Income Tax Malaysia

Malaysia is known to be a very tax friendly country when compared to other countries with much higher tax rates. The income tax in Malaysia is still considered relatively low and many taxes that are currently found in other countries are not applicable in Malaysia. The highest bracket of income tax in Malaysia that was previously 28% has been cut down to 26% for Malaysian citizens and 27% for non-Malaysian citizens. In addition, other taxes such as estate duties, accumulated earnings tax, annual wealth taxes and federal taxes are not applicable in Malaysia.

Who Is Required To Pay Income Tax?

Any individual that is staying in Malaysia for a period of more than 182 days are automatically regarded as a resident under the Malaysian tax law regardless of their nationality. In contrast, any individual that is staying in Malaysia for less than 182 days are regarded as a non-Malaysian citizen and that individual will be taxed differently. Besides that, there is a third group of individuals that are completely exempted from paying income tax. These are the individuals that is employed to work in Malaysia and stayed here for less than 60 days in a calendar year. The same rule also applies to individuals that are over the age of 55 years old that receive Malaysian pension and to individuals who are receiving interests from banks. Furthermore, expatriates that came to Malaysia under the Malaysia My Second Home Programme are also not required to pay any income tax on their pension or income that is remitted from overseas. Malaysian Government also had an Agreement with several countries on Avoidance of Double Taxation. Apart from these groups, all of the income that is achieved and derived to Malaysia is accountable for tax.

When to Pay For Income Tax?

The tax season in Malaysia rolls around from 1st of March to 30th April. Whenever this tax season comes around, an inevitably sense of worry can be seen amongst the Malaysian public because there are many things and considerations to be taken into account such as financial, legal and technical considerations when an individual is filling in the income tax form at Lembaga Hasil Dalam Negeri (LHDN or Hasil) or through ezHASiL, LDHN official online portal for paying taxes. According to the latest announcement on ezHASiL, any individual who is a new taxpayer or reporting his or her income for the first time with an income equal or more than RM450000 has to visit the nearest LHDNM branch to make an income acknowledgement first. The reason for this procedure is to avoid the possibility of that individual taxpayer making a mistake when entering the amount of his or her income. However, this announcement does not apply to an individual taxpayer that submits the e-Filing using a Tax Agent.

Income Tax Malaysia Rates

Before listing down the income tax rates for different income brackets, there are two keys things to remember first. The firs thing is to remember that tax rates are progressive therefore you will only need to pay the higher rate above the rate on the amount. For example, you will never have less net income after tax when you are earning more. The second thing is to remember that the tax rates are only imposed on chargeable income and not salary or total income. Chargeable income is an income that is calculated after deducting the tax exemptions and tax reliefs. The income tax rates in Malaysia are as the following:

  • Individuals that are earning RM1 to RM5000 chargeable income will be exempted from paying income tax
  • Individuals that are earning RM5001 to RM20000 chargeable income will be imposed with 1% income tax
  • Individuals that are earning RM20001 to RM35000 chargeable income will be imposed with 5% income tax
  • Individuals that are earning RM35001 to RM50000 chargeable income will be imposed with 10% income tax
  • Individuals that are earning RM50001 to RM70000 chargeable income will be imposed with 16% income tax
  • Individuals that are earning RM70001 to RM100000 chargeable income will be imposed with 21% income tax
  • Individuals that are earning RM100001 to RM250000 chargeable income will be imposed with 24% income tax
  • Individuals that are earning RM250001 to RM400000 chargeable income will be imposed with 24.5% income tax
  • Individuals that are earning RM400001 to RM600000 chargeable income will be imposed with 25% income tax
  • Individuals that are earning RM600001 to RM1000000 chargeable income will be imposed with 25% income tax
  • Individuals that are earning more than RM1000000 chargeable income will also be imposed with 25% income tax

The Exact Amount before Filing

For most of the Malaysian citizens, the key amount that you have to earn before there is a need for you to open a file for tax is about RM34001 per year after deducting EPF deductions such as all benefits, allowances, overtime, commissions and bonuses. If you are earning below RM340001 per year, there is no need for you to open a file for tax. However, if you are earning more than RM34001, it is mandatory for you to open a file for tax so that your income tax can be automatically deducted from your income.

Taxable Income

Taxable income refers to the base upon that an income tax system imposes the tax. In general, the Lembaga Hasil Dalam Negeri (LHDN) includes all types of earnings that Malaysian taxpayers have to pay for but these earnings are then reduced by expenses and other deductions. Some of the taxable income are:

  • General Taxable income such as business or profession, employment, dividends, interest but not including bank deposit interest, discounts, rent, royalties, premiums, pensions, annuities and others
  • Taxable benefits that can be converted into cash and are usually given by an employer to an employee known as perquisites such as bill claims, company credit card, loan from company, sponsored club membership, sponsored child tuition fees, company insurance premiums, personal driver, personal guard, personal maid, special staff discounts and gift vouchers
  • Taxable benefits that cannot be converted into cash and are usually given by an employer to an employee known as benefits in kind such as automobiles provided by the company, household furnishing by the company, lodging by the company and electronics purchased by the company

Tax Exemptions List

A full list of the items exempted from income tax are:

  • Leave passage
  • Medical benefit and dental benefit
  • Retirement gratuity
  • Gratuity that are paid by public funds
  • Gratuity that are paid to the contract officer
  • Compensation for loss of employment
  • Pensions
  • Death gratuities
  • Scholarships
  • Cultural performances
  • Royalties
  • Interests
  • Dividends
  • Income that are remitted from countries out of Malaysia
  • Fees or honorarium for providing expert services
  • Income that are derived from research findings
  • Company special service awards
  • Benefits in kind exemptions
  • Travelling allowances
 

Base Rate Malaysia

Sometime early this year, Base Rate (BR) was implemented to replace the previous Base Lending Rate (BLR) system. Under the Base Rate system, this rate will be the main reference rate for new retail floating rate loans. Banks in Malaysia can also determine their interest rate based on a formula that was set by the Central Bank.

Unlike the previous Base Lending Rate system where Bank Negara sets the rate based on how much it costs them to lend money to other financial institutions, the rate under Base Rate is based on the Overnight Policy Rate (OPR) set by the central bank of Malaysia.

Why It Was Changed?

The Base Rate system encourages greater transparency from banks in Malaysia and it will also help customers to make better financial decisions. Some banks such as Maybank and Public Bank that are strong in consumer financing will have an initial competitive edge over other banks in offering more competitive and attractive base rates and effective lending rates (ELR) to their customers. In the previous base lending rate system, some banks were found lending out money below the base lending rate in order to attract more customers and to boost their loan growth. However, customers are no longer able to borrow money below the base rate under the new base rate system.

Banks Base Rate and Their Effective Lending Rates

Below is a list of banks in Malaysia along with their base rate and effective lending rates:

  • Affin Bank – 3.8% Base Rate, 4.75% Effective Lending Rate
  • Alliance Bank -3.82% Base Rate, 4.65% Effective Lending Rate
  • Am Bank – 3.8% Base Rate, 4.45% Effective Lending Rate
  • CIMB Bank – 3.9% Base Rate, 4.65% Effective Lending Rate
  • Hong Leong Bank – 3.69% Base Rate, 4.8% Effective Lending Rate
  • Maybank – 3% Base Rate, 4.55% Effective Lending Rate
  • Public Bank – 3.52% Base Rate, 4.45% Effective Lending Rate
  • RHB Bank – 3.65% Base Rate, 4.65% Effective Lending Rate
  • Citibank – 3.65% Base Rate, 4.55% Effective Lending Rate
  • HSBC Bank – 3.50% Base Rate, 4.85% Effective Lending Rate
  • OCBC Bank – 3.72% Base Rate, 5.05% Effective Lending Rate
  • Standard Chartered Bank – 3.52% Base Rate, 4.52% Effective Lending Rate
  • United Overseas Bank – 3.85% Base Rate, 4.75% Effective Lending Rate

How Does It Affect the Borrowers?

This new change from base lending rate system to base rate system will only have minimum impact on the borrowers. For example, the rates offered by Maybank in the previous base lending rate system was 6.85% and the BLR -2.40%. This means that the borrower only needs to pay 4.45% on the mortgage. Under the new base rate system, Maybank will have to reveal its base rate and it must also disclose its margin which will be then used to determine the effective lending rate. Maybank’s effective lending rate was set to 3.20% and the interest presented here is +1.35%. This means that the effective lending rate that the borrower needs to pay on the mortgage is 4.55%, another 0.10% extra. Ultimately, the effective lending rate will be used to determine how much the borrower will have to pay the mortgage. Below is an example on how much a borrower will need to pay for a loan amount of RM550000 with loan tenure of 30 years:

  • Reference Rate – 6.85% Base Lending Rate , 3.20% Base Rate
  • Interest Rate – (-2.40%) Base Lending Rate, (+1.35%) Base Rate
  • Effective Lending Rate – 4.45%  Base Lending Rate, 4.55% Base Rate
  • Monthly Instalment (RM) – RM2770 Base Lending Rate, RM2804 Base Rate

Please note that the examples shown above may vary in its effective lending rate if the base lending rate and base rate changes. With this new base rate system, the borrower needs to pay an additional RM34 per month. This additional figure amounts to RM12240 more by the end of the loan tenure.

Although some of the banks can set higher base rate compared to other banks, these banks can also offer lower effective lending rates to attract customers and to remain competitive. For example, Public Bank has a base rate of 3.65% and Maybank has a base rate of 4.55%. Public Bank can then offer a low effective lending rate of 4.45% while Maybank maintains their effective lending rate at 4.55%. In this situation, this means that Public Bank is willing to take a smaller profit margin so that they can remain competitive.

Base Rate Effect on Banks

So far, banks and mortgage providers are still going on with their usual business because the change from base lending rate to base rate has not significantly increased the effective lending rate. When it comes to the actual interest rates, the borrowers are still paying almost the same amount in the base rate system as they did in the base lending rate system. However, some of the experts said that this switch is beneficial as it will create a better transparency between the banks and their borrowers. Consequently, this will lead to greater competition among the banks in Malaysia to provide a huge range of loan options for their customers. According to Bank Negara Malaysia, the base rate system will also properly reflect the costs arising from monetary policy and market funding conditions. This will also encourage the banks and financial institutions in Malaysia to have greater efficiency and discipline when pricing their retail financing products.

However, this change may impact on some of the smaller financial institutions as they will start to lose out in the race to attract more borrowers due to the flexibility to determine their respective benchmark rates. Some of these smaller financial institutions may not have much leeway and resources to offer competitive rates when compared to bigger and more established banks and financial institutions.

Base Rate Effect on Property Demand

The switch from base lending rate to base rate is unlikely to have any effect and impact on consumer demand for property. In fact, the base rate system may even benefit home buyers and property investors for them to make better buying decisions because of the transparency in reference rate. These home buyers and property investors are also able to make more sound financial decisions by looking through an array of different loan products offered by various banks and financial institutions.

 

Socso Guide Malaysia

Social Security Organization or also known as SOCSO is an organization that was established in 1971 under the Ministry of Human Resources. The Ministry of Human Resources was previously known as Ministry of Labour. The objective of this establishment is to provide social security protections to all workers and employees working in Malaysia.

SOCSO Functions

The SOCSO functions are as the following:

  • Registering employers and employees
  • Contribution collection from employers and employees
  • Payment of benefits to the workers or their dependents if unfortunate tragedy strikes
  • Provision of vocational and physical rehabilitation benefits
  • Promoting awareness on occupational safety and health

Employer

There are 2 different types of employers. They are known as principal employer and immediate employer. Principal employer refers to an employer who has directly employed an employee to work for him or her. The principal employer is responsible for the wages payment and all the service matters related to that employee. An immediate employer refers to an employer who works for a principal employer. This immediate employer will then undertake some of the work of the principal employer by using a sub-contract. The immediate employer also has direct control over the employees employed by him or her. Both principal and immediate employers that employ one or more than one employee have to register and contribute to SOCSO for all the employees stated under the Employee’s Social Security Act 1969 on a monthly basis. Furthermore, the principal employer is also liable to make sure that all the employees employed by the immediate employer are registered and they are paid with their monthly contributions. The principal employer will be liable if he or she fails to do so.

Employee

An employee is defined as an individual who has been employed by an employer either under apprenticeship or a contract of service as stated under the Act. Employees that are earning RM3000 or lesser have to contribute to SOCSO and employees that are earning more than RM3000 have the option to be covered under the act if they have not registered or contribute to SOCSO. However, there is also a principle known as Once In, Always In. This principle is created employees that were previously registered with SOCSO and is currently earning more than RM3000. In this principle, these employees have to continue to contribute to SOCSO under the First Schedule of the Act. After an employee is eligible under the Act, he or she will always to eligible for the coverage regardless of his or her next monthly wage amount. All employees that are eligible for SOCSO have to register and contribute to SOCSO without fail.

Wages Definition

Wages are defined as all payments paid to the employee based on an hourly rate, daily rate, weekly rate, piece rate or task rate. Payments by an employer to any statutory fund on the behalf of employees, mileage claims, gratuity payments or payments for retrenchment or dismissal and annual bonus are not defined as wages in this context.

The wages include payments such as:

  • Salary
  • Overtime payments
  • Service charge
  • Commissions
  • Payments for leave, annual leave, maternity, rest day, public holidays and others
  • Allowances, incentives, food, cost of living, housing, shifts and others

However, there is a certain group of employees that are not covered under SOCSO. The group comprises of government employees, domestic servants, self-employed persons, foreign workers, business owners and spouses of partnership or sole-proprietorship.

Benefits of SOCSO

SOCSO was incorporated with the objective to provide assistance financial and medical assistance to employees that have their capabilities reduced as a result of accidents or diseases. SOCSO also aims to provide assistance to the employees’ dependents in the form of pensions if the employee dies. The benefits under this scheme are divided into 2 parts known as Employment Injury Scheme and Invalidity Pension Scheme.

The Employment Injury Scheme provides protection and coverage for employees that suffer from employment injury. This include medical benefits, temporary disablement benefit, permanent disablement benefits, constant attendance allowance, rehabilitation benefit, return to work programme, dependent benefit, funeral benefits and education benefits. It is also important to understand that the employees might still be covered if they stopped contributing to SOCSO. However, the said employee has to fulfil certain conditions. This is a fact that has gone unnoticed by many people.

The Invalidity Pension Scheme provides coverage for employees that experienced invalidity or death due to any causes that are not related to their employment. Invalidity is measured by the inability of that employee to achieve one-third of the earnings of a sound insured person. The inability may be just temporary or forever. The benefits include invalidity pension, invalidity grant, survivors pension, funeral benefits, facilities for physical rehabilitation and dialysis and education benefits. The survivors pension is also important as many people will assume that the pension will stop after the employee has passed away. However, this is not the case as the dependent family members can also apply for the pension to be transferred to them through the survivors pension scheme.

Another benefit of SOCSO is the privilege to get free health check-ups. SOCSO has issued free health check vouchers to 2.2 million eligible Malaysian candidates. However, a staggering 1.7 million of them declined the initiative. Although it takes time and effort to go through the entire process, employees are encouraged to take some time off work to make use of this free service.

What Are You Expected To Contribute?

There are two types of categories for SOCSO contribution. The first category is known as Employment Injury and Invalidity Schemes and the second category is known as Employment Injury Scheme Only. Under the Employment Injury and Invalidity Schemes, all of the employees must be below the age of 60 years old and only 0.5% of the employee’s monthly wage is to be extracted out for SOCSO contribution. If the figure is higher than that, the related parties should report to relevant authorities. Under the Employment Injury Scheme Only, employees can be 60 years old and above and still currently work. It is also for employees above the age of 55 years old that has made their first SOCSO contribution. In this category, the insured person will receive invalidity pension if they are working and earning less than one-third of a monthly salary before invalidity happens. The employer has to bear the contribution costs at 1.25% of the monthly wages to SOCSO.

Registering For SOCSO

In order to register for SOCSO, there are two forms for the employer and the employee to fill in respectively. The employer is required to fill in the Form 1 Employer Registration Form while the employee is required to fill in the Form 2 Employee Registration Form. After that, SOCSO will issue an employers code number that can be used in all correspondence with the related company.

For more information about SOCSO, kindly visit Pertubuhan Keselamatan Social (PERKESO) headquarters at Menara PERKESO at Jalan Ampang, Kuala Lumpur or visit PERKESO’s official website. Alternatively, you can also contact them through their customer service contact number. The operating hours are from Monday to Friday 8AM to 5.15PM. Lastly, do know that it is an offence if your employer fails to make contributions to SOCSO on your behalf.