Malaysia's Tax Budget 2013: politically savvy for general election? Housebuyers may struggle to pay!

Beyond the statistics of Budget 2013, it is clear that the government is well aware that the middle income group has found itself in a sandwich position.

FOR some in the Malaysian middle class, especially those in the upper income bracket, there is not much to cheer about Budget 2013.

But this is a group that is not easy to please. If they have their way, they would want to have personal taxes reduced. I would want to pay less to the taxman too, but it is also about time that we wake up to the reality of having the consumption-based goods and services taxes (GST) implemented.

It may not be politically savvy to introduce the GST prior to the general election but the fact is the current tax base is simply too narrow. Just over a million people are now paying personal income tax in a country of over 27 million people.

Through the GST, the tax net would be wider and those who spend on more pricey items would just have to pay for them. An ordinary wage-earner buying economy rice or roti canai won’t have to pay GST, for sure.

But if you buy a Louis Vuitton bag in KL, then it’s only right that you pay a hefty GST bill, and help the government raise its tax revenue. If we want to encourage tourism, we just have to follow what other countries are doing – limiting GST only to our citizens. Tourists, even if they are rich sheikhs, can apply for tax refunds at the airport.

That’s how GST works, but there is a general election ahead. The government does not want to be in a defensive mode, where it has to explain how GST works.

We are always looking to pay less while we expect the government to spend more to boost the economy, or even give away monetary goodies to spur spending.

When the government spends, it has to look for money. Currency speculator George Soros is surely not a good option.

Reducing by one percentage point for those with chargeable income between RM2,500 and RM50,000, as proposed in the Budget, plus the other tax reliefs, also mean that only 1.7 million people will now pay taxes compared with the workforce of 12 million.

Beyond the statistics, it is clear that the government is well aware that the middle income group has found itself in a sandwich position. They are the ones who feel the rising cost of living the most, and any effort to reduce their tax burden should be lauded.

It is this group that the Budget wants to target. The rich can take care of themselves and the poor has been taken care of.

The higher income group would still benefit, in some way, as regardless of how much one earns, the existing tax relief for their children’s education has been increased to RM6,000 from RM4,000 per child.

But it is the financially distressed wage earners, especially those in the lower earning bracket, who are doing their best to stretch the ringgit. After paying for their home rentals, car or motorbike loans and food expenses, there is nothing left, really. Saving itself is difficult, let alone finding the downpayment for the first home.

The affordable houses scheme would be essential to allow this group of urbanites to believe that they can own houses. The government must make it work.

Another measure that is targeted at this group is the 50% discount on KTM fares for Malaysians earning RM3,000 and below monthly. I would have preferred the government to just provide a blanket free KTM ride during peak hours in the mornings and evenings.

I am curious to see how KTM plans to carry out the registration of commuters who qualify and give them the special discount cards. If it is not effectively carried out, due to practical logistic issues, this scheme is definitely open to abuse. So the government might as well just provide free rides.

The whining upper middle class won’t be joining the queues at the crowded KTM stations, that’s for sure. It will still be the same KTM passengers who want to cut down on their financial expenses because they live in the outer city zones or even in Negri Sembilan but travel daily to Kuala Lumpur to work or to study.

The 70 new 1Malaysia Clinics will surely be welcomed as they would be a great help to the urban poor. Furthermore, 350 clinics would be upgraded and an additional 150 dialysis machines will be made available in government haemodialysis centres nationwide. All measures to improve healthcare facilities for the masses are surely welcomed.

But there is one area where the whining from the Malaysian middle class is legitimate – the crime problem.

We have repealed laws such as the Emer­gency Ordinance because the intelligentsia in urban areas demanded it. But the reality is that many of the Simpang Renggam graduates are now on the streets and the police cannot find these crooks because their hands are tied.

Budget 2013 has allocated for 496 CCTV cameras to be installed in 25 local authorities nationwide to prevent street crime in urban areas. This is like a drop in the ocean and surely insufficient.

We should have thousands, if not hundreds of thousands, of these cameras put up, as in London, to keep an eye on potential criminals.

As I write this, I have just been informed that my colleague had his new car hijacked by two men while he was on his way home with his wife and son in Subang Jaya. Incidents like this point to the necessity of having more of our policemen out on patrol.

The proposal to increase the number of police personnel for patrolling and combating crime is in the right direction. The police also have to review how police reports are made so that a person making a simple report about a car accident, or a lost handbag, does not have to compete with people making reports for serious offences. We need to put our policemen on the streets, not behind desks.

Let us consider making Rela, the civil service group, and volunteer policemen take over simple tasks like crowd and traffic control. The Budget has proposed an additional 10,000 officers for the Police Volunteer Reserve force. This is not something new but it will definitely reduce the unnecessary burden on the police.

On the Beat By Wong Chun Wai

HBA: Housebuyers may struggle to pay

Among the goodies were the building of 123,000 affordable homes at a cost RM1.9bil in key locations such as Kuala Lumpur, Shah Alam, Johor Baru, Seremban and Kuantan. The houses will cost between RM100,000 and RM400,000 each.

THE National Housebuyers Asso­ciation (HBA) has warned that house-buyers may struggle to service monthly loan payments if they buy homes under the My First Home scheme.

An applicant with a household income of RM5,000 a month, or a couple with a combined income of RM10,000, will not be able to afford the monthly repayments of a RM400,000 housing loan based on a 30-year repayment period after taking into account other household expenses and mandatory tax payments, said its secretary-general Chang Kim Loong.

Chang said applicants who commit to housing loans of RM400,000 with an average interest rate of 4.75% would end up having to pay RM2,086 each month.

“Based on Bank Negara Malaysia (BNM) guidelines, a single loan repayment cannot exceed one third of the applicant, or joint applicant’s gross income.

“It would also be a potential disaster for a household which cannot afford to fork out the 10% down payment from their savings to commit to a RM400,000 loan,” he said.

He said house buyers should always match the repayment period with the number of remaining years they expect to work.

Otherwise, he said, the applicants would not be able to retire, or end up committing their children to continue paying the loan.

On PR1MA, he said, the price cap of RM400,000 for homes was too high.

“PR1MA should be pricing their properties below RM300K, preferably in the range of RM150K to RM300K to cater to a wider base of the middle-income and lower-income groups,” he said.

Related post:

A promising Malaysian tax budget for 2013 this Friday?

A promising Malaysian tax budget for 2013 this Friday?

Broadening income tax bracket will benefit the rakyat as a whole

IN the next few days, the Finance Minister will share with the rakyat the financial health of the country and the Government’s proposed budget for the next 12 months.

With the mission of “Driving Transformation Towards a Developed Nation”, the Government would have the unenviable position of balancing the economy of the country amidst the uncertainties in the external market, as well as ensuring that the plight and wishes of its rakyat are not forgotten, especially in these challenging times.

As tax consultants, we have the opportunity to hear from our clients their expectations and hopes for the upcoming budget. This article aims to analyse some of these expectations as well as the writers’ views as fellow taxpayers and as a rakyat.

Lower taxes

Looking back at the past four budgets, the Government has introduced various ways of lowering the taxes for resident individuals. (See graphics)

While a reduction in tax rate is always a welcome relief to any taxpayer, it would still depend on which level the rates are reduced as it may only benefit certain taxpayers as can be seen in 2010 whereby only those in the highest tax bracket benefited from the 1% tax rate reduction.

What the Government has not introduced is the broadening of the income tax bracket, especially at the lower rates, which will not only benefit those from the lower and middle-income group but the rakyat as a whole, with a higher disposable income. (See tables)

The tax relief available in respect of premiums for education or medical insurance has not been reviewed since 2000. Further, the RM3,000 tax relief limit covers both education and medical insurance.

As education and healthcare are essential for every rakyat and his family, the Government should consider granting tax relief for each category of the insurance premium separately – one for education and another relief for medical insurance.

The Government has also not reviewed the child relief, which has remained at RM1,000 per child below 18 years of age since 2004. Any parent will vouch that providing for a child’s wellbeing is neither easy nor cheap. Any increase in child relief for tax purposes would be welcomed.

Affordable homes

Over the last few months, the news of spiralling property prices has been hitting the media.

Currently, the Real Property Gains Tax (RPGT) regime for residents and non-residents are the same, i.e. tax is charged on the gain from sale of real property depending on the duration of ownership of the real property regardless of the residence status of the seller.

Genuine resident home buyers, particularly young families who do not yet have high disposable income, are usually at the losing end compared to non-resident buyers, who are usually buyers with higher purchasing power and who perhaps have more speculative intentions.

In the past, the Government has introduced incentives such as stamp duty exemptions. However, the threshold to qualify for the exemption is limited to those properties which have value not exceeding RM350,000, thus leaving young city folks hard-pressed to find homes within this range given the spiralling property prices.

An effective measure previously introduced by the Government was the deduction in respect of interest expended by individuals to finance the purchase of residential property.

Unfortunately, this incentive was only valid for purchases whereby the sale and purchase agreement was executed within a specific period of time, which has since lapsed. The Government could re-introduce this incentive.

The Government could also consider imposing different RPGT rates for residents and non-residents. If there is a concern that foreign investors will shy away as a result, conditions could be put in place for non-residents to be eligible for the resident rates, for example:

 

• having stayed in Malaysia for a number of years or
• set up business operations in Malaysia for a number of years, etc.

Alternatively, to quell speculative transactions, the Government could consider increasing the RPGT rates for disposals made within five years from the date of acquisition of the property, which is currently at 10% and 5%, to perhaps the present corporate tax rate of 25%. Disposal after five years will be exempted from RPGT. Genuine home buyers should not be adversely affected by this measure.

A similar measure, although from a stamp duty perspective, was adopted by a neighbouring country whereby affected buyers are required to pay an Additional Buyer’s Stamp Duty on top of the existing Buyer’s Stamp Duty. The affected buyers are mainly foreigners and non-individuals, or individuals who owned more than one or two residential properties. This is also an avenue for our Government to consider.

By NEOH BENG GUAN and NG SUE LYNN

·Neoh Beng Guan is executive director of KPMG Tax Services Sdn Bhd while Ng Sue Lynn is director.

New tax rules create a quandary for lending to family members

CHARGING below market interest gets you in trouble with the taxman or the law against money-lending.

“Neither a borrower nor a lender be”.

This advice by Polonius, the King's adviser to his son in Shakespeare's Hamlet remains good advice today.

But good advice, it is said, is least heeded when most needed.

Lending money gives rise to risk of default, a stark reminder of today's global phenomenon.

At a personal level, it can lead to the loss of a friend, a relative remaining one only by virtue of blood ties.

The term “relative” is defined in our tax law to include a wide network of family members including a nephew, a niece, a cousin and somewhat incredibly “an ancestor or lineal descendant.”

How the latter is to be determined, the law has not made clear, leaving the conundrum perhaps to the wisdom of the courts.

In many cases, loans between family members are below-market loans.

By this is meant that the lender charges either no interest or a rate that is less than the “market rate” also known as the “arm's length” rate.

This is in breach of the tax law, which requires a loan to a related party including a relative to be at the market rate of interest.

This requirement has been made clear by a recent Government Gazette setting out rules on transfer pricing as the rules do not state that such loans must be in the context of carrying on a business or must be used in a business.

Thus when you make a below market loan to a relative, driven entirely by altruistic reasons and devoid of any business considerations, the tax law treats you as having derived imputed' income from your borrower and would proceed to levy tax on that imputed income.

This phantom income on which tax is levied equals the market rate you should have charged less the interest you actually charged.

This means that you must report the imputed interest as taxable income in your tax return failing which you will be in default of the tax law.

If you were to consider avoiding this unfavourable tax outcome by being somewhat hard-hearted and charged interest to your relative, then you are in breach of the Moneylenders Act.

The law here precludes the charging of any interest since you are not a licensed moneylender.

A moneylender under this law is any person who “lends a sum of money to a borrower in consideration of a larger sum being repaid to him”.

So this puts you, the lender, setting out to help a financially distressed relative, on the proverbial “horns of a dilemma”.

You are in the untenable position of breaking one or the other law.

This state of affairs seems to run counter to any coherent tax policy objective.

In the United States, the lending of money below market rate historically occurred without tax consequences.

Through a series of court cases over several years culminating in a case in 1984, the court held that the lender's right to receive interest is a “valuable property right” and where such a right is transferred by way of an interest-free loan, it is in the nature of a gift subject to “gift tax”.

But the point here is that the taxing of the interest-free loan is because of the existence of a gift tax.

We do not have such a tax in Malaysia and taxing imputed interest, as this measure is generally known, between related individuals not conducting business transactions, is a retrograde step.

We had long repealed a similar imputed income provision, which treated a person owning an unoccupied house as having an income source, even where no income exist.

Business related loans follow similar concepts, but here the law is entirely understandable and justified where the intent is to avoid tax.

If company A makes an interest-free loan to its subsidiary which is a tax exempt pioneer company, then this leads to tax results which are not reflective of transactions between commercial parties.

Not charging interest inflates the subsidiary's tax exempt profits enhancing its capacity to pay tax exempt dividends, without a corresponding tax liability on the lending parent had interest been charged.

Here the existence of a “tax shelter” where one entity has either tax exempt status or a tax loss position, can lead to tax leakage, the reason for the arm's length rule.

Interest-free business lending between related companies can also lead to anomalous results.

This is a consequence of the divergence between the tax treatment and the new accounting standards for public listed companies.

The taxman will require tax to be imposed on the lender on the imputed market rate interest.

Whereas if such a company lends RM100,000 to its subsidiary interest - free to be repaid in equal instalment over five years and the market interest rate is 10%, the accounts will reflect the lender as having a debt of RM75,816, which is the discounted amount at the inception of the loan.

Over the period of the loan, the borrower will be shown as having paid interest of RM 24,184 which will equal the discount.

Thus the books of both companies will be recorded as if interest had been paid as shown in the table.

Since these are book entries and there are no costs incurred or income earned, they have no tax consequence.

This reflects the economic substance of the loan transaction as distinct from the strict legal substance, the mainstay for tax.

This fundamental difference in concept tends to make attempts at convergence between the accounting and tax treatments particularly problematic.

The more pressing issue is doing away with the taxing of imputed interest on non-business lending between relatives, a measure which seems unjustified.

Kang Beng Hoe is an executive director of TAXAND MALAYSIA Sdn Bhd, a member firm of TAXAND, the first global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. Beng Hoe can be contacted at kbh@taxand.com.my

It's a Dumb Scandal, But Taxing Christmas Trees Is Also Dumb

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Timothy B. Lee, Forbe Contributor

My Twitter feed is atwitter today over this post about the Obama administration’s proposal to assess a 15-cent tax on Christmas tree sales. The tax would go to a fund that the Christmas tree industry would use to run advertising promoting Christmas trees. After some negative publicity, the USDA says it’s delaying implementation of the tax.

Obviously, the “war on Christmas” spin some conservatives have been giving this story is ridiculous. As various folks have pointed out, this concept has been under discussion since the Bush administration, it’s supported by most Christmas tree growers, and I doubt President Obama had anything to do with it.

Still, I’ve been disappointed by the number of people on the left who have gone beyond rebutting idiotic partisan spin to actually defend the proposal on its merits. For example, several people have linked to this piece:

According to a statement issued by the group, there are at least 18 programs already in effect for other agricultural commodities under the Commodity Promotion, Research and Information Act of 1996.

“This program was requested by the industry in 2009 and has gone through two industrywide comment periods during which 565 comments were submitted from interested parties,” the National Christmas Tree Association said in a statement, adding that nearly 90 percent of the state and multi-state associations who commented on the program supported it.

“The program is designed to benefit the industry and will be funded by the growers at a rate of 15 cents per tree sold,” the release states. “The program is not expected to have any impact on the final price consumers pay for their Christmas tree.”

But some conservatives aren’t letting the facts get in the way of an awesome headline.

The “18 programs” referred to here are industries like milk, dairy, and eggs where taxes are levied to support generic ad campaigns like the dairy industry’s famous “Got Milk” spots. These campaigns are a waste of money, and I see no reason for the government to be levying the taxes to support them. Such campaigns are particularly unfair to niche producers who seek to differentiate their products from those of larger producers, but are nevertheless forced to pay for ads that promote milk (or beef, eggs, etc) as a generic commodity.

Nothing’s stopping the Christmas tree growers who support these ads from pooling their money and buying as many ads as they like. But why should a majority of growers be able to force the minority to contribute to ads they might not want or even agree with?

It’s also hard to take seriously the claim that these taxes won’t raise consumer prices. The economics here are pretty simple: when you tax a product on a per-item basis, producers usually pass the higher costs on to consumers. This is true whether the tax is formally assessed on consumers (as sales taxes are) or on businesses (like gas and cigarette taxes). Either way, the money ultimately comes out of consumers’ pockets. There’s no reason to think Christmas trees (or milk) are an exception to this general rule.

It’s hard to think of any other context where liberals cite industry support as a justification for an otherwise-indefensible government policy. Obviously, it’s worth pushing back on the idiotic “war on Christmas” spin, but the fact that Republicans are making fools of themselves doesn’t change the fact that Congress really ought to repeal the Commodity Promotion, Research and Information Act of 1996.

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