Based on the above calculations, it may be discerned that Miss Emm’s income is subject to tax at an average rate of 13.94%, but any additional income beyond her current level of income will be taxed at 24% or more.
B. Residence planning
The tax residence status of an individual has a direct impact on the following:
- The applicable tax rate or the effective tax rate at which his income derived from Malaysia will be levied
- His eligibility for personal reliefs and tax rebates
- His eligibility for certain tax exemptions
- His eligibility for tax treaty benefits and double tax relief
As such, individuals who take up employment or business activities in Malaysia, and individuals who return to Malaysia after a prolonged absence are well advised to carefully plan their pattern of physical presence in Malaysia to achieve tax residence status or tax non-residence status.
Mr Asing expects to arrive in Malaysia for the first time in the last quarter of the year for a seven-month project as a representative of his employer which is a non-resident company. As it stands, three months in Year 1 and four months in Year 2 will not allow Mr Asing to achieve tax residence in either Year 1 or Year 2.
Residence planning, by rescheduling his stay in Malaysia into seven months entirely in Year 2 will facilitate tax residence status for Year 2.
Alternatively, a half month in Year 1 and six and a half months in Year 2, with no absences from Malaysia other than permitted 'temporary absences' will enable Mr Asing to qualify for tax residence for both Year 1 and Year 2.
Alternatively, if the job demands that the three months in Year 1 be strictly adhered to, prolonging the total length of uninterrupted presence in Malaysia in Year 2 to at least 182 days will similarly enable Mr Asing to qualify for tax residence in both Year 1 and Year 2. Remember that the extra days of physical presence need not be work-related.
From another perspective, it may be that Mr Asing may wish to avail himself of the tax exemption for short-term employment in paragraph 21 of Schedule 6. In this case, residence planning will have to focus on Mr Asing preserving his non-residence status, and on having Mr Asing’s employment in Malaysia last no more than 60 days in Year 1, or in Year 2 or in the two-year period. Remember here that the 60-day threshold refers to the period of employment, not the physical presence of Mr Asing.
As demonstrated in the illustration above, residence planning requires sound and detailed knowledge of all the rules of tax residence of individuals, especially that of s7(1)(b) and the tax exemption afforded in paragraph 21 of Schedule 6 relating to short-term residence.
C. Contract of service and contract for service
If it is established that an employment exists and is exercised in Malaysia, or the employment income is otherwise deemed derived from Malaysia, the employment income will be taxable in Malaysia notwithstanding that payment is made outside Malaysia.
Employment is said to exist where there is a master-servant relationship that denotes an employer-employee situation. This is a contract of service.
A contract for service, on the other hand, calls to mind a principal-agent relationship, or principal and independent contractor relationship – ie an inter-dependent relationship where the agent/contractor executes contractual tasks in return for a fee. Income accruing to a person in respect of a contract for service is not employment income and will therefore fall outside the ambit of employment income under s4(b). Such income would be treated as income from exercising a profession or carrying on a business, both chargeable to tax under s4(a).
Factors for determination
Whether a contract is one of service or for service is a question of fact. The circumstances of the case should be fully ascertained to facilitate its determination.
- Extent of control
The distinction between master and servant and an independent contractor is generally that in the case of a servant, the employer has the power to direct what the servant is to do and also to direct how the work is to be done, while an agent or independent contractor has relatively more independence in these aspects
- Degree of skill
The ‘how’ question or the control factor depends on the degree of skill involved. Clearly, the amount of direction given is dependent upon the skills of the parties concerned. However, it must be noted that the fact that an individual is highly skilled does not necessarily preclude him from being a servant to the employer.
Dr Ekspert is a highly-trained and experienced medical specialist. He is employed by ABC Medical Centre as the chief surgeon. He works full-time for the medical centre and is paid a monthly salary with bonus.
It is highly unlikely that the diagnoses or professional decisions of Dr Ekspert would be subject to any supervision. Nevertheless, he is an employee of ABC Medical Centre because the medical centre has a lawful authority to command him so far as there is scope for it.
- The nature of remuneration
The name tag for the remuneration may throw light, but is often not conclusive as on the nature of the payment. Merely describing remuneration as 'fees' rather than as wages does not decisively lead to the conclusion that there is an employment or otherwise.
An employee normally receives a fixed monthly remuneration while a contractor/agent receives payment based on his output or deliverable. Having said that, an employee may also be paid commission, bonus incentive payment, etc, based on performance.
An employee normally works full-time for his employer. However, be mindful that the full-time or part time nature of an arrangement does not by itself decide whether it constitutes an employment.
- Freedom to contract with other parties
A contract that specifically disallows a party from similarly contracting with others may prima facie lead to a presumption that the contract was one of employment. The restrictive covenant should, however, be examined to ascertain the extent of its exclusivity.
If the effect is such that there is residual scope for the individual to contract rather than render him completely excluded from a capacity to contract, it is possible that it is not an employment.
- Exercising profession or employment
An individual who exercises a profession in his own right and not under an employment is treated as carrying on a business.
- Basis of assessment
With effect from the year of assessment 2016, the basis period for employment income has been overhauled: employment income is now taxable in the year it is received. No longer is it related to the period for which it is receivable. This change is introduced to avoid re-opening prior year assessments to tax gratuities and payments made in arrears.
Business income is taxable on accrual basis – ie taxable in the basis period it first becomes receivable, regardless of whether it is received. Additionally, with effect from the year of assessment 2016, any amount received in advance in respect of a business source of income is treated as income in the year the amount is received, regardless of whether the services have been rendered or amenities have been enjoyed.
The basis year – ie the calendar year – continues to be the basis period applicable to an individual in respect of all his sources of income, including business source [section 21]. Therefore, for an individual carrying on a business, the accounts should be made up to 31 December each year.
Only losses arising out of a business source (ie from a trade, profession or vocation) can be deducted against other sources of income in the basis period the loss arises. If the current year loss is not absorbed in that year of assessment, any unabsorbed amount is carried forward to be set off against statutory income from all business income in the future. With effect from YA 2019, unabsorbed loss may be carried forward for set-off for seven consecutive years of assessment after the year of assessment in which the loss arose. Any amount of loss remaining unabsorbed after the seventh year of assessment will be disregarded.
- Capital allowances
An individual exercising an employment is not entitled to claim capital allowances on capital expenditure incurred on plant and machinery for use in his employment. Capital allowances are only granted in respect of a business source of income.
There is generally a wider scope for deductions for a business than for employment. In fact, some expenses – eg bad debts, interest, rental, etc – are only deductible in respect of a business.
D. Cash and non-cash remuneration
Remuneration for an employment may come in the form of cash and/or benefits in kind. Cash remuneration is straightforward in that the amount paid is the amount taxable as gross employment income. Benefits-in-kind, however, involve the valuation of such benefits. Therefore, the significance of non-cash remuneration is in its valuation for tax purposes. Such a value is added on to the cash remuneration in totalling up the gross income from employment.
These values are mainly provided in the Public Ruling 11 of 2019. S13(1)(c) spells out the basis of valuation by restricting the defined value of the accommodation provided to 30% of the remuneration under s13(1)(a).
Effectively, the employee derives the benefit of the company car, the free living accommodation, the domestic servant, the driver and leave passage, by bearing the tax chargeable on such prescribed values rather than defray the full cost of such benefits.
Mr Mustahak is provided with the free use of a company car (worth RM120,000 when new) and free living accommodation (defined value: RM48,000 per annum). His child’s school fees of RM14,000 is borne by his employer. He draws a monthly salary of RM8,000.
If Mr Mustahak were to be paid entirely in cash, his monthly salary would be RM14,000. The monthly rental of a car similar to the one he is provided with is RM500.
To determine the relative advantage of each package, a computation of Mr Mustahak’s disposable income for each of the packages would be instructive, as follows: