Taxation II – ATX 20203 Chapter 2

CHAPTER 2 – INDUSTRIAL BUILDING ALLOWANCE

Qualifying building expenditure

 Capital expenditure incurred on the construction or purchase of a building which is
used at any time after its construction or purchase as an industrial building.

Industrial Building
Industrial building includes :
 A factory
 A dock, wharf , jetty or other similar building
 Mill, workshop, in connection with a working of a mine
 A warehouse let out to the public
 Buildings used in the working of a mine or farm
 Buildings used in the utility business or telecommunication services

Definition of factory [para 64, Sch 3]

 A mill, workshop or other building for housing plant or machinery used in the
manufacture of products or subjection of goods or materials to any process or the
generating of power used for that manufacture or process; and
 A building used incidental to the manufacturing business
 A building (within the same curtilage as a building which is used as a factory) which
is used to store raw material, fuel or stores necessary for the manufacture of that
product or the processing of those goods or materials or for the storage of products
which have already been processed prior to the sale of those goods.

‘Within the same curtilage’

- Means a building attached or adjacent to or within the same enclosure as the other
building.

Circumstances where buildings are to be treated as an industrial building

 Buildings used for staff welfare (para 65(1))

 Where there is already an industrial building any additional building
expenditure incurred for canteen, restroom etc for employees’ use will be
treated as industrial building.

 Buildings for living accommodation for employees

 Buildings used as staff welfare or as living accommodation for employees
working in a farm [para 65(2)]
o Building should have little or no value to any person except in
connection with the working of a farm.

 Living accommodation for employees (constructed) –[para 42(1)]

o Where there is already an industrial building any additional building
constructed for living accommodation for employees excluding directors
having control, management staff, administrative or clerical staff.
o Initial Allowance given is 40%

1
Taxation II – ATX 20203 Chapter 2

 Building which is constructed or purchased and used as a living

accommodation for employees employed in a business involved in
manufacturing, hotel or tourism project or approved service project (Sch 7B) –
[para 42A(1)]
o No Initial Allowance will be given
o Annual Allowance of 10%

 Building which is constructed or purchased and used as a child care facility for
employees employed in the business [para 42A(2)]
o No Initial Allowance
o Annual Allowance of 10%

 School/educational institution and technical training [para 42B]

 A building constructed or purchased for industrial, technical or vocational training
purposes approved by the Minister [para 42C]
 A constructed or purchased building used as a school or educational institution
approved by the Minister of Education or Minister of Higher Education.
 No Initial Allowance
 Owner is entitled to claim Annual Allowance of 10%

 Licenced private hospital, maternity home and nursing home (para 37A)
 Expenditure on construction, alteration or renovation of rented premises
 Initial Allowance 10%
 Annual Allowance 3%
 Has to be licensed under the provisions of any written law or approved by
Director General of Health.

 Research [para 37B]

 Building used for purpose of :
o Research approved by the Minister within the meaning of Sec 34A(1)
(a) and 34B(4)
o Research by an approved research company or institute (Sec 34B)
o Research by a research and development company or a contract
research and development company
 Expenditure on the construction of a building and includes expenditure on
alteration or renovation of rented premise
 Initial Allowance : 10%
 Annual Allowance : 3%

 Storage of goods for export[para 37C]

 Building used solely for storage of goods for export or storage of imported
goods which are to be processed and distributed or re-exported
 No Initial Allowance
 Annual Allowance 10%

 Hotel [para 37F]

 Hotel is registered with Ministry of Tourism and Culture Malaysia
 The building used as a hotel is an industrial building
 Initial Allowance 10%

2
Taxation II – ATX 20203 Chapter 2

 Annual Allowance 3%

 Public road and ancillary structures [para 67A]

 Where pursuant to an agreement with the Government, capital expenditure is
incurred on construction, reconstruction, extension or improvement on the
above which is recoverable through toll collection
 Initial allowance : 10%
 Annual Allowance : 6%
 Ancillary structures include toll plaza, retaining wall, rest and service areas.

 Airport [para 37G]

 Capital expenditure on construction , extension, improvement, reconstruction
or purchase of building, runway etc
 Initial allowance : 10%
 Annual Allowance : 3%

 Building used in approved service project [para 37E]

 Projects undertaken by service sector in transportation, communications,
utilities or sub-sectors approved by Ministry of Finance
 Initial Allowance 10%
 Annual Allowance 3%

 Motor racing circuit [para 37H]

 Capital expenditure incurred on construction, reconstruction, extension and
improvement of motor racing circuit or related ancillary structures, approved
by the Minister.
 Initial Allowance 10%
 Annual Allowance 3%

 Old folks care centre

 Capital expenditure on building purchased or constructed
 Old folks centre must be approved by Social Welfare Department
 No Initial Allowance
 Annual Allowance 10%
 [Income Tax (Industrial Building Allowance)(Old folks care cntre) Rules
2003]

 Kindergarten
 Capital expenditure on building purchased or constructed by an individual or
company which is used for the purpose of provision and maintenance of a
kindergarten
 Must be registered with Ministry of Education Malaysia
 No Initial Allowance
 Annual Allowance 10% for the owner of the building
 Balancing charge will be computed if building is disposed within 2 years from
date of acquisition
 [Income Tax (Industrial Building Allowance) (Kindergarten) Rules 2013]

 Child care centre

3
Taxation II – ATX 20203 Chapter 2

 Capital expenditure on building purchased or constructed by an individual or

company which is used for the purpose of child care centre
 Must be registered with Department of Social Welfare under Child Care
Centre Act 1984
 No Initial Allowance
 Annual Allowance 10% for the owner of the building
 Balancing charge will be computed if building is disposed within 2 years from
date of acquisition
 Disposal in respect of kindergarten & child care centre
o sale, transfer or assignment of the building
o Demolition or destruction of building
o Building ceases to be used as a kindergarten or child care centre
 [Income Tax (Industrial Building Allowance) (Child Care Centre) Rules 2013]

 BioNexus status company

 Qualifying building expenditure incurred for purpose of first approved
business undertaken by BSC
 Annual allowance 10%
 If qualifying building disposed off within 2 years from date of completion or
acquisition, IBA claimed will be withdrawn in the year of disposal
 BioNexus company – incorporated under CA 2016 engaged in business of life
sciences such as biology, medicine

 Privatisation project and private financing scheme

 Building constructed by resident person for business purpose:
o (i) under privatisation project & private financing initiatives approved
by the Privatisation/ PFI Committee, Public Private Partnership unit,
Prime Minister’s Department
o (ii) pursuant to an agreement entered into between a person and the
Malaysian Government on a build-lease-maintain- transfer basis for
which no consideration is paid by the Government of Malaysia
 Initial Allowance 10% and Annual Allowance 6%
 Balance of residual expenditure will be reduced by amount of compensation
received by resident person
 Disposal value of building (for (ii) above) deemed at nil when agreement
expires

 TunRazak Exchange
 Building constructed or purchased by TunRazak Exchange Marquee Status
Company
 Annual Allowance 10%, No Initial Allowance
 Qualifying activities are banking, insurance, Islamic banking etc

Qualifying Building Expenditure (QBE)

 Capital outlay incurred on building and incidental cost exclusively related to the
building. Includes the following :-
 Architect’s fees

4
Taxation II – ATX 20203 Chapter 2

 Cost of preparing plans in connection with obtaining approval from local

authority
 Cost of clearing old site including demolishing of existing buildings
 Interest expense on loan borrowed to construct the building till itscompletion
 Construction cost including labour, material
 Incidental expenditure on work which may be separately completed e.g.
installation of water
 Cost of installing fittings such as wiring
 Legal charges, stamp duty connected with acquisition of building

 Cost of land and legal fees relating to the acquisition of land would not qualify for
industrial building allowance

 Legal expense on loan borrowed to construct the building is also excluded.

 Interest expense on loan borrowed to construct building.

 Interest expense until construction of building is part of QBE.
 Interest expense paid upon completion will not be capitalized. It is a
deductible revenue expense provided building is used in the production of
gross business income.

 QBE for constructed building includes :-

 Cost of construction of building
 Subsequent capital expenditure on construction, alteration, renovation
 Initial repairs (which enhance the value) of the building

 Example 1

Bee Sdn Bhd carries on the business of manufacturing furniture. The company
prepares its accounts to 31 October annually.
In June 2019, it completed the construction of its own factory at the following costs:

RM’000
Land 580
Legal fees for
o Agreement for purchase of land 11
o Agreement with the building contractor 10
Consultant’s fees and building plan 80
Stamp duty for purchase of land 9
Construction cost 1,510

Land and factory costs 2,200

The Qualifying Building Expenditure :- RM’000

Legal fees for agreement with the building contractor 10

Consultant’s fees and building plan 80
Construction cost 1,510

5
Taxation II – ATX 20203 Chapter 2

1,600

75% rule [para 67)

 Where expenditure is incurred on cutting, levelling, preparing or tunnelling land to
prepare a site for installation of plant and machinery which is to be used for business
purposes and such expenditure exceeds 75% of the aggregate cost of plant &
machinery and installation cost, then the aggregate expenditure is treated as qualifying
building expenditure.

Cost of plant & machinery = P

Add :Cost of cutting, levelling & tunnelling of land = L

Where L > 75% of E, E will be treated as QBE

Where L ≤ 75% of E, P will be qualifying plant expenditure
No tax relief for L.

Example 2

Dee Sdn Bhd incurred the following expenditure for the financial year ended
31.5.2019 in relation to its manufacturing business.
RM’000
Cost of plant & machinery installed in a factory 100
Cost of preparing, cutting and levelling land to prepare 200
site for installation of plant
300

Cost of preparation of site is 200/300 x 100% = 67% of aggregate cost.

Qualifying expenditure for plant & machinery is RM100,000. No relief is given for
cost of site preparation.

Purchased industrial building

 Qualifying building expenditure is purchase price of building.

Part of building used as Industrial building

 If non qualifying part > 10% of qualifying expenditure
 The IBA can only be claimed on the qualifying part.
 If non qualifying part ≤ 10%
 IBA can be claimed on the qualifying expenditure of the whole building

Example 3

6
Taxation II – ATX 20203 Chapter 2

Kitty toys has been in the business of manufacturing toys for sale in Japan since 2012.
The company commences construction of a factory building on 1.3.2017 and
completed the building on 1.12.2019. Cost of the land and building is as follows :-

RM’000
Cost of land 190
Legal fee and stamp duty on acquisition of land 10
Architect’s fees 30
Building plan approval fee 20
Construction costs 850
Wiring and plumbing 100

1,200

20% of the floor space of the factory building was used as an office. Compute the
qualifying building expenditure.

Qualifying building expenditure RM’000

Total cost as above 1,200
Less : Cost of land (190)
Legal fee on land acquisition (10)

1,000

Qualifying portion = 80% 800

Initial Allowance

 10% Initial Allowance

 Conditions to claim Initial Allowance
 The person must be the owner of the building at the end of the basis period
 The building must be in use or about to be used as an industrial building for
business purpose
 The person must have incurred QBE on the construction or purchase of the
industrial building
 If building has been disposed off during the basis period in which it was purchased or
constructed
 IA will be given if the building was in use as an industrial building for the
purpose of the business during the basis period.
 * If building under above situation was not used as an industrial building within the
basis period for a YA following the YA of which Initial Allowance was given, a
balancing charge is raised

Annual Allowance

 Annual Allowance is given to a person :

7
Taxation II – ATX 20203 Chapter 2

 Who has incurred qualifying building expenditure on the construction or

purchase of an industrial building
 Who is the owner of the building at the end of the basis period
 Who used the building as an industrial building
 3% on the qualifying building expenditure computed on a straight line basis.

Constructed building / Purchased building

 Annual Allowance is 3% on the qualifying building expenditure computed on a
straight line basis.

Rental income on industrial building [para 16B]

 W.e.f. YA 2016, where the following Industrial building is used to derive rental
income, no IBA is available on the building cost even though rental income is
assessed as business income.
 Private hospital, maternity home and nursing home (para 37A)
 Building used for purpose of : (para 37B)
o Research approved by the Minister within the meaning of Sec 34A(1)
(a) and 34B(4)
o Research by an approved research company or institute (Sec 34B)
o Research by a research and development company or a contract
research and development company
 Building used solely for storage of goods for export or storage of imported
goods which are to be processed and distributed or re-exported [para 37C]
 Building used in approved service sector [para 37E]
 Hotel [para 37F]
 Airport [para 37G]
 Motor racing circuit [para 37H]
 Living accommodation for employees employed in a business involved in
manufacturing, hotel or tourism project or approved service project (Sch 7B) –
[para 42A(1)]
 Child care centre – constructed or purchased [para 42A(2)]
 School or educational institution approved by the Minister of Education or
Minister of Higher Education. [para 42B]
 A building constructed or purchased for industrial, technical or vocational
training purposes approved by the Minister [para 42C]

10% rule on Industrial building

Industrial building

Yes Is the rented out portion ≤ 10% of total No

floor area of the whole building?

The whole building Only part used as

Is Industrial Building Industrial Building eligible for
IBA

8
Taxation II – ATX 20203 Chapter 2

Disposal [para 48, Sch 3]

 Industrial building is disposed on :

 The sale, transfer or assignment of the relevant interest in the building
 The demolition or destruction of the building
 The building ceased to be used as an industrial building
 Where the relevant interest depends on the duration of a concession, the end of
the concession
 Where relevant interest is a leasehold interest, the determination of that
relevant interest otherwise than on the person entitled thereto acquiring the
reversion

Relevant interest
 The interest in the building to which the person who incurred the expenditure was
entitled to when he incurred it
 Industrial Building Allowance is granted to the person who actually incurs qualifying
expenditure on the construction of the building.

Rented premise
 Renovation costs incurred on a rented premise used as an industrial building is
eligible for Industrial Building Allowance.

Disposal value [para 62, Sch 3]

 Where asset is sold, transferred or assigned, DV is
 MV at the date of sale, transfer or assignment and
 net proceeds of sale
which ever is greater

 Where compensation from insurance is received, DV is

 insurance compensation received ; or
 market value
which ever is greater

 If a building is demolished and there are no compensation or insurance receipts, the

net cost of demolition(i.e. cost of demolition less any amounts received for sale of
materials etc.) may be added to residual expenditure, thereby increasing the
balancing allowance.

9
Taxation II – ATX 20203 Chapter 2

Building constructed for Government use [paras 67B, 16A, Sch 3]

 Building constructed on a build-lease-transfer basis under an agreement with the
Government and approved by the Minister of Finance qualifies as industrial building.
 Initial Allowance 10% and Annual Allowance 6% would be given against lease
income from the Government.
 At the end of the lease or upon termination of the lease, the building will be
transferred to the Government.
 Disposal value of the building would be deemed at zero price.
 If the owner receives any compensation from the Government, the compensation
would reduce the residual expenditure of the industrial building.

Controlled transfer

Criteria
Controlled transfer will apply if ALL the following conditions apply:-

(i) A person disposes off an asset on which initial and annual allowance, agricultural
allowance or forest allowance have been claimed or would have been claimed.
Disposer must carry on a business.

(ii) One of the situations stipulated under para 38(1) exists at the time of the disposal.

(iii) The acquirer uses the asset in a business and is eligible to claim Capital
allowances.

Controlled situations [para 38(1), Schedule 3]

Disposal of assets are subject to control if any of the following circumstances occur at the
time of the disposal.

(i) The disposer of the asset is a person over whom the acquirer of the asset has
control;
(ii) The acquirer of the asset is a person over whom the disposer of the asset has
control;
(iii) Some other person has control over both the disposer and the acquirer of the asset;
(iv) The disposal is effected as a result of reconstruction or amalgamation of
companies; or
(v) The disposal is effected by way of a settlement, gift or devolution of the property
in the asset on death.

(i) For a company

Control refers to either holding of shares or other means of control such as
management control through board representation.

Example

Co A Co B
55%

10
Taxation II – ATX 20203 Chapter 2

Transactions between Co A and Co B would be subject to controlled transfer as

Co A controls Co B

Co C Co D
49%
Co C does not control Co D. However if Co C has major board representation in
Co D, transactions between both companies would be subject to controlled
transfer.

Co E Co F Co G
60% 70%

Co E controls Co F and Co F controls Co G. Co E can also control Co G. Disposal

of assets between the 3 companies would be subject to controlled transfer.

(ii) For a partnership

A right to a share of more than half of the assets of the partnership or to more than
half of the divisible profit of the partnership.

(iii) For a limited liability partnership

A right to a share of more than half of the capital contribution of the limited
liability partnership, whether in cash or kind.

Tax treatment for controlled sale

Controlled transfer
Disposer Acquirer
Disposes plant & machinery

For the disposer

- There is no balancing allowance / balancing charge on the disposal

- Disposal is deemed to have taken place on the 1st day of disposer’s final period for a
sum equal to the disposer’s residual expenditure on that day

For the acquirer

- Amount paid to acquire the asset is irrelevant

- No initial allowance to be claimed
- Acquirer claims capital allowance subject to remaining residual expenditure
- Only annual allowance can be claimed and the amount is based on the original
qualifying expenditure

How to determine 1st day of disposer’s final period

11
Taxation II – ATX 20203 Chapter 2

Step 1 Identify the 1st YA in which the acquirer can claim CA

Step 2 Disposer’s final period is the basis period which coincides with the YA in Step
1

Step 3 The first day of the basis period for the YA in Step 2 is the 1 st day of the
disposer’s final period

Example 1

CK Sdn Bhd makes up its accounts annually to 30 September. It sold an asset to Deeland Sdn
Bhd, a company under common control on 1.12.2018. Deeland Sdn Bhd makes up its
accounts to 31 March each year.

Step 1
The 1st YA Deeland Sdn Bhd can claim capital allowance is YA 2019 (1.4.2018 – 31.3.2019)

Step 2
CK Sdn Bhd’s YA corresponding with Step 1 is YA 2019.
CK Sdn Bhd’s basis period for YA 2019 is 1.10.18 – 30.9.2019

Step 3
1st day of CK Sdn Bhd’s final period is 1.10.2018.

CK Sdn Bhd is deemed to have disposed of the asset on 1.10.2018, the disposal value of the
asset being the residual expenditure of the asset on 1.10.2018.

If the asset had been acquired by CK Sdn Bhd for RM15,000 in August 2016 and was sold to
Deeland Sdn Bhd for RM10,000 the capital allowance calculation would be as follows :

CK Sdn Bhd RM
Qualifying expenditure 15,000
YA 2016
Initial Allowance 20% 3,000
Annual Allowance 10% 1,500 (4,500)

10,500
YA 2017 Annual Allowance (1,500)

9,000
YA 2018 Annual Allowance (1,500)

Residual expenditure at 1.10.2018 7,500

No balancing allowance / balancing charge arises to CK Sdn Bhd. The sale consideration of
RM10,000 is ignored. The disposal price is deemed equal to the residual expenditure.

12
Taxation II – ATX 20203 Chapter 2

Residual expenditure 7,500

Less : Disposal (7,500)

--

Deeland Sdn Bhd

Qualifying expenditure 15,000

Residual expenditure b/f 7,500

YA 2019 Annual Allowance (1,500)

Residual expenditure 6,000

Date of disposal is earlier than 1st day of disposer’s final period

- Where the above is the case, the asset is deemed to be used by the disposer on the last
day of the basis period for the YA preceding the 1st day of the disposer’s final period

Example 2
E Sdn Bhd (year ending 30 June) sold to F Sdn Bhd (year ending 31 March) office equipment
on 1 June 2018 for RM20,000. E Sdn Bhd purchased the equipment on 2 May 2016 for
RM40,000. Assume that it is a controlled transfer under paragraph 38.

(1) YA 2019
(2) YA 2019 (y/e 30.06.2019)
(3) 1.7.2018

1st day of disposer’s final period is 1.7.2018

Asset was sold on 1.6.2018 i.e. before 1st day of disposer’s final period
Therefore asset would be deemed to be used in E Sdn Bhd’s business on 30.6.2018 i.e YA
2018

Capital allowances due to E Sdn Bhd

YA 2016 RM RM
Qualifying expenditure 40,000
Less : Initial Allowance 8,000
Annual Allowance (10%) 4,000 (12,000)

Residual expenditure @ 30.6.2016 28,000

YA 2017 – 2018
Less : Annual Allowance (2 x RM4,000) (8,000)

13
Taxation II – ATX 20203 Chapter 2

Residual expenditure @ 30.6.2018 20,000

Capital allowance due to F Sdn Bhd

YA 2019 RM
Qualifying expenditure 40,000

Residual expenditure from E Sdn Bhd 20,000

Less : Annual Allowance (4,000)

Residual expenditure @ 31.3.2019 16,000

Qualifying expenditure incurred on or after the 1st day of the disposer’s final period
- Where the above is the case, the qualifying expenditure of the disposer is deemed
incurred by the acquirer on the same date as was acquired by the disposer
- Initial allowances would be available to the acquirer

Example 3

C Sdn Bhd (year ending 31 March) is a wholly owned subsidiary of D Sdn Bhd (year ending
30 June)

On 1 June 2019, C Sdn Bhd sold some office equipment to D Sdn Bhd for RM20,000. The
asset had been acquired by C Sdn Bhd on 1 February 2019 for RM25,000.

(1) YA 2019
(2) YA 2019 (y/e 31.3.2019)
(3) 1.4.2018

As the asset had been acquired by C Sdn Bhd after the 1 st day of C Sdn Bhd’s final period,
the asset is deemed to be incurred by D Sdn Bhd on 1 February 2019. Both Initial Allowance
and Annual Allowance will be given to D Sdn Bhd only.

D Sdn Bhd RM RM

YA 2019 (y/e 30.6.2019)

Qualifying expenditure deemed incurred 1.2.2019 25,000
Less : Initial Allowance 5,000
Annual Allowance (10%) 2,500 (7,500)

Residual expenditure @ 30.6.2019 17,500

Disposal to 3rd party after controlled transfer

14
Taxation II – ATX 20203 Chapter 2

- Where the asset acquired under controlled transfer is subsequently disposed off to a
3rd party (not a controlled transfer), all capital allowances given to both disposer and
acquirer under controlled transfer will be taken into account when computing the
balancing allowance or charge.

Example 4

Following from Example 2, F Sdn Bhd disposed of office equipment to G Sdn Bhd (year
ending 31 December) on 1 September 2020 for RM45,000.

F Sdn Bhd RM

YA 2020 (Y/e 31.3.2020)

Residual expenditure 16,000
Less : Annual Allowance (4,000)

Residual expenditure @ 31.3.2020 12,000

YA 2021 (y/e 31.3.2021)

Disposal value 45,000

Balancing charge 33,000

Restricted to total allowances claimed 28,000

15