EMPLOYMENT INCOME

Chapter 2
CONTRACT OF SERVICE
1. Master and servant relationship subsists.
2. Extent of control by the employer (how the work is to
be performed and manner in which it is to be done)
3. Defined hour of work.
4. Provision of tools in the performance of work.
5. Restriction to contract with other parties.
 Derivation of employment income
• S13(2)Gross employment income shall be deemed to be derived from
Malaysia for any period:
• (a) during which the employment is exercised in Malaysia;
• (b) of leave attributable to the exercise of the employment in Malaysia;
• (c) during which the employee performs outside Malaysia duties
incidental to the exercise of the employment in Malaysia;
• (d) during which a person is a director of a company resident in Malaysia;
• (e) during which the employment is exercised abroad a ship or aircraft
used in a business operated by a person resident in Malaysia.
• Notes: S13(2)(a), (b), (c) where the employment contract is entered into or
where the remuneration is paid is irrelevant.
 Duties incidental to the employment in
Malaysia?
• Factors to consider:
• The employee had exercised his employment in Malaysia
prior to being sent for overseas assignment.
• The overseas duties are connected to the duties in Malaysia
and are part of their job responsibilities.
• The overseas duties are not for independent purpose. It is to
further the purpose of the employer in Malaysia which is
responsible for the decision making of the employee work
overseas.
• The employer in Malaysia bear all the risks and receives the
benefits from the employee’s work carried out overseas.
 Gross employment income S13(1)(a)
• Any wages, salary, remuneration, leave pay, fee,
commission, bonus, gratuity, perquisite or
allowance (whether money or otherwise) in
respect of having or exercising the employment.
• Having or exercising the employment?
• If the gains or receipts are not in respect of
having an employment, it would not be taxable.
• Ball v Johnson reward for personal qualities is not
taxable
• Pritchard v Arundale the amount received for inducement is
not taxable.
• Riley c Coglan an amount paid for future service is taxable.
• Reward from a person other than the employer can be taxable.
Calvert v Wainwright tips received by a taxi driver is taxable.
• Reed v Seymour voluntary payments to employees on their
retirement as an appreciation of their personal qualities, not
for their service is not taxable.
• gift or cash to employees purely for personal reason or
personal appreciation is not taxable. Example, wedding gift,
cash reward for passing examination.
 Exemption for gratuity
• Gratuity received by an employee is exempted (full exemption) from tax if:
• The Director General is satisfied that the retirement is due to ill health;
• The retirement takes place on or after reaching the age of 55, or on
reaching the compulsory age of retirement from employment specified
under any written law and in ether case the employment lasted at least 10
years with the same employer or with companies in the same group.
• With effect from YA2001, exemption is given if the retirement is taking
place on reaching the compulsory age of retirement under a contract of
employment or collective agreement at the age of 50 but before 55 and
the employment lasted at least 10 years with the same employer or with
companies in the same group.
• With effect from YA2016, partial exemption will be given at RM1,000 per
complete year of service the employee does not qualify the above.
 60 days exemption
(Para21, Schedule6)
• For Non Resident individual only
Employment income of a non resident
individual is exempted from tax if the
employment period is not exceeding 60 days in
a basis year.
 Basis period and basis of assessment
• S25(1)
• If gross income from employment is receivable in respect of any particular period, it shall,
when received be treated as gross income of the relevant person for the relevant period.
• S25(6)
• Any gross income from employment for the basis period or the basis period following the
basis year of departure is deemed to be income of the basis year in which an individual
departs Malaysia where the Director General(DG) is satisfied that:
• an employee has left or will be leaving Malaysia in the basis year of assessment to which
the relevant period relates and will not be resident for the basis year for the following
year of assessment;
• No pension derived from Malaysia will be receivable by the employee for the basis period
for the following year;
• Gross income from the employee’s employment will cease to be derived from Malaysia on
the expiration of a period of leave following the employee’s departure from Malaysia.
Examples of gross income under S13(1)(a)
• Income tax borne by the employer
• Utility bills (bills under the employee’s name), either paying to the
employee to settle or paying directly to the authorities concerned.
• Amount of car insurance premiums, road tax and maintenance
charges
• Credit card provided which the employee used for private
purchases and payment. The employer paid the amounts, including
the annual membership fees.
• Loan interest
If it is from internal loan. No benefit is taxed on employees. If the
fund is external fund, the amount taxed under S13(1)(a) is the cost
borne by the employer.
• Recreational club membership
If the membership is an individual membership, the entrance and
subscription fees will be taxed under S13(1)(a). If it is a corporate
membership, then only the subscription fee is taxable under S13(1)(b)
• Tuition fee or school fee
It is taxed under S13(1)(a) either the employer pays directly to the
school or it is a reimbursement to the employee.
• Insurance premiums
When the employer pays the annual premium for an insurance
scheme where the employee, his/her family member or their nominee
is appointed as the beneficiary of the policy, the annual premium is
taxed under S13(1)(a).
• Driver, gardener, domestic servant
If the employee employed the above and pay them. The
employer reimbursed the employee for the salaries paid to
them. The amount will be taxed under S13(1)(a). However, if
the employer employed and provided to the employee, the
benefit will be taxed under S13(1)(b).
• Scholarship
Para24, Schedule 6 exempted any sums paid by way or in the
nature of a scholarship or other similar grant or allowance to
an individual, whether or not in connection with an
employment of that individual.
• Waiver of loan. Taxable under S13(1)(a) in the basis
period for the year of assessment in which the loan is
waived.
• Gift voucher is not taxable unless it is of recurring
basis and the employees expect such gift voucher as
part of their remuneration.
• Professional subscription fees. If it is essential to the
business of the employer. It is not taxable. Otherwise,
if it can not be proved that the membership is relevant
to the business, it will be taxed under S13(1)(a).
Exemptions (not applicable to directors of controlled
companies, sole proprietors and partnership)
1. Petrol card or petrol allowance or travel
allowance and toll card for official duties up
to RM6,000 a year;
2. Parking allowance or parking fee;
3. Meal allowance;
4. Subsidies and allowance for childcare up to
RM2,400;
5. Telephone, mobile phone, telephone bills,
pager, PDA and internet subscriptions;
6. Purchase of employer’s good for free or at a discounted
price where the discount does not exceed RM1,000;
7. Services of employer provided free or at a discount
provided the service is not transferable;
8. Subsidy on interest on loans where the loan is up to
RM300,000 for housing, passenger car or education.
9. Existing perquisite (service excellence award, long
service award) extended to awards related to innovation,
productivity and efficiency such as the Six Sigma Award of
RM2,000
 Benefit in Kind S13(1)(b)
• An amount equal to the value of the use or enjoyment by the employee
of any benefit or amenity (not being a benefit or amenity convertible
into money) provided for the employee by or on behalf of their
employer, excluding:
(EXEMPTION)
• A benefit or amenity consisting of medical or dental treatment or child
care;
• A benefit or amenity consisting of leave passage within Malaysia not
exceeding 3 times in any calendar year or between Malaysia and any
place outside Malaysia not exceeding 1 passage (max RM3,000) in any
calendar year;
• A benefit or amenity used by the employee solely in connection with
the performance of their duties.
 Leave passage
• Cost of leave passage is cost of fares
• Members of his/her immediate family means
spouse and children.
 Calculation or prescribed value of BIK

• Using formula
• The value of BIK based on the formula method
provided to the employee can be abated if the
benefit is
• Provided for less than 1 year;
• Shared with other employee;
• Used for the purpose of the business of the
employer.
 The prescribed value(PV) method
• Car and fuel benefit
• The PV can be abated if the car is provided:
• For less than a year;
• Shared with another employee.
• For fuel benefit: in July 2009, the MOF allows
a taxpayer to continue with the prescribed
benefits for petrol if it is lower than the
taxable benefits after RM6,000 exemption.
 Car benefit
Cost of car Prescribed annual value Prescribed annual value
(when new) of private usage of car of private petrol
RM RM RM
Up to 1,200 600
50,000
50,001 to 2,400 900
75,000
75,001 to 3,600 1,200
100,000
100,001 to 5,000 1,500
150,000
150,001 to 7,000 1,800
200,000
200,001 to 9,000 2,100
250,000
250,001 to 15,000 2,400
350,000
350,001 to 21,250 2,700
500,000
500,001 and above 25,000 3,000

If the car provided is

above 5 years, annual
value will be reduced to
half
Other benefits RM per month

Household furnishings, apparatus and appliances:

Semi-furnished with furniture in the lounge,
dining room, or bedroom 70
Semi-furnished with furniture as above
plus air-conditioners and/or curtain and carpet 140
Fully furnished premises 280

Domestic help 400

Gardener 300
Driver 600
 Living accommodation S13(1)(c)
• Living accommodation provided to an
employee or a service director
• The taxable amount is the lower of:
30% of S13(1)(a) or
Defined value
• S13(1)(a) excludes gross income in respect of
the right to acquire shares in the company.
• Defined value means:
• The rental of unfurnished accommodation provided the
accommodation is not subject to rent control and the lessor and
lessee were independent person dealing at arm’s length. OR in
other cases
• The rateable value or the annual value for rating purposes
determined by the local authority (City Hall, Municipal Council)
OR
• The economic rent at which those premises (not subject to any
written law providing for the restriction or control of rent) would
be let out, provided the fire insurance, rates, repairs and
maintenance are borne by the lessor.
• If the living accommodation is provided in an y of the following:
• A hotel, hostel or similar premises;
• Premises on a plantation or in a forest;
• Premises not subject to public rates even though the premises are in a
rateable area;
• The taxable value is
• 3% of S13(1)(a)
• Both methods used to determine the value of the living
accommodation can be reduced by :
• The premises is larger than the employee needs; or
• The premises is shared with other employees; or
• The premises is provided for less than a year.
 Living accommodation provided to director
in a controlled company
• Director (not a service director)
• Service director in relations to a company means:
• A director who is employed in the service of the company in a
managerial or technical capacity;
• Is not, either on their own or with any associate, the beneficial
owner of more than 5% of the ordinary share capital of the
company
• Controlled company
• Members not more than 50; and
• Controlled by not more than 5 member under S139of the ITA
1967.
 S13(1)(c) for director
• The living accommodation is :
• Defined value
No comparison with 30% of S13(1)(a)is allowed .
However, the taxable value can be reduced if it is
provided for less than 1 year or shared by other
employee in the same company.
Expenses on living accommodation provided
by the employer
• When the employer provided the living
accommodation and the employee pays for the
following expenses, S38 allows a deduction:
• Rent;
• Any public rates or insurance premiums;
• Expenses on repair or maintenance of premises.
• The deduction is allows as follows:
Rent payable by employee / rent payable by or on
behalf of employer X economic rent
 S13(1)(d)Unapproved fund
• When the employer and employee contribute
to an unapproved fund, the amount (only
employer portion and interest earned, if any)
will be taxed when the employee receives or
withdraws the amount.
 Deductible expenses
Adjusted employment income
1. Professional subscription fee
If the employee is required to retain his professional
qualification by subscribing to his professional body, the
subscription fee is deductible.
2. Entertainment expense for official duties
When the employee receives entertainment allowance,
it will be taxed under S13(1)(a). The amount used for
official duty (with a restriction to the amount taxed
under S38A)is deductible.
3. Rental paid to employer relating to the living
accommodation or furniture provided.

If the expenses are deductible, they will be

deducted from gross employment income to
ascertain the adjusted employment income
 Not deductible expenses
1.Travelling expenses
Travelling expenses incurred from the employee’s home to the
office is not deductible. The expense is private and domestic in
nature. However, travelling expenses from the office to
customers’ places or travelling to discharge the official duties
are deductible.
2. Self improvement expenses, for example attending classes
or purchasing books is not deductible.(note that under
personal relief there is RM2,500 life style relief)
3. clothing;
4. Examination fee.
 Short questions
1. Aaron resigned on 30 June 2019 from company A and his employment
income for the six months amounted to RM60,000. Immediately
thereafter, Aaron commenced employment with Company B on 1 July,
for which he is given the following remuneration and benefits:
(i) Basic salary of RM12,000 per month;
(ii) Bonus of RM12,000 in December 2019;
(iii) Fully furnished bungalow, the rental for which is RM5,000 per month for
the unfurnished accommodation and RM1,000 per month for
furnishings
(iv) Two-year-old car costing RM120,000 when new with petrol
(v) Employer’s contribution to the EPF of 12%
(vi) Overseas leave passage to Japan for him and his wife of RM5,800
Required
Compute the statutory income from the employment of Aaron for YA 2019.
2. Ben is employed as a marketing executive with DS Sdn. Bhd. (DSSB) In
2019, DSSB provided him with corporate membership of a golf club. The
entrance fee was RM12,000 and subscription fee for the period 1/1/19 to
31/12/19 was RM800.

DSSB provided a house for Ben. The annual value of the house was
RM36,000 and the value of the furnishings was RM140 pm, as per IRB
public ruling. Ben was provided with the house from 1 April 2019.
• Remuneration of Ben was as follows:
• Salary RM8,000pm
• Entertainment allowance RM1,000pm
• Bonus RM16,000

• Required:
Compute the employment income of Ben for YA2019.
3. Celine is an employee of a manufacturing company in KL. She was away in
Korea from 1/1 /19 until 28/2/19 to attend a training course. Her income for
the year ended 31/12/19 was as follows:
RM
• Salary (January and February) 20,000
• Salary (March to December) 100,000
• Entertainment allowance
(March to December for official duties) 12,000
• The company paid for the following expenses:
• Course fee in Korea RM30,000.
• Return airfare to Korea costing RM3,000
• Return airfare to Korea costing RM6,000 for her husband and their son, to
join her for a vacation at the end of her training.
• Subsidised interest on the education loan of RM200,000 obtained from a
bank at the rate of 6% per annum, of which 2% was reimbursed to Celine by
the company.
• Rental and all business calls from March to December 2019
amounting to RM3,000 in respect of a mobile phone owned
by Celine. The phone line is registered under the company.
• Medical and dental benefit provided was RM5,300.
• A domestic servant was provided since March 2019. The
company paid RM1,200 per month to the domestic servant.

Required:
Compute Celine’s employment income for YA 2019.
4. Daniel has been a logistic manager in ABC Sdn. Bhd since
January 2010 with a monthly salary of RM10,000.
In June 2019, Daniel was sent to Bangkok for two months until end
of July 2019, to oversee the implementation of a new project there.
ABC Sdn. Bhd made all the decisions and issued all the instructions
to Daniel’s overseas duties. Daniel sent all reports regarding th
project in Bangkok to ABC Sdn. Bhd.
On top of the monthly salary, ABC Sdn. Bhd. paid additional
RM20,000 for the work done in Bangkok.

Required:
Determine whether the duties performed in Daniel in Thailand are
considered to be incidental to his employment in Malaysia.
5. Dennis, a civil engineer with Daylight Sdn. Bhd. since 2006, was sent by his
employer to China from 1/1/15 to 31/12/16.
His overseas duties include planning, evaluation and implementation of
construction projects in China. On completion of his secondment overseas,
Dennis continued to work with daylight on his return to Malaysia in 2017.
The subsidiary company in China would be responsible for the decision making
and would issue all the instructions for Dennis’ work in China. All plans and
evaluation reports will be sent to the company in China.
The company in China would bear the remuneration of Dennis during this period
in China.
Required:
Determine whether the employment in China for the YA2015 and YA2016 is
incidental to the employment in Malaysia.
(ACCA)
 Rate of Income Tax
• Resident company (paid-up capital not exceeding
RM2.5 million)
Chargeable Income: First RM500,000 17%
Remainder 24%

• Resident company (paid-up capital exceeding RM2.5

million) 24%
• Non-resident company 24%
• Non-resident individual 28%
 Individual (Resident individual)
Chargeable income   Rates (%) Cumulative Tax
RM RM

(0 - 5,000) First RM 5,000 0 0

(5,001 - 20,000 Next RM 15,000 1 150

(20,001 - 35,000) Next RM 15,000 3 600

(35,001 - 50,000) Next RM 15,000 8 1,800

(50,001 - 70,000) Next RM 20,000 14 4,600

(70,001 - 100,000) Next RM 30,000 21 10,900

(100,001 - 250,000) Next RM 150,000 24 46,900

(250,001 - 400,000) Next RM 150,000 24.5 83,650

(400,001 -600,000) Next RM 200,000 25 133,650

(600,001 – 1,000,000) Next RM 400,000 26 237,650

Exceeding RM1,000,000   28