiency as a Sole Proprietorship or Partnership.
Register your business
Having your business registered with Suruhanjaya Syarikat Malaysia (SSM) entitles you to tax incentives that are not available to taxpayers with only non-business income.
Keep business expenses separate
With a registered business, you may declare business-related expenses as a separate deduction for your personal relief entitlement.
Account for asset depreciation
According to LHDN, capital allowance provides deductions for "depreciation expenses incurred in purchase of business assets”, which helps offset the depreciated cost of your business assets such as office equipment, furniture, computers, and work vehicles.
Larger businesses
If you run a larger business, you might want to consider founding a Private Limited company (Sdn Bhd).
Limited liability protection to shareholders
As a separate legal entity, Sdn Bhd offers protection to shareholders' personal assets from business debt and liabilities.
Annual dividend payout
As an owner or shareholder of the company, you receive dividends or benefits which are disbursed yearly.
Enjoy better tax advantages
If your business's annual taxable profit is over RM70,000, you may enjoy lower tax rates with a Sdn Bhd. You may also be entitled to additional business expense deductions and tax incentives.
Simpler planning for business succession
The ownership of Sdn Bhd can be easily passed on through the sales or transfer of shares, so the company can continue to exist independent of the original shareholders.
What is tax relief?
Tax reliefs are deductions given by LHDN to taxpayers for expenses on certain activities in the tax year. As a Malaysian taxpayer, you are able to deduct certain expenses from the total annual income, up to a limit.
Taking advantage of tax reliefs can help reduce your chargeable income, and thus your taxes due. Tax reliefs change year-by-year, so it's important to keep up-to-date.
