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Ascertainment of

Chargeable Income (S5)

The chargeable income of a person upon which tax is


chargeable for a YA shall be ascertained in the
following manner:
1. Determine the basis period for each source of income
2. Ascertain the gross income from each source
3. Ascertain the adjusted income or loss from each
source
4. Ascertain statutory income for each source
5. Ascertain aggregate income and total income for that
YA [PR 1/2005, Para 4 & 5, Appendix A]
6. Ascertain chargeable income for that YA

1.
2.
3.
4.

EMPLOYMENT
INCOME
[S4(b), ITA 1967]

Definition of employment
Employment vs profession
Derivation of EI S13(2) and S13(3)
Basis period for EI S20 and S25, ITA
1967
5. Gross income from employment S13(1)
(a) (e), ITA 1967
6. Allowable expenses and exemption
7. Adjusted and statutory income

Definition of Employment
S2 (a) the relationship of master (employer) and
servant (employee) subsists;
- (b) any appointment or holding of an office
whether public or not and whether or not that
relationship subsists (no master-servant
relationship such as directors, trustee, treasurer of
a club or secretary of a club) for which
remuneration is payable.
[PR 1/2003, 3.4, 3.5, 3.6]

Employment vs
Profession
S4(b) vs S4(a)

Deduction rules - flexibility


Capital allowances
Scheduler Tax Deduction (STD) system
Employee Provident Fund (EPF) contributions
Medical benefit, sick pay and leave pay
Compensation for loss of employment
Gratuity
Exemption of employment income (for non-resident if the period
is =< 60 days)
Basis year calendar year; accounting year
Losses

Derivation of EI
EI would be subjected to IT if:
(i) EI is deemed derived from Malaysia by
virtue of S13(2) and S13(3)

S13(2)(a) - employee exercising


employment (wholly or a part) in Malaysia
S13(2)(b) - leave pay attributable to the
exercise of employment in Malaysia
S13(2)(c) employee perform duties outside
Malaysia which is incidental to the exercise
of employment in Malaysia (must exercise
employment in Malaysia first before taking
up overseas duties)

cont

S13(2)(d) remuneration of a director of a


Malaysian resident company
S13(2)(e) employees of Malaysian resident
sea or air transport operator

Exemption: (para 34, Sch 6) w.e.f YA 2007


income of an individual derived from exercising
an employment on board of a ship and the ship
must be used in a business and owned by a
tax resident is exempted from income tax.
Prior to YA 2007 exemption is only available if
such employee is on board of a Malaysian ship.
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cont
(ii) EI is deemed derived from Malaysia
by virtue of S13(3)
income of an employee (Malaysian
citizen) employed in the public service or
a statutory authority even if the
employment is exercised outside Malaysia
or the leave pay is attributable to the
exercise of employment outside Malaysia.
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Exemption of EI

Para 21, Sch 6:

Para 22, Sch 6 para 21 shall not apply if

A non-resident and exercise employment for


period/s 60 days in Malaysia
Not applicable to a director of a company
(a) employment is exercise for period/s > 60 days;
or
(b) EI of a public entertainer (i.e professional
entertainer, artiste, athlete) who is not paid by a
Government of a country outside Malaysia

Para 28, Sch 6:

W.e.f YA 2004, foreign source EI received in


Malaysia is exempted from income tax
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Basis Period of EI

W.e.f YA 2000 the basis


period for EI is the current
calendar year period (S20)
[PR 1/2005, Para
6]

Gross Income from


Employment
S13(1)(a)-(e)

S13(1)(a) 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
S13(1)(b) benefits in kind provided by employer
S13(1)(c) living accommodation provided by
employer
S13(1)(d) contribution to an unapproved scheme
S13(1)(e) compensation for the loss of employment

[PR 1/2005, Para 7.3]


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Adjusted Employment
Income

PR 1/2005, Para 8.4

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S13(1)(a)

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

Income that is convertible into money


Received in respect of having or exercising the employment
Not including reward for personal qualities (such as passing
examination, marriage etc) and payment to meet personal
distress (such as compensation for house damage or car
accident)
Must be taken at gross.
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Wages, Salary,
Remuneration

Wages paid on daily, hourly or productivity


basis
Salary or remuneration fixed payment
made weekly, fortnightly or monthly
Taxed at gross; if deduction has been made
(such as EPF deduction) it must be added
back to bring back to gross.
Ex1: Suri received a net salary of RM4,272 a
month after 11% of EPF deduction. How
much is his gross income from employment?
13

Commission and Bonus

Commission

additional payment to salary


non-contractual, varied in amount and not paid
every year
if received for an overlapping period, should be
evenly distributed to the relevant basis year

Bonus

paid in addition to salary; by reference to services


rendered
may be contractual or non-contractual payment
(at the employers discretion)
serve as an incentive for better performance and
loyalty to the employer in the long term
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Allowances

Payment made to cover an employees expenses and to


represent extra remuneration for work performed
Will be assessed on gross income. Even if the whole or part of
the allowance is ultimately spent in the production of the
employment income, the amount spent must be included as
the gross income.
Eg: entertainment, travelling, housing, clothing, car etc.
The amount of allowance used for official purposes (i.e.
related to employment) will be adjusted from the total gross EI
to arrived at the adjusted EI
Ex2: Adnan received salary and RM400 car allowance per
month. If the total of his salary and car allowance was
RM48,000 in 2007 and he used RM3,000 of the allowance
for official purposes. How much was his adjusted income
for YA 2007?
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15

cont

Travelling and entertainment allowance

W.e.f YA 1989, the amount claimed by the employee on


entertainment expenditure cannot exceed the total amount
of allowance received (S38A)
W.e.f YA2008 petrol card, petrol allowance or travel
allowance to travel between home to work place up to
RM2,400 is tax exempt
Reimbursement a transfer of the burden of expenses from
the employee to the employer

To include the provision of food, drink, recreation or hospitality


and related accommodation or travel incurred for the purpose
of a trade or business

- not taxable income; it is treated as employers expenses

Clothing allowance

If uniforms are provided, they are exempt from IT.


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Gratuity

A sum of money paid to employee upon resignation or retirement


from employment after serving a long period of service; also known
as ex-gratia payment or golden-hand-shake.
It is taxable in full unless granted an exemption (Schedule 6, para
25, 25A and 25B, ITA 1967).
Gratuity is exempted if:

The retirement was due to ill-health;

The retirement takes place on or after reaching the age of 55 or


compulsory age of retirement under written law and in either
case the employment has lasted for at least 10 years with the
same employer/with companies in the same group. The 10 year
period must be a continuous period immediately prior to
retirement.

Gratuity received from public funds on retirement from an


employment under any written law;

Gratuity received from public funds on the termination of a


contract of employment (less employers contribution to EPF, if
any, and interest thereon).
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Treatment of gratuity

If the total period of employment commenced


more than 5 years before the commencement
of the last basis period, gratuity will be divided
(or spread back) equally over 6 years (prior to
YA 1999, it was spread over 10 years).
If the total period of employment commenced
5 years before the commencement of the
last basis period, the gratuity must be divided
(or spread back) over the actual employment
period.
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Examples
Ex3: Mr Sam received a gratuity amounting to
RM60,000 on 30.9.08. He had been
employed by Semat Sdn Bhd since 1.5.1995.
Mr Sam was 52 years-old on 30.9.08. How
would the gratuity be treated?
Ex4: How would the gratuity be treated if Mr
Sam
commenced employment with the
company
on 1.6.05?

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Examples
Ex3: 13 years 5 months
60, 000/6=10,000 per year
Ex4: 2 years 4 months
28 months
YA 2008 : 9/28x60,000= RM19,285.7
Refer example 7.11 to 7.14,pg 142-143, CKF (2010)

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Leave pay

Payment received from employer after the employment


ceased and the employee is intended to leave Malaysia.
The amount will be assessable to tax either in the year
of departure or later depending on the conditions
provided under S25(6).
The conditions to apply S25(6) are as follows:

The employee has left or is leaving Malaysia


He will not be resident for the following basis year
He will have no pension in the following basis year
Gross income from employment will cease to be derived from
Malaysia after he has left.
21

cont

If the conditions are fulfilled, any payment


which is receivable in the year following the
year of departure shall be included as income
in the year in which the employment ceases.
However, such employee is eligible to make a
written request for proration of the advance
income to the following YA. It is beneficial if
he is tax resident in the following year to do
so.
22

Example (Ex5)
Ray (a New Zealand citizen) ceased employment with
KBU Sdn Bhd on 30.9.07. He left Malaysia for NZ on
1.12.07. There will be no pension or other employment
income earned by him after he left Malaysia.
In 2007, Ray received a gross salary of RM120,000 and
leave pay of RM12,000 per month starting from
October 2007 to April 2008.
Required:
(i) Compute Rays gross income from employment for YA 2007
under
S25(6).
(ii) Show the gross income of Ray if he made an election to
prorate
the leave pay.
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Example (Ex5)
(i) Compute Rays gross income from employment for YA
2007 under
S25(6).
Sec 13 (1)(a):
Salary
120,000
leave pay
84,000
204,000
(ii) Show the gross income of Ray if he made an election to
prorate
the leave pay.
Salary
120,000
leave pay
36,000
156,000
the remaining balancing of leave pay (RM48,000) will be
assessed in YA 2008 at 27% (non resident)
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Perquisites [PR 1/2006]

Benefits in cash or in kind that are convertible


into money received by an employee from the
employer or third parties in respect of having
or exercising the employment.
E.g. of perquisites shares offered to
employee, tips, pecuniary liability, credit card
facilities etc (para 6).
The value of a perquisite (para 6.2).
Also read para 6.3 to para 10.

25

Cont

Pecuniary liabilities employees income tax, water bill,


electricity bill, telephone bill, road tax, car insurance
premiums, car parking fees and car maintenance charges.
Taxable under S13(1)(a) irrespective of the way the
payment is made.
Income tax borne by the employer [PR 2/2006]
Water bill, electricity bill, telephone bill

If under employees name and paid by employer, tax under


S13(1)(a)
If subscribed by employer under employers name but the
benefits are enjoyed by the employee, tax under S13(1)(b)

Car insurance premiums, car parking fees and car


maintenance charges, tax under S13(1)(a) if paid by
employer.
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Cont

Card credit facilities provided by employer if used exclusively


for employment purposed, the annual membership fees are not
perquisite; if used for private purpose also, the annual
membership fees and amount paid for private purchases are
perquisites.

Loan interest

internal fund: no perquisite;


external fund: perquisite can be either (i) the cost borne by the employer to
the third party or (ii) the preferential rate or (iii) interest charged by the
third party less amount of nominal interest paid by the employee to the
employer;
No perquisite if the loan is given to the employee at the same rate with the
cost paid by the employer.
27

Cont

Recreational club membership

individual membership: entrance, monthly/annual fees are


perquisite;
corporate membership: entrance fee is not perquisite but
monthly/annual fee is taxed under s13(1)(b).

School/tuition fees

Perquisite if paid or reimbursed by the employer for


employees children studying in or outside Malaysia
No perquisite if the reimbursement is received from
education refund plan for employees school/tuition fees to enhance employees education and skills.
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Cont

Insurance premiums

Perquisite if the premium is paid by the employer for the benefit of


employee, members of his family/nominees.
No perquisite if. PR 1/2006, Para 6.8.2

Gardener, driver, domestic helper or guard

The salary paid to gardener, driver, domestic helper or guard is a


perquisite if they are hired by the employee or can claim for
reimbursement from the employer of the salaries paid;
However, no perquisite if they are employed by the employer and
the employee only enjoy the benefit but will be taxable under S13(1)
(b);
If a driver is not specifically provided to any employee but provided
for the used of other employees as well, it is not taxable.
29

Cont

Scholarship not taxable; but salary paid while on study


leave is taxable.
Waiver of loan/advance to employee is a perquisite.
Assets provided free of charge or sold at discounted price

perquisite = market value less amount paid by employee (if any)

Gift vouchers perquisite if recurring in nature or


employee expects such gift as part of his remuneration
or the practice of the employer based on the length of
employees service.

30

Cont

Gift of a personal computer

Excellence service payment

perquisite = market value of the computer


If such gift received in YA 2001 2003, the perquisite was
exempted.
perquisite;
but w.e.f YA 2007, a tax exempt of RM1,000 is given for long
service, past achievement and service excellence award
[Addendum to PR 1/2006, para 2]

Professional subscription to professional body paid by


employer

Not a perquisite if it is proven that the subscription is essential


to the business of the employer; else it is a perquisite.
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Cont

Employees income tax borne by employer


[PR 2/2006]

A perquisite and will be taxed in the following YA [para 5.1].


for additional assessment taxed in the year of the
additional assessment is made [para 5.2].
For reduced assessment [para 5.3] .
Employer pays only a portion of the employees tax [para
5.4].
An employee defaults in furnishing the return form [para
5.5].
Perquisite in leaver cases [para 5.6].
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Cont

Employee Share Option Scheme (ESOS)


[PR 4/2004] :

ESOS is one of the methods employer


grants shares to employees.
Characteristics of ESOS [para 4.4]
Purpose of ESOS [para 4.5]
Perquisite from the shares granted [para
5.2, 5.3, 5.4, 5.5, 5.6]

Refer to example 6.9 to 6.12, pg 101-103, CKF2010


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