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Unit 3: Tax Planning: An Introduction

their income will be taxed at the maximum marginal tax rate which is 26% in 2010. If they Notes
apply tax avoidance techniques, they can save RM260 in taxes for every RM1,000 income
avoided which is a substantial sum.” “Please give some simple examples so that I can
understand all these tax jargons,” Ravi requested. “Sure, employees who draw higher
salaries should not go for allowances. Take for instance, the House Rent Allowance (HRA)
and Travelling Allowance (TA), these allowances are fully subjected to tax. Instead, if an
employee opts for a Rent-Free Accommodation (RFA) provided by the employer the tax
bill will be reduced. Similarly, the Travelling Allowance may be replaced by providing
car, fuel and driver to these employees. The car can be used by the employees for private
purposes also,” Khir added.
“In what way will this save tax? Both are taxable at the same rates,” Ravi insisted.

Khir gave an explanation on how different allowances were treated in the Income Tax Act.
“The HRA is fully taxable whereas for RFA there is a formula to convert this non-cash item
into cash equivalent. That formula produces a lesser value for the accommodation provided
and this in turn will reduce taxable income. Similarly, instead of travelling allowance, one
can opt for a car, fuel and driver from the employer. For the car, fuel and driver, there is
also a formula that will produce lesser taxable value and the taxable income will be
considerably reduced, especially for expatriates who are hesitant to buy cars as the disposal
value of the used cars is generally very low. Most times, there is no market for used car in
Malaysia. Another allowance that plays a significant role in tax planning is entertainment
allowance. Entertainment allowance will be fully added in Section 13.1(a) and the
expenditure incurred for official purposes will be given as a deduction. But the problem is
the RFA value is calculated with the gross entertainment allowance and not with the net
allowance.”
Tax Planning
“Then what is this tax planning about?” Ravi asked.
“One of the approaches is to invest our savings in Income Tax Act - approved schemes so
as to get approved reliefs and thus our chargeable income will be less and then subjected
to lesser tax payable,” Khir replied.

“It is interesting. Could you please give more examples for this?” Ravi requested. Khir
then gave to Ravi the following list of individual tax reliefs.

Ravi had a look at the list and immediately responded, “I cannot understand any of the
examples given. Rather than telling me and giving me this list, can you please come up
with some hypothetical income levels with HRA or RFA, CAR or TA etc. to illustrate how
much tax reduction one can get by applying different levels of salaries and remuneration
schemes? The illustrations you have prepared will not only be useful for expatriates but
also for all employees.
Contd...

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