Start Your Tax-free Investment Early

Some local investments need time to get tax privileges

To protect your wealth, you need to find all legal avenues for enhancing your investment return. The key to success is to spend sensibly, use all the tax-deductible items that you are given, and invest prudently in tax-free vehicles.

The Thai government has given individual investors some tax incentives when investing in a number of instruments. The most common are contractual bank deposits, stocks listed on the SET and mutual funds.

Contractual bank deposit accounts

While the Revenue Department takes away 15% of your interest earned from normal bank deposit accounts as withholding tax, it gives a break on some accounts.

Interests earned from contractual bank deposit accounts are tax-free. These require you to place deposits equally every month for 24 months and prohibit you from withdrawing early. A number of local banks offer this type of accounts and even give you a higher interest than normal fixed deposit rates.

Its only drawback is that the maximum you can deposit is 25,000 Baht per month or 600,000 Baht for the whole program. That is, you save only a few thousand Baht per year on taxes. Clearly, the government simply does not want to give the rich all the tax benefits.

Stocks

When you invest in stocks listed on the SET, profits from sales of those stocks are tax-free. However, this does not apply to unlisted stocks or listed stocks that you do not trade on the SET. So, when you actually sell or transfer shares to someone else, you have to be careful with the price you declare as the selling price.

In addition to the capital gains, dividends that you receive from stocks can also be used as tax credits. That is, when you include the dividends as part of your taxable income, you may use three-seventh of them as tax credits, which will subsequently reduce your overall tax burden.

While most people think that investments in the Thai stock market are risky, they tend to overlook some companies that continue to be profitable and pay high dividends. These stocks, if held for a medium-to-long term, can provide yields that outperform the bank deposit rates, and give you a tax break as well. You should also know that most listed companies pay dividends in April and May.

Note that you will only reap this benefit if your overall disposable income is below the 37% tax bracket. If you belong to the top-most bracket, you will be indifferent whether you include the dividend income as part of your taxable income or you don’t.

Mutual funds

Mutual funds are forms of indirect investment. That is, you may put your money in a bank or buy government bonds and corporate bonds directly. However, such direct investments don’t give you any tax breaks – you still have to pay 15% withholding tax on the interests and discounts that you receive from those instruments.

Investment in those assets through mutual funds gives you a tax-free status. Mutual funds in Thailand can transfer the tax-free interests that they receive into a rise in their prices, or NAVs, which is also tax-free for individual investors.

This is why fixed income mutual funds have become more popular in the past one year, even though it carries higher risks than bank deposits. Most high-net-worth individuals find that they can save a lot of taxes by investing in bonds and other money market instruments through these funds.

It is quite ironic that such investment vehicle, which is originally created for small, inexperienced investors to pool their money together to become a large, diversified investment portfolio, is now owned mostly by wealthy, experienced investors. The first group often lacks understanding of the product and neglects its advantages whilst the latter has used it to maximize benefits.

Whether you are a small-time investor or a wealthy investor, it is important to always realize the importance of well-planned investment strategies. Remember that you have to always evaluate your risk profile and investment goals before deciding on your asset allocation. While investment in Thailand is still limited, there are a few tax-free possibilities for you.

Reprinted with modification from 'Money Matters', a weekly column written by Reungvit Nandhabiwat, former managing director of AYF, for the Bangkok Post.

January 10, 2001