More On the Single Tier Tax System

Published on the Edge Daily:

• 12-09-2007: Employees, pensioners among losers in single-tier tax system by Yong Yen Nie, 12 Sep 2007 11:59 AM
  
  12-09-2007: Employees, pensioners among losers in single-tier tax system
  by Yong Yen Nie
  
  KUALA LUMPUR: Employees lose more under the single-tier tax system as the Employees’ Provident Fund (EPF) will be unable to claim tax refunds, tax expert Ronnie Lim said.
  
  “The losers in this new tax system will be tax-exempt bodies such as the EPF, as well as lower-income groups such as pensioners,” he told The Edge Financial Daily on the sidelines of the 33rd Deloitte KassimChan Tax Management Seminar on
  
  “Introducing tax clinics-Breezing through taxing matters.”
  
  Under the present imputation system, companies are required to maintain a section 108 tax credit account in which, income tax paid by a company is “imputed” on dividends paid to shareholders. Excess in “imputed” tax is refunded to shareholders, provided their tax brackets are below that of the company.
  
  However, in the single-tier tax system, the section 108 tax credit system will be abolished over the six years transitional period ending on Dec 31, 2013 or when the section 108 tax credit account is zeroed. Hence, no tax refunds will be made thereafter.
  
  Lim, who is managing director for Deloitte KassimChan Tax Services Sdn Bhd said: “For instance, if the EPF receives a gross dividend of RM100, it means it receives cash of RM73 (after deducting taxes at 27% of gross dividend). Then, it will apply to the IRB to obtain the refund of RM27. So, EPF will still get total cash of RM100.”
  
  “But with the single-tier tax system, it will only get RM73 and nothing else. When the funds decrease, the employees will lose out, both the highly-paid and lowly-paid ones.”
  
  KPMG Tax Services Sdn Bhd executive director Nicholas Crist said: “Under the single-tier system, anyone who buys shares to obtain dividend income will be disadvantaged as the income is tax-exempt. Hence, interest expense paid in acquiring and holding these shares cannot be effectively set off.”
  
  Nevertheless, the single-tier tax system still benefits shareholders that are in the high-tax bracket (above 25%) because they no longer have to pay for the differences between corporate and personal tax rates, he told The Edge Financial Daily in an email interview yesterday.
  
  Crist said: “However, shareholders that belong to lower tax bracket (below 25%) will lose out because they can no longer claim tax refunds from the excess in section 108 tax credits on dividends. These shareholders include retirees who are dependent on dividend income.”

Previous blog posting: Retirees and the Single Tier Tax Dividend

Forum postings of interests: Budget 2008 and Min Brokerage Charges

Other noteable blog postings: http://stocktube.blogspot.com/2007/09/stock-brokerage-fees-debate-win-win.html

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Retirees and the Single Tier Tax Dividend

Here is an interesting note regarding the single tier tax structure announced on the recent Buget. In the announcement it states that dividends at shareholders' are tax exempted.

It has been pointed out that this is rather misleading.

Commentaries has been made to suggest that this is a plus point for the man-in-the-street since the dividends are no longer subject to tax.

However, some opinions differs.

And according to several folks, this new structure will result in a loss to the public; retirees in particular and low income minority shareholders generally.

Let me quote what has ben said:

• What is being said is that dividend income received by shareholders will not be subject to tax. However, at the same time, shareholders will also not be eligible to claim back a rebate in the event that the shareholders tax bracket is lower than the the corporate tax rate.
  
  In truth, at the shareholders level, dividend income has never been subject to tax. Tax has always been paid at the corporate level. So to say that "dividends at shareholders' level are tax-exempted" is utterly confusing, and I am not surprised that most people are happy with this new tax structure, blissfully unaware that they would actually be out of pocket as a result of it.
  
  Let's take an example of a retiree who is not subject to income tax. If he owns shares in Company A, and Company A declares a dividend of RM1,000 to him, the retiree will (under current tax regime) receive RM730 from Company A, and then claim back RM270 from the IRB.
  
  So, even though Company A declares a dividend of RM1,000, the company knows that in terms of cashflow, it is only paying out RM730. The retiree has to claim the rebate RM270 back from the IRB.
  
  If we assume that Company A maintains this cashflow payout of RM730 henceforth, then the retiree is now RM270 short under the new structure since he is no longer able to claim back the rebate from the IRB.
  
  Of course, if Company A is generous and decides to still declare a dividend of RM1000, then there is no loss to the retiree who will get the full RM1000, all from the company. This however is because Company A has increased its cashflow payout, and not a result of the new tax structure.
  
  All said, the big winner is the govt who will no longer need to pay back the rebate to taxpayers whose tax bracket is lower than the prevailing corporate tax.

Would you agree with what has been said?

Me?

I rather agree very much that this new single tier tax structure actually becomes a handicap for the retirees.

And I for one, would rather prefer that this whole issue could have been represented in a much more clearer fashion.

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