Why You Should Become an Angel Investor in Malaysia
Question:
Hi, my name is Wu Lui. I’m an angel investor in Malaysia who is accredited by the Malaysian Business Angel Network (MBAN). In 2019, I made an investment of RM 450,000 into Disruptor Sdn Bhd, an investee company certified by the Angel Tax Incentive Office (ATIO) which is involved in the advanced electronics industry.
Presently, I earn RM 36,000 a month from my employment as a sales director of a global trading firm and receive RM 9,000 per month in net rental income from my investment properties. Typically, I claim about RM 25,000 a year in personal tax reliefs, consisting of personal relief, child relief, and contributions to my own EPF account, life and medical insurance policies.
How do I estimate my tax savings incentives as an angel investor in Malaysia for the year assessment (YA) 2021 and is there any tax planning method I should be aware of as an angel investor in Malaysia?
Read also: Is Interest Income Taxable on a Director Loan From a Company? – What You Need to Know
Answer:
Before we start the calculation of Wu Lui’s tax savings estimation I will like to give a short introduction to what an angel investor is and how the angel tax incentive works in Malaysia.
Angel Investor Definition:
According to Investopedia: “An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends.”
Basically, angel investors can be anyone that has excess money to invest in a business or company, and in Malaysia, there is a great new tax incentive for angel investors.
How Does Angel Tax Incentive Work?
The angel tax incentive is a recent government-approved programme aimed to encourage more private early-stage investments. By offering angel investors a tax benefit in return for providing funding to local startups. This incentive will help reduce your risk related to early phase investments.
How to Register for The Tax Incentive
You must register yourself at the Angel Tax Incentive Office (ATIO) in order to be eligible to fund and obtain the Angel Tax Incentive, after which you will receive a letter that certifies you as an angel investor. Following your investment, ATIO will send all investment-related documents to the Ministry of Finance for approval and endorsement. If you want to learn more, you can check out: Inland Revenue Board of Malaysia website for further details about the Angel Tax Incentive in Malaysia.
Now, back to Wu Lui’s question and his angel investment example:
As an angel investor in Malaysia, Wu Lui shall be entitled to a tax exemption which amounts to his amount of investment into Disrupto Sdn Bhd in the second YA following the YA he made the investment. Hence, Wu Lui could claim up to RM 450,000 in tax exemptions against his aggregate income for YA 2021 for his RM 450,000 investment made in YA 2019 when he becomes an angel investor in Malaysia.
Yea, that is a lot.
If you’re interested to know more about the 2021 tax budget, please read: Malaysian Budget 2021 | Tax Highlights – What’s New?
Income Tax Payable for YA 2020
As such, to put it into context, first, let us calculate Wu Lui’s income tax payable for YA 2020 after he became an angel investor in Malaysia, assuming that his income is RM 45,000 a month and Wu Lui claims RM 25,000 in personal tax reliefs:
Tax Calculation Table:
| No. | Year Assessment (YA) 2020 | Amount (RM) |
|---|---|---|
| 1 | Employment Income (RM 36,000 x 12 months) | 432,000 |
| 2 | Net Rental Income (RM 9,000 x 12 months) | 108,000 |
| 3 | Aggregate Income | 540,000 |
| 4 | Less: Personal Reliefs | (25,000) |
| 5 | Chargeable Income | 515,000 |
| 6 | Income Tax Payable: First RM 400,000 @ RM 83,650 The Remaining RM 115,000 @ 25% = RM 28,750 | 112,400 |
For YA 2020, Wu Lui shall pay as much as RM 112,400 in income tax.
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Income Tax Payable for YA 2021
Similarly, let us assume that he maintains his income and tax reliefs for YA 2021 and Wu Lui is able to deduct RM 450,000 from his aggregate income as a result of his investment made in YA 2019. Thus, as an angel investor in Malaysia his income tax payable in YA 2021 will be calculated as follows:
Tax Savings Calculation Table
| No. | Year Assessment (YA) 2020 | Amount (RM) |
|---|---|---|
| 1 | Employment Income (RM 36,000 x 12 months) | 432,000 |
| 2 | Net Rental Income (RM 9,000 x 12 months) | 108,000 |
| 3 | Less: Approved Investment Under Angel Investor Tax Incentive – Maximum Amount: RM 500,000- Restricted to RM 450,000 (Wu Lui’s Investment) | (450,000) |
| 4 | Aggregate Income | 90,000 |
| 4 | Less: Personal Reliefs | (25,000) |
| 5 | Chargeable Income | 65,000 |
| 6 | Income Tax Payable: First RM 50,000 @ RM 1,800 The Remaining RM 15,000 @ 14% = RM 2,100 | 3,900 |
For YA 2021, Wu Lui would only need to pay RM 3,900 in income tax. That is really a great tax planning example and tax planning strategy that you can use yourself when you become an angel investor.
How Much is Wu Lui’s Tax Incentive?
Here, we can see that Wu Lui’s income tax payment for YA 2021 is a drop in the bucket as compared to YA 2020, which we can call his tax incentives.
The difference, which is the value of Wu Lui’s tax incentives in Malaysia for his investment in YA 2019 is:
Wu Lui’s Tax Incentive in YA 2021:
= Tax Payable for YA 2020 – Tax Payable for YA 2021
= RM 112,400 – RM 3,900
= RM 108,500
So, excluding the investment returns from Disrupto Sdn Bhd, Wu Lui could yield a total of 24.1% in return on investment (ROI) from tax-saving itself as long as Wu Lui keeps his investment in Disrupto Sdn Bhd for a period of 2 years.
Wu Lui’s ROI (tax savings only)
= (Wu Lui’s Tax Incentive in YA 2021 / Wu Lui’s Investment) x 100%
= (RM 108,500 / RM 450,000) x 100%
= 24.1%
Isn’t that fantastic?
How The Rich Gets Richer
If we think about it, Wu Lui has two options:
Option 1:
He can declare a high amount of income and pay a high amount of income tax.
Option 2:
He can invest his cash into acquiring shares of a company which could generate income from offering products or services in high-growth technology industries in Malaysia. He could qualify for a huge tax break and concurrently, enhance his wealth as the company he had invested into experiences growth in its valuation as it matures over time.
If you are Wu Lui or an angel investor in Malaysia, which of the two options would you prefer?
How to be an Angel Investor in Malaysia?
You do not need to be a Malaysian citizen to be an angel investor in Malaysia. A foreigner could apply to be an angel investor in Malaysia as long as he is a local tax resident in Malaysia. This means, if he works and pays income tax in Malaysia, he can be an angel investor and receive the tax advantages from the government. In contrast, if a Malaysian citizen is working abroad and is not a tax resident of Malaysia, he could not be an angel investor in Malaysia.
1. You Must be a Tax Resident in Malaysia.
You do not need to be a Malaysian citizen to be an angel investor in Malaysia. A foreigner could apply to be an angel investor in Malaysia as long as he is a local tax resident in Malaysia. This means, if he works and pays income tax in Malaysia, he can be an angel investor and receive the tax advantages from the government. In contrast, if a Malaysian citizen is working abroad and is not a tax resident of Malaysia, he could not be an angel investor in Malaysia.
2. You are either a High Net Worth Individual (HNWI) or High Income Earner
One of the ways to become an angel investor in Malaysia is by being an HNWI or high-income earner. Here are their definitions:
a. High Net Worth Individual (HNWI)
This includes any individual who exceeds RM 3 million in net personal assets or total wealth in Ringgit Malaysia or its equivalent in foreign currencies to become an angel investor in Malaysia.
b. High Income Earner
If you wish to be an angel investor in Malaysia you as an individual must earn more than RM 180,000 in the preceding 12 months or a husband and wife duo who earn more than RM 250,000 in the preceding 12 months.
Thus, if you have met the two requirements stated above, you could register to become an angel investor in Malaysia with the Malaysian Business Angel Network (MBAN). Once your registration for becoming an angel investor in Malaysia is successful, you would be eligible for the Angel Tax Incentive as illustrated above.
For more information on how you, an angel investor or a prospective one could plan your income taxes in advance or if you want to get more advice on how to get tax incentives as a private investor, you may get professional assistance from a qualified tax professional and if that is you, you may use Joolah.my, a platform that quickly refers you to the very best tax, audit and accounting experts in Malaysia.
