Topic 3:

Employment Income
TAX267
TAXATION 1

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 Objectives
 To differentiate employment income from
business income

 To identify the basis period of employment

income

 To identify the derivations of employment

income and their exemptions

 To be able to compute gross and

adjusted/statutory employment income

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 Introduction
 Assessable under S4(b) of ITA 1967
 Employment Income = income that is derived or
earned from exercising an employment.

 The relationship between master/employer and

servant/employee must exist
 Appointment of a post/holding an office
 Remuneration is given to servant for such service rendered

 Assessment is based on basis year regardless of

sources of employment

 Derivation S13(1)(a)-(e)

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 Exemption of Employment Income

 Income of a NR individual from an employment

is exempted if the persons works in M’sia:
 For a period or periods which together do no
exceed 60 days in the basis yr for a YA.
 For a continuous period (not exceeding 60 days)
which overlaps the basis yr for 2 successive YA.
 For a continuous period ( not exceeding 60 days
which overlaps the basis year for 2 successive
YA and for a period, which together with the
continuous period do not exceed 60 days.
 Employment income
VS business income
Employment income Business Income
Advantages Advantages
EPF contribution by Flexible deduction of
employer expenses
Medical benefits, sick pay Capital allowances are
& leave pay assured available.
Tax exemption on gratuity, Can utilised unabsorbed
compensation for loss of loss of the taxpayer.
employment
 Employment vs business
Employment income Business income

NR employees will be
exempted from taxation of
employment income if the
employment period do not
exceed 60 days.

Disadvantage: Disadvantage:
Risk of job termination Risk of business failure
resulting in bankruptcy.
 Types of Employment Income
 S13(1)(a) – Cash and perquisite (can be
converted into cash)

 S13(1)(b) – Benefit in kind (can’t be converted

into cash)

 S13(1)(c) – Unfurnished living accommodation

 S13(1)(d) – Withdrawal of unapproved provident

fund

 S13(1)(e) – Compensation for loss of

employment
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 Section 13(1)(a)
 Cash or equivalent
 Salary
 Overtime
 Bonus
 Allowance
o Clothing
o Traveling
o Entertainment
o Food
 School/tuition fees
o For employee’s children - taxable
o For the employee himself – not taxable
 Insurance premium
o If paid by the employer and beneficiaries are the
employee, employee’s family or their appointed
nominees 8
 Sec 13(1)(a)
 Salary & wages =Both items are taxed at
gross ( add EPF if it has been deducted).
 Allowances- assessed on gross amt. Eg:
Traveling, entertainment, clothing
allowance. However, uniform exempted
from tax.
 Section 13(1)(a)
 Gift of personal computer
 Professional subscription
o If paid by the employer and not directly contributed
of its business
 Excellent public service award
o If paid by the employer and not directly contributed
of its business
 Excellent service
o Tax exempted of RM2,000 per YA if it is long service
award (min 10 years), past achievement award or
service excellence award
 Credit card facilities
o Exempted if exclusively used in the performance of
duties
 Scholarship
o Exempted either related to his employment or not
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 Section 13(1)(a)
 Reimbursement
o An employee pays in advance for an expense during
his course of duty
o Later, he claims for such expense to his employer
o Claims paid by the employer are known as
reimbursement

 Gratuity
o Gratuity – also called ex-gratia payment/ golden-
hand-shake.
o A sum of money given to employee in recognition of
past year services upon resignation/retirement.
o Can either be taxable, partially or fully exempted
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 Section 13(1)(a)
 Fully exempted if:

o Cessation of employment is due to retirement

or ill-health

o Age is more 55 y.o or has reached compulsory

retirement age

o Has been working with the same

employer/group of companies min 10 years

o Paid out from public funds*

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 Section 13(1)(a)
 Partially exempted :

o With effect from YA 2016, gratuity on

retirement from an employment under any
written law or termination of a contract of
employment would be given an exemption of
RM1,000 for each completed year of service of
that individual employee.

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 Share option- sec 13(1)(a)
 Share option scheme allows an
employee to acquire shares in a
company at a fixed price and with a
right to exercise the option at some
future date.
 The option value that constitutes
perquisites under sec 13(1)(a) is the
excess of the market price over the
option price at the time the option
was granted. (compare 2 MV, take
the lowest – option price)x no. of
share exercised
 Loan to employees- Sec 13(1)
(a)
 Employers may give loans to employees
either interest free or with interest but at a
lower market rate. Employee will be
assessable to this benefit depending on the
source of fund & cost to the employer.
 Internal fund –employee not taxable.
 External fund – employee will be assessed on
the amt of interest expense incurred by the
employer, where int.free loan was provided
to the employee.
 Interest subsidy – the amt of int. subsidised
by employer will be taxed on employee.
 Individual Membership in
recreation club- Sec 13(1)(a)
i. Individual membership – entrance fee
and monthly fee paid by employer for
staff/director – taxable in full.
 Section 13(1)(b)
 Covers benefits that are not convertible into money or does not have an
exact monetary value.
 Commonly known as “benefit in kind” provided by an employer to an
employee e.g furniture, mobile phone.
 The income assessable would depend on the cost to the employer providing
itBenefit in kind : facilities provided by the employers
 Exempted items:
 Medical/dental treatment
 Child care
 Goods/services offered at lower price or at discount
 Free transport
 Food/drinks provided FOC or subsidised by employer
 Leave passage
- exemption on air passage, meals and accommodation (w.e.f YA 2007)
- max 3 times in Malaysia
- RM3,000 per family for leave passage ONE leave
passage outside Malaysia. Leave passage for travel is restricted to
costs of passage such as air fares,insurance and transit costs but not
hotel accomodation.

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 Section 13(1)(b)
Car –prescribed value method
(appendix)
Driver- RM600
Servant –RM400
Gardener-RM300
Furniture –prescribed value method

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 Motor vehicles and related
benefit –Sec 13(1)(b)
 Where an employer provides MV to the
employee for both business and private
use, the benefits assessed will be based
on the value of the car and fuel provided
in accordance with the table.
 If the age of the car > 5 yrs, annual value
would be reduced by half.
 IRB allows proportionment of the annual
value if the car benefits is not provided for
a full year.
 Driver – Sec 13(1)(b)
 The employer may provide a driver
to the employee.
 The salary would be borne by the

employer and the employee would

be assessed a fixed amount of
RM600 per month.
 The actual salary of the driver is not

relevant in ascertaining the taxable

benefit of an employee.
Household furniture & appliances – Sec 13(1)(b)

 Formula method: Cost of the asset / average life

span.
 Prescribed value method:
i. Semi-furnished with furniture in the lounge,
dining room or bedrooms – RM70 per month.
ii. Semi-furnished with furniture as in (i) above
plus, one or more of the following: curtains, air
conditioners, and carpets – RM 140 p.m.
iii. Fully-furnished with benefits as in (I) and (ii)
above plus, one or more of kitchen equipment,
crockery, utensils and appliances – RM280 p.m
 Utilities- Sec 13(1)(b)
 Utilities bills such as water,
electricity and telephone paid by the
employer- the amt of benefits is
based on service charges and bills
paid by employee.
 The amt can be reduced if the

employee has used the utilities while

performing his duties & substantiated
by evidence.
 Corporate Membership in
recreation club- Sec 13(1)(b)
Corporate membership :-
a.entrance fee/membership fee – employee
will not be subject to tax.
b.Monthly subscription- taxable
 Gardener / Domestic Servant-
Sec 13(1)(b)
 In the event gardener/domestic servant are
provided, the employee would be assessed:
 Gardener–RM300 p.month/RM3,600 p.year.
 Domestic servant–RM400 p.m/RM48K p.year.
 Time apportionment is allowed if the usage
less than a year.
 If the amt paid for gardener/domestic servant
is claimed on reimbursed basis ( I.e the
employee hires and pays the servant and
claims the costs from his employer), it would
be assessable under section 13(1)(a).
 Mobile phone –Sec 13(1)(b)
 Where an employee is given a
telephone(including mobile phone,
he is exempted only for 1 unit.
 School/ Tuition fees
 The actual expenses incurred by the
employer on the school/tuition fees
of the children of the employee
would be taxable benefit on
employee.
 Section 13(1) ( c )
 Free or subsidized living accommodation
provided by employer.
• The value of living accommodation for
employee or service director :
1. Defined value of living accommodation
2. 30% of the employee’s gross income under
sec 13(1)(a)- share option,Whichever is
lower.
 Service director – a director who owns less
than 5% shares in the co. & act in a
managerial/technical capacity.
 Defined value –rental value/ rateable
value/economic rent.
 Section 13(1)( c )
 Accommodation provided to a director of controlled
co.- the comparison with the 30% of the sec.13(1)
(a) is not applicable.
 Director is assessed on the full defined value.
 Living accommodation for employee/service
director/director can be apportioned under 2
circumstances:
1) If the accommodation is provided < 12 months
2) If it is shared with other employee/ use for co.’s
interest.
 Hotel – Sec 13(1)( c )
 If hotel / hostel / house located in a plantation/
forest/situated rateable area was provided to
employee or service director – the value is to be
taken as 3% of his gross income under sec 13(1)(a)-
share option.
 The value can be apportioned if it is < 12 months but
no adjustment for shared accommodation.
 For directors – the full defined value is to be taken
and not the value of 3% of sec 13(1)(a).
 Section 13(1)(c)
Dual usage or not
- if used for other purpose other than living
accommodation, therefore S13(1)© of the
house will be apportioned accordingly
- not applicable for hotel

Number of tenant
- Will be apportioned accordingly if house is
shared
- Not applicable for hotel

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 Section 13(1)(d)
 Contribution made by the employer to any
unapproved pension, fund, scheme or
society

 Any income earned from the contribution

above

o It is not taxable.

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 Section 13(1)(e)
 Compensation for loss of employment,
including

 Salary/wages in lieu of notice

 Compensation for breach of contract of service
 Payment on the revoked contract of service
 Ex-gratia
 Restrictive covenant

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 Section 13(1)(e)
o Total exempted : if due to ill-health

o Partial exempted of RM10,000 per

complete year if due to other causes

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 Deductible expenses
 Allowable expenses
 Expenses incurred during the performance of
duties (pass S33, not prohibited by S39)
o Traveling expenses from office to client premise
o Professional subscription
 Expenses related to furniture/living
accommodation (S38)
o Rental of furniture/accommodation
o Repair of the house
 Entertainment expenses (S38A)
o Restricted to the amount of entertainment allowance

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 Non- Deductible expenses
 These expenses are non-allowable due to their
failure to pass the ‘whole and exclusively’ test,
capital or domestic in nature

• Traveling expenses from home to office

• Self improvement expenses
• Examination fees
• Professional journal and books
• Subscription of newspaper
• Club subscription
• Telephone cost
• Cost of clothing

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 The computation of adjusted/statutory
employment income for a basis year of…
S13(1)(a) X
S13(1)(b) X
S13(1)(c) X
S13(1)(d) X
S13(1)(e) x
Gross employment income xx
(-): Allowable expenses (x)
Expenses related to furniture/house
provided by employer (x)
Entertainment allowance (x)
Adjusted/statutory employment income xxx

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 Basis Period for Employment
Income
 Basis of assessment is based on calendar year
 S25(1) – employment income would be assessed
on income earned rather than income received
 S25(2A) – bonus or director fees is chargeable in
the year it is received
 S25(5) – Income received for the future period
shall be treated as income in the year it is received
 S25(6) – Income received after leaving Malaysia
permanently will be treated as income in the year
of departure ( year in which the employment
ceases) provided that:

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 Basis Period for Employment
Income
• S25(6) – Income received after leaving Malaysia permanently will be treated as
income in the year of departure ( year in which the employment ceases)
provided that:
 fulfill all of the following conditions:
a) The employee has left or leaving Malaysia;
b) the employee will not be resident for the following basis year
c) The employee will have no pension in the following basis year;
d) Gross income from employment will cease to be derived after he has left
 Make election (written notice) to apply s25(6)

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 Basis Period for Employment
Income
 If cannot fulfill the conditions or no
election is made, income received
after year of departure would be
treated as income in that particular
year

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 Tax Planning
 How can we minimize tax on employment
income?
 Choose an employment with remuneration
package instead of the one with high salary
but without fringe benefits
o Effect: reduce the value of S13(1)©
 Keep proper records on expenses which
allowances are provided
 Purchase goods/services supplied at discount
by employer
 Exercise the share option scheme
 Take up loan provided by employer if it is
internally funded
 Opt for EPF scheme instead of pension scheme
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