Sunday, August 24, 2008

It's all about choices


It's all about choices


From my experience, people often feel like they aren't in control of how they are taxed. They simply pay what they are told to. This is the wrong mindset. You do have options. The law gives us avenues to lower our tax burden but you have to be active in pursuing it. This is particularly true when it comes to withholding tax.

Payers of certain types of income are required to withhold a percentage of the income for tax purposes. Examples of these income types include:

- Interest (subject to withholding tax at 15 per cent)

- Dividends (subject to withholding tax at 10 per cent)

- Income from the sale of immovable property (subject to withholding tax at the personal income tax rate after special deductions)

Thus, for every 100 baht you earn, say dividend, the amount you actually receive is 90 baht. The other 10 baht is remitted as tax. Since the tax is withheld at the source, which is before you see a single satang, there is really nothing you can do about this.

But where you have control is whether to include it as assessable income. If you choose not to, then the amount withheld becomes final tax and you are not obligated to pay additional taxes on it. Alternatively, you can use the 10 baht as credit towards your total tax obligation at the end of the year. The key is to know when to include and when not to.

Take this example: Let's assume you are single and your salary plus bonus equal to 3.5 million per year. Additionally, you also earn 400,000 baht in interest from bank deposits. As mentioned above, the bank would be obligated withhold 15 per cent of the interest payment, or 60,000 baht. At the year end, your tax calculation for your salary and bonus (not including the interest) would be:

With only your salary and bonus you would already be in the 30 per cent tax bracket. If you include the 400,000 baht interest, it would be taxed at 30 per cent. That means you would pay an additional 120,000 baht on top of the 858,000 baht! Obviously, this is a case where you are better off with the original 15 per cent withholding tax as the final tax and should not include the interest as assessable income.

At the other end of the spectrum is the example of my wife. We did not register our marriage for family and tax planning reasons. (Before you file those divorce papers, note that whether or not it will affect your taxes will vary significantly from case to case). Back to my wife - she has the formidable task of raising me and our two daughters, full-time. And while she undoubtedly has the "tougher" job, this is not reflected in our income. Last year, she earned approximately 400,000 baht in interest and an additional 300,000 baht in dividends from investments. As such, the tax withheld was 60,000 baht and 30,000 baht respectively. If she had chosen not to file a return, she would have ended up paying 90,000 baht in taxes. However, based on some incredibly valuable advice? dispensed free-of-charge, she did in fact file a return and chose to include both the interest and dividends in her tax calculation as demonstrated below:

As you may notice, her amount of tax payable was negative. That meant a refund of Baht 129,857! Upon this piece of good news I eagerly reminded her that, registered or not, we were married and thus the money was "ours". We eventually used "our" money to finance a family trip during the summer. A win-win situation.

Lesson learned

Tax payers should be aware the options available to them under the law and learn what the best choices are given their situation and at the time these options present themselves.

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