YOUR RMF AND THE LAW: KEEP ALL YOUR PAPERS IN ORDER

The great economist Adam Smith once outlined four canons of taxation, one of which is certainty, or as he put it: “The tax which each individual is bound to pay ought to be certain and not arbitrary.” This means that where the law denotes what tax should be collected from the taxpayer, there should be no interpretation required to expand the scope of the tax to be collected.

The same principle was applied recently in interpreting the scope of the conditions that the holder of a Retirement Mutual Fund (RMF) must meet to qualify for tax exemptions, so that the taxpayer’s rights will remain untouched insofar as the required conditions are fulfilled.

As most people know, an individual who invests in an RMF is eligible to claim some or all of the amount invested (including contributions to mutual funds and government pension funds, where applicable) when calculating personal taxable income. Under current regulations, the exemption is capped at 15% of annual income, or 500,000 baht per year, whichever is lower.

In order to maintain the right to claim the exemption, an individual must continue to purchase RMF units once a year in a minimum amount equal to 3% of annual income or 5,000 baht per year, whichever is greater, and must not skip a purchase for longer than one consecutive calendar year.

One of the most controversial conditions is that the investor must hold the RMF units for at least five years from the first day of purchase, and must not redeem the units until after he or she turns 55 years old. The same conditions apply in exempting the individual from tax on capital gains that may arise from redemption of the units.

The Revenue Department has long offered the straightforward interpretation that the five-year holding requirement, for investments made during all consecutive years, is counted from the “first day” that the very first RMF investment unit was purchased.

For instance, in one revenue ruling it advised that, where an investor started purchasing RMF units on Dec 30, 2010, and continued to purchase them every year until 2015, then sold all of them in 2016, the investor (already 55 years old at the time) had fulfilled the five-year holding period, as the first lot was purchased in 2010. Mind you, the same investor must restart counting the five-year holding period for any new RMF units purchased from 2016 onward.

Lately, another question arose as to whether the five-year holding requirement must also be applied to the portion of RMF investment units that have not been claimed for tax exemptions by an individual investor.

The case involved a woman who purchased her first lot of RMF units in 2002 and continued to purchase units every year until 2006. However, 10,653 units purchased in 2005 exceeded the limit allowable under the law for that year, so their value was not exempted. In 2006, the woman decided to sell these same 10,653 units for a gain. She agreed to pay tax on this portion, as no tax privilege had been granted under the RMF regulation.

However, the Revenue Department was not satisfied with the tax payment and informed the woman that, since she sold a portion of RMF units (even though they were non-exempt) before reaching the end of the five-year holding period, she was exposed to individual income tax on that portion but also forfeited her tax exemption for all units purchased between 2002 and 2006.

The court reviewed the legislation and noted that RMF tax exemptions were intended to encourage long-term retirement saving for those able to save more money than the minimum contribution required under the law to social security or other schemes. The exemption for units purchased was limited to 15% of annual income or 300,000 baht per year (at the time of the dispute), whichever was lower. An investor was free to buy units beyond that amount but would not be eligible for exemptions.

Thus, the court ruled: “If an individual would like to sell the portion of the RMF investment that exceeds the maximum amount allowable under the law, he or she should be able to do so before the advent of the five-year holding period.”

It went on to state that “since only a portion of the RMF investment in 2005 was claimed for the tax exemption, and the holding had been carried on, the excess could be sold without having to wait for five years, with the entitlement to tax incentives maintained for the unsold units”.

As for the capital gain that the woman earned from the sale of the units for which she had not claimed an exemption, the court ruled that they were subject to normal tax treatment.

Although this precedent case offers some relief to taxpayers, it raises a further question: In order for the above court interpretation to apply, does the taxpayer need to identify which RMF units were used for claiming exemptions and which units exceeded the limit and were sellable?

While the court did not pinpoint this identification issue, it turned out that the woman happened to be very well organised. She was able to identify the RMF units she had claimed and could sort them out from those she sold. This is a credit to the taxpayer, and one of the reasons for her victory.

The lesson for other RMF investors is clear: make sure you have all your documents in order at all times.

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th