I suppose to write some more about income tax reducing but my partner mIng pointed out something today. So I have to clarify a bit here otherwise it seemed not so professional for me. I have corrected one of my statement in yesterday's post about "CPF is not taxable". Indeed it is taxable but it is not taxable to some extent that most of us won't have problem as a freshgraduate.
If you follow this link, it will brings you to the CPF Relief (CPF exemption) for income tax. There you will be served with a term called Ordinary Wage Ceiling and what does this term means? This is only my logical thinking, if you are a high-salary-employee and with 20% CPF contribution. You are going to save a lot of your cash without going to the government pocket. Remember what tax does is to get rich man money to help the poors (quite impressive right? but this is only the ideal case.) That is why when you are poor, you pay lesser to the government. Therefore in order to get more of the rich man money, there is a max limit for CPF relief.
If you don't understand then just imagine 20% out of $10,000 is $2,000. One year is $24,000 and if you minus this amount from your rich income, your tax rate is going to be very low. So this will not be the case for you - Rich Men!
In the example from IRAS, the Ordinary Wage Ceiling (OWC) for 2005 is $5,000. So if your salary is more than that, your contribution to CPF is partial taxable. . Take a look at the chart below and let say your salary is $10,000 per month and annual bonus $50,000.
| Actual Income | Annual Income | CPF Contribution (20%) | |
|---|---|---|---|
| Ordinary Wage | $10,000/month | $10,000 x 12 = $120,000 | |
| Additional Wage | $60,000 | ||
| Total | $180,000 | $36,000 |
So we calculate the max CPF relief by $10,000 x 17 x 20% = $34,000. Therefore it is over the limit and $36,000-$34,000=$2,000 is taxable. Why I was ignoring this case? This is because the amount of salary is way beyond us now but it is a good point from mIng. You might need this in the future.
By the way, for your information, there is a relief that will automatically acted upon everyone which is the Earned Income Relief. This is not important. $1,000 will be reduced from your annual income if you are below 55 years old.
For this year onwards, local bank interest is not taxable under income tax anymore which I think is logic. Another way to invest and still avoiding income tax is to use CPF Investment Scheme. I still have some doubts regarding this issue but I will still write a bit and if it is incorrect I will edit them in the future.
Refering to Dividend, income distribution for CPF Investment Scheme and Supplymentary Retirement Scheme is not taxable. To make things not so complicated, we will only discuess CPF Investment Scheme today. As far as I know, income distribution from Unit Trust is taxable and Debt Securities is not taxable. To sum things up, please look at the table below:
| Source of Income | Taxable? |
|---|---|
| Local Bank Interest | No |
| Unit Trust | Yes |
| Debt Securities | No |
| CPF Investment Scheme | No |
| Real Estate Investment Trusts (REIT) | Yes |
If you notice almost all kind of investment here is taxable. As mentioned earlier, why putting everything into CPF? This is because you can use CPF to invest but the bad news is CPF is a black box. However, there are a lot of way you can ultilize CPF for living and be wise to use it. (There is bad rumours on CPF too which I don't want to mention here.)
As a conclusion on this income tax issue, always try to avoid it if you can and reduce it when you can't avoid. When you read Rich Dad Poor Dad, the author mentioned about buy property with business/company. It is a way to avoid taxes but I will not cover it here as this is what you need to know for time being. If anyone wish to write articles here, (I welcome you as long as it is related to our problem now) please drop me an email.
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