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ESOS – What You Need to Declare When Filing Your Income Tax

Are my shares bought under an Employee Share Option Scheme taxable in Malaysia? It's a good question. Let's have a look at a scenario that can help you when filling out your income tax form
Employee Share Option Scheme (ESOS), Income tax Malaysia

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 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?’

Is your employer providing you with 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?

Answer:
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
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) in 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 @
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 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.

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 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.

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