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Should I pay extra income tax – If I’m paying Monthly Tax Deduction (MTD)?

First, the above question applies to you if you are earning employment income from working in a company, be it yours as its director or for others. Monthly tax deduction (MTD) is introduced by the Malaysian government for the benefits to both income tax payers and the federal government
person who is earning employment income

In essence, monthly tax deduction enables the Inland Revenue Board (IRB) to collect steady flows of tax revenues monthly, thus, managing government finances better and more efficiently. Whereas, for taxpayers, they would make small but steady and regular tax payments to the IRB, hence, lifting the burden of making a large one-time income tax payment on an annual basis. This system would also lower the issue of backdated tax liabilities in the absence of MTD.

Back to the question, ‘Am I required by law to file in my tax returns to the IRB & make additional tax payments after MTD?’

The answer is not as straightforward for you have been given two options. First, you may elect to make monthly tax deduction as your final income tax payments. In this case, the amount paid via monthly tax deduction is taken as the final amount to your income tax payments and thus, not needing to file in your annual tax returns to the IRB. This option is available to you if you fulfil all of the following criteria:

1. You have one source of employment income.

2. You have worked with the same employer for more than one year.

3. Your income tax is not borne by your employer.

4. You opt your income to be assessed separately from your spouse.

Otherwise, you are required by law to file in your annual tax returns to the IRB.

With that being said, it is a misconception to believe that you would be making additional income tax payments indefinitely. It is because the objective of filing tax returns is your final income tax payments with the amount you have paid via a monthly tax deduction. If your final income tax payments:

1. Exceeds your monthly tax deduction payments, you are required to pay up the difference to the IRB.

2. Fall short of your monthly tax deduction payments, the IRB would refund the excess monthly tax deduction payments to your bank account.

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If you are given a choice between Yes or No to filing tax returns after monthly tax deduction, how would you choose? Which of the two is better, if you are given a choice?

Has your employer offered you an Employee Share Option Scheme (ESOS)? The article explains how to do the tax calculation for an ESOS.

Personally, we would opt to file my tax returns to the IRB annually despite making monthly tax deduction payments. The advantages are as follows:

1. Convenience

Today, it is a norm to change jobs, make career switches, have side jobs or side hustles, start a business, and collect multiple streams of income from investments. The idea of landing a job with a government or a big corporation and remain loyally employed over the next 30 – 40 years in the future is rapidly fading. Hence, it is a more likely scenario for one to not qualify for the option to not submit his tax returns to the IRB in the future, even if he is eligible to make an option for that today.

2. Tax Refunds

As stated above, it is possible for you to receive a tax refund, if the final amount of your income tax payment is lower than your monthly tax deduction

    1. payments. But, how is that possible? Often, this may arise from claiming a handful of additional tax reliefs from additional incidental expenses incurred by you during the year. To name a few, they may include:
Tax Reliefs Maximum Amount
Claimable (RM)
Medical Expenses for Taxpayers 5 000
Medical Examination Expenses on
Serious Disease for Taxpayer, Spouse, and Children
6 000
Amount Deposited into Skim Simpanan Pendidikan Nasional (SSPN) 8 000
Life Insurance Premiums 7 000
Insurance Premium on Education/Medical 3 000
Education Fees paid by Taxpayers for Postgraduate Studies 7 000
Lifestyle Expenses for Taxpayer, Spouse, and Children:
-Purchase of Reading Materials
-Purchase of Computers, Smartphones, and Tablets
-Internet Subscription
-Gym Membership Fees
2 500

3. Proof of Income

This is our favourite reason for filing tax returns. Income tax documents are recognized by financial institutions such as banks, insurers, and non -bank lenders as proof of income to be submitted to them for purposes of obtaining financing. It would affect the success of your application of credit cards, mortgage, car loans, personal loans and business loans. As such, if you wish to obtain financing from these institutions, I believe, it is to your advantage to file in your tax returns to the IRB.

Read also: 10 Things a Tax Payer Should Know. Don’t Gamble, Understand the Basics Income Tax Filing in Malaysia.

But, what if I have to pay additional income taxes?

First, it is required by law that you do so. Otherwise, you may be at risk of being penalised by the IRB. Second, if your monthly income is below RM 7,000, the extra tax payments are not substantial because your extra income declared is subjected to a lower tax bracket.

Third, let us assume that your extra income declared is subjected to the maximum tax bracket of 28% (update: 30% yr 2020), for every RM 12,000 in extra income, you would make RM 3,360 in extra income tax payments. After making your tax payments, you may submit your tax documents to your local banker for a mortgage application. That RM 12,000 in extra income declared in your tax document could potentially raise your loan eligibility to as high as RM 200,000 based on the Rule of 200.

Extra Mortgage Eligibility:
= (Extra Annual Income Declared / 12 Months) x The Rule of 200
= (RM 12,000 / 12 months) x 200
= RM 200,000

Would you want to save a maximum of RM 3,360 in your tax payments and forgo an extra RM 200,000 worth of mortgages?

It is a classic example of not being ‘penny wise, pound foolish’.

Conclusion:

In regards to your eligibility to opting for non-submission of annual tax returns, we believe it is to your benefit for submitting your annual tax returns. The benefits of submitting tax returns annual after monthly tax deduction outweigh its costs. With that being said, we also believe that your situation is different from mine and could be far more complex, needing professional tax advice.

If so, you may use Joolah.my a free search tool that connects you to the best accounting and legal services providers in Malaysia in a matter of minutes.