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.