What are the differences between 'Contract for Service' and 'Contract of 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.