Sec 4 (b): Employment Income

Section 13 (1) (a) of the Act reads as follows:

(1) Gross income of an employees in respect of gain or profit from an employment includes:

(a) any wages, salary, remuneration, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance (whether in money or otherwise) in respect of having or exercising the employment.

Section 13(1) (a) comprises of income that is convertible into money. The scope is wide enough to encompass the following:

a. amount received in the ordinary course of employment, which may or may not, be from the employer

b. it must make reference to services rendered in the past, present or future.

c. voluntariness is not relevant for consideration.

d. amount accrued from or directly connected to employment.

e. the employee is entitled to the payment.

Bonus

Bonus would be assessed to tax under sec 13 (1) (a). It has the following characteristics:

a. bonus is paid in addition to the salary. It can be contractual or non-contractual.

b. the true nature and character of the payment should be examined.

c. the amount can be fixed or contingent subject to the profits of the company.

d. bonus is paid by reference to services rendered.

e. bonus is paid on recurring basis. If the bonus is paid one and for all to mark the personal excellence of an individual, it would not be taxed as bonus but is capital in nature.

Gratuity

Gratuity is normally referred to as ‘money present of amount fixed by giver in recognition of an inferior’s good offices. It is normally paid to an employee in the course of his employment upon resignation or retirement from the employment after service a long period.

Gratuity is treated as part of gross employment income under sec 13(1)(a).

Gift is not, even though the gift is paid by the employer.

Exemption of gratuity

a. Ill health : If the Director General is satisfied that the retirement was due to ill-health.

b. Age 55 years: If 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 either case from an employment which has lasted ten years with the same employer which has lasted ten years with the same employer or with companies in the same group. The ten years must be continuous period immediately prior to retirement.

c. Age 50 but before 55: Tax free gratuity to early retiree employee following the global trend of merger and acquisition, voluntary separation scheme, thus have fully exempted the gratuity.

d. Government Servant – retirement

e. Government Servant- termination.

Sole Proprietorship

- An attractive form of legal status for a new business

- Business Registration Act 1956

- Individual in business on his own

- The owner may transfer his business to someone else

- Owner managers the firm himself.

- One person

- No agreement is necessary

- The owner may withdraw capital, but his liability for the business’s debt is unlimited.

- A sole proprietorship may be dissolved informally by the owner himself.

Advantage

- Ease of information: business can be started fairly easily with minimal capital requirements.

- Total independence in decision making: he can make decisions and run the business the way he wishes.

- Total responsibility: he is willing to accept total responsibility for the firm’s performance.

- Taxation advantage: he only needs to pay personal income tax and not business tax.

Disadvantage

- Unlimited liability: failure in the business may mean a loss of personal property.

- Lack of continuity: if the owner dies, insane, the business ceases operations.

- Lack of experience and ability: business operations depend on one individual and his ability.

- Limited skills: he may find himself forced to make decision in areas of business operations which he lack expertise.

Partnership

- 2 or more persons doing business with a view of profit.

- Business Act 1956

- Cannot transfer his title to someone else without the consent of the other partner.

- A partnership must have an agreement.

- Partner’s may withdraw capital, but their liability for the firm debts is unlimited

- A partnership may be dissolved informally by agreement of the partners.

Advantages

- Taxation advantage: most partnership pay taxes as individuals, not corporative tax.

- Ease of formation: established by meeting only a few legal requirement.

- Combined talents and business acumen: all the partners’ abilities are combined to cover a wide range.

Disadvantages

- Unlimited liability: all partners are personally liable for the debts of the business

- Limited life span: partnership may end if any one of the partner suffers from dies, mental disorder.

- Lack of continuity: if any one of the partner dies, partnership arrangement ceases.

- Shared profit: any profit earned by the partnership will be shared among all partners.

Private Limited Company

- Limited by shares, shares can’t be sold to the general public.

- 2 persons until 50 persons

- Limited: legal identity of its own that is separated from the people who won it.

- Shareholders are not liable as individuals for the business debts beyond the paid-up value of their shares.

- Sdn. Bhd. or Pte Ltd

Advantages

- Limited liability: limited to the capital contributed to the company

- Perpetual life: not dependent upon the resignation of its members

- Ease of expansion: easier to expand and develop a private limited company because of its simplicity in equity participation.

- Attracts skilled employees: attract the interest of skilled employees.

Disadvantages

- High taxation: pay corporate tax as well as personal income tax.

- High set-up costs: cost setting up a private limited company is high.

- Limited membership: not more than 50 individual.

- Regulations: not allowed to offer or sell any shares or debentures to the general public.

Public Limited Company

- Limited by share, no maximum limit.

- Raise source (capital) selling shares

- Easily sell and purchase the shares of company

- Bhd & Ltd

Advantages

- Limited liability: limited to the individual’s investment in the company.

- Perpetual life: separates and distinct life from that of its owners.

- Transfer of ownership: transfer through the sale of stock to interest buyers.

- Ease of expansion: public limited company has a great potential for expansion.

Disadvantages

- High set-up cost: a large amount of organizing expenses involved in forming a corporation.

- High taxation: various taxes must be paid by the company.

- Financial disclosure: to disclose more information about its operations and financial status than it would desire.

Sec 4(e) Pension

Represent contractual or voluntary payments made to an individual who has retired or ceased to hold an office

Pension is derived where:

a. payment is by the government

b. a person has a right to a pension

c. the person paying a voluntary pension is resident in Malaysia.

Exemption of pension

- Subject to the following conditions:

a. the pension is derived from Malaysia

b. the recipient is resident in the basis year

c. the retirement was due to ill health

d. the retirement was due on attaining the age of 55

- Pension paid to:

a. president, deputy president

b. Speaker, deputy speaker

c. member of the state legislative assembly

d. wound and disability pensions paid to members of Malaysia armed forces

e. pensions grated to widows and orphans under written law or an approved.

Dual residence

Dual residence

Where by reason of the preceding provisions an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules

a. he shall be deemed to be a resident solely of the Contracting State in which he has a permanent home available to him

b. if he has permanent home available to him in both Contracting State, or if he does not have a permanent home available to him in either of them, he shall be deemed to be a resident solely of the Contracting State in which he has an habitual abode.

c. if he has a habitual abode in both Contracting State, or if he does not have an habitual abode in either of them, he shall be deemed to be a resident solely of the Contracting State with which his personal and economic relations are the closer.

The Residence Status

S 7 (1) (a) of Income Tax Act 1967

- In Malaysia for 182 or more days of which the period of stay.

- The period of stay need not be consecutive.

- Part of a day counts as a full day.

S 7(1) (b) of Income Tax Act 1967

a. Linked to a period of 182 or more consecutive days to the immediately preceding calendar year.

b. Linked by a period of 182 or more consecutive days to the immediately succeeding calender year.

c. Provided temporary absence from Malaysia:

o Connected with his service in Malaysia and owning to service matters or attending conference, seminars or study abroad.

o Owing to ill health involving himself or a member of his immediate family parents, children and spouse.

o Social visit not exceeding 14 days.

S 7(1) (c) of Income Tax Act 1967

- In Malaysia for 90 days or more (not necessarily consecutive days) and was either resident or in Malaysia for 90 days or more in 3 out of the 4 immediately preceding basis years.

S 7 (1) (d) of Income Tax Act 1967

- Individual is resident for the three immediately preceding basis years and for the immediately following basis year.

- Consequently, an individual may be found to be a resident for a particular basis year even though he or she might not have been in Malaysia at all in that basis year.

Sources of Income

s 4(a) Gains or profits from a business for whatever period of time carried on.

s 4(b) Gains or profits from an employment

s 4(c) Dividends, Interest or Discounts

s 4(d) Rents, Royalties or Premiums

s 4(e) Pensions, annuities or other periodical payment not falling under any of the foregoing paragraphs

s 4(f) Gains or profits not falling under any of the foregoing paragraphs.

s 4(A) Special classes of income.

Income Tax Planning

Objectives:

a. to eliminate, minimize or defer income tax within the ambit of the law

b. to understand anything relates to personal taxation

c. be able to minimize the amount of taxes that have to be paid

d. be able to maximize disposable income

Self assessment

a. Taxpayer is required to complete and submit return form by the required dates but no notice of assessment sent to the taxpayers.

b. Taxpayer have to compute their own tax and make full amount at the time return form were sent.

c. Taxpayers are allowed to make monthly payment to IRB.

d. Scheduler Tax Deduction Scheme allow tax payment deducted from the monthly salary and remitted to the IRB by the employer.

Separate assessment: all income of a married women is automatically assessed separately from that of her husband and no election is required.

Combined assessment: the wife/husband can elect to have their total income to be combined and assessed either in the name of husband or wife.

Separation / Divorced Cases

a. the husband continues filling his tax return under his own tax reference number. Assessed as an individual.

b. the wife reverts to her format tax status prior to the marriage. Previous tax file reopen/register new file if none.

c. the wife file her own separate tax return and report her own income including alimony, if any.

Annuities

Annuity is a sum of money payable on a regular basis either in perpetuity for life or a fixed term under a contract, will or settlement.

Exemption

Annuity is exempted if it under para 36: Sums received by way of annuities granted under annuity contracts issued by Malaysian life insurers.

Annuity from life insurer

Any income of a life insurer or takaful operator from an investment made out of a life fund or family fund in respect of a deferred annuity will be exempted.

s 4(e) Alimony

In a divorce situation, a husband may be required to pay a sum to support his ex-wife.

They are no loner married to under a separation order.

The payment as alimony payment.

Sec 4 (d): Royalty Income

Any person receiving royalty income will be subjected to tax in Malaysia if:

a. the royalty income is derived from Malaysia

b. received in Malaysia from outside Malaysia

Deduction of expenses: the s 33 and s 39 would apply.

Exemption for royalty income

- Paragraph 32

RM 10000, payment in respect of the publication, or the right to use any artistic work (other than any original painting), and from royalty in respect of recording discs or tapes.

- Paragraph 32A

RM 12000, payment received in that uear in respect of any translation of books or literary work at the specific request of any agency of the Ministry of Education, Ministry of Higher Education, or the Attorney general's Chambers.

- Paragraph 32B

RM 20000, payment in respect of the publication of, or the use of or the right to use, any literary work, or any original painting.

- Paragraph 32C

Exempt from performance in cultural performance approved by the Minister.

- Para 32D

RM 20000, musical composition

- Para 32E

Fee or honorarium in respect of services provided for purposes of validation, moderation or accreditation of franchised educational programmes in higher educational institutions and service are verified by the Lembaga Akreditasi Negara is tax-exempt.

Sec 4 (d): Rental Income

In Malaysia, rental income can be derived from the following sources:

a. letting out of land, commerical buildings or residential properties such as terrance houses, flats and condominiums b. letting out of ships, plant, machinery or motor vehicles.

Section 4(a)

Rental income assessed as business source is one source. All rental income of the properties are aggregated and revenue expenses are deducted therefrom.

The commencement of rental income is on the date the property is made available for letting. It must be ready for occupation by tenants.

Section 4(d)

Where rental income is assessed as s 4(d) investment income.

Derivation of rental income from immovable properties and movable properties.

Movable properties normally involve the lease of plant or machinery.

Advance rental are assessable in the year of receipt, nowwithstanding that it may be subject to refund. Rental income was assessed as income of the basis period in which it was received.

Deduction of expenses

The deduction test for rental income will be revenue expenses that are wholly and exclusively incurred in the production of rental income (s 33), These expenses are:

a. cost of repairs and maintenance of the property (plumbing repairs, replacement of damaged doors / windows)

b. insurance premium on fire / burglary

c. cost of supervision and rental collection

d. cost of obtaining tenant to replace the old tenant

e. interest paid on loan facility taken to finance the property

f. cost of renewing rental agreement and other miscellaneous expenses.

g. quit rent and assessment

h. security service

i. repainting of the rented premises.

Expenses not allowable

Cost of obtaining the first tenant (initial expenses) such as advertising, commision and legal expenses on the first rental agreement is not allowed because these expenses are incurred to create a source of income. It is not inccurred in the production of income.

Where rental income is assessed as a s 4(d) source, capital allowance cannot be claimed as only business source [ s 4(a)] is entiled to capital allowance.

s 4(c) Interest Income

Interest income as a business income (s 4B)

With effect from YA 2013, interest income will only be assessed as business income if:

a. interest is derived from a source which form part of the stock in trade of a business of a person

b. interest is receivable by a person from the business of lending money and that business is licensed under any written law. This applies to banking, insurance or money lending companies.

Derivation of interestincome

Any person receiving interest income will be subject to tax in Malaysia if:

a. the interest income is derived from Malaysia

b. the interest income is received in Malaysia from outside Malaysia (applies only to specialised industries companies)

Sectino 27(1)

Gross income consists of any interest when it first becomes receivable in the relevant period shall be treated as gross income of the relevant person for the relevant period when it has been received.

Section 27(2)

Where the gross interest income receivable overlaps two or more basis periods, then the interest will be apportioned to the relevant period and it is deemed accrued evenly.

It should be noted that the s 27(2) covers interest income that relates to past period. When the interest income is received, it will then be spread back to the past years on a time basis.

Section 27(3)

Section 27(3) deals with interest received in advance. Where interest is an investment income and received in advance for more than a basis period, the interest income would not be apportioned but instead be treated as gross income of the period in which it is received.

Exemption

Paragraph 35 of Sch 6 exempts interest or discount paid or credited to any individual, unit trust and listed closed-end fund:

a. in respect of securities or bonds issued or guaranteed by the Government

b. in repect of debentures or Islamic Securities other than convertible loan stock, approved by the Securities Commission

c. in respect of Bon Simpanan Malaysia issued by the Cebtral Bank of Malaysia.

Income Tax (Exemption) - Individual

a. a bank or a finance company licensed or deemed to be licensed under the Banking and Financial Institutions Act 1989

b. a bank licensed under the Islamic Banking Act 1983

c. a development financialinstitution prescribed under the Development Financial Institutions Act 2002

d. the lembaga Tabung haji established under the Tabung Haji Act 1995

e. the Malaysia Building Society Berhad incorporated under the Companies Act 1965

f. a co-operative society registered under the co-operative Societies Act 1993

g. the Borneo Housing Finance Berhad incorporated under the Companies Act 1965

s 4(c) Dividend Income

Dividend represents distribution or payment out of profits or any undistributed profits of a company to its shareholders in accordance with the shareholding ratio.

With effect from 1.1.2014, Malaysia operates fully on dividend single tier system. All Malaysia derived dividend is now tax exempt.

Bonus shares are not dividend income

Bonus shares are not income in the hands of shareholder. The company's asset has not been reduced in any way. The wealth of the company remained the same before and after the issuance of bonus shares.

Bonus share was held not to be dividend income due to the following principles:

a. the issuance of bonus shares did not release any assets of the company to its shareholders

b. the shareholders' holding remained the same after the issuance of bonus shares

c. there was no 'dividend' out of the accumulated profuts, the profits were devoted to increase the capital of the company.

Deduction of tax from dividend

With effect from 1 jan 2008, company is effectively placed on single tier dividend system. Any dividend paid out under single tier dividend system will be tax-exempt in the hand of shareholders.

Deduction of expenses

When the shareholders are assessed on the dividend income, they can only deduct expenses that are'wholly and exclusively' incurred in the production of the dividend income (s 33). This includes interest expenses, management charges, if a loan is taken to finance the investment of shares.

Exempt dividend

The following dividends received by a person are exmpt from income tax:

a. dividends paid, credited or distributed to a member of a co-operative society

b. dividends paid out of the exempt income of unit trusts and property unit trusts

c. dividend paid out of the exempt income of venture capital companies

d. dividends paid out of an exempt income account arising from tax incentives enjoyed by a resident company under the Promotion of Investment Act 1986.

e. dividend paid out of an exempt income account arising from tax incentives enjoyed by a resident company under the Income Tax Act 1967

f. dividends paid out of tax exempt account arising from foreign income recived in Malaysia by a resident company or unit trust.

g. dividends paid out of exempt income account arising from chargeable income for which tax is waived for YA 2000

h. dividend from Labuan Offshore Company

i. dividend from company paying under single tier dividend system (YA 2008 onwards).

Double Deduction for Expenses

The Malaysian Government encourages taxpayers to incur certain expenses in their business by providing double tax deduction for such expenses in arriving at their adjusted income.

Generally, the pre-requisites for the claiming of double deduction are:

a. the expenses must be revenue expenditure

b. such expenses must be eligible under s 33 and not prohibited by s 39

c. the expenses are related to the business activity.

The following are some example of revenue expenses that are eligible for double deduction:

a. promotion of export

b. approved training

c. research and development, cash contribution to approved research institute

d. advertising expenses on Malaysian brand names

e. freight charges incurred by manufacturers to ship goods from Sabah and Sarawak via ports in Peninsular Malaysia

f. insurance premium paid for import/export of cargo insured with local insurance companies

g. employment of handicapped staff

h. expenses in obtaining certification for recognised quality systems and standards, and halal certification.

Adjusted income

Sec 33(1) of the ACT provides: "... the adjusted income of a person from a source for the basis period for a YA shall be an amount ascertained by deducting from the gross income of that person from that source for that period all outgoing and expenses wholly and exclusively incurred that period by that person in the production of gross income from that source ..."

Section 39 lists out expenses that are specifically prohibited.

Adjusted income = Gross Income - Allowable expense (permissible by S 33)

The allowabble expenses must have all the following attributes as stated in S 33 in order to rank for deduction.

a. outgoings or expenses

b. wholly and exclusively

c. incurred

d. in the production of gross income.

The list of prohibited expenses as provided in S 39(1) is as follows:

a. domestic or private expenses

b. disbursement or expenses that are of 'dual' purpose

c. capital withdrawn / sum employed as capital

d. contribution to an unapproved pension and provident scheme

e. qualifying mining, agriculture, forest, prospecting, and farm expenditure

f. interest and royalty expenses where applicable withholding tax are not deducted and paid

g. payment for the use of licence or permit to extract timber from a forest in Malaysia other than to Government or statutory bodies

h. contract payment to non-resident where applicable withholding tax are not deducted and paid

i.special classes of income paid to non-resident where withholding tax are not deducted and paid

j.lease rental for motor vehicles in excess of Rm 50,000 or RM 100,000 (in certain cases) per vehicle, computed on aggregate basis

k.a sum equal to 50% of the entertainment expenses

l.leave passage for employees within and outisde Malaysia

m.remuneration paid to partner of a limited liability partnership (LLP) where such remuneration is not specified in the LLP agreement.

Gross Income

Gross income refers to the income upon which income tax is chargeable under s 4(a) to (f) of the Act.

Each source of income has to be determined separately and computed individually.

Gross income from a business source [s 4(a)] includes

a. sales and services rendered

b. insurance recoveries

c. compensation for loss of income

d. recoveries where such sums were given deduction in prior years

e. interest income

Gross income from employment [s 4(b)] include

a. salary, bonus, wages, directors' fee

b. benefits provided by employer (benefit in kind)

c. living accommodation provided by employer

d. withdrawal of contribution from unapproved pension scheme

e. compensation for loss of employment