Compensation for Loss of Employment in Malaysia

Compensation is exempted from income tax in the following circumstances: 

a. If the Director General is satisfied that the payment is made on account of loss of employment due to ill-health; or

b. In case of a payment made in connection with a period of employment with the same employer or with companies in the same group, in respect of so much of the payment as does not exceed an amount ascertained by multiplying the sum of RM10,000.00 by the number of completed years of service with that employer or those companies.

Compensation for the purpose of this paragraph includes termination under the Voluntary Separation Scheme (VSS) or Mutual Separation Scheme (MSS).

Balance of compensation after deducting the qualifying exemption will be subject to MTD and the MTD shall be calculated using Additional Remuneration Formula.

Example: 

i. Employee commenced employment on 1 May 2004 
ii. Employee is terminated on 25 March 2010 
iii. Total compensation paid RM75,000.00 

Determination of Amount of Compensation Which Is Subject to Tax

1. Determine the Number of Completed Years of Service

1/5/2004 - 30/4/2005: one completed year of service. 
1/5/2005 - 30/4/2006: one completed year of service. 
1/5/2006 - 30/4/2007: one completed year of service. 
1/5/2007 - 30/4/2008: one completed year of service. 
1/5/2008 - 30/4/2009: one completed year of service. 
1/5/2009 - 25/3/2010: less than one completed year of service. 

Employee has served for 5 completed years of service.

2. Tax Exemption on Compensation Shall Be: 

RM10,000.00 x 5 completed years of service = RM50,000.00 

Compensation paid RM75,000.00 
Less: Amount of exemption RM50,000.00 
Balance of compensation subject to MTD RM25,000.00 

Balance of compensation of RM25,000.00 after deducting the qualifying exemption will be subject to MTD and the MTD shall be calculated using Additional Remuneration Formula. However, payment for compensation made by a controlled company to a director of the company who is not a whole-time service director shall not be exempted from tax.

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Edited by: 浪子

Bibliography

Inland Revenue Board Of Malaysia. (2016). Compensation for Loss of Employment. Retrieved from http://www.hasil.gov.my/bt_goindex.php?bt_kump=50&bt_skum=1&bt_posi=1&bt_unit=8&bt_sequ=5&bt_lgv=2