Rest In Peace, My Fellow Small Time Investors

If you asking me my comments on the announced Malaysia Budget 2008, then you are asking the right guy. I tell no bullshit and give no damn about the cover they try to put up.

Just one statement would summarize the entire Budget Plan:

The rich become richer and poor become even poorer.

1. Monthly withdrawal of EPF deduction to pay off housing loan

A nothing-seem-to-be-wrong budget item at first, but the effects are deep and further in the future that you might overlooked. Although the withdrawal only allowable from Account 2, the action is totally against the very idea of setting up the retirement/pension funds. The issue of insufficient savings for old day retirement will (and definitely) surface after maybe 20 years, and our government will then come out with another brilliant temporary workaround to divert the real cause. Again, why I say "Rich will get richer" is the truth that rich people rarely care about going through all the hassles to take out money from their EPF thingy.

The true fact about this budget item is to take more money out from the very private piggy bank of the general middle class people.


2. Single Tier Taxation System

The only real reason that I can think of why the Budget 08 introduce this nasty thing is for improvement over taxation efficiency. (Beside another real reason of "Rich become Richer"). Single tier taxation or whatever they want to name it, will have NO direct benefit to retail investors. When I mentioned retail investors, I really meant those people who take their monthly spare cash to buy in maybe 100 unit of PBBANK for the sake of hoping to get some dividends in return for a year end vacation (Nah, dreaming, my friends).

Drawing an example of country (territory) that adopted something like the Single Tier Taxation System, Hong Kong. Let us examine HK 07/08 taxation structure.

17.5% rate compared to Malaysia's 27%.

16.5% fixed rate or progressive rate until 17% compared to Malaysia's 28%.

Charitable donations entitled to up to 25% deduction of assessable income. Woo hoo, do more charity. This really helps poor people.

I totally understand that a taxation system such as these in Hong Kong really makes it admirable, but whether suitable to be applied to a specific country, really NEED to be assessed thoroughly and locally before adopting it (Too late to say i think).

Ok, since the deal already settled, we have no call in agreeing or denying the implementation. Let's assess what're the implication of putting this Single Tier System into legistration and how the gap of tax rates play a role in making the rich richer.

Technically speaking our current corporate dividend system taking a variant of what they called an imputation system. Under such system, investors receiving dividend are entitled to tax rebate or enjoying excessive tax credit depending on their marginal tax rate bracket. Franking credit referring to the paid tax amount by the company that you can use to cover your payable tax amount, if your marginal tax rate is higher than the corporate tax rate.

I know i know, all these starts to sound too technical. An example would do the trick :p

Let say YTLPOWR (KLSE:6742) declared a final dividend of 5 cent for the 4th Quarter of financial year ending 30/06/2007.

So Eddy who hold 1000 unit of YTLPOWR shares will entitled to 5 cent LESS 28% dividend dividend under the imputatin dividend taxation system of 06/07.

At the dividend payment, Eddy will be credited RM36 for the 1000 unit he hold.

In the year 2008, when Eddy filed his income tax assessment, let say his taxable income amount is fall under the 7% category. Then he can request for a rebate of (28% - 7%) = 21% of the RM50 he's originally entitled. In other word, he can get back 50 * 21/100 = RM10.5.

At the end of day, total dividend in pocket is RM46.5.

Now, assuming the Single Tier thing is in place for this year. So using the same scenario, however YTLPOWR now WOULDN'T declare a 5 cent dividend. Instead they will declare a 3.6 cent dividend and recipients don't need to pay the tax.

Eddy don't need to file this income for the year 2008, however he receives RM36 ONLY. Eddy lost RM10.5 due to the fact that he now don't have the luxury to file for a rebate even his tax bracket is far below that 28%.

So, let's shout together: DARN!!!!

But hey, let assume Eddy is a high paid C level personnel where his income tax bracket is 28% instead of 7%. Given the actual corporate tax rate of 27% for year 07 and

under imputation dividend system, he need to top up 1% of the dividend amount because 28% - 27% = 1%, meaning he gotta pay RM0.5 for the RM50 dividend. Total dividend tax is RM14.5 and dividend received is RM35.5


under the Single Tier system, he can save 1% because all dividends will be taxable according to the corporate rate, 27%. He saves RM0.5 by not paying according to his personal income tax rate. So, by the year of 2009, where the corporate tax rate is 25%, he will saves RM1.5 because of the 3% difference in rates.

See. Rich become richer.

Note: 6 years briging period between imputation and Single Tier System.

3.) Reduction in Clearing Fee Rate and Increment of Minimum Brokerage Fee

Clearing Fee Rate cut down from 0.04% to 0.03% (-25%). What !! That is only a RM0.1 difference per RM1,000. Somemore, the maximum clearing fee increased from RM500 to RM1000 (+50%). Ok, no much complaint about this, since it couldn't affect me or other retail investors any worst than setting the minimum brokerage fee at RM40 from RM12 (+333%).
This move is indeed really discouraging. Direct intepretation from retail investors' point of views are "Get Lost, if you don't have even money", "Go to next door and buy mutual fund, losers", "Better prepared to keep it for long long term", "Sorry we have taken your money and you gotta wait" and etc. To regulate investors behavior is one thing, but to demolish the remaining little desire to invest definitely are senseless and ungrounded. Booooo!

And what about the goodies like more research fundings and free schooling in Malaysia. Well, let take a perspective that if "minum kopi" culture is quantifiable and taking 5% out of it I think it is more than enough to cover all these relatively small carrot for the general public.


Again, the idea of the Budget 08 is just to make sure Rich become Richer, Poor become Poorer. Ok fine, maybe hardcore poverty will then become not so hardcore, but definitely not rich afterall.