6 Smart Income Tax Moves Malaysians Can Make

It is tax season again – a time to look back over the previous year with an eye toward maximising tax deductions and tax credits to lower your tax burden.

What should you look out for this time around? We speak to SIMways Formulation’s consultant Choong Hui Yan to gather the best tips to lower your tax bills. SIMways Formulation is a non-audit firm that specialises in the Goods and Services Tax (GST), tax and accounting.

Check out these 6 smart tax moves that Malaysians can make to maximise the opportunities offered by tax laws and to reduce tax liability.

1. Change remuneration to reimbursement (claims)

If you’re a salaried employee, fixed allowances given by your employer such as mobile subsidies and parking fees are taxable as they are considered part of your employment income.

One way to go about this is by requesting for your employer to change these fixed allowances from remuneration to reimbursement (claims) as part of your salary package.

“Reimbursement is not taxable as it is merely a transfer of burden of expenses from employee to employer. Also, unlike allowance, employees do not get private benefits from reimbursement,” Choong explained.

Meanwhile for employers, reimbursement will be treated as business expense and would be tax deductible.

“With the onset of the Goods and Services Tax (GST), many employers prefer reimbursement over allowance, as the company can claim for input tax incurred under reimbursement so it is a win-win situation for both employees and employers,” said Choong.

2. File for separate tax assessment

If you are married and both spouses command high salaries during the assessment year, you and your partner will both pay less in taxes if you file for separate assessment.

This is especially true for super-high income earners. In Budget 2016, the tax rate for those earning an income between RM600,000 and RM 1 million was increased from 25% to 26% for year of assessment 2016. Meanwhile, for those earning above RM1 million, the tax rate was increased from 25% to 28%.

If both husband and wife are high-income earners, filing for separate assessment is an obvious and easy decision. This is because electing for joint assessment will result in higher tax payment as your combined chargeable income will be taxed at a higher tax rate bracket.

Middle-income earners can also benefit from filing for separate tax assessment. In the revised Budget 2016, the Prime Minister announced that the Government will provide a tax relief of RM2,000 to individual taxpayers earning a monthly income of RM8,000 and below, Choong explained.

This relief will apply for the year of assessment 2015, and can be enjoyed by both husband and wife respectively (if they both fall within that income bracket) by filing for separate assessment.

3. Claim spouse relief

Joint assessment on the other hand, is beneficial to a couple if either the husband or wife is a salaried employee and their spouse has no income or earns less than RM35,000 in a year.

For example, Adam is a salaried employee but his wife has no income during the assessment year.

In this case, electing for joint assessment under Adam’s name would be ideal, as Adam will be eligible to claim spouse relief of up to RM3,000 under a joint assessment for year of assessment 2015.

“The tax relief for the individual taxpayer whose spouse has low or no income has been increased to RM4,000 for year of assessment 2016,” said Choong.

4. Mitigate business losses

Here’s another tip for married couples: If you are running a business and have unfortunately incurred some financial losses during the assessment year, one way you can mitigate these losses is by filing for joint assessment.

For example, Jack runs a sundry shop while his wife Rose, is a salaried employee. If Jack is making some small losses in his business, electing for joint assessment under Rose’s name would help to maximise the business loss deductions and reliefs available.

This will lower the amount of tax that Jack will have to pay.

5. Earn tax-exempt income

This refers to financial products or instruments that are not taxed and with earnings that are not taxed. One example of this is the Private Retirement Scheme (PRS), a voluntary long-term contribution scheme designed to help self-employed individuals accumulate savings for retirement.

Income generated from PRS is exempted from income tax. You are also allowed to claim for a tax relief of up to RM3,000 per annum when you invest with PRS.

6. Ask your employer to increase your EPF contributions

In the recent Budget 2016 recalibration, the Prime Minister Datuk Seri Najib Tun Razak announced there will be a reduction of the employees’ contribution rate for the Employee’s Provident Fund (EPF) by 3%.  So now EPF members have the option of choosing between 8% or 11% of their salary to be contributed to EPF savings every month.

The upside of choosing 8% is that you will have a higher amount of disposable income. The obvious downside to this is, with higher disposable income, also comes a higher amount of tax you will have to pay.

Meanwhile, contributions to EPF are tax-exempt, plus you can claim up to RM6,000 of tax relief on EPF contributions and life insurance premium a year . So to reduce your taxable income, opt for 11%.

Of course, there is no right or wrong to whichever option you choose, and it will very much depend on how much disposable income you are willing (and able) to do without in the short term, and also if keeping your money in EPF is a better solution in the long run.

Understanding the various tax reliefs available and identifying which are applicable to you can help ensure that you spend wisely and maximise your income tax savings.