Deloitte Insight: The 2009 employee tax deductions

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Author: Ang Weina

Major changes to the monthly tax deductions from the remuneration of employees came into effect on 1 January 2009 replacing the five-year old 2004 provisions. Most employers would recall the concern when the announcement of the change was made and the sighs of relief when the Inland Revenue Board allowed employers till March 2009 to adopt the new provisions, and a further extension until June 2009 in a recent announcement by the CEO of the Inland Revenue Board, Datuk Hasmah Abdullah.

The previous tax deduction schedule incorporated a discount on the monthly tax deduction, commonly called STD (schedular tax deduction), which resulted in many employees having to pay the balance of tax by 30 April of the following year. The 2004 STD provisions attempted to minimise tax over deduction and the administrative effort in making repayments.

With the reduced top tax rate announced in Budget 2009 and the introduction of several new tax exemptions, the 2009 STD provisions aim to have aggressive deductions close or equal to the final tax charge. From the revenue perspective, the 2009 STD provisions accelerate the collection of tax in an economic downturn and also minimise the burden of effecting refunds.

What does the 2009 STD mean to employees? To begin, in comparison with the previous system, for a single employee or an employee who is married with a working spouse and has no children, STD will now commence at a lower salary range of RM2,401 – RM2,450 compared to the previous salary range of RM2,551- RM2,600. Employees will also experience a higher STD under the new provisions, compared to what they were used to previously. This will mean that the monthly take home pay may be slightly reduced.

Employees can now ask employers to deduct less STD or more STD by submitting Borang PCB/TP1 (1/2009) (less deduction) and Borang PCB/TP2 (1/2009) (more deduction). TP1 allows for STD to be reduced taking into account the deductions like life insurance payments, medical expenses for parents, equipment for the disabled, higher education fees, full medical examination, purchase of books, magazines, journals and computer and alimony payments plus rebates like zakat payments and levies for employment pass. This should rank as a well-received taxpayer friendly move in an economic downturn. With TP2, an employee can make an irrevocable election for benefits in kind and housing benefits which are not normally subject to STD to be brought within its scope. This would appeal to taxpayers who prefer to spread their tax payment over the months rather than incur an unbudgetted amount on or before 30 April of the next year. The completed election forms are to be submitted to the employer.

Will the use of TP1 cause a cash bonanza in the month concerned? Regrettably no in most cases. A simulation carried out did not result in a significant increase in take home pay. Instead, the additional deductions were adjusted through a spread over subsequent months.

It is also interesting to note that the implementation of the TP1 and TP2 are subject to the agreement of the employer.

What impact has the 2009 STD provisions on employers? More costs, in terms of system changes plus the responsibility of managing the elections by deciding to agree or not. It appears that the Inland Revenue Board may be attempting to place some level of due diligence on employers to reject false deduction claims like medical expenses for serious diseases by hale and hearty employees. After acceding to the employees’ elections, the employer has to retain TP1 and TP2 for at least 7 years for audit purposes. The employer also has additional responsibilities to recalculate the STD arising from employee’s elections. Bearing in mind that elections by employees can vary, and be rather complex, the Inland Revenue has made available a PCB or STD Calculator in its web site and requires this to be used where an election for deduction and rebates is agreed to and implemented.

The Inland Revenue also expects employers to inform their employees of the elections available and the forms to be completed. Employers, have you done this?

One shortcoming in the 2009 STD tables is that it assumes that the individual was employed throughout 2009. Where a fresh graduate or expatriate commences employment in Malaysia later in the year, for example in July 2009, a simulation shows that the application of the STD rates will result in over deduction of tax. In such cases, the Inland Revenue has provided an alternative in the form of e-PCB calculator which would not overstate the monthly tax deduction required.

Overall, do the 2009 STD provisions spell a better tomorrow? A resounding YES for employees if they know of the election facilities and make one or both elections. For employers, it means increase in compliance costs, a familiar phenomenon in this day and age.

The writer, Ang Weina is an executive director and global employer services leader with the tax practice of Deloitte Malaysia.