Topic 9

Employment Income
(Derivation & Exemption)
 Coverage
I. Characteristics of Employment
II. Basis Period and Year of Assessment
III. Income Tax Assessment on Employment Income
IV. Malaysian-derived Employment Income: Section 13(2)
of ITA 1967
V. Malaysian-derived Employment Income: Section 13(3)
of ITA 1967
VI. Exemption of Employment Income (Para 21 and 22, Sch
6)
I. Characteristics of
Employment
 Key Question

• Is an individual exercising an employment or is he

self-employed?
• Rests on its own circumstances i.e. case-by-case
basis
• Case law reveals that there is no single conclusive
test.
• Certain principles can serve as a guide.
 Employed versus Self Employed
An individual is more likely to be an employee if:
1. there is a master-servant relationship
2. the master has the right to control the method of doing works
3. the master has the right to terminate/dismiss/suspend
4. the work is full-time job and the employee has to perform it himself
5. the employee has no financial risk
6. the employee enjoys benefits (EPF, SOCSO, leave pay, etc.) & is part
of the organizational structure
7. the employee uses tools provided by the master to work
8. the employee’s duties form part of the business’ activities.
 EXAMPLE 9.1

Jack is an accountant by profession. At the same time, he is engaged

as a part-time model under a modelling agency in Kuala Lumpur.

Under the terms of Jack’s contract with the agency, he has to report
for duty at 8.00pm to 12.00am on weekends. in performing his
modelling assignments, he is provided with the clothing and other
necessary props by the agency. He is paid RM4,000 per month.

Required: Explain whether Jack is exercising an employment by

working as a part-time model.
 EXAMPLE 9.1
Jack is exercising an employment with the modelling agency.
1. There is a master-servant relationship. Jack has to obey the contract set
by the agency.
2. The master has the right to control the method of doing works. Jack has
to report and perform the duties as arranged by the agency.
3. Jack uses the clothing and props provided by the agency to model.
4. Jack’s modelling sessions form part of the agency’s business activities.
The salary of RM4,000 per month received Jack would be
deemed/assessable/taxable/liable to tax as employment income under
s4(b).
 IMPORTANCE OF DISTINGUISHING BETWEEN
“EMPLOYED” VERSUS “SELF-EMPLOYED”
Employed - employee Self-employed – sole proprietor
Type of s4(b) employment s4(a) business income.
income income.
Deduction Only expenses directly More flexible deductions under
rules for related to the s33
expenses employment are
deductible.
Adjusted loss Cannot be deducted as Deductible as current year
current year business business loss. Unutilised amount
loss. can be c/f for 7 YAs as unabsorbed
business loss.
Income tax Monthly salary Tax installment payments every
deduction deduction based on six months based on the CP500
prescribed schedules. form issued by IRBM.
 ADVANTAGES & DISADVANTAGES: EMPLOYMENT
INCOME VERSUS BUSINESS INCOME
s4(a) Business income s4(b) Employment income
Advantages: Advantages:
1. Flexible deduction of 1. EPF contribution by employer.
expenses [s33, s34(6), etc.]
2. Capital allowances are 2. Medical benefits, sick pay & leave pay
available. assured.
3. Unabsorbed business loss 3. Tax exemption on gratuity, compensation for
can be c/f. loss of employment.
4. Non-resident employees will be exempted
from tax when their employment period ≤ 60
days in a calendar year.
Disadvantage: Disadvantage:
1. Risk of business failure. 1. Risk of job termination.
II. Basis Period and Year of Assessment
 Basis Periods & YAs for Individuals
With effect from year of assessment (YA) 2004, the income
source of a person (individual, Hindu joint family, estate
under administration, club, and association) will be on
calendar year basis.
III. Income Tax Assessment
on Employment Income
Income Tax Assessment on Employment Income

Employment income would be assessed in Malaysia

under the following circumstances:
• the employment income is deemed derived from
Malaysia [s13(2), s13(3)];
• the employment income is received in Malaysia from
outside Malaysia (i.e. foreign source employment
income) by a Malaysian tax resident
 Malaysian-derived Employment Income

Once the employment income is deemed derived from Malaysia

[s13(2), s13(3)], it will be assessable to tax in Malaysia regardless
that;
• the employer is not in Malaysia
• the employee is not tax resident
• the payment of employment income is made outside Malaysia
• the employment income is not received in Malaysia
IV. Malaysian-derived
Employment Income:
Section 13(2) of ITA 1967
 Section 13(2) of ITA 1967
“Gross income in respect of gains or profits from an
employment:
a. for any period during which the employment is exercised in
Malaysia;
b. for any period of leave attributable to the exercise of the
employment in Malaysia;
c. for any period during which the employee performs outside
Malaysia duties incidental to the exercise of the employment
in Malaysia;
[Continued]
 Section 13(2) of ITA 1967
[Continued]
d. for any period during which a person is a director of a company
and that company is resident in Malaysia for the basis year for a
year of assessment and within that basis year that period or part
of that period falls; or
e. for any period during which the employment is exercised aboard
a ship or aircraft used in a business operated by a person who is
resident in Malaysia for the basis year for a YA and within that
basis year that period or that period falls.

shall be deemed to be derived from Malaysia”.

 Section 13(2)(a) of ITA 1967
• Employee discharging duty in Malaysia as assigned by
employer = exercising employment in Malaysia = employment
income is to be deemed ‘derived’ from Malaysia.
• Source of employment is irrelevant.
• Discharging part of employment duties in M’sia is also
deemed as exercising employment in M’sia.
• Physical presence of employee in M’sia does not count as a
factor.
 Example 9.2
Mr. Eric is employed by Yoyo Denmark, a family owned
company in Denmark. From early 2019 to the end of 2020, he
has been stationed in Penang to set up a factory as a joint venture
between Yoyo Denmark and a local trading company, to
manufacture cordial drinks.

Mr. Eric has chosen to have his remuneration paid partly in

Malaysia and partly in Denmark.

Required: State, with reasons, whether the remuneration received

by Mr. Eric in Denmark would be subject to Malaysian income
tax.
 Example 9.2
• According to Section 13(2)(a), Mr. Eric is an employee
exercising his employment in Malaysia. He carried out his
duty of setting up a factory in Penang on behalf of his Danish
employer.
• Thus, his income would be deemed derived from Malaysia,
irrespective of the place of payment.
• As such, his remuneration which he received in Denmark
would be subject to income tax in Malaysia. By right, all his
income (received in M’sia & Denmark) would be assessable in
M’sia.
 Example 9.3

Mr. Stacey Lang is a Malaysian tax resident. In December 2019,

he had entered into an employment with Dream Home Bhd. as a
marketing director of its subsidiary, Dream Home (Indonesia)
Ltd. Throughout the five-year tenure of the contract, all the
remuneration benefits will be paid into his bank account in
Indonesia.

Required: Discuss whether the remuneration benefits received by

Mr. Stacey will be assessable in Malaysia for YA2020.
 Example 9.3
The employment income received by Mr. Stacey Lang from his
employment in YA2020 was not derived from M’sia since the
duties and functions of his employment were wholly performed
outside M’sia (i.e. in Indonesia) even though the source of
employment is indeed in M’sia.
 Section 13(2)(b) of ITA 1967
 Salary received in respect of leave period which is attributable
to the exercise of employment in Malaysia is deemed to be
derived from Malaysia.
 Place that the entire period of leave was spent is irrelevant.
 Example 9.4
Samuel, who is a British citizen, was employed as a lecturer in
Multimedia University Malaysia since 1st January 2010.

During the year 2020, he took a two-month leave to return to

England from 21st September to 20th November. His salaries for
that period was credited to him in England.

Required: Would the salaries he received during his leave be

assessable to tax in Malaysia?
 Example 9.4

• As his leave is attributable to the employment he exercised in

Malaysia, the salary he received while on leave would be
taxable in Malaysia notwithstanding that it was paid outside
Malaysia [S13(2)(b)].
• The fact that the leave is spent in England is irrelevant
according to GBH v Ketua Pengarah Jabatan Hasil Dalam
Negeri (1994).
 Section 13(2)(c) of ITA 1967
• An individual exercising employment in Malaysia may be
required to perform duties outside Malaysia.
• If the overseas duties are connected to the Malaysian
employment, the overseas duties would be deemed to be
‘derived’ from Malaysia or ‘incidental to’ the Malaysian
employment.
• The employee would have to discharge his duties in
Malaysia first before taking up the overseas assignment.
• The income from the overseas duties will be foreign
employment income and taxable in Malaysia.
 Example 9.5
Mr. Ashoka works as a sales manager for Confectionary Sdn.
Bhd. He spends three months each year in Singapore and Brunei
to promote sales of his company’s products.

The preparation works for his sales visits are carried out in
Malaysia. After the visits, reports for submission to his superior
are prepared in Malaysia.

Required: Is Mr. Ashoka’s income from the months he works

outside Malaysia taxable in Malaysia?
 Example 9.5
• His income for the three months he spends working outside
Malaysia is taxable in Malaysia as the overseas works are
incidental to his exercise of employment in Malaysia.
• The overseas works are connected to his position as a sales
manager in Malaysia.
• All pre- and post-visit works are conducted in Malaysia.
• Therefore, by virtue of Section 13(2)(c) of ITA 1967, his gross
income received from the months working in Singapore and
Brunei is deemed to be derived from Malaysia.
• This is in accordance with GBH v Ketua Pengarah Jabatan
Hasil Dalam Negeri (1994).
 Section 13(2)(d) of ITA 1967
• A specific provision applied to director of a company.
• Remuneration received by a director of a resident company shall
be deemed derived from Malaysia notwithstanding that he does
not discharge his duties in Malaysia.
• Note: A company is tax resident in Malaysia when it exercises
its management and control (e.g. board of directors meeting),
even for only one time, in Malaysia.
• If Section 13(2)(d) is not applicable, then Section 13(2)(a) shall
apply.
 Example 9.6
Wong is a director of Nu Life Sdn. Bhd., a Malaysian resident
company, for the calendar year 2020. He is a resident of Hong
Kong and does not discharge his duties in Malaysia.

Wong receives directors’ fees of RM24,000 from Nu Life Sdn

Bhd in 2020.

Required: Is the director’s fees Wong receive liable to income

tax in Malaysia?
 Example 9.6

The director’s fee Wong receives is liable to income tax in

Malaysia.
Even though he does not discharge his duties in Malaysia, the
director’s fees is deemed to be derived from Malaysia as it is paid
by a Malaysian resident company [s13(2)(d)].
 Section 13(2)(e) of ITA 1967
• Employees of resident sea or air transport operators in Malaysia
are deemed to derive their gross employment income from
Malaysia.
• The derivation scope relies on the residence status of the
employer/company and not the place of the performance of
duties by such employees.
• Exemption for employees exercising employment on
Malaysian-registered ship [Para 34, Sch. 6] will be covered in
Advanced Taxation.
V. Malaysian-derived
Employment Income:
Section 13(3) of ITA 1967
 Section 13(3) of ITA 1967
• The income of an employee will be deemed to be derived
from Malaysia when:
• he is a Malaysian citizen; and
• his employment is exercised in the public service or a
statutory authority.
covers exercise of employment in M’sia, leave pay
received outside M’sia, overseas duties.
• It is notwithstanding that the employment is exercised outside
Malaysia or the leave pay is attributable to the exercise of
employment outside Malaysia.
 Example 9.7
Dr. Shafie is a Malaysian citizen. He works in the
Malaysian Embassy in Medan, Indonesia.

Required: Advise Dr. Shafie as to whether his income from

discharging his services in Medan, Indonesia is taxable in
Malaysia.

As Dr. Shafie is a Malaysian citizen and is employed by

Malaysian government as a public servant, his income would
be deemed to be derived from Malaysia notwithstanding that
the employment is exercised outside Malaysia by virtue of
Section 13(3).
 VI. Exemption of
Employment Income
(Para 21 and 22, Sch 6)
 Exemption of Employment Income
(Para 21 and 22, Sch 6)
• In order to apply for income tax exemption on employment
income, the employee must be
• a non-tax resident in the YA
• he has exercised employment for period/periods not
exceeding 60 days

• The exemption will not be available to company director(s).

 Example 9.8

Yusuf Adebola is a Nigerian architect who had exercised his

employment in Malaysia for the following periods.

12/12/2019 – 31/12/2019 Working in Putrajaya

01/01/2020 Vacation in Singapore
02/01/2020 – 20/02/2020 Working in Putrajaya

Required: Advise Yusuf as to whether his employment income

during these periods is taxable in Malaysia.
 Example 9.8

Yusuf Adebola’s employment income will be treated as

follows:
YA No. of Tax Remarks
days in treatment
M’sia
2019 20 days Exempted No. of days present in
2020 50 days from tax M’sia < 60 days
 Example 9.9
Yusuf Adebola is a Nigerian architect who had exercised his
employment in Malaysia for the following periods.

12/12/2019 – 31/12/2019 Working in Putrajaya

01/01/2020 Vacation in Sabah
02/01/2020 – 20/02/2020 Working in Putrajaya

Required: Advise Yusuf as to whether his employment income

during these periods is taxable in Malaysia.
 Example 9.9
Yusuf Adebola’s employment income will be treated as follows:

YA No. of Tax Remarks

days in treatment
M’sia
2019 20 days Assessable to Total no. of days
tax continuously present in
2020 51 days Assessable to M’sia during the YAs >
tax 60 days.
THE END