If you’ve taken on a side gig to supplement your income or made money from shares, you might want to catch Roshan Kanesan’s chat with tax consultant Thanneermalai about what income is taxable & what isn’t.
They also wrap up the conversation with some tax filling and document preservation tips.
Produced by: Roshan Kanesan
Presented by: Roshan Kanesan
Roshan Kanesan: Welcome to Ringgit & Sense. The show that’s all about personal finance. I’m Roshan Kanesan. Have you taken on a side gig to supplement your income. Well, if you have, you might want to pay attention because it’s that time of here again. Nope, not the holiday, it is tax season. And you’ve got till the end of April to get your e-filings in. So, what income is taxable and what isn’t? I’ll discuss this right now with Thanneermalai, Managing Director of Thannees Tax Consulting Services. Thannee, thanks for joining us again on Ringgit & Sense.
Thanneermalai: Thank you, Roshan. Thank you for inviting me again.
Roshan Kanesan: So Thannee, I think you have to start of with the definition of taxable income in Malaysia. What is it?
Thanneermalai: Taxable income will be income on employment nature, your rental income or any form of income that you received other than capital gains or gift. If you got anything that you received on a personal basis or on gratuitous when somebody is actually giving it to you personally without expecting anything back in the form of gift. Say your parents, your relatives, your friends give it to you, that’s not taxable and also the most important thing is capital gains is not taxable. Now what’s the difference between capital gains and income. Income will be something where you are actually make a profit. For example, a business income is where you go in with the intention to make a profit whether it is a one-off transaction or
a multiple transactions that you undertake on a regular basis, it is all income. So, that is it. The no.2 thing you got to also bear in mind is when we distinguish with capital gains, capital is where you will buy an asset, you will buy something and keep it or perhaps you keep it for a period of time with the intention to realize a gain in the long run. For example, you buy a property, you keep it for 2, 3 years or 5 years and then you sell the property. Whereas if you the shares or you buy property on a regular basis then you sell on a regular basis. Let’s say you sell it within six months or year. And you do this on a regular basis over a five-year period, you buy 5 properties or 10 properties on a regular basis. Then, that will be subjected to income, that will be subjected to income tax. Whereas if you kept the same property for 5 years or 3 years later or 4 years later, and you have no intention to sell but someone comes along and say he wants to buy from you. You are living in it, you are enjoying the house or you are renting it out or earning rental income. Subsequently, when someone comes to you and insist, he wants to buy the property from you, you put it up for sale also. That will be capital gain. So you can make the distinction. One is the time, for example if it is a property, how long do you keep it, what is the income that you earn out of the property which is investment property that you have been earning income out of it. And therefore, you maintain it with the intention of not wanting to sell it. But if you have bought something with the intention to sell that is trading you know, even if you do something on the side, for example here you are in an employment and on the side, in the evening, you develop a platform where you actually buying and selling product. For example, cupcakes. You maybe actually getting somebody to bake the cupcakes, you are selling the cupcakes, you may be making just about RM500 a month or RM1000 a month. Unfortunately, that is taxable. Because it will be caught. Because if they look at your bank statement, if they look at your credit cards, you are actually buying. The buying will be seen. The selling will be seen. So you can put the two and two together. But many people in Malaysia think that they only earning about RM5,000, RM3,000 and RM10,000 is quite small. Will I be caught? Maybe I can get away. It depends on you. Some people get away with it but that’s not what I encourage you to do.
Roshan Kanesan: Thannee, I have so many follow up questions. But I’ll start with this, long story short. Does that basically mean that all income is taxable in Malaysia?
Thanneermalai: All income is subjected to tax. But what is income you got to distinguish from gift, you got to distinguish from capital gains.
Roshan Kanesan: So, from my understanding of what you said earlier, it basically come down to one intention but two also the minute you start doing regular trading itself.
Roshan Kanesan: So if I’m buying and selling sneakers as a regular basis and I’m doing it with the intention to make money. That sound like it is taxable.
Thanneermalai: Because you already organize yourself for the intention to trade and if you’re going into that sort of you think you are actually receiving it when you are trading. But don’t forget your other types of income, because you can have directors’ fees, you can have directors’ emoluments, you can have rental income, you can have etc. Interest income is one that you got to be careful because interest income if you are earning in majority of the cases, you will be exempted from tax. Because that is specific exemption on tax. And also if you are receiving any foreign income, for example you have property oversea, that is foreign source income. That is not subjected to tax. Because Malaysia only taxes on income that arises in Malaysia. We called that Malaysia is territorial system of taxation, it’s not a world scope of taxation.
Roshan Kanesan:So before I move on this point, I want to make this very clear. If I make a RM100 from a posting said on my Instagram, right, I got a sponsor post or something like that. Or even RM300 from gains I made on sneakers trading for example. That is taxable?
Thanneermalai: Absolutely taxable. Even casual income for example you give a speech, and someone give you RM250. They give you a gift, so you think it is a gift. It’s not a gift because when you’ve gone then you regular link giving speeches and you are earning RM500, RM300, RM400 when you give each of the speeches. That is a venture in the nature of trade and that is income.
Roshan Kanesan: And we shouldn’t be fooled by the use of the word ‘gift’. Correct?
Thanneermalai: You got to be careful. It’s not a gift. Because it’s expecting something back. Because they give you a RM500 per speaking, that’s the expectation. So they gave you the RM500 in return for your speech. So effectively, you have given something back. Gift is something that you do not give anything back.
Roshan Kanesan: So Thannee, but there are forms of income that are tax exempted. What are they?
Thanneermalai: Basically is your fixed deposit, the interest income that you earn. This is specific and retirement gratuity said the age of 55, you can have large sum. Any sum, it can be any amount, it can be millions, it can be hundreds or thousands. As long as you worked to the employer for 10 years etc., then you will be fully exempted. And they’ll be also exemption if there is compensation for the of employment. Currently, last year they increased to twenty-eight thousand for each year. So if you’re receiving and you work somebody for 30 years, so 30 times 20 will be RM600,000, so that will be exempted. And there will be other items which you then have to look at, what we call the Schedule 6 of the Income Tax Act. You got to go in that, not too difficult. Go in there and check. There are different types of income that is specifically exempted. These are the common one that I’ll tell you. And for example if you’re getting in the health issue, for example if you get any donation and things like that, that’s also exempted. So look at Schedule 6 and also look at the basic principle of what is gift. If someone like your parents give you money or someone else give you a gift, and they don’t want to expect anything. That’s also exempted. So you should be looking up all that. And there are also the dividend. Remember that dividends are also not subjected to tax. If Malaysian companies are to pay you the dividend, you don’t need to bring them to tax. Because it’s already being taxed in the company level and it’s exempted in your hands.
Roshan Kanesan: So Thannee, do I need to bother with tax exempt income during my filing?
Thanneermalai: No, you don’t have to disclose it at all. Because once an income is exempted, it’s outside the tax.
Roshan Kanesan: So I don’t have to bother or keep track?
Thanneermalai: You don’t have to bother keeping record. You don’t have to bother about anything else except you have to prove that you receive the money that is exempted, that’s exempted income. But when it comes to compensation for lost of employment, you got to be careful. Make sure that the letters you received etc. actually makes it very specific that it is compensation for loss of employment. Because if you don’t fall within that category, you don’t get the exemption and you’re going to be subjected to tax on the whole amount of money that received for example on the voluntary separation scheme.
Roshan Kanesan: But there is also a flaw for tax filing, right? Am I correct to say RM34,000 of the EPF?
Thanneermalai: There is a flaw. It depends whether you have a child or you don’t have a child. If you don’t have a child, maybe if you are a single individual, it could be that level of about 34, 35 and etc. But if you have a child, you have two children, it about in a RM40,000. It’s up to 40 over thousand. So somebody running about RM4,000 a month. You know roughly around RM3,800 or RM4,000, you are not going to be subjected tax or its minimal taxation. Remember the lower brackets are extremely low like 1% or 2%. So hardly on paying any taxes. So it brought them and say anybody earning lesser RM50,000, it’s not going to be subjected too much taxes.
Roshan Kanesan: And that is income in general, right? We’re talking about all the side gig and all of that.
Thanneermalai: I’m talking about RM50,000 which mean it will be more than RM50,000. Because if you think about it, this is where we come. So anybody earning RM50,000 after receiving all these reliefs, you can be rest assured that you’re not going to be taxed.
Roshan Kanesan: Right, but just to take into consideration what we have talked about so far. So, let’s say I make RM20,000 from my full-time job, right? Am I still below the taxable?
Thanneermalai: You’re well below.
Roshan Kanesan: But let’s say I make another RM20,000 from the side gigs and all of that. Now I start getting close that taxable amount.
Thanneermalai: You will get, you get closer. Ya.
Roshan Kanesan: And so once I start reaching an aggregate income in the RM35,000 and above that’s when I should start to do the filings?
Thanneermalai: Then you should start looking at it and filing your returns. Remember, even if you have to pay like a RM100 of tax, you have to inform the tax authorities once you become. There is a section in the Act that requires you to inform them within 30 days period that you become a chargeable person. You have to voluntarily do that. They don’t know, they’re not going to come to you. But it’s an offence if you haven’t done that. And you then open a file reference number. In my advice, it is the sooner you open a file reference number, even if you do not have to pay the tax is better. Because having a file reference number allows you to undertake all the transactions. Because there are a lot of transaction where they expect you to have file reference number. It gives you credibility too. So, I advise you even if you are not paying taxes, if you have close to RM30,000 to RM40,000, open a file number, keep it. It’s useful.
Roshan Kanesan: It’s better safe than sorry in this kind of scene.
Thanneermalai: No, not only that. It also gives you credibility when you apply your credit card, when you do other transaction. They will ask you to show that if you’re already a taxpayer.
Roshan Kanesan: So Thannee, what about the rental income?
Thanneermalai: Rental income basically very simple. If you got rental income, you’re going to be taxed. You’re not a business, you don’t have 200 properties. You have just got
a 3 or 4 properties. It’s going to be treated as passive income. So for that rental income, you can offset against the rental income, the quit rent, the assessment, the insurances, the maintenance charges, the repairs to the property etc. if you’re receiving the rental. And the direct expenses basically expenses that directly connected to generating that rental income. But you can’t get you know tax depreciation, for example if you want to put in a lift into that building, you can’t claim tax depreciation on the lift you know. Because you are not a business, you are actually receiving it as a passive income. So as far as I am concern, all the direct expenses you can offset it, and you have to bring that rental income to tax.
Roshan Kanesan: Alright, Thannee. So basically, when I look at how rental income is taxed, I take the aggregate income I get from the rental?
Thanneermalai: I get the rental income, the gross, then I less solve the theoretic expenses.
Roshan Kanesan: Related to that property?
Thanneermalai: Related to that property.
Roshan Kanesan: So Thannee, if I am making let’s say RM2,000 a month with rental income, that’s come out RM24,000 a year. And that’s the only income I have. Non-taxable?
Roshan Kanesan: I’ve been speaking with Thanneermalai, managing director of Thannees Tax Consulting Services. After this, is your shares income taxable? Keep it here to Ringgit & Sense to find out.
Roshan Kanesan: Welcome back to Ringgit & Sense, this show is all about personal finance. I’m Roshan Kanesan. This morning I’m speaking with Thanneermalai, managing director of Thannees Tax Consulting Services. And we’re talking about what income is taxable and what isn’t. Thanneer, very hot question right now is going to be whether a profit from shares trading is taxable now. Earlier you did mention it is. Maybe you could break that down for me because what is the line between when it becomes taxable and when it isn’t.
Thanneermalai: There you come to the question of intention. Did you buy the share with the intention to trade? And trade means you are doing it on a frequent basis. The time period you keep the shares is very short. So, you are effectively a speculator. If you remember, if you use to think about the word ‘speculator’, then ‘speculator’ will be subjected to tax. Whereas if you are an ‘investor’, a long-term investor, then you’re not subjected to tax, it’s capital gains. What is the difference? It’s a time, the period for which you keep the shares. So if you are doing a regular trade every other day, every other week that you’re buying and you’re selling, you’re buying and you’re selling then you’re clearly in a business of trading. So you’re actually trading in which case it will be subjected to income tax. Because it’s income that you are generating. You’re sort of organized to do things on a regular basis. Whereas an investor will be looking at it where is you will get a lot of people who actually buy shares, keep it for a long-term, receive the dividend, wait for it to grow, there will be up and down of those shares. So there the facts that you kept for a long time and receive the dividend out of it, then you can actually classify that as an investment. And therefore, if it is an investment, the gain you realize in maybe 1 year, 2 years, 3 years down the line, it’s actually capital. But the problem you have in Malaysia at the moment is the tax authorities are not consistent in taxing everybody who is actually trading. It’s only the unlucky one who get caught by the authorities, who they pick up get to pay for. But if you think about it, there are many Malaysians especially last year during COVID-19 period when they’re sitting at home do trading could be now subject to income tax because they are trading throughout the year on the regular basis. But this is been there from 1967, but unfortunately the tax authorities have issue no guideline and therefore, it’s a matter of whether you’re lucky or unlucky. But as it stands at the moment, if you have been regularly trading you are subject to income tax. That’s it.
Roshan Kanesan: So Thannee, there is a vagueness here, right? Essentially. And I believe there is often this notion that capital gain and share trading is taxable but it really come down to the frequency here it seems like that’s part of element here, intention is another part there, do you have good rule of thumb here to help us determine the line between trading income and what is perceived that’s capital gains from the tax point of view?
Thanneermalai: I think to me is simple, you have to buy the shares and you have to keep it for perhaps maybe a year, and if you sell the shares, maybe a year or 9 months at the least and you receive dividend out of the shares, then it is capital. To me, you’ve capped with the intention of not wanting to trade, but if you have done something more frequently, let’s say within three months, you buy and sell within three months, I’m very clear that it is trading. Now, if you have capped say more than 3 months and less than 9 months, I would still argue and knowing that you are not dealing with it frequently that is you are not buying and selling more than fifty or hundred transactions, once you go into the fifty, hundred and more than that then it will be income again. So, it’s a volume and the time frame.
Roshan Kanesan: But let’s say I’m unemployed and the net profits I made from all the share trading come up to with RM30,000, again it’s below the floor, right?
Thanneermalai: No problem, you’re not subjected to tax.
Roshan Kanesan: Thannee, what is the consequence if I fail to declare all of my taxable income in the filing
Thanneermalai: Consequence is that basically if you are failed, you’re under declare, your tax return is incorrect and you’re under declare your income and you will be subjected to a minimum penalty of 45% and it could go up to 100% if you don’t go to court. Also that’s minimum you are talking about is 45 and now there is the tax authorities, if you are a frequent offender and they’ll increase the offense, the penalty up to 60% and 80%. It’s not uncommon.
Roshan Kanesan: Now, Thannee. We’ve got a few minutes left. I would like to swift the gear to lower bit because we are a month away from the end of the tax deadline for e-filing in particular. What are some of your top tax filing tips in which not only make this a good experience but an optimum one as well?
Thanneermalai: I think the first thing is make sure you have all the reliefs that you are entitled to claim it. Please claim it because if you don’t claim it, it’s going to be a gift to government. Secondly, whatever expense deduction like your books, your special reliefs, remember you got RM2,500 and another RM2,500, so it is a total of RM5,000 and if you are spending it, make sure you have the receipts. The medical expenses, you keep the receipts. As for your parents, you keep the receipts. So you must keep the receipts to claim the reliefs and make sure that you are declaring the correct amount of income. Get whole of the form EA from your employer and make sure you have that in place too. If you have received any other income, look in that income and say is that income or is this capital and distinguish it because you may be receiving
in gift which you may not be absolutely certain whether is it an income or not, distinguish that and ignore the gifts, only bring in the income to tax.
Roshan Kanesan: So, what happens if let’s say my parents give me RM1,000? Is that a gift, is that taxed?
Thanneermalai: It’s absolutely a gift because your parents are giving out of your love and kindness but if your parents are giving you RM1,000,000, my advice is it’s still gift. Please get a letter, make sure it is documented and because gifts are so sensitive in Malaysia. At the moment it’s terribly sensitive. When you receive a large gift and the income tax authorities are always challenging you and saying is that a gift or income, so you must get it in right thing. Make sure you have the word in correct and they are actually express the word love and kindness and they are giving it to you gratuitously and they are your parents and etc. Have it recorded so that tomorrow we do not have a dispute with the authorities.
Roshan Kanesan: Speaking of documentation, Thannee. From my experience, receipts fade. So how long do we need to keep the document like receipts when we are filing taxes?
Thanneermalai: Receipts you must keep per seven years, and let me go further and say if you do not have those receipts, you lost the receipts, then look for alternative. Keep your bank statements, keep your credit cards, you can actually prove to them. Otherwise, my best advice to you is whenever you get the receipts, photocopy it and keep it. Otherwise, scan it, keep it in your cloud, you got all these places to keep in the cloud. Please keep it in the cloud, so that you can retrieve these documents, and authorities, custom authorities, the income tax authorities accept this soft copy of thing and they accept the e-copies of everything. So, this is acceptable.
Roshan Kanesan: So just get a scanning app on my phone and scan the documents and then keep it digitally.
Thanneermalai: Yes, digitally.
Roshan Kanesan: Should I keep the photocopy as well? Do I need to keep the physical?
Thanneermalai: Not necessary. Once you are comfortable, your documents are scanned and kept in the cloud and you are not going to lose it or erase it accidentally, then you are fine. You don’t need to keep it in hard copy of those documents.
Roshan Kanesan: So, Thannee, aside the receipts, actually the point of keeping these documents is to prove that you file for the tax relief properly, right?
Roshan Kanesan: Any other documents that we should be keeping files so that you mentioned the letter, the letter I get RM1 million from my parents. Keep the letter. Any other documents?
Thanneermalai: No, for example your company, your income was a capital, for example if you want to say that’s capital, even the authorities when they marked a large, they will argue with you. So if you want to prove it is capital, for example if you receive a compensation and you are actually asked to leave the job, you’re asked to leave the professional and forever not be able to work and somebody gives you a RM10 million as a matter of just keeping you out of your profession permanently, that’s capital not income, in which when your documentation there is absolutely important to show that that is capital and the compensation they give you is not an income. So, have that documented. So when you receive any large sum of money, depends on who you are. If you are a billionaire, RM10,000 doesn’t matter, but if you are an ordinary man, anything in the assets of may be RM10,000 or RM20,000, please have them documented.
Roshan Kanesan: On the note, Thannee. Always a pleasure having you on the show, thank you so much for your time.
Thanneermalai: It’s a pleasure, Roshan. Thank you.