(TAX UPDATE) Insurance for Directors, Keyman and Staff : What Is Tax Deductible in Malaysia?

(TAX UPDATE) Insurance for Directors, Keyman and Staff : What Is Tax Deductible in Malaysia?

Introduction

A director’s insurance premium was paid by his company for 5 years.
During audit, LHDN added it back as perquisite.
The director paid additional tax, and the company paid penalty.
All this happened because the policy was under the director’s name.

Also the benefit is personal and not “wholly and exclusively incurred in the production of income”, LHDN also rejects the corporate tax deduction.

But in Malaysia tax law, insurance is not so straightforward.

Some premiums are deductible.
Some premiums are taxable benefits.
Some are not deductible at all, especially for shareholders of a controlled company.

Let us break it down in simple English.

Keyman Insurance : When Is It Tax Deductible

Keyman insurance is insurance taken by the company on the life of a key employee or director.
The purpose is to protect business income if something happens to that key person.

Premium is tax deductible only if:

• It is a pure term life or accident insurance
• No investment or savings element
• The company is the beneficiary
• Proceeds stay with the company

When these conditions are met, the premium is treated as a business expense under Section 33(1).

When Premium Is Not Deductible

• Controlled company
If the insured director is also a shareholder, the Inland Revenue Board normally disallows deduction because there is a mix of business benefit and personal benefit.

• Whole life or endowment policies
These policies have cash value or investment value. Premiums are capital in nature and are not deductible.

• Sole proprietors or partnerships
Insurance on owners is not deductible because the owner and business are the same legal person.

Tax Treatment of Insurance Proceeds

If the premium was allowed as a deduction, any proceeds received later are taxable as business income.

If the premium was not deductible, the proceeds are capital in nature and are not taxable.

Simple rule:
Deducted before means taxable later.
Not deducted before means not taxable later.

Director’s Personal Insurance

Many SMEs pay insurance for directors.

If the beneficiary is the director or family, and especially if the director is a shareholder, then:

• Premium is not deductible to the company
• Premium becomes a perquisite to the director
• Must be reported in Form EA
• Director pays tax on it as employment income under Section 4(b)

This is a common adjustment during LHDN audits.

Staff Insurance and Medical Benefits

Fully tax exempt for employees:

• Group accident insurance
• Foreign worker mandatory insurance as replacement for SOCSO
• Travel insurance for official work trips
• Medical and dental benefits for employees, spouses and children
• Treatment for serious diseases and maternity
• Traditional medicine treatment

Tax deductible for the company:

These expenses qualify as business expenses under Section 33(1) because they relate to employee welfare and business operations.

When it becomes perquisite:

If the insurance policy is under the employee’s own name, the employee or family is the beneficiary and the premium paid by employer is a perquisite.
It must be reported in the employee’s Form EA and taxed as employment income.

Other Business Insurance (Fully Deductible)

These are normal business insurance for business protection:

• Fire insurance
• Burglary insurance
• Motor insurance for business vehicles
• Public liability insurance
• Money in transit
• Professional indemnity insurance (for professionals such as accountants, lawyers or doctors)

All qualify as deductible business expenses.

What SMEs Must Remember

Keyman insurance is deductible only when it is a term policy with no investment value and the company is the beneficiary.

Personal insurance for directors or shareholders is normally not deductible.

Group insurance and medical benefits are tax exempt for employees and deductible for employers.

If premium is deducted, insurance payout will be taxable.

KTP’s View

Insurance planning and tax treatment must match.
Many SMEs assume all insurance premiums are deductible.
But LHDN regularly rejects claims when there is personal benefit, investment value or controlled company element.

One wrong claim can result in tax disallowance, penalties and additional tax.

We recommend reviewing existing policies before claiming deduction.

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