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Saturday, October 11, 2014

STRUCTURING AN EMPLOYMENT PACKAGE



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Changing Jobs? Taking on another position? Renegotiating your employment package? Well then, it may be an opportune time to look at or relook your compensation package, or potential package, and see if you can make it more tax efficient.

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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