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Compensation for Loss of Employment in Malaysia – Tax Treatment

June 9, 2021 / Tax

Many industries have been impacted severely by the Covid-19 pandemic that led to retrenchment of their employees in Malaysia.

Are the income received by these employees from loss of employment taxable or exempted in Malaysia?

Before diving into the tax treatment, do note that in some circumstances sum received from loss of employment may include both “compensation for loss of employment” and “gratuity”.

A clear distinction must be made between the two due to different tax treatments.

Compensation for loss of employment

Gratuity

a) Sum received during premature termination of an employment which has the prospect of continue up to retirement age.

b) Taxed under Section 13(1)(e) of the Income Tax Act 1967 (“ITA”)

a) Sum received at the end of an employment contract or retirement age

b) Paid to recognize the past services rendered by an employee

c) Taxed under Section 13(1)(a) of the ITA

We will first look into compensation for loss of employment and its tax treatment.

Compensation for Loss of employment

What is included in compensation for loss of employment?

Salary or wages in lieu of notice
Compensation for breach of a contract of service
Payments to obtain release from a contingent liability (employer’s obligation) under a contract of service
Ex-gratia or contractual payments – redundancy payments, severance pay etc made to employees who have become redundant for reasons beyond their control
A payment in consideration of a covenant, agreement or similar agreement restricting the activities of an employee in respect of engaging in an employment of a similar kind after termination of his employment
Voluntary Separation Schemes (VSS) or Mutual Separation Scheme

Tax treatment for compensation for loss of employment received in malaysia

Compensation for loss of employment received due to ill health is given full exemption. However, this will be based on the IRB’s discretion.

Note: The health condition of the employee has to be certified in writing by a Medical Board. Documentation that verifies the medical condition of the employee has to be forwarded to the IRB.

Date	Details
Termination on or after 1 July 2008	RM10,000 for every completed year of service (i.e. 12 months)
Termination in 2020 and 2021	RM20,000 for every completed year of service (i.e. 12 months) This amount is only applicable for loss of employment occurred in 2020 and 2021.

Criteria for the above exemption: Worked with the same employer or companies within the same group during the period.

Example 1:

	Details
Date of commencement	1 April 2016
Date of cessation	30 June 2020
Total compensation received	RM85,000
No. completed years of service	4 years 1 April 2016 to 31 March 2017 : 1st completed year 1 April 2017 to 31 March 2018 : 2nd completed year 1 April 2018 to 31 March 2019 : 3rd completed year 1 April 2019 to 31 March 2020 : 4th completed year 1 April 2020 to 30 June 2020 : less than 12 months, not a completed year
Amount exempted	RM80,000 (RM20,000 x 4) As the date of cessation falls in 2020, the employee is entitled for an exemption of RM20,000 for every completed year of service.
Amount taxable	RM5,000 (RM85,000 – RM80,000)

Example 2:

	Details
Date of commencement	1 April 2016
Date of cessation	30 June 2022
Total compensation received	RM85,000
No. completed years of service	6 years 1 April 2016 to 31 March 2017 : 1st completed year 1 April 2017 to 31 March 2018 : 2nd completed year 1 April 2018 to 31 March 2019 : 3rd completed year 1 April 2019 to 31 March 2020 : 4th completed year 1 April 2020 to 31 March 2021 : 5th completed year 1 April 2021 to 31 March 2022 : 6th completed year 1 April 2022 to 30 June 2022 : less than 12 months, not a completed year
Amount exempted	RM60,000 (RM10,000 x 6) As the date of cessation falls in 2022, the employee is entitled for an exemption of RM10,000 for every completed year of service.
Amount taxable	RM25,000 (RM85,000 – RM60,000)

The above tax exemption for compensation for loss of employment does not apply to:

Voluntary Separation Schemes where reemployment (by the same or different employer) is expressly stated or implied.
Payments made by controlled companies to non-full-time service directors.

Service director:

A director employed in the service of the Company in managerial or technical capacity
Does not own or exercise control (directly or indirectly) more than 5% of the ordinary share of the Company

Example 1 – Reemployment implied under separation schemes:

Mr K was employed by a company, undergoing restructuring and offered its employees a separation scheme. The company made arrangements to get their employees to be employed by another company. Mr K opted for the separation scheme and received RM100,000 as compensation for loss of employment.

As reemployment was implied, Mr K was not entitled to any tax exemptions. The RM100,000 received was wholly taxable.

Example 2 – Compensation for loss on employment for non-service director:

Mr M was the finance director of Company B Sdn Bhd (“Company B”). He held 20% of Company B’s ordinary shares. In 2020, Company B was liquidated due to the pandemic. Mr M was forced to leave the company and was compensated with RM500,000 for loss of employment.

Mr M is not considered as a service director as he holds more than 5% of Company’s B ordinary shares. Hence, he is not eligible for any tax exemption. The RM500,000 received will be wholly taxable.

Gratuity

Tax treatment for Gratuity received in Malaysia

Full tax exemption is given for gratuities received for the following reasons:

Due to ill health (based on IRB’s discretion)
On or after reaching age 55 or other compulsory age of retirement & worked 10 years with the same employer or companies within the same group
Reaching compulsory age of retirement as per employment contract at age 50 but before 55 & worked 10 years with the same employer or companies within the same group
Gratuity paid out of public funds
Gratuity paid to a contract officer
Death gratuity

Other than the above, partial exemption will be given at RM1,000 for each completed year of service.

The balance will be taxed in the year of receipt.

In computing the partial exemption, period of employment with other companies within the same group is NOT REGARDED as a period of employment with the same employer – the partial exemption is only applicable to the gratuity attributable to the service with the last company of the group.

Example:

Mr S worked in the following companies within the same group and received gratuity payments upon his retirement in 2020:

Details	AB Manufacturing Sdn Bhd	AB Distributor Sdn Bhd
No of completed years	4 years 1 Jan 2014 to 31 Dec 2017	3 years 1 Jan 2018 to 31 Dec 2020
Gratuity received	RM40,000	RM30,000
Amount exempted	nil	RM3,000 (RM1,000 x 3) The partial exemption is only applicable to the gratuity attributable to the service with the last company of the group.
Amount taxable	RM40,000	RM27,000 (RM30,000-RM3,000)
Total taxable amount upon receipt	RM67,000 (RM40,000 + RM27,000)

The partial exemption for gratuity does not apply to:

Sums received from unapproved retirement scheme
Gratuities received while still under employment
Compensation for loss of employment

Gratuities received in respect of the above will be taxed in full.

Take note of the following when filing tax returns:

1. Update “No. Majikan” to reflect your current employer.

2. Update incentives received (if applicable).

For example:

ERP of RM600 x 6 months received from SOCSO.
Select “Section 127(3)(b)” and enter incentive code “621”.

You may obtain the list of incentives by clicking on “lampiran” as shown in the snapshot below. As an alternative, you may download and refer to the incentive list here.

3. Ensure ALL remunerations received from employments are reported.

This should include employment income from your previous and new employer, based on the Forms EA, payslips etc.

4. Update “Bilangan Penggajian”

This should be updated for situations (non-exhaustive) like:

You have more than 1 than employment income during the year
You are terminated and employed by another company during the year
Change of jobs

For example:

Employment income from Company A (terminated during the year) – 1 source
Employment income from Company B (employed in the same year) – 2nd source

5. Keep all supporting documents

Ensure that you obtained and keep all Forms EA, payslips (if any), supporting letters etc to be inspected by the IRB in the event of an audit.

Amount disclosed in the Forms EA should be net of tax exemptions as shown in below.

If in doubt please check with your previous employers or HR or your tax consultants.

Our taxation service cover areas in Ipoh, Kampar, Tapah, Taiping, Chemor, Cameron Highlands, Sitiawan, Manjung, Bidor, Penang, Kedah, Alor Setar, Kelantan, Kuantan, Pahang, Perlis, Terengganu, Kuala Lumpur, Selangor, Melaka, Johor Bahru, Seremban and other areas in Malaysia.

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How To Reduce Your Tax Payables

March 25, 2021 / Tax

Through the years, taxes are perceived as one of the main cost of businesses. Taxpayers and business owners have been paying more attention to topics on tax savings, acknowledging the importance of tax planning and how this may have an impact on their budgets and cash flows.

Due to the ever-changing tax policies, it is of importance that taxpayers and business owners engage and work closely with tax experts. Careful considerations should be given to each business transactions, which leads to that million-dollar question – What is the tax impact?

Even though the amount of tax savings may not be apparent at times, the long-term savings is worth the hassle. Not to mention, being compliant with the Income Tax Act 1967 and the other tax policies in Malaysia, avoiding being penalized and fined for non-compliance is definitely one of the major cost savings!

Here are some tips for income tax savings that you may consider for your businesses:

The Basics: Making all the allowable tax deductions

Generally, allowable tax deductions, reliefs or allowances will reduce your taxable income. Here are some of the key issues to consider:

Debt financing may be a better option as interest expenses may be tax deductible.

Note: The interest expense is only deductible provided that the money borrowed is for:

For the production of gross income (eg: for working capital)
For assets used or held for the production of gross income.

(Source: Section 33(1)(a) of the Income Tax Act 1967 (“ITA”))

Depreciation and capital expenses are generally disallowed for tax deductions in Malaysia. However, expenses incurred on qualifying expenditures used in the production of gross income is allowed for deductions in the form of capital allowances – subject to Schedule 3 of the ITA.

Has this been fully utilized by the company?
Is the company eligible for claiming accelerated capital allowances? (eg: small value assets)

There have been various incentives offered by the Malaysian government to promote certain industries and activities. Companies may consider applying for these incentives to reduce their tax liabilities. Some of the common tax incentives may include the followings:

Reinvestment allowances
Pioneer status
Investment tax allowances

Note: There are certain terms and conditions attached to these tax incentives. During a tax audit, the IRB may make the necessary tax adjustments and impose penalties or fines if a Company is found to be in breach of these terms and conditions. It is therefore advisable for Companies to:

Conduct an annual review on these terms and conditions to ensure that they have been adhered to.
Keep proper records and documentations so that they can be readily available to the IRB in the event of an audit or investigation.

Being charitable is a part of tax savings too!

There are several approved donations or gifts where you may be granted a deduction from your aggregate income. You may check for the list of deduction here.

One of the common donations made are to approved institutions or organizations. Take note however, that ONLY CASH DONATIONS (gift of money) are allowed for deduction. Please obtain and retain the original receipts from the approved organizations or institutions for tax deduction purposes.

To check for the list of approved organisations or institutions under Section 44(6) of the ITA 1967, please click here.

An arrangement to declare director fees or contractor fees may be considered to utilize the effective tax rates.

Review your accounts and identify if the following items had been taken into consideration:

Are there any obsolete inventories to be written-off?
Are there any expenses to be accrued that have been omitted from the accounts?
Are there any long and outstanding debts? Are these debts recoverable?

Note: As the above tax deductions can only be made after certain criteria have been met, do ensure that the relevant records and documentations are retained properly in the event of a tax audit.

Consider the impact of withholding taxes if there has been payment made to non-residents.

The following may be claimed for the usage of company motor vehicle:

Capital allowances
Petrol or mileage claims
Repair and maintenance of motor vehicles
Insurance and road tax

Note:

A clear distinction should be made between business and private use of the motor vehicles.
Where motor vehicles are provided to directors or employees of the Company, the enjoyment of these benefits may need to be disclosed in the statement of remuneration (EA Form).

The Intermediate: Taking note on income that are taxable

Section 24 of the ITA now provides that any sum received in the course of carrying out a business constitutes income which should be duly subject to tax in that year.

Any sum received in advanced will be taxed in the year of the receipt, even though there have been no debts arising, or services have not been performed or property has not been used or enjoyed yet – where the sum may be wholly or partially refundable.

This however does not include security deposits or refund deposits.

Companies may need to put this into consideration while drafting their sales proposals, agreements etc.

Companies that provide loans or advances to directors are subject to deemed interest under Section 140B of the ITA.

Companies should take this into consideration before providing any advances or loans to directors. Where advances or loans had been granted to the directors, plan and keep track on repayment terms to avoid long outstanding amount which may impact the taxability of the deemed interest.

How To Reduce Your Tax Payables Read More »

Capital Statements in Malaysia

March 25, 2021 / Tax

What is a Capital Statement?

A capital statement, also known as “penyata modal” in Bahasa Malaysia, is a tool used by the Inland Revenue Board (“IRB”) in Malaysia to detect tax under-reported by an individual. The capital statement comprises two forms:

Usually, individuals are required to prepare the above for a period of 5 years, including the “base year” – the opening balance of an individual’s assets and liabilities.

Who is targeted for capital statements?

High net-worth individuals
Directors, shareholders, CEO, CFO, etc. of companies being investigated
Individuals with sudden increase of spending – purchasing expensive assets (land or properties, expensive motor vehicles, etc.) or luxury items, large sum of investments made
Individuals who are seen to live a lavish lifestyle
Individuals with overseas bank accounts with large funds transferring in or out of Malaysia
Information provided to the IRB through whistle-blowers

How Does a Capital Statement Work?

The mechanism behind a capital statement is that your income or earnings should either be spent, or saved. Your reported income or other sources of income (eg: capital gains) should be able to substantiate your spending habits and support your growth in your net worth.

For example, you reported an income of RM100,000 during the year. In the same year, you:

Year 1

Details	Amount (RM), Year 1
Assets Motor Vehicle Fixed deposit Branded bag Savings account	50,000 20,000 10,000 10,000
Net capital	90,000
Less: Opening balance	–
Net increase in assets	90,000
Add: Expenses (food etc.)	10,000
Apparent income	100,000
Less: Reported income	(100,000)
Total discrepancies	–

In a perfect scenario, there should be no discrepancies as shown above – all spending or savings has been appropriately disclosed and income has been fully disclosed and reported.

Your reported income of RM100,000 is enough to substantiate the net increase of assets of RM90,000 and expenses of RM10,000.

Let us have a look at another scenario.

In the following year (Year 2), your reported income remains the same at RM100,000. In Year 2, you:

purchased a property of RM200,000, financed by loan of RM150,000 (assuming whole amount drawn down in the same year)
spent RM15,000 on food and other expenses
made another placement of RM30,000 to fixed deposit, assuming received fixed deposit interest of RM1,000 in the year
assuming savings account has a balance of RM50,000 at the end of Year 2

Year 2

Details	Amount (RM), Year 1	Amount (RM), Year 2
Assets Property Motor Vehicle Fixed deposit Branded bag Savings account	– 50,000 20,000 10,000 10,000	200,000 50,000 50,000 10,000 50,000
Less: Liabilities (Loan)	–	(150,000)
Net capital	90,000	210,000
Less: Opening balance	–	(90,000)
Net increase in assets	90,000	120,000
Add: Expenses (food etc)	10,000	15,000
Apparent income	100,000	135,000
Less: Fixed deposit income Reported income	– (100,000)	(1,000) (100,000)
Total discrepancies	–	34,000

Based on this scenario, your apparent income is RM135,000 but it can only be proved by the reported income of RM100,000 and fixed deposit interest of RM1,000. There is a shortfall of RM34,000. Your total income is insufficient to prove the net increase in assets of RM120,000 and expenses of RM15,000.

How did you obtain the extra cash of RM34,000? Have all income or gains been appropriately disclosed in the capital statement?

From the illustrations above, this is an example of how the IRB estimates your income by analysing your net worth and spending, eventually determining if there is indeed an under-statement of tax reported.

How to Prepare a Capital Statement?

A capital statement is prepared based on cash basis instead of the usual accounting accruals concept. The methodology is to understand the flow of cash of an individual.

The concept of a capital statement may seem simple. However in reality, preparing a capital statement is a very tedious and complex exercise. A capital statement specialist deals with voluminous data, tracing and verifying transactions, including exercising professional judgement on the treatment of the transactions (as circumstances varies between individuals).

Due to the complexity and its specialised nature, many would engage a professional to prepare the capital statement and to represent them in negotiations with the IRB.

What to Include in a Capital Statement?

Below is a non-exhaustive summary and examples of items to be included in the capital statement.

Please note that individuals are required to include in the capital statement the assets, liabilities, income and expenses of their spouse(s) as well. Below is the list of items – of the individual and spouse(s) and its examples.

Capital injected
Balance of current accounts
Profit or loss

All properties acquired and owned by the individual under investigation, spouse(s), including properties jointly owned; or
Any land/properties acquired, or amount paid by the individual for immediate family members, third parties etc.

Quoted shares
Unquoted shares
Trust accounts etc.

Savings accounts
Current accounts
Investment linked accounts
Fixed deposits
Cash in safe deposits etc.

Furniture or appliances for long term personal use (eg: fitness machines, laptops, handphones, computers, PDA, televisions etc.)

Motor vehicles acquired and registered under the name of the individual under investigation and spouse(s)’s;
Motor vehicles purchased by the individual for immediate family members, third parties etc.

Branded bags
Jewelleries
Antiques
Watches etc.

Term loans
Hire Purchase
Personal loans
Advances obtained from private limited companies
Credit cards
Amount owing to individuals etc.

Loans to other individuals
Loans or advances to private limited companies

quoted and unquoted shares
land/properties
motor vehicles

As per the list of expenses in CP102

Employment income
Dividends received
Commissions received
Contract income received
Rental income
REITs
Income from fixed deposits or current account
Repatriation of funds from outside Malaysia to Malaysia
Windfall
Funds inherited

What are the issues faced in preparing a capital statement?

Most often than not, the main issue faced by many is the ability to produce supporting documents or information to support transactions transacted years ago. Unlike companies or businesses, individuals are less likely to keep proper documents on their personal transactions.

Upon issuing the CP102 and CP103, usually taxpayers are given 30 days by the IRB to prepare the capital statement. Extension of time may be applied, based on the discretion of the IRB.

Due to time constraints, many taxpayers had struggled to search for documents and recalling transactions that was made years ago. This may place the taxpayer at a disadvantage.

Without proper documents, taxpayers are unable to provide justifications or a basis to disagree with the IRB’s adjustments, if any.

Is preparing a capital statement compulsory? Do I need to prepare a capital statement?

Currently preparing a capital statement is not compulsory. However, it is a good practice to prepare the capital statement annually.

Preparing a capital statement will help you identify potential risks and eliminate them. With this practice, documents and the necessary information would have been kept properly and recorded. This would smooth and ease the process in the event of an investigation.

Asides from the above, you will be able to keep good track of your personal financial affairs as well as being able to determine an estimate of your net worth.

What should I do if I receive a CP102 and CP103 from IRB/LHDN?

Contact your tax agent immediately. If your tax agent is unable to assist you, please contact us.

Capital Statements in Malaysia Read More »

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