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An analysis of the Malaysian Taxation System
In order to be qualified as business expense so that it can be deducted from the gross income of a business source, it must fulfill all the following conditions:
Each business source has to be accounted separately;
The scope of expense refers to ‘outgoings and expenses’;
Section 33(1) provides guideline to ‘outgoings and expenses’ for the deductibility. ‘Expenses’ would have smaller scope than ‘outgoings’ because it would not include business losses due to theft, defalcation of employees, bad debts etc. It generally refers to ‘disbursement’, which paid by trader and involves some sort of willingness. Revenue expense is deductible whereas capital expense is not deductible.
The expenses have to be ‘wholly and exclusively’;
The word ‘wholly and exclusively’ is not defined in the Act. However, in order to be qualified for deduction, the outgoings and expenses have to satisfy the ‘wholly and exclusively’ test. ‘Wholly’ refers to the quantum of money expended and ‘exclusively’ refers to the motive or object in the mind of incurrence and the purpose must be the sole purpose.
‘Incurred’ defines as money which is actually laid out or money which arise from a legal liability to pay. It includes amount paid, payable or becoming payable. It is different from ‘provision’. A provision of expense would not be deductible. This is because the contingent nature would be too uncertain to be fairly treated as an expense.
In the production of gross income from that business source.
It is sufficient for a taxpayer to show that the outlay was for the purpose of earning income, whether in the year under review or future years. An expense must be incurred for the sole purpose of producing income from the business. A dual-purpose expenditure is one which is incurred for more than one reason. Expenses incurred for both a business and private purpose would fail the 'exclusively incurred' test.
In the case given, Smart Tag Bhd (STB) employed Mr. Muhd Shukri as information technology engineer. The company provided him with hotel accommodation on many occasions as he needs to travel quite often. The company will pay up all the expenses. From the view point of employer or STB, the expenses incurred on Shukri can be classified as entertainment expense under business expense. All expenses paid for by the company are wholly and exclusively incurred during that period by Shukri in the production of gross income.
Entertainment is defined in the Income Tax Act under section 18 as (i) the provision of food, drink, recreation or hospitality of any kind; or (ii) the provision of accommodation or travel in connection with or for the purpose of facilitating entertainment of the kind mentioned in (i), by a person or an employee which related to a trade or business carried out by that person.
With effect from YA 2004, entertainment expenses incurred in relation to specific business transaction on suppliers and bankers either by a company or the staffs of the company are 50% deductible. This encompasses entertainment allowance paid to employees for the purpose of defraying expenses incurred by employee in the provision of entertainment.
However, there are certain entertainment expenses which are wholly deductible as business expenses if they fall under the provision of Section 39(1)(1). They are 100% deductible. These exceptions included entertainment business where the business consists of entertainment, promotional gifts at foreign trade fairs, promotional samples of the company’s products, cultural or sporting events, and entertainment relates wholly to sales.
As a conclusion, hotel accommodation expenses paid by STB for Shukri are entertainment expense. This is because the entertainment of the employees is incidental to the entertainment to the client. The expenditure is allowed only 50% deduction.
From the view point of employee or Mr Muhd Shukri, hotel accommodation provided by him will be taxable under Section 13(1)(c) of the Act. Under S 13(1)(c), gross income of an employee in respect of gains or profits from an employment includes an amount in respect of the use or enjoyment by the employee of living accommodation in Malaysia provided for the employee by or on behalf of the employer rent free or otherwise. The employer will provide free or subsidized living accommodation to its employees. However only the value of unfurnished accommodation provided will be assessed on the employees. Furniture provided with the living accommodation will be assessed under S 13(1)(b).
When hotel or hostel or house located in a plantation or forest or situated in a rateable area is provided to an employee, the value is to be taken as 3% of his gross income under 13(1)(a). The value would be apportioned on time basis when accommodation is provided to employee for less than one year. However, there is no adjustment for shared accommodation or if the accommodation is too large or for personal use.
In the case given, the amount of hotel accommodation provided by STB to him will be taxed under employment income under S 13(1)(c). Assume that the gross income of Shukri under S 13(1)(a) is RM 48,000, the value of accommodation to be taken is 3% based on his gross income under 13(1)(a). So the amount of 13(1)(c) would be 3% x RM 48,000 = RM 1,440.
Assume that the hotel accommodation provided is for private and business purposes. Unless the expense is wholly and exclusively incurred in his performance of his duties/in the production of gross income, the whole amount would be taxable under employment income under S 13(1)(c).
The benefit of the car from the company will be charge under S13(1)(b) benefit in kind under employment income. There are 2 methods to determine the amount or car benefit to be charged. The first method would be formula method.
Cost of the motor car x 80% Prescribed average lifespan of the asset
= annual value of car benefit
The cost of the car is RM350 000. According to the formula method, the benefit of the car would be RM 35 000.
RM 350 000 x 80% 8 years
= RM 35 000
For the first option, the total amount of RM 35 000 will be entirely charged under S13(1)(b). However, if the second option is to be chosen, the amount can be deducted. According to Public Ruling 2/2004, employee is allowed to deduct from the taxable value in the event he made any contribution to the employer for the car. So, to determine the contribution per annum from MS Chuah, we do as follows:
*Ms Chuah pays half of the price
RM 350 000 / 2 = RM 175 000
*assume that Ms Chuah needs to pay the money within 5 years
Employee contribution per annum
= RM 175 000 / 5 years
= RM 35 000
So, the amount RM 35 000 charged on car benefits can be deducted by RM 35 000, which is the contribution from the Ms Chuah on the car.
RM 35 000
RM 35 000
At the end, by choosing the second option, there is no amount charged to employment income under S13(1)(b).
After scanning through the first method, the second method would be the prescribed value method. Prescribed value method requires the amount of car benefits charged according to the table. According to the table, car with the cost of RM 350 000 will be charged RM 15 000 per annum under S13(1)(b). If the first option to be chosen, the full amount will be charged. However, for the second option, since the employer just pay for the half of the price, so we assume that the car benefits would be apportion accordingly.
15 000 x ½ = RM 7500
So, the amount charged under S13(1)(b) would be just RM 7500.
In addition, we can compare from the aspect of ownership. For the first option, the car is put under company’s name. Ms Chuah does not own the car. For the second option, the car will belong to Ms Chuah after 5 years. After 5 years, she will have the legal title over the car and can choose whether to dispose or keep it. She can even sell it to gain income.
However, for the first option, employee does not need to pay any money for the car given. All the costs including the cost of car would be bare by the company. For the second option, Ms Chuah still have to pay half of the car price (RM175 000) within 5 years. In this case, she has to get a loan to settle it. Therefore, company provides another solution that is internal loan. There would be no interest charged. From here, she would have save the time to look for reliable financial institution to get a loan, as well as save the time in approving the loan. It would also be easier for both company and employee as company can just deduct the amount of installment from the salary. There are no worries that employee unable to pay the installment. As for employee, she can get internal loan way easier than external one.
However, Ms Chuah’s current financial condition can be a factor in choosing between the options. If currently employee is having difficulties financially, it would be burdensome for her to bare another loan if she would want the second option. Instead, she can just take the first option and need not pay anything. Although it is interest free, but she still have to pay around RM2917 per month (RM175000/60) to settle installments. We assume that she earn RM 10 000 per month as the divisional head. It still can be burdensome as the amount of installment is almost 30% of her salary!
There is another hidden intention in the tempting offer. Company intends to tie the employee to the company if she was to choose the second option. If she was to choose the second options, she has to work for the company for at least 5 years. The reason is that she has been paying the money for the car which she will own after 5 years. If she was to leave the company after just 3 years, she would have pay RM 105 000 for nothing! The worst thing would be the loan. She still has to continue to pay for the loan, and company may charge the interest as she is no longer the employee of the company. Hence, if she chooses the second option, she would have to sacrifice her freedom and the choosing power. Instead, she can leave anytime for better offer if she chooses the first option.
All in all, if she is in the process of moving to the peak, she may as well consider the first option, as there would be better offers outside which can bring her to the top of her career. If she would want a stable job, she may as well choose the second option, as the benefits provided are way better than the first option. For the first option, she can consider to use prescribed value method to have a lower amount charged on employment income. For the second option, she might consider to use formula method so that no amount will be charged on her employment income, and the tax payable would be lesser.
Madam Subashini’s current salary is RM 3,500 per month and the new company is offers an immediate increase of RM 2,000 over her current salary. EPF, leave pays and medical expenses are given. However, she wants to save the tax payment on her employment income.
So, we advise that Madam Subashini can negotiates with the new employer by breaking down the increase of salary which is RM 2,000 to save on the amount of tax payable on her according the income tax (exemption) Order 2009 PU (A) 152/2009.
Madam Subashini has two kids age 5 years old and 3 years old, who are legitimate children of madam and are below age of 12 years. So, she can request for child care allowance from company to relieve her financial obligation. The amount of child care allowance is RM 2,400 per year and is exempted up to RM 200 per month.
The distance between the new company and Madam Subashini’s home is about 15 km. She can request for travelling allowance from company. There are two types of travelling allowance. Firstly, travelling allowance which for travelling from home to place of work and from place of work to home is exempted up to amount of RM 2,400 per year, which is RM 200 per month. Secondly, travelling allowance for travelling in exercising an employment. For example, attend the meeting with clients. This allowance can get exemption of tax up to RM 6,000 per year, RM 500 per month. Thus, the total amount of travelling allowance which can be exempted is RM 700 per month. However, employer must be able to identify the amount of allowance for each category, or else the employee will be able to be exempted up to RM6000 only. This exemption is only applicable from 2008 until 2010.
Assume that Madam Subashini drives her own car to new company and need to park her car during the office hour. The parking fee is paid on flat rate for the staff. Assume that Madam can claim the parking allowance from company up to RM 2,400 and RM 200 per month. Parking allowance will be exempted as long as it is reasonable and not excessive.
The new post of Madam Subashini is the finance executive director (service director), to make sure she can obligate the duties of new post and help to reach the goals of company, Madam should request from the new company to pay for her the professional subscription such as Association of Chartered Certified Accountants. The fees which paid by the employer is not taxable if the training is essential to the business of the employer in terms of enhancement of knowledge for the employee to facilitate her in carrying out her duties. So, we make assumption that the payment of subscription every year is RM1000.
The total allowance from child care, travelling, parking and professional subscription per year is RM14200. These allowance expenses which provided by the company will be given full exemption from tax and are with effect from year 2008. Thus, Madam Subashini can save the amount of tax payable and get tax exemption. All allowances paid by the employer will be assessed on gross amount under S13(1) (a).
In conclusion, the allowances that can be received by Madam Subashini is RM 14200 instead of getting increase of salary, RM 24000 per year. There is still left RM 9800 as an increasing of salary for her, which will be around RM800 per month. Instead of having RM24000 charged under S13(1)(a), now reduce to only RM9800 will be charged. The increment which has been broken down into allowances is exempted.
The advices that suggested above can help Madam Subashini in reducing her tax payment and also improve her welfare in the company.