This article first appeared in Personal Wealth, The Edge Malaysia Weekly on October 23, 2017 - October 29, 2017

Lower income tax, more tax relief and incentives for secondary-market property purchases are some of the items on the Budget 2018 wish list of middle-class Malaysians, according to Yap Ming Hui, managing director of Whitman Independent Advisors Sdn Bhd. 

Middle-class Malaysians, who account for 40% of the country’s population, are the biggest segment of taxpayers. Yet, they are often neglected when it comes to financial incentives and aid, says Yap, adding that this group earns between RM3,000 and RM20,000 a month.

“I think there has not been enough attention on this group of people, even though they are the backbone of the country’s well-being. For some reason, they are often perceived as better off despite the fact that they too are hit by the higher cost of living,” he says. 

The most relevant help that can be given to those in the middle-income category is by lowering income tax rates, says Yap. Singapore, he points out, cut its income tax rates by more than 10% when it introduced its Goods and Services Tax (GST) of 7%.  

By comparison, when Malaysia implemented the GST in 2015, income tax rates were only reduced by 1% to 3%. Since then, there has been no news of any further income tax reduction. 

Yap hopes that the government will consider cutting income tax rates by at least 5% across the board. “Then, someone who has chargeable income of, say, RM100,000 can enjoy savings of more than RM4,000. This is something more meaningful for those in this tax bracket, compared with the option of lower Employees Provident Fund (EPF) contributions,” he says. 

Currently, there is income tax relief of RM3,000 for education or medical insurance premiums. However, this is a small amount, says Yap. As the middle class have more options when it comes to their children’s education, they may not want to send their children to public schools and universities. So, their education expenses may be significantly higher than those of the lower-income group.

“The tax relief for medical insurance premiums should not be lumped together with education insurance — it should be made separate. The amount should also be increased because RM3,000 is not enough coverage for the whole family,” says Yap.

He adds that for some people, insurance policies may not be the best way to invest or save for their children’s tertiary education. So, non-insurance products should be made eligible for claim as well, he suggests.

“It could be a private education savings scheme or unit trust-linked investment products. This would allow the middle class to contribute more to such schemes,” says Yap. 

Malaysians who participate in the National Education Savings Scheme (SSPN) are given tax relief of RM6,000 (since year of assessment 2012). The SSPN is managed by the National Higher Education Fund Corporation. 

“This is a good initiative. But if there were a separate fund managed by a private entity, it would be more efficient and give better returns. If there was a tax relief for something like this, it would be beneficial for the middle class,” says Yap.

Meanwhile, many of those in the middle-income group have investments in multiple asset classes. However, as they do not pay enough attention to their investments, they are not optimising their returns to grow their wealth. Thus, Yap says tax relief for advisory fees paid to licensed financial planners would really help the middle class to get better financial returns. 

“This will also help stimulate the capital markets because there are thousands of middle-class families in Malaysia. If their assets are currently worth RM2 million to RM3 million, generating an extra return of 5% to 10% would definitely help stimulate the economy. Tax relief would be a small price to pay for the desired outcome,” he adds. 

In terms of financial products, the government should continue its efforts to lower the distribution cost, says Yap. He points out that Malaysian investors are sometimes reluctant to invest in unit trusts because they are under the impression that such products are expensive due to the high fees charged. 

“The government has announced that it is trying to bring the cost down. So, if the sales charge is currently 5%, maybe it can be reduced to 2% or 1%. This would be good for investors because if they could pay lower charges, they could put more money in their investments. This, in turn, would be good for the local capital market,” says Yap. 

Initiatives and incentives 

Yap suggests that financial education in the form of counselling or advisory services be provided for all Malaysians so that they do not end up in bankruptcy. According to the Department of Insolvency’s statistics, 97,215 people were declared bankrupt between 2012 and September last year, with Selangor leading the other states with 27,269 cases.

“The number of bankrupts in Malaysia is very worrying, especially in the wake of money games, illegal crowdfunding and other unregulated investment vehicles in the market. For some reason, it is very easy for even the most educated Malaysians to fall for these schemes. Thus, I believe that if there are no proper financial education programmes offered, the likelihood of people getting into debt or becoming bankrupt will be higher,” says Yap. 

In terms of real estate, two major areas need to be addressed for the middle-income group, he says. The first is providing incentives to those who want to purchase their first home on the secondary market. Currently, incentives are only given for property purchases on the primary market. 

“The government is providing a lot of schemes and incentives to make housing more affordable. A few years ago, Bank Negara Malaysia even asked banks to impose stricter financing rules to curb speculation. Thanks to these initiatives, secondary-market property prices have dropped 20% to 30%. Speculators cannot afford to pay instalments, so they are forced to sell the properties at lower prices.

“Maybe the government should give incentives to those buying their first home on the secondary market — not just from the developer — because the developer’s price is still very high, so young people will not be able to afford them,” says Yap.

“I think property prices have skyrocketed due to speculation. So, if the government could provide such an incentive, it would really help Malaysians buy their first home.” 

Under Budget 2010, the government offered tax relief of RM10,000 a year for interest on housing loans. The tax relief was offered for years of assessment 2010 to 2012. Yap hopes that this tax relief can be reintroduced and increased to RM30,000 a year for five years. He also suggests that the stamp duty for properties up to RM500,000 be waived.

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