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1CHAPTER 3 : EMPLOYMENT INCOME

DBF 206

TAXATION I

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1. INTRODUCTION

Employment income: income derived and earned fromexercising an employment

Govern by Section 4(b) of ITA 1967

S.2, ITA 1967: employment means when there is arelationship of a master and servant; when there is anappointment of office, whether public or not andrelationship between master and servant subsists, as a

result of which a remuneration is payable. Employeeservant who is being employed by the

employer

Employermaster who is employing the employee

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2.DERIVATION OF EMPLOYMENT

INCOME

Employment income is deemed derived inMalaysia under S.13(2) and S.13(3) of ITA 1967.

Once the employment income is establishedto be deemed derived from Malaysia, suchemployment income would be taxednotwithstanding that:

the employer is not in Malaysia

the employee is a non- resident the payment of salary is made outside Malaysia the employment income is not received in

Malaysia

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2.1 SCOPE OF S 13(2)

S.13 (2) : employment income is deemed derived from Msia for:

(a) any period during which the employment is exercised in Msia,

(b) period of leave attributable to the employment in Msia,

(c) any period where the employee performs duties outside Msiaincidental to their work in Msia,

(d) any period which a person is a director of a company residentin Msia for the basis year

(e) any period where the employment is exercised aboard aship/ aircraft used in a business operated by a Msian resident forthe basis year

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2.2 SCOPE OF S 13(3)

gross income in respect of gains or profits from anemployment in the public services or the service ofa statutory authority:

for any period during which the employment is exercised outsideMalaysia; or

for any period of leave attributable to the exercise of theemployment outside Malaysia

shall be deemed to be derived from Malaysia if theemployee is a citizen.

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2.3 EXEMPTION OF INCOME TAX

Non- resident is exempted from income tax if he works inMsian;

(i) for a period/ periods do not exceed 60 days in the basisyear

(ii) for a continuous period (not exceed 60 days) whichoverlaps the basis year for 2 successive YA

(iii) combination of (i) and (ii)

* Days refer to then period when the employee exercises

employment in Malaysia and not the days of his physicalpresence in Malaysia

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3. TYPES OF EMPLOYMENT INCOME

3.1 Section 13 (1)(a)

Income that is convertible into money.

Gross income of an employee in respect ofgains or profits from employment includes:

any wages, salary, remuneration, leave pay, fee,

commission, bonus, gratuity, perquisites or

allowance (whether in money or otherwise) in

respect of having or exercising the employment

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1.1 Salary and wages

Taxed at gross

Deduction of EPF should be added back

1.2 Bonus

An incentive paid to employee for better services andloyalty to the employer in the long term.

1.3 Gratuity

Also known as ex-gratia payment or golden-hand-shake

Referred as a sum of money given to the employee inrecognition of past year services.

Paid to the employee upon resignation or retirement fromthe employment after a long period of service.

Taxable in full unless exemption is granted under Sch.6,paragraph 25, 25A, and 25B

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1.3.1 Treatment of Gratuity

(a) If total employment period is more than 5years before the commencement of the last

basis period (1 Jan of the resignation year)- gratuity is spread back to 6 yrs in equal fortax computation

(b) If total employment period is less than 5 yrs- gratuity is deemed to accrue evenly overthe entire period (divided by the actualperiod of working)

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1.3.2 Exemption of gratuity:a. Ill health

b. Age 55 years

- reach the age of 55 or reaching the compulsory age ofretirement from an employment (under written law)which has lasted 10 yrs with the same employer(continuous period).

c. Age 50 but before 55- must at age of 50 but before 55 (early retirement) andthat employment has lasted for 10 years with the same

employer or with companies in the same group.

d. Government Servant- retirement

e. Government servant- termination

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1.4 Perquisite or allowance (whether in the form of money or otherwise)

1.4.1 Share option and share incentive scheme Scheme that allows an employee an option to acquire shares in a

company at a fixed price and with a right to exercise the option at

some future dates perquisite : excess of the market price over the option price at

the time option was granted Computation: lower of

(a) MV at the time option was (granted) exercisable; or

(b) MV at the time the option was exercisedLess:Option price

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1.4.2Allowances

Allowances will be assessed on gross amount.- Traveling and entertainment allowance

- Clothing allowance- Gift vouchers : given during festivals based on

length of service of employee, it is perquisite

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1.5 Loan to employees

Given by employer either interest free or lower interest rate

Employees will be assessable to this benefit depending on thesource of fund and the cost to the employer.

a) Internal fund

not taxable

b) External fund

Cost incurred by the employer (-) Amount of nominal interestpaid by the employee

c) Interest subsidy taxable on the amount of subsidy

d) Waiver of loan/ advance taxable on the amount waived

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1.6 Tuition Fees and School Fees

If the employer pays the school fees or tuition fees for theemployees children, employee will be assessed on theactual amount incurred

1.7 Insurance premium

Life insurance policy paid by the employer- subject to taxon the employee of the annual premium paid

Group insurance policy for workers- tax exempted onemployee

Insurance for foreign workerstax exempted

1.8 Personal computer & broadband subscription fees

Exempted from income tax w.e.f YA 2008 -2010 for 1 unit ofnew personal computer and monthly broadbandsubscription fees registered under employers name

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1.9 Professional subscriptions Related to employment and paid by the employernot

taxable Not related to employment and paid by the employer

taxable

1.10 Excellence service In PR 1/2006 (para 5.5), it was stated that payment in

appreciation of excellence service rendered eventhough made voluntary, is assessable to s 13(1) (a).

However, a tax exemption of RM2,000 for eachemployee with effect from YA 2008 is given for: long service award (must have exercised employment for

at least 10 years with the same employer); past achievement award; service excellence award.

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1.11 Pecuniary liabilities When employer is paying income tax, utilities, car charges on

behalf of the employeetaxable to employee

1.12 Credit card facilities

Where credit card is provided by employer to employee tofacilitate the carrying on the duties and also for private purchase,the followings will be perquisite:(a) annual membership fees;(b) amount paid for private purchases

However, if used exclusively for performing duties includingentertaining the employers customers not taxable

1.13 Scholarship Tax- exempt whether related to employment or not.

1.14 Asset provided free of charge/ sold at discounted price Perquisite : MV (-) amount paid by the employee

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1.15 Income Tax (Exemption) Order 2009

W.e.f from YA 2008 and comprises of:

i. Allowances or subsidies for childcare of up to RM2,400 ayear (YA 2008- 2010)

ii. Telephone and mobile phone, telephone bills, pager,PDA and internet subscription;

iii. Employers own goods provided FOC or at discountedvalue does not exceed RM1,000 a year;

iv. Employers own services provided free or at a discountprovided & such benefits are not transferable;

v. Subsidies on interest on loans totalling up to RM300,000 forhousing, passenger motor vehicles & education (new &existing);

vi. Medical benefitsinclude maternity & traditionalmedicines

vii. Existing perquisites be extended to awards related toinnovation, productivity & efficiency from RM1,000 toRM2,000 a year

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3.2 Section 13 (1)(b)

Benefits provided to the employee by his employer in which

is not convertible into money

Types of benefits:

3.2.1 Motor vehicle and related benefits Employee will be assessed to tax on the benefit

attached to the car (include usage of fuel) Applicable to new car i.e. 5 years and below More than 5 years ? - benefit is divided by two, but the

value of fuel remains the same If the car and fuel benefit is not provided for a full year, it

should be apportioned based on the actual period. In the event of employee is provided with fuel without

motor car, the actual fuel expenses related to theprivate usage would be taxable to the employee.

Car benefit is determined as follows:(a) Prescribed method for motor vehiclepls refer topage 112(b) Formula methodpage 114

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3.2.2 Driver If the employer pays the driver salary of the employee, the

employee will be assessed at a fixed amount of RM600 permonth.

3.2.3 Household Furniture and Appliances(a) Formula method

Annual value of benefit =Cost of the asset providing benefit/ amenityPrescribed average lifespan of asset

(b) Prescribed value method Semi- furnished with furniture in the lounge, dining room , or

bedroomsRM70 per month (RM840 per annum); Semi- furnished with furniture as (a) above plus one more of thefollowing: air- conditioners, curtains and carpetsRM140 per month(RM1,680 per annum)

Fully furnished with benefits as in (a) and (b) above plus, one or morekitchen equipment, crockery, utensils and appliancesRM280 permonth (RM3,360 per annum)

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3.2.4 Utilities Used by the employee - bills are under employers name

and are paid by employer -related to performing his work -the amount of benefits assessable is based on servicecharges and bills paid by the employer

If bills are in the name of employee and paid by employer-

it is perquisite and will be assessed under s 13(1) (a).

3.2.5 Membership of recreation clubs Corporate membership is owned by the employer

Entrance fee : employee will not be subject to tax on thisamount

Monthly/ annual subscription : assessed under s. 13 (1)

(b) Individual membership is refer to membership owned by an

individual - Subject to tax under s 13 (1) (a) with regard tothe entrance fee, annual membership fee and termmembership paid

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3.2.6 Gardener/ Domestic servant/ guard

Gardener - RM300 per month.

Domestic servantRM400 per month

In the situation of employee is paying the gardener/

servant and is claimed on a reimbursement basis-Section 13(1)(a).

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3.3 BENEFITS EXEMPT FROM TAX

i) Free transport For factory buses

ii) Goods and services offered at a lower price or at a discount Benefits for everyday consumption, which are provided or sold by

the employer to the employee but do not refer to houses sold toemployees at a discount.

The value of the consumable or products must not exceed RM200. If

it is exceed RM200, full amount will be taxable.

iii) Food and drinks

iv) Medical, dental and child care benefits Include benefits to the spouse and children

v) Insurance premium Group insurance policy for workers Insurance for foreign workers

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vi) Leave passages Leave passage include the benefit enjoyed by the employee and

members of his spouse and children (exempt from tax on theemployee)

Subject to the limits of;

a) 3 leave passages for travel within Malaysia, andb)1 leave passage for travel between Malaysia and any place outside

Malaysia, maximum RM3,000 per family

travel within Malaysia include travel from Peninsular Malaysia toEast Malaysia and vice versa.

Effective YA 2007, meals and accommodation provided by

employer, together with 3 local leave passages are also exemptedon employees.

leave passage for travel is restricted to costs of passage such as airfares, insurance and transit but not hotel accommodation.

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3.2 Section 13 (1)(c) Assessed the value of unfurnished living accommodation (VOLA)

Related terms:

a) Controlled companyS.2: a company having not more than

50 members and controlled by not more than 5 persons.b) Directora person who is director of a company, givingdirections and instructions, manager of the business or payremunerations to the employee

c) Defined valuerent paid for the accommodation, rateablevalue or economic rent

d) Rateable valueannual values as determined for ratingpurposes by the local authority

e) Economic rentamount of rent that can be collected fromthe lessee

f) Service directordirector own less than 5% share in thecompany and acts in a managerial or technical capacity.

g) AssociatesS.139: includes a spouse, parent, child, brother,sister, partner, trustee of a settlement or estate

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Methods;

a) If accommodation is provided to an employee, thevalue will be; defined value of living accommodation

30% of the employees gross income under Section 13 (1)(a)whichever is lower

b) If accommodation provided to a non-service directorthe amount assessed is full amount of the defined value ofthe accommodation provided

c) If accommodation is provided in a hotel, hostel,quarters, plantation or forest- 3% of Section 13(1)(a) grossincome and will be apportioned based on the period ithas been provided

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d) If accommodation is in hotel and provided to a non-service directoramount assessed is the actual hotel bill.

Apportionment of value of accommodation is when;

shared with another employee part of the accommodation provided is used to

advance the companys interest

accommodation is larger than is needed by theemployee

accommodation provided is less than 12 calendarmonths

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Example:

Anderson works JTE Holding for the whole year of 2009. Her salary was RM10,000 per month and shewas provided with accommodation in Bangi by the employer from 1.1.2009 to 31.12.2009. Theemployer rented the accommodation for RM4,000 per month , inclusive of furniture value of RM350per month. The place is semi- furnished.

Determine the gross income from employment for YA 2009.

Solution:

Employment income for YA 2009

RM

S 13 (1) (a) Salary (RM10,000 x 12 months) 120,000

S 13 (1) (b) Furniture (RM70 x 12 months) 840

S 13 (1) (c) VOLA

a) Defined value

(RM4,000- RM350) x 12 = RM43,800

Or b) 30% x RM120,000 = RM36,000

Whichever is the lower amount 36,000

Gross income 156,840

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3.4 Section 13 (1)(d)

Withdrawal of money from unapproved pension or providentfund, scheme or society, any interest earned or bonus earnedby unapproved fund and credited to the employee- subject totax on the amount contributed by the employer only (includinginterest and bonus earned) in the year of withdrawal.

3.5 Section 13 (1)(e)

Scope include;o Salary or wages in lieu of noticeo Compensation for breach of contract of serviceo Payment for the release of the employers obligation under

contract of serviceo Ex-gratia such as retrenchment payment, severance pay,

gratuity made to employees who have become redundant;and

o Restrictive covenant (when you are restricted from exerciseanother employment with different employer)

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4. EXPENSES ALLOWED AS DEDUCTION AGAINSTEMPLOYMENT INCOME

a) Membership subscription fees to professionalbodies;

b) Entertainment expenses (restricted to

entertainment allowance given);c) Travelling expenses for business purpose; and

d) Rental expense paid to employer if housingaccommodation is provided by employer

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5. EXPENSES NOT PERMITTED TO DEDUCT AGAINSTEMPLOYMENT INCOME

commission paid to employment agencies self- improvement expenses such as seminar fees, tuition fees,

attending part time courses such as ACCA, degree program,post- graduate program etc

examination fees- e.g.: MIA s examination professional subscriptions that are merely customary/ contain

personal choice/ give private benefits journals and books subscriptions of newspaper club subscription to maintain social position of the employee telephone cost Clothing Entertainment expenses

-If the employee is not provided with entertainment allowance- if provided with entertainment allowance, amount isrestricted to the amount of entertainment allowance includedin the gross income

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Example:Julie is employed as a senior accountant in the finance department of StyleSdn Bhd. His income for the YE 31.12.2010 is as follows:

RMSalary 174,000Travelling allowance 18,000

The company made the following payments and provided him with thefollowing benefits:

(i) Reimbursement of salary of the driver employed by Julie, amountingto RM11,140.

(ii) From 1.1 -30.9.2010 Julie was provided with a company car costingRM99,000, which she was required to share with another employee.From 1.10- 31.12.2010, she was provided with a new car costingRM165,000, solely for her own use. Petrol was provided for the wholeyear.

(iii) Leave passage to Europe taken by Julian and her husband IDecember at a cost of RM4,600.

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(iv) Unfurnished living accommodation provided to Julie from 1.7-31.12.2010, at a cost of RM8,000 per month. She pays rental of RM1,000 to

the company.

Julie claimed travelling expenses incurred on visiting companys clients,amounting to RM19,000. She incurred RM2,000 for membership subscription

fees to MIA and ACCA.

Required:

Compute the statutory income from employment of Julie for the YA 2010.

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SOLUTION: Julie

Computation of statutory income for the YA 2010

S 13(1)(a) RM RM

Salary 174,000

Travelling allowance 18,000

Reimbursement of driver salary 11,400203,400

S 13(1)(b)

1st car (3,600 x9/12 x ) 1,350

Petrol (1,200 x 9/12 x ) 450

2nd car (7,000 x 3/12) 1,750

Petrol (1,800 x 3/12) 450Leave passage (4,600- 3,000) 1,600 5,600

S 13(1)(c)

Defined value(RM8,000 x 12= 96,000)

or 30% x 203,400x = 61,020

Whichever lower RM61,020 x 6/12 30,510

Gross income 239,510

Less: Travelling exp 19,000

Membership subscription fees 2,000

Rental (1,000 x 6) 6,000 (27,000)

Statutory income 212,510

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END OF CHAPTER 3

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