Active verses passive income from an income tax perspective

[gautam]

http://www.todayonline.com/singapore/doc...ax-evasion


We read in the newspapers every now and then about high earning professionals, like doctors and lawyers, and business owners who earn a high income, under declaring their income in order to pay less tax.

Compare and contrast that with income earned from dividends from investments.

Active income
1) its actually trading active time from waking hours for money. it is harder to earn usually.
2) there is usually a limit as to how much money one can make with his time available
3) it is taxable. part of this hard earned money goes to the government.

Passive income
1) it is usually easy to earn, since it is passive. The cheques comes in every now and then.
2) taxed already at company level. So no need to pay further tax.
3) no limit as to how much one can make.
4) no need to trade time for money.


With the above considerations, sometimes I can understand why even highly educated people go on the wrong side of the law. Its human nature to "protect" their hard earned money, money earned through their blood sweat and tears. Alas its a wrong thing to do.

any forummers have any comments or any other thing to add?

[opmi]

In my view, only passive income is FD. The rest need some effort.

Marketed 'passive income' schemes are usually lousy. Especially those that return capital in form
of 'distributions' or 'dividends'. Basically paying someone to manage cashflow for you. Hahaha.

For passive income to make a difference to lifestyle, the capital base must be big enough or returns must be high enough.
high returns may not mean high risks. Once in a while, can pick 1 or 2 'durians'.

[corydorus]

Passive income like FD can be a personal calamity. Just asks those savers who lost significant of their deposits. You need to monitor everything you invest imo and control your risk exposure. Passive income to me can be fixed or % amount of expected dividends. Eg. Reits, PS, bonds, treasury.

[specuvestor]

I think the point that OPMI brought up is very important... though we are Outside Passive Minority Investors, it actually takes a lot of effort to generate passive returns.

To me the difference between active and passive return is that the latter is scalable. The former requires your presence but both requires effort. Being a CEO of the company earning $5m is active return, but you can only be CEO of one company, but you can be shareholder of multiple businesses employing people smarter than you to do the work.

That's why most of the time I advise people to invest in index funds if they don't want to make an effort. Active investing is not for everyone.

[opmi]

Passive income like FD can be a personal calamity. Just asks those savers who lost significant of their deposits. You need to monitor everything you invest imo and control your risk exposure. Passive income to me can be fixed or % amount of expected dividends. Eg. Reits, PS, bonds, treasury.

You mean structured deposits. Not fixed deposits (FD).

Yes. you need to monitor where your money is invested. No one is going
to look after it except yourself. Thats why no real passive income.

[pianist]

like to ask is it necessary to obtain a stamp duty for tenancy agreement?

I see so many ah sohs uncles rent out their houses without a tenancy agreement, is that ok?

[opmi]

Can rent out without tenancy agreement.
But income still need to be declared to IRAS.

[chialc88]

Pianist,
Opmi is right, stamp duty is not mandatory.
But, if you are the land lord, you must ask for it.
The stamp duty is paid by the tenant.
It's a legal document.



A Life not Reflected is a Life not Worth Living.

[pianist]

Ok thanks. Without stamped tenancy document, how is iras gg to know if U have rental income?

[gautam]

I think the point that OPMI brought up is very important... though we are Outside Passive Minority Investors, it actually takes a lot of effort to generate passive returns.

To me the difference between active and passive return is that the latter is scalable. The former requires your presence but both requires effort. Being a CEO of the company earning $5m is active return, but you can only be CEO of one company, but you can be shareholder of multiple businesses employing people smarter than you to do the work.

That's why most of the time I advise people to invest in index funds if they don't want to make an effort. Active investing is not for everyone.

Hi Specuvestor and OPMI,

you do have a point. personally, I now derive a larger and larger part of my income through dividends which are not taxable, or rather taxed at the company level before going into my pocket.

I do agree what strictly speaking, that passive incomes require some effort. One can hardly get passives with zero effort. Even seed money involves effort to build up.

From personal experience, in deriving my passives, the initial effort (I agree effort must be expended), is in doing the appropiate research to be completely or at least adequately satisfies that the company in question satisfies one's criteria. That can take anywhere from one month to a few months. And sometimes, a seemingly good company misses me simply because I've not done adequate homework at the time when the price is attractive. It happens sometimes.

And it might take a few weeks to a few months to achieve the initial investment amount.

But eventually a few companies will make it and my style is to buy deeply and hold for long and let compoundation do the trick. I have an at least decade long view on the companies I buy into. I look into the past decade record. I look at the managing directors and chairman face and talk to them if possible. AGM's are a good place to speak to these key people. Forget about the buffets. The buffet time is the best time to talk, not to eat. I prefer to ask them about their passion about running their business. How the business can survive from one generation to the next. Companies are run by people. They must be people you can trust. They are the ones taking care of your money. This is a important consideration.

Thus, only the selection part and the deployment of funds to purchase the stock takes active effort. Once that active part is done, to me, its all pretty non-active for the next decade perhaps.


gautam