Tax updates: Compensation for loss of employment

When an employment ceases, employer may make lump sum payment to the employee in accordance with the terms and conditions of the contract of service.

Lump sum payment may be described by the employer as compensation for loss an employment, ex-gratia, contractual payment, retrenchment payments, gratuity, etc.

The circumstances and nature of payment must be reviewed to determine the real character of the payment
​.
​The amount paid may consist to these two elements which are attributable to the loss of employment (compensation) and past services of the employee (gratuity).

Compensation includes the following:

• Salary or wages in lieu of notice
  
• Compensation for breach of a contract of service
• Payments to obtain release from a contingent liability  (employer’s obligation) under a contract of service
• Ex-gratia or contractual payments
• Payment in consideration of a covenant, arrangement or similar agreement

Tax treatment of compensation:
​

• 100% exempted if due to ill-health
• Exemption of RM10,000 for each completed year of service with the same employer or with companies in the same group effective from 1 July 2008.

 

​If you need further clarification, please do not hesitate to contact our tax team.

Source:

• lampiran1.hasil.gov.my/pdf/pdfam/PR1_2012.pdf
• www.mia.org.my/v2/ppt/tcontent_display.aspx?ID=1081​

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