We discuss the benefits and costs of various tax changes, subsidy adjustments and incentives tabled during Budget 2025.
In Part 1, we cover taxes related to dividend income, housing loan, medical treatments, and insurance, as well as stamp duty introduction/exemptions.
2% tax on dividend income >RM100,000 annually
Effective from Year of Assessment (YA) 2025, a new tax framework will impose a 2% tax on individual taxpayers whose dividend income exceeds RM100,000 annually.
On the positive side, one of the most compelling advantages of this tax policy is its potential to increase government revenue. By targeting higher-income dividend recipients, the government stands to generate additional funds that can be allocated towards essential public services, infrastructure projects, and social programs. This influx of revenue could be pivotal in addressing societal needs and enhancing the quality of life for the broader population.
Moreover, the tax adheres to progressive taxation principles, which aim to redistribute wealth more equitably within society. By placing a financial burden on those who can afford it, the policy could contribute to reducing income inequality, ultimately fostering a more balanced economic environment. Furthermore, the tax structure includes specific exemptions for dividends from companies with pioneer status and reinvestment allowances.
This provision encourages businesses to reinvest their profits rather than distribute them as dividends, potentially leading to economic growth and job creation. Additionally, the various exemptions for specific dividend sources, such as foreign dividends, cooperatives, and closed-end funds, can help maintain investor confidence and attract both domestic and foreign investments. This strategy is crucial for stimulating sectors that are vital to economic stability and growth, thus creating a more favorable investment climate.
However, the new tax also presents several challenges that could undermine its intended benefits.
One significant concern is that the introduction of a tax on dividends may deter some investors from purchasing stocks, particularly those that offer high yields. The diminished after-tax returns could discourage investment in dividend-generating assets, potentially leading to reduced market activity and lower stock prices. Moreover, the administrative complexity of implementing and enforcing this tax may create additional burdens for both the tax authority and individual taxpayers. Investors will need to meticulously track their dividend income, resulting in increased compliance costs that could outweigh the benefits of the tax.
Another critical point to consider is the potential financial strain on retirees, many of whom rely on dividend income for their living expenses. The new tax could disproportionately impact this demographic, creating challenges for individuals who depend on stable income from investments to maintain their quality of life. Additionally, while the tax targets high-income earners, its overall impact on addressing broader economic challenges faced by lower-income populations may be limited. This raises questions about the tax’s effectiveness in promoting economic equity.
Lastly, the uncertainty surrounding tax changes can lead to market volatility, as investors may react to potential impacts on their returns. Such volatility could create short-term instability in the stock market, affecting overall investor sentiment and confidence.
Despite the overarching tax structure, several critical exemptions are in place to ensure that certain dividend recipients are not adversely affected. For instance, dividends received from foreign sources are exempt, acknowledging the importance of international investments and the potential for economic growth through foreign capital inflows. Additionally, dividends derived from companies enjoying pioneer status and reinvestment allowances are excluded from this tax, as these incentives aim to promote industrial development and encourage reinvestment in key sectors.
Further exemptions encompass dividends distributed by cooperatives, which play a vital role in fostering community-driven economic activities, and those from closed-end funds, which are typically less liquid investment vehicles that serve niche markets. Shipping companies that benefit from tax exemptions are also included in this list, reflecting the government’s support for the maritime industry, crucial for trade and economic connectivity. Furthermore, dividends received by residents from Labuan entities, known for their attractive tax regimes, are exempt, ensuring that investors in these jurisdictions are not deterred.
Importantly, the new tax policy delineates specific distributions that fall outside its scope. Distributions from the Employees Provident Fund (EPF), Amanah Saham Nasional Bumiputera (ASNB), Lembaga Tabung Angkatan Tentera (LTAT), and unit trusts are explicitly excluded, safeguarding the interests of those who rely on these vehicles for retirement savings and collective investment strategies. By carving out these exemptions, the government aims to strike a balance between increasing tax revenue from higher earners while protecting the interests of lower-income and middle-income investors, thereby fostering a more equitable investment landscape.
Up to RM7,000 tax relief for interest paid on housing loan
The government is poised to implement a new tax relief program designed to provide financial assistance to first-time residential home buyers by offering deductions on the interest paid on housing loans. This initiative aims to facilitate homeownership, particularly among lower- to middle-income families, by reducing the overall cost of purchasing a home.
Under this program, eligible homeowners can claim a maximum tax relief of RM7,000 per Year of Assessment (YA) for properties valued at RM500,000 or less. For those purchasing homes priced between RM500,001 and RM750,000, the tax relief is capped at RM5,000 per YA.
The tax relief can be claimed for three consecutive Years of Assessment, beginning from the first year in which the homeowner starts making interest payments. This provision allows first-time buyers to benefit financially during the crucial early years of homeownership when the burden of mortgage repayments can be particularly heavy.
However, the program also has its limitations. The eligibility criteria, such as property price limits and the requirement that homes cannot be income-generating, may exclude some potential buyers, particularly those looking to invest in rental properties or those purchasing more expensive homes. This stipulation ensures that the relief is strictly targeted at individuals purchasing a home for personal use as their primary residence, thereby promoting stability within the community and discouraging speculative investment in residential properties.
Additionally, the eligibility period for claiming this tax relief is strictly defined: the sales and purchase agreement must be executed within the time frame of 1 January 2025 to 31 December 2027. This establishes a clear window for prospective buyers, encouraging them to make informed decisions about home purchases within this specified period.
In cases where the tax relief applies to multiple individuals (for instance, in joint ownership scenarios), the relief will be apportioned based on the amount of interest each individual has paid. This provision ensures fairness and transparency in the distribution of benefits, allowing all eligible co-owners to receive a proportionate share of the relief based on their contributions to the mortgage payments.
Overall, this new tax relief initiative represents a strategic effort by the government to enhance accessibility to homeownership for first-time buyers, particularly in the affordable housing sector. By providing substantial financial relief based on the property value, the program aims to alleviate the financial strain of housing loans, foster greater participation in the housing market, and ultimately contribute to the economic stability of households.
This targeted support not only benefits individual homeowners but also has the potential to stimulate the broader housing market, encouraging development and investment in residential properties during a critical period for the sector.
Medical treatment, medical and education insurance tax relief expanded
The annual tax relief available for medical treatment expenses for taxpayers, their spouses, and children, which is currently capped at RM10,000, is set to be reviewed to enhance its benefits. As part of this review, the scope of tax relief specifically allocated for full medical check-ups, mental health consultations, and COVID-19 detection tests will be expanded from RM1,000 to encompass a broader range of medical services. This includes adding influenza test kits, self-testing medical devices, and various fees associated with disease detection examinations, thereby promoting greater accessibility to essential healthcare services.
Moreover, the definition of eligible medical expenses will be extended to incorporate payments made by taxpayers under medical and health insurance policies, as well as takaful products that feature co-payment arrangements. This adjustment recognizes the financial contributions taxpayers make toward their healthcare coverage and seeks to alleviate some of the financial burdens associated with medical expenses.
In addition, the current limit for treatment and rehabilitation expenses for children diagnosed with learning disabilities will be increased from RM4,000 to RM6,000, allowing for more comprehensive support for families seeking specialized care for their children.
Lastly, the annual tax relief for premiums paid on medical and education insurance policies will see an increase from RM3,000 to RM4,000. This increase aims to encourage more families to invest in insurance coverage for both medical and educational needs, ultimately contributing to improved health and educational outcomes for children. Collectively, these changes are designed to enhance the financial support provided to taxpayers and their families, promoting better health and well-being within the community.
Relief for persons with disabilities increased
The government has announced an increase in the annual tax relief for Persons with Disabilities, aimed at providing greater financial support to affected individuals and their families. For taxpayers who are classified as Persons with Disabilities, the tax relief will rise from RM6,000 to RM7,000, allowing them to retain more of their income. Additionally, the relief available for a spouse of a disabled individual will see an increase from RM5,000 to RM6,000, acknowledging the financial strain that caregiving can entail. Furthermore, the tax relief for unmarried children with disabilities will experience a significant boost, going from RM6,000 to RM8,000. This increase is a recognition of the added expenses that families often face when supporting a child with disabilities, and it is intended to ease the financial burden while promoting inclusivity and support for individuals with disabilities and their families.
Stamp duty for life insurance policy or family takaful certificate
The introduction of a fixed stamp duty rate for the deed of assignment of life insurance policies or family takaful certificates, ranging from RM10 to RM1,000, brings both advantages and disadvantages. On the positive side, this change simplifies the process for individuals transferring policies as gifts or through a trustee, reducing the financial burden associated with ad-valorem rates, which can vary significantly based on the policy’s value.
This fixed rate promotes accessibility, encouraging more individuals to assign their policies without the fear of incurring high costs, thus potentially increasing the number of people who consider life insurance and family takaful as part of their estate planning. However, the downside could be that the fixed rate may not proportionately reflect the value of higher-value policies, leading to a perceived inequity where wealthier individuals benefit more from the lower fees, while those with modest means may still feel the impact of the costs. Additionally, this system might lead to a loss of revenue for the government, which typically collects higher duties on more valuable transactions, potentially affecting public services funded by these taxes.
Overall, while this policy change is likely to streamline transactions and make life insurance assignments more financially manageable for many, it also raises concerns about equity and revenue implications.
Stamp duty exemption on SPM loans and IEO agreements up to RM100,000
The stamp duty exemption on Skim Pembiayaan Mikro (SPM) loans and certain Initial Exchange Offering (IEO) financing agreements is a significant initiative aimed at supporting micro, small, and medium enterprises (MSMEs) in Malaysia. The exemption on SPM loans applies to amounts up to RM100,000, which is an increase from the previous threshold of RM50,000. To be eligible, loans must be approved by the National Small and Medium Enterprises Development Council, a governmental body responsible for overseeing the development of MSMEs in the country. This exemption will take effect for loan or financing agreements executed on or after 1 January 2025. The increase in the exempted loan amount is designed to enhance access to financing for smaller enterprises, enabling them to secure the necessary capital for operations, expansion, or recovery.
In addition, the exemption extends to loan or financing agreements executed by MSMEs and investors through the IEO platform, which allows businesses to issue tokens in exchange for funds via cryptocurrency exchanges. This aspect of the exemption is applicable to agreements executed between 1 January 2025 and 31 December 2026. By exempting these agreements from stamp duty, the government aims to encourage investment in innovative financing methods that leverage digital assets and blockchain technology, aligning with global trends toward digitization and the evolving financial landscape.
The overall impact of these exemptions is expected to be substantial, as they will increase access to financing for MSMEs, which are crucial to Malaysia’s economic development. By facilitating greater access to financial resources, these initiatives not only support traditional business operations but also encourage the exploration of digital financing solutions, reflecting an understanding of the importance of fintech in the modern economy. Moreover, the removal of stamp duty costs allows businesses to retain more of their funds for investment and operational expenses, leading to enhanced sustainability and growth.
Overall, these strategic efforts signal a progressive approach by the Malaysian government to bolster the MSME sector, promote financial inclusivity, and contribute positively to the national economy, with the changes set to take effect in 2025.
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