Tax traps for Australians in Malaysia

Malaysia has become a popular international business hub.

Malaysia has one of the most globalised economies in the world. Although it has a double tax agreement with Australia, you should still get advice on your tax status before heading to Malaysia for work.

Tax resident or not?

The most important question is your tax residency status. Are you still an Australian tax resident or a Malaysian tax resident? You might assume that if you’re living and working in Malaysia, you’re no longer a resident for Australian tax purposes, but this isn’t always the case. The following factors may have a bearing on whether you retain your Australian tax residency:

  • The purpose and length of any return trips to Australia while you’re on assignment
  • Your family, business and employment ties in Australia
  • Whether you maintain assets, such as a family home, in Australia while you’re on assignment
  • If you’re living in temporary accommodation while on assignment and your other social arrangements.

In addition, for many Australian employees, you will need to satisfy the Australian Taxation Office that you have established a permanent home outside of Australia to ensure you cease being an Australian tax resident from departure. Income Tax Ruling IT 2650 assists taxpayers in deciding this question. It’s definitely worth getting professional advice on this.

1.     Malaysia’s tax jurisdiction

Learn more: Professional year-end tax resources from CPA Australia

From the Malaysian tax perspective, any income accruing in or derived from Malaysia is subject to tax in Malaysia.

Foreign-source income remitted to Malaysia is not taxable in Malaysia..

2.     Malaysian tax residency

Tax residency in Malaysia is determined based on an individual’s physical presence in Malaysia. .An individual may qualify as a Malaysian tax resident for a year of assessment (i.e. calendar year basis) if they satisfy one of four quantitative tests. For example, if the individual has been physically present in Malaysia (either continuously or intermittently) for 182 days or more of the calendar year, they are regarded as a Malaysian tax resident for that year.

3.     Salary packaging

It is possible for an Australian employee on assignment in Malaysia to receive a total remuneration package that includes salary and other benefits. If the employer and employee are both non-residents for Australian tax purposes, then there is unlikely to be Australian fringe benefits tax or income tax payable when providing the non-salary benefits to the employee.

Malaysia does not have a fringe benefits tax. Generally speaking, benefits in cash or in kind received by an employee (or their relatives) are treated as assessable income. However, the following benefits are sometimes exempt from tax and may feature in an employee’s remuneration:  

  • Airfare provided to an expatriate and their immediate family members for one overseas trip per year, subject to a RM3,000 per year limit for airfare.
  • Certain medical and dental treatments.
  • Petrol, travelling allowances or tolls for official duties up to RM6,000 per year.
  • Parking fees and parking allowances (at a reasonable rate).
  • Meal allowances received by an employee on a regular basis where such allowances are provided to all employees at the same rate.
  • Childcare allowances for children up to 12 years of age (subject to a RM2,400 annual limit).
  • Mobile phones and fixed-line phones provided to an employee.
  • Monthly bills paid by the employer for mobile phone, fixed-line phone, or broadband subscription fees, in the employee’s name.
  • Benefits used by an employee solely in the course of their employment.

4.     Retirement issues

The fact a person has worked in Malaysia for a period will not affect his or her superannuation accumulated in Australia. But Australian superannuation guarantee contributions are not required to be made for Australian non-resident employees who are paid for work done in Malaysia.

However, if you’re not considered an Australian tax resident while working in Malaysia, your Australian self-managed super fund may be taxed at 47 per cent on its taxable income. Employees with SMSFs should seek tax advice before departing Australia.

When you permanently cease working in Malaysia, you may withdraw the contributions accumulated in Malaysia’s Employees Provident Fund on departure. You may then transfer such superannuation amounts back to an Australian fund, under certain tax rules, when you become an Australian resident on your return to Australia.

If the Employees Provident Fund does not meet the definition of a “foreign superannuation fund” in the Income Tax Assessment Act 1997, there may be a concern that the accumulated income earned in the fund may be assessable in Australia if the employee withdraws it when they return home.

The Malaysian tax regime at a glance

Tax treaty between Australia and Malaysia?

Yes, there is a double tax agreement between Australia and Malaysia, to avoid workers being taxed twice on the same income. 

Malaysian tax year

1 January to 31 December

Malaysian tax rates (resident individuals)

Taxable income (RM)

Tax rate (%)

0-5,000

0

5,001-20,000

1

20,001-35,000

5

35,001-50,000

10

50,001-70,000

16

70,001-100,000

21

100,001-250,000

24

250,001-400,000

24.5

Over 400,000

25

Relocation costs

In Malaysia, these expenses are generally borne by employers.

Housing allowances

Living away from home allowances are generally taxable to an employee in Malaysia.

Housing benefits

Employees are assessable to tax on the living accommodation provided by the employer (where the tenancy agreement is signed between the landlord and employer) at the lesser of:

(i) the “defined value” of the accommodation, or

(ii) 30 per cent of the employee’s gross cash remuneration.

Where the employee is provided with hotel accommodation, the taxable benefit is 3 per cent of gross cash remuneration.

An apportionment is required for part-year housing benefits provided. It is also required if the accommodation is shared with other employees or is used by an employee to advance the employer’s interest.

An employee may be able to deduct certain accommodation expenses against the value of their housing benefit (such as public rates, insurance premiums, rent paid by the employee, and repair and maintenance expenses the employee is legally obliged to pay).

Note: Generally, defined value is defined as the unfurnished portion of the accommodation.

Retirement/ pension contributions

An employee is required to contribute 11% whilst the employer is required to contribute to the Employees Provident Fund (EPF) in Malaysia at the rate of 12 per cent (or 13 per cent for employees earning RM5000 and less per month) of an employee’s monthly Malaysian salary, unless the employer elects to contribute in excess of the statutory rate.

Only Malaysian citizens and permanent residents are required to contribute to EPF. However, the expatriate may elect to contribute to EPF if they choose to do so, provided they complete the necessary documents.

Withholding tax for employees

Dividends = 0 per cent; interest = 15 per cent; and royalties = 10 per cent.

Australian tax considerations for individuals continuing to be Australian residents

Housing allowance

A non-resident employer can be subject to PAYG withholding and fringe benefits tax (FBT) in respect of Australian resident employees working overseas if the employer has a sufficient connection with Australia.

However, the accommodation component of a living-away-from-home allowance provided to the employee for the first 12 months of their assignment might NOT be subject to FBT. This is provided that the employee continues to maintain an Australian home for their immediate use or enjoyment. If the employee does not meet this last condition, the entire living away from home allowance may be subject to FBT (it is assumed the employee does not work on a fly-in, fly-out basis).

If a housing allowance is not a fringe benefit, it may be assessable income to the Australian resident employee. The employee may be entitled to a foreign tax credit for any Malaysian tax paid on the allowance.

Relocation costs

If the employer is subject to FBT on benefits provided to the employee, there is a cluster of relocation benefits that attract exemption from FBT. These include the costs of: a relocation consultant, the removal and storage of household effects, certain home purchase and sale costs, the connection or re-connection of utilities, the leasing of household goods, and certain relocation transport benefits.

If the employer is not subject to FBT on benefits provided to their Australian resident employee, then those benefits may be included in the employee’s assessable income. The employee may be entitled to a foreign tax credit for any Malaysian tax paid on the benefits.

If the employee pays for their own relocation, such costs may not be deductible to them.

Superannuation contributions

If the employee remains an Australian resident, superannuation guarantee contributions are not required if they are employed by a non-resident employer for work done in Malaysia.

Main residence

The expatriate may rent out their Australian main residence while in Malaysia for up to six years and continue to treat it as their main residence. If they meet this condition, any capital gain that arises when they eventually sell the property is likely to be tax-free.

Capital gains tax event on ceasing to become a resident

If an employee ceases to be an Australian tax resident, they are deemed to have disposed of some of their capital gains tax assets (such as shares in Australian companies) for their market value on the date they stop being resident. This means that a capital gain or loss might arise on that date which needs to be included in their Australian tax return.

The rules enable the employee to choose deferring the taxation on such assets until they are eventually sold. Some assets are also excluded from this deeming (such as Australian rental properties).

An Australian in Malaysia

Here is an example of how much tax an Australian tax resident might pay

Assumed facts:

  • Australian employee sent on a work assignment to Malaysia for two-plus years.
  • Single employee (no partner or children).
  • The Malaysian employer pays the employee a salary of A$250,000.
  • The employee has annual deductible expenses / reliefs of A$10,000.
  • The exchange rate is A$1.00 = RM2.84
  • The Australian tax rates used are for the income year ended 30 June 2015.
  • The Malaysian tax rates used are for the income year ended 31 December 2015.

If the individual continues to be an Australian tax resident

If the individual is not an Australian tax resident (non-resident)

Malaysian tax position (AUD & MYR amounts shown for comparison only)

AUD

MYR

Gross income

250,000

710,000

Less: Deductions

10,000

28,400

Taxable income

240,000

681,600

Income tax charged

54,595

155,050

Australian tax position

AUD

Taxable income

240,000

Income tax charged

81,547

Budget repair levy

1,200

Medicare levy

4,800

Foreign income tax offset

(54,595)

Net tax payable

32,952

Total Tax Paid

AUD

Australia

32,952

Malaysia

54,595

Total

87,547

Malaysian tax position (AUD & MYR amounts shown for comparison only)

AUD

MYR

Gross income

250,000

710,000

Less: Deductions

10,000

28,400

Taxable income

240,000

681,600

Income tax charged

54,595

155,050

Australian tax position

AUD

Taxable income

0

Income tax charged

0

Budget repair levy

0

Medicare levy

0

Foreign income tax offset

0

Net tax payable

0

Total Tax Paid

AUD

Australia

0

Malaysia

54,595

Total

54,595

This information was compiled and produced exclusively for intheblack.com by Tom O’Sullivan, tax lead at Wolters Kluwer CCH.   

The above information is not exhaustive and you should always speak to a CPA-registered tax agent about your specific circumstances.


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