IRB imposes tax on allowances

Saturday January 27, 2007

Source : The Star Newspaper

Reference : Income Tax Public Ruling 1/2006 - Perquisites from Employment

- It's a PDF file, so those without broadband please be patient

IRB imposes tax on allowances

By M. KRISHNAMOORTHY

KUALA LUMPUR: Companies have started making deductions on transport and other allowances paid to their employees for income tax purposes.

Such allowances, which are considered perquisites or perks, are subject to Schedular Tax Deduction (STD) in line with the Income Tax Public Ruling. (means Public Ruling 1/2006)

Although the ruling came into effect last year, it is learnt that most companies are only starting to make monthly deductions from this month.

I don't think so, Date of issue of the ruling is 17th January 2006. And in Para 10 of the ruling stated it is effective from Year of Assessment 2005 and onwards. So in layman terms it is the calender year of 01.01.2005 - 31.12.2005 and onwards. Most of the company who appointed their tax consultants would have been advised on this and making deductions beginning year 2006.

Inland Revenue Board Principal Assistant Director Rahimah Abdullah said that taxable allowances included those given for relocation, displacement, transport and parking, clothing, car wash, telephone bills and others.

However, she said taxpayers could claim tax deduction against the allowances if they had documented evidence to prove that the expenses were incurred as part of their duties or employment.

“The deduction is line with the Inland Revenue Board’s (IRB) Public Ruling No. 1/2006 on Perquisites from Employment, issued on Jan 17, 2006,” she added.

“These benefits are part of the gross income from employment, and therefore taxable.”

Rahimah said perquisites referred to benefits in cash or in kind that were convertible into money received in relation to employment.

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I think I need to explain more on this rather keep those taxpayer in the mist.

Para 3.9 “Perquisites”, means benefits in cash or in kind that are convertible into money received by an employee from the employer or third parties in respect of having or exercising the employment

Perquisites have the following characteristics:
i. Perquisites can be received regularly or casually.

ii. Perquisites received can be in cash or in kind. If it is received in kind, such items must have money's worth and are convertible into money. The phrase "convertible into money" means that when the items are provided to the employee, they can be sold, assigned, transferred or convertible into cash.

iii. Perquisites can be received by an employee in respect of an employment contract entered into by him or is given by the employer or a third party voluntarily. In the case of perquisites received from third parties, the employee must declare such income in the Income Tax Form BE or B.

And here I list down some of the example on type of perquisite given in the ruling
• Pecuniary liability of employees paid by the employer, such as income tax payment, electricity bills, water and telephone bills;
• Credit card facilities
• Loan interest
• Recreational club membership
• Tuition or school fees of child
• Life insurance premiums
• Gardener, driver, domestic help or guard
• Waiver of loan or advance
• Scholarship
• Assets given free of charge or sold at a discount
• Gift vouchers
• Gift of personal computer to the employee by the employer
• Excellent public service award
• Professional subscriptions

So the title that we are in debate was this :-
• Pecuniary liability of employees paid by the employer, such as income tax payment, electricity bills, water and telephone bills;

Para 6.3 Employee’s pecuniary liabilities.
All pecuniary liabilities of an employee which are paid by his employer whether voluntarily or under the terms of an employment contract are perquisites to the employee and is his gross income from the employment under paragraph 13(1)(a) of the ITA, irrespective whether the payment –
• is made direct to the person who should receive the amount owing;
• given to the employee so that the employee can settle his pecuniary liability; or
• given to the employee as a reimbursement.

Among the pecuniary liabilities of the employee paid by the employer are income tax, water bill, electricity bill, telephone bill, road tax, car insurance premiums, car parking fees and car maintenance charges. The amount chargeable to tax in respect of pecuniary liabilities paid by the employer can be reduced if the employee makes use of such amenities in the performance of his official duties, on the condition that such official duties can be substantiated with a certification by the employer.

I guess the above explanation above is clear enough, in layman terms, whatever the benefit that the employees pay you and which not falls under Benefit In Kind is a perquisites and it is a taxable income. And the amount brought into gross income can be reduced by proofing it is for official duty by certification of employer.

So the computation for an employees will be as follows :-
Gross income from employment
Less : Direct expenses incurred during employment

My verdict : IRB wants to tax every single income under the sun to be taxed. And IRB always has the stand that taxpayers are always guilty. It is up to the taxpayers to proof that he/she is not guilty by providing all those hassle documentation and so on. Under Parking, petrol, repair and maintenance, what is the proof that has to submitted? Do the taxpayer write a log books on where and when is he travelling to? What is timecost incurred on scribbing those words in the diary?Lots of Malaysian don't really bother about this and doesn't even wants to claim from Inland Revenue. So most of them will just let the IRB tax them. By doing this IRB will get a windfall income from the taxpayers.