Tax Tips For Employees Who Lost Their Jobs Or Get Retrenched
As of December 2020, around 772,900 people had lost their jobs, up from 510,000 the previous year.
Last year also ended with Malaysia’s unemployment rate rising to 4.8%. The country has not experienced such a high unemployment rate since 1993.
2020 has been a year most of us have never experienced before with the impact of the Covid-19 pandemic being felt in every industry and sector of employment, and the legacy will linger for years to come.
Given that it is income tax season in Malaysia again, how do workers laid off or facing layoffs report their annual income for last year (2020)? Read on to find out how your income should be reported in these unfortunate situations.
What is downsizing?
It is a strategy adopted by companies or corporations to reduce the diversity or the overall size of its operations. This strategy is often used to reduce expenses in order to become more financially stable.
Typically, the strategy is to withdraw from certain markets or downsize as part of a cost restructuring plan. In a downsizing exercise, companies may lay off workers due to cost, business or operational factors. Due to the ongoing pandemic, downsizing has occurred on an unprecedented scale in 2020.
According to the International Labor Organization (ILO), 8.8% of working hours worldwide were lost in 2020 compared to the last quarter of 2019. This translates into a huge loss of 255 million jobs on time full. In fact, the loss of working hours in 2020 was four times greater than during the global financial crisis of 2009.
This sudden loss or lack of income is not only a terrifying prospect, it also means an increase in Non-Performing Loans (NPLs) in the country, resulting in increased debts for individuals, especially for people with financial obligations. such as a home loan. or an auto loan.
What happens when you are made redundant?
One of the first things to ask yourself after your layoff is whether you are entitled to severance pay after the employment relationship ends.
As an employee, your right to severance pay in the event of dismissal depends on whether or not you are covered by the Employment Act (EA).
In general, an employee is only covered by EI if his salary does not exceed RM2,000 per month, or his occupation is manual, regardless of his salary (applicable only to workers in Peninsular Malaysia and Labuan; Sabah and Sarawak have their own labor ordinances),
If an employee falls within the scope of the EI, he is entitled to severance pay if he has been employed for at least 12 months. The severance payments due are as follows (or the amount of the employment contract if it is higher):
- 10 days of pay for each year of employment if employed for less than two years
- 15 days’ wages for each year of employment if employed for two years or more but less than five years.
- 20 days’ pay for each year of employment if employed for five years or more.
During this time, an employee who is not covered by EI is only entitled to severance payments if they are provided for in the employment contract. If this is not stipulated in the contract, it is at the employer’s discretion to determine the amount of severance pay to be paid or to be paid or not.
According to the Inland Revenue Board Malaysia (LHDN), when employment ceases, the employer can pay a lump sum to the employee. Lump sum payment can be described by the employer as compensation for job loss, ex gratia, contract payment, dismissal or gratuity, etc.
However, it should be noted that gratification is not the same as “job loss” in this context, underlines Choong Hui Yan, consultant of SIMways Formulation.
On the one hand, the gratuity is normally referred to as a fixed amount which is presented in recognition of an employee’s services. As such, the bonus is normally paid upon the resignation or retirement of an employee after having served for an extended period.
“It’s about recognizing the past service rendered by an employee,” Choong said.
Meanwhile, the layoff is linked to job loss as the employee is laid off before the end of the service contract, Choong added.
She explained, “In the Malaysian tax system, gratuities would be taxed under Section 13 (1) (a) while loss of employment would be taxed under Section 13 (1) (e) of the Law of. 1967 on income tax. tax exemption. The law was last revised in 2013.
In all cases, the circumstances and nature of the payment must be reviewed to determine the actual nature of the payment. The amount paid upon termination of employment may consist of the following two elements: (a) it is attributable to loss of employment such as dismissal (compensation); and (b) it is attributable to the employee’s past service (tip).
The purpose of the lump sum payment must be established in order to determine the tax treatment of the payment received by the employee.
However, it is important to note that some employers may use dismissal disguised as dismissal to lay off unwanted employees. If you believe that you have been unfairly dismissed, you can take action against the employer by filing a complaint or claim with the Department of Industrial Relations Malaysia, the labor court, civil courts or the labor court.
Meanwhile, employers who make layoffs due to severe financial hardship may be exempted from paying severance pay.
How to declare your taxes when you are made redundant?
According to LHDN on their website, job loss compensation is a payment made by an employer to its employee before or after the termination date, and a certain amount of that payment is exempt from tax. The same goes for severance payments such as voluntary separation plans (VSS).
This compensation is tax exempt if the compensation received is due to poor health, and in other cases:
- Termination before July 1, 2008 – exemption of RM 6,000 for each full year of service with the same employer or affiliated companies.
- Termination on or after July 1, 2008 – exemption of RM 10,000 for each full year of service with the same employer or with companies in the same group.
Adam worked at his old oil and gas company for five years and was recently laid off. He received 60,000 RM in compensation in 2020.
Under local tax laws, he is entitled to an exemption of RM 10,000 for each full year of service. So, if he served the company for five full years, RM50,000 out of the RM60,000 he received is eligible for tax exemption (RM 10,000 x 5).
However, the remuneration received by a director (and not a department manager) of a controlling company is fully taxable.
If complications arise when you are fired, SIMways Formulation consultant Choong Hui Yan advises you to gather ALL the documents you can get your hands on to prove that the lump sum payment you receive is compensation for loss of employment. . For example, you will need to present a termination letter, contract, or even the description of the payment voucher and then discuss the matter with LHDN.
In addition, you will need to present your payslip and EA form to prove that you have completed your LHDN service mandate.
“Sometimes our interpretation of ‘severance pay’ may differ from that of the LHDN. So, if there is any complication, you should try to explain the problem with LHDN. If necessary, you may even need to hire a tax professional to speak to LHDN, ”Choong advised.
This article was first published in April 2016 and has been updated to include the latest changes on this topic.
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