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This Ruling explains the characterisation of lump sum payments received by employees upon the termination of their employment as compensation for loss of employment and the tax treatment of compensation for loss of employment.

Please be informed that the Inland Revenue Board (IRB) has uploaded Public Ruling No.1/2012: Compensation for Loss of Employment, issued on 27 January 2012. You may view the Public Ruling on the website of the Institute and the website of the IRB.

It is essential to determine whether the payment made to employee is in the nature of gratuity or compensation for loss of employment as different tax treatment is accorded for gratuity payment.

When an employee receives payment in the form of compensation for loss of employment it is necessary to determine whether the payment is in connection with a period of employment with the same employer or with companies in a group.

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Before diving into the tax treatment, do note that in some circumstances sum received from loss of employment may include both “compensation for loss of employment” and “gratuity”. A clear distinction must be made between the two due to different tax treatments.

Those employees will receive money either in the form of compensation for loss of employment or gratuity. Do you know whether the incomes received by the employees from loss of employment are taxable or exempted in Malaysia?

If the lump sum payment is received due to the premature termination of an employment which has the prospect of continuing up to the retirement age, such sum should be treated as compensation for loss of employment.

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Income from employment for women returning to work after a career break of at least two years is exempted up to 12 consecutive months (application to Talent Corporation Malaysia Berhad by 31 December 2027).