Lecture 6

Employment income
Part 1

Topics Addressed
Characteristic of employment income
Derivation of employment
Scope of income under section 13(2)
Employment in public service
Exemption of employment income
Foreign sourced employment income

Characteris
tic of
Employmen
t
3

Introduction
Employment is defined as:
Employment in which the relationship of
master and servant subsists
Any appointment or office whether public
or not and whether or not that relationship
subsists for which remuneration is payable

Employment

An employment in
which the relationship
of master and servant
subsists.

Any appointment or
office whether public or
not and whether or not
that relationship subsists.

An office is a post to which

a person can be appointed,
which he can vacate and to
which a successor can be
appointed.
5

 The key point is the master and

servant relationship
The payment of a remuneration
The holding of an office

Employment or self employed

A very ambiguous (vague; unclear)
question with no clear definitive answers
Some general tests can be applied:

Control of job functions

Ownership of tools to provide the service
Financial risk of activities
Substitution of staf
Contracts whether of engagement or for
engagement of services

Employed versus Self Employed

An individual is more likely to be an employee if they are:

contractually obliged to provide personal service (no substitution
permitted);
paid regularly on either an hourly, weekly or monthly basis; does not
share financial risk.
are part and parcel of the employers organization and use equipment
provided by the employer.
subject to a high degree of control over their working actions; and
entitled to holiday, sick pay or pension rights.
employment contract usually prohibits the employee from being
engaged in other revenue generating activities.
there exists a master servant relationship.

Employed versus Self Employed

On the other hand, they are more likely to be self-employed
where they:
provide their own equipment;
take a financial risk (are paid by the job, and could make a
loss);

could earn extra profit from their own entrepreneurial skills;

and
work for short periods for a number of different contractors

Importance of Employed versus SelfEmployed Distinction

Rewards,
which
a
self-employed
individual receives, will form part of his or
her business income under sec. 4(a).
Rewards from an employment will be
taxed as employment income under
section 4(b).
10

Significance of Distinguishing
Between Employment and
Profession/business
Factors
Profession/business

Employment

Basis of assessment Calendar Year

Assessment of income
Deductions
deductions

Receipt basis

Fewer deductions

60 day exemption rule

Calendar year
Accrual basis
More

Exemption available N/A

Capital allowances

No claim

Can claim

Losses
current year losses

Cannot be utilized

Become
11

Example 1
Carol is a professional entertainer who is contracted with
Hotel in Langkawi to provide floorshows.
She was paid a fixed remuneration and was not allowed
to contract with other parties. In addition, the duration of
her performance was controlled. Is Carol exercising an
employment?
Discussion:
Yes, she is.
The degree of control exercised by employer (Carol was
not allowed to contract with other parties)
Duration of her performance was controlled she has
to follow fixed hours; and
The nature of remuneration (She was paid a fixed
remuneration) indicates that Carol is employed (contract of
service).

Example 2
Sheeta graduated from The Law University of Malaya in
September 2010. On 1 Jan 2011, she was employed as a
legal assistant in a law firm. On 1 July 2011 she was
admitted as a junior partner in the law firm.
How will her income from the law firm be assessed? as a
business income? Or employment income?
Discussion:
Her tenure as a legal assistant is the employment period.
However, after being admitted as a partner she would be selfemployed.
Her income as a legal assistant would be taxable under section
4(b) i.e. employment income
Her statutory income from the partnership after being admitted
as a partner would be taxable under section 4(a) i.e. as a
business income.
13

Malaysian
Derived
Employment
Income

14

Derivation of employment income

It is important to distinguish whether the employment
income is derived from Malaysia or outside Malaysia. Why is
this important?
Only income derived from Malaysia is taxed in Malaysia.
Income derived from outside Malaysia will not be taxed
It will not be taxed even if it is remitted to Malaysia.

15

Section 13(2) of ITA 1967

Gross income in respect of gains or profits
from an employment
shall be deemed to be derived
from Malaysia
under the following circumstances

16

Section 13(2) of ITA 1967

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;
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 YA;
and
within that basis year that period or that period falls.
shall be deemed to be derived from Malaysia.

Section 13(2)(a) of ITA 1967

Employee discharging his duty in Malaysia as assigned by his
employer = exercising his employment in Malaysia = employment
income to be deemed derived from Malaysia.
All the employment duties need not be discharged in Malaysia it can
be discharged outside Malaysia.
Source of employment is irrelevant.
Physical presence in Malaysia is not material, but the discharge of
duties does.
The question to ask: Is it related to the duties of the employment in
Malaysia?

Section 13(2)(a) of ITA 1967

Example 4:
Mr. Eric is employed by Yoyo Denmark, a family owned company in
Denmark. From early 2009 to end 2010, he was stationed in Penang to set
up the factory for a joint venture company between Yoyo Denmark & a
local trading company, to manufacture cordial drinks. He chose to have his
remuneration paid partly in Malaysia and partly in Denmark.
Issue: State, with reasons, whether the remuneration received in Denmark
would be subjected to Malaysian income tax.
Discussion: His employment was exercised in Malaysia s13(2)(a).
The remuneration would be Malaysian derived irrespective of the place of
payment.
Income that is attached to personal services derives its source from the
location where the services are rendered.
Therefore, where employment services are performed in Malaysia, all
income so derived is taxable here, notwithstanding the location where the
rewards are paid. The source of the income is also irrelevant.

Section 13(2)(b) of ITA 1967

Leave pay attributable to the exercise of the
employment in Malaysia
What does this mean?

Individual is must have exercised employment in

Malaysia.
Place that the entire period of leave was spent is
irrelevant.
GBH v Ketua Pengarah Jabatan Hasil Dalam Negeri

Section 13(2)(b) of ITA 1967

Example 5:
Samuel, a British citizen was employed as a lecturer in
Multimedia University from 1st January to 31st December 2008.
He returned to England for a holiday from 21st September 2008
to 30 September 2008. He received leave pay for that period
which was credited to him in England.
Would the leave pay be taxable in Malaysia?
Discussion: As his leave is attributable to employment exercised in
Malaysia, the leave pay is taxable here notwithstanding that it was
paid outside Malaysia. S13(2)(b)
Also irrelevant is the fact that the leave was spent in England
GBH v Ketua Pengarah Jabatan Hasil Dalam Negeri

Sec. 13(2)(c)
...for any period during which the employee
performs outside Malaysia duties incidental to
the exercise of the employment in Malaysia...

The key words are :

...duties incidental to the exercise of the
employment in Malaysia...

22

Section 13(2)(c) of ITA 1967

An individual exercises employment in Malaysia may
require to perform duties outside Malaysia which are
connected to the Malaysian employment.
If overseas duties has some connection to the
Malaysian employment, overseas duties would be
deemed derived from Malaysia or incidental to the
Malaysian employment.
Duties outside Malaysia do not serve an independent
purpose.
In order for the foreign employment income to be
incidental to Malaysia employment, employee would
have to discharge his duties in Malaysia first before
taking up the overseas assignment.

Section 13(2)(c) of ITA 1967

Example 6:
Mr. Ashok, the sales manager of Confectionary Sdn Bhd, spends three
months each year in Singapore and Brunei promoting sales of his
companys 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. Paskaran 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 Singapore and Brunei. His works in Singapore and
Brunei is considered as incidental to his duties exercised in Malaysia.
Therefore, by virtue of s13(2)( c )of ITA, gross income received from
those months working outside Malaysia is deemed derived from
Malaysia.

Section 13(2)(d) of ITA 1967

For any period during which a person is a director of a
company and that company is resident in Malaysia for
basis year for a year of assessment and within that
basis year that period or part of that period falls...
This specific provision of the law applies to an individual who is a
director of a Malaysian resident company.
And that company is a resident in Malaysia.
The issue is the taxability of the income of the director
Duties need not be discharged in Malaysia.
Remuneration received by a director of a resident company shall be
deemed derived from Malaysia notwithstanding that he does not discharge
his duties in Malaysia.

Section 13(2)(d) of ITA 1967

Example 7:
Wong was a director of Nu Life Sdn Bhd, a Malaysian resident company
for the calendar year 2009. Wong himself was resident in Hong Kong and
therefore did not discharge his duties in Malaysia. Wong received
directors fees of RM24,000 from Nu Life Sdn Bhd in year 2009.
Is he liable to tax on the directors fees received?
Discussion: Wong will be assessed to tax in Malaysia on the directors
fees received even tough he did not discharge his duties in Malaysia.
The directors fees would be deemed Malaysian derived as it was paid
by a Malaysian resident company s13(2)(d).

Section 13(2) of ITA 1967

Example 8:
Mr Jagtar Singh signed an employment contract in India with Singha
(India) Ltd since 1 January 2002. On 1 January 2009, he was assigned
to Malaysia to render service to the companys client. He is required to
work in Thailand for three weeks, Indonesia one week and Singapore
two weeks to supervise the companys business in this region. He plans
to spend three weeks leave in New York, visiting his girlfriend. His
salary for the year 2009 is as follows:
RM
Malaysian duties
Thailand

Payment received

225,000 70% in India, balance in Malaysia

15,000 Thailand

Indonesia

6,000 Indonesia

Singapore

10,000 Singapore

Leave pay

21,000 New York

Explain to Jagtar Singh of his Malaysian tax exposures and compute his
gross income for year of assessment 2009.

A
n
s
w
e
r

Section 13(2)(e) of ITA 1967

Employees of resident sea or air operator in Malaysia
are deemed to derive their gross income from Malaysia.
Examples of sea and air operator are MISC, MAS etc.
The derivation scope in respect of remuneration
received by pilot or sailor places reliance on the resident
status of the employer/company and not the place of the
performance of duties by such employees.

Exemption of income under

Section 13(2)(e)
However, paragraph 34 of Schedule 6 exempts the
income of an individual derived from exercising an
employment aboard a ship used in a business
operated by a person being a registered owner of a
ship under the Merchant Shipping Ordinance 1952
who is resident in Malaysia.

Section 13(2)(e)
A Malaysian ship is a sea-going ship registered under the
Merchant Shipping Ordinance 1952 but excludes:
a ferry
barge
tugboat
supply vessel
crew boat
lighter
dredger
fishing boat ; or
other similar vessel.
31

Section 13(2)(e) of ITA 1967

Example 9:
Abraham is an employee of Malaysia Airline System Berhad. As a
pilot he is never in a particular country for more than 3 days. He is
unsure as to whether his income from MAS Berhad is taxable in
Malaysia.
Discussion
As MAS Berhad is a Malaysian resident company, Abrahams
income is deemed to have a Malaysian source.

Section 13(3) of ITA 1967

Gross income in respect of gains or profit from an
employment in the public services or the service of a statutory
authority shall be derived from Malaysia:
if the employee is a citizen ;

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.

Section 13(3) of ITA 1967

Example 9:
Dr. Shafie, a Malaysian citizen is one of the employees of the
Malaysian Embassy in Medan, Indonesia.
He is unsure as to whether his income from discharging his services
in Medan, Indonesia is taxable in Malaysia.

Discussion:
As Dr. Shafie is a Malaysian citizen, employed by Malaysian
government, his income would be deemed to be derived from
Malaysia notwithstanding that the employment is exercised outside
Malaysia s13(3)

Exemption of employment income

(Para 21, sch 6)

In order to apply for income tax exemption, the employee must

be
a) a non resident
b) he has exercised employment for period/periods not
exceeding 60 days
The exemption will not be available to company director(s).

Example 10:
Jerry first arrived in Malaysia
in 2008, serving as
consultant to Dragon Bowl
Sdn. Bhd. The following are
the analysis of his stay in
Malaysia.

1/1/082/1/08

2 days

Holiday

3/1/0831/1/08

29 days Employment

1/2/0831/5/08

121
days

Holiday

1/6/0829 days Employment

Jerry left Malaysia on
29/6/08
29/6/2008.
Is Jerrys
employment income liable to
The employment income for the basis year
income tax?

will be exempted from income tax because:

Jerry is a non resident
the period of exercising the employment is
less than 60 days in total (para. 21, sch 6)

Public entertainer
A public entertainer is defined as:
A professional entertainer
Artiste
Athlete
Any person who entertains in public or
private for profit on stage, radio, television
or stadium or otherwise.

Exemption
A professional sportsman or woman is
exempt from income tax in respect of prize
monies from participation in a sports
tournament. Law: Income Tax (Exemption)
(No. 23) Order 1990
The payment to an entertainer may be
exempted if the sum is paid from a public
fund.
Law: Para 22(b) Schedule 6

Foreign source income

Under the law, foreign sourced income
may be taxed in Malaysia if such income is
remitted and received in Malaysia.
Such income will be exempted under Para
28 Schedule 6

Section 25 of the Act

Sec 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.
Additional assessment will be raised upon receipt of
income in respect to year of assessment the
income is first receivable.

Sec 25 (2)
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.
Refers to income which is attributable to the whole or
part of a period.
Income will be treated as gross income of the relevant
person for the relevant period for which it is
receivable.

Sec 25 (4)
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.

Sec 25 (5)
Where gross income from an employment first
becomes receivable in a particular basis
period and is in efect a payment in advance,
the income is taken into account in the basis
period in which it is received.
Applies to gross employment income which
relates to future period or to the present and
future periods.
No apportionment is made between the current
and subsequent basis years.
Income treated as income in the year received.

Lets do the tutorial Questions

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