Sunday 7th November, 2004


Save before taxman’s take

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Money Matters
with Raziah Ahmed

In the Christian tradition, some 2,000 years ago, one of the greatest women to walk the earth, the Virgin Mary (may God bless her), journeyed to Bethlehem, for the express purpose of paying taxes.

History also records that in the Arabian peninsular, taxes were paid to the “king” based on an assessment of the animals owned by herdsmen, and such money was used to feed poor pilgrims. The fact is that taxation has always served a social function.

More recently, taxation serves as revenue for government, to fund services and infrastructure for communities. Income tax is what is called a progressive tax. This is a tax in which the amount levied increases more than proportionately, as the amount of income increases. This situation poses a particular difficulty since the more one earns the more one pays, and the net increase in “take home,” is significantly diluted.

The best money to save is “pre-tax” dollars. This is the subtle art of saving the money before any tax is levied upon it. Pension plans, long-term savings plans, and other forms of tax incentives allow the consumer to save money before any tax is removed. These are usually called “tax deductibles.” Another form of savings is “tax credits.” These are essentially reimbursements of taxes already deducted, on the basis of participation, typically in schemes that support Government policy.

In today’s local market, the average return on pre-tax dollars, for an individual annuity is about nine per cent. This is significantly way above the return on savings accounts and CD’s, which average two per cent to five per cent . But what is more attractive about such individual annuities is the overall return, in light of the Tax Refund claims.

If the consumer claims a 30 per cent refund on his contribution, and adds to that the per annum return of nine per cent, you can see the potential for some exponential growth in saving.

For example, if you contribute $10,000 for the year into an individual annuity, and you earn a nine per cent return, plus a 30 per cent refund on contributions, you realise $3,000 in refunds and $900 in per annum earnings, totalling an earning of $3,900 in approximately one year.

Without the annuity, you will pay tax on the $10,000 at 30 per cent , and end up with $7,000. Participation in the tax shelter allows you to achieve your savings goals faster.

Current tax laws also allow a percentage of such individual annuity funds to be used by first-time homeowners to assist in the purchase of homes.

Taxation does serve a social function, and the need to assist the poor is inherent, but you should reduce your taxation if possible.

There are two concepts in tax law, relevant today, since our local revenue service, BIR, has been running newspaper ads on the subject. These are known as the doctrine of constructive receipt and the economic benefit theory.

In 167 BC, the infamous “publicans, were a band of “tax farmers” who worked for the provincial governors, seeking to collect taxes from the people, above and beyond what was due. They then used the money to buy up grain at a low rate at harvest time, and trade it again at high prices in times of shortage.

There is a lesson here: the tax collectors may be involved in subterfuge, but the example for us to follow is that of the great lady who journeyed to pay the tax.

We have been chosen to pay for welfare, yes, but we need to avoid collapsing into the welfare net ourselves, for mangers and stables are not common today, and wise men bearing gifts are an illusion.

Next week—economic benefit theory.

n Raziah Ahmed is a registered financial consultant.



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