Generally, non-cash benefits (e.g. accommodation or motorcars) provided by employers to their employees are treated as income of the employees. These benefits are called benefits in kind (BIK).
There are several tax rules governing how these benefits are valued and reported for tax purposes. And one should also be aware of exemptions granted in certain cases.
Benefits in kind is a tax area which could be complicated and this article is written to give you an overview of the rules involved.
TAX SAVINGS THROUGH PROPER BIK PLANNING
It is worthwhile spending time looking into this area - if BIK is properly planned and executed, there could be tax savings opportunities to the employers as well as the employees.
FAILURE TO COMPLY
It is important to know that employers who have failed to comply with these rules will be prosecuted or fined under the Income Tax Act (ITA). The tax department often focus or cover this area in tax audit.
Common Benefits in Kind (BIKs)
Some of the common BIKs include:
Car and related benefits provided to employees for private usage
Residential accommodation provided to employees
Assets provided to employees for private usage (phone, furniture, fittings, household appliances, etc)
Free products or discounted products manufactured and provided by the employer to his employees (free services included)
Refreshments made available by the employer (e.g. Milo, tea, coffee, biscuits, etc) *
Medical and dental treatments *
* Refreshment and medical and dental treatments are treated as benefits and amenities used by the employee solely for the performance of his/her duties. As such, these benefits are specifically exempted from tax (the employer could claim these expenses while the employee is not liable to tax for these benefits).
We will deal with these 2 common BIKs in further detail:
Car and related benefits
Living accommodation benefit
1. Car and related benefits
When an employee is provided with a car for private usage, the benefit is a taxable income of the employee and the employer is required to report this benefit in his employer tax return (Form E) and in the Form EA of the employee. And the employee is required to report this benefit as a taxable income in his/her tax return.
A car is regarded as being use privately when the employee could use the car to travel between his/her home and the work place, and the car is kept in the employee's home where the car could be used by the employee or his/her family at any time.
The annual value of car benefit is determined by using either the formula method or prescribed value method.
a. The 80% in the formula reflects an abatement of 20% being the deemed value of the motorcar when it is returned to the employer.
b. Cost of the motorcar refers to the actual cost incurred by the employer or market value of the motorcar.
c. Prescribed average life span is provided by the Inland Revenue Board (refer to Appendix A). For motorcar, the prescribed life span is 8 years.
Joey is provided with a used car (4 years old) which was purchased by the employer for RM120,000. The cost of the car when new was RM205,000.
Using the Formula method, the annual value of benefit in kind (BIK) in respect of the car which is taxable as part of Joey's gross income from employment is as follows:
The BIK of RM20,500 would be reported in Joey's Form EA and he is liable to pay tax on the BIK received from the employer.
Prescribed Value Method
As a concession, the employer may use the prescribed value method by referring to the prescribed value issued by the Malaysian Inland Revenue Board (MIRB). Please refer to Appendix B "THE PRESCRIBED VALUE OF MOTORCAR AND ITS RELATED BENEFITS" for the prescribed BIK value of motorcar and petrol benefits.
In Joey's case, the prescribed value of the BIK shall be RM9,000 (compared to RM20,500 using the formula method).
Please note that under the prescribed value method, a. The valuation of the benefit will be based on the cost of the motorcar at the time when it was new (not at purchase price or market value). And it is applicable to second hand cars and leased/rented cars.
b. The annual value of BIK would be reduced by half in the event the age of the motorcar provided to the employee exceeded 5 years old.
Ascertainment of age of the motorcar is by reference to the 1st of January of the year. No discount is offered if the BIK is determined using the formula method.
# Please note that the employer's tax position is not affected by the method used in determining the BIK.
Benefit of free petrol
Where an employee enjoys the benefit of car with free petrol, the BIK in respect of the petrol to be reported shall be either:
a. The actual amount of petrol expenditure incurred by the employer; or
b. The prescribed value as per Appendix B.
Using Joey's case, if Joey is also given benefit of free petrol, the employer would have to report either one of the followings as BIK:
a. The actual amount of petrol expenditure, in this case, let’s assume it to be RM6,000 throughout the year; or
b. The prescribed BIK value of RM2,100 (refer to Appendix B).
The tax rules require consistency in method employed. If the employer has chosen the formula method is determining the value of BIK for the car, he would be required to report the actual amount of petrol expenditure incurred. However, if the employer has chosen the prescribed value method to determine the value of car benefit, the free petrol enjoyed by the employee would be determined using the prescribed value as well.
2. Living accommodation provided to employees
Pursuant to S.13(1)(c), when an employer is providing living accommodation to the employee, the value of this benefit must be included in the employee's gross income. And the benefit shall be reported in employer’s Form E and Form EA of the employee.
And the employee shall pay tax on the living accommodation benefit.
The value of living accommodation benefit is imputed as:
the “defined value” of the accommodation; or
30% of the employee’s gross income, i.e. the total of salary, leave pay, fees, commission, bonuses, gratuity, perquisite or allowances, as defined in S.13(1)(a) of the ITA, whichever is the lower.
“Defined value” according to S.18 in relation to accommodation is:
the rent which is or would be paid if the accommodation is or has been unfurnished and the lessor and lessee were independent persons dealing at arm’s length where the accommodation is not affected by any written law providing for the restriction or control of rents and the person so providing the accommodation holds the accommodation on lease the rent which is or would have been paid if the accommodation is or had been unfurnished and the lessor and lessee were independent persons dealing at arm’s length;
in any other case, the rateable value or, in the absence of a rateable value, the economic rent.
David's is a senior manager of a software company. The following is his yearly remuneration package according to the employment contract:
His gross income under S.13(1)(a) would be RM75,000 (RM60k+RM10k+RM5k).
The value of the accommodation benefit would the lowest of either
a. 30% of RM75,000 = RM22,500, or
b. RM18,000 — the defined value.
In this case RM18,000 (the lowest of the 2 methods) shall be the value of the living accommodation benefit that that the employer has to report to the tax authority. And David will get taxed for the RM18,000 worth of living accommodation benefit that he has received.
a. Reference to living accommodation is to unfurnished accommodation. The value of furniture, if also provided, is considered an amenity additional to the 30% and is to be so included in the gross income.
b. Where the accommodation is shared by two or more employees, or where the employee is required to live in any particular premises or where the employee is required to use part of the premises for the benefit of the employer’s business, such as entertaining, accommodating visiting company executives or clients, the defined value of the accommodation is to be reduced to a reasonable amount(sec 32(3)(c) of the ITA) and compared with 30% of the gross income of the employee. The lower of the two is brought to charge.
c. Where an employee is provided accommodation which is beyond “normal” needs, a case may be made out to claim that only a fraction of the annual value of the relevant property should be taken into account when arriving at the deemed taxable benefit. Factors such as
entertainment, hospitality, business guest rooms, etc are good grounds for a request for a reduced taxable benefit.
d. Where accommodation is provided for a period of less than 12 months, sec 32(3)(b) of the ITA states that the value to be ascribed should be just and reasonable in the circumstances.
e. Accommodation provided to a director (non-service director) of a controlled company, the accommodation benefits shall be the full defined value and the comparison with 30% of the S.13(1)(a) gross income is not applicable. This is to prevent non-service directors of controlled companies from taking advantage of the accommodation benefit intended or available to employees. However, where the accommodation is shared with one or more employee or being larger than required by the director, the defined value could be reduced
on a reasonable basis.
f. Special treatments are granted to officers, employees, service directors of government and statutory bodies.
g. Expenses incurred by the employee in respect of the living accommodation, such as repair and maintenance of the premises, quit rent, assessments, insurance premiums for the building can be allowed as deductions.
h. Nominal rent paid by the employee in respect of the living accommodation shall be allowed as deduction.
i. Where employees are provided with accommodation in a hotel, hostel, chalet or in premises located in a plantation, forest or in areas not subject to any rates, the value of the accommodation will be 3% of the gross income (S.13(1)(a)).
j. The accommodation benefit is a taxable benefit under S.13(1)(c) if such living accommodation is provided to the employee as private residential purposes. As such, for the occupation of a living accommodation solely for the carrying on the works or discharging the employment duties, there will not be any living accommodation benefits accrued to such an employee. For example, the following staff quarters are not considered as living accommodation benefit under the scope of S.13(1)(c):
Plantation workers working in an estate
Factory workers working in a factory
Foreign construction workers at construction site
Where a staff is sent to an outstation or overseas to carry out short-term assignments (e.g. James is sent to Abu Dhabi, UAE to perform quality check on a particular shipment of oil for the company. He is required to be there for 2 months and during this time he is required to stay in an apartment owned by the company. The occupation of the apartment is not a living accommodation benefit and does not form part of James’ employment income)
For detailed guidelines and requirements on BIKs and perquisites, please refer to the followings:
Public ruling 3/2005 and addendums (Living accommodation benefit)
Public ruling 11/2012 (Employee share scheme benefit)
Public ruling 12/2012 (Share scheme benefit for cross border employees)
Public Ruling 2/2013 (Perquisite from employment)
Public ruling 3/2013 (Benefit in kind)
Public Ruling 11/2016 (Tax borne by employer)
APPENDIX A: PRESCRIBED AVERAGE LIFE SPAN OF VARIOUS ASSETS PROVIDED BY EMPLOYERS TO EMPLOYEES (download)
PRESCRIBED VALUE OF BENEFITS IN KIND COMMONLY PROVIDED BY EMPLOYERS TO EMPLOYEES (download)
Let’s talk: Please also speak to us if you are interested to find out how our team could assist you in planning remuneration packages that are tax efficient for your key employees and foreign expatriates.