Malaysia · Proposed legislation
Malaysia proposes cashless-payroll condition for salary deductions
On 9 October 2026, Malaysia’s Ministry of Finance proposed restricting salary-expense deductions from year of assessment 2028 for non-MSME employers that do not use specified cashless payment channels.
- Official document:
- Budget 2027, Tax Measures Appendix 14; Income Tax Act 1967 (Act 53), section 33; Employment Act 1955 (Act 265), sections 25 and 25A
- Development date:
- 2026-10-09
Current deduction rule
Section 33(1) of the Income Tax Act 1967 currently permits outgoings and expenses wholly and exclusively incurred in producing gross income. Budget Appendix 14 says this includes employee salaries and that deductibility presently does not depend on whether an expense is paid in cash, in non-cash form or by another method.[1][2]
Proposed payment condition
The proposal would allow a deduction for salary expenses only where payment is made through a financial institution or a cashless payment instrument prescribed under the Employment Act 1955. Micro, small and medium enterprises would be excluded, and the method used to pay non-salary expenses would not affect their deductibility. The proposed rule would apply from year of assessment 2028.[1]
Interaction with wage-payment law
Sections 25 and 25A of the Employment Act require wages to be paid into an employee’s account with a financial institution, while permitting legal-tender or cheque payment on the employee’s written request and with the Director General’s approval. For this purpose, a financial institution includes specified licensed banks and approved issuers of designated payment instruments. The Budget proposal does not say whether every employment-law exception would also preserve the tax deduction.[1][3]
Practical consequence for groups
A non-MSME group using cash or cheque payroll arrangements could therefore face a corporate-tax adjustment even where the salary remains a genuine business expense and the payment method is permitted under employment law. Groups should identify payroll populations and payment channels across Malaysian entities, retain evidence linking payments to employee accounts, and model the possible denial from YA 2028. The measure remains a proposal: the implementing legislation must define the MSME exclusion, the relevant payment instruments and the treatment of approved alternative wage payments before the restriction can be treated as operative.[1][2][3]
Official sources
- [1] Budget 2027 Tax Measures
Malaysian Ministry of Finance · Document date: 2026-10-09
Appendix 14, printed pages 19–20 (PDF pages 19–20): current section 33 treatment, proposed cashless-payment condition, MSME exception, non-salary expenses and YA 2028 effective date.
- [2] Income Tax Act 1967 (Act 53), updated text as at 21 May 2024
Attorney General’s Chambers of Malaysia · Document date: 2024-05-21
Section 33(1), printed pages 89–90: deduction for outgoings and expenses wholly and exclusively incurred in producing gross income. The official file identifies itself as an updated, non-authentic text dated 21 May 2024.
- [3] Employment Act 1955 (Act 265), updated text as at 1 January 2023
Attorney General’s Chambers of Malaysia · Document date: 2023-01-01
Sections 25 and 25A, printed pages 36–38 (PDF pages 35–37): payment through a financial institution, covered institutions and approved issuers, and approved legal-tender or cheque alternatives. The file is an updated, non-authentic text as at 1 January 2023.