This article was last updated in March 2014. It is now updated to prevailing tax laws as at 31 March 2016.
It is presumed that the reader already has a comprehensive understanding of the fundamentals of personal taxation in Malaysia. The reader is also expected to be conversant with the contents of the following public rulings:
This article endeavours to bring together all the advanced aspects of personal taxation to afford the candidate an overall picture of taxation of individuals in Malaysia.
The aspects or factors which should be borne in mind when planning for an individual structuring an optimal compensation package or considering a cross-border move are as follows:
A. Tax rates
B. Residence planning
C. Contracts of service and contracts for service
D. Cash and non-cash remuneration
E. Lump sum payments
F. Employee share option scheme
G. Anti-avoidance provisions
H. Exemption under DTA
I. Exemptions under the Income Tax Act
Effective rate means the same as 'average rate'. This concept is relevant in Malaysia because resident individuals are allowed personal reliefs and the remainder is subject to tax at scale or progressive rates across several tax bands. The marginal rate is the highest rate reached by the resident individual given his income level. For a non-resident individual, who is not allowed any personal reliefs, and who is taxed at a fixed rate of 28%, his effective tax rate is 28% – ie the same as his marginal rate.
By way of illustration, assume that Miss Emm derives an annual gross income of RM180,000 from employment and is eligible for personal reliefs amounting to RM20,000. Her income tax liability for the relevant year is computed as follows:
|Less Personal reliefs||(20,000)|
|Income tax on first RM100,000||11,900|
|Income tax on the remaining RM60,000 at 24%||14,400|
Based on the above calculations, it may be discerned that Miss Emm’s income is subject to tax at an average rate of 14.61%, but any additional income beyond her current level of income will be taxed at 24% or more.
The tax residence status of an individual has a direct impact on the following:
As such, individuals who take up employment or business activities in Malaysia, and individuals who return to Malaysia after a prolonged absence are well advised to carefully plan their pattern of physical presence in Malaysia to achieve tax residence status or tax non-residence status.
Mr Asing expects to arrive in Malaysia for the first time in the last quarter of the year for a seven-month project as a representative of his employer which is a non-resident company. As it stands, three months in Year 1 and four months in Year 2 will not allow Mr Asing to achieve tax residence in either Year 1 or Year 2.
Residence planning, by rescheduling his stay in Malaysia into seven months entirely in Year 2 will facilitate tax residence status for Year 2.
Alternatively, a half month in Year 1 and six and a half months in Year 2, with no absences from Malaysia other than permitted 'temporary absences' will enable Mr Asing to qualify for tax residence for both Year 1 and Year 2.
Alternatively, if the job demands that the three months in Year 1 be strictly adhered to, prolonging the total length of uninterrupted presence in Malaysia in Year 2 to at least 182 days will similarly enable Mr Asing to qualify for tax residence in both Year 1 and Year 2. Remember that the extra days of physical presence need not be work-related.
From another perspective, it may be that Mr Asing may wish to avail himself of the tax exemption for short-term employment in paragraph 21 of Schedule 6. In this case, residence planning will have to focus on Mr Asing preserving his non-residence status, and on having Mr Asing’s employment in Malaysia last no more than 60 days in Year 1, or in Year 2 or in the two-year period. Remember here that the 60-day threshold refers to the period of employment, not the physical presence of Mr Asing.
As demonstrated in the illustration above, residence planning requires sound and detailed knowledge of all the rules of tax residence of individuals, especially that of s7(1)(b) and the tax exemption afforded in paragraph 21 of Schedule 6 relating to short-term residence.
If it is established that an employment exists and is exercised in Malaysia, or the employment income is otherwise deemed derived from Malaysia, the employment income will be taxable in Malaysia notwithstanding that payment is made outside Malaysia.
Employment is said to exist where there is a master-servant relationship that denotes an employer-employee situation. This is a contract of service.
A contract for service, on the other hand, calls to mind a principal-agent relationship, or principal and independent contractor relationship – ie an inter-dependent relationship where the agent/contractor executes contractual tasks in return for a fee. Income accruing to a person in respect of a contract for service is not employment income and will therefore fall outside the ambit of employment income under s4(b). Such income would be treated as income from exercising a profession or carrying on a business, both chargeable to tax under s4(a).
Factors for determination
Whether a contract is one of service or for service is a question of fact. The circumstances of the case should be fully ascertained to facilitate its determination.
Dr Ekspert is a highly-trained and experienced medical specialist. He is employed by ABC Medical Centre as the chief surgeon. He works full-time for the medical centre and is paid a monthly salary with bonus.
It is highly unlikely that the diagnoses or professional decisions of Dr Ekspert would be subject to any supervision. Nevertheless, he is an employee of ABC Medical Centre because the medical centre has a lawful authority to command him so far as there is scope for it.
Remuneration for an employment may come in the form of cash and/or benefits in kind. Cash remuneration is straightforward in that the amount paid is the amount taxable as gross employment income. Benefits-in-kind, however, involve the valuation of such benefits. Therefore, the significance of non-cash remuneration is in its valuation for tax purposes. Such a value is added on to the cash remuneration in totalling up the gross income from employment.
These values are mainly provided in the Public Ruling 3 of 2013. S13(1)(c) spells out the basis of valuation by restricting the defined value of the accommodation provided to 30% of the remuneration under s13(1)(a).
Effectively, the employee derives the benefit of the company car, the free living accommodation, the domestic servant, the driver and leave passage, by bearing the tax chargeable on such prescribed values rather than defray the full cost of such benefits.
Mr Mustahak is provided with the free use of a company car (worth RM120,000 when new) and free living accommodation (defined value: RM48,000 per annum). His child’s school fees of RM14,000 is borne by his employer. He draws a monthly salary of RM8,000.
If Mr Mustahak were to be paid entirely in cash, his monthly salary would be RM14,000. The monthly rental of a car similar to the one he is provided with is RM500.
To determine the relative advantage of each package, a computation of Mr Mustahak’s disposable income for each of the packages would be instructive, as follows:
Child’s school fee
Lower of defined value and 30% of s13(1)(a)
|Less Tax charged|
|On first RM100,000||11,900||11,900|
|On remaining RM32,000|
|On remaining RM52,000|
|Total tax charged||19,580||24,380|
|Child’s school fee||Nil||(14,000)|
(Note: Personal reliefs are for self, EPF and child)
Although the cash package brings a substantially higher gross income, it yields a lower disposable income because:
However, it should be noted that the cash package provides a larger base figure for EPF contributions.
The cash-and-benefit package obviously presents a more advantageous outcome to Mr Mustahak because he has a higher disposable income after accounting for essential expenditure such as his child’s education, housing and the use of a car.
However, it should be borne in mind that the cash package, being a larger figure, is more advantageous for the purposes of EPF contributions, bonuses, salary increments or the starting salary for a new job.
Incidentally, it should be noted that in computing the value of living accommodation, the reference to gross income under s13(1)(a) shall not include the amount of gross income in respect of any right to acquire shares in a company.
At or about the time of cessation of employment, lump sums are usually payable. These may be payable as compensation for the loss of employment or for a restrictive covenant, or as gratuity on the completion of a contract of service or on retirement.
These lump sums are accorded different tax treatment. There are also some tax exemptions if the requisite conditions are satisfied.
Compensation for the loss of employment
This specifically constitutes gross income from employment under s13(1)(e). It includes any payment for restrictive covenant after the cessation of employment, as well as any payment made under a voluntary separation scheme (with no express re-employment provision).
If the loss of employment is due to ill-health, the entire amount of the compensation paid is tax exempt under paragraph 15(1)(a) of Schedule 6 of the Income Tax Act.
If ill-health is not the reason for the loss of compensation, there is an exemption [under paragraph 15(1)(b) of Schedule 6] of RM10,000 for every completed year of service with the same employer or with companies in the same group.
The remainder, if any, will be subject to tax as income in the year the compensation payment first becomes receivable.
Do note that any compensation receivable by a non-service whole-time director from a controlled company does not rank for any tax exemption at all, be it for ill-health or otherwise. This is an anti-avoidance provision.
A gratuity is gross income from employment pursuant to s13(1)(a). The significance of this classification is that it will increase the base figure on which the 30% is calculated in arriving at the value of living accommodation.
There is a tax exemption [under paragraph 25 of Schedule 6] for a gratuity if the retirement is:
(a) due to ill-health, or
(b) on or after reaching 55 years of age or the compulsory retirement age under any written law, after having served at least 10 years with the same employer or with companies in the same group, or
c) on or after reaching 50 years of age, but before 55 years, pursuant to a contract of employment or collective agreement, after having served at least 10 years with the same employer or with companies in the same group.
The exemption applies to the entire amount of gratuity received.
With effect from the year of assessment 2016, if a gratuity does not qualify for tax exemption as stated above, there is a residual exemption of RM1,000 for each completed year of service. Any balance is then subject to tax in the year it is received.
|Compensation for loss of employment||Gratuity|
|Exemption for ill-health||Yes||Yes|
|Exemption for other requisites||RM10,000 for every completed year of service||Total exemption if all requisites are satisfied.
If one does not qualify for exemption, there is an exemption of RM1,000 for every completed year of service
|If taxable, basis period in which taxable||In the basis year it is received||
In the basis period it is received
|Anti-avoidance provision||No exemption for compensation paid to non-service director of controlled company||None|
|Tax treatment, generally stated||Partial exemption and the remainder taxable in the year it is received||Full exemption if the conditions are fulfilled, failing which there is partial exemption. Any remaining taxable amount is taxable in the year it is received|
In view of the differing tax treatment for the two events that sometimes may be confused with each other, pre-planning may reduce the tax exposure.
If the contemplated cessation of employment occurs not too far ahead of the time of statutory or contractual retirement age, and the requisite conditions of a minimum of 10 years of continuous service with the same employer are satisfied, pre-planning the cessation as a retirement will lead to total tax exemption.
If the above requisites are not satisfied – ie the individual is not anywhere near retirement age, but has some completed years of service with the same employer – the individual should try to attain the largest number of completed years as there is an exemption of RM1,000 for every completed year of service.
Additionally, it may help mitigate tax liability to structure the cessation as a loss of employment or a voluntary separation, as that will afford an exemption of RM10,000 for every completed year of service.
The planning will also depend on the marginal rate of tax in the relevant years. For instance, a compensation for loss of employment will render the remainder sum taxable as a lump sum in the year it is received. This may vastly increase the marginal rate of tax. On the other hand, planning it as a retirement, even though not eligible for exemption, will render the sum being spread over up to five basis years, which may render the taxable income to fall under a lower tax band – therefore a lower marginal rate. However, this planning opportunity is no longer available with effect from the year of assessment 2016 as all employment income is recognised in the year of receipt.
A share option is a benefit in connection with one’s employment. It is pertinent to determine when and how much income is taxable.
Income from shares benefit arises (therefore taxable) when the option is exercised. (Note: This contrasts with the old treatment prior to the year of assessment 2006 when income was deemed to arise when the option was granted.)
'Exercising an option' means exercising the right and actually acquiring the shares at the offer price.
How much is taxable?
The taxable benefit is the difference between the market value of the shares when the option is exercised and the amount actually paid by the employee to acquire the shares. See Illustration 5 below.
If the option period extends over a specified period, then the market value of the shares on the first day of the option period is compared to the market value of the shares on the day the option is exercised. See Illustration 6 below.
Mr Vee was given the option to acquire 2,000 shares of his employer company on 1 February 2014 at RM1.00. Mr Vee duly exercised the option on 1 February 2014 when the market value of the shares was RM1.45.
The value of the benefit is computed as follows:
|Market value of shares on the date the option is exercised||1.45|
|Amount paid by Mr Vee||1.00|
|Share benefit per share||0.45|
|Share benefit for 2,000 shares @ 0.45 |
The RM900 is taxable in the year of assessment 2014 because the share option was exercised in the year of assessment 2014.
Mr Yue was given the option to acquire 2,000 shares of his employer company on 1 February 2014 at RM1.00. He is given a period of 12 months to exercise the option.
On the first day of that 12-month option period (ie 1 February 2014), the market value of the shares of the employer company was RM1.45, but when he exercised the option and purchased the 2,000 shares on 10 January 2015, the market value had risen to RM1.80.
His share benefit is calculated as follows:
|Market value of shares on|
| the first day of the option|
period – ie 1 February 2014
| the day the option is|
exercised – ie 10 January
|The lower of the 2 values||1.45|
|Amount paid by Mr Yue||1.00|
|Value of benefit per share||0.45|
|Share benefit for 2,000 shares @ 0.45 per share||
The RM900 is taxable in the year of assessment 2015 as the share option is exercised in the year of assessment 2015.
On 1 February 2014, Mr Tee was given the same 12-month option period to acquire 2,000 shares of his employer company at RM1.00, and he exercised the option on 15 January 2015.
On the first day of that 12-month option period (ie 1 February 2014), the market value of the shares of the employer company was RM1.45, but when he exercised the option and purchased the 2,000 shares on 15 January 2015, the market value had dropped to RM1.25.
|Market value of shares on|
| the first day of the option|
period – ie 1 February 2014
| the day the option is|
exercised on 15 January
|The lower of the 2 values||1.25|
|Amount paid by Mr Tee||1.00|
|Value of benefit per share||0.25|
|Share benefit for 2,000 shares @ 0.25 per share||
The RM500 is taxable in the year of assessment 2015 because the share option is exercised in the year of assessment 2015.
The anti-avoidance provisions relating to individuals are:
Mr A employed his son, Jason, in his business, at a monthly salary of RM10,000. However, the RM120,000 for 2015 was not paid to Jason.
Mr A and Jason are father and son. Hence they are relatives as defined in section 140(8). Pursuant to section 29(4), the RM120,000 salary is deemed obtainable on demand in 2016, the year immediately following 2015, the year it first becomes receivable. Jason will therefore have to report the employment income of RM120,000 for YA2016.
There is an exemption available under a double tax agreement (DTA) based on fulfilment of all three of the following conditions:
Details are as follows:
|1||The employee is present in the other state for period/periods not exceeding 183 days during the relevant calendar year, or which form part of a continuous period|
of more than 183 days in any continuous 12-month period (moving 12-month period)
|In counting the days, physical presence is required. Whether it is 183 days in a calendar year or in a moving 12-month depends on the provision of the DTA concerned|
|2||The services are performed or remuneration is paid for or on behalf of the employer who is not|
a resident of the other state
|In determining whether the payer of remuneration is the bona fide employer or merely an intermediary, substance will prevail over form|
|3||The remuneration is not borne by a PE or fixed base which the employer maintains in the other state||If the PE pays the remuneration directly to the employee but it charges the head office for it, the PE does not bear the remuneration|
Mr ABC was in Malaysia during the period 20 September 2013 to 10 February 2014 (144 days), carrying out a market survey and feasibility study for his employer Foreign Ltd, a company resident in Foreign Country, with whom Malaysia has signed a DTA that has come into force.
Mr ABC’s salary during the period was paid by the Kuala Lumpur branch office of Foreign Ltd which, in turn, would recover such payments from the Foreign head office as it was not attributable to the Kuala Lumpur branch business operations.
Mr ABC left Malaysia on 10 February 2014 and thereafter did not return to Malaysia.
Under the Foreign Country-Malaysia DTA, Mr ABC would be exempt from tax in Malaysia in respect of his income derived from Malaysia during the period because:
Below are other exemptions provided to individuals:
Written by a member of the P6 (MYS) examining team