Chapter 3

Employment Income - Derivation,

Exemptions, Types and Deductions
 Employment Income

• Assessable under sec 4(b) of ITA 1967

• Sec 2 defines:
employment is said to be taken place when
– the relationship of master and servant subsists AND/OR
– any appointment or office subsists, for which remuneration
is payable. Office is a position or post to a person and he
can vacate and a new person can be appointed to replace
him.
 Employment Income
• Employee is
– the servant AND/OR
– the holder of the appointment or office
• Employer is
– the master AND/OR
– the person responsible for paying any
remuneration to the employee. That person and
employee can be the same person acting in
different capacities.
 Employment vs Profession

To be decided case by case by the court of law. In

general,
• A profession (contract for service) is a series of
appointments, which may be conducted
simultaneously during a period of time.
• An employment (contract of service) involve
appointment to an office which usually maintained for
sometime and which ends with resignation,
retirement, termination or the death of employee
 Employment vs Profession

Several features from preceding cases :

1. Employment is taken place when master-servant
relationship exist but even in the absence of such
relationship, an employment can exist.
2. Control - existence of control is a strong indication
for employment, but not really relevant for
professionals.
 Employment vs Profession
3. Substitution of staff – not free to replace with
other people
4. Contract of engagement / prohibition of
moonlighting unless specified permission is
granted by employer.
 Employment vs Profession
5. Nature of remuneration and benefits – fixed
remuneration, contribution to EPF, SOCSO, tax
deduction on salaries
6. Place of work and integration - restricted and
specified. No freedom when and where to work
7. Sharing of financial risk and success
8. Employer provide the employee necessary
tools and equipment required to perform his
duties.
 Employment vs Profession
Tax Item Employment Profession
Capital allowance Cannot be claimed Can be claimed
Losses carried forward Not applicable Can be carried forward
Basis of assessment year Calendar / basis year Financial / Accounting year
Deductions Scope is limited for More scope for deductions
deductions
Assessment of income Receipt basis* Accrual basis
60-day rule (exemption) Exemption is available Not applicable
Compensation for loss of Taxable Not applicable
employment
Other requirements Not applicable Required to contribute to EPF, tax.
Must provide medical benefit, sick
pay, holiday leave, gratuity etc.

* In case where income is not associated with any period

Derivation of employment Income

Employment income would be taxable

only if employment income DEEMED TO
BE DERIVED from Malaysia - S13(2) and
S13(3).
 Situations For Employment Income
Deemed To Be Derived From Malaysia

Sec 13(2) of ITA 1967:

(a) Any period in which employment is
exercised in Malaysia. ‘Exercised’ means to
discharge the employment duties, either
wholly or partly, and not merely physical
presence.
 Situations For Employment Income
Deemed To Be Derived From Malaysia

Sec 13(2) of ITA 1967:

(b) Any period of ‘leave attributable’ to the
exercise of employment in Malaysia. ‘Leave
attributable’ means connection of some
kind with exercising employment in
Malaysia.
 Situations For Employment Income
Deemed To Be Derived From Malaysia

Sec 13(2) of ITA 1967:

(c) Any period during which employee
performs outside Malaysia duties
‘incidental to’ exercise employment in
Malaysia.
(d) Remuneration received by a DIRECTOR of
a RESIDENT COMPANY. He may not
exercising his duties in Malaysia.
 Situations For Employment Income
Deemed To Be Derived From Malaysia

Sec 13(2) of ITA 1967:

(e) Employees of a RESIDENT SEA OR AIR
TRANSPORT OPERATOR in Malaysia. E.g.
MISC, MAS.
Exemption: Employees exercising
employment on a SHIP (registered under
Merchant Shipping Ordinance 1952) & the
ship is owned by a tax resident
 Situations For Employment Income
Deemed To Be Derived From Malaysia

sec 13(3) of ITA 1967:

(a) Income received by employee, who is a
CITIZEN of Malaysia, in the PUBLIC SERVICE
or STATUTORY AUTHORITY
(b) Any period of leave attributable to the
exercise of the employment
 Employment income

Irrelevant fact on determining taxable income

for employment:
• Employer not in Malaysia
• Employee is a non resident
• Payment of salary is made outside Malaysia
• Employment income is not received in
Malaysia
 Basis of Assessment
Effective YA 2016:
Sec 25(1): Gross income from an employment
which is receivable for any basis year for a YA is
taxed in the basis year it is received.
 Basis of Assessment
25(6) Where an employee

(i)has left or will be leaving Malaysia in the basis year for a YA;

(ii)is not resident in Malaysia for the basis year for the following YA and
does not derive any pension from Malaysia for that basis year; and

(iii)ceases to derive gross income from employment from Malaysia on

the expiration of a period of leave following his departure from Malaysia,

the employment income receivable for the relevant year or for the basis
year of the YA following the relevant year shall be deemed to have been
received in the basis year in which he leaves Malaysia.

*But he can elect to be taxed in the following basis year

 Employment Income - Types

Categories of employment income is

provided in sec 13(1)(a) to (e) of the ITA
1967
• Sec 13(1)(a) : comprises all income that is
convertible into money.
• Sec 13(1)(b) : comprises all income that is
not convertible into money
• Sec 13(1)(c) : accommodation
 Employment Income - Types

• Sec 13(1)(d) : contribution by employer to

unapproved funds, scheme or society &
income received from unapproved funds
• Sec 13(1)(e) : compensation for loss of
employment
 Sec 13(1)(a)
Examples of sec 13(1)(a) income are:
1. Salaries, wages (including leave pay)
2. Bonus, commission, fees
3. Gratuity (exclude gift).
• Gratuity: recognition of services rendered upon resignation or
retirement
• Full exemption (Para 25 Sch 6) if satisfied following conditions:
(a) Retirement due to ill health; or
(b) Retirement on or after reaching 55, or on reaching
compulsory age of retirement and with the same company(s)
within the group for 10 years or more
(c) Retirement after age 50 but before 55 (on reaching the
compulsory age of retirement pursuant to a contract of
employment, or collective agreement) and employment lasted
for 10 years with the same employer
(d) Government servant (retirement and termination) para 25A
& 25B, Sch 6.
 Sec 13(1)(a)
Examples (continued):
4. Perquisite or allowances including clothing ,
travel & entertainment allowance (exclude
reimbursement)
5. Share option/incentive
6. Loan to employees by employer using external
funds: (cost incurred by the employer – amount paid by
employees)
7. Tax borne by employers
 Sec 13(1)(a)
• Other consideration:
– amount received in having or exercising the
employment
– Not necessarily received from employer. e.g: tips
to taxi driver/waiter.
– amount received is referred to services rendered
in the past, present or future
– amount accrued/connected to employment
– voluntariness is not relevant for consideration
– the employee is entitled for such payment
 Sec 13(1)(a)

• But it excludes:
– reward for personal qualities, e.g.
marriage, passing exam
– payment to meet personal distress, e.g.
compensation for house damage.
 Example
• Azhar works as a sales executive with Tading Sdn Bhd. For the
year ended 31/12/16, he was paid a gross salary of RM60,000,
study leave pay of RM12,000 and commission (sales and
collection) amounting RM8,000. He is also entitled to a bonus
of RM12,000. Determine his gross income.

Salary RM72,000
Commission RM 8,000
Bonus RM12,000

Total RM 92,000
 Example
Elegan worked as a waiter in TenTen Co. Elegan was very pleasant, kind and helpful to
customers in recommending dishes to customers. Thus, he usually receive tips and
souvenirs from them. In year 2016, Elegan received tips and souvenirs amounting to
RM8,000. Elegan later got married and the employer gave him a cash present of
RM18,000.
Explain, with reasons, the tax treatment of the receipts of RM8,000 and RM18,000.

The tips would be taxed as part of employment income under S13(1)(a)

because it was received in the ordinary course of employment. The tips was
received in respect of having the employment as a waiter and it would not
have been received unless he has been an employee of TenTen Co.
However the cash present of RM18,000 would not be taxed as it was paid to
him for personal characteristics. It was a gift which was never intended to be
a reward of service.
 Sec 13(1)(b)

• Benefits that are not convertible to money/ no exact

monetary value
• The value of the benefits are specified by the IRB
• Examples:
– car benefit/fuel benefit
– furnishing benefit [semi furnished RM840p.a.; semi furnished
with aircond/curtains/carpets RM1,680p.a.; fully furnished
RM3,360 p.a.]
– domestic servants (RM4,800 p.a.)/gardener (RM3,600
p.a.)/driver (RM7,200p.a.)
– Mobile phone (rental & charges): RM7,200p.a.
– insurance premium, etc
 Motorcars and related benefit

Cost of Car when new Annual Value of BIK (RM) Fuel per annum (RM)
(RM)
Up to 50,000 1,200 600
50,001 – 75,000 2,400 900
75,001 – 100,000 3,600 1,200
100,001 – 150,000 5,000 1,500
150,001 – 200,000 7,000 1,800
200,001 – 250,000 9,000 2,100
250,001 – 350,000 15,000 2,400
350,001 – 500,000 21,250 2,700
500,001 and above 25,000 3,000
 Example

Mr Abu is working as an accountant with Time Sdn Bhd. He was provided

with a car which cost RM89,000, when it was bought on July 2009. Fuel
was also provided by the company.
Compute his S 13(1)(b) benefits if:
(a) He was provided with the car since 2010.
Annual value of BIK = RM3600
Fuel per annum = RM 1200
Total RM4800
(b) He only uses the car for 6 months.
Car value = 6/12 x RM4800 = RM2400
(c) The car is more than 5 years old.
Car value = (½ x RM3600) + RM1200 = RM3000.
 Example

Ah Man has been working with Allstars Sdn Bhd for 10 years. Besides salary,
bonus and allowances, he was also provided with a fully furnished house
for the whole year in 2013. His employer was also provided him with a
servant (company paid wages of RM450 monthly) and a gardener
(company paid wages of RM350 monthly). Details of cash items earned by
him are as follows:

Salary RM8,010 (after EPF 11%)

Bonus RM15,000
Entertainment allowances RM700 per month

Determine his gross income under S13(1)(a) and the amount of assessable
benefits under S13(1)(b) for the YA 2013.
 Example

Answer:
S13(1)(a):
Salary (8010 x 100/89) x 12 RM108,000
Bonus 15,000
Entertainment allowances (700x12) 8,400
S13(1)(a) income RM131, 400

S13(1)(b):
Furniture RM3,360
Servant 4,800
Gardener 3,600
S13(1)(b) benefits RM11,760
 Benefits exempted from tax

• Free transport
• Food and drinks
• Medical, dental and child care benefits
• Leave passages for employee and immediate family. Subject
to the limit of: (a) 3 leave passage for travel within Malaysia
(include meals and accommodation), and (b) one leave
passage for travel between Malaysia and any place outside
Malaysia. The amount is limited to RM3,000.
• Corporate membership in recreation clubs – only on entrance
or membership fees. Monthly/annual subscription will be
taxable (s13(1)(b)).
Other exempt benefits:
 Discounted prices of consumable business
products (max RM1,000);
 Discounted prices for services provided by the
business;
 Subsidies on interest in respect of housing,
education or car loans;
 Subscription broadband, fixed line telephone,
mobile phone, pager;
 Gift of pager, personal digital assistant,
telephone, mobile phone.
 Sec 13(1)(c)
• Living accommodation-either house / hotel/ hostel
• Value of living accommodation (sec 32(2) is EITHER
– Defined value (unfurnished): rental value / rateable
value / economic rent, OR
– 30% of the sec 13(1)(a) income, WHICHEVER IS LOWER
• This is not applicable to director of a controlled companies
(full amount)
 Sec 13(1)(c)
• Shared accommodation & accommodation occupied less than a
year is apportioned accordingly [sec 32(2)(b) & (c)].

• Sec 32(2)(a)Value of hotel/hostel is

– 3% of the sec 13(1)(a) income (not applicable to director)
– Apportioned accordingly if less than a year
 Example

Wai Mun is a technical manager in a manufacturing company and earned the

following:
Salary RM75,000
Bonus RM15,000
He was also provided with unfurnished accommodation. The rent paid by the
employer was RM19,200 for the year. Calculate the assessable value of living
accommodation under each case:
a)The accommodation was provided for the whole year;
b)The accommodation was provided for only 6 months in the year;
c)The accommodation was shared with another employee for the whole year;
and
d)The accommodation was too large for his needs and he was required to use
it to advance the interest of his employer. It was agreed by the IRB that he
was entitled to a 1/3 rebate on the defined value.
 Example

Gross income from employment under s13(1)(a):

RM
Salary 75,000
Bonus 15,000
90,000

a) The accommodation was provided for the whole year;

Value of living accommodation is:

Defined value RM19,200

30% of s13(1)(a) income RM27,000
Therefore, the value is the lower amount i.e. RM19,200.
 Example

b) The accommodation was provided for only 6 months in the year;

Defined value RM19,200
30% of s13(1)(a) income RM27,000
The lower amount is RM19,200. Value of living accommodation is:
6/12 x 19,200 = RM9,600.

c) The accommodation was shared with another employee for the whole
year;
Defined value (RM19,200/2) RM9,600
30% of s13(1)(a) income RM27,000
Value of living accommodation, whichever is the lower amount: RM9,600.
 Example

d) The accommodation was too large for his needs and he was required to
use it to advance the interest of his employer. It was agreed by the IRB
that he was entitled to a 1/3 rebate on the defined value.

Defined value RM19,200

Less: 1/3 rebate (RM6,400)
RM12,800

30% of s13(1)(a) income RM27,000

Value of living accommodation, whichever is the lower amount: RM12,800

 Sec 13(1)(d)
• Contribution by employer plus any interest accrued to
unapproved pension, funds, scheme or society
• Income received from unapproved funds
• Fund was previously approved but was subsequently revoked.
• Approved fund is fully exempted (like EPF)

All these incomes will be fully assessed in the year of

withdrawal.
 Example

Anand made contribution to an unapproved pension fund set up by his employer, Aman Sdn Bhd. On
retirement, he withdraws all money from the unapproved fund, which comprise of the following:
(a) Amount contributed by him RM40,000
(b) Amount contributed by employer RM80,000
(c) Amount of interest earned RM 6,500
Total RM126,500

Determine the amount assessable on him, under S13(1)(d).

S 13(1)(d):
Employer’s contribution RM80,000
Interest earned RM6,500
Total RM86,500
 Sec 13(1)(e)
Including in the Sec 13(e) income are:
• Compensation for loss of employment, maybe exempted
(RM10,000 for each completed year of service with the same
employer); full exemption if termination is due to ill health of
the employee.
• Wages/salary in lieu of notice, compensation for breach of
contract of service
• Payment for the release of employer’s obligation under the
contract of service
• ex-gratia payment - eg. retrenchment payment
 Example

Mr Barvin is a 43-year old geologist employed by Geo Services Sdn Bhd since 1 Jan
2008. His service was terminated on 2 May 2016 and he received compensation
amounting to RM125,000. Prior to taking up employment with Geo Services Sdn
Bhd, Barvin had been working for a subsidiary of the company since 1 Jan 2006.
How much of the receipt is chargeable to tax?

Since Barvin has been working with companies in the same group, his period of
employment with the same employer would be 1 Jan 2006 to 2 May 2016 (a
period of 10 complete years of service). The amount assessable to tax for the YA
2016 would be:
Compensation for loss of employment RM 125,000
Less: Exemption (10 x 10,000) RM 100,000
Amount assessable to tax RM 25,000
 Exempt income
• Gratuity – full exemption:
– para 25 of Schedule 6 ITA 1967 - due to ill health, reaching
compulsory retirement age (55 years or any other age) and serve
the same company for 10 years immediately prior to retirement
– para 25A of Schedule 6 ITA 1967 - government servant
retirement
– para 25B of Schedule 6 ITA 1967 - government servant
termination
• Effective YA 2016, employee who received gratuity, is
eligible for an exemption of RM1000 for each completed
year of service (partial exemption) , working with the last
company in a group.
 Exempt income
• Compensation for loss of employment:
– Para 15 of Schedule 6 ITA 1967 - Full exemption if termination is
due to ill health of the employee.
– Para 15 of Schedule 6 ITA 1967 - Exemption of RM10,000 for
each completed year of service with the same employer
 Exempt income
• Excellence service awards: maximum of RM2000 effective
YA2009 for each year of assessment
– Long service award: provided the employees served the same
employer for more than 10 years
– Past achievement award
– Service excellent, innovation and productivity award
• Travelling allowance: RM6,000 on petrol allowance & toll
charges for official duties)*
* All can be deducted if enough evidence is kept.
 Exempt income
• Free petrol / petrol card – either used prescribed method
or formula. If choose prescribed method, the above
petrol allowance exemption is not applicable
• Parking allowance, meal allowance, child care allowance
RM2400 per year
 Exempt income
• Subsidies on interest
– Full exemption for subsidy on interest for housing, education or
car loan provided total loan less than RM300,000
– If total loan exceeds RM300,000, the following formula applies to
determine the exemption:
A x B / C, where A = interest subsidy
B = the balance of principal amount of the loan or RM300,000
whichever is lower
C= Total aggregate of principal amount of the loan
 Exempt income
• Gifts and monthly bills for fixed line telephone, mobile phone, pager,
personal digital assistant (PDA) and subscription of broadband,
registered under employee name (not include allowance for
telephone)
• Discounted price for consumable business products of the employer
(maximum of RM1000) and discounted price for services provided by
the employer (fully exempted)
• Traditional medicine and maternity provided by a medical
practitioner registered with bodies which are certified or registered
in accordance with the rules governing traditional medicine as laid
down by the Ministry of Health e.g. Persatuan Perubatan Tradisional
Melayu Malaysia (PUTRAMAS), Pertubuhan Perubatan Tradisional
India Malaysia (PEPTIM), Federation of Chinese Physicians &
Acupuncturists Associations of Malaysia (FCPAAM)
 Exemption of Employment Income
For NON RESIDENT ONLY if they satisfy any of
the following conditions (exclude Director):
1) Exercise employment in Malaysia for a TOTAL
not more than 60 days in a basis year
 Exemption of Employment Income

2) Exercise employment in Malaysia for

CONTINUOS PERIOD not more than 60
days which overlaps 2 year of
assessment

1 Jan 16 31/12/16 31 Dec 17

 60 days
 Exemption of Employment Income

3) Exercise employment in Malaysia for a

continuous period (not exceeding 60 days) which
overlaps the basis year for 2 years of assessment
& for a period(s) which together with that
continuous period do not exceed 60 days

1/1/16 31/12/16 31/12/17

A + B + C  60 days
 Deductions

• Basically, all expenses which incur WHOLLY &

EXCLUSIVELY in the production of employment
income
• From case law, it is found that these specific
expenses are NOT ALLOWABLE:
– commission paid to employment agencies
– travelling expense
– self improvement expenses
 Deductions
Non Allowable expenses (continued)
– examination fees
– professional books/journals. Relief up to RM
1000 only
– subscription to newspaper
– clubs subscription
– clothing
– telephone cost at home
 Deductions

• From case law, it is found that these

specific expenses are ALLOWABLE:
– professional subscription
– travelling expenses to visit clients
– clubs subscription that is required in the
performance of duties
 Deductions

• ALLOWABLE EXPENSES (continued):

– clothing- uniforms, only the renewal cost is
allowed, initial cost is not allowed
– Entertainment expenses that incur wholly &
exclusively, provided the employer give the
entertainment allowance.
END OF TOPIC.. ANY QUESTION??