Q: 

I am a sole proprietor of a legal firm and I have received RM200,000 from an insurance company to cover a compensation claim of RM250,000 by my client. Are the insurance proceeds of RM200,000 subject to tax?

A: 

Yes, the insurance proceeds of RM200,000 are subject to tax. However, when the proceeds are paid out as compensation to your client as part of the contract, the amount is allowed as a tax deduction against your business income. 

I am a sole proprietor of an engineering firm and I purchased an insurance policy to cover lawsuits related to my professional services. The insurance company paid me RM350,000 for a negligence claim arising from my advisory services, and I paid RM250,000 as compensation to my client. Are the whole insurance proceeds subject to tax or would it be restricted to the compensation paid?   

A: 

The whole insurance proceeds of RM350,000 are subject to tax. The amount taxable is not restricted to expenses incurred to pay compensation to the client. However, the proceeds paid out as compensation to the client as per the contract is allowed as a tax deduction against your business income.