Need HR and tax expert advice on this situation (person and company are fiction):

Johnny got a job offer from Apple on 1 Feb 2012 and is required to report for duty on 1 Mar 2012. Unfortunately, his current employment at Microsoft requires him to give a 3-month resignation notice. He tendered his resignation at Microsoft on 1 Feb 2012 with 1-month notice and 2-month salary in-lieu.

Apple told Johnny to pay the 2-month salary in-lieu first to Microsoft and it will be reimbursed into his first salary later.

When Johnny got his first salary at Apple on 31 Mar 2012, he was shocked to find out that the salary in-lieu got taxed and deducted for EPF, and termed as “allowance” in the salary slip. The tax amount was significant as the tax bracket was based on 3-month salary (1-month at Apple and 2-month salary in-lieu at Microsoft).

My understanding is, salary in-lieu should be treated as “claim” (not taxable and not entitled for EPF) rather than “allowance” (taxable and entitled for EPF). Is there a clause in the tax regulation that Johnny can use to present his case to Apple and have the salary in-lieu treated as “claim” – not taxable and not deducted for EPF?

Imagine if Apple were to pay Microsoft directly the 2-month salary in-lieu in favour of Johnny – it will not have any tax or EPF implication, right?

This post has been edited by ZeTaBYTeS: Aug 23 2012, 01:39 PM

Why don't you use Company ABC and DEF... rather than actual company names

ABC = Microsoft
DEF = Apple

Johnny is stupid to pay 2-month-in-lieu out of his own pocket. He should get DEF to pay. DEF is the smarter company in this scenario. Why didn't Johnny ask before commiting to DEF ?

My first statement above reads: "Need HR and tax expert advice on this situation (person and company are fiction)"

My first statement above reads: "Need HR and tax expert advice on this situation (person and company are fiction)"

Tax cap on.....
DEF is smart to charge as allowance.... actually Johnny gets 12% more in EPF Employer Contribution.

Since DEF already pay in the payslip.... Johnny have no choice to bear the consequences. Johnny should ask in the forum before committing. Take it as lesson learnt.

Thanks for your opinion. The 12% EPF contribution by Apple is nothing when compared to the over 25% income tax incurred. Apple is not smart - it's just the HR personnel's incompetence to do their part and treat the transaction as it should - claim rather than allowance. Johnny is not aware of the curve ball (if so, would've asked around first) and is now in the midst of challenging them on this.

Depends on which point-of-view only lah
HR personnel also get info from Managers... Johnny ASSUME too much lah.

1) I agree the fictional Johnny is stupid Hope is not a real person, then double-stupid.

2) The 25% tax is normal. As PCB is calculated for each month. Next year when declare tax, you'll average out again based on annual income. Most likely, there will be a refund for extra tax paid.




3) No matter what, it already happen. If Johnny goes and challenge his current company boss, HR, finance, etc. it will leave a bad image for this newly hired staff. Triple-stupid by now.

4) Johnny should start to look for other jobs. Seriously. And change his attitude of challenging people everytime, all the time.

5) Johnny should start to join LYN forum and learn from others.

Well said cute_boboi ... i like the triple-stupid comment. +1

I believe Johnny is paying a full trust on his new employer, as he doesn't want to leave a bad image at the first place. Further more, HR thingy is very complicated sometimes, and it is fine for him to pay in advance.

I can imagine if Johnny insist not to pay in advance for Apple, his reputation and image will soon drop to the bottom. Offending the employer before stepping into his new office, he is indeed digging a grave for himself; In opposite, the former employer may also insist him to do a clearance before he can leave the company. In such dilemma, I truly understand Johnny has no choice but to trust his new employer, since a reputable company is highly likely won't decline to what they had promised to Johnny earlier. The only "out of expectation" is the tax and epf deduction of the reimbursement.

In my experience, Apple should issue the reimbursement to Johnny in a separate form. It can be cheque, cash or bank account credit same like salary, but not together in the monthly salary transaction. HR's payroll system will calculate tax and epf deduction automatically. This is the exact situation/problem which Johnny has met with. As such, such reimbursement has to be handled individually.

1) Johnny is stupid if he pay himself first, even if it is RM1. (for the in-lieu notice)

2) If Apple agreed to buy him out, Apple should negotiate and pay directly to Microsoft. This is not the part on Johnny insisting. It is Apple who insist to buy him out. Johnny should not get involve at all on the payment.
Even if Apple decide to hire secretly, Apple should make advance payment to Johnny, so that Johnny can pay Microsoft.
If Apple don't trust advance payment to Johnny, then pay direct to Microsoft (duh!)

3) If Apple cannot settle the approval for the payment, then might as well wait Johnny to finish serve his notice period. The point here again is, it is Apple who needs Johnny to join earlier, hence the need to make the payment, not Johnny.

4) It can be HR/Finance fault for not doing it proper way, but some companies insist on doing that way. What can you do ? Therefore, for Johnny to argue and make noise as a freshie in the company (even with >10 years experience), it leaves a bad impression.

5) Unless Johnny is hired as the CEO/MD/President, perhaps he can make noise and take actions to improve this.

Some company with red tape procedure, strict procedure, they have their way of doing on HR issue.

It is easier to say, why not make it as claim as compared as wages, but for some company, HR cannot do, or powerless to do such thing at their wish.

This is especially for large company whereby HR may need to follow rules and guidelines set by HQ.

Correct me if I am wrong, Johnny will have to pay tax notwithstanding the payment is counted as wages, or fixed allowance. So even if you treat the payment as allowance, it is still considered as income and subject to taxation.

Claims to the tax authority should be supported by bills and invoices. If it is a monthly fixed claim (eg entertainment, petrol claims) without supporting documents, it is also subject to tax

If the above is true, the question now is not a taxation issue, but an employment contract issue / what is negotiated before joining Apple

What Johnny has done wrong (some say "stupid") is that when he negotiate with Apple, he did not mention specifically Apple should pay the net of tax amount (ie gross up) so that he doesn't need to pay penalty for leaving early

If it is Apple who insists Johnny should join them early, and they will bear the pay-in-lieu payment, then Johnny should "discuss" with the boss and tell Apple he should not be on the losing side for something Apple requested and get the tax amount reimbursed

But if during negotiation, Apple told Johnny "if you cannot join us in 1 month's time, you couldn't get the job", then Johnny will have to keep quiet and get on with life in the new company loh...

p/s the naming of the companies sounds like a case study of a lecture course to me....

This post has been edited by EddyLB: Aug 24 2012, 06:42 PM

Concur that it is a reimbursement, just like other usual reimbursement like out-of-town trip expenses or one-time relocation costs. Johnny should have also make a written claim, and present it for boss approval in the 1st week, instead of allowing it to be paid with his 1st month salary, hence the screw-up by Payroll mistaken it as special allowance or bonus.

---

Added on August 24, 2012, 8:09 pmBut how to rectify it without embarrassing Payroll staff and maybe immediate boss? Maybe just let it be, and take it as a petty matter, and pretend to be too busy in new job to notice it... since the extra 12% EPF more or less offset the tax on this extra ‘income’.

But Johnny already "in the midst of challenging them on this." So the discussion is academic.

This post has been edited by j.passing.by: Aug 24 2012, 08:09 PM

if the new company ask me to pay 1st before joining them,

for sure i would not join them. what if they dun pay me back?

Thank you all for the interesting debate and opinion. Johnny is still pursuing on his claim. Some more info:

- Johnny paid upfront first as it will take Apple awhile to get the approval processed due to red tape in a big organization. Also, Johnny has a good relationship with Microsoft and wanted to leave in a good manner instead of telling Microsoft HR to deal with Apple HR in the coming months on the salary in-lieu.

- Actually, Johnny only worked for half-month notice as the other half was cleared using annual leave. As Johnny reported for work at Apple immediately thereafter (urgently as requested) after serving half-month at Microsoft, it made total sense that paying upfront is the best way forward.

- As agreed by some of you here, this transaction is supposed to be treated as reimbursable claim and not allowance by the Apple HR. Claim is not taxable or entitled for EPF. Johnny is pretty sure if Apple HR has followed proper guideline then this thread wouldn't even exist. Johnny has letter and receipt on the total amount of salary in-lieu paid from Microsoft and these have been submitted to Apple. During recruitment, Apple recruiter has agreed on the reimbursement - the last Johnny checked, reimbursement is not income.

- Apple has effected salary in-lieu payment to other companies directly before and of course, the transaction has no tax or EPF implication. So why Johnny's case be any different? It all boils down to the personnel processing Johnny's claim.

This post has been edited by ZeTaBYTeS: Aug 25 2012, 11:23 PM

As a conclusion, this was a mistake by HR personnel. Not sure what is the best mitigation on this, but for sure it will create a lot of issues and troublesome. Payment made is hardly to be refunded especially from government agencies, such as KWSP and LHDN.

Please correct me if I am wrong, I believe HR needs to send a letter to LHDN to inform of the mistake of reimbursement payment recorded as taxable allowance. HR will then need to get a notification or agreement from LHDN, to allow them to file the document as evidence and followed by modifying some entries in payroll system. In the year-end EA form, the relevant payment should be reflected as reimbursement instead of allowance. And then, Johnny should proceed to claim for "Cukai Terlebih Bayar" in the subsequent year of tax submission. As for KWSP, no turning back as I do not come across any case whereby KWSP "refund" any payment to either employee or employer.

** No offense, solely my personal opinion in a possible mitigation. May not be the actual solution, so do comment to correct me as i may wrong.

Knowing the mindset of Accounts/Admin, Johnny shouldn't be too worry about his claim (and not show his concern about the tax deducted too much)... just let know to the right person ie. the HOD of that Dept, that he likes the generosity of company in paying EPF on reimbursements... bet the HOD will jump.

Rectifying the error, simple matter... Payroll will treat the mistake as advance salary, and deduct partially the next 2 months on the paid EPF and tax; and the balance of the reimbursement....

Thank you all once again for your opinions!