INLAND REVENUE BOARD MALAYSIA - Hasil

1 INLAND REVENUE BOARD MALAYSIA Translation from the original Bahasa MALAYSIA text DATE OF ISSUE: 27 JANUARY 2012 COMPENSATION FOR LOSS OF employment PUBLIC RULING NO. 1/2012 INLAND REVENUE BOARD MALAYSIA COMPENSATION FOR LOSS OF employment Public Ruling No. 1/2012 Date Of Issue: 27 January 2012 CONTENTS Page 1. Introduction 1 2. Interpretation 1 3. Lump Sum Payment On Termination Of employment 1 4. Compensation For Loss Of employment 2 5.

2 Payment Of Compensation For Loss Of employment 3 6. Determination Of Elements Of Compensation And Gratuity 3 7. Tax Treatment Of Compensation For Loss Of employment 4 8. Separation Scheme 9 9. Period Of employment With The Same Employer 11 10. Termination Of employment Of A Service And Non-Service Director Of A Controlled Company 13 11. Effective Date 14 DIRECTOR GENERAL'S PUBLIC RULING A Public Ruling as provided for under section 138A of the Income Tax Act 1967 is issued for the purpose of providing guidance for the public and officers of the INLAND REVENUE BOARD MALAYSIA .

3 It sets out the interpretation of the Director General of INLAND REVENUE in respect of the particular tax law, and the policy and procedure that are to be applied. A Public Ruling may be withdrawn, either wholly or in part, by notice of withdrawal or by publication of a new ruling which is inconsistent with it. Director General of INLAND REVENUE , INLAND REVENUE BOARD MALAYSIA . INLAND REVENUE BOARD MALAYSIA COMPENSATION FOR LOSS OF employment Public Ruling No. 1/2012 Date Of Issue: 27 January 2012 Issue: A Page 1 of 14 1.

4 This Ruling explains the characterisation of lump sum payments received by employees upon the termination of their employment as compensation for loss of employment and the tax treatment of compensation for loss of employment . 2. The relevant provisions of the Income Tax Act 1967 (ITA 1967) for this Ruling are sections 7, 13, subsection 83(3) and paragraph 15 of Schedule 6. 3. The words used in this Ruling have the following meaning: Employer in relation to an employment , means (a) the master, where the relationship of master and servant subsists; (b) where the relationship does not subsist, the person who pays or is responsible for paying any remuneration to the employee who has the employment , notwithstanding that that person and the employee may be the same person acting in different capacities.

5 Employee in relation to an employment , means (a) the servant, where the relationship of servant and master subsists; (b) where the relationship does not subsist, the holder of the appointment or office which constitutes the employment . Service director , in relation to a company, means a director who is employed in the service of the company in a managerial or technical capacity, and is not, either on his own or with any associate or associates, the beneficial owner of (or able directly or through the medium of other companies or by any other indirect means to control) more than 5% of the ordinary share capital of the company.

6 employment means (a) employment in which the relationship of master and servant subsists; (b) any appointment or office, whether public or not and whether or not that relationship subsists, for which remuneration is payable. Controlled company means a company having not more than fifty members and controlled, in the manner described by section 139 of the ITA 1967, by not more than five persons. 4. Lump Sum Payment On Termination Of employment An employee s employment may cease due to a variety of reasons such as retirement, resignation, premature termination of the contract of service or by mutual agreement.

7 INLAND REVENUE BOARD MALAYSIA COMPENSATION FOR LOSS OF employment Public Ruling No. 1/2012 Date Of Issue: 27 January 2012 Issue: A Page 2 of 14 When an employment ceases, the employer may make a lump sum payment in accordance with the terms and conditions of the contract of service. The lump sum payment may be described by the employer as compensation for loss of employment , ex-gratia, contractual payment, retrenchment payments, gratuity, etc. The circumstances and nature of the payment must be reviewed to determine the real character of the payment.

8 The amount paid on the termination of an employment may consist of the following two elements: (a) it is attributable to the loss of employment such as redundancy (compensation); and (b) it is attributable to the past services of the employee (gratuity). The purpose of the lump sum payment has to be established in order to determine the tax treatment of the payment received by the employee. Employees can seek redress for wrongful dismissal or termination breaches of the employment contract by the employer by making a complaint or claim to the Department of Industrial Relations MALAYSIA , Industrial Court, Civil Courts or Labour Court.

9 Where the court finds that the dismissal was without cause or excuse, the two main remedies that are determined by the court are reinstatement of the dismissed employee and/or monetary compensation for the wrongfully dismissed employee. As such, the monetary award by the court to the employee has to be analysed in order to ascertain the tax treatment on the recipient. 5. Compensation For Loss Of employment Pursuant to paragraph 13(1)(e) of the ITA 1967, compensation for loss of employment is specifically included in the gross income from an employment .

10 Compensation for loss of employment would include: (a) salary or wages in lieu of notice; (b) compensation for breach of a contract of service; (c) payments to obtain release from a contingent liability (employer s obligation) under a contract of service; (d) ex-gratia or contractual payments such as redundancy payments, severance pay, etc. made to employees who have become redundant for reasons beyond their control; INLAND REVENUE BOARD MALAYSIA COMPENSATION FOR LOSS OF employment Public Ruling No. 1/2012 Date Of Issue: 27 January 2012 Issue: A Page 3 of 14 (e) a payment in consideration of a covenant, arrangement 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 .