Which income is the best income?

by Thomas Sim, 27 Dec, 2001

Section 4 of Income Tax Act 1967 classifies sources of income as:

Section 4(a) - Business Income

Section 4(b) - Employment Income

Section 4(c) - Dividend, Interest and Discount Income

Section 4(d) - Rental, Royalties and Premium Income

Section 4(e) - Pension, Annuity and Other Periodical Payments

Section 4(f) - Gains or profits other than above

If you have seen this classification for the first time, it is no surprise you feel amazed. Who else could be so detail in defining income other than the Inland Revenue Board?

The objective of this article is to debate on which income is the best income.

If you still can remember the SRP (sijil rendah pelajaran) Bahasa Malaysia essay topics, "Makan gaji lebih baik daripada bekerja sendiri" was to some, a piece of cake. Of course, we didn't know the complexity of s.4 ITA 67 at that time. Most of us were restricted to s.4(b) income alone, or if you stay in kampung, s.4(a) income mainly - self employed.

So, which income is best income?

A scenario: I need not have to wake up to work in the morning. I do not have any bosses or any nasty business customers. Nobody reports to me. That, is what most people would say is the luxury of life.

So, which source of income would enable me that type of living?

Let us use the pyramid scheme as an example. The lowest level are the workers. They draw income from sweat and saliva. They are, in fact, earning just a 'salary'. The middle managers are given more benefits, other than sweat and saliva income, some may get referral income or leadership income. The highest level are those who flag their dollar bills as they draw all the incomes enjoy by the managers below and extras - royalties or pension incomes.

The conclusion is that the more income source you have, the wealthier you could be. However, that is not the answer to this article. What we want is 'which is the best?"

Most people are in the s.4(a) or s.4(b) categories. This is an economic limiting effect probably a natural phenomena. Economic progress of any entity is limited by space of time and resources. You just can't expect a child to run a successful business without first learning how to walk!

Having these limiting factors in mind, and understanding the system of our pyramid and capitalist society, every one should strike to have:

• More sources of income and;
• Income outside business source (s.4(a) and/or employment source (s.4(b)

Still and again, which is the best income?

The answer is: No income is best income if you are not happy.

However, if you insist to know my answer to which income is the best source of income, it is s.4(c) income. Why?

Dividend and Interest income are quite like perpetual incomes. They are also the most immediate and movable source of revenue from their business activities. 'Immediate' means immediate stage of yield from economic activities. 'Movable' means 'liquid' and 'transferable' which reduces risks.

Of course, these incomes too, cannot run away from economic limitations. In another words, they are also dismissing in nature as inflation, depreciation and management fees eat into the profit from the source of these revenues.

Despite, the good thing is that with the right investment decision, the appreciation of value could at least cover the risk of inflation, depreciation, and other costs of deriving at the revenue.

The next 'best' source of income is s.4(d) incomes - rental and royalties. However, I choose s.4(d) as second best because not all risks of this source of income is under investors' control. There is a high risk in property or R&D investments. If you have heard of one success story, there are probably hundreds of failures that you are yet to discover.

If you want to live a life of luxury, the best sources of income would be s.4(c) and s.4(d) incomes.

However, the truth is that s.4(c) and s.4(d) incomes are incomes derived from earlier s.4(a) and s.4(b) business and employment activities. In simple economics sense, we are bounded by this limitation.

Therefore, unless you are rich by inheritance, royal blood or by simply luck - strike a lottery, s.4(a) and s.4(b) incomes are the starting point in quest to your luxury income dreams!

Or, you are not from this society.