Share option
Director of Covid Berhad, a company that listed in Bursa Malaysia, are considering a proposal
to make share in the company available to employee free of cost. Two possibilities have been
put forward:
Scheme 1
Employees will be granted options to buy a specified number of shares in the company at
RM1 per share within a period of two years from the date of the grant. At the same time, each
participant will become entitled to a bonus equal to the price to be paid for the shares (RM1
per share) payable at the time of exercising the option so that these funds can be used to pay
the purchase price of the shares.
Scheme 2
co. issued out new share and give to
employee
Employees will be given free of any payment the same number of new shares in the company
as is specified under scheme 1.
If the proposal is implemented, employee A will be entitled to 10,000 shares in Covid Berhad
with effect from 1 July 2019. The market price of the shares will be RM3 each at the time of
the grant of the option, or the date of the gift depending on which scheme is used. If granted
the option, assume employee A will exercise the option on 1 July 2020 at a time when the
market price is expected to be RM7 per share.
Required:
(i)
Explain the tax implication for employee A of each of the alternative schemes, making
appropriate reference to the applicable law:
(ii)
State and explain the tax implication for Covid Berhad of applying each of the alternative
schemes.
Scheme 1
law and fact
Employee A will receive bonus and share option.
The bonus that received by employee A is subject to tax under S13(1)(a). bonus is assessed on receipt basis. Covid
Berhad will pay out the bonus on exercising the option. so employee A is receiving the bonus on 1 July 2020. the entire
sum of RM 10,000 will be taxed in Y/A 2020.
as for share option, it is perquisite, share option fall under S13(1)(a), the value of gain to be assessed is derived as
formula below:
The lower of :
(a) Market value at the time the option was granted
(b) Market value at the time the option was exercise
Less: option price
value benefit per share
RM 3
RM 7
______
RM 3
RM 1
_____
RM 2
assessable gain 10,000 share x RM 2 = RM 20,000, taxable when the share option is exercise, thus it will tax in Y/A
2020.
Scheme 2
The company give free share to the employee, the free share actually is perquisite tax under S13(1)(a), value of share
upon gift made = gain to employee, so the gain is RM 30,000 (RM 3 x 10,000 share), thus such income is taxed in Y/A
2019.
wholly and exclusively incurred in the production of income
tax treatment from Covid Berhad side
ii)
Scheme 1 (Bonus and share option)
Bonus actually is a staff cost thus is rank for tax deduction when it is incurred on 01/07/2019. while share option is
not a cost to the company.
Scheme 2
The company may issues a new shares and give it to the employee, if this is the case there will be no implication or the
company purchase a treasury share and transfer it to employee then the company will incurred cost of acquiring the
shre. the cost of treasury share will rank for tax deduction.
On 1 December 2016, Mr Otak, aged 43 years, tendered his resignation from X Sdn Bhd. His last
working day will be 31 December 2016, by which date he will have been employed with X Sdn Bhd for
12 years and ten months. Mr Otak is in good health and has resigned to pursue employment
opportunities in other fields of work.
Privately, both parties have agreed that in return for X Sdn Bhd paying Mr Otak a sum of RM300,000
being compensation for a restrictive covenant, Mr Otak will refrain from joining a competitor
employer in Malaysia within 18 months of his cessation of employment with X Sdn Bhd.
However, officially, Mr Otak has told X Sdn Bhd that he would prefer the RM300,000 payment to be
termed an ’early retirement gratuity’ in recognition of his past services and contributions
Whichever option is pursued, the RM 300,000 payment will be paid to Mr Otak on his last day of
service with X Sdn Bhd.
compensation for loss employment taxed under S13(1)
(e)
exemption - entitle for full exemption?
(i) Explain the tax treatment of the RM150,000 in the hands of Mr Otak as
No, only due to ill health will
qualified for full exemption
Required:
(1) compensation for a restrictive covenant; or
(2) a gratuity
partial exemption yes, 20,000 exemption for
each completed year of
service
You should identify the basis periods involved, as well as the amounts subject to tax or eligible for tax
exemption
in this case - has 12 full year of service, total
exemption available would be RM 240,000
(ii)
Based on the explanations in (i) above, advise Mr Otak on what he should do differently in
order to minimise his income tax exposure
S13(1)(e)
compensation for loss employment 300,000
(240,000)
Less: exemption
60,000
Taxed in Y/A 2016
Gratuity under S13(1)(a)
entitle for full exemption? No, not due to ill health or he is only 43 years old
partial exemption ? yes, exemption of RM 1,000 for each completed year of service
in this case he entitle a total exemption of RM 12,000 as he has 12 full year of service
S13(1)(a) Gratuity
less: exemption
300,000
(12,000)
_____
Taxed in Y/A in 2016 288,000
tax saving is 2
Tax advise (tax planing )
- Mr. Otak shoud opt to received compensation for loss of employment instead of gratuity becuase if opt for gratutiy his
exemption is only limited to RM 12,000. meanwhile if opt for compensation for loss of employment the exemption available
to him will be RM 240,000 and only suffer on RM 60,000
- otak should consider continuing work for another two months , so that he can achieved an additionl completed year of
service with the same employer , thus qualified for another RM 20,000 exemption.
not more than 60days
January 2021
January 2021
20 days
December 2021
December 2021
30days
41 days
20 days
2021
2022
S7(1)(a) - physically present in Malaysia during the calendar year amounting to a minimum of 182days
183 days
Jan
80 days
192days
Dec
50 days
60 days
linked by a period of 182 or more consecutive day
3 days
2021
S7(1)(b)
2022
linked to a period of 182 or more consecutive day
3days
192 days
2021
S7(1)(b)
2022
3) 14 days social visit
Temporary absent rule
1) missing due to official duty
2) owning to ill health
90days or more
S7(1)(c) - at least 90 days in Malaysia+ 3 out of 4 immediately preceding year either
2018
2019
2020
R
R
R
2018
2019
90days
90days
2018
R
S7(1)(d)
2022
2021
NR
1 day
1 day
90days
2020
NR
R
91 days
2021
2020
2019
OR
resident
2022
90 days
2021
2022
90 days
90 days
resident in the following year
3 immediately preceding year must be a resident
2018
R
2019
R
2020
2021
R
0 days
2022
R
R- S7(1)(d)
CA rule ,IBA, agricultural allowance
16 topic
Advance taxation
solid foundation in taxation
employment income - contract of service
vs contract for service
Tax computation format