Many companies, particularly Sdn Bhds, include personal tax payments for directors or employees as part of their remuneration packages. While this may seem like a thoughtful benefit, it often leads to costly mistakes if not handled correctly.
Public Ruling No. 3/2024 by the Inland Revenue Board of Malaysia (IRBM) provides detailed guidance on the proper treatment of such arrangements and highlights common errors made by taxpayers. Understanding these nuances is essential to avoid penalties and ensure compliance.
When a company pays personal taxes on behalf of a director or employee, the payment is treated as a ''perquisite,'' becoming part of the employee's taxable income.
For example, if a director earns RM200,000 annually and the company pays RM40,000 in personal taxes, the director's total taxable income increases to RM240,000. This amount must be accurately reflected in the EA form.
Although employers may think paying these taxes eases the employee’s financial burden, failing to declare this benefit properly can create unintended tax liabilities for both parties.
Mistake 1 : Assuming tax paid is tax deductibl ate the company level
One common error is treating personal taxes paid on behalf of directors or employees as a deductible business expense. This is not permitted under Malaysian tax law. IRBM considers these payments as non-deductible, and companies attempting to claim them may face significant tax liabilities and penalties during audits.
Mistake 2 : Failing to include tax borne as taxable benefits for employees
Another frequent mistake is not reporting taxes borne by the employer as part of the employee’s taxable benefits. This results in under-reporting the employee’s gross income, leading to penalties and additional taxes during IRBM reviews. This omission is especially prevalent among Sdn Bhds without proper tax policies.
Scenario: XYZ Sdn Bhd pays RM20,000 in personal taxes for its director, whose annual salary is RM150,000.
Error 1: The company claims the RM20,000 as a deductible expense in its corporate tax filing. The IRBM disallows this claim, resulting in additional tax liabilities and penalties.
Error 2: The RM20,000 is not included in the director’s taxable income on the EA form, leading to under-reported income and personal tax penalties for the director.
When an employer covers an employee's income tax, the amount paid is added to the employee’s taxable income.
Example:
Hendrik, a foreign employee earning RM20,000 per month, has RM25,650 in taxes paid by his employer for 2023. This RM25,650 is treated as part of Hendrik’s 2024 taxable income and taxed accordingly. Accurate reporting is critical to avoid IRB penalties.
Employers and employees must recognize that tax benefits come with obligations:
For Employers: Properly calculate, declare, and pay the tax liability to the IRB.
For Employees: Understand that such benefits increase taxable income and tax payable in the following year.
Keep detailed records of all employee benefits, including taxes paid.
Communicate transparently with employees about the tax implications of employer-borne taxes.
Seek professional advice to ensure compliance and avoid unnecessary penalties.
Managing employer-borne taxes correctly is essential for avoiding penalties and maintaining good standing with the IRBM. Mistakes in reporting or deductions can result in hefty fines and damage to your company’s reputation.
To learn more about managing these benefits effectively, contact our team at www.ktp.com.my. Together, we’ll help you navigate the complexities of Malaysian tax regulations.
Visit Us
Wisma KTP, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
Wisma THK, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients
Website www.ktp.com.my
Instagram https://bit.ly/3Rko5kN
Linkedin https://bit.ly/3sapf4l
Telegram http://bit.ly/3ptmlpn
A licensed secretarial firm in Johor Bahru providing fast reliable incorporation, secretarial services, corporate compliance services, outsourcing bookkeeping, and payroll services to clients
Website www.thks.com.my
Facebook https://bit.ly/3nQ98rs
An internal community for our colleagues on work and leisure.
Tiktok http://bit.ly/3u9LR6Q
Youtube http://bit.ly/3ppmjyE
Facebook http://bit.ly/3ateoMz
Instagram https://bit.ly/3jZpKLo
An external job community on vacancies in Johor Bahru for interns, graduates & experienced candidates.
Instagram https://bit.ly/3u2PxHg
Facebook http://bit.ly/3rPxz9o
Malaysia