Introduction
In Malaysia, employee compensation isn’t limited to just the basic salary. Employers often provide a range of supplementary payments and benefits—collectively known as “other income”—which can significantly enhance an employee’s total remuneration package. Understanding the implications of these components is vital for both employers and employees, particularly in terms of taxation and compliance with Inland Revenue Board of Malaysia (LHDN) regulations.
Whether you’re a payroll officer, business owner, or employee, knowing what counts as other income and how it’s treated under Malaysian law can help avoid costly errors and ensure accurate reporting.
Legal Framework and Compliance
Overview of LHDN Regulations
The Lembaga Hasil Dalam Negeri (LHDN) governs income tax in Malaysia, and its policies guide the treatment of all income types. According to the Income Tax Act 1967, any form of remuneration or benefit arising from employment is subject to taxation unless explicitly exempted.
Income Tax Act 1967 Provisions
Key sections of the Act emphasize that income includes not just wages, but also allowances, perquisites, bonuses, and benefits-in-kind (BIKs). LHDN’s public rulings and guidelines help interpret these elements, setting the stage for clear payroll compliance.
What Constitutes "Other Income"?
Differentiating from Basic Salary
“Other income” refers to all earnings that are additional to the regular monthly salary. These include:
- Bonuses and commissions
- Allowances (e.g., transport, housing)
- Perquisites (cash-convertible benefits)
- BIKs (non-cash and non-convertible benefits)
These elements are counted towards an employee’s gross income, affecting both taxable income and statutory contributions.
Key Categories of Additional Income
- Bonuses
- Allowances
- Commissions
- Perquisites
- Benefits-in-kind (BIK)
- Living Accommodations (VOLA)
Each of these has different rules for taxability, which we will explore in detail below.
Bonuses and Their Tax Implications
Types of Bonuses
Bonuses are performance-based or discretionary payments. Common types include:
- Year-end bonuses
- Festive bonuses (e.g., Hari Raya or Chinese New Year)
- Productivity incentives
- Profit-sharing bonuses
How Bonuses Are Taxed
Bonuses are fully taxable and considered part of employment income. Employers must:
- Include bonuses in monthly tax deduction (MTD/PCB) calculations
- Reflect the bonus in the annual EA form issued to employees
Commissions and Incentive-Based Earnings
Commission Structures
Commissions are especially common in sales roles, where employees earn a percentage of the revenue or sales they generate. These are also fully taxable and subject to PCB.
Incentives Linked to KPIs
Incentives are rewards tied to targets like sales goals or operational efficiencies. These can include:
- Cash bonuses
- Vouchers or gift cards
- Performance-related cash prizes
All are considered taxable, unless exempted under specific LHDN rulings.
Understanding Allowances in Payroll
Housing, Transport, Meal, and Childcare Allowances
Allowances are payments for specific purposes. Here’s a breakdown:
|
allowance type
|
tax status
|
|---|---|
|
Housing Allowance
|
Taxable
|
|
Transport Allowance
|
Taxable
|
|
Meal Allowance
|
Exempt if provided fairly and regularly
|
|
Childcare Allowance
|
Exempt up to RM3,000 per annum
|
LHDN Guidelines on Allowances
Employers should refer to LHDN’s monthly deduction tables and ensure correct classification of taxable vs. non-taxable allowances to remain compliant.
Perquisites: Cash-Convertible Benefits
Common Perquisites
Perquisites are non-cash benefits that can be converted to cash. Examples include:
- Petrol cards
- Club memberships
- Loan interest subsidies
These are often taxable, unless specified otherwise by the LHDN.
Taxation Limits and Rules
Petrol allowances for official duties, for instance, are exempt up to RM6,000 annually. Any amount exceeding this threshold becomes taxable.
Benefits-in-Kind (BIK): Non-Cash Advantages
Defining BIKs
BIKs are non-cash and non-convertible items provided by employers. Common examples:
- Company car usage
- Rent-free housing
- Private healthcare services
Prescribed vs. Formula Method
To compute the taxable value of BIKs, LHDN offers two methods:
- Prescribed Value Method – Uses fixed yearly rates for certain items.
- Formula Method – Based on actual cost or market value.
Employers must choose the method that ensures fair and accurate reporting.
Value of Living Accommodation (VOLA)
What is VOLA?
When an employer provides accommodation (like a company apartment), it’s termed as Value of Living Accommodation or VOLA.
Tax Computation Methods
VOLA is taxable and computed based on:
- Type and location of the property
- Employee’s position
- Annual rental value or market rent
Refer to Public Ruling No. 3/2005 by LHDN for full guidelines.
Employee vs. Employer Tax Responsibilities
Monthly Tax Deductions (MTD/PCB)
Employers must deduct the appropriate amount of tax monthly and remit it to LHDN. This includes:
Tax Computation Methods
- Salary
- Bonuses
- Allowances
- BIKs
EA Forms and Annual Reporting
At year-end, the EA Form consolidates all income and tax deductions. It’s used by employees to file their personal income tax returns.
Using Payroll Software for Compliance
Benefits of Payroll Automation
Modern payroll software helps businesses:
- Automate tax calculations
- Stay updated with LHDN policies
- Generate EA forms and monthly reports
These tools ensure error-free compliance and reduce manual effort.
Common Mistakes in Declaring Other Income
- Omitting taxable allowances
- Incorrect classification of perquisites as BIKs
- Miscomputing VOLA
- Failing to report bonuses or commissions
Regular audits and professional payroll systems can help prevent such errors.
Case Studies and Real-Life Scenarios
SME Payroll Management
A small logistics firm uses SQL Payroll to manage employee income, successfully separating taxable allowances and tracking commissions accurately.
Large Corporation Compliance Models
A multinational company leverages AutoCount’s multi-level reporting system to file compliant EA forms for over 1,000 employees across different states.
Expert Tips for Payroll Management
- Stay updated with LHDN public rulings
- Use automated payroll systems
- Conduct monthly internal audits
- Provide training to HR and finance staff
- Regularly consult tax advisors
FAQs on Other Income in Malaysian Payroll
Yes, all types of bonuses are taxable under Malaysian tax law.
Only allowances for official duties are exempt up to RM6,000 annually.
No, employer-provided medical benefits are typically exempt unless they fall outside LHDN’s approved scope.
Yes, unless provided under very specific exempted conditions.
No, BIKs are assessed at the employer level and included in the employee’s taxable income.
AutoCount Payroll is the top recommendations due to their integration with LHDN regulations.
Conclusion
Navigating the various components of other income in Malaysian payroll is essential for employers and employees alike. From understanding the tax treatment of bonuses and allowances to accurately reporting perquisites and BIKs, staying compliant with LHDN rules is non-negotiable. With proper tools and a clear understanding of regulations, payroll management can be seamless, accurate, and transparent.
