Tuesday, September 27, 2011

How do company save some tax?

What I'm about to share to you is a way for company to save on tax. But please bear in mind that this only applicable to company that has a cash surplus and place these cash in their current account or fixed deposit.

If a company has a surplus in cash what normally a company do?
- Most companies will just put them in the current account and that is where the money in there does not really earns anything.

You ask: If these companies know that the money they place in the current account does not generate any return then why still they do it?
Me: The answer is simple. They either do not plan on their working capital (maybe busy with other things, maybe they do not aware, etc) or they didn't really know what they can do with it to generate return.

I know this is because I've seen a lot of business man (I'm talking about small business) that has up to hundred of thousands in the current account which generally has no return to the company. They know they want to use the money but they didn't plan on how much they will lightly to use or how long before they need the money. 

- The second way to deal with surplus cash is they place in Fixed Deposit.
These are the people that actually plan their cash flows. They know exactly when they need to use the money and so placing the balance with fixed deposit with the bank.
They place the money based on the needs of the cash in future either 15% in 12 months, 40% in 3 months, 20% in 6 months, 20% in 1 month, etc. 
By doing this they can pretty much have enough cash to continue run their business at the same time they can get some interest income for their business.

The drawback of this is that these interest for companies are treated as revenue to the company and is taxable income. 25% of the income is taxable.
Let's do some small calculation. You'll have say RM500,000 in the bank with 12 months maturity because you know your company will not be using this money for the next 12 months. Let's say we take the rate of 3.6% which is offered by Affin Bank Berhad as at today's date 27th September 2011. This money is therefore getting a return of RM18,000 for a period of one year. That's a pretty good return. But you'll be tax 25% out of that return which will be RM4,500.

What I'm about to share is the third way which currently offered.It offer you the ability to earn the interest income at the same time the income is tax exempted.
According to tax act, companies who invest in unit trust fund will have tax exemption for either interest income, dividend paid or capital gain.

Look carefully into this statement. But you'll need to invest in unit trust. You fear that investing in unit trust is not safe comparing to invest in bank?
What if I tell you a unit trust that can basically just place the money according to your needs in the bank on fix income or even for overnight rate REPO to provide you a greater liquidity at the same time have the interest income you wanted and also save you on the tax. That would be great right?

Yes. By investing extra money back to your unit trust, you potentially can save tax for your company. But bear in mind, you will need to know which unit trust to invest and not all carry the same risk. Talk to a financial adviser for further understand on the product offered.
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