Tax Treatment of Motor Cars Provided
by Employers

This article appeared on The SME paper, Malaysia on July 14 - July 27 issue 08

TAX TREATMENT OF MOTOR CARS PROVIDED BY EMPLOYERS

In my last column I shared with you some tax questions commonly asked by my clients, friends and relatives. Now, here are some more

(1) Shin, my employer provides me with a Toyota Camry 2.0 and I use it mainly to visit customers. The HR manager says that I need to pay tax for the benefit of using of the company car and she has included the benefit in kind “BIK” in my EA form. Why is the benefit of using the car taxable? After all, I use the car mainly for carrying out my duties as an employee of the company.

(2) Shin, my company has done exceptionally well this year. As the owner and director of the company, I would like to reward myself by upgrading my company car to a brand new Mercedes S-Class and employ a driver to take me around. My accounts executive tells me that I need to pay additional tax for benefit of using the S-Class. Why is the benefit taxable? After all I am the director and owner of the company.

To answer these questions, I would usually start with going through the definition of employment income.

Definition of employment income :
The definition of employment income in the Income Tax Act, 1967 (ITA) is very wide and comprehensive; covering all forms of remuneration including the value of benefits-in-kind (“BIK”) provided by the employer for the personal use or enjoyment by the employee.

Employers have a duty to report the value of BIK provided to employees in the respective employees’ EA form as well as the company’s E form annually. Employers should indicate in the respective EA form the type, year and model of the car provided to the employee.

Motor cars provided by employers are taxable benefit in kind :
So going back to Questions (1), the benefits on the value of private use of the car and petrol provided is benefit-in-kind and taxable to the person receiving the benefit. A car which is provided to the employee is regarded to be used privately if:

  • It is used for travelling between the office and the employee’s home; and

  • It is kept at the employee’s home where the motorcar can be used by the employee or his family.

Computation of BIK :
Inland Revenue Malaysia has provided the following two methods to compute the annual value of BIK:

  • Based on the formula method:

Cost of the car _________________ X 80% = Annual value of benefit of car 8 years (prescribed average lifespan)

Under this method, an abatement of 20% is given which is deemed to be the value of the car at the time it is returned to the employer by the employee.

  • Based on prescribed value method:

COST OF CAR (WHEN NEW)*

ANNUAL VALUE OF BIK
RM

Up to RM50,000

1,200

RM50,001 - RM75,000

2,400

RM75,000 - RM100,000

3,600

RM100,001 - RM150,000

5,000

RM150,001 - RM200,000

7,000

RM200,000 - RM250,000

9,000

RM250,001 - RM350,000

15,000

RM350,001 - RM 500,000

21,250

RM500,001 and above

25,000

* To take note: The definition of cost of car is the market value of the car when purchased including accessories but excluding financial charges, insurance premiums and road tax.

To better understand how all this works, let us look at how much tax is payable for the employee in Question (1) who was provided with a Toyota Camry 2.0 which costs approximately RM151,000 with annual petrol of RM5,000 incurred by employer and no driver.

 

Based on the formula method

Based on prescribed value method

 

RM

RM

Annual value of BIK

151,000/8 X 80% = 15,100

7,000 (refer to table above)

Fuel per annum (actual amount)

5,000

5,000

Total taxable BIK income

20,100

12,000

Let's assume the taxpayer's tax rate is at 20%, the Tax on BIK is:

 

RM20,100 X 20% = RM4,020

 

RM12,000 X 20% = RM2,400

In the above example, it is better to choose the prescribed method as it will result in lower tax on BIK of RM2,400. However, please take note that the basis of computing BIK needs to be consistently applied throughout the provision of the benefit.

As for Question (2), a director is an officer of the company and is considered to be an employee of the company; therefore the private use of car and petrol is benefit in kind and taxable to the director receiving the benefit. 

Here are some more details to take note:

  1. Where the car provided is more than 5 years, the value of the car benefit will be equivalent to half of the rates provided in the table. The value of fuel remains unchanged.

  2. Where a car is not provided throughout the basis year, the value should be adjusted accordingly.

  3. Where fuel is provided without motor cards, the actual value is treated as a benefit received.

  4. Toll fees which are paid by the employer are regarded as inclusive in the value of the BIK of the motorcar.

  5. Maintenance costs such as servicing, repairs, annual road tax and annual insurance premium are not regarded as part of the benefit of the employee.