Smart Investor recently have the honor to interview Yang Berhormat Syed Saddiq bin Syed Abdul Rahman, the Member of Parliament for Muar. There were lots of very insightful and powerful thoughts that are outside of the box which can be used to power Malaysia into the future.
Among other things, he also shares with us 3 tips for the youths in Malaysia.
3 Powerful Tips for the Youths in Malaysia
1. Don’t Be Afraid To Make Mistakes
“Young people today are expected to work two or three different jobs to earn a decent living as the average wage has stagnated for the past ten to 20 years, while inflation has only gone up.”
– Syed Saddiq
We will be making a huge mistake if we stand still, whereas others are making progress by leaps and bounds.
“The fear to even begin doing something because you are afraid to make mistakes, makes you suffer from paralysis analysis,” stresses Saddiq.
We can afford to make mistakes when we are young, as there is ample time to learn from them.
2. Invest In A Good Mentor
Mentor is an experienced person who has gone through lots of trials and tribulations. By having a mentor, we can take a shortcut and learn the tips and tricks, while avoiding the mistakes.
A mentor will be able to hand-hold you through the journey, mingle and learn from their networks, and learn directly from their experience which is invaluable. By investing in a good mentor, you can accelerate your progress by 10 to 20 years, as compared to earning a high salary.
3. Think Outside The Box
Being young doesn’t mean you have to follow the steps of previous generations that makes them successful. You will have to compete with others who have more experience and stronger capital, which inevitably causes you to be more creative to take on the giants in the industry.
This is where you need to be disruptive and use ways that were unimaginable previously. Even though the journey is hard, this is an important recipe of success.
“It is about using unconventional methods to achieve conventional outcomes,” quips Saddiq.
There you have it, 3 tips for the youths in Malaysia. It is our hope that Malaysia will improve by leaps and bounds, powered by the younger generation.
This is one of the most heated debate in the financial industry, saving vs investing. Before we get into it, let’s first take a look at the definition of saving and investing.
“Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs.”
-Wikipedia
Saving is your income, either from your monthly salary or sales commission, being put aside somewhere. This could be in your savings account or cash.
“Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.”
-Wikipedia
Whereas investing is putting in your money in an instrument where you can watch it grow. The longer you invest, the bigger returns from your investment.
Saving vs Investing
As you can see from the above, you won’t be able to invest if you don’t have money in the first place. Which also means that if you don’t have any savings, then you can’t invest.
And did you know that according to statistics, 75% of Malaysians can’t even come out with RM1,000 for any emergency? The culture of saving is sorely missing in our community.
In case anything untoward happens such as meeting with an accident, car repairs, or dengue fever which requires hospitalization, then you may have to resort to borrowing money from family members or friends. Worse if there’s no one to help, then you turn to ‘ah long’ and be trapped in a vicious cycle.
So in the case of saving vs investing, make sure you have sufficient savings first.
RM5.2 Billion Lost To Scammers
According to the Inspector-General of Police, Tan Sri Acryl Sani Abdullah Sani, there were 71,833 fraud cases recorded since 2020 until May 2022, with a loss amounting to RM5.2 billion.
Hang on a minute, but didn’t you say that Malaysians don’t save but they have tons of money to invest, and ultimately gets scammed in the process?
It goes to show how poor we are in managing our finances. We don’t have savings, and we invest in investment that is not legitimate or scams. When we lose it all to scammers, then we don’t have anything to fall back on – because we don’t have any savings.
Of course everyone wants the fastest way to getting rich, myself included. But bear in mind that investment should be a long-term game. For example you want to build up your retirement fund, and you have 30 years until you hit the retirement age of 60. That means you have time on your side, and still can afford to make mistakes.
Compared with someone in his 50’s and have less than 10 years to retire, he/she needs to invest for a shorter time period and take lesser risk.
So again, get your priorities right when it comes to saving vs investing.
Save Before Invest
That’s why you need to get your priorities right. Save at least 3-6 months of your monthly salary. If your salary is RM5,000 per month, have at least RM15,000 in an emergency fund for rainy days ahead. Best if you can have RM30,000, to better prepare for any emergencies.
If there’s anything that the pandemic has shown us, is that no plan can prepare us for something of that magnitude. Even if you have done the necessary preparation, you should still feel the effects of it.
Let alone those who didn’t have any savings. Thankfully the government came out with many schemes to help us out.
Now you know what to do when faced with the dilemma of saving vs investing?
Invest In A Diversified Portfolio
I’m sure we all have heard of the phrase, “High risk high return”. Which literally means that in order to get a high return, you need to take a high risk.
And I’m also pretty sure that you have heard of “Don’t put all your eggs in one basket”.
Combine the two of them, and you should be investing in a diversified portfolio – some in low-risk instruments (with low returns) such as fixed deposits or money market funds, some in medium-risk instruments (with medium returns) such as unit trust or property, and some in high-risk instruments (with high returns) such as stocks and crypto.
By having a diversified portfolio, should any ‘basket’ were to fall and break all the eggs inside it, you will still have other basket of eggs that can compensate for your loss.
But in the case of saving vs investing – make sure you have some savings first before deciding to invest.
What About The Upcoming Recession Next Year?
In a recent survey on saving vs investing that was carried out by Palindrome Communications, 40 percent of respondents said that they thought that investing is more important in a recession than holding on to cash. 60 percent of the respondents said that holding on to cash is more important than investing.
The data displayed a cautious sentiment among professionals in Malaysia as we head into what might possibly be an upcoming recession. Respondents were made up completely of professionals in the fintech and tech sectors.
Palindrome helps finance companies communicate more effectively in the market. More info here.
Over the years, Malaysian corporations have grown and expanded their business footprint, not only to neighbouring countries, but also to other continents in many parts of the world. It is not uncommon to see many Malaysian companies receiving income from their business and investment ventures in foreign countries, hence we need to understand about the issue of tax on foreign income.
These income sources include sales from exports of goods and services, dividends and interest income from foreign investments, royalty fees from licensing of intangible assets, rental from properties located overseas, and commission from acting as agents.
Generally, income received from out of Malaysia has been exempted from tax. However, in the Budget 2022, the Government announced removal of the tax exemptions on such income.
The rationale quoted for the removal, other than a measure by the Government to raise revenue collection, is that it is a step taken by the country to comply with the global tax standards on harmful tax practices.
Tax On Foreign Income
Malaysia adopts a territorial principle of taxation in that only income accruing in or derived from or received in Malaysia from outside Malaysia, is subject to income tax in Malaysia pursuant to Section 3 of the Income Tax Act, 1967 (ITA). Nevertheless, Malaysian tax residents enjoy tax exemption on the “income received in Malaysia, from outside Malaysia”, also called foreign sourced income (FSI), under Paragraph 28, Schedule 6 of the ITA (Para 8).
In short, while the FSI received by Malaysian tax residents are taxable under the Section 3 of ITA, the amount are exempted under Para 28. (Note: the exemption excludes those engaged in banking, insurance or sea or air transport businesses)
However, not all FSI income received are exempted as it has to be truly “sourced from outside Malaysia”.
Generally, whether the income is sourced within or outside Malaysia would depend on the location where the related income-generating activities had taken place. For example, export sales of goods by a trader are not exempted because the personnel who carried out the various business functions are located in Malaysia.
In contrast, it is argued that interest income from investment funds placed and managed outside the country is foreign sourced and thus, exempt under Para 28.
Tax Treatment On FSI From 1 January 2022
Effective 1 January 2022, the tax exemption for FSI received by Malaysian residents provided for under Para 28 was removed, following the Budget 2022 made on 29 October 2021. The implementation of the legislation is staggered into two remittance timeline of FSI into Malaysia:
January to June 2022 @ 3%:
Taxpayers are given this 6-months transitional period to remit their foreign sourced income in order to enjoy the lower tax on foreign income rate of 3% calculated on the gross income remitted (Part XX, Schedule 1 of the ITA)
Subsequent to 30 June 2022:
Remittance will be subjected to the normal tax rates.
In summary, the tax treatments for the income of a person residing in Malaysia are depicted as follows:
Special Remittance Programme Terminated
In November 2021, the Inland Revenue Board of Malaysia (IRBM) introduced the Special Income Remittance Programme (Program Khas Peremitan Pendapatan or PKPP) to help taxpayers in the transition to the new FSI regime.
The FSI remitted during the PKPP period (between 1 January 2022 and 30 June 2022) would be accepted in good faith by the IRB without any audit nor investigation be conducted on the taxpayer. In addition, there will be no penalties imposed for the remittance during the PKPP period.
However, this programme is shortlived and was revoked on 11 March 2022, as it is deemed not relevant, after the Ministry of Finance (MOF) announced in December 2021 on a concession to exempt certain categories of FSI for a period of five years from 2022 to 2026.
Concession: 1 January 2022 – 31 December 2026
The removal of exemption under Para 28 has been highly debated and criticised with regard to, among others, its timeliness of implementation, vagueness on the scope of FSI, and lack of clarity on claiming of double tax relief if the income had suffered foreign tax.
It is also seen as a stumbling block to attract foreign direct investment (FDI) in Malaysia, thus affecting Malaysia’s competitive position in the global trade map.
On 30 December 2021, MOF made an announcement to defer the full implementation of the new Para 28 to 1 January 2027. The official rules were issued by the Government by way of exemption orders dated 19 July 2022, in the Income Tax (Exemption) (No.5) Order 2022 and Income Tax (Exemption) (No.6) Order 2022 (“Exemption Orders”), applicable to individuals, partners in conventional partnerships, limited liability partnerships (LLP) and companies.
The exemption period granted is from 1 January 2022 to 31 December 2026.
Individuals are exempted on all categories of income including income from employment, dividend, rental and interest. Meanwhile companies and LLPs are exempted on foreign dividend income only.
However, there are the preconditions set in the Exemption Orders to qualify for the exemption during the fi ve years concession period, whereby:
FSIs received by individuals, LLPs and companies “shall have been subjected to tax of a similar character to income tax under the law of the territory which the income arises”.
For foreign dividends received by individuals from conventional partnerships, LLPs and companies, the added condition is that “the highest rate of tax of a similar character to income tax charged under the law of the territory which the income arises at that time is not less than 15%”.
IRBM is to issue the relevant guidelines on the applicable tax treatments, which are yet available at the time of writing. Clearly, taxpayers will need to meet certain conditions to enjoy the tax exemption during the five years concession period as it may not be as straight forward to qualify.
The limelight is now on the IRBM to expedite the issuance of the relevant guidelines, which are expected to provide the much-needed administrative details surrounding the reporting of FSI, including documents required to provide evidence for exemption of FSI, tax calculations of non-exempt FSI, the claiming of double taxation relief on FSI, especially foreign dividends, etc.
Tax Exemption Of FSI From 1 January 2022 To 31 December 2026
Taxable FSI Received By Corporate Investors
For now, FSI other than dividend income received by Malaysian corporate tax residents will be subject to tax in Malaysia. Notably, where the foreign dividends are received by a legal corporate structure other than a company incorporated under the Companies Act 2016, there is no exemption provided during the 5 years period on the income.
A list of the more common situations of tax on foreign income is set out below:
Common Situation Of Taxable FSI
Double Tax Relief On Foreign Tax Suffered
The tax on foreign income received in Malaysia may be reduced by the foreign tax credit paid. Where a Malaysia tax resident has suffered foreign tax on the FSI, the taxpayer is given bilateral or unilateral tax credit relief against the Malaysian tax payable on the same FSI.
Bilateral relief is given under Section 132 of the ITA when the foreign country has a double tax agreement with Malaysia eg Singapore, Indonesia, Japan, China, Australia, South Africa, United Kingdom, France, etc. Under a double tax agreement, a full relief may be possible based on the calculation of a prescribed formula, but the relief amount is only up to the Malaysian tax suffered.
On the other hand, unilateral relief is given under Section 133 of the ITA when there is no or limited double tax agreement by Malaysia with the foreign country eg British Virgin Islands, Taiwan, United States of America, etc. For such relief, the foreign tax recognised is automatically halved.
One is required to substantiate the amount of tax paid overseas with the relevant supporting documents from the tax authorities in the foreign countries, in order to claim the aforementioned tax relief in their tax return.
Capital Receipts Are Non-Taxable
The tax on foreign income will only affect gains that are “income” in nature. Receipts that are “capital” in nature (also known as capital gains) will not be subject to Malaysian tax. Capital gains include proceeds from the disposal of foreign stocks, foreign properties, foreign assets, foreign currencies, and foreign investment papers. However, these assets have been held as long-term investments.
Whether the gains are “income” or “capital” in nature, the onus of proof lies with the taxpayers. If the remittances are found to be income in nature instead of capital as claimed by the taxpayers, the same shall be subject to income tax.
Action Plan
The year 2022 marks an impact on investors with foreign asset holdings, in navigating a new tax landscape going forward with the removal of tax exemption under Para 28. The imminent measures include evaluation of the financial returns on their existing overseas investments, net of all tax costs. In sourcing new investment opportunities overseas, such investors shall need to factor in the additional tax costs in Malaysia.
Here are a few suggestions on the action that affected investors should look into:
1) Review the Malaysian tax impacts on all taxable FSI from investments outside Malaysia- tax simulations may be useful for the investment selection process.
2) Maintain proper records of the foreign assets, including tracking of the funds retained in foreign bank accounts vis-à-vis those repatriated to Malaysia. On the amount remitted into Malaysia, ascertain the nature as to whether they belong to “income” or “capital”, which will have different tax implications.
3) Where the funds are mixed, distinguish between foreign source income and domestic source income for proper reporting of taxable income for Malaysian tax purposes.
4) Conduct a comprehensive review of the current investment structure and strategise the most optimal approach to undertake future investments. This review may involve international tax planning to mitigate tax exposure involving multiple countries.
5) Examine the existing intercompany loans and undertake possible steps, including debt restructuring exercises, or rescheduling repayments to reduce the tax impact on remittance of interest income into Malaysia. On this note, any proposed changes will need to include transfer pricing considerations to avoid tax pitfalls in the future.
If guidance is required on the issue of tax on foreign income, consider seeking professional advice from a tax consultant. This would help you avoid stepping into potential tax landmines that could be uncovered in the future, when the company is audited by the IRBM.
Each year in October, the global financial planning profession comes together to help raise awareness of financial literacy, the importance of having a financial plan, and working with a trusted financial planner to formulate plans towards one’s long and short-term financial goals for financial stability.
Smart Investor takes a look at the current state of financial literacy in Malaysia, how the past two pandemic-fueled years have impacted Malaysians, and why a financial planner is an invaluable ally in working towards your financial goals.
Tough Times Called For Financial Stability
Vincent Kwo, President of the Malaysian Financial Planning Council (MFPC)
“The recent pandemic drove home the fact that financial planning and literacy are essentials, not options. This came about as many people lost their income unexpectedly and matters were made worse for those who did not have a comprehensive financial plan. Unfortunately, financial literacy is very low among Malaysians,” says Vincent Kwo, President of the Malaysian Financial Planning Council (MFPC).
Furthermore, Kwo reveals that, “Various studies, including the Capital Market Development Fund (CMDF) report on Financial Literacy and Utilisation of Financial Advisory Services in Malaysia, reveal that Malaysians generally have a worrying low financial capability, do not know how to manage their money, and do not plan ahead. This does not bode well for their financial sustainability, making them prone to falling into the bankruptcy trap, and becoming prey to loan sharks and get-rich-quick scams. The problems arising from the low level of financial literacy have been magnified by the recent pandemic, which greatly affected the financial well-being of many Malaysians.”
As the body representing financial planning and service providers, MFPC’s objectives – along with developing and enhancing the financial planning profession in the country – include elevating financial literacy among Malaysians with various initiatives for the public at no cost.
One of the initiatives of note to promote financial planning and literacy, observed globally on 6 October each year, is World Financial Planning Day (WFPD). This year’s theme, ‘Live Your Today, Plan Your Tomorrow’, is very relevant to Malaysians as we continue to face various challenges requiring better financial literacy and planning for a better financial stability.
Ooi Beng Cheang, Financial Literacy Manager at the Financial Planning Association of Malaysia (FPAM)
“As we live with post-COVID challenges, many are now faced with uncertainties as they might have drained their EPF savings, facing difficulty in servicing their loans again after the end of the moratoriums, dealing with rising healthcare costs, and overall inflation causing cost of living to rise. Adjustments must be made to our current personal finances to adapt to these challenges for us to achieve our future goals,” explains Ooi Beng Cheang, Financial Literacy Manager at the Financial Planning Association of Malaysia (FPAM).
As an affiliate of the Financial Planning Standards Board (FPSB), the global organizer of WFPD, FPAM has rallied its stakeholders and financial planners to take part in this year’s WFPD2022 to promote financial literacy and the financial planning industry.
Licensed Financial Planners Are Here To Help
In the forest of questions about money, a licensed financial planner is an invaluable guide in finding the best path for your life’s journey. No one path is alike, and a financial planner will be able to chart the best roadmap for each individual as they aim for financial stability.
“Malaysians are dealing with many pressing issues related to inflation that may derail their life goals. Plans for retirement or their child’s education fund may not seem feasible anymore. Will they have to push back their retirement age by working longer? Will their child still be able to afford tertiary education overseas? These are pertinent questions that one should sit down with a financial planner to hash out a plan together,” says Ooi.
He further adds that, “Financial literacy is a life skill that if not picked up early on, may result in personal finance mistakes that may have lifelong repercussions. The earlier one engages a financial planner in their life, the better, as they will have a proper financial road map of where they are headed in life. With a proper financial plan, one is much more prepared in facing the variables and uncertainties of the future as opposed to someone stumbling along, making knee-jerk reactions to major changes in their life. Should they encounter adversity, the financial planner will be there to guide them through the storm.”
Kwo concurs, saying, “A licensed financial planner can help one establish a personal financial plan, set measurable goals to work towards, track progress, reduce doubt and make better financial decisions. This will help one manage cash flow and debt efficiently. Planning can be tailored to suit every personality type and meet different needs, at different times of one’s life stages. A licensed financial planner can provide the necessary advice on changes and adjustments to support one’s lifestyle, resulting in peace of mind and general wellbeing.”
If one is looking to engage a financial planner soon, make sure that the financial planner is licensed under Securities Commissions Malaysia (SC) to practice as a Licensed Financial Planner (LFP). This can easily be done by going to SC’s website (https://easy.seccom.com.my:8222) and searching for the full name of the LFP under Licensed and Registered Persons.
The result should show their license number and the name of their financial planning firm. As for the other qualities in a financial planner, Kwo suggests the following should be considered: trustworthiness, ability to provide evidence of a good track record of success, ability to provide independent advice, compatibility with the client, the ability to provide up-to-date information, and the ability to refer to other specialists if required.
“In short, one should look for professionalism in a financial planner,” he concludes.
It won’t be easy to achieve financial stability, but it is also not impossible to do so.
World Financial Planning Day (WFPD) on 5 October 2022 is a global event organized by the Financial Planning Standards Board (FPSB). The Financial Planning Association of Malaysia (FPAM) as an FPSB affiliate, has rallied its stakeholders and financial planners to take part in this year’s WFPD2022 to promote financial literacy and the financial planning industry.
Ooi Beng Cheang, Financial Literacy Manager at the Financial Planning Association of Malaysia (FPAM), answers some questions regarding financial literacy and planning, and what it means to ‘Live your today, plan your tomorrow’.
Smart Investor: This year’s theme for WFPD is ‘Live your today, plan your tomorrow’. Who does it pertain to the most, and why the message is more relevant at this point in time?
Ooi Beng Cheang: It is a relevant theme for Malaysians as we continue to face various challenges requiring better financial literacy. With the rising cost of living, adjustments must be made to our current personal finances for us to achieve our future goals. Malaysians are faced with many pertinent questions today such as:
How do we setup a realistic monthly and yearly budget?
How will inflation affect my retirement plan?
How do I deal with rising healthcare cost?
There are many other questions with no easy answers.
In the forest of questions about money, many will need a licensed financial planner to serve as a guide to find the best path through life’s journey. No one path is alike, and a financial planner will be able to chart the best roadmap for each individual.
SI: What is FPAM’s plan to promote financial planning and financial literacy this year and how the public can make the most of it?
OBC: FPAM has organized a much larger campaign for WFPD this year compared to last year. This year, FPAM has engaged with its corporate and chartered members, financial planners, and the media to help promote financial literacy since July 2022. We realize it is important to get the financial planning firms and financial planners involved early so that they will be seen as a source of authority for financial literacy in Malaysia.
Financial Planners were encouraged to post financial literacy content on social media from 31 August to 5 October and use the hashtag #wfpd2022 and #MYwfpd2022 to increase visibility of the campaign. Postings were also shared by the financial literacy website SmartFinance.my on Facebook and Twitter.
To ensure that the campaign reaches as many people as possible, financial planners were also encouraged to post content in a variety of languages.
Besides the promotional campaign, FPAM is also working with the Securities Commission Malaysia (SC) on making #FinPlan4u a success this year. The yearly event allows the public to speak to a licensed financial planner in a one-to-one financial consultation session.
As the time is limited to one-hour for #FinPlan4U, one should prepare some talking points ready on what they want to address with the financial planner. This could be questions about their life goals like retirement or children’s education fund. In the session, the financial planner is not allowed to sell products and will advise the public in general about personal finance.
This year’s #FinPlan4u kicks off in Kuching, Sarawak on 17 to 18 September. After that, the event will continue with online sessions from 11 to 13 October. It will then continue on ground at KLCC from 14-16 October. FPAM is working with the state chapters, corporate and chartered members to rally our financial planners to take part in #FinPlan4u.
SI: Tell us more about smartfinance.my. Specifically, what function does it serve and how can those seeking the help of a licensed financial planner can make the most of it?
OBC: Besides the #FinPlan4U sessions for this year in September and October mentioned earlier, the public can also arrange to meet other financial planners by searching for one on smartfinance.my. The website list licensed financial planners that have been vetted to ensure they have the proper credentials. The public can search for a financial planner based on location of specialty area and then arrange for a free one-hour consultation to see if the financial planner is a good fit for them. This way, the public can screen several financial planners and only work with the one that best suits them.
The public can also read articles and watch videos about financial literacy. These will give them a good basic understanding if they are on the right path. These articles and videos will also give the public some talking points with the financial planner if they notice some areas of concerns.
SI: Why does one need a financial planner in their life and how can one go about looking for the right professional?
OBC: Financial Literacy is a life skill that if not picked up early in life, may results in personal finance mistakes that may have lifelong repercussions. For example, going into credit card debts and not paying it off in time will affect one’s credit rating. A financial planner will work with their client to help set a disciplined payment schedule, putting their client on the right path again.
The earlier one engages a financial planner in their life, the better as they will have a proper financial road map of where they want to go in life. If they should encounter any costly adversity, the financial planner will be there to guide them through the storm.
To be a licensed financial planner, the person must hold either of these credentials – CFP, IFP, ChFC, RFP, or Syariah RFP. The public should ensure that the financial planner is licensed under SC to practice as a Licensed Financial Planner (LFP). This can easily be done by going to SC’s website (https://easy.seccom.com.my:8222) and searching for the full name of the LFP under Licensed and Registered Persons. The result should show their license number and the name of their financial planning firm.
Ooi Beng Cheang, Financial Literacy Manager at the Financial Planning Association of Malaysia (FPAM)
The following story is based on an actual series of events with some names and circumstances fictionalised and any similarity to the name, character or history of any person is entirely coincidental and unintentional. It can’t be emphasized enough on the importance of estate planning.
The woman lunged forward, grabbed the hair of the man and screamed: “You influenced daddy to keep me out of the will!” That shattered the solemn atmosphere at the wake of the head of the family.
What started with three sisters huddled together next to the casket listening to their brother-in-law holding court, turned chaotic. Their murmurs grew louder and louder as it turned into a heated argument.
All eyes at the Funeral Parlour were now on the mourners. Daughter No 1, Cheng, held back by relatives from attacking her brother-in-law, continued berating the man. “I was in daddy’s will. He showed me…” she said in between sobs.
Daughter No 2 countered for her shocked husband saying, “You deserve it! It’s all your own doing!”
From a corner, a voice commanded: “Enough! We’ve not sent off daddy yet and you’re already fighting…”
The voice trailed off. Tears streamed down her cheek as she watched unbelievably at how the family was starting to break apart.
She was soon lost in her own thoughts as the altercation stopped. “Have we raised our children right?” she questioned herself.
She looked at Cheng, who was now crying quietly. She was more of a problem among her three children. Probably being first born, and the apple of Daddy Hock’s eyes, she was spoilt. Her gambling habit and getting into debts were what got her father angry most of the time in the past one year.
So, was disappointed Daddy Hock right in rewriting his will? Was Cheng right in saying Beng influenced Daddy Hock to leave her out of the will, she wondered.
“Ah, that Beng, he likes to show off that he knows-it-all! How much of an influence did he have over my Hock?” her thoughts went racing. Out of the corner of her eye, she could see Beng smirking.
She wondered why Hock ended up with making Beng the executor of his will and also letting Beng keep the will. The matriarch of the family was at a loss as to restoring the bonds between the daughters.
This is crucial why we need to understand the importance of estate planning.
The Importance Of Estate Planning
This family drama at the wake highlighted several pertinent issues which are valuable pointers to note for in the importance of estate planning.
Re-writing of Wills
The Last Will and Testament is an important legal document giving clear instructions for wealth distribution.
While the will can be re-written as many times as one wishes according to change in circumstances, it is nevertheless important that the document be kept private and confidential to avoid occurrences of tampering or being damaged and rendering the will invalid.
In the case of Hock, he has divulged the contents to his Daughter No 1, giving rise to possibility of squabbles among family members even before he is gone.
It is also prudent that the reading of the will be held at a conducive place and time. In the family drama above, Beng, a related party, who was appointed Executor and Custodian of the will, had – whether by design or coincidence – divulged the contents of the will at the wake. Stemming from this, things could get ugly.
Executor
Appointing the right Executor is crucial to ensure that the estate is administered professionally and efficiently to carry out the wishes of the deceased and avoid the bereaved family members and dependents having to deal with issues arising from the estate such as creditors chasing for payment and tedious administrative matters such as preparation of accounts and filing taxes.
With the right Executor in place, the administration can be carried out efficiently where the beneficiaries would have fast and easy access to their inheritance.
It is a common practice for testators to appoint, out of convenience, their spouses or children or trusted friends as executors to handle their estate administration. This is not wrong or prohibited but it could be counter-productive for the effective administration of the testator’s estate if the appointed executor is unfamiliar and inexperienced with the tasks at hand.
A trust company is a recommended option as unlike the individual, the company will exist in perpetuity and has experienced and dedicated skilled staff with the time, capability and resources on hand to perform the function of the Executor.
Custody
It must be the borne in mind that equally as important in having a will is the safe custody of the will. A will that cannot be found is as good as not having a will. Safe custody from possibility of being tampered or damaged is also essential.
Keeping the will in a Will Custody Centre is a recommended option to being in one’s locked cabinet or safe. Worse if the will is kept in a bank safe deposit box because it cannot be retrieved without probate, which cannot be obtained without the deposition of the will in court.
A dedicated Will Custody Centre can ensure that the will is easily located and retrieved; is in safe storage in a humidity-controlled environment that ensures the document’s good condition over time; and is in secure vault with appropriate tight security system in place.
It is hoped that we now understand the importance of estate planning and to avoid any last rites drama.
About Rockwills International Group
Rockwills International Group, now in its 27th year, pioneered professional will writing in 1995 and has since evolved into the leading estate planning specialist in the country. It is today the largest provider of solutions and support services in the areas of trusts, succession, management and distribution of wealth. It has shareholders’ funds exceeding RM50 million. It has done over 280,000 wills and 15,000 trusts and hold more than RM25 billion in assets under trust.
The 2022 Budget was short on outlining any initiatives to enable Malaysia to build a more sustainable tax revenue base. The review of the tax incentives regime has yet to be finalised and hopefully, some progress will be announced in the coming Budget.
We expect the 2023 Budget to outline a more structured mid to long term reform of the tax system, so that we can have a more sustainable tax system. Malaysia needs to, in the medium term, broaden the scope of the existing Sales and Service Tax (SST), and ultimately make it a broad-based consumption tax with added features such as tax invoicing similar to a Value-Added Tax.
We should also have a more inclusive capital gains tax and move quickly on an efficient integrated national tax agency, in order to have a more sustainable tax.
Tax Treatments To Review
Currently, fees paid to tax advisers and company secretaries for the various services rendered on tax and corporate compliance matters are subject to restriction. Furthermore, the Inland Revenue Board of Malaysia (IRBM) recently issued the Corporate Tax Governance Framework (Framework) to enhance companies’ processes and governance on income tax matters.
The Framework expects the involvement from the board of directors, audit committee and senior management to set up appropriate checks and balances on tax reporting.
However, the IRBM states that costs incurred for advice and assistance to develop the Framework are considered to be capital in nature and therefore not tax deductible. This further irks businesses as such expenses are incurred to encourage corporate governance.
For a more sustainable tax, another area to review is the exclusion of Intangible Assets from the definition of the term “Plant” in the 2021 Budget. This has resulted in cost incurred such as computer software, licences, trademarks, patents, films, copyrights etc are no longer eligible for capital allowances or tax depreciation, despite these being assets utilised in the production of taxable income.
This is truly surprising, given the Government is leading the push from brick-and-mortar businesses to a digitalised and knowledge-intensive economy. Engagements have been held among various parties and it is hoped that in the upcoming Budget, the IRBM would review those tax treatments.
A More Sustainable Tax Structure
As a country, we cannot keep on borrowing and servicing debt. We should remove unnecessary exemptions and deductions, and simplify things to enable all to be part of the tax net. There is a need to push on towards a reliance on consumption taxes, in order to achieve a more sustainable tax.
The Ministry of Finance (MOF) has stated in the Pre-Budget Statement in June that tax reform initiatives with the objective of broadening the tax base, as proposed by Tax Reform Committee, will continue to be implemented.
The initiatives include:
a) Undertaking a review of broad-based incentives, reliefs and deductions
b) Improving tax administration through comprehensive registration of taxpayers
c) Better training of tax personnel
d) Improved registration of cross-border trade
e) Strengthening the tax audit and investigation
f) Enhancing legal certainty for taxpayers
Necessary details on the aforementioned will need to be spelt out in the 2023 Budget.
On the international front, Malaysia has committed to implement several agreed upon tax standards to create a competitive business environment for investors and to counteract cross-border tax evasion activities. To date, we have implemented four minimum standards of the Base Erosion and Profit Shifting (BEPS) Action Plans, while continuing to review the rest of the Action Plans under our domestic tax law.
Domestically, the tax net can be widened by tracking down those who should be within the tax net. That means curtailing tax evasion, curtailing smuggling, registering those who should be registered as taxpayers, and devising strategies using the tonnes of data that various agencies accumulate to ensure that all who should be taxable are indeed taxed.
In the Budget 2022, several initiatives were introduced to manage revenue leakages, including:
a) Removal of tax exemption on foreign-sourced income received in Malaysia by a Malaysian tax resident
b) Introduction of the Tax Compliance Certificate as a precondition for tenderers to participate in Government procurement
c) Implementation of a Tax Identification Number (TIN)
It was a surprise when a five-year exemption of the tax on foreign income was announced subsequently. Even Singapore and Hong Kong, which have similar tax systems to Malaysia do not have such a time-based exemption period.
However, the implementation of Tax Compliance Certificate and the TIN are very good compliance initiatives to reduce leakages, but more details are needed.
In line with the 12th Malaysia Plan to strengthen digital services infrastructure, the digitalisation of the tax function will be implemented with e-Invoicing to be done in stages. This will enhance the efficiency of the country’s tax administration, reduce compliance costs to taxpayers, and increase the efficiency of business operations. E-Invoicing will also support the use of TIN as a measure to expand the income tax net.
The Auditor General’s report has stated time and time again about losses and waste in the public sector. Greater accountability on where our tax ringgit goes and how it is utilised is essential to further narrow the trust deficit that exists, which is a factor why some are reluctant to pay their taxes.
A more sustainable tax structure for the future is probably in the pipeline. But such matters can be excruciatingly slow in coming into fruition, due to the lack of political will and vested interests.
All said, the 2023 Budget may turn out to be an election budget, with a slew of populist measures to score brownie points that may damage the country’s rather fragile fiscal momentum. Against this backdrop, debt and inevitably debt service charges, will rise.
Given that Malaysia’s narrow tax base means high concentration revenue risk to the overall economy, its fiscal vulnerability could increasingly become a trigger factor for sovereign rating downgrades by international credit rating agencies. Here’s to a more sustainable tax structure for a better Malaysia.
About the Author
Dr Veerinderjeet Singh is a tax observer who is the Non-Executive Chairman of Tricor Malaysia. He is the Immediate Past President of the MIA and MICPA, and a Past President of CTIM. He is a strong advocate of tax reforms and sits on the boards of a few public entities. He is also an Adjunct Professor at Monash University Malaysia, as well as a Vice Chair of the Global Tax Commission at the International Chamber of Commerce based in Paris.
The following story is based on an actual series of events with some names and circumstances fictionalised and any similarity to the name, character or history of any person is entirely coincidental and unintentional. With it, hope that we can understand more about why family business fail.
It was unexpected for Jade. Her late husband, Chee’s family business empire had just fallen in the hands of others!
How wrong Jade was with her assumption that when it came to the crunch, her late husband’s two partners would be sympathetic towards her. Instead they teamed up to make sure that not only she had no say in the business but also for her two estranged step-sons from her late husband’s first marriage.
The two partners combined their equity holdings to ring-fence control and totally keep out the family of late founder Chee (Jade’s late husband) as they were worried and felt strongly that the ensuing family conflicts between Jade and her late husband’s family from his first marriage would be disruptive to the business.
The partners had the advantage of the split equity holding of the Chee family members to stage a takeover of control of the business. Jade had never thought the partners would betray her as they were very supportive of founder Chee, and also empathised with her when they saw how terrible the step-sons treated her after their father passed on.
The partners consoled Jade many times and offered to help in anything. She had the feeling that they would not be inclined to bring the step-sons into the business. She also reckoned that they would not be averse to appointing her as Director of the company so as to maintain the Chee family interest. However, all those so-called partners were fake. Eventually the partners took control of Chee’s family business empire and kicked her out.
How Easily A Family Business Fail
How could Jade’s late husband not foresee this? It became clear to Jade now that her late husband was good in running the business but he had failed miserably in ensuring continuity of the family business empire that he so capably built.
While Jade’s late husband knew of Jade’s capabilities as a successor, he had not planned for it. He had not been communicative and shared with her anything to do with the business. He had been going about in the prime of his life as if he was immortal. And that probably was the reason why he didn’t even have a will!
Only after the cruel blow of being killed in an accident following a drinking session with business associates that Jade found out that her late husband was actually not in control of things, especially his business empire. He was so ill prepared.
Without a will, her late husband’s assets would, according to the intestacy law, be distributed to his parents, spouse and children. Effectively without surviving parents, his estate which included his majority shareholding in the family company is split between Jade and his two sons from the first marriage. That means not only his business but the house that Jade is staying is now co-owned by her step-sons too!
But being on unfriendly terms, the fragmented shareholding of the Chee family members delegated them to be minority shareholders. By not combining their shareholding, they could not match, out-vote and block the combined controlling power of the two partners. What a tragedy!
The Importance Of Succession Planning
Proper succession planning would have ensured smooth continuity of management, control and ownership of a family business. If not, the chances for the family business fail will increase.
It is prudent that succession planning starts as early as possible to avert a situation like the unwanted outcome of the Chee family business. Consult experts in estate planning to make sure a succession plan is achievable and will not have unforeseen pitfalls, even of tax and financial nature.
A viable solution would be a Business Trust which creates a structure for family succession. Through instructions in the trust deed from the owner, the Business Trust can be designed to benefit the family members to ensure the continuity and preservation of the business within the family, even for those who are not on good terms with each other.
Contentious issues such as successor -be it a family member or a business partner – and the delegation of powers could be pre-determined and stipulated in the Business Trust for the appointed Trustee, which is recommended to be a licensed trust company that operates in perpetuity, to carry out the instructions.
Other relevant matters that could be addressed could include triggering event, for example, death, illness, incapacity or disappearance; or legal considerations that include exit arrangements or buy-sell arrangement of shares by other existing partners/shareholders from family shareholders; and also succession structure and process.
With such proper estate planning that also encompasses protection of beneficiaries from unwarranted or future claims from creditors or ex-spouses, or takeover attempts by unfriendly parties, or even possibility of squandering of inheritance by beneficiaries, nothing is left to chance and the interest and future of one’s family business would be safeguarded.
Such comprehensive estate planning solutions can be achieved by consulting an experienced estate planner working with an established company such as Rockwills Trustee Berhad.
About Rockwills International Group
Rockwills International Group, now in its 27th year, pioneered professional will writing in 1995 and has since evolved into the leading estate planning specialist in the country. It is today the largest provider of solutions and support services in the areas of trusts, succession, management and distribution of wealth. It has shareholders’ funds exceeding RM50 million. It has done over 280,000 wills and 15,000 trusts and hold more than RM25 billion in assets under trust.
A very simple definition of Financial Planning is the process of managing our resources to help us achieve our life goals. Now that we are in the cryptocurrency age, how do embrace crypto in our financial planning?
It is a process which we proactively look at our financial situation and determine the better routes which can allow us to use these resources to help us accomplish what we hope to have to call it a good life.
Many people seem to think that when we have got a financial plan done, we have done financial planning, and hence we can then on our way to become richer, and retire early, or sending our children to study abroad.
The truth is that financial planning is a process but not a touch-and-go activity that produces a document called financial plan. Life is full of changes, so any plan we make today will always be challenged or need to change in response to the actual situation in life.
Financial Wreck Caused By The Pandemic
For instance, no financial plan will have predicted COVID-19 and prepare everyone for the Movement Control Order (MCO) and all the consequences from having these shutdowns in the past two years.
Our money is one of the resources we have that can be used to help us accomplish our goals, and money itself is not the goal.
If our reason to invest in good deals or engage in financial planning conversation is to have more money, this reason itself invites more questions than being an answer.
“More money for what?”
“More money to do what?”
“Why do you need to have more?”
To have more, there’s a trade-off that we must accept.
More Work = More Money = Less Rest
For example, to earn more, one must work more, to work more, it could mean one has to let go of time for rest, or to not spend more time with loved ones, or not able to enjoy activities that they like.
It could also means taking more risk so that we have a potential higher return from our investing activity.
So, in our pursuit for more money, we may fare better if we adopt a big-picture view but not only focus on having more money.
Sometimes, we decide to delay, or postpone doing things we really want or hope to because we are afraid to do it. And often, it is due to our feeling of afraid we don’ that enough to ‘just do it’, or the fear of “cannot afford to”.
This is not abnormal, and I can totally understand this emotion. When we do not know how much we need for the rest of our life, how are we able to feel we have got enough, right?
A good financial planning process is one where we spend more time to understand the person, identify the values (what’s important for this person), then take a look at their money management habit and their net worth (what they have left after minus what they owe), then we can have an idea if this person will have enough money for the rest of their life.
What Are Your Life’s Goals?
This process helps us understand a few important answers, such as:
Do I have to reduce my spending today?
Should I get a side hustle to boost up my income today?
Do I have to take more risk on my investment?
Can I change my car or house without affecting my future?
Can I quit the job I hate and accept a new job with lower pay?
At what age may have a huge cashflow deficit?
At what point (or age) will I run out of money in the future?
If I lose all my investment money today, how bad will my future looks like?
Establishing a good financial planning process can help us to bring our future to the present, and by looking at this future we can assess what are the thing we do not like so that we can make the change to it today.
Imagine having to wait for 20 years only to find out that we will still run out of money at a certain age, versus knowing this scenario is likely to happen 20 years earlier and we have 20 years of time to change something, which route would you prefer to take?
Through proper financial planning, we get a ‘preview’ of our future today, but at the same time, we make some assumptions of what might happen, such as inflation, potential investment return, our spending and potential future income, taxes, etc.
Hence, one of the things we will be thinking about is where or how should we allocate our money, to what kind of asset classes. And nowadays, it is likely most people have heard of and are quite keen to understand where cryptocurrency or crypto assets can fit into their plan.
Dawn Of The Crypto Age
Before the emergence of crypto assets, people have allocated their savings to various types of asset classes like stocks, debts, some keep most of their savings in cash or cash equivalent, businesses, real estates, arts, collectibles, gold or silver, to name a few.
Some of the assets have a low risk and value tend to not fluctuate too much and are ‘predictable’, while some the value may deviate quite a lot, and are considered ‘risky’.
One of the key considerations in determining our asset allocation, is to understand if we need the investment to generate additional income, or to have the value increase in future for us to have ‘gain’.
Essentially, crypto assets are assets that are non-income generating but more for the investment objective for capital gain.
While it is undeniable that crypto currency has helped make many new millionaires, for this wealth to be sustained into the future, one may want to explore how this new wealth can be protected or kept, so that even if the value of the asset class reverses its course, this person will not be knocked back to the ‘pre-crypto’ life.
Of course, it is perfectly fine if we remain having our 100% of our wealth be invested in crypto assets. However, that will also mean we tie our future financial health and possibility in life to a single asset class.
Imagine a person putting all their savings for old age to the stock of the single company they work at, and over the course of years for whatever reason, this company went out of business, or the company’s business dropped a lot due to new competition, or innovation.
The above example is not just pure imagination, we have seen a few big company’s gone through such trajectory before. Will this person be better off ‘putting all the eggs in different basket’ instead of ‘in the only basket’?
It does not matter what asset classes we are thinking about, it seems that it is not a bad idea to limit our downside risk and avoid over-concentration.
What about people who have not experienced the explosive growth or have not invested in crypto assets before?
Diversification Is Key
Generally, crypto assets or digital assets are one new asset class for us to incorporate to our personal investment portfolio to achieve diversification beyond the common asset classes mentioned above.
Depending on your tolerance for risk, and your investment objective, you will then understand how expose you can be, just like on every other asset classes. A person who is conservative or cannot sleep well even with a small up and down may want to limit exposure to volatile asset class, regarding the potential upside, and vice versa.
For asset class that can have a large swing in value, non-income-generating, it is advisable that we limit our exposure and do not over commit our wealth to it.
However, if one decides to do so, it will be prudent to ensure that we have prepare sufficient savings that can offer us liquidity and peace of mind during challenging time in life, or when the asset value is not at a good level for us to make withdrawal.
It is also very important that people only invest into cryptocurrency via digital assets exchanges that are operated by operators approved by Securities Commission Malaysia [1]. This ensures your investment will not fall into schemes that are unregulated or hands of scammer.
Regardless of what we do with our money, it is important that we understand why we want to do certain thing, and how this fit into the overall big picture of our life. By having a proper asset allocation that can support our future and lifestyle, we can avoid overexpose to certain asset classes, or certain asset.
A good financial planning process is about setting a good foundation, and manage our risk, so that we can increase our chance of living a life we consider well lived.
Debt, in essence, is all about borrowing money from a third party, and having the means to pay it back. Debt is not always bad news; it really depends on the kind of debt you currently have and your ability to pay it back. Let’s take a closer look at ‘good debt vs bad debt’.
Therefore, let’s start off with a self-assessment on debt. Referring to Table 1, kindly answer the statements with a “yes” or “no”. The more “no” in your replies, the higher your stress level in debt management.
1
My monthly loan servicing ratio over my monthly income is about 38% or below.
2
I am only investing my free money and never borrow to invest.
3
I have consistently (monthly) and/or fully paid my credit card debts.
4
I keep a track of my total debts annually and it is decreasing over the years.
5
I know the difference between good and bad debt, and only utilise the good debt to acquire appreciating assets like property.
6
I pay all my household bills on time.
7
I am current on all my debt payments.
8
I know who to look for help if any of my family members r I are in deep debt.
9
I know the risks of becoming a guarantor, co-loan owner and supplementary credit card owner.
10
I know the interest rate of each loan that I borrowed, and how the interest is charged on the loan amount.
11
I know how to restructure my debt wisely if needed, and clear the loan with the highest interest rate first.
Table 1: Self-Assessment
Good Devt VS Bad Debt?
Did you know that debts can be categorised as “good” or “bad”? Good debts refer to the ones with low-interest rates (below 8%), and your borrowing is used to purchase appreciating assets such as residential or commercial properties, or investing in a business.
A study on Malaysian property valuation between 1991 and 2014 showed that the compound annual growth rate (CAGR) for overall property in Malaysia is around 5.97%。No doubt that property is an appreciating asset, still location is key for greater return.
Bad debt, on the other hand, is akin to borrowing money to buy a car, which is a depreciating asset, although the loan interest rate is considerably not high (around 4-6%). Every year, the car value will drop at an average of 10%.
From Table 2, it is crystal clear that we shouldn’t borrow if the interest rate is more than 8%.
Debt Type
Average Interest Rate (Annual)
Illegal Shark Loan
60%
Credit Card
15-18%
Personal Loan
10-12% (Promotional 8.88%-9.99%)
Education Loan
8-10%
House Loan
4.5-6.5%
Car Loan
4-6%
PTPTN
1% (3% is the old rate)
Table 2: Types of Debt and Average Interest Rate (Annually)
Words Of Advice
Healthy Debt Ratio – A key indicator on whether you have a healthy debt ratio is the Monthly Debt Servicing Over Monthly Income Ratio. It simply totals up your monthly debt repayment amount over your monthly income.
This ratio should always be kept below 40% at all times, though a temporary spike is still acceptable. For those far below 40%, you have more room to gear on appreciating assets resulting in easier loan approvals.
Never Borrow to Invest – The first rule of financial planning is not borrowing to invest, even in share margin investment, where the interest rate is low at about 4%.
We should only invest free money. Don’t borrow money even from family members, relatives or friends to invest. Otherwise, it could cost you both money and relationship.
Get the Longest Loan Period (if possible) – Forget affordability, will you apply for a 25-year loan (instalment: RM2,400) or 35-year loan (instalment: RM1,200) for a property purchase?
Choosing 35 is a wiser strategy to deal with loan and cash flow. Even if you opt to pay RM2,400 (instead of RM1,200) monthly and consistently, the loan will end in 25 years.
However, if you select the 25-year package, there is no way you can reduce your monthly repayment if you have cash flow problems in certain months.
In the event you don’t pay consistently, banks will increase the interest rate causing the repayment amount to rise, lesser free cash in hand, and a whole lot more stress!
If non-repayment continues for two months or more, you will be seen as failing to service your home loan, and worse, the bank might even auction your house. Therefore, why risk your financial position with a shorter period of loan which offers lesser flexibility?
The longer the tenure of your home loan, you would have more cash in hand to actively invest into an investment instrument that can give you an annual return of more than 6%. This is smart financial planning.
About the Author
This article is written by Yong Chu Eu. He is the Founder, Principal, MFPC Shariah RFP, CPD/CPE, HRDF Certified Corporate Trainer of Money & Life, Financial Book Author, Licensed Financial Planner, E2E Financial Literacy Principal Coach & Local Media Guest.
