ESOS – What You Need to Declare When Filing Your Income Tax
Question:
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 2017, I did not exercise my option 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 option five times throughout the entire year as the price of MEGA shares have appreciated. The following are the dates when I had exercised my options, the number of shares purchased and their current market prices at the dates I executed my options:
| 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?
Answer:
Firstly, capital gains, realised or unrealised, from share trading activities are not taxable in Malaysia. Thus, Bryan is not liable to pay income tax on gains derived from his investments into MEGA shares in both 2017 and 2018. To put it simply, if Bryan decides to sell all of his MEGA shares 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 Shares | Investment Gains | Taxable |
|---|---|---|---|---|---|
| 1 | 2017 | RM 1.80-RM 0.95= RM 0.85 | 25 000 | RM 21 250 | No |
| 2 | 2018 | RM 1.80-RM 1.00= RM 0.80 | 60 000 | RM 48 000 | No |
| Total | 85 000 | RM 69 250 | No | ||
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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 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?’
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 Option was Granted
b. Market Value at the Time the Option was Exercised.
Less Option Cost, if any.
In Bryan’s case, his option 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 is to be calculated as follows:
Step 1: Calculate Perquisite per Share for each Option
| No. | Execution Date | MV @ Granted | MV @ Executed | Purchase Cost | Perquisite Per Share |
|---|---|---|---|---|---|
| 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 |
Notes:
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 Per Share | Amount of Shares | Perquisite |
|---|---|---|---|---|
| 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 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 year 2018?’
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.
For instance,
| 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%) |
Conclusion:
Shares bought under ESOS is treated as perquisites and hence, are subjected to declaration of income tax under ITA 1967 if the shares are bought at prices that are lower than their current market price.
Shares bought and sold through stock brokerage accounts are subjected to any income tax. Capital gains arising from stock trading activities are also not liable for income tax payments in Malaysia.
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