Gains or profits made from employment are subject to income tax payments under section 4(b) of the Income Tax Act 1967 (“ITA 1967”).
However, does this requirement also apply to remuneration of independent non-executive directors?
Recently, the High Court had to consider this issue in Datuk Oh Chong Peng v Ketua Pengarah Hasil Dalam Negeri [2024] 5 CLJ 989.
Brief Facts
- The Appellant incorporated two management companies.
- After the Appellant retired from professional practice, he sat on the Board of Directors as an independent non-executive director of several public companies. He received director’s fees and allowances from these companies.
- As for other companies (where he is not a part of the Board of Directors), he received consultancy fees from these companies for his services.
- All director fees, allowances and consultancy fees received from December 1997 to date were remitted to the management companies. These were treated as the income of the management companies and were subjected to income tax under section 4(a) of the ITA 1967 (ie: gains or profits from a business).
- The management companies then paid a monthly salary to the Appellant, which was further subjected to income tax in his personal capacity as business income under section 4(a) of the ITA 1967. This was adopted consistently by the Appellant since 1998 and accepted by the Inland Revenue Board (“IRB”) until 2015.
- Consequent to an audit, the IRB was of the view that the director fees, allowances and consultancy fees were employment income of the Appellant from all the companies where he sat as an independent non-executive director. Therefore, it was subjected to income tax as employment income under section 4(b) of the ITA 1967. IRB subsequently raised notices of additional assessments against the Appellant for the years 2002 to 2012.
- This led to the Appellant appealing against the notices of additional assessments to the Special Commissioners of Income Tax (“SCIT”). The SCIT disallowed the appeal. The SCIT held that the Appellant was an “employee” for the purposes of the ITA 1967 and that he was subject to further tax under section 4(b) of the ITA 1967.
- Aggrieved with the SCIT’s decision, the Appellant appealed to the High Court.
High Court’s Findings
The High Court held that the Appellant was never an employee of the public-listed companies. In doing so, the High Court considered multiple factors, such as: –
- There was no relationship of master and servant between the Appellant and those companies.
- The Appellant was never subject to the control of those companies.
- There was no offer of employment, increment letter, circular on employment and employee handbook given by the companies to the Appellant.
- The Appellant did not receive common employees’ benefit such as EPF or SOCSO from those companies.
- The Appellant did not receive his independent director’s fees monthly. His fees will only be paid upon approval during the annual general meeting of a company and the approved fees will be segregated among the board of independent non-executive directors.
- The letters from the company secretary of these companies show that the Appellant was appointed as an independent director and is not an employee of the companies.
While there were EA forms issued by the public listed companies to the Appellant, the High Court held that the EA forms were merely an administrative form to obtain necessary information on taxpayers. EA forms are not the determining factor in deciding the Appellant’s status and role in the companies and the Appellant’s chargeability to tax.
The High Court also noted that Bursa Malaysia Securities Berhad Practice Note 13 and paragraph 1.01 of the Listing Requirement, whereby an independent director is defined as someone who is “independent of management and free from any business or other relationship which could interfere with the exercise of independent judgment or the ability to act in the best interests of an applicant or listed issuer”. This definition implies that an independent director cannot be an employee.
In short, the fact that the Appellant received remuneration for the services he provided does not mean that he is an employee of all the companies in which he sat as an independent non-executive director.
The judgment also explores the issues of whether the notices of additional assessments were time-barred and whether the IRB is allowed to impose a penalty for providing incorrect returns. These issues were ultimately resolved in favor of the Appellant.
Key Takeaways
Although this case pertains to the income tax treatment of remuneration received by independent non-executive directors, the High Court’s observations are equally relevant to the common issue of misclassifying directors as employees.
While it is possible for a director of a company to also serve as an employee, problems arise when a director who is not an employee is incorrectly classified as one. Such misclassification can inadvertently expose the employer to a range of employment-related obligations, including potential liability in the Industrial Court and claims for employee entitlements such as salary.
To mitigate these risks, it is crucial to educate management and board members on the distinct treatment of independent non-executive directors.
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This article was written by Leow Ho Eng (Associate) from Donovan & Ho’s employment law practice.
Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation.
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