Latest Malaysian Tax Scheme for ESPP is Stupid

If you do not know what ESPP is, you may skip this article.  Basically, ESPP stands for employee stock purchase plan. ESPP is one of the company’s compensation which allows you to purchase the company share with discount (e.g. 15%). Your company may or may not have this benefit and every company has slightly different way to implement this ESPP.

How this ESPP works is you can enroll this ESPP program for about let’s say 6 months. During this 6 months window, your company will deduct up to maximum certain percentage (e.g. 10%) of your salary every month and use this money to purchase the company share at the 6th month - the closing window (e.g. June 30) based on the “Subscription Value” with discount (e.g. 15%).

Let’s assume number of shares you have purchased with this ESPP is 50 shares and see the following example to illustrate the previous and the latest tax scheme for ESPP:

Subscription value                       = $30
Purchase price at 15% discount   = $30 X 0.85% = $25.5
Stock price on June 30 (highest)  = $51
Stock price on June 30 (lowest)   = $49
Stock price on June 30 (average) = $50
No. of shares purchased              = 50



Previous Tax Scheme for ESPP

Based on the previous tax scheme for ESPP, the taxable gain  is based on the discount (e.g. 15%) the company gives you.  In this example, the taxable gain will be $225 -  see the calculation below. This tax scheme makes a lot of sense because if the company doesn't offer you the discount, you will still need to purchase the share price at $30 not at $25.5  Because of the 15% discount, $225 is the extra money your company gives to you. Thus,  $225 to be considered as taxable income makes a lot of sense.

The taxable gain calculation based on previous tax scheme:
   = ($30 – $25.5) X 50 or ($30 X 15%) X 50
   = $225


Latest Tax Scheme for ESPP

However based on the latest tax scheme for ESPP, the taxable gain is no longer based on the 15% discount. but based on the average price of the last day of your ESPP closing window (e.g. 30 June). In this example, the average price on June 30 is $50. So it is automatically assumed that you gain $50-$25.5 = $24.5 although you didn't sell the share at June 30. Huh, what a crap?

The taxable gain calculation based on latest tax scheme:
   = ($50 – $25.5) X 50
   = $1225

So technically speaking, if you sell your ESPP share later at price lower than $50, you're actually being taxed more. Well, you may argue that what if you sell higher, then you're getting taxed less. Isn't that a good thing?Well, don't you know that capital gain in Malaysia is not taxable? If it is not taxable, why I sell higher, then I need to be taxed more? Think again!


Conclusion

Honestly if you ask me, there is something wrong with the latest Malaysian tax scheme for ESPP. The previous tax scheme is  reasonable but definitely not the latest. Although similar tax scheme is being applied to the restricted stock units (RSU) and stock options, I'm still okay with that because we do not fork out our own money. It is just like you're getting less compensation, not really that a big deal. However for ESPP, we basically fork out our OWN money to purchase the shares and now you simply tax me. This is not acceptable!

Well, what can you do? You can protest to the government or  just be alert of the price at the ESPP closing window (e.g. June 30) and if the price is high, you may want to consider a quick sell rather than keep it. I know this is suck...

[Update: 19 August 2011]: Let's look at the comment in this post from "HS Ooi". He gave a very good explanation why market gain is classified as the compensation instead of capital gain. Thus, it should be taxed. What do you think?


P/S: By the way, please don't confuse that you can claim back your money if your sell your ESPP share at lower price. I"m talking about taxable gain here and not the tax deduction in your monthly payslip. If there is extra tax deduction, you can only claim them back but this is not the case. The $1225 is reported as a taxable income in your EA form and it is part of your income.

Veterans, Baby Boomers, Gen X, Y and Z

I do not know about this generation stuff after I have gone through a training. So I think that is worth to share with you all about these 5 generations (i.e. Veterans, Baby Boomers, Gen X, Gen Y and Gen Z). I think it is important to understand the behavior or characteristics of these generations which may help you in all aspects. Here you go the high-level summary of all these 5 generations:


High-Level Summary

	Veterans	Baby Boomers	Gen X	Gen Y	Gen Z
Born Year	< 1946	> 1946 < 1964	>1965 <1979	>1980 <1995	> 1995
Behavior	Very conservative and discipline                   Very respect law and order	Very optimistic and work-centric           Believe employment is for a life.	Well educated generation             Not interested in long-term careers	Very technology wise          Expect great workplace flexibility	Never known a life without the internet    Communicate through social network.

Veterans are very comfortable with directive, command and control management style. They prefer live to be predictable and not willing to change and not flexible. This is probably due to the effect of world war I and world war II because they have seen the worst.

Baby boomers tend to be very optimistic and work-centric. They will never think the employer will fire them. The reason why it is being called as baby boomers in this generation was due to the sudden increase of birth rates after the world war II.

Gen X has the “slacker” or “lazy” mentality because they born with almost everything ready. They are the first generation that has gone through day care, tuition and etc. Thus, most of the Gen X people are well educated. Loyalty is no longer in their mind, they change job or career frequently as long as they;’re unhappy. Work-life balance was invented by this generation!

Gen Y is very technology wise. They love gadget! They are way optimistic than the previous generations. They really want to do something that they really enjoy. Similar to Gen X but more extreme, they don’t give a damn about loyalty at all.

Gen Z is also know as Internet Generation. Most communication are gone through social network (e.g. Facebook, Twitter) and they do not understand or have not experienced the life without an internet.


Conclusion

Well, there is no hard rule. Let’s say if you’re Gen X, you must behave like Gen X. From one generation to another, they are always an overlap. Let’s take myself as an example – I belong to Gen X but I do not change job often, does that mean I”m baby boomer? At the same time ,I love gadget every much too! Well, I love to communicate through social network as well! It seems like I overlap 4 generations!

What it really means here is I can understand all types of generations and be part of them. lol When you’re one of them, it is easier for you to communicate or manage them.

Which generation you belong to? I bet you’re from Gen Y. : ) If wrong, then it should be Gen X! :) lol Hope article is useful to you!

My Boss is Weak In Technical

My boss doesn’t know what I”m doing! My boss is lack of technical skills! I lazy to talk to my boss because he is weak in technical. A good boss supposes to know better than me, why he still ask me? Does this sound familiar to you? Well before you complain, let’s look at what are the management skills needed from a single contributor to first-line, middle and top managers in a company.

Notes

1. Technical skill is a skill to perform each single detailed tasks. Human skill a skill to deal with human and resources to accomplish the company’s goals. Conceptual skill is a skill to understand the business need and set directions for the company.
2. The area of the shape tells you how much the role should spend their time in technical, human and conceptual. The total area for each role or shape should be the same. We have only 24 hours a day. :)

Is My boss Really Weak in Technical or….

Well I agree your boss is weak in technical. So you expect your boss should be better than you since he/she has worked so many years in the industry? If this is the case, you’re really in deep trouble because when your boss is better than you technically, you’re actually underperformed. Let’s look at the diagram above, a first-line manager supposes to spend less time in technical than a single contributor. How could you expect your manager is better than you since he spend less time than you? Yes, you’re underperformed!

If you look at the other way, let’s assume you’re not underperformed and you boss is really damn good in technical. You should start asking if your immediate boss focus on the right things? He should spend more on the human side for the skills. Does he do that? That is the reason why not all managers are suitable to be managers. In this case he is probably better to stay in the technical path (e.g. group lead, team lead) rather than in management path.

So think about it again. Is your boss really week in technical? It is expected your boss has less technical knowledge than you, and your role to explain to him and make sure he has the right amount of detail information.


Discussion

That is the general understanding of management skills. The higher you go, the less technical you’re as you’re now moving towards more human and conceptual management skills. Please set at least the right expectation to your manager. Having said so, one may still challenges this statement. The first argument of this is does this also apply to a technology company? Basically in a technology company, even managers are expected to be strong in technical? Is that true?

I myself work in a technology company and I have seen middle managers are damn good in technical and also both human and conceptual skills? Those are usually the outstanding manager. Is the expectation now set to the manager in a technology company somehow different? If that is the case, looks like being a manager in a technology company is a lot more harder. What do you think?

Simple Way to Explain Black Swan Theory (Book Review)

You may have heard before the “Black Swan” movie but have you heard of the “Back Swan theory”? At first I thought the movie talks about the “Black Sawn theory". So I went to watch it. But after watching it, it turned out that there are 2 independent subjects. One talks about psychology and another one is economy. :)

The black swan in fact is a book which was written by Nassim Nicholas Taleb, a practitioner of mathematical finance. The book was published in 2007.  Yes, I know it is old book but I only have a chance to read it now after introduced by my VP in few years back. However, I did not finish reading the book simply because I find this book is too difficult to understand. A very simple idea but the author makes it so complicated for layman to understand. I do not know why. Perhaps this is called “expert”?  or it is probably not meant for layman to read. So if you think you’re layman like me, read my following post will do or else you can go to the bookstore to purchase this book for in-depth understanding.

What is Black Swan Theory?

Let’s understand what is black swan. First of all, it is an event and not a bird! lol. The reason why black swan is used is an event is because before discovery of Australia, all swans were convinced to be white. It was then proven wrong. Does this sound familiar to you? That is what happen to the subprime mortgage crisis. Real estate were convinced to be the best reliable asset but it was then proven wrong again. The black swan is used to explain such phenomena that is unpredictable and creates major impact. The black swan event term was then also referred as the Black Sawn theory or the theory of black swan event.


Can You Predict Black Swan Event?

Well if the answer is can, then it is no longer called Black Swan. :) Probably the answer is yes for the economy in 20 years ago. One could still possible to predict future using statistic based on historical data. However during this 21’s century,  this is no longer be true. Statistics has failed!

2 reasons why statistic has failed. The first reason - based on the statistics calculation or any type of economy’s formula, the probability of such black swan event is always very small and nearly impossible to happen. Another words, the formula has failed to model the economy. The second reason - people have build-in physiological biases that make them unable to predict.  For example, I have been getting salary since day one of working and never going to have pay cut for 10 years. Thus, I predict my future will NOT have pay cut as well regardless of my job performance. The technical term for this prediction is called “Inductive Reasoning”.


What is the solution?

At first when I was reading this book, I expected the author will give a better solution to replace the existing statistic formula to model the economy. Unfortunately, I don’t think the book offers such solution. Offering advice, probably yes. This also makes the whole book is completely useless in my opinion at least to me The reason is I have already known all these facts since the day one I learned about physics:

1. Whatever proven right today, doesn’t mean it will be right forever. It can be proven wrong tomorrow.
2. Whatever proven wrong tomorrow, doesn’t mean it will NOT be proven right again.
3. Whatever proven wrong today, doesn't mean it will be wrong forever. It can be proven right tomorrow.
4. Whatever proven right tomorrow, doesn’t mean it will NOT be proven wrong again.

This books basically in a way tells the same thing that I have learned since my secondary school.:)


What are the takeaways?

You may ask what are the takeaways then? If you ask me, I only have 2. The first thing is you should not deny the black swan events. It happens to everyone. Another important thing to understand is, a black swan event to me might not be a black swan event to you. For example, getting pay cut is a Black Swan event (i.e. unpredictable event ) to me while it could be White Swan event (i.e. predictable event) to you. This is just an example. Black swan event could happen in personal too and not always global.

The second takeaway is plan for the worst case. What could be the black swan event for you? You lost a job tomorrow? You get a job demotion? Property house price bubble burst? Car accident? Something serious happen to your family? Your health problem? You should not be too optimistic but always identify your worst case scenario. Once your worst case is identified, plan for a defense strategy. This is also called "Personal Financial Planning"! :) :) :)


Summary

I honestly do not really understand why this book get the New York Times Bestseller. It is definitely not a book for layman. The content of this book is also questionable as the ideas that being brought up in this book is really nothing new. Everyone knows that  the statistic’s formula is just a prediction and it could be wrong. Not to talk about the human’s greediness, whatever statistic data that you have seen out there could be designed to blind you from the truth too based on their own biasness. Basically smart people will know all these technical analysis based on statistic cannot be trusted and you have to use it at your own risk.

This book has 444 pages with plenty of words and very less graphic or diagram explanation that makes me really no mood to continue reading. The worst part of this book is it explains a very simple idea with 444 pages and I could summarize these 444 pages into one sentence below:

“No one can predict the future, so you have to plan for the worst case and do not over optimistic.”

P/S: I have no intention to shoot the author of this book and I was just giving my opinion from a layman reader’s perspective. If you do think this book is good or beneficial to read especially for layman, I’m happy to hear your opinion.

How Do Insurance Companies Determine Your Life Insurance Premium?

Understanding how life insurance companies determine their premium rates can help you get better life insurance rates!
Life insurance companies work with actuaries and underwriters to calculate the risk of insuring your life. There are several factors they consider that influence these rates. You may find that some of these factors are modifiable in your life. In order to fall into a premium classification that offers better rates, all you have to do is work on those modifiable factors.


Life Insurance Rates

Life insurance is a business, and in order for any business to remain healthy, there is a reasonable amount of profit that must be made. Life insurance companies profit from probabilities. A major factor they consider is your probability of dying soon. Looking at your personal profile, life insurance underwriters determine the probable age you will die. If you’re likely to die soon, they will charge you a higher premium rate. Conversely, if you are likely to live a long life, your premium rates will be much lower. To make it simple, life insurance companies will divide people into at least four different groups based on their personal profile and consequent risk of death. In descending order of preference, these are usually referred to as:

• Best Preferred
• Preferred
• Standard
• Smokers

Factors that determine your life insurance rates

Age
Mortality rates are tools that underwriters use to determine the risk of insuring your life. For this reason, those who are young usually get the best life insurance rates. The older you are, the more likely you are to have health concerns. The premiums for a 20-year old will be significantly higher than premiums for a 65-year old, even in good health. Buy life insurance when you are young and lock those rates in for a long-term period!

Health
The second most important factor that determines your premiums is your health. Those who are young, and in top health, will be offered the Best Preferred rates. By purchasing a level-term life insurance policy at an early age you can lock in those rates for the entire term period.

Most life insurance companies require you to undergo a medical examination that is conducted by a company-appointed medical officer. Being slightly overweight or having a higher than normal blood pressure can knock you down to the next premium rate class. Other factors that are considered are high cholesterol counts, diabetes, any medication taken regularly, and mental health. A company may also look at your family health history to check whether there are any genetic dispositions. Health may not always be an area we can control, but following a good diet, incorporating a daily exercise regime and practicing weight management may help!

Your Occupation
Life insurance companies check out the kind of job you do and your workplace environment. If your job exposes you to dangerous health risks, requires extensive travel, or is considered a high-stress job, be prepared for higher premium rates. A safer job would attract low cost life insurance rates.

Your Hobbies
You may not think it matters, but the type of hobbies you engage in may be considered a risk to your life. Some of these hobbies may include skiing, bungee jumping, rock climbing, scuba diving, car racing, or any other such extreme sports. Engaging in one or more of these activities on a regular basis may cost you in terms of premiums that you will need to pay.

Smoking
If you are a tobacco user, you will qualify for smokers’ rates. Tobacco, in any form, is dangerous to health, and will substantially increase your premium rates by 20 to 30 percent. To give you an incentive to quit smoking, some companies will offer you better rates if you can prove you have quit smoking for at least a year.

Your Credit Card Score
What does your credit score have to with your life insurance rates? The way you handle your money may give life insurance companies a little more insight on your personality traits. If you’re rash with your spending, you may be applying same principle to your health.


It must be noted that if your risk of death is extremely high, a life insurance company holds the right to deny you any coverage. However, you need to remember that just because one life insurance company gives you standard rates, this does not mean that another life insurance company will not hike you up to preferred class. While life insurance companies generally use the same criteria to determine life insurance rates, they may specialize in some areas in order to give them a competitive edge over other companies. For instance, most life insurance companies will charge you higher premiums if your cholesterol is above normal. But, there are some life insurance companies that will combine this fact with other factors in your life, such as your weight, age, job and lifestyle. If all other factors are favorable, you may be eligible for better rates these life insurance companies.

In many cases, it is possible to obtain better premium rates by kicking the smoking habit, losing a few pounds, or even changing jobs or hobbies!


Compare Life Insurance Rates

Online life insurance quote providers have made it easier than ever to compare life insurance rates of top-rated life insurance companies all in one go! Their huge database instantly locates life insurance carriers that specialize in the weak factors of your personal profile, making it easy for you to obtain the best life insurance quote that suits your personal needs!


This is a guest post by Denise Mancini.