Chapter 4 (a)employment income stds (1)

CHAPTER 4 (a)
EMPLOYMENT INCOME
- DERIVATION -

ATXB213 MALAYSIAN TAXATION 1

1

LEARNING OBJECTIVE


2

DEFINITION OF EMPLOYMENT
 Employment is defined in Sec 2, ITA 1967
employment in which the relationship of master &
servant subsists;
any appointment or office, whether public or not &
whether or not that relationship subsists, for which
remuneration is payable


3

DEFINITION OF EMPLOYEE AND
EMPLOYER
 Employee in relation to an employment means
where the relationship of master & servant subsists,
the servant;
where that relationship does not subsist, the holder of
the appointment or office which constitutes the
employment


4

CONTINUE
 Employer in relation to an employment means
where the relationship of master & servant subsists,
the master;
where that relationship does not subsist, the person
who is paying/responsible for paying any
remuneration to employee who has the employment.


5

EMPLOYMENT Vs PROFESSION
 The issue whether an individual is exercising an
employment. (contract of service) or is self
employed/profession (contract for service) rest
entirely on its own situations.

 The following principles may serve as a guide as to
whether there exist an employment source:
 There exists a master & servant relationship;
 The master’s right to control the method of doing works;
 The master’s right of suspension or dismissal;


6

CONTINUE
The employment is normally a full time job
undertaken by the employee himself without
substitution of staff (he does not hire helpers);
No financial risk;
Employee enjoy benefits;
Employee uses tools provided by the employer to
carry out duties;
The employee’s duties would form part of the
business activities.
 Refer example 1,


7

DIFFERENCES BETWEEN EMPLOYMENT
AND BUSINESS INCOME
 It is important to know differences between
employment and business income for income tax
purpose since there are some pros and cons between
two sources.
Tax Items

Employment

Capital allowance

Cannot be claimed

Can be claimed

Losses carried forward

Not applicable

Can be c/f

Assessment of income

Receipt basis

Accrual basis

Basis of assessment yr

Basis year

Financial/accounting

60-day rule

Exemption available

Not applicable

Deductions

Limited

More scope for
deductions


Profession

8

DERIVATION OF EMPLOYMENT
INCOME S.13(2) AND S.13(3)
 Employment income is deemed derived from
Malaysia by virtue of :
 Section 13(2)
 Gross income in respect of gains or profits from
employment,
a. for any period during which the employment is
exercised in Malaysia;
b. for any period of leave attributable to the exercise of the
employment in Malaysia;
c. for any period during which the employee performs outside Malaysia
duties incidental to the exercise of the employment in Malaysia;


9

SECTION 13(2)
d. for any period during which a person is a director

of a company and that company is resident in
Malaysia for the basis year for a year of
assessment and within that basis year that period
or part of that period falls; or

e. for any period during which the employment is
exercised aboard a ship or aircraft used in a
business operated by a person who is resident in
Malaysia for the basis year for a year of
assessment and within that basis year that period
or part of that period
falls.

10

SECTION 13(2)(a) OF ITA 1967
To discharge an employment is to exercise the
employment duties.
All the employment duties need not be discharged in
Malaysia before it could be said that the employment
is exercised in Malaysia.
Source of employment is irrelevant.
Physical presence in Malaysia does not count.
Discharge of duties does.


11

EXAMPLE – SECTION 13(2)(a)
•

Mr. Cico is employed by Co-Ro London, a family
owned company in London. From early 2011 to end
2012, he was stationed in Melaka to set up the
factory for a joint venture company between Co-Ro
London & a local trading company, to manufacture
cordial drinks. He chose to have his remuneration
paid partly in Malaysia and partly in London.

•

Issue: Would he be assessable in Malaysia on the
whole of his remuneration related to his tenure
in Malaysia?

12

DISCUSSION
•


13

SECTION 13(2)(b) of ITA 1967
 Leave pay is attributable to exercise of employment

in Malaysia.
Individual is said to have exercised employment in
Malaysia.
Leave pay does not need to have a close connection
with the “exercise of employment” in Malaysia. Casual
connection is sufficient.
Place that the entire period of leave was spent is
irrelevant.


14

EXAMPLE – SECTION 13(2)(b)
Maria, a British citizen was employed as a
lecturer in Sunway College from 1st January to
31st December 2012. She returned to England
for a holiday from 21st September 2012 to 30
September 2012. She received leave pay for that
period which was credited to him in England.
Question: Would the leave pay be taxable in
Malaysia?

15

DISCUSSION


16

SECTION 13(2)(c) of ITA 1967
 Individual is required to perform duties outside
Malaysia which are connected to the Malaysian
employment.
 Duties outside Malaysia do not serve an independent
purpose.
 Employee would have to discharge his duties in
Malaysia first before taking up the overseas
assignment.


17

EXAMPLE – SECTION 13(2)(c)
Mr. Sam, the sales manager of Confectionary Sdn Bhd,
spends three months each year in Singapore and Brunei
promoting sales of his company’s products in these
territories. The preparation work for the sales visits are
carried out in Malaysia. Furthermore, the sales visit reports
for submission to his boss Mr. Prakash are prepared in
Malaysia. Is his income from those months working outside
Malaysia taxable here?
Discussion:
His income for those months working outside Malaysia is
taxable in Malaysia as he is in fact merely extending his
Malaysian employment into Indonesia and Brunei.


18

SECTION 13(2)(d) of ITA 1967
 Is a specific provision.
 Applies to director of a Malaysian resident
company.
 Duties need not be discharged in Malaysia.
 If not applicable, provision 13(2)(a) shall apply.


19

EXAMPLE – SECTION 13(2)(d)
Suzan is a director of See Lake Sdn Bhd, a
Malaysian resident company. Suzan herself is
resident in Hong Kong as therefore does not
discharge her duties in Malaysia. For the calendar
year 2012, Suzan receives directors’ fees of
RM24,000 from See Lake Sdn Bhd. Are the
director’s fees taxable in Malaysia?
Discussion:
The fees are taxable in Malaysia, although she did not
discharge his duties in Malaysia.


20

SECTION 13(2)(e) of ITA 1967
 Applicable upon employment exercised
aboard a ship or aircraft used in a
business operated by a Malaysian
resident.
 Reliance is placed on the resident status
of the employer and not on the place of
performance of duties by such employee.


21

CONTINUE
 However, paragraph 34 of Schedule 6 exempts
the income of an individual derived from exercising
an employment aboard a Malaysian ship.
 Example 21


22

EXAMPLE – SECTION 13(2)(e)
Ramli is an employee of Air Asia Airline
Company. As a pilot he is never in a particular
country for more than 3 days. He is unsure as
to whether his income from Air Asia is taxable
in Malaysia.
Discussion
As Air Asia Company is a Malaysian resident
company, Ramli’s income is deemed to have a
Malaysian source.

23

SECTION 13(3) of ITA 1967
 Gross income in respect of gains or profits from
employment in public service or the service of a
statutory authority:
 Employee is a Malaysian citizen.
 Employment is exercised in the public service or a
statutory authority outside Malaysia.
 Employment is exercised outside Malaysia or the
leave pay is attributable to the exercise of
employment outside Malaysia.


24

EXAMPLE – SECTION 13(3)
Dr. Ali, a Malaysian citizen is one of the
employees of the Malaysian Embassy in New
Zealand. He is unsure as to whether his income
from discharging his services in New Zealand is
taxable in Malaysia.
Discussion:
As Dr. Ali is a Malaysian citizen, exercising
employment overseas with a public authority, his
income is deemed to have a Malaysian source.

25

BASIS OF ASSESSMENT : SECTION 25
 Section 25(1)
 Where gross income from an employment is not
receivable in respect of any particular period; and first
becomes receivable in the relevant period, it shall when
received be treated as gross income of the relevant
person for the relevant period.
 Applicable only upon gross income from an employment which is
not receivable for any particular period.
 Will be taxed when received but would be attributable to the
year of assessment when it first became receivable.
 Refer Example 3


26

 Where gross income from an employment is receivable
in respect of the whole of the relevant period of any
part of the relevant period, it shall when received be
treated as gross income of the relevant person for the
relevant period.

 Income will be treated as gross income of the relevant
person for the relevant period for which it is
receivable.
 Refer Example 4


27

SECTION 25(3) OF ITA 1967
Where the receipt of employment income becomes known to
the Director General on a day more than five years after the
end of the relevant basis year, it will be treated as gross
income for the basis year for the year of assessment, which
began 5 years before the beginning of the year of assessment
(which includes the day when the receipt first becomes
known).
 Applies to income where the receipt first becomes
known to DGIR on a day more than 5 years after the
end of the basis year it is receivable.
 Income will be treated as gross income of the fifth year
of assessment before year of discovery. (Year of
receipt – 5)

28

Abu’s bonus for his employment in 1996 was not paid to
him until 15th April 2012. The Director General came to
know of the receipt on 15th April 2012. In which year of
assessment will the bonus be taxed?
Discussion:
The receipt can be related back to the fifth year before
the year of discovery. Therefore an additional
assessment for the year of assessment 2007 (2012-5)
will be issued.
 May refer to Example 5

29

 Where employment income is receivable for
overlapping periods, the income is apportioned to
the appropriate basis periods on a time basis.
 Applies to income which overlaps several basis periods.
 Apportionment is based on the number of days in each basis
year to which the employment income relates.
 Income is then taxed in the relevant “apportioned periods”.


30

SECTION 25(4)(a) of ITA 1967
 Where an employee receives a lump sum by
way of gratuity or deferred pay upon ceasing
employment, that payment is to be spread back
on a time basis over his period of employment
including periods in which the employee was
employed by a different company but within the
same group of companies. However, if the
period of employment is more than 5 years the
lump sum must be spread back evenly over six
years.
 Refer to Example 6,7 & 8


31

 Where gross income from an employment
first becomes receivable in a particular
basis period and is in effect a payment in
advance, the income is taken into account
in the basis period in which it is received.
 Refer to Example 10


32

 Where an employee:

 is not resident for the following basis year; and
 Leaves Malaysia in a basis year; and
 has no pension receivable from Malaysia for the basis
period for the following basis year; and

 and income from the employment ceases to be
derived from Malaysia at the end of any leave period
following the employee’s departure from Malaysia,


33

 the employment income for the basis period following
the basis year of departure is taken into account as
income of the basis period in which he left Malaysia.
 The taxpayer can, however elect that the income
for the basis period following the year of
departure be taken into account as income for
that basis period (Sec 25(6)).


34

Mrs. Vee retires on 31st December 2011 and
plans to settle down in England. She leave pay in
respect of January and February 2012 would be
paid to him at the end of the relevant months.
Discussion:
Without election under sec. 25(6), the leave pay
will be taxable in Y/A 2011.
With election under sec. 25 (6), the leave pay will
be taxable in Y/A 2012.
 May refer Example 11

35

THANK YOU
Q&A

ATXB213 MALAYSIAN TAXATION I

36

Chapter 4 (a)employment income stds (1)

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