ESOS – What You Need to Declare When Filing Your Income Tax
Hi, my name is Bryan. I’m a Senior Manager of MEGA Retail Bhd, a public listed company which owns 200 MEGA home furniture stores in Malaysia. Presently, I have worked in MEGA for 15+ years and intend to remain employed with MEGA until I hit my retirement age of 55.
In 2016, MEGA has introduced an Employee Share Option Scheme (ESOS) which entitles all employees who worked in MEGA for more than 10 years to purchase MEGA shares at its par value of RM 1.00 per share for a period of 5 years which started from 1 January 2016 to 31 December 2020. The market value of a share of MEGA was RM 1.20 on 1 January 2016.
In 2017I did not exercise my ESOS as MEGA shares had dropped to RM 0.90 – RM 1.05 throughout the year. Instead, I had bought a total of 25,000 shares of MEGA at an average cost of RM 0.95 a share via my online brokerage account.
In 2018, I have exercised my ESOS five times throughout the entire year as the price of MEGA shares have appreciated. The following are the dates when I had exercised my ESOS, the number of shares purchased and their current market prices at the dates I executed my ESOS:
|No.||Execution Date||Amount of Shares||Market Price|
|1||1 February 2018||10 000||RM 1.25|
|2||15 April 2018||2 000||RM 1.10|
|3||22 July 2018||8 000||RM 1.20|
|4||9 September 2018||15 000||RM 1.30|
|5||16 November 2018||25 000||RM 1.50|
As I write, the market price of MEGA shares is RM 1.80 per share.
My question is: ‘Are there any tax considerations that I need to be aware of regarding my ESOS?’
Firstly, capital gains, realized or unrealized, from share trading activities including ESOS are not taxable in Malaysia. Thus, Bryan is not liable to pay income tax on gains derived from his ESOS investments into MEGA shares in both 2017 and 2018. To put it simply, if Bryan decides to sell all of his MEGA shares under the ESOS at its current price of RM 1.80 per share today, he would make RM 69,250 in investment gains, tax-free.
|No.||Year||Profit per Share||Amount of |
|1||2017||RM 1.80-RM 0.95= |
|25 000||RM 21 250||No|
|2||2018||RM 1.80-RM 1.00= |
|60 000||RM 48 000||No|
|Total||85 000||RM 69 250||No|
Is your employer providing you a company car beside the Employee Share Option Scheme? Read this: Company Car Benefit | Should I declare it on my income tax filing in Malaysia?
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However, Bryan is liable to declare income tax on the price differences that had been granted to him for the purchase of MEGA shares under ESOS. It is because these price differences are viewed as ‘perquisites’ under Section 13(1)(a) of the income tax. Act (ITA) 1967.
They are taxable in 2018 as Bryan has exercised all of his options under the ESOS in 2018. As for 2017, Bryan does not need to declare income tax for his shares purchased as he bought them from the open market through his stock brokerage account.
The next question is: ‘What is the amount of perquisite value that Bryan should be declaring to the Inland Revenue Board (IRB) of Malaysia from his ESOS?’
Based on Section 32(1A) of ITA 1967, the formula to compute Bryan’s perquisite value is as follows:
It is the lower of:
a. Market Value at the Time the ESOS was Granted
b. Market Value at the Time the ESOS was Exercised.
Less Option Cost, if any.
In Bryan’s case, his ESOS was granted on 1 January 2016. Its market value was RM 1.20 a share. Bryan did not incur any option cost for his purchases of MEGA shares under ESOS in 2018. Thus, Bryan’s perquisite value of his ESOS is to be calculated as follows:
Step 1: Calculate Perquisite per Share for each Option
|No.||Execution Date||MV @ |
|MV @ |
|1||1 Feb 2018||RM 1.20||RM 1.25||RM 1.00||RM 0.20|
|2||15 Apr 2018||RM 1.20||RM 1.10||RM 1.00||RM 0.10|
|3||22 Jul 2018||RM 1.20||RM 1.20||RM 1.00||RM 0.20|
|4||9 Sep 2018||RM 1.20||RM 1.30||RM 1.00||RM 0.20|
|5||16 Nov 2018||RM 1.20||RM 1.50||RM 1.00||RM 0.20|
The figures in colored boxes are chosen as they are lower in market value.
Step 2: Calculate Perquisite for each Option & Total Perquisite
|No.||Execution Date||Perquisite |
|Amount of |
|1||1 Feb 2018||RM 0.20||10 000||RM 2 000 |
(RM 0.20 x 10 000)
|2||15 Apr 2018||RM 0.10||2 000||RM 200 |
(RM 0.10 x 2 000)
|3||22 Jul 2018||RM 0.20||8 000||RM 1 600 |
(RM 0.20 x 8 000)
|4||9 Sep 2018||RM 0.20||15 000||RM 3 000 |
(RM 0.20 x 15 000)
|5||16 Nov 2018||RM 0.20||25 000||RM 5 000 |
(RM 0.20 x 25 000)
|Total||RM 11 800|
Hence, Bryan needs to include RM 11,800 in perquisite value for each ESOS when he declares income tax for year 2018.
Here is another question: ‘Does it mean that Bryan would be paying RM 11,800 extra in income tax for the year 2018 after exercising ESOS five times?’
The answer is Nope. The amount of income tax payable depends on Bryan’s tax bracket for 2018. Simply put, if he falls under the maximum income tax of 14%, then, Bryan would pay a maximum of RM 1,652 in income tax payments for his perquisite value of MEGA shares bought under ESOS. But, if his maximum tax is at the bracket of 28%, then, the maximum amount payable is RM 3,304.
|No.||Perquisite Value||Maximum Tax Bracket||Maximum Tax Payable|
|1||RM 11 800||14 %||RM 1 652 |
(RM 11 800 x 14%)
|2||RM 11 800||28 %||RM 3 304 |
(RM 11 800 x 28%)
Shares bought under ESOS is treated as perquisites and hence, are subjected to declaration of income tax under ITA 1967 if the ESOS shares are bought at prices that are lower than their current market price.
Shares bought and sold through stock brokerage accounts are subject to any income tax. Capital gains arising from stock trading activities including ESOS are also not liable for income tax payments in Malaysia.
You may need customised tax services if your present financial standing is a lot more complex. To search for highly qualified local tax consultants, you may us Joolah.my , a free search tool that quickly refers you to the best accounting, audit and tax professionals in Malaysia.