Tips on how to file your income tax and claim exemptions

EVERY employee when filing the tax return (Form BE) for year of assessment (YA) 2009 on April 30 has to understand the concept of income exemption, deduction and relief in order to maximise the tax benefits available under the Income Tax Act 1967 prior to paying the legally required amount of income tax.

Income Exemption: Generally, any amount paid by the employer to the employee in relation to having or exercising an employment will be taxed. This refers to employment income such as salary, bonus, gratuity, commission, allowance, director fees and many other forms of remunerations as stated in section 13(1) of the Act.

The Government, however, would from time to time legislate through the Act or gazette order (PU(A) Orders) on the category of income paid by the employer where tax exemption will be granted. This means that such income will be excluded from the income tax computation.

In short, the phrase “income exemption” refers to employment income that is excluded from taxability.

Deduction: Employee can only deduct expenses incurred in carrying out the employee’s duties provided allowance has been received from the employer. This generally refers to travelling allowance, entertainment allowance and meal allowance.

Income tax only imposes tax on net income, ie. after deduction of the required expenses incurred in discharging the performance of the employee’s duties. The amount to be taxed is mathematically computed as follows:

With effect from YA 2008, payments by the employer to the employee in the form of child care allowance, payment of traditional medicine and maternity expenses constitute tax exempt income to the employee. The amount paid in relation to these expenses by the employer is tax deductible against his business income and yet not taxable in the hands of employees.

The relationship between the employer and the employee is illustrated in the table below.

If the employee incurred on his/her own child care, medical expenses on traditional medicine or maternity expenses, these expenses are not deductible from the employment income due to the followings:

● no allowance has been received from the employer on these items;

● it is not related to the carrying on of the employee’s work;

● it represents personal expenses which are not permissible under the Act.

The Act only permits the deduction of expenses provided it is incurred “wholly and exclusively” (the sole objective test) in discharging the performance of employees duties as stated in section 33 of the Act.

Tax Planning: Since the expenses are tax deductible to employer, it would be tax efficient for the employee to forgo their bonus in exchange for these benefits as child care allowance, medical expenses on traditional medicine and maternity expenses that are given by the employer to the employee are tax exempt on the employee’s hand.

Alternatively, employer may consider providing these benefits to the employee at the additional cost to the business but it gives employee loyalty to the firm in long run.

Tax relief: The Act provides a list of items deductible from any income earned by a resident individual in order to relief him/her from tax burden. These expenses are essential to provide welfare to an individual and are given to any resident individual irrespective whether he/she is earning business income, employment income or investment income. The resident individual refers to an individual who has been staying in Malaysia for at least six months.

By Dr Choong Kwan Fatt