Barir's World
Humanity To Others;Knowledge Is Not Ours To Keep Alone;Your Mind Is Your Most Precious Resource
Tax planning and wealth preservation
WEALTH preservation is no easy task. Most people find it easier to focus on wealth accumulation because the results are visible – they see their money growing. The bottom line of being financially sound ultimately boils down to how much wealth one has and how much one can generate.
However, wealth is not infinite. As easy it is to focus on accumulating wealth, it is also easy for one’s wealth to trickle away without one realising it. More often that not, many people find themselves having less than what they initially perceived.
|
An area most people take for granted is the payment of taxes. Left unplanned,
taxes can erode a sizeable amount of one’s wealth. |
Why tax planning is vital
Every taxable individual has an obligation to fulfil his tax payments. However, that does not mean he has no part to play in determining the correct amount of taxes he should pay.
While taxes cannot be avoided, they can be minimised through careful planning. Making informed business and investment decisions in view of tax implications can actually make a significant difference on one’s efforts to preserve his wealth. Here, knowing what is at stake and the numerous steps one can take is the key.
Tax reducing liability strategy
Before considering possible tax reducing liability strategies, one must bear in mind the stance taken by the Inland Revenue Board (IRB). In the past, tax avoidance was considered legal whereas tax evasion was illegal.
Today, in the eyes of the IRB, so long as there is a possible loss of tax revenue to the board, even tax avoidance can be termed as illegal whenever one fails to adhere to tax principles or guidelines.
As such, tax planning is an on-going exercise which one needs to review periodically. As tax principles and guidelines evolve rapidly, methods adopted today may not be applicable tomorrow.
As it is now, certain tax reducing liability mechanisms can still be adopted provided one adheres to tax principles and guidelines set by the IRB and one of the most common schemes used is the income splitting method.
This method allows a higher taxpayer to pass on some of his income to a lower income taxpayer with a view to enjoying the lower tax rate bracket. This method may apply to two individuals, possibly husband and wife who are in business partnership, and the income is split equally, depending on the individual relief claimed by each party.
By so doing, each would enjoy the lower bracket of taxes until they attain the level of RM250,000 when they hit the highest bracket of 28%.
One may also want to consider the income shifting method whereby the income from a higher taxpayer is “transferred” to a lower taxpayer. This method may be possible where the other party of a lower income bracket is providing a service to the higher taxpayer and can justify a payment for the assistance rendered. The payment may be in the form of commissions or contract payments.
Such shifting of income enables the higher taxpayer to shift part of his income to the lower taxpayer with the view to enjoying the lower rate of taxes. One however must bear in mind that the transfer of any such income either by way of commissions or contract payments must be on a commercial basis and that services were actually rendered to justify such payments.
One of the simplest methods is to ensure that the right tax incentives are claimed, bearing in mind that tax planning is in effect the organisation of one’s financials to minimise tax charge. To achieve this objective, a taxpayer has to select between competing alternatives and this means that the correct incentive is claimed at all times.
By the same token, one needs to ensure that correct personal relief, and where applicable, double deductions are rightfully claimed to minimise tax liability. For investors, it would be prudent to pay attention to investments that could be tax exempt, partial exempt or subject to a minimum level of tax charge.
Seeking professional advice
In conclusion, every one should consider tax planning as an integral exercise in preserving wealth and it is through this that one is able to maximise the value of his accumulated wealth.
To kick-start the process, individuals are encouraged to meet with financial and tax advisors to review their financial situation to formulate an effective tax plan.
There is a need for professional help in this area as taxes are complex and ever changing. There are more ways than one to go about forming a tax plan. Being in the loop and having renewed strategies that fit the bill will ensure constant minimising of tax liability.