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Malaysia: Tax Status of Retirement Plans Clarified

(Jan. 7, 2015) A December 24, 2014, Public Ruling issued by the Inland Revenue Board of Malaysia clarifies the tax status and other aspects of private retirement plan contributions. The Ruling covers such contributions made by individuals and by employers, as well as the income of the retirement plan itself. (Janice Loke, Malaysia: Public Ruling on Private Retirement Scheme, TAX NEWS SERVICE (Jan. 6, 2015), International Bureau of Fiscal Documentation online subscription database; Private Retirement Scheme: Public Ruling 9/2014 (Dec. 24, 2014), Inland Revenue Board of Malaysia website.)

The ruling established that individuals can pay into various plans under one provider of retirement schemes or into several separate schemes, run independently. All the privately managed plans must fit into the following categories, by age of the contributor: growth funds, for those below 40 years of age; moderate funds, for those 40 to 49 years of age; and conservative funds, for those 50 years old and older. Growth and moderate funds are permitted to invest outside of Malaysia, but conservative funds are not, and other rules limit the types of investments each fund may make. (Loke, supra.)

Tax Rules for Individuals

The Ruling made the following points regarding the tax treatment of individuals with private retirement plans:

  • because the retirement plan is considered a unit trust scheme, any gains made by the plan are capital gains, which are not subject to individual income tax;
  • any profits distributed by a retirement plan to an individual in the form of units that are credited into the individual’s account are not taxable;
  • contributions to a retirement plan of up to MYR3,000 (about US$846) per year can be deducted from income for tax purposes (this applies to the years 2012 through 2021 (Loke, supra); and
  • ” … if a husband or wife elects for combined assessment under [the tax law], the PRS [private retirement scheme] contributions or deferred annuity premiums that are paid by the husband or the wife will be deemed to have been made by the spouse and the amount claimed shall not exceed RM3,000.” (Public Ruling 9/2014, ¶ 5.1.3.)

Employers

Employers may deduct contributions they make on behalf of their workers, but only up to the level of 19% of the employees’ salaries. (Loke, supra.)

Contributions made for employees when those workers are subject to a vesting schedule can be paid out to them only when the time period stated in the vesting agreement is reached; if the worker leaves his or her job before the pre-set time for being vested in the plan, the money paid into the plan for that worker can be retaken by the employer. In such cases, however, the amount retrieved from the retirement plan’s funds is considered part of the employing company’s gross income. (Id.)

The Retirement Fund

There are no taxes on income received by a private retirement plan, under the provisions of the Income Tax Act. (Id; Income Tax Act, Act 53, 1967 (as amended by Act 755, 2013), Schedule 6, “Exemption from Tax,” ¶ 20, Inland Revenue Board website.)