Tuesday, September 11, 2007

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?


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.


pilgrim said...

Holy hells, I was just thinking about this when I got up this morning.

For the past couple of days I was thinking that the single tax structure would be an advantage for me (I'm not a retiree though) but then I realised I'm no longer going to be able to claim a tax refund on the dividends.

It was truly a ....WTF?!? moment right there, and then I logged on to your blog and saw this article.

Damn man, it's bad enough that as a retail investor I'm being pushed to pay a higher brokerage (unless I buy a minimum of what...RM6K worth of shares in a single transaction), but now this. Bah.

And yes, yes, internet trades are fully negotiable. Right now I'm a client with one of the few brokerages that doesn't seem to have any form of online trading. Doh! (Online trades for them means that your order keyed in your computer is dispatched to your broker's screen for him/her to key it in manually into his system)

Hmm, I wonder how the whole internet trading thing is going to affect N2N (the listed firm that facilitates the bulk of online trades). I can see the brokerages screaming as to how they're suffering with fully negotiable online trades and how N2N should be paid a lower comission. Heh.

stocktube said...

this is the one of the things that bother me moola ... at this moment it's still in grey area, the authority might needs to come out to explain and clarify it once and for all ... not that i can claim back previously but if i were to retire one of this day, then ...

cheers ...

Moola said...


I strongly believe that this issue needs utmost clarification from the authorities.

As it is, it represents a whole new ball game for the retirees.


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I have something which you might be interested in.