TOPIC 3

CAPITAL ALLOWANCE
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LEARNING OUTCOMES:
➢ Qualifying plant expenditure (QPE) for plant and machinery
➢ Computation of initial allowance (IA), annual allowance (AA),
notional allowance (NA) and accelerated capital allowances
➢ Acquisition of new plant and machinery (cash and hire
purchase) and acquisition of used plant & machinery
➢ Motor vehicle as plant and machinery
➢ Disposal (computation of balancing charge and balancing
allowance)
➢ Disposal of asset within two years of acquisition
➢ Clawback of capital allowances

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INTRODUCTION
▪ Capital allowance (CA) is a relief tax
deduction) given to a person who is carrying
on a business.
▪ Depreciation is not tax deductible as it is not
an ‘outgoing expenses’. Therefore, CA is
given to be deducted against the adjusted
business income (ABI).

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INTRODUCTION
The formula:
RM RM
Net profit before tax xx
Add: Acquisition of asset (capital) x
Depreciation x
Adjusted income xx
Add: Balancing charge x
xx (A)
Less: Capital allowance (CA)
Unabsorbed capital allowance b/f x
Current year capital allowance x
Balancing allowance x (x) (B)
Statutory income xx

➢ CA deducted is restricted to the aggregate of adjusted income and balancing

charge (A).
➢ Any excess (unabsorbed capital allowance (B-A) is carried forward to future
years to be set off against SAME business source
➢ CA of one business (ie trading) cannot be used to be set off against adjusted
income of another business (ie manufacturing).
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CRITERIA TO CLAIM CAPITAL ALLOWANCE

Qualifying
expenditure/
Qualifying The person
The person The asset must plant must be the
must be be used for expenditure owner of the
carrying on a the purpose of (QE/QPE) asset until the
business business must have end of the
been incurred basis period
in providing
the asset

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 DEFINITION OF MACHINERY

Plant and machinery are not defined in the ITA.

The basic characteristic of machinery is that it has moving parts.
A machinery is easily determined compared to a plant.

Machine

Heavy machine
General
Eg: crane, bulldozer,
Machine
backhoe
 DEFINITION OF PLANT
Plant
Any apparatus used by a person carrying on his business
but does NOT include a building, an intangible asset used and
. functions as a place within which a business in carried on

Apparatus
- Function to facilitate to carrying
on business operation
- Exclude stock in trade
= PLANT
Eg: Law Report/law text-book used
by lawyer in carrying his profession,
movable office partition
Setting/apparatus
- Inseparable and annexed to
the structure building
= NOT PLANT
Eg: Old ship used in restaurant
business
QUALIFYING EXPENDITURE (QE)/QUALIFYING
PLANT EXPENDITURE (QE)
▪ QE/QPE is capital expenditure incurred by a person
on the provision of plant and machinery used for the
purpose of business.

Capital expenditure incurred under Para 2 Schedule 3

(page 291):
Fishponds, animal pens,
Preparing, cutting, chicken house, cages,
Provision of Alteration of an
tunneling or levelling building structural
plant and existing building
land in order to prepare improvement
machinery for installation of
site for the installation of
used in the plant and EXCLUDE: Living
plant and machinery
business machinery accommodation for
(10% rule)
directors or shareholders

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 10% RULE
cost preparing, cutting, tunneling or levelling land
(to install plant or machinery) does not exceed
10% of the AGGREGATE COST
of the machinery.
If this cost exceeds the 10% of the aggregate cost,
it will be excluded from QE/QPE.

COPTS < 10% of aggregate cost = include as QE/QPE

COPTS > 10% of aggregate cost = exclude as QE/QPE

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 SCENARIO 1
Best Construction Bhd has
installed a cutting machine in
Ipoh factory for RM150,000. The
cost of preparing the site for
such installation and installation
of the machine amounted to
RM14,000 and RM12,000
respectively.
SCENARIO 2
Best Construction Bhd has
installed a cutting machine in
Ipoh factory for RM150,000. The
cost of preparing the site for
such installation and installation
of the machine amounted to
RM30,000 and RM12,000
respectively.

Calculate the QPE of the Calculate the QPE of the

machine. machine.

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ANSWER
SCENARIO 1 SCENARIO 2
RM RM
1) Calculate aggregate cost
Cost of machine 150,000 150,000
Cost of preparing site to 14,000 30,000
install machine (COPS)
Cost of installation 12,000 12,000
AGGREGATE COST 176,000 192,000

2) Check 10%
10% x 176,000/192,000 17,600 19,200

3) Include/exclude Since COPS to install the Since COPS to install the

machine (7.9%) is LESS than
10% of the aggregate cost,
COPS to install machine will
be part (include) of the QPE.
Thus, QPE = RM176,000
machine (15.6%) is MORE
than 10% of aggregate cost,
COPS to install machine will
NOT part(exclude) of the QPE.
Thus, QPE = RM162,000 11
TYPES OF ALLOWANCES
1) Initial Allowance (IA)
- IA can be claimed only once; in the first year of
acquisition of the asset.

- IA rate: 20% of QE/QPE

- conditions to claim:
✓ The person must incurred QE/QPE on plant and
machinery;
✓ The asset must be used for business purposes;
✓ The person must be the owner of the asset at the end of
the basis period

* If asset acquired and dispose in SAME year, IA is given

provided he is the owner and such asset is used sometime
before the disposal.
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TYPES OF ALLOWANCES
2) Annual Allowance (AA)
- AA is claimed annually, as long as the asset is not being
disposed/fully claimed.

- AA rate: OE, furniture & fitting, other 10% of QE/QPE

Plant & machinery (general) 14% of QE/QPE
Heavy machinery, motor vehicle 20% of QE/QPE

- Conditions to claim:
✓ The person must incurred QE/QPE on plant and machinery;
✓ The asset is owned by the taxpayer at the end of basis period;
✓ The asset must be used for business purpose.

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TYPES OF ALLOWANCES
3) Notional Allowance (NA)
- NA is calculated when the asset is not in use
(permanent disuse) for business purpose.

- Replacement to AA and must be included in

calculation to find the next residual expenditure
(RE).

- Can never be deducted from ABI.

- The rate is same as AA.

- Even though the asset is not being used for the

business purpose, it must not be disposed.

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TYPES OF ALLOWANCES
4) Accelerate capital allowance (ACA)

- Purchase of information and communication

technology (ICT) equipment used in business
entitled for:
IA – 20%
AA – 20%

- Example of ICT:
computer, scanners, central processing unit
(CPU)

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HOW TO CALCULATE CA? Calculation of
IA and AA
is based on QE
Only in 1st year

20XX (1st year) RM

Qualifying expenditure (QE) xxx
IA (20 %) (xx)
AA (14 %) ie: general machine (xx)
Residual Expenditure (RE) xxx

20XX (2nd year)

AA ( 14 %) (xx)
RE xxx
Amount of AA
will be the same
every year
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BASIS PERIOD
❑ Basis period for YA for QE incurred for capital
allowances follow basis period of YA of business
source of income of a person.

❑ Accounting period of company would constitute

basis period of YA

Eg: ABC purchased machine of RM5,000 on 10 Sept

2023. Company closes its account on 31 Dec
annualy.

ABC incurred QE on machine (RM5,000) in YA

2023.
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A. ORDINARY PURCHASE
▪ Straight forward computation.

▪ Important steps:
✓ Does expenditure incurred is QE/QPE?
✓ If yes, identify types of QE/QPE in arriving AA
rate.
✓ Identify first YA for CA computation.
✓ Compute CA for relevant YAs

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SCENARIO 3
On 15 August 2022, Anggun Sdn Bhd bought a
machine worth of RM170,000. The business incurred
insurance and machine installation amounted to
RM8,000 and 32,000 respectively.
Compute CA for relevant YAs up to YA 2023.

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ANSWER
QPE= cost of machine + insurance + installation
= RM170,000 + RM8,000 + RM32,000
= RM210,000

YA RM

2022 QPE 210,000

(-) IA (20%) (42,000)
(-) AA (14%) (29,400)
RE 138,600

2023 - IA (14%) (29,400)

RE 109,200

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B. ORDINARY PURCHASE + 10% RULE
▪ Besides plant or machinery purchases,
business incurred cost of preparing a site to
install that plant or machinery.

▪ Refer slide no 9.

▪ Cost of preparing a site to install (COPS) =

preparing, tunneling, leveling, cutting land.

▪ COPS < aggregate cost, then COPS be part of

QE/QPE

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SCENARIO 4
On 15 August 2022, Anggun Sdn Bhd bought a
machine worth of RM170,000. The business incurred
insurance and machine installation amounted to
RM8,000 and 32,000 respectively. The cost of
preparing a site for machine installation amounted to
RM17,000.
Compute CA for relevant YAs up to YA 2023.

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ANSWER
RM
Cost of machine 170,000
Insurance 8,000
Machine installation 32,000
COPS 17,000
Aggregate cost 227,000

10% x RM227,000 = RM22,700

Since the cost of preparing the site to install the machine

(7.49%) is less than 10% of the aggregate cost, therefore the
cost of preparing the site to install machine (COPS) will be
part (included) of the QPE. Thus, QPE = RM227,000

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 ANSWER
YA RM

2022 QPE 227,000

(-) IA (20%) (45,400)
(-) AA (14%) (31,780)
RE 149,820

2023 (-) IA (14%) (31,780)

RE 118,040

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C. SMALL VALUE ASSETS
▪ SVA = each asset being not more than
RM2,000 & useful life is more than 2 years.
▪ Example: cash register, telephone system, sofa
set, cabinet, air-conditioner, table, handphone
etc.
▪ Maximum amount is 100% (accelerated
capital allowance, ACA) deduction of cost as
CA however is restricted to a total of RM20,000
in any one YA. Any excess of RM20,000 would
be claimed for ordinary AA rate.
▪ Not applicable to assets under hire purchase

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C. SMALL VALUE ASSETS
▪ SME (Small Medium Enterprise)

✓ Paid up capital of ordinary share does not

exceed RM2.5 million at the beginning of
basis period of YA
AND
✓ gross business income does not exceed
RM50 million

“SME entitled for full deduction of CA on small

value asset even if it exceeded the threshold of
RM20,000.”
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SCENARIO 5
On 20 June 2023, Julang Sdn Bhd bought 4
units of air conditioners for business use. Cost
per unit was RM1,500.
Compute capital allowance for YA 2023.

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ANSWER
▪ The purchase of air conditioners would be treated as small
value asset as price per unit is RM1,500 (<RM2,000)

▪ 100% deduction for year of purchased (1st YA)

YA RM

2023 QE (4 X RM1,500) 6,000

(-) CA (100%) (6,000)
RE NIL

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D. HIRE PURCHASE TRANSACTION (PARA 46)
▪ A person incurs capital expenditure under a
hire purchase agreement shall be deemed to
be the owner of the asset.
▪ As such, the CA would be available to him.
▪ The IA and AA would be computed by
reference to the deposit and the capital
portion of any installment paid in that basis
period.
▪ Formula:
✓ HP loan = cash price – deposit
✓ Capital portion of monthly installment
= HP loan/no. of months

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SCENARIO 6
On 1 May 2022, Mega Enterprise purchased
a lorry under hire purchase agreement for its
business purpose. The cash price was
RM58,000. The company agreed to pay
RM28,000 for the deposit and monthly
installment of RM1,500 for 24 months,
commencing on 1 September 2022. The
company closes its account on 31 December
annually.
Compute the CA for the relevant YAs up to YA
2023.

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ANSWER
Capital portion of monthly installment
= (cash price – deposit) / no. of months
= (RM58,000 – RM28,000) / 24 months
= RM1,250

YA RM Accm. QPE
(RM)
2022 QPE:
Deposit 28,000
Instalment (RM1,250 x4) 5,000
33,000 33,000
(-) IA (20% x RM33,000) (6,600)
(-) AA (20% x RM33,000) (6,600)
RE 19,800
2023 Instalment (RM1,250 x 12) 15,000 15,000
34,800 48,000
(-) IA (20% X RM15,000) (3,000)
(-) AA (20% X (RM33,000 + RM15,000) (9,600)
RE 22,200
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 E. QE FOR MOTOR VEHICLES
(NON-COMMERCIAL PURPOSES)
▪ Non-commercial purpose = not licensed to transport
goods/passengers ie lorry, truck, bus.

▪ QE/QPE for motor vehicles (non-commercial purposes) is

restricted to RM50,000.

▪ However, this restricted amount increases to RM100,000 if:

✓ the total cost of the motor vehicle does not exceed RM150,000
(≤ RM150,000);
✓ the car has not been in use prior to purchase (new car); and
✓ the car is purchased on or after 28 October 2000.

▪ The restricted QE/QPE of RM50,000 or RM100,000 does not

apply to commercial vehicle/transaction such as truck, bus, lorry,
taxi, van.
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 E. QE FOR MOTOR VEHICLES
(NON-COMMERCIAL PURPOSES)
Motor vehicle

Commercial vehicle:
New passenger vehicle: Secondhand
bus, lorry
motorcar for manager passenger vehicle
- No restriction on
RM50,000
amount of QE

Cost : < RM150,000 > RM150,000

QE: RM100,000 RM50,000

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DISPOSAL OF ASSET

Assets owned
Balancing Balancing
for less than 2
Charge Allowance
years

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BALANCING CHARGE (BC)
▪ Arises when Sales Proceed (SP) exceed the
last Residual Expenditure (SP > last RE).
▪ BC will be added to the ABI
▪ Rule of BC:
➢The amount of BC is restricted to the total
amount of CA claimed previously (IA +
accumulated AA)

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BALANCING ALLOWANCE (BA)
▪ Arise when Sales Proceed (SP) less than the
last RE (SP < last RE).
▪ Therefore, BA will be deducted from ABI.

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ASSETS OWNED FOR LESS THAN 2 YEARS
▪ Any assets disposed within 2 years of
acquisition (24 months and below), there will
be a ‘clawback’ of capital allowance given.
▪ The amount of BC would be the total CA
claimed previously.
▪ There are exceptions to clawback:
✓ theft
✓ fire or accident
✓ asset has been obsolescence (computer)

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SCENARIO 7
Galaxy Sdn Bhd bought a set of furniture on 1.4.2022
for RM6,000. The furniture was found to be faulty
after 1 year of usage. It was disposed of at RM4,000
on 1.10.2023. Galaxy Sdn Bhd closes its account on
31 December each year.
Compute the capital allowance balancing charge or
balancing allowance (if any) for all the releavnt YAs
to YA 2023.

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ANSWER
YA RM
2022 QE 6,000
(-) IA (20%) (1,200)
(-) AA (10%) (600)
RE 4,200
2023 Disposal value (4,000)
BA 200

Since the asset was disposed within 2 years of acquisition,

therefore the capital allowance claimed previously will be
clawed back as BALANCING CHARGE amounting to RM1,800.
BC = Total CA claimed previously (1,200+600)
The balancing allowance of RM200 is disregarded.
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DISPOSAL OF MOTOR VEHICLE
(NON-COMMERCIAL PURPOSE)
▪ If the motor vehicle (non-commercial purpose) is
disposed, where the amount of QE/QPE is restricted,
the disposal value should be proportion to the same
value as the QE/QPE being claimed.

▪ DP = QE
Sales proceed (SP)
Actual cost

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SCENARIO 8
Arab Sdn Bhd purchased a BMW car for the use of
CEO on 1 Jan 2021. The cost of the car was
RM200,000. The car was sold on 31 August 2023 for
RM95,000.
Calculate the balancing charge or balancing
allowance (if any) on such disposal.

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ANSWER
YA RM
2021 QE (restricted to) 50,000
(-) IA (20%) (10,000)
(-) AA (20%) (10,000)
RE 30,000
2022 (-) AA (20%) (10,000)
RE 20,000
2023 Sales proceeds (50,000/200,000 X 95,000) (23,750)
BC 3,750

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TEMPORARY DISUSED OF ASSET
▪ CA (annual allowance) can be claimed for any
temporary disused of plant and machinery if:
✓ it was used for business purpose immediately
before the period of disused.
✓ it was constantly maintained in readiness to be
brought back into use during the period of
disused.
✓ the period of disused is temporary.

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 DUAL PURPOSE CASE
▪ When any plant and machinery is used for dual purpose
(i.e. partly for business purpose and partly for private
purpose), the amount of CA must be apportioned
accordingly.

▪ However, only the business portion will be deducted

against ABI.

▪ In the case of disposal, it can be either:

➢BA – only business portion will be deducted from ABI
➢BC – the BC can never be exceeded the total CA on
business uses given AND total portion (private and
business) will be added back to ABI (BC rule applies
first)

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USED PLANT AND MACHINERY
Para Circumstances QPE
2A Plant and machinery which was Amount of market
used for personal but not been value (MV) on the
brought into business day the asset is
brought into business
2C Plant and machinery which was LOWER of
used for business outside MV or NBV on the
Malaysia and is brought into day the asset was
use for business in Malaysia brought into use in
Malaysia
* No IA is available in all the situations described below.

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