If you hold shares in the stock market, or your father or mother or grandfather or grandmother hold shares in the stock market, the newly proposed single-tier tax system which results in tax exempt dividends in the hands of shareholders sure sounds like a good deal right?
I am sorry to burst your bubble but you might need to think again. In fact, I think it is detrimental for most of us. And before some of my friends in the industry think that I copy the analysis from anyone, it hit me 2 hours after the budget was announced. I have also made a comment here on Saturday morning.
Why the exempt dividend arising from the single-tier tax system may not be a good move… hopefully I can explain it without using too many technical terms…
Currently, the full imputation tax system is in force where tax paid on profits at the company level will be distributed to the shareholders as dividends with a credit attached to it. This is why you will see the following breakdownin the dividend warrants based on the prevailing tax rate of 27%:
Gross dividend ------------------>100
Tax deducted at source ------->(27)
Net dividend ----------------------->73
As you may know by now, the actual cash received by you is only 73 because it is a taxable dividend. But you don’t need to pay additional tax because taxes have already been paid at the company level, thus “deducted at source”… deducted from the gross dividend. Hope I am making sense here.
So you will then report this dividend as your income in your annual headache a.k.a. tax return during tax filing season. Then you will need to pay tax based on your chargeable income as per the table shown below. Please note that having a chargeable income of RM12,000 does not mean your monthly salary is RM1,000. A lot of relieves are deducted from your annual salary before arriving in chargeable income, e.g. the newly proposed RM300 deduction for purchase of sports equipment.
As you can see, your will only be taxed at 27% for your chargeable income exceeding RM100,000, all the way till RM250,000 where anything beyond that will be taxed at 28%.
So, assuming that you are a slightly above average income earner of about RM7,500 a month (how many here?), you will then have an annual salary of RM90,000. After deducting all the insurance payments, EPF, medical expenses, fees, children allowances, sports equipment, books, etc… you then arrive at your chargeable income of say… RM68,000 (just an estimate). Based on the table, your highest tax rate is only 19%.
What exactly happens here? This simply means that the dividends which you received are to be taxed at 19%. But since tax has already been paid at 27% (as above), you will actually get a refund of 8% and this refund is being incorporated into your tax via the Section 110 set-off. Okay… it’s getting a bit technical here but let’s just say you will have a tax benefit. The lower your chargeable income, the higher the tax benefit.
Now, if you are a person who earns only RM2,500 a month; you will not be in a tax-payable position. If you; or your parents or grandparents are pensioners, you will then be totally exempted from paying tax. This simply means that when such persons receive dividend income, the “tax deducted at source” will be FULLY refunded. With reference to the calculation above, the company will pay you 73 and 27 will be refunded by the government.
Now… what happens now when the dividends under the single-tier tax system are exempt from tax? Referring to the calculation above again… you will receive a net dividend of 73 and it’s exempted from tax. And because it is tax free dividend, you don’t need to report it in your tax form and because you don’t need to report it, you will not get the refund in respect of taxes paid on the profits at company level.
It basically means that the government will tax companies at the prevailing corporate tax rate (27% for 2007) and if you happen to be a shareholder of that company, and so happened your tax bracket is lower than 27%... too bad, you’re screwed. If you’re a pensioner and hold a lot of shares, you’re wonderfully screwed.
Now, how many here are going to say hallelujah to tax free dividends?
Disclaimer: This is purely a personal opinion and does not constitute tax advice. Please consult your own tax advisor for a clearer picture.