Budget 2025 was announced last Friday with a slew of tax reliefs, so our producer Jake Lim speaks with Thanneermalai Somasundaram, Managing Director of Thannees Tax Consulting Services for a rundown on what goodies the Budget has for regular Malaysians like you and I.

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Presenter: Jake Lim
Producer: Jake Lim

Podcast Transcription

Jake Lim:
Joining us this week is Thanneermalai Somasundaram, Managing Director of Thannees Tax Consulting, who will be talking about what he thinks of next year's budget and how you can make the most out of these tax incentives. So, Mr. Thannee, what are your overall thoughts on Budget 2025? Did it meet your expectations and where did it fall short?

Thanneermalai:
Yeah, I think the budget more than met our expectations. I think the budget was actually expansionary. It's actually a work in progress towards the reforms. So it's on a progressive path, very much focused on individuals. And I think the individuals were given significant focus.

The only part that I felt that perhaps more attention could have been paid is on the corporate side. But personally, I think the individuals benefited from this budget. And actually, if you look at it, it's looked at the whole ecosystem and the reforms have not been isolated.

They've been actually looking at meeting the changes that are occurring in the world—digitalisation, working towards actually helping the individuals and trying to narrow the disparity between the rich and the poor. I haven't achieved it, but at least it's work in progress in the right direction. But I think the biggest change they have made, as far as reform is concerned, is attacking subsidy rationalisation, which they've started with diesel.

Definitely coming in mind, 2025 is the RON95, where 15% of the population may not get the benefit and 85% will get it. So there is going to be rationalisation on the RON95, which is costing us a huge amount of money, more than RM10 billion a year. So that's another one.

And also, they are now going to—I mean, if you think about it—they're going to widen the tax base, because Malaysia really has one of the lowest tax bases when you talk about the GDP, about 12.5% or 12.8% of the GDP, compared to Singapore and all our neighbours. But even with the widening of the tax net, for example, the SST, the subsidy rationalisation, et cetera, it is still not going to improve. In fact, it's going to get a little worse, probably 12.4% of GDP next year.

Jake Lim:
Let's go on to one of the big revelations from the budget, which is the expansion of the sales and service tax, otherwise known as SST. So the government is looking to expand the scope, right, to include non-essential basic necessities and new taxable services. Wouldn't this worsen the cascading effect in the existing SST system? And is this expanded SST a sustainable replacement for the GST? It's only going to be on the non-essential items.

Thanneermalai: And he gave an example like salmon and avocado.

Jake Lim: That's right, yeah.

Thanneermalai:
But it's going to be much more.

There are 5,000 items in the sales tax system. So they're reviewing it at the moment to see which of the non-essential items. So you might have the expensive items—the people who can afford it—the fine cheese, you have other products which are being imported, which is actually a lot of the imported foods at the costlier end, will now have the SST.

The other area that's actually going to come out is commercial services—the phrase 'commercial services'. Let me explain that. If they talk about financing from the banks, so you might think, you're going to borrow from a bank, you're going to actually end up paying administrative fees, all that will be subject to it.

But my thinking is—and this is my own view—they are unlikely to be imposing it on retail banking, the services provided in retail banking. It would be more for investment banking, where you earn RM1 million, RM5 million, RM6 million, and RM10 million in fees—those guys. But to answer your question, will it cascade, especially when it comes to commercial services? Who knows? It may even include rental.

It may include leasing. So that would have an impact. Because once you start including it on rental, which—again, they won't go for residential—they're likely to go for commercial: your shophouses, your malls, et cetera, could be affected. But we have yet to see the details, though I think that's how it will be. That's exactly the kind of direction they have been giving, the kind of indications of which ones are commercial.

But the overall impact of it is, if you start imposing this on rental or shophouses, if you impose it on malls, if you impose it on expensive goods, the expensive goods and the high-end non-essential goods will only affect maybe the upper end of the M40, the T15s and all that. It may not really flow through. Ultimately, the consumer pays for it.

Don't forget, ultimately, everything that you increase in the sales tax, the consumer pays for it. So don't forget that. Yes, it has a cascading effect, but it will be confined to parts of society who can afford to pay for it.

If you're buying expensive cheese at RM50 or RM60, you pay a little extra.

Jake Lim:
You mentioned a little bit about the rationalisation of RON95 petrol earlier, but how do you see this being implemented? Because as far as we know at the moment, the T15 is not very well-defined. That's one thing, right? Yeah.

Thanneermalai:
So the T15—I think they cannot be looking at wealth. It's possible that the extremely wealthy who have more than RM1 billion, RM2 billion and all that—there is a small segment who own a significant part of our economy—there are no statistics, it's very difficult to collect. So they don't have that income.

Like if they receive dividend income at the moment, which is not taxed, all of it being dividend income, they won't fall within the T15. So for the T15, I think the government is going to take the easiest available database, which is income tax. So if you are declaring for income tax, then they can easily pick up those numbers from the income tax declaration.

I think that is the easiest means. That's the most straightforward way.

And some people, the rich—it's not worth spending the time—they will escape. The extreme rich who do not receive—I mean, who don't declare their income because it is not required—dividend income doesn't need to be declared now.

Maybe in the future, what we need to do with the income tax returns is bring back the declarations of non-taxable income to capture that. And if you capture that, then you can bring them into the net, but the tax return has to be changed. And you can't do that for 2025 because the returns have already come out; they will soon come out unless they tweak it now so they can capture that additional information.

Because at the moment, dividend income is exempt. So you don't declare it. I'll give you an example.

So you can capture it, but you need to change the tax return. At the moment, they're just going to use what's available in the database: the T15 based on pure income. And pure income, at the moment, if you think about it—if you earn more than RM10,000, you're already in the M40.

And many people earn more than RM10,000, even civil servants—a lot of civil servants and non-civil servants. So it's too low. The T15 threshold has to be much higher.

Jake Lim:
Now we move on to the dividend tax, right? This introduction of a 2% dividend tax on income exceeding RM100,000 for individuals. Are there any exemptions? Does it apply to unit trusts, for example? How does this work?

Thanneermalai:
Okay, only to individuals who are receiving more than RM100,000. And there is a misconception that it has to be share by share.

No, if you've got five shares—Maybank, Public Bank and all that—you're going to put all the dividends that you receive together. If it exceeds RM100,000, then you're subject to this 2%.

But the exemptions apply if you receive dividends from abroad, dividends distributed from the profits of companies enjoying tax holidays like pioneer status, dividends distributed by cooperatives, and dividends received by residents from Labuan entities.

So practically, if you are not an individual—if you actually have a company in Labuan or somewhere else—then all the dividends are not going to be subject to the 2%. And also what is out of scope are distributions from institutions like the Employees Provident Fund, Amanah Saham, Lembaga Tabung Haji, and LTAT, which could be expanded.

These are the distributions that will be out of scope. The exemptions are also coming in for all these dividends. Unless you receive it through another entity, it's very easy at the moment to overcome this 2%, if you think about it.

If you incorporate a company in Labuan, or if you actually have a trust in the middle, or if you have a company and then receive the money yourselves, it's not too difficult to get out of it. I'm sure many will be thinking about how to get out of the 2%. But if you think about it, at the moment, most family-owned companies' directors receive their money in the form of dividends.

Because if they start receiving it as salaries and directors' fees, the income tax rate can go up to 30%. There's a 6% differential.

Now, by paying that 2% effectively—I mean, in broad terms, without getting into the technicalities—from 24%, you're now paying 26%. It's not a huge burden, but generally, you know how the rich think: even paying any amount of tax is unwelcome; they cannot give up even RM100,000 or RM50,000. It's just human nature that they will try to walk around it or circumvent it.

I think the authorities also know about it. They're going to put in anti-avoidance measures. So be very careful when planning your way out of it; you have to watch for possible new anti-avoidance regulations to prevent such abuse.

Jake Lim:
We are continuing our conversation on what's in it for you in Budget 2025. What about the tax exemption for foreign-sourced income for individuals? Are the conditions for the exemption the same as last year? What about companies?

Thanneermalai:
No, it's different. Companies are different from individuals.

If you talk about individuals, they will not be taxed provided they have paid tax in the foreign country. As long as they pay tax—which can be withholding tax, or underlying tax (which is what the foreign company pays)—for example, if you're in the UK, you pay UK tax, called underlying tax. So if they're paying tax and the dividend is coming in, it's not a problem. Or if the individual is not taxed in that country, but the income is subject to tax.

However, due to local regulations or various tax brackets, he isn't subject to tax—he will not be taxed when receiving the dividend. If the income is subject to a tax incentive and he receives it after enjoying that incentive, he will not be taxed. Similarly, regarding foreign dividends, if he received income but incurred losses, capital allowances, or was not taxed due to capital gains rules in that country, as long as he was subjected to tax in that country and brings that income in, he will not be taxed.

And don't forget—I may as well bring this point in—the dividend will not be taxed as long as he's subjected to tax in that country. Secondly, any other income he brings in for the next period, until 2036, is practically not going to be taxed.

Initially it was 2026. Now it's another 10 years. So, he's not going to be taxed at all when he brings in that income up until 2036.

Whereas the only difference with a company is that the Malaysian company receiving the dividend must have economic substance—meaning it must have operations, an office, and staff in Malaysia—and then it will not be taxed, provided it has been taxed overseas.

Jake Lim:
So we saw quite an expansion in personal tax relief in Budget 2025, right? A big one is housing loan interest. Can you help us understand how this works and who's eligible?

Thanneermalai:
It's a broad-brush relief: a tax deduction of up to RM7,000 for a house valued up to RM500,000, and an RM5,000 relief for a house valued between RM500,000 and RM750,000, provided you sign the sale and purchase agreement between January 1, 2025, and December 31, 2027. So you've got 2025, 2026, and 2027—three years. And it'll be applicable for three consecutive years.

So if you can just defer the purchase or signing of the S&P until January 1, you should slow down your transaction right now. Then you're going to get this relief. So I would think a lot of buyers who fall into that category will now defer it.

Jake Lim: So in your opinion, is it significant in helping first-time home buyers?

Thanneermalai:
It was given back in 2010, then they stopped it. But this is significant. I consider it relatively new.

Secondly, many countries encourage first-time homebuyers. This is strictly for first-time homebuyers, so it's a help in the right direction.

Jake Lim: What tax reliefs are there for childcare, and for parents who want to save for their children's education?

Thanneermalai:
The first thing is SSPN. The SSPN relief has been extended for another three years.

The SSPN relief allows up to RM8,000 per year for children's education savings, which is very good. Next, the tax relief currently given for childcare at RM3,000 for children below six years is extended by another three years. The tax limit for education and medical insurance has now increased to RM4,000. When it comes to medical relief, vaccinations are now included as well.

And when it comes to caring for elderly parents, relief has also been extended. The RM3,000 childcare-style framing has been expanded to cover parents taking care of parents, and there is something for grandparents as well.

Oh yes, that's right. Don't forget the grandparents—they have now included grandparents in the expanded scope.

They've also expanded tax relief for medical checkups. The RM1,000 limit is expanded to include influenza test kits, self-testing, and similar expenses.

Furthermore, the scope of medical expenses is being expanded to include medical payments made by taxpayers under medical health insurance and takaful products.

They have also provided some benefits for OKUs (persons with disabilities). They've increased the allowance for OKU taxpayers and OKU spouses. Tax relief for medical and education insurance premiums has been increased from RM3,000 to RM4,000.

For disabled individuals, they've increased the personal allowance from RM6,000 to RM7,000, for the spouse from RM5,000 to RM6,000, and for an unmarried disabled child from RM6,000 to RM8,000. So significant reliefs have been given to them.

Healthcare and family care have both received attention. Don't forget the PRS (Private Retirement Scheme) as well.

They've extended the RM3,000 relief to 2030 so that youngsters can save money.

The annual relief of RM8,000 for medical treatments and special needs care incurred by taxpayers for parents, along with the RM1,000 relief for full medical checkups (which now includes vaccination costs), has seen its scope expanded to include not just parents, but also grandparents.

So there's a whole slew of reliefs and benefits on insurance for parents, children, and a little bit for grandparents.

Jake Lim:
Yes, it helps ease the burden a little bit. Tell us about the Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah programmes. Who will benefit the most from these handouts?

Thanneermalai:
The main participants will be from the B40 group—they are the ones who will benefit. The allocation is going to increase to RM13 billion from RM10 billion.

Jake Lim: What are your thoughts on these handouts?

Thanneermalai:
I think the people deserve it, but the question is: should we be giving it out to everyone? Do we give it to 9 million people? My personal view is that it should be targeted at single mothers, individuals with no income, or those with disabilities. My gut feeling is that some people who don't necessarily need it are currently receiving it, which may disincentivise them from working.

If you could reduce it by 20%—which is about RM2.6 billion to RM3 billion—they should consider targeted adjustments. Just as they think about targeted subsidies for fuel, they need to think about refining this without stopping it completely. Deserving groups like single mothers and those without income or ability to work must be helped.

Jake Lim:
Coming back full circle to how we started our conversation: the overall tax-to-GDP ratio stands at about 12.6%, which is quite low compared to our peers. Is the issue here more about enforcement rather than not having enough tax measures in place?

Thanneermalai:
No. I think we have enough tax measures in place. It's just a matter of time and political will to bring back a full GST instead of continually tinkering with the SST.

That would solve the problem possibly at one stroke, bringing the ratio above 15%. As far as enforcement is concerned, the tax and customs authorities have been set high KPIs, like RM197 billion and RM64 billion.

There is an intensification of audits and investigations. Sometimes the positions they take are becoming more rigid, so taxpayers declaring their taxes are not having an easy time. The authorities are very quick to issue assessments or bills of demand.

If they push too hard to meet these targets, it can sour relationships between taxpayers and the authorities, which is not ideal. It is important to maintain a cordial relationship and show a willingness to listen to taxpayers' reasons for their tax positions.

Even if records aren't available for the full five or seven years, if trends show honest expenditure, there should be some concession and compassion.