DBF 206 TAXATION I

CHAPTER 3: EMPLOYMENT INCOME

1. INTRODUCTION
Employment income: income derived and earned from exercising an employment Govern by Section 4(b) of ITA 1967

S.2, ITA 1967: employment means when there is a relationship of a master and servant; when there is an appointment of office, whether public or not and relationship between master and servant subsists, as a result of which a remuneration is payable. Employee servant who is being employed by the employer Employer master who is employing the employee
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2. DERIVATION OF EMPLOYMENT INCOME

Employment income is deemed derived in Malaysia under S.13(2) and S.13(3) of ITA 1967. Once the employment income is established to be deemed derived from Malaysia, such employment income would be taxed notwithstanding 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

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 Msia incidental to their work in Msia,
(d) any period which a person is a director of a company resident in Msia for the basis year (e) any period where the employment is exercised aboard a ship/ aircraft used in a business operated by a Msian resident for the basis year
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2.2 SCOPE OF S 13(3)

gross income in respect of gains or profits from an employment in the public services or the service of a statutory authority:
for any period during which the employment is exercised outside Malaysia; or for any period of leave attributable to the exercise of the employment outside Malaysia

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

2.3 EXEMPTION OF INCOME TAX

Non- resident is exempted from income tax if he works in Msian; (i) for a period/ periods do not exceed 60 days in the basis year (ii) for a continuous period (not exceed 60 days) which overlaps 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 physical presence in Malaysia

3. TYPES OF EMPLOYMENT INCOME

3.1 Section 13 (1)(a) Income that is convertible into money. Gross income of an employee in respect of gains 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

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 and loyalty 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 in recognition of past year services. Paid to the employee upon resignation or retirement from the 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 5 years before the commencement of the last basis period (1 Jan of the resignation year) - gratuity is spread back to 6 yrs in equal for tax computation (b) If total employment period is less than 5 yrs - gratuity is deemed to accrue evenly over the entire period (divided by the actual period 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 of retirement 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) and that 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 exercised Less: Option price

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1.4.2 Allowances 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 the source of fund and the cost to the employer.
a) Internal fund not taxable b) External fund Cost incurred by the employer (-) Amount of nominal interest paid 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 the employees children, employee will be assessed on the actual amount incurred 1.7 Insurance premium Life insurance policy paid by the employer- subject to tax on the employee of the annual premium paid Group insurance policy for workers- tax exempted on employee Insurance for foreign workers tax exempted 1.8 Personal computer & broadband subscription fees Exempted from income tax w.e.f YA 2008 -2010 for 1 unit of new personal computer and monthly broadband subscription fees registered under employers name
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1.9 Professional subscriptions Related to employment and paid by the employer not 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 even though made voluntary, is assessable to s 13(1) (a). However, a tax exemption of RM2,000 for each employee 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 employee taxable to employee 1.12 Credit card facilities Where credit card is provided by employer to employee to facilitate 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 including entertaining 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 a year (YA 2008- 2010) ii. Telephone and mobile phone, telephone bills, pager, PDA and internet subscription; iii. Employers own goods provided FOC or at discounted value does not exceed RM1,000 a year; iv. Employers own services provided free or at a discount provided & such benefits are not transferable; v. Subsidies on interest on loans totalling up to RM300,000 for housing, passenger motor vehicles & education (new & existing); vi. Medical benefits include maternity & traditional medicines vii. Existing perquisites be extended to awards related to innovation, productivity & efficiency from RM1,000 to RM2,000 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 the private usage would be taxable to the employee. Car benefit is determined as follows: (a) Prescribed method for motor vehicle pls refer to page 112 (b) Formula method page 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 per month. 3.2.3 Household Furniture and Appliances (a) Formula method Annual value of benefit = Cost of the asset providing benefit/ amenity Prescribed average lifespan of asset (b) Prescribed value method
Semi- furnished with furniture in the lounge, dining room , or bedrooms RM70 per month (RM840 per annum); Semi- furnished with furniture as (a) above plus one more of the following: air- conditioners, curtains and carpets RM140 per month (RM1,680 per annum) Fully furnished with benefits as in (a) and (b) above plus, one or more kitchen equipment, crockery, utensils and appliances RM280 per month (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 service charges and bills paid by the employer If bills are in the name of employee and paid by employerit 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 this amount 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 to the entrance fee, annual membership fee and term membership paid

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3.2.6 Gardener/ Domestic servant/ guard

Gardener - RM300 per month. Domestic servant RM400 per month In the situation of employee is paying the gardener/ servant and is claimed on a reimbursement basisSection 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 to employees 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)
iv)

Food and drinks

Include benefits to the spouse and children

Medical, dental and child care benefits

v)Insurance premium

Group insurance policy for workers Insurance for foreign workers

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 vi)

Leave passage include the benefit enjoyed by the employee and members of his spouse and children (exempt from tax on the employee) Subject to the limits of;
a) 3 leave passages for travel within Malaysia, and b)1 leave passage for travel between Malaysia and any place outside Malaysia, maximum RM3,000 per family

Leave passages

travel within Malaysia include travel from Peninsular Malaysia to East Malaysia and vice versa. Effective YA 2007, meals and accommodation provided by employer, together with 3 local leave passages are also exempted on employees. leave passage for travel is restricted to costs of passage such as air fares, 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) b) c) d) e) f) g)

Controlled company S.2: a company having not more than 50 members and controlled by not more than 5 persons. Director a person who is director of a company, giving directions and instructions, manager of the business or pay remunerations to the employee Defined value rent paid for the accommodation, rateable value or economic rent Rateable value annual values as determined for rating purposes by the local authority Economic rent amount of rent that can be collected from the lessee Service director director own less than 5% share in the company and acts in a managerial or technical capacity. Associates S.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, the value 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 director the amount assessed is full amount of the defined value of the accommodation provided

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

If accommodation is in hotel and provided to a nonservice director amount 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 the employee accommodation provided is less than 12 calendar months

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Example:

Anderson works JTE Holding for the whole year of 2009. Her salary was RM10,000 per month and she was provided with accommodation in Bangi by the employer from 1.1.2009 to 31.12.2009. The employer rented the accommodation for RM4,000 per month , inclusive of furniture value of RM350 per month. The place is semi- furnished.
Determine the gross income from employment for YA 2009. Solution: Employment income for YA 2009 S 13 (1) (a) S 13 (1) (b) S 13 (1) (c) Salary (RM10,000 x 12 months) Furniture (RM70 x 12 months) VOLA a) Defined value (RM4,000- RM350) x 12 = RM43,800 Or b) 30% x RM120,000 = RM36,000 Whichever is the lower amount Gross income RM 120,000 840

36,000 156,840

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3.4 Section 13 (1)(d)

Withdrawal of money from unapproved pension or provident fund, scheme or society, any interest earned or bonus earned by unapproved fund and credited to the employee- subject to tax on the amount contributed by the employer only (including interest and bonus earned) in the year of withdrawal.
3.5
o

Section 13 (1)(e)

Scope include;

o o

o
o

Salary or wages in lieu of notice Compensation for breach of contract of service Payment for the release of the employers obligation under contract of service Ex-gratia such as retrenchment payment, severance pay, gratuity made to employees who have become redundant; and Restrictive covenant (when you are restricted from exercise another employment with different employer)
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4. EXPENSES ALLOWED AS DEDUCTION AGAINST EMPLOYMENT INCOME a) Membership subscription fees to professional bodies; b) Entertainment expenses (restricted to entertainment allowance given); c) Travelling expenses for business purpose; and d) Rental expense paid to employer if housing accommodation is provided by employer

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5. EXPENSES NOT PERMITTED TO DEDUCT AGAINST EMPLOYMENT 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 is restricted to the amount of entertainment allowance included in the gross income
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 Example:

Julie is employed as a senior accountant in the finance department of Style Sdn Bhd. His income for the YE 31.12.2010 is as follows: Salary Travelling allowance RM 174,000 18,000

The company made the following payments and provided him with the following benefits: (i) (ii) Reimbursement of salary of the driver employed by Julie, amounting to RM11,140. From 1.1 -30.9.2010 Julie was provided with a company car costing RM99,000, which she was required to share with another employee. From 1.10- 31.12.2010, she was provided with a new car costing RM165,000, solely for her own use. Petrol was provided for the whole year. Leave passage to Europe taken by Julian and her husband I December at a cost of RM4,600.
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(iii)

(iv) Unfurnished living accommodation provided to Julie from 1.731.12.2010, 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:

S 13(1)(a) Salary Travelling allowance Reimbursement of driver salary

Julie Computation of statutory income for the YA 2010 RM

RM 174,000 18,000 11,400 203,400

S 13(1)(b) 1st car (3,600 x9/12 x ) Petrol (1,200 x 9/12 x ) 2nd car (7,000 x 3/12) Petrol (1,800 x 3/12) Leave passage (4,600- 3,000)
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 Gross income Less: Travelling exp Membership subscription fees Rental (1,000 x 6) Statutory income

1,350 450 1,750 450 1,600 5,600

30,510 239,510 19,000 2,000 6,000

(27,000) 212,510
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END OF CHAPTER 3

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