Masters of Financial Planning Associate Professor Dr. GholamReza Zandi Taxation Planning EMPLOYMENT INCOME By: Associate Professor Dr. GholamReza Zandi zandi@segi.edu.my

Employment Gains or profits from employment are taxable under sec 4(b) ITA. “Employment” means : employment in which the relationship of master and servant subsists; or any appointment/office, whether public or not and whether or not that relationship subsists, for which remuneration is payable.

Employment (cont’d) “Employee” means: where the relationship of master and servant subsists, the servant; or where that relationship does not subsist, the holder of the appointment or office which constitutes employment. Case: Trustee of Estate of Y v CIT .

Sec 13(1)(a) Sec. 13 (1) – Gross income of an employee in respect of gains or profits from an employment includes (a) Any wages, salary, remuneration, leave pay, commission, bonus, gratuity, perquisite or allowance (whether in money or otherwise) in respect of having or exercising the employment. A perquisite is a benefit in cash or in kind that is convertible into money received by an employee from the employer or third parties in respect of having or exercising the employment Para 15(1)(a) Sch 6: Compensation for loss of employment are completely tax exempt if employment ceased due to ill health.

Sec 13(1)(a) (cont’d) Para 15(1)(b) Sch 6: If payment is for loss of employment or for entering into a restrictive covenant, then a sum of RM10,000 multiplied by the employee’s number of years of service with that employer is tax exempt. Gratuity is a gift of money in addition to salary to a retiring/ resigning employee for services rendered. Taxable. The manner in which it is paid does not alter the nature of the gratuity

Sec 13(1)(a) (cont’d) Case law: DGIR v Leong Ngoh Sang A ‘ retirement gratuity ’ is exempt from tax under Sch 6 provided it is due to ill health [Para 25(1)(a)] or he is 50 years and above and has been employed by the same employer for at least 10 years [Para 25(1)(b)].

Sec 13(1)(b) Car benefit (private use) Fuel Furnishing Sec 13(1)(b) – Employment income includes the value of the use or enjoyment by the employee of any benefit or amenity provided for the employee by or on behalf of the employer. Note: Income taxed under Sec. 13(1)(b) include: Car benefit (private use) Fuel Furnishing Driver/ Gardener/Maid Utilities/Bills

Benefit in Kind A benefit in kind is a benefit provided for the employee by or on behalf of the employer which is not convertible into money. Benefit in kind (BIK) is valued in one of the 3 following ways: Where scale rates are provided by the IRB in the IRB Guidelines for valuation of benefits in kind provided to employees. Where special valuation rules are provided by the ITA’67 such as Sec. 32: Value is the cost to employer on just and reasonable basis. Where not covered by (i) or (ii), value on money’s worth basis if convertible to money (i.e. its market value) or otherwise, what it costs the employer to provide it to the employee.

Exempt Benefits Exempt BIKs : Sec. 13(1)(b) Medical, dental treatment and childcare benefits provided by employer. Medical benefits extended to include maternity and traditional medicine. Leave passage within Malaysia not exceeding 3 times per annum or one overseas leave passage p.a. up to a maximum of RM3,000 for employee and immediate family members. Petrol/travel allowance for official duties up to RM6,000. Allowance/subsidy for childcare up to RM2,400 p.a.

Sec 13(1)(c) Accommodation [sec 13(1)(c)] Sec. 13(1)(c ) – Employment income includes an amount in respect of the use / enjoyment by the employee of living accommodation in Malaysia provided for the employee by or on behalf of the employer rent free or otherwise subsidized. 2 Categories Sec. 32(3): Non Service Directors of a Controlled company. Sec. 32(2): Other Employees. Public Ruling No. 3/2005 explains the tax treatment of value of living accommodation .

Sec 13(1)(c) (cont’d) Defined Value means (sec 18): the rent on the unfurnished accommodation if it is rented leased from an independent lessor dealing at arm’s length (provided not under rent control); or in any other case, the annual value or in its absence the ‘economic rent’. Other Employees Section 32(2): Assessable value of living accommodation provided for an employee is (a) the defined value of the accommodation OR 30% of the gross employment income from the employment falling within sec 13(1)(a), whichever is LOWER; OR

Sections 13(1)(c), (d), (e) (b) 3% of the gross employment income within Sec. 13(1)(a) if the living accommodation is a hostel, hotel or any premises on a plantation and forest. Section 13 (1)(d): Receipts from unapproved provident funds Section 13(1)(e): Compensation from loss of employment. But exemptions are given for each completed year of service.

Deductions from Employment Income Deduction of expenses from gross employment income is governed by: Section 33 [Deductions in general] ; Expenses only deductible if incurred in production of employment income, i.e. must be ‘incurred in the performance of employment duties’. Example: fees paid to professional bodies. Sec 38 – [Deductions against benefits in kind on furnishing and living expenses]; and Sec 38 A – [Deduction for entertainment expense] Deduction for entertainment expenses so long as they are taxed on the entertainment allowance under sec 13(1)(a).

The End End of Chapter 1.