Chapter 3 PTX2053/ Industrial Building Allowance

CHAPTER 3

INDUSTRIAL BUILDING

ALLOWANCE

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Chapter 3 PTX2053/ Industrial Building Allowance

1.0 INTRODUCTION
Industrial Building Allowance (IBA) is granted to companies incurring capital expenditure on
construction or purchase of a building which is used for specific purposes. In this regard, companies
are eligible for an initial allowance of 10% and an annual allowance of 3% from the QBE.

2.0 INDUSTRIAL BUILDING

Section 2, ITA 1967 defines building is any structure erected on land (not being plant & machinery).

Schedule 3, para 63 specifies the types of building that qualify as an industrial building includes:

i) A factory
ii) A dock, wharf, jetty or other similar building
iii) A warehouse
iv) Building used in the utility business (supplying water or electricity) or telecommunication
service
v) Building used in the working of a mine or farm

3.0 FACTORY
Para 64, defines factory as:

(i) A building used in the manufacture of any product or the subjection of goods or materials to
any process or the generating of power used for the purposes of that manufacture or process
(ii) A building used incidental to the manufacturing business – a workshop used for the repairing
goods which is incidental to a business of selling those goods – NOT considered as industrial
building.
(iii) A building used for storage of any materials for the manufacture of that product (within the
same cartilage)1

1
within the same cartilage : a building attached or adjacent to or within the same enclosure as the factory building

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Chapter 3 PTX2053/ Industrial Building Allowance

Industrial building

Construction building Purchase building

QBE = QBE = Purchase Price

(i) Architect’s fess
(ii) Construction cost
(iii) Cost of preparing plans – obtaining the
approval from local authority
(iv) Cost of clearing old site/demolition cost *
(v) Incidental cost – drainage, installation of
water and electricity
(vi) Legal charges, stamp duty – connected with
/ acquisition of building
(vii) Interest expense on loan borrowed to
construct the building till its completion
(viii) Other expenditure to an existing building
which will not qualify as revenue expenses
or as repairs and maintenance.

NOTE :
*demolish IB is not qualify
Demolish NIB is qualify

The cost of land, legal fees relating to the acquisition of land and legal expenses on loan borrowed to construct the
building -would not qualify for IBA

Industrial Building Non Industrial Building

Building
Factory Office
Warehouse Showroom
Hospital House
Staff welfare Retail shop

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Chapter 3 PTX2053/ Industrial Building Allowance

IBA is granted to an industrial building and approved buildings used for the following purposes:
IA (%) AA (%)
(a) Industrial Building (factory) 10 3
(b) Building constructed & provided as living 40 3
accommodation for individuals employed in a business
bina bangunan utk buat hostel at the same time
where an IB is in use. kena ada factory baru bleh apply

(c) Capital expenditure on public roads and ancillary 10 6

structures recoverable through toll collection.
(d) Building (construct or purchase) for the provision of 0 10
child care facilities.
(e) Building (construct or purchase) used for providing
living accommodation to employees engage in a :
- Manufacturing business 0 10
- Hotel or tourism business or approved service 0 10
project. dy tk dak factory

(f) Building (construct or purchase) used for a school or an 0 10

educational institution approved by the Minister of
Education.
(g) Building (construct or purchase) used as warehouse for 0 10
the storage of goods for export or imported goods to be
process for re-exported
(h) Warehouse buildings which are used for storing goods - 10
for exports and re-export;
(i) Approved industrial training, technical or vocational - 10
training and education;
(j) Private hospital, maternity home, nursing home. 10 3
(k) Kindergarten – construct or purchase - 10
(l) Old folks care Centre 10
(m) Canteen, restroom, recreation room, lavatory, 10 3
bathhouse, bathroom, washroom for employees
(n) Hotel registered under MOTAC 10 3
* A warehouse of a RETAIL shop would not qualify since the retailer does not manufacture goods.
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Chapter 3 PTX2053/ Industrial Building Allowance

4.0 10% RULES

Where only part of a building or an extension to a building is used as an industrial building, the
whole building is to be treated as industrial building if the capital expenditure on the construction of
that part which is not in use (not qualifying part) is less than 10% of the cost of constructing the
whole building

i) If the area of NIB is 10% or less from the whole building – NIB considered/treated as IB
ii) If the area of NIB is more than 10% from the whole building – differentiate between IB
and NIB
4.1 Determination of 10% Rule:
4.1.1 Level
Area of Non Industrial Building (NIB)
Level 10
9 - Used as an office
8
7
6
5
4
3
2
1

Level 10
9
8 - Used as an office
7 - Used as meeting room
6
5
4
3
2
1

4.1.2 Square feet

The building with a 1,200 sqf, 40 sqf is for office.

4.1.3 Percentage
20% of the total floor space of the factory building was used as an office.

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Chapter 3 PTX2053/ Industrial Building Allowance

5.0 75% RULES

Where capital expenditure is incurred on preparing, cutting, tunneling or leveling land in order to
prepare a site for the installation of the machinery if such expenditure exceed 75% of the aggregate
cost of that plant or machinery and installation cost, then the aggregate expenditure is treated as
qualifying building expenditure.

Plant and machinery

Cost of machinery A
Preparing site for installation cost B
Total cost C

If B>75% of C, then C will be treated as QBE

If B≤75% of C, then A will be treated as QPE

6.0 INITIAL ALLOWANCE

An initial allowance of 10% on a straight –line basis of QBE would be given if all the following
condition is fulfilled:

i) Incurred QBE on the construction or purchase IB

ii) Building was used as an IB
iii) The person owned the building at the end of the basis period

7.0 ANNUAL ALLOWANCE

Annual allowance is given for a YA to person who-

i) Incurred QBE on the construction or purchase IB

ii) Building was used as an IB
iii) The person owned the building at the end of the basis period

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Chapter 3 PTX2053/ Industrial Building Allowance

8.0 RENTED BUILDING

Not qualify as IB, except renovation cost (incurred on such rented IB (not owned) shall be granted.

9.0 DISPOSAL
An IB is disposed on:
i) Sale, transfer or assignment of the relevant interest in the building
ii) Demolition or destruction of the building
iii) Building is ceased to be used as an IB

9.1 Disposal value

The disposal value of a building is an amount equal to its market value at the date of
disposal. Where the building is sold, transferred or assigned the disposal value will be:
i) Its market value at the date of sale, transfer or assignment; or
ii) The net proceed of sale, transfer or assignment

Whichever is the greater.

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Chapter 3 PTX2053/ Industrial Building Allowance

TUTORIAL
QUESTION 1

Hepii Feet (M) Bhd commenced a business as a manufacturing company on 1 July 2015 and prepares
its first set of accounts on 30 June annually. The company constructed a factory building on 10
A/P
March 2016. It was complete and immediately put into use on 30 April 2018. The following
expenditures were incurred for the construction of the factory:

Date Expenditures RM

6.7.2015 Acquired a piece of land 700,000

NIB
18.3.2016 Demolition of old office building situated on that land 148,000
1.5.2016 Architect's fee - design of building 12,000
7.7.2016 Approval of plan - Local authority 8,000
17.3.2017 Plumbing and wiring 35,000
18.3.2017 Installation of fittings forming part of the building 30,000
18.4.2017 Contractor's cost 240,000

As agreed by the DG, the gross built up area was allocated for the following purpose:

Square metres

Factory 35,000 IB
Storage of raw material, fuel and goods in process 10,000 IB
(not for import/export concern)
Showroom 2,500 NIB
Office/meeting room 5,700 NIB

On May 2020, Hepii Feet (M) Bhd also constructed a living accommodation for the factory workers
QBE
amounting to RM380,000.

In April 2021, due to inadequate storage space, Hepii Feet (M) Bhd decided to rented a nearby
NIB
bungalow house of which rental was RM15,000 per month. The company had to make a minor
Bleh claim as IB
renovation to the bungalow costing RM200,000. The building is situated within the same cartilage as
the factory.

Required:

a) Compute the Industrial Building Allowances or Charges (if any) up to the year of
assessment 2021. [Showing all necessary workings].
b) List four (4) expenditures do not qualify as qualifying building expenditure.
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Chapter 3 PTX2053/ Industrial Building Allowance

QUESTION 2 A/P : 1/3 - 30/4

YAALA Industries SdnBhd (accounting date 30 April) acquired a piece of land in the town of Ampang
- not qualified as IBA
for RM4,500,000 in order to construct its factory and other buildings.

For the year assessment of 2019, the company constructed a factory cum office block at a cost of
RM1,200,000. The total built-up area of this block was 450,000 sq. feet of which the
sales/administration office occupied 67,500 sq. feet. - 10% rules

On April 2019, the company incurred RM420,000 on the preparation of a site for the installation of
plant and machinery and cost of the plant and machinery was RM105,000. On 18 July 2020, the
plant and machinery was sold for RM300,000.

In July 2017, YAALA Industries Sdn Bhd constructed an additional building as a living accommodation
for its hostel employees. The company paid RM690,000 for the building. The living accommodation
AP
was ready to be used on 31 March 2020.

The company also required a premise for carrying on an approved industrial training. It managed to
lease a shop house near its business premises at an annual rental of RM96,000. An amount of
RM105,000 was incurred on 1 January 2020 for renovation of the shop house to carry out the
industrial training.

Required:

a) Compute the industrial building allowances for the year of assessment 2021. (Explain or show
your computation separately for each type of industrial building)

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Chapter 3 PTX2053/ Industrial Building Allowance

QUESTION 3

IRAB S/B bought a piece of land and decided to construct its own building. An old building on the
land which is was previously used as an industrial building was demolished and a 20,000 square feet
building was constructed at the following costs.

Cost of land 400,000

Legal fee and stamp duty (RM8,000 relating to acquisition of land) 29,000
Cost of demolishing the old building 12,000
Architect’s fees 18,000
Cost of internal road 75,000
Construction costs 360,000
Wiring and plumbing 21,000

The building was complete and brought into use on 1 July 2017 as follows:
Area (square feet)
Factory 10,000
Office 4,000
Showroom 4,000
Canteen and recreation room 2,000

Due to lack of space, on 31 March 2019 the company rented a warehouse 8 kilometers away which
was used to store raw material for the manufacturing process, rental was RM12,000 per annum.

On 1 May 2019, IRAB S/B acquired a piece of land and constructed another building for RM125,000
(inclusive of land cost RM35,000). The building was complete and used as manufacturing
employee’s accommodation on 31 January 2020.

On 31 August 2020, due to financial problem, the factory building was sold to Kel S/B for
RM700,000. Kel used the whole building as a factory.

IRAB S/B makes up their account to 28 February each year respectively.

Compute the industrial building allowances for Irab SB for the relevant years of assessment up to
year of assessment 2021.

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Chapter 3 PTX2053/ Industrial Building Allowance

QUESTION 4

Rezeki Firman Sdn Bhd was incorporated on 1 May 2010 and its accounts are made up to 30
November annually. On September 2017, the company purchased a plot of land in the town of
Kuantan. An old building on the land previously used as administration office was demolished and a
150,000 square feet factory was built on that land at the following costs:
RM
Cost of land site 590,000
Legal fee and stamp duty (RM8,000 relating to acquisition of land) 16,900
Architect's fees 42,000
Cost of demolishing the old building 12,000
Cost of approving plan from the local authority 21,000
Cost of internal roads and parking 75,300
Drainage and irrigation 31,800
Construction costs (including materials, labour and overheads) 384,000
Wiring and plumbing 21,000

Upon completion the building was immediately used for industrial purpose in October 2019. Space
occupied was estimated as follows:

Square feet
Factory 120,000
Canteen, surau and recreation (for workers) 12,000
Office 18,000

In addition, on 1 February 2019, the company incurred RM 452,000 on the preparation of a site for
the installation of plant and machinery. The cost of the plant and machinery was RM72,300. The
company also incurred the following expenditure for the plant and machinery:

RM
Transportation charges 33,000
Wiring 17,300
Insurance 26,000

Due to lack of space, on 31 March 2020 the company rented a warehouse 24 kilometers away which
was used to store raw materials for the manufacturing process. Rental was RM35,700 per annum.

On 1 June 2021, the factory building was sold to Jannah Manufacturing Bhd for RM 728,000 of
which RM 124,200 was related to the cost of land. Jannah Manufacturing Bhd was used 9% of the
building as an office. Its accounts are made up to 31 August annually.

Required:
Compute the industrial building allowances for each company for the relevant years of
assessment up to year of assessment 2021.
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Chapter 3 PTX2053/ Industrial Building Allowance

QUESTION 5

Colorcoil Sdn Bhd just opened up business to supply paints for the domestic market and export. The
company closes its accounts on 30 September annually. Colorcoil Sdn Bhd acquired a piece of land in
Kota Kinabalu in order to construct its factory and others buildings. The company constructed a
factory with a total built- up of this block factory was 125, 000 square feet of which the sales and
administration office will be occupied 20,000 square feet, canteen and recreation room will
occupied for 5,000 square feet. The factory building was completed on 25 November 2017 and used
on 24 February 2018.
The following cost was incurred in construct that particular factory building:
RM
Cost of land 3,800,000
Architect’s fees 19,000
Legal fee and stamp duty (RM 9,000 related to land) 20,000
Construction cost 1,534,000
Wiring and plumbing 33,000
Cost of internal road 69,000

On 1 January 2019, Colorcoil Sdn Bhd incurred RM800,000 on the preparation of a site for the
installation of plant and machinery and cost of the special plant and machinery was RM250,000.

On 3 September 2018, a living accommodation for the factory workers was built up in the same area
of the factory for a cost of RM 630,000. The living accommodation was ready to be used on
February 2020.

Required to compute the industrial building allowances for each company for the relevant years
of assessment up to year of assessment 2021.

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Chapter 3 PTX2053/ Industrial Building Allowance

QUESTION 6

Miracle Herbs Bhd is involved in manufacturing bicycles. The company purchased a piece of land
and constructed a building. The construction completed on 30 October 2017. The company started
using the building on 1 January 2018. Six-eighth (7/8) of the building floor space was used as a
factory and the balance as the showroom to display their bicycles.

The total cost incurred in constructing the building was RM670,800 (including RM120,000 for the
cost of land).

On 1 September 2018, the company constructed another building which was used for living
accommodation for the factory workers. The construction cost involved was RM95,000.

Due to internal problems, both buildings were sold to Magic Foods Bhd on 16 January 2021 at a
total price of RM910,000 (RM210,000 related to the living accommodation building).

Magic Foods Bhd used the first building as a factory and the second building was used to store their
raw materials.

The accounting date for Miracle Herbs Bhd and Magic Foods Bhd are 31 March and 30 September
respectively.

Required:

a. Compute industrial building allowances, balancing charge or allowance (if any) for both
companies for all the relevant years of assessment up to the year of assessment 2021.
(13 marks)
b. State any FIVE (5) costs which qualify as building expenditure.
(5 marks)

c. State TWO (2) costs which is NOT a qualifying building expenditure

(2 marks)

(Total: 20 marks)

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