There have been several controversies about the tax perspective on clothing allowance, especially for workers in the banking space where looking sharp and professional is key to the industry. The Income Tax Act and the accompanying Practice Note provide the better perspective.
Section 4(2)(a)(iii) of the Income Tax Act 2015 (Act 896) prescribes that a person ascertaining the profits or gains of an individual from employment for a year of assessment shall include in the calculation personal allowances, including cost of living, subsistence, rent, entertainment, clothing and travel allowance.
Section 130(1)(c) also provides that where an individual incurs expenditure in respect of that individual, the expenditure is domestic to the extent that it is incurred in acquiring clothing for the individual, other than clothing that is not suitable for wearing outside of work.
Clothing not suitable for wearing outside of work
For the purposes of section 130(1)(c), clothing would be considered not suitable for wearing outside of work where, among others:
- The employer's logo is clearly embossed on the uniform, dress or clothing — a detachable badge is not sufficient to make it a uniform.
- It is customised with the name of the employer written on it.
- It is specialised or safety clothing.
- It is ceremonial clothing of the employer or organisation, for example Friday wear.
- The employee would readily be recognised as wearing a uniform by a person on the street.
Clothing allowance is therefore a taxable allowance and should be included in the assessment of profit or gains from employment unless the above criteria are met.
Note that where an employer requires an employee to wear specific attire such as suits or jackets, other than clothing suitable for work only, it cannot be excluded from the chargeable income of that employee, since the attire can be worn to weddings, funerals and interviews that do not relate to the work.