Key points of this update:
1. Insurance premium paid for professional indemnity insurance is tax deductible if the
professional carries on a business related to his professional.
2. Taxpayer affected includes lawyers, accountants, architects, doctors, pharmacists, engineers, surveyors or any other professions where the status of the profession is recognised by a written law or statute in Malaysia.
3. Compensation received from the insurance company is a taxable income.
4. Compensation paid to the claimant is a tax deductible expense.
Professionals in Professional Practice
According to the latest Public Ruling 8/2017, insurance premium paid for professional indemnity insurance (PII) is tax deductible, provided
a. The person claiming the expense must be a professional as defined in the public ruling.
b. The person must be carrying a business related to his profession.
Dr. Wong is a practising as a general practitioner in his own clinic. He is registered with the Malaysian Medical Council (MMC). He has purchased a PII policy to cover himself in the event of lawsuits arising from the carrying of his profession as a doctor. The PII premium paid by Dr. Wong is a tax deductible expense for his business.
Professionals in Employment
In the case of a professional who is in employment, the premium paid for PII is not allowed as a deduction against the gross income from that employment.
Dr. Aidil is a full-time surgeon employed by a government hospital. He is registered with the MMC and is also a member of the Malaysian Medical Association (MMA). In the year 2017, he purchased a PII policy and paid a premium of RM2,400.
The PII premium paid for the year 2017 is not eligible for a deduction against Dr. Aidil’s employment income because he is not carrying on a business related to his profession.
Professionals Carrying Other Business
A professional who is not practising his profession but carries on other business, the PII premium is not a tax deductible expense.
Felicia is an accountant who does not practise as an accountant but instead is carrying on a full-time direct-selling business. Felicia
purchases a PII policy to maintain her professional status as an accountant.
As Felicia is not carrying a business related to her profession as an accountant, she does not satisfy the requirement needed for deduction of PII premium. Thus, the PII premium paid is not allowed as a deduction from the gross income of the direct-selling business.
PII Premium Incurred by the Company
Where a particular professional body allows its members to practise the profession in the form of a company and PII is purchased by the company, the PII premium paid by the company is allowed as a deduction against the gross income of the company if the company carries on a business related to that profession.
Senibina Bumi Landskap Sdn Bhd (SBLSB) is a consulting architecture company which provides architectural consultancy and services. The company purchased a PII policy to cover the cost of compensation and defending lawsuits in relation to the construction project of a hotel in Putrajaya. Since SBLSB which carries on an architectural business purchased a PII policy related to the architect profession, the PII premium paid is allowed as a deduction against the gross income of the company’s business.
Insurance Proceeds and Compensation
Where a professional has been allowed a deduction for the PII premium paid, any proceeds received from the insurance company in connection with the PII will be subject to tax.
Whereas compensation paid to the claimant will be allowed as deduction.
Bernard, the sole-proprietor of a legal firm received proceeds amounting to RM200,000 from an insurance company and this amount could not cover the compensation of RM250,000 to be paid to a customer who had made a claim against him. Therefore, Bernard had to bear on his own RM50,000 to cover the shortfall of compensation payment to the claimant.
Proceeds amounting to RM200,000 will be subject to tax. When the proceeds are paid out as compensation to his client, the amount is allowed as a tax deduction. The compensation totalling RM50,000 incurred by Bernard is also allowable as a deduction from the gross income of his business.
For more details, please click here: Public Ruling 8/2017 (PDF)
Let’s talk: StanleyCo is a Licensed Tax Agent and GST Agent, please contact us if you need assistance with the topic above.
Disclaimer: Every effort has been made to provide accurate information. However, the information and regulations contained in this article are subject to changes and amendments by the relevant authority at any time. As such, the information in this article may not be current.
And the information provided in this article is general commentary only and shall not be considered as advice or recommendation. As all tax situations are specific to their facts and will differ from the situations in this article - if you have specific tax questions you should consult a licensed tax agent.