The pandemic has seen a boom in small businesses as many people started their own businesses ranging from baking to selling clothes to ICT services. While many have found new opportunities in this wave of new entrepreneurial strides, there’s a lot of considerations to be had. One such is taxation. How can you make a better tax plan for your business? Why should you set up a sendirian berhad or open up a business bank account instead of using your own personal bank account? Tax expert Thanneermalai Somasundaram of Thannees Tax Consulting Services shares some advice. Image credit: Shutterstock.com
Produced by: Sim Wie Boon
Presented by: Sim Wie Boon
Sim Wie Boon: Good morning, you are tuned into Ringgit & Sense. The show all about personal finance and I’m Sim Wie Boon. The pandemic has amount other things necessitated and facilitated the mushrooming of small businesses in many fields, from baking to selling cloths, starting own ICT services, even getting to manufacturing and supply. Many found opportunities to make their own entrepreneurial strides during this past 2 years. Of course, most of them are first time business owners which is not easy as it comes with a lot of considerations to be made, once such is taxation. How can you do better tax plan? Where do you start? What are the rebates and the charges that you need to consider? Is it better to setup a sole proprietorship or a company? Join me to discuss this and share some advice, is Thanneermalai Somasundaram, the managing director of Thannees Tax Consulting Services. Good morning, Thannee. Let’s start off with a bit of 101. What are the basic of tax filing for a new business owner? How does it defer for you as a business owner when you go back to doing your own personal tax?
Thanneermalai: I think the first thing you go to decide when you start a business is whether you want to remain as a sole proprietor in which case you do a very little in term because you’ve already probably have a tax filed on a personal basis and therefore you really have to do very little when you prepare your account as a Sole proprietor and file that as your part of your personal tax return. Many will actually move in to forming a company or a limited liability. The biggest advantages that is liability because if anything goes wrong, if the business doesn’t go well, it goes south and it goes into loses, at least your liability will be kept as oppose to your personal assets being. That’s number one. So that’s why. You move into forming a company on limited liability partnership, so that your liability is actually at the end of the day is restricted to a shared capital that you put into the company concern. My advice is step 1, if you are a one-man show or two-man show or husband & wife, maybe start off as a Sole proprietor, but as soon as your business is looking good and it is becoming profitable, then form the company, don’t stay with the Sole Proprietorship because you are already successful and you know it will be successful, then use the company, limit your liability, you can still make your income in the company and take out as much as you want until you reach the 24% personal tax bracket because you’re entitle to all the personal tax relief and etc. Now as part as taxes I concern when you form a company is that you must have a tax reference number for the company which we called that C. You have a tax reference number which you have to applied to the tax office and you get the tax reference number. The other thing you have is that even you have 1 employee or 2 employees or even 5, you need to get a E reference that is an employer reference number because you have to start deducting. Don’t forget you must deduct the monthly taxes, the pay as you earn, or what we called PCB, monthly deduction. So you go to deduct from the employees, the taxes and handover to the ligament revenue in the following month, by the 15th of the following month. Don’t forget that. Otherwise, penalty will also be imposed for any late payment or non-payment. So you need to get an employer reference which is E reference, that you have to go to separate section of Inland Revenue and yet, and you need a C reference number, that will be the starting point because for every transaction, or in many transaction, they will ask you for your C reference number or in the case the employees, when they come, they will ask you because the employees will need that too. So that’s number 1. And don’t forget your statutory responsibility will be to deduct the taxes from the employees on a monthly basis and pay over and I want to just highlight to you that you have a good break at the moment because from 1st July 2020 up to December 2022, whatever tax liability you have for this 3 years that is for next 3 years from the time you actually commence your business in the year, you will get RM20,000 rebate. That is at the bottom line. Let’s say you have a tax liability of RM50,000 then RM20,000 will be offset, you only pay RM30,000. So that is a break that you have, provided you commence your business from now up to 31st December 2022. Or if you have commenced your business a little earlier. It is available from 1st July 2020.
Sim Wie Boon: What about separating your expenses like your bank account? I think a lot of people tend to mix their own personal expenditure with their business expenditure especially when you just started off and it can get a bit complicated.
Thanneermalai: For new companies, for the people who start new businesses and form new companies, there is always a tendency for individuals that they are unable to separate the company from the personal themselves. You got to remember that the company is a separate entity. You can’t mix both. If you use the bank account, your personal bank account and the company’s bank account like your own bank account, be careful that you are going to get yourself in to a mess because you won’t able to distinguish this. I think this is something you must have discipline which is in separating the company affairs from your personal affairs.
Sim Wie Boon: So what do you think are some of the things when the first time business owner are not so aware about?
Thanneermalai: When you startup, you got to just make sure that you keep good record in terms so that you can make the necessary claims such as expenditure claim, and your income that you received, you got to record it in the correct period. You cannot record it on a basis of cash received as when you received the cash. You cannot record it as an income. You’ve got to record it on a basis of when you invoice on an accrual basis that is when you invoice and you got to record it. You may receive the cash only later. So you got to bear in mind that whatever income that you record you may have to pay taxes on the income you record and the cash you may receive later. The other point I want to make is, you mustn’t forget the service tax and the indirect taxes. If you have many factories, don’t forget to register for the sales tax. And there are a lot of issues around that so you need to be aware about that. Otherwise, custom is very transaction documentation centre. If you don’t get the documents in the right order, they will not give you the beneficial deduct, because if you’re a small manufacturer and you buy raw materials, you can get exemptions when you buy it. But you got to get the right exemptions, you got to fill up the right forms and then when you sell, you charge. So that you are not out of pocket for cash flow. When you are in service business, for example the digital guys, there is always service tax. They pay service tax on importation and they also charge. So you maybe able to get exemption because you don’t have to pay on importation. So you only pay on one side, so you got to watch, it will help you with your cash flow. Otherwise, you are out of pocket that both ways in tax. And the other things that for any startup should also think about is there are many expenses like research and development expenditure relating to the exports. If you employ a handicap employee, you can get double deductions. And if you are exporting goods for example the insurance that you buy on export, you will get double deduction and there are special deduction also. So you got to look for those incentive. Secondly, especially the people in the digital business, there are tax incentive available such as the MSC tax incentive is available because it is very good. You can get a 70% or a 100% tax holidays for 5 years. It is pretty good. Even if you are small, you are entitled to it if you’re in the digital space. So don’t forget incentives. Always look at the incentives. That’s very important. Finally, don’t forget stamp duty when you are signing up a rental agreement or when you are signing up any agreement. There is usually stamp dollar but watch it, sometimes it can be 4% or it can be sometimes 0.5%, so watch the document and the agreement you draw. So those are the kind of things I would actually warn you. And the kind of mistakes they make is actually like for the small businesses, usually the record keeping is not good because they don’t have time. They forget to differentiate themselves from the company. So, there’s a mix. They mix up their spending. They take money from the company and treat it as their own money. The separation is not there. And usually directors account can be overdrawn and that will cost you also because when it’s overdrawn, you have to pay interest on it. And the biggest problem I have with family-owned or individual is actual private expenses, they push private expenses into the company and unfortunately the tax authorities are well aware of it. Usually they can pick it up quite easily in an audit, you end up paying penalties for that. So, those are the kind of mistake that they usually made. The problem is when you startup, you need to factor in all these taxes and take it into account as a cost of doing business. So, these are the factors that people usually when they come and they forget the tax, they just calculate what will be their profits. Actually their profits will be reduced by easily – if they are profitable for example the small businesses, up to 600,000 of taxable income, pay tax at 17%. If you exceed the 600,000, then you pay 24%. Let’s assume you are paying at 17%, you must factor in your 17%, and any holding taxes, services taxes, all these should be taken into account in calculating the cost of doing business. So, your return cannot be pure profit, you have to take into account of the taxes and see what’s your net return after taxes.
Sim Wie Boon: Welcome back, you are tuned in to Ringgit & Sense and I’m Sim Wie Boon. Today’s topic is all about taxes especially for small businesses that’s just started. Joining me to discuss this and share some views is Thanneermalai Somasundaram, the managing direct of Thannees Tax Consulting Services. Prior to the break, we were just going through some of the things that first time business owners should know about. These are the service charge, rebate, double deduction, separating your personal and company transaction. Now, Thanness. All these sounds quite a lot to keep tabs on and perhaps, even somewhat complicated for the every man. So how can one make sense on what you are supposed to do when it is not something that you can just pick up so easily?
Thanneermalai: They must have some idea for it upfront, but not necessary focus on tax, they should focus on their business. My suggestion is they should at least have an accountant right from the start. They should have somebody who give them the basic advice and actually if possible outsource this initially as oppose to them spending time in filling the forms and getting to know where to go and actually do all these is time consuming. It is bureaucratic. Whereas if you give it to an outsource such as an accountant or somebody, he is doing it on a daily basis. For him or her it will be a regular event and they will take care of it. And even when it comes to employee deduction, once you have the payroll software, the software takes care of it. It is an expenditure but it is worthwhile because the amount of the money that you pay a small accounting firm to take care of all these is actually quite small in relation to that.
Sim Wie Boon: When does it make money to make sense? Is it how much are you making at a point? Is there a number to it like how much is your revenue then you should start considering these, getting someone to help you with your account like is there a number to it?
Thanneermalai: I think if you are a really small company, if you set aside even RM1,000 a month to somebody, they will help you initially for RM12,000 to RM18,000 a year, they will actually help you to sort out and navigate all these initially. Let’s say you’re a 5-man or 4-man or a 10-man firm, I think it will only cost you in a reasonable RM1,000 to RM1,500 and this headache will be taken out away from you. Someone else will monitor it and make sure it’s paid on time.
Sim Wie Boon: Right. So what could be the cost of making taxation mistakes, filling a tax wrong, not knowing what charges or rebates that they are supposed to do or make?
Thanneermalai: Very simple. For example, your monthly deduction on taxes, you don’t pay on time such as the employee taxes. Let’s say if you have a payroll of about RM30,000 or RM20,000 and if you fail one month, they will be a 10% added on automatically which is already RM2,000. So if you keep failing for a few months, there will be a RM2,000 to be added on for RM20,000 payroll every month, which will include your payroll remember? You’re also working in the company. Let’s assume you are RM15,000 to RM20,000, so RM1,500 for that alone and then if you fail to pay any of these withholding taxes, everything on a rough, the penalties will usually another 10% of the tax that you have to pay. So, if you make any of these mistakes, and these are automatic. If you fail, it will automatically to the system because you’re registered, they system will immediately prompt you and say “Okay, you owe me another 10%” automatically. So, the cost of failing to file something correctly or to file it on time and pay the tax, you can just take as a whole of sum, another 10% will be automatically added on a month that you have failed to pay or failed to actually account for it. So, even if a small business but a RM20,000 or a RM15,000 payroll, you are talking about RM1,500 a month and if you failed to do it for a few months, either it is the indirect tax like the imported services, say for example every month you are paying a bill to Facebook or every month you are actually taking care of the employee taxes and there you are already subjecting yourself at least 10% of that tax that you have to pay.
Sim Wie Boon: Well, we move on to kind of the other aspect of where I think a lot of people will be curios about and it is the expenses you can charge on or is there certain consideration to be made? Let’s say if you form a LLP or a LLC…
Thanneermalai: or a company?
Sim Wie Boon: Yes. What kind of charges can you make? What kind of charges can’t you make?
Thanneermalai: Because the mistake the small owners mostly make is they tend to use the company bank account to stood their bank accounts. And so what happen is many owners tend to use their personal bank account to pay on behalf of the company because it is easier to pay sometimes, and they will use their personal account and then get reimburse. The problem takes place at a later point in time, maybe some years down the line when you are actually start seeing all these movement of cash and then the inland revenue comes back to the individual and there is the successful, and they’ll ask you account for your wealth, we call that Capital Statement. We’ll have a big problem because a lot of money has come back in the form of reimbursement and when we look at the bank statement, many of these individuals after 3 or 4 years cannot tell us what these credit entry for the bank account but actually they are reimbursement and they’re paying on behalf of the company. So my advise is if you’re becoming successful, don’t mix and don’t pay the company expenses through your personal account. That’s number 1. And this is number 2. A lot of private expenses are usually paid by the company. You got to be very careful. If there are private expenses paid by the company, like household expenses, holiday expenses, travel expenses and etc., the inland revenue will disallow it. Many companies like the small companies tend to actually try claiming it saying it is business expenditure and then you’ll get into trouble because in an audit, if you get audited and there’s an adjustment, there’s more or less a compulsory penalty added of 45%. So if you made a wrong claim, for example you put your family entertainment or you put your family food bill or your family travel into the company and then the revenue questions and says “What business they give you on this travel?” and if you can’t prove that then it will be disallowed. Let’s say RM100 is disallowed then you have to pay another RM45 add on to that RM100. So you got to be very careful. There’s a common mistake they make. And number 2 is they use the bank account, for example the directors or the shareholders and finally they end up pooling the company’s money, the company’s cash flow and they will owe the money. Under the tax law, if the director or the shareholder director in which the director is also a shareholder who owes the company’s money, then there’s a 4% of deemed interest charge that will be deemed on the individual and he has to pay the interest, as for the company will have to pay for the tax on the 4% income which they may not realize.
Sim Wie Boon: Alright and that’s all the time we have for Ringgit & Sense. I’ve been speaking to Thanneermalai Somasundaram, the managing director of Thannees Tax Consulting Services.