Understanding Income Tax

This section discusses:

  • Determination of the tax category.

  • Determination of the tax scale.

  • Determination of the tax method

  • Determination of the taxable gross.

  • Calculation of the tax.

The system uses the tax deduction table to determine which tax deductions apply to a payee. The table that is used depends on the payee's marital status, gender, and spouse's employment status. The system uses the formula TAX FM CATEGORY, data from HR, and the Payee Details page to assign tax categories. This formula is referenced by the formula TAX FM INIT (INITIALIZATION TAXES), which is resolved first in the TAX SE CALC section.

Note: The system retrieves the tax category only when using the formula method of tax calculation.

The system determines the appropriate tax scale by assessing the payee's eligible children. Applicable criteria are the child's age, student status, the child's marital status, and disability. The system uses the formula TAX FM DERIVE SC and data from HR (including the Full Time Student and Student in Malaysia fields on the Update Dependent/Beneficiary page) to determine the tax scale.

To calculate taxes, the system can use either the tax scale method or the formula method which is also called the computerized calculation method. You make this selection by setting the variable TAX VR METHOD to S (scale method) or F (formula method).

When using the tax scale method, you can override the tax scale at the payee level by using the Maintain Tax Data MYS - Payee Details page. When using the formula method, you can override the category and number of dependents at the payee level by using the Maintain Tax Data MYS - Payee Details page.

Note: The system is delivered with TAX VR METHOD set to F.

The taxable gross is the amount in each pay period that the system uses to calculate tax liabilities.

Using the Scale Method

The payroll system calculates the taxable gross amount by subtracting all of the nontaxable earnings and pretax deductions and benefits from the total gross income. To accomplish this, the system uses TAX FM BASE and TAX FM ANN BASE, which use the regular gross amount and annual gross amount, respectively.

Taxable gross consists of three tax classes: regular tax (TAX AC REG GROSS), annual tax (TAX AC ANN GROSS), or previous year tax (TAX AC BASE PY).

Using the Formula Method

The payroll system calculates the income for the year subject to the tax, by performing the following calculation:

  • Add the net income received up to the previous month including additional annual income.

  • Add the income received in any previous employment.

  • Add the net income for the current month.

  • Add the projected net income for the remainder of the year.

  • Add the annual income for the current month (only for the annual tax calculation).

  • Subtract the optional and allowable deductions for the fiscal year.

  • Subtract EPF (subtract no more than 6000 MYR per year).

To accomplish this, the system uses TAX FM COMP FL CLC which uses chargeable income for the year excluding the current month's annual income, and TAX FM CMP AN BASE, which uses chargeable income for the year including the current month's annual income. Segment gross, which contributes to the chargeable income for the year subject to the tax, consists of three classes:

  • Regular income (TAX COMP REG GROSS).

  • Annual Income (TAX COMP ANN GROSS).

  • Previous year income (TAX AC BASE PY).

The system uses a scheduler tax-calculation process. The one it uses depends on the tax method that you select using the variable TAX VR OPTIONS. The possible processes are:

  1. Calculate no tax for the period.

  2. Calculate taxes as a flat percentage.

  3. Divide the month into two pay periods.

    For the first pay period, the system predicts the total monthly tax deduction (using formula TAX FM COMPTE OPT3) and applies this amount. In the last pay period, or for terminated employees, the system automatically calculates the reconciliation deduction using formula TAX FM COMPTE OPT4.

  4. Calculate the monthly tax for the month to date (MTD) income and subtract the previously calculated taxes using formula TAX FM COMPTE OPT4.

  5. Divide the month into two pay periods.

    For the first pay period, the system predicts the total monthly tax deduction (using formula TAX FM COMPTE OPT3), compares it with the amount that is calculated through method 4, and applies the larger of the two. In the last pay period, or for terminated employees, the system automatically calculates the reconciliation deduction using formula TAX FM COMPTE OPT4.

Note: The variable TAX VR OPTIONS operates at a collective level. You can override it at the payee or organizational level.

Annual Tax Calculation Using the Scale Method

The system calculates annual tax in this way:

  1. Derives Tax A by adding the MTD scheduler tax income and the recurring monthly rate for the missing period of the month when the period end date is not equal to the month end date.

  2. Derives Tax B by adding 1/12 of the MTD annual tax income to the income that is used to calculate MTD tax.

  3. Determines the annual tax, where

    (Annual Tax) = (Tax B – Tax A) × 12.

Note: When a non-contractual bonus for the current year needs to be run before the regular payroll for a particular calendar, you must replace the value that is contained in formula CMN FM REMPER with a 1 at the calendar level override.

See Delivered Deductions Elements.

STD Calculation Using the Formula Method

The system uses the TAX FM COMP FL CLC formula to calculate regular STD (scheduler tax deductions) in the following manner:

  1. Net STD for current month equals STD for current month minus Zakat and Fee/Levy for the current month.

  2. STD for the current month equals:

    [(P-M)*R+B]-(Z+X)/n+1

    • P is the chargeable income for the year subject to the tax. The system adds the net year-to-date income up to the current month, plus the income received in any previous employment, plus the current month net income projected for the remaining months of the year, plus the annual income (only for the annual tax calculation), subtracting any optional and allowable deductions for the fiscal year

    • Up to 6000 MYR per year EPF is subtracted to determine the chargeable income P.

    • Z is the total year-to-date of zakat paid other than the zakat/fee for the current month.

    • X is the total year-to-date STD paid up to the previous month.

    • N is the number of remaining months in the fiscal year.

  3. The system calculates the projected EPF subject to the chargeable income for the remaining months using the formula EPF REG TAX PROJ.

Annual Tax Calculation Using the Formula Method

The system uses the formula TAX FM CMP AN BASE to calculate any additional annual remuneration tax in this way:

  1. Determines the total STD for the year by adding the accumulated year-to- date STD and current month-to-date STD multiplied by the number of months remaining in the year.

  2. Derives the chargeable income for the year using the following formula:

    P = [Σ(Y–K*)+ (Y1 – K1*)+[(Y2 – K2*) x n]+(Yt – Kt*)] – [D+S+1000C + ΣLP LP1)]

    Where (Yt –Kt*) is the net annual income (MTD) for the current month after subtracting EPF calculated for annual income received for the month.

  3. Derives the total tax for the year for the chargeable income P.

  4. Determines the annual tax by subtracting Step 1 from Step 3 and adding any Zakat/Fee paid before the current month. STD for additional remuneration equals Step 3 - [Step 1[D] + Zakat and fee/levy which has been paid]

Previous Year Tax Calculation Using Collective Agreement

Collective Agreement combines both the scale and the formula methods of calculating previous year taxes on the additional remuneration paid for previous years as arrears in the current year. For additional remuneration coming from fiscal year 2008 and before, tax is computed using the scale method. For additional remuneration coming from fiscal year 2009 and after, tax is computed using the formula method. For example, when the salary adjustment was paid for three previous years, the tax amount is derived based on the respective year of tax-relating information such as tax category, number of dependents, taxable gross, EPF amount, and tax amount. Tax calculation method and other tax parameters pertaining to each of the previous years are also considered.

With Collective Agreement, the system can manage retroactive payments for up to five previous years. Remuneration of each of the five previous years is segregated and forwarded to five different elements in the current year. This functionality has introduced five override sets (1, 2, 3, 4, and 5) catering to each of the five previous years. Override set number 99 is to forward retro deltas coming from the current year.

  • Formula TAX FM PY COLLCALC is derived from the formula TAX FM BASE and is used to calculate the taxes for previous five years remuneration using Collective Agreement.

  • Formula TAX FM COLLEC CALC is used to calculate taxes on previous year additional remuneration. Depending on the previous year from which the arrear comes, either the formula or the scale method is used.

  • Formula TAX FM CMP PRE YR is used to fetch previous year’s data from the historical rule TAX HR CMP PREV YR using the formula method.

  • Formula TAX FM PRE YEAR is used to fetch previous year’s data from the historical rule TAX HR PREV YR AC using the scale method.

  • The duration element, CMN DR RETRO YR, returns the difference between the current year and previous year(s).

  • The retro deltas of each of the previous year’s remuneration are forwarded separately to separate earning elements.

  • The retro process override formula element, CMN FM RTO_TYPE, is modified to return the correct Override set number based on the retro year.