Quiz of the day - Keyman Insurance Tax Deductible Malaysia

1. Issue

KTP Tax Consultant Sdn Bhd can claim a tax deduction on Mr. Koh Teck Peng personal insurance in KTP Tax Consultants Sdn Bhd?

What is the personal tax impact on Mr. Koh Teck Peng?

In my opinion, the personal insurance paid by the Company for Mr. Koh is not tax allowable as Mr. Koh is control director of KTP Tax Consultants Sdn Bhd.

However, Mr. Koh has to declare the total amount of premium paid in his personal income tax which is taxed under paragraph 4(b) of the ITA

2. Fact

Company Tax impact

There are a number of requirements that must be met in order to claim a tax deduction.

According to Income Tax Act 1967 Section 33(1), expenses only can be deductible if it wholly and exclusively incurred in the generate of income is allowable as a tax deduction.

Refer to Paragraph 4 of Public Ruling No.2/2003 – Key Man Insurance, if the insurance meets the following two requirements, the premium payable on a term life policy or an accident policy which is no return after expiration policy is allowable as a deduction against gross income from a business:-

• The insurance has no element of investment

• beneficial of the insurance must remain with the employer or company not the “key-person” or his family

However, a whole life policy and endowment policy is deemed to have element of investment due to both of these policies have cash value that are redeemable.

Therefore, these two policies would be regarded as a capital asset of a Company and thus the premium paid on these policies would not be allowed for tax deduction under paragraph 5.

Connected person

Addition, if the premium paid for director insurance on life of that person who owns share in the company is not allow to claim tax deduction in controlled company. It is also not permitted to deduct the premium for a ''key-man'' insurance coverage on the life of a business partner or sole proprietor under paragraph 7.

Personal Tax Impact

Refer to paragraph 6.8 Insurance premiums - Public Ruling No.5/2019 – Perquisites From Employment

The amount of the annual premium paid by the Company on behalf of the employee (including his family, his nominee) is a perquisite to the employee and shall reported in employee Form EA.

By reporting in the Form EA in employee, this would results in the amount of annual insurance premium become taxable income for the employee.

3. Reference

• Public Ruling No: 2/2003 “Key-man” Insurance

  https://phl.hasil.gov.my/pdf/pdfam/PR2_2003.pdf

• INCOME TAX ACT 1967 - Section 33(1) Adjusted income generally

  https://phl.hasil.gov.my/pdf/pdfam/Act_53_20190101.pdf

• INCOME TAX ACT 1967 - Section 139 Controlled companies

  https://phl.hasil.gov.my/pdf/pdfam/Act_53_20190101.pdf

• Public Ruling No.5/2019 – Perquisites From Employment

  https://phl.hasil.gov.my/pdf/pdfam/PR_05_2019_2.pdf

Authored by Ms Lee Liu Shi, audit & tax associates, in her personal LinkedIn post.