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A compensation package typically comprises cash and non-cash component is usually referred to as benefits-in-kind (BIK). Through an adroit combination of cash and BIK, one’s tax bill may be somewhat reduced and disposable income, after paying certain essential expenditures, increased.
The
statement above is best illustrated with the following example.
Facts
Mr X is
offered a compensation package with a total value of, say, RM200,000 per annum,
inclusive of the employer’s contribution of 13% to the Employee Provident Fund (EPF).
He has a choice of taking it all in cash or in a combination of cash and BIK.
Mr X is
married and has two children who attend private schools. Mrs X is employed with
a monthly salary of RM8,000.
CASH
PACKAGE
If the
package is straightforward and in cash, it will comprise the following
RM
CASH
SALARY-----------------------------------177,000 a year
Employer’s
contribution to EPF at 13 %--23,000 a year
CASH AND
BIK PACKAGE
Alternatively,
Mr X may wish to consider the following package.
Unfurnished
accommodation at RM4,000 a month;
Company
car, which costs RM150,000 (for which the employer attributes an annual cost of
RM10,000)
School fees
of up to RM20,000 a year;
Leave
passage (domestic) of up to RM5,000 a year for the family;
Cash salary
of RM100,000 a year;
Employer’s
EPF enhanced rate of 17% that is RM17,000.
Total Value
of the package is RM200,000 for the year
Before Mr X
decides on which package to go for, he should do some calculations to ascertain
his after-tax position, his available cash position and his EPF savings
From the
example, we see that the cash package is subject to a higher tax, to the tune
of RM4,200 (RM29,450 minus RM25,250). The reason for the lower tax in
cash-and-BIK package scenario is that although the BIK are subject to tax, the
value attributable to them may be less than the actual cost of the
BIK, as in
the case for accommodation and company car.
AVAILABLE-CASH
POSITION AND EPF SAVINGS
Now that we
know the tax bill is lower by about 15% (14% to 17%, depending on which base is
adopted), we should explore next how much cash is left after accounting for the
essential outgoings.
In this
case, the items are house rent, children’s education, car employee’s EPF
contribution of 11% and the yearly holiday. Assume that Mr X will rent
accommodation at RM4,000 a month on his own and incur a cost of RM10,000 a year for a car he will lease or buy
himself.
Thereafter,
the sum total of savings as a result of EPF contributions from both employer
and employee is added on to complete the picture.
The lower
salary of RM100,000 produces a higher availability of cash, of RM63,750
compared with the RM45,080 from the cash package. This is mainly due to the
fact that under the cash-and-BIK package, Mr X basically pays the tax attributable
to the value of the BIK. Compare this with the cash package where the outgoings
are payable in full after the gross salary has been taxed.
However, it
does not stop there. The employer’s contributions to the EPF in the cash
package, although at 13%, has a larger base of RM177,000. More importantly,
such contribution are tax exempt when withdrawn at retirement or for approved
designated purposes, such as house installments and medical treatment.
Overall, in
our example, the total amount of cash in hand and savings in the EPF is higher
under the cash-and-BIK package. So, from the illustration above, it does look
like it might be smart to factor in some BIK in a compensation package (if the
BIK feasible for the employer).
But then
again, it is undeniable that cash is king. The cash package gives you a higher
base amount when it comes to salary increments, bonuses and when you are
negotiating for another job. So it all depends on the prevailing circumstances
at the material time.
FROM THE
EMPLOYER’S PERSEPCTIVES
If the
employee benefits, tax-and cash-wise, from receiving a BIK instead of the
equivalent cash, how does the employer fare? Usually, but not always, it is a
win-win situation- both employer and employee derive some tax benefit or tax
deduction.
With
reference to the company car in our example, the employer will be able to claim
capital allowance ( tax depreciation) of up to RM100,000 against its business
income, thus saving tax ( at 25%) of RM25,000 over the course of four to six
years, so that the car costs only RM125,000.
As for
bearing school fees and house rent and contributing EPF ( up to 19%) the
employer will be allowed tax deductions on the amounts incurred. However,
pursuant to a policy law, leaves passages are generally not allowed any tax
deductions to the employer.
BONA FIDE
EMPLOYER-EMPLOYEE RELATIONSHIP
It should
be pointed that the preferential tax treatment of BIK, such as adopting
pre-determined prescribed values and capping to 30% of remuneration under
section is not applicable if the employee is deemed to have control or
influence over the employer. In other words, the preferential treatment is only
applicable if there is genuine or bona fide employer-employee relationship,
that is master-servant relationship.
CONCLUSION
It will be advisable
to list your essential outgoings and see to what extent they can be converted
into BIK. Then, with the help of your tax adviser, do your calculations to see
if the numbers stack up. The calculations should be based on medium term view
about 2 to 5 years.
TABLE 1 :
AFTER-TAX POSITION
CASH
(RM) CASH & BIK (RM)
Salary
|
177,000
|
100,000
|
Perquisite – school
fees
|
NIL
|
20,000
|
Section 13(1)(a)
income
|
177,000
|
120,000
|
BIKs under s
13(1)(b)
Motor car
(prescribed value)
Leave passage
|
NIL
NIL
|
5,000
EXEMPT
|
Value of
accommodation
Defined value 48,000
30% of
s.13(1)(a) 36,000
The lower is
taxable
|
NIL
|
36,000
|
Less
Personal reliefs
Self
Children
EPF
|
9,000
2,000
6,000
17,000
|
9,000
2,000
6,000
17,000
|
Chargeable income
|
160,000
|
144,000
|
Tax charged
On first RM100,000
On remaining 60,000
@ 26%
On remaining 44,000
@ 26%
Tax
chargeable/payable
|
13,850
15,600
29,450
|
13,850
11,440
25,250
|
TABLE 2
CASH (RM) CASH & BIK (RM)
Cash inflow:
Salary
Less EPF
contribution (11%)
|
177,000
(19,470)
|
100,000
(11,000)
|
Cash inflow:
House rent
Car
School fees
Family holidays
Income tax
|
157,530
48,000
10,000
20,000
5,000
29,450
(112,450)
|
89,000
Nil
Nil
Nil
Nil
25,250
(25,250)
|
Cash available
|
45,080
|
63,750
|
EPF savings
Employer’s
contributions
Employee’s
contributions
|
23,000
19,470
42,470
|
17,000
11,000
28,000
|
Total
|
87,550
|
91,750
|
source from personal money magazine september edition 2014
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