With the June 30 deadline for submission of corporate tax returns looming, chartered tax adviser and author of Malaysian taxation books, Richard Thornton, wants to remind small and medium enterprises (SMEs) the importance of tax planning.
Considering that more than 90% of Malaysian businesses are SMEs, Thornton says it is imperative that the owners are aware of the tax rules applicable to them so that these can be factored into their business plans.
“A lot of businesses are carried out by partnerships or sole traders, and these are the ones that need tax advisors and tax knowledge. It is about structuring business transactions in such a way that the incidences of taxes is mitigated in a lawful way,” says Thornton. “Tax planning is permitted but it is largely overlooked and left to tax agents.”
For example, a wife makes a good business partner. A married couple pooling resources makes sense, but to reduce their tax liability, the husband and wife should be assessed separately as this allows them to claim more personal reliefs than if they were to opt for a joint assessment.
Author and chartered tax advisor Richard Thornton with a copy of his 100 Ways to Save Tax in Malaysia for Small Businesses. “She also benefits from the scale rates of tax and if her chargeable income is not more than RM35,000 from a tax rebate. If she is in the business, she also becomes self-employed and the income can be divided between both spouses, and less tax is paid,” he writes in 100 Ways to Save Tax in Malaysia for Small Businesses. Another example is treating the car as a business expense.
If the vehicle is bought on hire-purchase, the finance cost can be deducted as a business expense and a capital allowances deduction can be claimed for the purchase price, although there is a limit.
“Using more than one vehicle, as most Malaysians do these days, gives businessmen the opportunity, or burden, according to your point of view, of bringing several vehicles into the mix,” he writes.
Thorntons answers other questions pertaining to taxes for SMEs.
Why is it important for SMEs to know the workings of the tax system considering that there are tax experts to help them?
Many SMEs do not have, or cannot afford, regular access to tax experts and may only have contact with a tax agent around the time of submission of the annual tax return.
To be effective, tax planning needs to be done in advance. If a manager has a good knowledge of the tax system, he can save the business a lot of money.
Is there a shelf life to your book 100 Ways to Save Tax in Malaysia for Small Businesses?
Not at all. It is completely up to date, with the latest legislation effective for 2010, and has many tips on tax strategies that will reduce the burden of tax payable in 2011 and after.
Right now, there is no separate tax structure for SMEs. They follow either the individual or the corporate tax structure. Would it be more viable if SMEs have their own tax structure and why?
Small businesses often grow into big ones and I am not in favour of a formal structure that would place a firewall around them.
Also, we have to remember that SMEs may start out as sole traders or partner enterprises and go corporate after they grow to a suitable size. This gives them flexibility to opt for the tax structure that suits them at the time, whether individual tax as a family business or corporate income tax.
But having said that, I would like to see more of the tax incentives that apply to companies made available to non-incorporated businesses.
Are there any Asian countries with a special tax structure for SMEs and how successful is this?
I am not aware of any.
What are the differences between an individual tax structure and a corporate tax structure?
They relate mainly to the extraction of profits. Sole traders and partners have no constraints on the withdrawal of profits whether by way of salaries or other benefits.
However, they are liable for tax on the whole of the profit.
A company has to pay regard to the “corporate veil” because the owners of the company are not the same as the company itself.
Owners receive dividends, which are paid out of profits, after the company has paid tax on them and they have no personal tax liability on them. However, if the shareholders are also directors, they may receive directors’ fees on which they, and not the company, pay tax.
Because there is no separate structure for SMEs, how will an SME know which one to choose – an individual or a corporate structure – in order to best mitigate taxes?
Tax-wise, the decision is usually made by reference to the withdrawal of profit comparisons and in particular their influence on comparative tax rates.
At the top end, there is little difference with companies being liable at 25% and individuals at 26% at the present time but in the fledgling stage, a business is often looking at much smaller amounts and maybe at losses, which can have significantly different tax consequences for corporate and non-corporate businesses.
How will the impending goods and services tax (GST) impact SMEs?
A non-registration threshold of RM500,000 per annum has been mooted and many small businesses will welcome this as a way to avoid the burden of compliance, which will be quite heavy for all businesses.
Besides applying tax on goods and services, there is the need to keep track of what they pay to suppliers so that they can obtain the tax credits they are entitled to.
What can SMEs do to mitigate this (in relation to the GST)?
SMEs that cannot keep below the registration threshold should make sure that they are well informed on the workings of the GST system as early as possible and set up their administrative and accounting systems in good time so as to minimise the problems of the changeover.
Y THEAN LEE CHENG
Considering that more than 90% of Malaysian businesses are SMEs, Thornton says it is imperative that the owners are aware of the tax rules applicable to them so that these can be factored into their business plans.
“A lot of businesses are carried out by partnerships or sole traders, and these are the ones that need tax advisors and tax knowledge. It is about structuring business transactions in such a way that the incidences of taxes is mitigated in a lawful way,” says Thornton. “Tax planning is permitted but it is largely overlooked and left to tax agents.”
For example, a wife makes a good business partner. A married couple pooling resources makes sense, but to reduce their tax liability, the husband and wife should be assessed separately as this allows them to claim more personal reliefs than if they were to opt for a joint assessment.
Author and chartered tax advisor Richard Thornton with a copy of his 100 Ways to Save Tax in Malaysia for Small Businesses.If the vehicle is bought on hire-purchase, the finance cost can be deducted as a business expense and a capital allowances deduction can be claimed for the purchase price, although there is a limit.
“Using more than one vehicle, as most Malaysians do these days, gives businessmen the opportunity, or burden, according to your point of view, of bringing several vehicles into the mix,” he writes.
Thorntons answers other questions pertaining to taxes for SMEs.
Why is it important for SMEs to know the workings of the tax system considering that there are tax experts to help them?
Many SMEs do not have, or cannot afford, regular access to tax experts and may only have contact with a tax agent around the time of submission of the annual tax return.
To be effective, tax planning needs to be done in advance. If a manager has a good knowledge of the tax system, he can save the business a lot of money.
Is there a shelf life to your book 100 Ways to Save Tax in Malaysia for Small Businesses?
Not at all. It is completely up to date, with the latest legislation effective for 2010, and has many tips on tax strategies that will reduce the burden of tax payable in 2011 and after.
Right now, there is no separate tax structure for SMEs. They follow either the individual or the corporate tax structure. Would it be more viable if SMEs have their own tax structure and why?
Small businesses often grow into big ones and I am not in favour of a formal structure that would place a firewall around them.
Also, we have to remember that SMEs may start out as sole traders or partner enterprises and go corporate after they grow to a suitable size. This gives them flexibility to opt for the tax structure that suits them at the time, whether individual tax as a family business or corporate income tax.
But having said that, I would like to see more of the tax incentives that apply to companies made available to non-incorporated businesses.
Are there any Asian countries with a special tax structure for SMEs and how successful is this?
I am not aware of any.
What are the differences between an individual tax structure and a corporate tax structure?
They relate mainly to the extraction of profits. Sole traders and partners have no constraints on the withdrawal of profits whether by way of salaries or other benefits.
However, they are liable for tax on the whole of the profit.
A company has to pay regard to the “corporate veil” because the owners of the company are not the same as the company itself.
Owners receive dividends, which are paid out of profits, after the company has paid tax on them and they have no personal tax liability on them. However, if the shareholders are also directors, they may receive directors’ fees on which they, and not the company, pay tax.
Because there is no separate structure for SMEs, how will an SME know which one to choose – an individual or a corporate structure – in order to best mitigate taxes?
Tax-wise, the decision is usually made by reference to the withdrawal of profit comparisons and in particular their influence on comparative tax rates.
At the top end, there is little difference with companies being liable at 25% and individuals at 26% at the present time but in the fledgling stage, a business is often looking at much smaller amounts and maybe at losses, which can have significantly different tax consequences for corporate and non-corporate businesses.
How will the impending goods and services tax (GST) impact SMEs?
A non-registration threshold of RM500,000 per annum has been mooted and many small businesses will welcome this as a way to avoid the burden of compliance, which will be quite heavy for all businesses.
Besides applying tax on goods and services, there is the need to keep track of what they pay to suppliers so that they can obtain the tax credits they are entitled to.
What can SMEs do to mitigate this (in relation to the GST)?
SMEs that cannot keep below the registration threshold should make sure that they are well informed on the workings of the GST system as early as possible and set up their administrative and accounting systems in good time so as to minimise the problems of the changeover.
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