CHAPTER 2

INDUSTRIAL BUILDING
ALLOWANCE

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 Learning Outcomes
 Definition of Industrial Building
 Determination Qualifying Building Expenditure
(QBE)
– Constructed Building
– Purchased Building
 Person eligible to claim IBA
 Types of Industrial Building Allowance
• Initial Allowance
• Annual Allowance
 Temporary Disuse of Industrial Building
 Disposal of Industrial Building
– Balancing Charge
– Balancing Allowance 2
 Introduction 1
 A taxpayer who has incurred expenditure on the
construction or purchase of a building, which is used
for his business is entitled to claim Industrial
Building Allowance (IBA).

 IBA is deducted from the adjusted income in arriving

at the SI of a business.

 Para.75 (Sch. 3) – any IBA that cannot fully

absorbed in a YA can be carried forward for
subsequent YA until fully absorbed.

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Meaning Of Industrial Building 1

 Section 2, ITA 1967 defines building is any structure

erected on land (not being plant and machinery).
• Schedule 3, para 63 specifies the types of building that
qualify as an industrial building.
• Types of industrial building :
– Used as a factory
– Used as a dock, wharf, jetty or etc
– Used as a warehouse
– Used in the water, electricity and
telecommunication
– Used in the working of a farm
– Used in the working of a mine
(page 465-477)
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 Meaning of Factory 1
 Para 64, defines factory as to include a mill, a workshop
and a building for the housing of plant and machinery.
 Besides that, factory also include a building (within
same cartilage as a building which is used as a factory)
used for storage of raw material, fuel or stores
necessary for the manufacture as well as a finished
product before it has been sold.
 Internal road, car parks, fences and bridges in same
compound – industrial building.
 Workshop used for repairing goods which is incidental
to a business of selling those goods – NOT
considered as industrial building.

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 1

Example 1:
Hi Five Sdn. Bhd is an authorized distributor of
electrical equipment. The company has its own
workshop to carry out their repair jobs for its
customers. Will the w/shop be considered as industrial
Building?

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Meaning Of “Within The Same 1
Cartilage”
A building attached or adjacent to or within the same
enclosure as the other building.
Example 2:
Mesra Bhd. is a manufacturing company. The
factory is located at Klang. The warehouse to
store raw materials is within the same
compound as the factory. But the warehouse
for finished product is located at Kajang. Are
BOTH warehouse is considered as IB?

Answer:
ONLY warehouse in Klang
considered as IB as it is within the
same curtilage as factory.
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 1
Example 3:
Quicksave Bhd. is a retailing business
company. It constructed a warehouse
adjacent to its supermarket building. Can the
company claim the warehouse as an
industrial building?

Answer:

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Public Road and Ancillary 1
Structures (Para 67A)
 Where pursuant to an agreement with
government – a person incurs capital
expenditure on the construction,
reconstruction, extension or
improvement of any public road and
ancillary structures which is recoverable
through toll collection, such exp. Is
eligible to claim IBA.

 Initial allowance is at 10% whilst the

annual allowance is 6%.

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Non-industrial Building 1

• Under Para. 65(3) of Sch. 3 ITA 1967,

building used for the following purposes are
NOT treated as industrial buildings:
– Dwelling house [not being for
accommodation of the kind mentioned in
Para. 42 and 65(2)]
– Retail shop
– Showroom
– Office

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 Part Of Building Used As IB 1
(Para 44 & 66)
 Where part of the building or extension of a building is
used as industrial building and the other part of the
building is not used.
 Rule: Application of
1. 10% rule using cost of construction or
2. 10% rule using the floor space area
 Then, if the capital exp. incurred on the construction of
the non-qualifying part does not exceed 10% of the total
cost /space of the whole building, so the whole building
qualifies as industrial building. (Para 66)
 If the construction cost of non-qualifying part exceeds
10% of total cost/space incurred of the whole building,
then only part of the such building is qualify for IBA.
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Example 4:
Modern Furniture Bhd. Incurred an expenditure of
RM400,000 of a construction of a factory to produce
furniture. The factory space included an admin office,
costing RM50,000. Factory building space 100,000 sq ft
included 12,000 for admin.
a) Application of 10 % rule using cost of construction.
b) Application 0f the 10% rule using the floor space area.
Answer

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Answer

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 Qualifying Building 2
Expenditure (Para. 3, Sch. 3)
 Qualifying Building Expenditure (QBE):
– Cost of clearing the site
– Cost of demolition any old building from the site where the new building
is to be sited. It MUST not be an industrial building
– Architect fee on the design of the building
– Cost of preparing the various plans for the purpose of obtaining approval
from authorities
– Interest expense on loan borrowed to construct the building till its
completion
– Actual costs of the construction
– Incidental costs of the construction (plumbing, electrical, drainage)
– Installation of fittings that form part of the building
– Alterations and additions of a capital nature to an existing building
– Other expenditures to an existing industrial building which will not qualify
as revenue expenses or as repairs & maintenance
– Professional charges relating to the building (i.e legal fees) 14
 Constructed Building 2
 The qualifying building expenditure includes:
• Cost of construction of building
• Subsequent capital expenditure on construction,
extension, alterations and renovations
• Initial repairs (which enhance the value) of the
building.
 Expenditure not qualifying for IBA:
 Cost of the site/land
 Expenditure connected to the acquisition of the land
 Professional charges connected to the acquisition of
the land
 Cost of demolition an existing industrial building
 Page 481-482
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 Plant and machinery: 2
deemed IB
 In the case where capital expenditure incurred on
preparing, cutting, tunnelling or levelling land for
purpose of installing plant and machinery exceed 75%
of the aggregate cost of plant and machinery and the
cost of installation, the total cost will be treated as an
expenditure on a building. (para 67)

 If the building qualify as an industrial building, then it

will qualify for IBA.

 Hence, the plant and machinery will not qualify for

capital allowance.

 Refer Example 12, 479

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Example 5:
Mari Masak Sdn Bhd inccured the following expenses for
the financial YE 31/5/2011 in relation to its manufacturing
business:
Cost of plant and machinery installed in a factory RM85k
Cost of preparing, cutting and levelling land
to prepare a site for installation RM260k

Determine the QBE.

Answer

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Example 6:
2
 Star Bhd. Incurred the following expenditure to
construct a factory:
– Cost of land RM280,000
– Legal fees for acq. of land RM6,000
– Cost of approving plan RM15,000
– Construction cost RM180,000
– Cost of demolishing an old factory RM35,000

 Required:
Determine the QBE for the factory

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 2
Answer:
QBE for the factory:
– Cost of approving plan RM15,000
– Construction cost RM180,000
RM195,000

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Purchased Industrial 2
Building

 Prior t year of assessment 2005, to

determine the qualifying building
expenditure (QBE) for purchase building,
we applied either Para. 4 or Para 5.

 Effected from year of assessment 2005, in

the case of a purchased building, the
purchase price will be taken as the
qualifying building expenditure (QBE).

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 Qualifying Building 2
Expenditure (Para. 3, Sch. 3)
Purchase Building
– The QBE depends on whether the building was in
use as an industrial building or not within one month
before the purchase.
1) Purchased building in use within one month of
purchase (Para 4)
– The QBE incurred by the purchaser on building
shall be either the lower between:
» The purchase price
» The RE at the date of the purchase plus
taxable BC of vendor.
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Example 7: 2
Mesra Bhd. is a manufacturer, incurred RM160,000 to
construct a building on 1 May 2008. The building was
used as a factory until 1 Sept. 2012 when it was sold
to Budi Bhd. for RM135,000. Both adopt 31 Dec as
their accounting date.

Mesra Bhd.
YA 2008 QBE RM160,000
IA (10% ) (RM16,000)
AA (2%) (RM3,200)
RE RM140,800

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YA 2009 AA (2% x 160,000) (RM3,200)
RE RM137,600
YA 2010-2011 AA (3%x160,000x2yrs) (RM9,600)
RE RM128,000

YA 2012 Disposal value (RM135,000)

Bal. charge RM7,000

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 2
2) Not used as industrial building within one month
before the purchase (Para 5, Sch. 3)

The QBE incurred by the purchaser on building shall

be either the lower between:
 The purchase price
 The cost of construction less all allowances
including Notional allowance given if the
building had been used as industrial building
from the date of construction to the date of
purchase.

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Example 8: 2
Jaya Bhd. constructed a building in 1997 at a cost of
RM600,000. It was not used as industrial building.
On 12 August, 2002, the building was sold to Melati
Sdn. Bhd for RM510,000. Melati Sdn. Bhd is a
manufacturing company and it uses the building as a
factory. The accounting dates for both company are
31 December.

Answer:

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 Discussion 2
Purchase price RM510,000
OR
Cost of construction RM600,000
Less: Notional allowance (YA 97-02)
(2% x RM600,000 x 5) RM 60,000
RM540,000

 Since the lower is the purchase price, thus QBE to Melati

is RM510,000.

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Date Of Expenditure Incurred 2

 Expenditure on the construction of a building

is deemed to be incurred on the day in
which the building is completed.

 In the case of a business that is about to

commence, any expenditure incurred before
the commencement of the business –
deemed to have been incurred on the day
the business commenced.

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Example 9:
Lighting Sdn Bhd manufactures light bulb, construct a
building and completed on 15/9/2011. They commenced
trading on 1/2/2012 (Year ended 31/12). When the
company can claimed the QBE?

Answer

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Person Eligible To Claim IBA 3
 To qualify for IBA, a person must qualify three
conditions:
– Must have incurred capital expenditure on the
construction of building (including reconstruction and
rebuilding).
– The building must be industrial building.
– Must be in use for the purpose of business.

 In the case where a person who owns a building grants

a lease and that building is used as an industrial building
by lessee – then the lessor is eligible to claim IBA (para.
60).

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Example 10:
Steven Park constructed a building at qualifying
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exp. of RM3.2m. It leases the building to Jaya
Bhd. who uses the building as a factory. Later,
Jaya Bhd incurred RM200,000 to build another
building at the leased building. The second
building is used as an electricity power supply
station for factory.

Answer:

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 3
Relevant interest (para. 49 -51)
Interest in the building to which the person
who incurred the expenditure was entitled to
when he incurred the said expenditure.

May refer to page 484 – 485 (example 14,15)

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Initial Allowance (Para. 12 & 13) 4

 Initial Allowance (IA) is given for the year in which the

expenditure was incurred if:
– The building was owned at the end of the basis
period.
– Be the owner of the building at the end of basis
period.
– The building is used or about to be used as ind.
building at the end of basis year.

 If the building was disposed off in year in which it was

constructed or purchased, the person will still qualify for
IA if it was used as IB at some time before the disposal.
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 4
Constructed Building
The rate for Initial Allowance (IA) is 10%.

Purchased Building
A person who purchase an industrial building
does not qualify for IA (prior YA 2002).
However, for building fall under Para. 3A, the
purchaser entitle to claim IA.

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 Annual Allowance (Para. 16 & 4
17)
 An annual allowance (AA) will be given to a person who:
– has incurred QBE on the construction/purchase of
industrial building.
– is the owner of the building at the end of basis period.
– the building was in use as industrial building for the
purpose of a business.

 Constructed Building
– The rate of annual allowance is 2% on a straight line
basis.
– However, with the effect of YA 2002, the rate is 3% on a
straight line basis.
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 4
Purchased Building
The rate is based on permitted fraction
prior to YA 2002.
However with the effect from YA 2002,
annual allowance is based on permitted
fraction or 3% of QBE, which ever is
higher.

Refer Choong Kwai Fatt ( additional

references)

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 Permitted Fraction 4
Formula for permitted fraction:
– Year of assessment of construction of the
building was completed xxx
– (+) 50 yrs
xxx
– (-) Year of assessment the building
was purchased (xxx)
xxx
– (+) 1 yr
xx_

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Example 11:
Satellite Bhd constructed an industrial building on
1/1/95. In 2001, it sells the building to Settle-it
which also uses it as an IB. Compute the
permitted fraction which will be used by Settle-it
for claiming annual allowance.

YA – construction 1995
+ 50 yrs
2045
(- ) YA - purchased (2001)
44
+ 1 yr
45
The number of years from YA2001 to YA2045 = 45

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Special Allowance (Construction 4
Building)
 The taxpayers is not entitled to an
initial allowance in the case of
buildings provided as living
accommodation for employees in
the manufacturing, hotel or tourism
sector or in an approved service
project and other.

 Special allowance of 10% in the

basis for the year of assessment.

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Temporary Disused (Para. 56 5
& 57)
 An industrial building which is temporarily
disused shall deemed to be in use for the
purpose of the business if:
– It was in use immediately before becoming
disused
– During the period of disuse, it is constantly
maintained in readiness to be brought back
into use.

 Therefore in this case, the building is eligible for

annual allowance, otherwise there will be no
annual allowance given.
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 Balancing Charge & Balancing 6
Allowance (Para. 33 To 37)
 When person disposes of an Ind . Building, a balancing
adjustment can arise.

 Where RE exceeds its disposal value – balancing

allowance:
[RE > Disposal value]

 Where its disposal value exceeds RE– balancing charge:

[RE < Disposal value]

 Balancing charge imposed cannot exceed the total IBA

actually given to the seller.
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Meaning Of Disposal (Para. 48) 6

 The act defines disposal as:

– The sale, transfer or assignment of

the relevant interest in the building.
– The termination of concession.
– The demolition or destruction of the
building
– The building ceases to be used as
industrial building.

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 Meaning Of Disposal Value 6
(Para. 62)
 Where a building is disposed of, its disposal value will
be:
– The market value at the date of the sale, transfer or
assignment or
– The net proceeds of the sale, transfer or assignment,
whichever is greater.

 Where a building is destroyed or demolished, the

disposal value will be:
– The compensation or insurance recovery received or
– The market value, whichever is greater.

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Building Owned For Less 6
Than Two Years
 When a person incurred qualifying
expenditure in respect of an industrial
and it owned for less than two years, the
DG may direct that no allowances shall
be given.

 If allowances have already been given,

they shall be withdrawn by imposing a
balancing charge in the year of disposal.

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 Other Issues 6
 Building constructed for Government use (para. 67B, 16A,
Sch 3):
 Initial allowance of 10%
 Annual allowance of 6%
Given against the lease income from the Government.

Example 12:
TCD, a property developer company enter into Built-lease transfer
contract with Malaysian Government in 2005 to construct an
Office Complex in Putrajaya. The MoF approved that construction
qualify as IB. The complex was completed in 2008 and was
leased to the Government on 1.1.2009 for a lease rental of
RM200,000 per month for 20 years. The QBE was RM3.5mil. On
1.2.2010, Malaysian Gov made a compensation of RM800,000
to TCD. Compute the IBA for YA2009 & 2010 (YE 31/12)
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Answer:
QE 3,500
YA2009
IA 10% (350)
AA 6% (210)
RE 2,940

YA2010 Compensation (800)

2,140
AA (2010) 6% x 3,500 (210)
RE 1,930

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 Qualifying renovation or refurbishment expenditure
(para. 8A, 32A): page 496, example 23

 Renovation or refurbishment expenditure on a

business premises is capital expenditure which
is not taxable.

 However, is the building use for business during

10.3.2009 to 31.12.2010 shall be given
allowances of 50% in that year and 50% the
following year but restricted to RM100,000.

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TUTORIAL 4 –
TOPIC 2
FOR PRESENTATION
PURPOSE…

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TUTORIAL 4 –
TOPIC 2
FOR SUBMISSION
PURPOSE…

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THANK YOU

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