Chapter 4 (a)employment income stds (1)

ATXB213 MALAYSIAN TAXATION 1 1

CHAPTER 4 (a)

EMPLOYMENT INCOME- DERIVATION -


LEARNING OBJECTIVE

Definition of Employment

Differences between employment & business

Derivation of employment income S13(2) and S13(3)

Basis of assessment (Section 25)


DEFINITION OF EMPLOYMENT

Employment is defined in Sec 2, ITA 1967employment 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


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


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.


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;


CONTINUEThe 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,


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 Profession

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

DIFFERENCES BETWEEN EMPLOYMENT AND BUSINESS INCOME


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;


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.


SECTION 13(2)(a) OF ITA 1967To 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.


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?


DISCUSSION

•


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.


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?


DISCUSSION


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.


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.


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.


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.


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.


CONTINUE

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

Example 21


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.

DiscussionAs Air Asia Company is a Malaysian resident company, Ramli’s income is deemed to have a Malaysian source.


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.


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.


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


SECTION 25(2) of ITA 1967 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


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).

SECTION 25(3) OF ITA 1967

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)


EXAMPLE – SECTION 25(3)

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



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”.


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



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


SECTION 25(6) of ITA 1967 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,



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)).


EXAMPLE – SECTION 25(6)

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

ATXB213 MALAYSIAN TAXATION I 36

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Chapter 4 (a)employment income stds (1)