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As a first time business owner, Mr. Tan must be careful where he invests his money in order to avoid potential financial losses and maximize his tax deductions. This is not an easy feat, as the tax laws can be overwhelming, especially for someone who has recently gained a large amount of money he has never had access to or experience with before. Having a professionally created tax plan will help him avoid the common pitfalls of the newly-wealthy investor. He will need to synthesize his investments to complement one another, and keep detailed records on his spending and income. The first few years of a business’s existence and operation are crucial to the future success of the company, and these early years can efficiently “make or break” an investment. This is why it is incredibly important for a growing business owner to have a firm grasp on tax laws, as well as a thorough tax plan. The purpose of this document is to guide Mr. Tan’s strategic moves in the form of a tax plan in order to help him gain the most amount of money from his investments, while keeping his investments tax-efficient.
Mr. Tan should acquire his properties and investments under the name of companies rather than his own. Mr. Tan should do so because the investments he makes when under the name of a company will allow him to utilize special tax exemptions related to business expenses due to the risk of investing in these companies. He will also be able to receive special tax breaks if his business investments do not immediately make a profit, which in the case of the hotel, Mr. Tan expects will not. In addition, if Mr. Tan acquires his properties and investments under his personal name, it is possible that he will be taxed for each individual investment as a personal expenditure. It will be legally “cleaner”, as well as less of a tax-burden, for Mr. Tan to acquire his investments a Company.
Mr. Tan can expect some form of relief from the losses he will incur in the first year of business in the form of the tax rebate he will receive under Section 6B of the Income Tax Act of 1967. Mr. Tan “shall be rebated by an amount equivalent to two per cent prorated per annum” he is loaned as part of the budget hotel acquisition and operations, so long as, in the fiscal year in which he starts his business, he legally remains a “small business.” [Ins. Act 241:s.5, Am. Act 264:s.4 ] In order to receive this rebate as a “small business”, his business must not employ over 50 full-time employees, nor have his annual sales turnover exceed RM5 million. If Mr. Tan’s income does not exceed thirty-five thousand ringgit, as he expects it will not, he will be allotted a three hundred and fifty ringgit rebate. [Subs. Act 608:s.5] If he purchases a computer or other such small equipment to use ether for personal use, he is entitled to a tax rebate of four hundred ringgit. [Ins. Act 578:s.5]
In addition, since Mr. Tan is looking to invest in the tourism industry through a hotel, he may apply for pioneer status. In Malaysia’s effort to promote the tourism industry, business owners who invest in ventures which actively support the needs of tourist are eligible for special tax exemptions. Pioneer status may be granted to Mr. Tan if he can apply through the Malaysian Development Investment Authority and provide substantial proof that he is making an effort to improve a current tourism-centered amenity. We believe that Mr. Tan can make a compelling argument that he is through his operations as a budget hotel. We also believe that this compelling argument would be accepted by the Malaysian Development Investment Authority. If so, Mr. Tan would be rewarded with pioneer status. This pioneer status would allow Mr. Tan to be taxed at only 70% the rate he would regularly be taxed based on his statutory income for a period of five years. This will be a huge help for Mr. Tan, as the first five years of a company’s business are the years in which it is expected to have minimal cash flows with which to pay taxes in the case on income. Mr. Tan can doubly benefit by reinvesting his positive cash flows from income into capital investments to grow his budget hotel business. Further, if his budget hotel is still not seeing a minimal profit turnaround after the fifth year of business, he can reapply for these substantial tax exemptions for an additional five years, and cover ten years in total.
A capital allowance refers to the sum of money that a business owner can deduct from his or her income taxes. A hotel registered with the Ministry of Tourism is allotted a 10% initial allowance upon registration, and 3% annually after completion of his first year in business. In addition to qualifying him for capital allowance, being registered with the Ministry of Tourism will also greatly increase Mr. Tan’s chances of being chosen to receive pioneer status by providing evidence that his business is fostering the tourism industry in Malaysia. In Mr. Tan’s choice of “modern high-technology plant and machinery” to invest in, he should choose to put his money into industries that are considered to be “heavy machinery,” as this subsection of industry provides the highest return in the form of capital allowance. If Mr. Tan chooses to invest in heavy machinery, 20% of the money he spends can be written off as capital allowance, which is a perk he will enjoy for as long as he is actively invested in the industry. Another subset of modern high-technology that Mr. Tan should look into investing in is motor vehicles, which carry the same capital allowance. He must also time his investments so that they coincide with the fiscal year in which he can file them for deductions. Mr. Tan should invest before the end of the accounting year in which he receives the loan in order to claim capital allowance against his business. He also needs to remember that if he is buying the asset with a hire-purchase loan, allowance can only be claimed as and when repayments are made to the lender. So, if Mr. Tan is using the money he was loaned from the bank in order to invest in the technology, he should finish repaying the loan before the end of the accounting year in order to reap the highest amount of capital allowance he can from his investments. Also, if Mr. Tan is granted pioneer status, he will benefit even further. Normally a taxpayer has the right not to claim capital allowances but, during the tax relief period, a pioneer company is deemed to have claimed all capital allowances to which it is entitled including any unabsorbed capital allowances of its pre-pioneer business. For assets used in the pre-pioneer business, the residual expenditure at the end of the previous basis period is deemed to be the residual expenditure at the start of the tax relief period. Any expenditure incurred in the final pre-pioneer basis period is deemed to have been incurred during the pioneer period. A similar provision applies on the transition to the post-pioneer period. Where a pioneer period ends on or after 1 October 2005, any unabsorbed allowances at the end of the tax relief period can be carried forward to the post-pioneer period.
Mr. Tan could also look into investment in the growing Malaysian Biotechnological industry. If Mr. Tan invests in a company with approved BioNexus status, he will receive 100% tax exemption for ten years if he is supporting a new project or five years if he is fostering expansion of an already established company. This means that his investment will be completely tax deductible, and he will also reap profits if his shares in the company become especially profitable in the biotechnology industry. However, as a precaution, Mr. Tan must do extensive research on the companies in which he is investing, as biotechnology is a relatively new industry in Malaysia and even previously established projects can fail to produce a profit.
Mr. Tan can synthesize his investments with his business ventures. In particular, the seafood restaurant he plans on opening. Food production industries have their own set of tax exemption statuses, and Mr. Tan can take advantage of this in accompaniment with his seafood restaurant. A company that invests in a subsidiary which engages in approved food production is eligible for a tax deduction of 100% for ten years on a new project or 5 years on a previously existing project. One of the approved subsidiaries is the seafood and fishing industry. If Mr. Tan can build and grow a flourishing, high quality seafood company, he may be able to make a deal that if he invests large amounts of money in the company as a startup, he can receive discounted fish and ingredients for his restaurant. By utilizing this strategy, not only will Mr. Tan be able to ensure his customers that they are receiving the freshest seafood around, but will also gain a sustained discount on a necessary ingredients and a huge tax incentive. Mr. Tan just needs to be careful with his transfer pricing scheme. In May 2012, Malaysia has transfer pricing rules. The rules provide for five methods for determining the arm’s length price for a controlled transaction between related parties. Any transaction for supply or purchase of properties/services with an associated person which is not at arm’s length price can be adjusted by the IRB. Failure to demonstrate arm’s length consideration may also result in additional taxes and penalties. However, advance pricing arrangement is available for cross border transactions. It will be worth it for Mr. Tan to mitigate the transfer pricing risk because it will benefit the customer service at Mr. Tan’s seafood restaurant and could help grow his western tourist customer base; western tourists are very interest to know what kind of preservatives or packaging chemicals the company in which he gets the seafood uses, he can more efficiently help his customers with allergies choose menu items that will complement their dietary needs. This may lead to repeat customers, and as a result, more sales.
In starting his new business ventures, it is important that Mr. Tan keeps meticulous track of the money he spends in relation to his business. Business expenses can be deducted from his taxes, so even the smallest amount of money spent should be documented in the form of bills or receipts. As a general rule, any expenditure that Mr. Tan can prove was made solely for the purpose of increasing his business profits, he can deduct from his income tax. However, not properly documenting the expenses he incurs or recording non-financial transactions can actually increase his income tax. Mr. Tan should be keeping detailed books from day one on every expenditure he incurs related to his business. It is also important that he keeps tangible proof (receipts for office supplies, restaurant bill from taking a client out to dinner, etc.) and writes down how the expense was related to his business ventures. In addition to expenses based solely on business transactions, if Mr. Tan makes a charitable donation, he may also write this off as a tax deduction for up to 7% of his taxable income. Starting from YA 2007, Mr. Tan may also claim a personal deduction of up to RM1000 for the purchase of books, magazines, or other journals. In order to maximize this deduction, Mr. Tan should consider printing training manuals for his employees and recording them as both a business deduction as well as a personal one. He may even consider personal uses for these books, such as giving them away as gifts.
Mr. Tan should also look into buying or investing in similar types of property. Similar types of property can often be grouped together for tax purposes. If one property in the group is not profitable, and the other is, Mr. Tan can lower the taxable income because the properties were in a similar grouping. If a loss is incurred by one property in a specific grouping, such as residential, the owner of such properties can be reduced on all properties in the group, even if the others are profitable. This strategy would be most effective and relevant to Mr. Tan’s plans to operate a seafood restaurant on the ground floor of two adjoining shop-houses.
Malaysia has various stamp duties on various instruments and documents. Such duties may be significant if Mr. Tan is disposing of property or marketable securities. Fortunately, this is not currently Mr. Tan’s plans until five years, but he needs to be aware of these charges and factor them into his decision to sell those shop-houses or showroom. Malaysia’s requirement for companies to pay tax in monthly installments on or before the 10th day of each month ends up being an indirect tax via loss of interest earned on the cash balances. Mr. Tan will often be prepaying his tax liability, instead of settling up many months after the close of his fiscal year or paying quarterly, which is the case in most western countries.
In conclusion, in order for Mr. Tan to most effectively minimize the burden of his income tax, he will not only need to invest smart, but also invest at the right times. Combining strategies will also be beneficial to his final taxation: for example, if Mr. Tan currently has an old computer he is using for personal use, and he donates that computer to charity and purchases a new one, he can write the gift of the computer off as a charitable donation and receive a rebate for the purchase of the new computer. It will be absolutely crucial for him to keep detailed records of all his spending, especially in the first year of business. Even the smallest expenditure should be recorded, as these expenses add up quickly and can be detrimental to a flourishing new business. As Mr. Tan expects his investments to not make profit in the first year, it is also crucial that he will take advantage of as many money-saving strategies as he can. Efficiently doing so will not only minimize the amount of money Mr. Tan needs to pay in income taxes, but also set him up for substantially more sustainable profits later in his business career. In addition to this tax plan, it will be important for Mr. Tan to keep extended contact with a tax professional for help with each year’s income tax. Laws change, and as different tax benefits expire, a professional accountant or tax expert can ether help with renewing old exemptions or incorporating new ones into Mr. Tan’s business plan. Doing so will result in manageable and affordable income taxes in the present, and maximized and robust profits in the future.