3 Surprising Benefits For Declaring Your Income Tax In Malaysia When You Are Working For Your Parents
My name is Sarah. I have just graduated from college and would be working as a marketing executive in my father’s company, Awesome Reads Sdn Bhd, which runs two bookstores in Petaling Jaya. My father agrees to pay me a fixed salary of RM 4,000 a month but is reluctant to register me as his employee citing that he would save ‘money and paperwork’. Question, ‘Should I declare my income to the IRB (Inland Revenue Board) in Malaysia?’
My answer is a definite Yes. I would declare my income to the IRB if I am Sarah for it is lawful to do so under Section 4(b) of Income Tax Act 1967. Also, Sarah’s father should begin contributing to Sarah’s EPF and Social Security accounts as required by law under the Employee Provident Fund Act 1991 (Act 452) and as well as the Employee’s Social Security Act 1969 (Act 4).
In addition to legal responsibilities, I believe, Sarah and her father would enjoy a handful of financial benefits if Sarah declares her income to the IRB. They are as follows:
Benefit #1: Sarah Doesn’t Pay Much in Income Tax
Let us assume, Sarah works for the full 12 months from January to December in her father’s company. A year later, she will earn RM 48,000 in salary and would have contributed RM 5,280 (11% of her salary) and RM 237 (PERKESO’s rates of contribution) into her EPF and Social Security accounts respectively.
Sarah’s income tax payment, based on Year Assessment (YA) 2018’s rates given by the IRB, is calculated as follows:
Step 1: Sarah’s Tax Chargeability
First, the maximum amount of Sarah’s tax chargeability is calculated by netting off her salary from multiple personal tax reliefs granted by the IRB. In this case, Sarah would be able to enjoy:
|No.||Personal Tax Reliefs||Maximum Amount Claimable (RM)||Sarah’s Claimable Amount (RM)|
|1||Self and Dependent||9,000||9,000|
|2||Life Insurance and EPF||6,000||5,280|
|3||Social Security Organization||250||237|
|Total Amount Claimable||15,250||14,517|
Sarah’s maximum tax chargeability is RM 33,483 and it is calculated as follows:
Maximum Tax Chargeability:
= Salary – Total Amount Claimable
= RM 48,000 – RM 14,517
= RM 33,483
Step #2: Sarah’s Income Tax Payments
Second, the amount of income tax payable is calculated by multiple the income tax rates stipulated by IRB with Sarah’s tax chargeability. For Sarah, her income tax payment works out to be RM 824.15 a year or RM 68.68 a month. Thus, her effective tax rate is 1.72% of her annual salary of RM 48,000.
|No.||Chargeable Income||Sarah’s Income Tax Payments (RM)|
|1||For her First RM 5,000 @ 0%||RM 0.00|
|2||For her Next RM 15,000 @ 1%||RM 150.00|
|3||For her Remaining RM 13,483 @ 5%||RM 674.15|
|Total Amount Payable||RM 824.15|
Sarah’s income tax payments could be lower if she is able to enjoy more reliefs from spending on:
– Medical insurance premiums.
– Medical expenses for herself and her parents.
– Investments into PRS and SSPN’s scheme
– Books, Laptop, and Internet Subscriptions … and so on and so forth.
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Benefit #2: Sarah’s Father Enjoys Thousands in Tax Savings
Sarah’s father, owner of Awesome Reads Sdn Bhd opines that he is able to save some money for not registering Sarah as his employee. This is because, if Sarah is a registered employee of his, he needs to spend an additional RM 589.05 per month or RM 7,068.60 a year on Sarah’s EPF and Social Security contributions.
|No.||Employer’s Contribution to Sarah||Additional Expenses per Year|
|1||EPF: 13% of Sarah’s Annual Salary||RM 6,240.00|
|2||Social Security: RM 69.05 per month||RM 828.60|
|Total Amount Payable||RM 7,068.60|
This view is not true especially, if Awesome Reads Sdn Bhd is profitable.
I believe, Sarah’s father is being Penny Wise, Dollar Foolish if he chooses not to register Sarah as his employee. This is because, he would be paying higher sum of corporate taxes which would exceed his ‘savings’ on the additional expenses stated above.
If Sarah is a registered employee, Awesome Reads Sdn Bhd would be eligible to deduct from its business profit the following business expenses:
|1||Sarah’s Fixed Salary||RM 48,000.00|
|2||Contribution to Sarah’s EPF and Socso||RM 7,068.60|
|Total Business Expenses||RM 55,068.60|
If Awesome Reads Sdn Bhd earns below RM 500,000 in profits, its profits would be subjected to 18% in corporate tax. It will declare RM 55,068.60 lesser profits to the IRB, hence, enjoying tax savings of RM 9,912.35 (18% of RM 55,068.60).
As a result, Sarah’s father would enjoy net savings of RM 2,843.75 if Sarah is to be registered as his employee. The calculation is as follows:
= Tax Savings – Additional Expenses to Sarah’s EPF & Socso Accounts
= RM 9,912.35 – RM 7,068.60
= RM 2,843.75
The amount of tax savings would be much higher if Awesome Reads Sdn Bhd is making above RM 500,000 in profits as corporate tax rates for profits which are beyond the RM 500,000 mark is 24%.
Benefit #3: Wealth Building Together through Property Investment
In addition, Sarah’s income declaration to the IRB is beneficial to Sarah and her father if they wish to build wealth as a family unit through property investment in the near future. Here is how it works:
Let us assume, Sarah is 24 years old and her father is 55 years old. Chances are, Sarah is not cash rich and is financially dependent on her parents as she is fresh out from college. But, if Sarah is buying her first residential property, she could obtain up to 90% financing of the property price at a loan tenure of 35 years.
Whereas, her father may be cash rich. But, if he applies for mortgages as a sole applicant, he would be given a loan tenure of 15 years (70 Years – Current Age). The amount of loan financing is restricted up to 70% of the property price if he is presently servicing mortgages for two or more properties.
If Sarah declares her income, she is able to apply for mortgages. Let us assume, local banks today are lending based on a 70% Debt-Service Ratio (DSR) of one’s monthly income. Her maximum amount of mortgage installment is RM 2,800 a month, thus, enabling her to borrow up to RM 552,611 in mortgages.
Hence, if they are interested to buy a residential property for RM 400,000 from the secondary market, Sarah’s father is able to fork out a downpayment of 10% and finance the remaining 90% of its purchase price by applying for a mortgage as joint applicants with Sarah.
It is beneficial to declare your income to the IRB, especially if you are presently working for a company owned by your immediate family members. The above illustrates briefly potential tax savings and wealth building opportunities which could be derived from implementing sound tax strategies.