Employment is a contract between two parties, one being the employer and the other being the employee. In this relationship, the employer conceives of a productive activity, generally with the intention of creating financial revenues, and the employee contributes labour to the enterprise, usually in return for payment. Employment also exists in the public, non-profit and household sectors. An employer is any entity that hires employees; it can be a person, a company, an organisation or a corporation. There are a number of employment arrangements available, including full time employment, part time employment, casual employment, fixed term or contract employment, apprenticeships, traineeships, and probationary works. Employment allows an individual to be a valuable contributor to society and the economy, while providing for the needs of those under his/ her care. Being employed can also provide a sense of personal worth to the individual, and is a means for personal development.
1.1.1 Characteristic of Employment
There are few factors that link to make a person to be an employee such as personal services, presence of control, equipment, financial risk, basis of payment, benefits, sense of belonging to the organization, nature of contract, and intention of the parties.
When comes to employment, the duties will be perform by the employees themselves which means providing the service or task assigned by themselves but they also can hire another person to complete the task who are qualified to the job assigned. Meanwhile control is where employers take control over the employees in directing them the way to accomplish and perform a job.
Employment also exits when the employees use tools provided by the employer to perform a duty or task. As for self-employed individuals, they use their own tools.
Financial risk is where as for self employed they faced the risk for expected return, but as for employees, they only share the profits but not the risks. A payment is given for the employees in a fixed rate of salary either on a monthly or weekly basis. As for self employed individuals, they are given a professional fee upon the completion of the task or progressively throughout the engagement based upon agreed deliverables.
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An employee are entitle for benefits such as, sick pay, pension rights, Employee’s Provident Fund contribution, Socso contribution, annual leave, and many more but all these benefits are not applied for self employed. Employees normally have a great sense of belonging to a particular organization that they serve. Employees duties sort of link together with their employer’s business. There will be always an agreement or contract between the employers and employees, where it benefits for both parties such as for an employer they might expected the employee to perform work as promised, as for employee they want to protect the right against unfair dismissal.
1.2 Employment as defined in Section 2 of the Income Tax Act 1967
An employer is defined in Section 2 of the Income Tax Act (ITA) 1967.In general, employer means the party that pays remuneration to the employees, where there is an “employer-employee” relationship. For instance a manager, agent or person responsible for the payment of salary or wages to an employee, e.g. manager of a company, sole proprietor / partnership or any persons, whether or not statutory incorporated, e.g. an association. They also can be from Statutory Boards, Federal and State Governments.
Employment in which the relationship of master and servant subsists or any appointment or office, whether public or not and whether or not that relationship subsists, for which remuneration is payable.
As for employee, in relation to an employment, means where the relationship of master and servant subsists, the servant and that relationship does not subsist, the holder of the appointment or office which constitutes the employment.
The term employer, in relation to an employment, means where the relationship of master and servant subsists, the master and that relationship does not subsist, the person who pays or is responsible for paying any remuneration to the employee who has the employment, notwithstanding that that person and the employee may be the same person acting in different capacities.
2.1 What is Business Income?
According to Internal Revenue Service (IRS), a US government agency that is responsible for tax collection and tax law enforcement, defined business income as income received from the sale of products or services. Examples of what is considered as business income are fees received by a professional person and rents received by a person in the real estate business.
Section 2 of Income Tax Act 1967 states that a business is defined when the element includes a profession, vocation, trade and manufacture, adventure or concern in the nature of trade but excludes employment. The business receipts are what you called a business income.
According to Section 4(a) of Income Tax Act 1967, states that business income is subject to income tax provided that they are revenue in nature and derived from Malaysia.
Diagram below shows how to determine a taxable business income:
Is there a business source?
Yes
Are the business transactions incomes in nature?
Yes
Business income is derived from Malaysia?
Yes
Business income to be taxed in Malaysia
Diagram 1: Taxable Business Income
Foreign source income remitted into Malaysia, on the other hand, is exempted from tax. To know whether business income is attributable to operations of the business carried on outside Malaysia is when one or more of the following exists:
Contracts are concluded outside Malaysia
Stocks are maintained outside Malaysia from which orders are filled
Passing of ownership and risk of trading stocks takes place overseas
Sales proceeds are received overseas
Services are rendered outside Malaysia.
The above factors help us determine a clearer definition of business income and in what aspects business income is subjected or exempted from income tax.
2.2 What is Employee Income?
According to the “Essential Guide to Personal Income Tax in Malaysia” a 2009th edition book by Adam Malik et al, “employment is defined as being among else an appointment or office whether public or not and whether or not the relationship of master and servant subsist for which remuneration is payable”. In addition to the definition, an employment is deemed to exist when the relationship of master and servant subsists. The factors that can be used as a guide for employment definitions are as follows: control, personal service, equipment, financial risk, basis of payment, benefits, sense of belonging to the organization, nature of contract and intention to the parties. Receipts derived from one of the factors that defining employment is what you called an employment income.
Employment income derived from Malaysia is taxable both in the hands of resident and non-resident individuals. Foreign derived employment income, on the other hand is exempted from income tax. The situations wherein employment income is derived from Malaysia are as follows:
Employment Discharged in Malaysia: Employment income is deemed to be derived from Malaysia in the event that the employment is discharged in Malaysia.
Attributable Leave Pay: Leave pay is deemed to be derived from Malaysia in the event that the leave is attributable to the employment exercised in Malaysia.
Incidental Overseas Duties: Employment income in respect to overseas duties or assignments is taxable in Malaysia provided that the duties outside Malaysia do not serve an independent purpose but are connected to the Malaysian employment.
Malaysian Company Director: A director of a Malaysian resident company need not physically exercise any of the duties of his or her office in Malaysia and yet the remuneration he or she receives will be deemed to be from a Malaysian source.
Malaysian Operated Ship or Aircraft: Applicable upon employment exercised aboard a ship or aircraft used in a business operated by a Malaysian resident.
Employment in Public Service or Statutory Authority Outside Malaysia: Income of a Malaysian citizen attributable to employment exercised in the public service or in a statutory authority outside Malaysia is deemed to be derived from Malaysia.
In regard to the types of employment income, section 13(1) (a) to 13(1) (e) of the Income Tax Act 1967 grouped employment incomes into five categories:
Monetary or near monetary benefits: Any wages, salary, remuneration, leave pay, fee, commission, bonus, gratuity, perquisite or allowance in respect of having or exercising employment.
Benefits-In-Kind (BIK): Benefits or amenities which are not convertible into money and which are provided for the employee by or on behalf of his employer. Examples include car, fuel, driver, household furnishings and appliances, mobile phone, gardener and corporate membership in recreational clubs.
Unfurnished accommodation: The value of any unfurnished living accommodation in Malaysia provided by an employer to his employee.
Refund from unapproved funds: Funds are not approved by the Director-General under section 150 of the Income Tax Act 1967.
Compensation for loss of office and entering into restrictive covenants.
The types of employment income stated above must be reported in the employee’s tax return.
2.3 The Differences between Business Income and Employment Income for Income Tax Purposes
The difference between business income and employment income when it comes to tax is employment income is taxed under the section 4(b) and business income is taxed under section 4(a)
Table below shows the differences of business income and employment income that subject to income tax.
Subject to income tax
Business Income
Employment Income
Business income derived from Malaysia for any period of time.
Exercises an employment in Malaysia for any period of time
Tax is based on accounting period
Tax is based on calendar period
Depreciation on fixed assets
Performs duties outside Malaysia which are incidental to his employment in Malaysia
Include sole proprietor, private limited companies
Is employed to work on board an aircraft or ship operated by a person who is resident in Malaysia
Table below shows differences of business income and employment income that is exempted from income tax.
Exempted from income tax
Business Income
Employment Income
All expenses and outgoings incurred wholly and exclusively in the production of the business income
Leave passages provided to the employee, his spouse and children up to a maximum of RM3,000 for one overseas trip and up to a maximum of three local trips per year
Capital allowances
Retirement gratuities (on meeting certain conditions)
Specific provision of bad debts
Employees Provident Fund withdrawals
Interest on loan used in the business
Dental or medical treatment or child care benefit
Rental in respect of any land or building occupied
Foreign employment income remitted back into Malaysia.
Repairs and maintenance
Non- resident income that have exercised the employment for period not exceeding 60 days.
Many people try to cheat on their status of employee to any profession that is entitled to a business income, because they assumed that they can reduce their taxes more compared to being an employee. Tom Langford (2004) listed out several test by the courts in Canada to determine a person work status. First, they will look at the degree of control an employer has over the work to be performed. Second, the courts will examine whether the person, and the person’s work, is an integral part of the employer’s business, or whether it is just an accessory to the employer’s business. Third, they examined the tools and equipment is required on the job site to complete the work. Fourth, they analyzed whether the person has the chance of making a profit and the risk of loss. And finally, they investigated whether the person has been hired to achieve a specific result, or rather than merely placing his or her services at the disposal of the employer for a period of time without reference to a specified result.
If, upon a review of these aspects, it can be determined that the person is from a business element services, the expenses which that person wishes to deduct from income must still meet the requirements for deductibility. If the person has claimed to be from business element services but later fails to meet the requirements when challenged by the courts, there may be reassessed taxes, interest, and possibly penalties on the amounts claimed as deductions from income. Therefore, it is highly recommended that a person seek professional advice regarding their particular circumstances and needs before attempting to make a change in their work status.
3.1 What is Resident Individual?
Status of resident in Malaysia is examined according to Section 7 Income Tax (ITA) 1967 which had realest by Inland Revenue Board (IRB). “It should not confused with the permanent resident status granted to individuals by the Home Affairs Ministry” according to the chapter 2 “Essential Guide to Personal Income Tax in Malaysia” a 2009th edition book by Adam Malik et all. By right, for individual to had a resident status in a year of assessment (year the income tax are realest), individual must examine the section one after the other from Section 7 (1) (a) until Section 7 (1) (d).
The diagram shows how an individual can be granted as a resident, IRB will examined it by reference to the number of days an individual was in Malaysia by desirable quality of Section 7 of the Act. In the occurrence that if an individual does not fall under any of these circumstances in a particular basis year, therefore that individual are not resident for that basis year.
3.1.1 Benefit for Resident
Being gratifying a resident status may earn plentiful of benefit for the year of assessment. The key benefit as resident are
Personal relief: assumption from total income in arriving at chargeable income. (table 1 as per attach)
Income tax rate: As for non-resident individual, they are subjected to flat rate of 28%. Though the resident individuals are subjected to scaled income tax rate starting with 1% on the second RM 2500 and ending the scaled income tax with 28% on the income exceeding RM 250000, an example taken from “Essential Guide to Personal Income Tax in Malaysia” .(table 2 as per attach)
Rebate: Resident individual have right to plentiful tax rebate subject to certain condition being satisfied. In the event that the aggregate values of the rebates exceed the individual (residual) income charged, the excess will be a permanent loss. (table 3 as per attach)
Exemption: Resident can be exempted from tax only in the hands of resident individuals, most likely fall in royalties from literary or artistic work, income from cultural performance approved by Minister and / or income from musical composition. (table 4 as per attach)
Table 1 : Personal relief for individual (Resident) base year 2009. Sources from http://www.hasil.gov.my/lhdnv3e/individuIndex.jsp?process=21000&menu=34&expandable=1&pg_title=Tax%20Relief
No.
Individual Relief Types
Amount (RM)
1
Self and Dependent
8,000
2
Medical expenses for parents
5,000 (Limited)
3
Basic supporting equipment
5,000 (Limited)
4
Disabled Individual
6,000
5
Education Fees (Individual)
5,000 (Limited)
6
Medical expenses for serious diseases
5,000 (Limited)
7
Complete medical examination
5,00 (Limited)
8
Purchase of books, journals and magazines
1,000 (Limited)
9
Purchase of personal computer
3,000 (Limited)
10
Net saving in SSPN’s scheme
3,000 (Limited)
11
Purchase of sport equipment for sport activities
300 (Limited)
12
Interest expended to finance purchase of residential property. Relief of up to RM10000 a year for three consecutive years from the first year the interest is paid.
Subject to the following conditions:
(i) the taxpayer is a Malaysian citizen and a resident;
(ii) limited to one residential unit;
(iii) the sale and purchase agreement is signed between 10th March 2009
and 31st December 2010; and
(iv) the residential property is not rented out.
Where:
(a) 2 or more individuals are eligible to claim relief for the same property ; and
(b) total interest expended by those individuals exceeds the allowable amount for that year ,
Each individual is allowed an amount of relief for each year based on the following formula:
A x B
C
where;
A = total interest allowable in the relevant year;
B = total interest expended by the relevant individual in the relevant year;
C = total interest expended by all the individuals.
10,000 (Limited)
13
Husband/Wife/Alimony Payments
3,000 (Limited)
14
Disable Wife/Husband
3,500
15
Ordinary Child relief
1,000
16
Child age 18 years old and above, not married and receiving full-time tertiary education
1,000
17
Child age 18 years old and above, not married and pursuing diplomas or above qualification in Malaysia @ bachelor degree or above outside Malaysia in program and in Higher Education Institute that is accredited by related Government authorities
4,000
18
Disabled child
Additional exemption of RM4,000 disable child age 18 years old and above, not married and pursuing diplomas or above qualification in Malaysia @ bachelor degree or above outside Malaysia in program and in Higher Education Institute that is accredited by related Government authorities
5,000
19
Life insurance dan EPF
6,000 (Limited)
20
Insurance premium for education or medical benefit
3,000 (Limited)
Table 2: Income tax rate for individual (Resident) base year 2009. Sources from http://www.hasil.gov.my/lhdnv3e/individuIndex.jsp?process=21000&menu=13&expandable=1&pg_title=Income%20Tax%20Rate
Chargeable Income
Calculations (RM)
Rate %
Tax(RM)
0-2500
On the First 2,500
0
0
2,501-5,000
Next 2,500
1
25
5,001-10,000
On the First 5,000
Next 5,000
3
25
150
10,001-20,000
On the First 10,000
Next 10,000
3
175
300
20,001-35,000
On the First 20,000
Next 15,000
7
475
1,050
35,001-50,000
On the First 35,000
Next 15,000
12
1,525
1,800
50,001-70,000
On the First 50,000
Next 20,000
19
3,325
3,800
70,001-100,000
On the First 70,000
Next 30,000
24
7,125
7,200
100,001-150,000
On the First 100,000
Next 50,000
26
14,325
13,000
150,001-250,000
On the First 150,000
Next 100,000
26
27,325
26,000
More 250,000
On the First 250,000
Next RM
26
53,325
……….
Table 3: Rebate for individual (Resident) base year 2009. Sources from http://www.hasil.gov.my/lhdnv3e/individuIndex.jsp?process=21000&menu=42&expandable=1&pg_title=Tax%20Rebate
Income tax rebates for resident individual with Chargeable Income Less than RM35,000
Year Of Assessment
2001 – 2008
Year Of Assessment
2009 Onwards
No
Tax Rebate
(RM)
(RM)
a
Separate Assessment
Wife
Husband
–
350
350
–
400
400
b
Combined Assessment
Wife
Husband
–
350
350
–
400
400
Total
700
800
b
Assessment Where Husband Or Wife Does Not Has Any Total Income
Wife
Husband
–
350
350
–
400
400
Total
700
800
Other tax Rebates
No
Tax Rebate
(RM)
a
Zakat/Fitrah
Subject to the maximum of tax charged
b
Fess/Levy on
Foreign Workers
Subject to the maximum of tax charged
Table 4: Tax exemption for an individual (Resident). Sources from
http://www.hasil.gov.my/lhdnv3e/individuIndex.jsp?process=21000&menu=2&expandable=1&pg_title=Tax%20Exemptions
3.2 How a resident individual is charged under income tax if he derives income from employment and businesses.
Malaysia income tax is ‘territorial’. This mean all revenue income derived or accruing from Malaysia is subject to tax unless specifically exempted. More over, foreign source incomes remitted into Malaysia are exempted from being tax. The resident individual which had derive their income from employment and business, by right are be delineated by Section 4 of the income tax act 1967. According to Inland Revenue Board, the residual individual may need to commence a business in the year of assessment. The residual individual also has to declare their income using
Form B. If the residual individual has received Form BE, have it changed to Form B at the nearest branch or at the Processing Centre or
E-Filing. Select e-B although previously income has been declared in e-BE thru online application.
All the forms may be downloaded from the Inland Revenue Board website or collected from the head office.
The way to determine the individual income before a tax is determine the exact income and then subtract personal debt. The most formula using is Individual income – Personal Debt = residual Income. Most of the financial institution makes an assessment on individual residual income. However if there is a case where an individual would like to obtain a loan, they may need to determines how much money as the individual had left after paying off their entire obligation.
4.1 Conclusion
Employees in relation to an employment according to Section 2 of the Income Tax Act 1967 are defined as where the relationship of master and servant subsists, the servant. Second determination is where that relationship does not subsist the holder of the appointment or office which constitutes the employment. Beside that, employees a paid as salaries for service rendered. Nowadays, there are a number of employment arrangements available, including full time employment, part time employment, casual employment, fixed term or contract employment, apprenticeships, traineeships, and probationary works. The employee’s duties sort of link together with their employer’s business. An employer is defined in Section 2 of the Income Tax Act (ITA) 1967.In general, employer means the party that pays remuneration to the employees, where there is an “employer-employee” relationship. The business receipts are what you called a business income. According to Section 4(a) of Income Tax Act 1967, states that business income is subject to income tax provided that they are revenue in nature and derived from Malaysia. Foreign source income remitted into Malaysia, on the other hand, is exempted from tax. Contracts are concluded outside Malaysia Services are rendered outside Malaysia. The above factors help us determine a clearer definition of business income and in what aspects business income is subjected or exempted from income tax. Receipts derived from one of the factors that defining employment is what you called an employment income.
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Employment income derived from Malaysia is taxable both in the hands of resident and non-resident individuals. Foreign derived employment income, on the other hand is exempted from income tax. The situations wherein employment income is derived from Malaysia are as employment income is deemed to be derived from Malaysia in the event that the employment is discharged in Malaysia. Employment in Public Service or Statutory Authority outside Malaysia Income of a Malaysian citizen attributable to employment exercised in the public service or in a statutory authority outside Malaysia is deemed to be derived from Malaysia.
The types of employment income is classified into section 13(1) (a) to 13(1) (e) of the Income Tax Act 1967 grouped employment incomes into five categories. The types of employment income stated above must be reported in the employee’s tax return. The difference between business income and employment income when it comes to tax is both are tax under different section and based on different period system. The high lights of benefit being as resident individual are personal relief, assumption from total income in arriving at chargeable income. Income tax rate, as for non-resident individual, they are subjected to flat rate of 28%. Though rebate, resident individual have right to plentiful tax rebate subject to certain condition being satisfied.
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