CAPITAL

ALLOWANCES
 LEARNING OUTLINE

 Qualifying plant expenditure (QPE)

 Capital allowance (CA) for PPE
 Balancing adjustments

FOR EDUCATION PURPOSES

 Introduction
 Capital Expenditure is not deductible under s.39(1)(c)
 Depreciation (accounting) – disallowed tax deduction – a provision
 Capital allowances (CA) given instead on qualifying capital
expenditure (QCE) (Schedule 2, 3, 4)
 Capital [1] Allowance [2]
[1] –Based on the cost of the capital asset that qualifies
[2] –Calculated as a % of the cost

FOR EDUCATION PURPOSES

Introduction
 Capital allowance are given on the qualifying capital
expenditure under Schedule 2, 3 and 4
 The deductions in respect of capital expenditure:
• qualifying expenditure on machinery or plant
(Sch. 3);
• qualifying expenditure on industrial buildings (Sch. 3);
• qualifying agriculture expenditure (Sch. 3);
• qualifying forest expenditure (Sch. 3);
• qualifying mining expenditure (Sch. 2);
• qualifying prospecting expenditure (Sch. 4).

FOR EDUCATION PURPOSES

 No definition in in the Act;

What is
Plant & Machinery – straightforward

Machinery Plant – must be used in carrying on the business

? i.e. must serve a functional purpose

Not stock-in-trade

Not part of premise (setting of a business not

plant)
5
 What is “plant”
 Accounting term -tangible items that are held for use in the production
or supply of goods or services, for rental to others, or for administrative
purposes; and are expected to be used during more than one period
 Books (for self-employed lawyers)
 Munby vs Furlong (CKF, Chp 18, page 293)
 Décor, pictures, light fittings for hotel guests
 CIR v Scottish & Newcastle Breweries Ltd (CKF, Chp 18, page 296)
 Car park building (parking lots for rent)
 Recent case, DGIRv Tropiland S/B (2013) (CKF, Chp 18, page 297)
 Partitions in office ?
FOR EDUCATION PURPOSES
An item would Only be Qualified as plant

 An apparatus used for carrying on

business is “plant” (e.g. book, portable
and demountable dormitories, movable
office partitions)
 A mere part of the setting used for
carrying on the business is NOT “plant”
(electric lamps and fittings in shops,
ship used as a floating restaurant); and
 Shelter to the business is not “plant”
(canopy at a petrol station)

FOR EDUCATION PURPOSES

 Conditions for entitlement of Capital Allowances

i. Must be carrying on a business;

ii. Capital expenditure must have been incurred;
iii.Used for the purposes of the claimant’s business;
iv.Owner of the asset at the end of the basis period.

FOR EDUCATION PURPOSES

 Conditions for entitlement of Capital
Allowances

 PR No. 5/2014: Ownership of an asset - legal or beneficial:

• Where beneficial owner (who is not registered owner) of the asset has
incurred qualifying expenditure, the beneficial owner can claim CA
• CKF, Chp 18, page 301, Example 18.11

Krisnan operates a restaurant. Krisnan’s brother, Chandra, runs a grocery

store. Krisnan asked Chandra to buy him a van. Chandra paid for the van
and the van is registered in Krisnan’s name and will be used in the
restaurant business. Explain who is eligible for CA

FOR EDUCATION PURPOSES

 Format of capital allowance computation
YA 20XX RM
Qualifying expenditure (QE) XXXX
Less: Initial allowance (20%) XX
Annual allowance (table) XX (XXX)
Residual expenditure XXXX

QE means capital expenditure incurred on the provision, construction or

purchase plant and machinery used for the purpose of a business other than
assets that have an expected life span of less than two (2) years (PR:6/2015)

FOR EDUCATION PURPOSES

Qualifying Expenditure (QE)
General rule to establish QE:
 Para 2(1)(a), Sch 3
 Purchase price; plus
 Cost incurred on alteration of
existing building to install that
plant or machinery; plus
 Cost incidental to installation.

11
Qualifying Expenditure (QE)
QE shall include:
 Para 2(1)(b), Sch 3
 Cutting, tunneling, leveling land to prepare site to install plant or
machinery
 Condition – expenditure must not exceed 10% of total cost
 If 10%< cost < 75%, permanent lost
 If exceeds 75% - treat as industrial building and claim industrial
building allowance – para 67, Sch 3 - see later
 Para 2(1)(c), Sch 3
 Related to agriculture/plantation business

12
Illustration 1
RM182,400
Ace Sdn Bhd acquired a printing
87.8%
machine (non-heavy machine) costing
RM180,000 that was used in its
business during its financial year 11%
ended 30 June 2019. 1.2%
100%
The cost of alteration to the existing
building for installation of that machine
was RM22,600 and incidental costs of
installation was RM2,400.
Compute the Qualifying Expenditure
for the printing machine.

FOR EDUCATION PURPOSES

 Cost of preparing site to install machinery
(cutting and levelling land)
Cost of machine P
Cost of preparing site L
Aggregate E

CA IBA
Cost of
10% rule 75% rule
– cost (L) must be at most
preparing the – cost (L) must be at
site (L) will least 75% the aggregate
10% the aggregate
YES NOT get any
YES
tax relief
Aggregate (cost of machine Aggregate (cost of machine and
and the cost of preparing site) the cost of preparing site) =
= QE QBE
Illustration Ace Sdn Bhd acquired a
1.

generator costs RM200,000.

2 Costs for preparing and
leveling the site for the
installation is RM80,000.

1. What is the qualifying

expenditure for CA?

2. Would your answer differ

if costs for preparing site
is RM16,000? 2

15
 Qualifying Expenditure – Motor vehicles

 Maximum qualifying expenditure is RM50,000 .

 The qualifying expenditure is increased to a
maximum of RM100,000 on condition that:
• the motor vehicle is acquired NEW and the total
cost does not exceed RM150,000.
 The rules does not apply to commercial motor
vehicles:
• E.g. van, lorry, bus or motor vehicles licensed by
the appropriate authority for commercial
transportation of goods or passengers.
FOR EDUCATION PURPOSES
 Passenger MV
NOT
m p a ny’s Operating lease
co
ASSET
Leased new MV
• Deduct lease pymt against
gross income [s.33]
• Total lease pymt deduction
limit based on MV’s cash
price [s.39(1)(k)]:
• ≤ $150k, limit to $100k
• Otherwise, limit to $50k
Leased used MV
• Deduct lease pymt [s.33]
• Total deduction limited to
$50k [s.39(1)(k)]
• MV’s cash price disregarded
Term loan/ HP/ cash
Company’s
Purchased new MV asset
• CA for QE against adjusted
income [Para 2, Sch 3]
• Total CA claim limit based on
MV’s cash price [Para 2(2)]:
• ≤ $150k, limit to $100k
• Otherwise, limit to $50k
Purchased used MV
• CA for QE [Para 2, Sch 3]
• Total CA claim limited to $50k
[Para 2(2)]
• MV’s cash price disregarded
17
 Initial allowance

• Claimable on the first year by the owner.

• One off allowance
• IA would be given for assets bough and sold in
the same year if the assets have been owned
and used in the business

Annual allowance

• Claimable every qualified year

• From the date of purchase until sold
• No AA in the year of disposal

TYPES OF Balancing charges/allowances

ALLOWANCE • Arises from the sale or disposal of the qualifying

asset

18
Rate of Two components of capital allowance;
Capital •Initial allowance 20%

Allowance •Annual allowance

•Type of asset Rate (%)
• Office equip., furniture & fittings, others 10%
•Plant and machinery 14%
•Heavy machinery, motor vehicles 20%

Some special equipment given accelerated IA & AA up to 40% &

60%, e.g. equipment acknowledged by relevant agency with ability
to conserve energy.

19
 CA on Small Value of Assets (SVA)

 Small value assets <RM1.3k

 claim full deduction (100%) in year of acquisition, but cap
RM13k each YA [para 19A, Sch. 3]
 SMEs is not subject to the maximum limit of RM13,000 for the
100% CA on small value assets.
 SME is resident company with p/up capital of ≤2.5 and does not
control or controlled by (directly or indirectly) another co with p/up
capital ≥ 2.5m

FOR EDUCATION PURPOSES

Illustration 3
Acquisition of plant (not heavy machinery) worth RM150,000 in
2019. CA= RM51000
Year QPE IA AA RE
2019 150,000
2020 150,000

RE = Residual expenditure (para 68, Sch 3) i.e. the tax written
down value (TWDV)
AA = 14% - granted until RE/TWDV is nil, e.g. CA fully claimed
or asset written off or disposed (see later)
21
Recap on the format

51,000

FOR EDUCATION PURPOSES

 Arises when asset is disposed and:

• Disposal value (DV) > RE

• BC = DV - RE
• DV can be sale proceed or market value on
Balancing the date of disposal, whichever higher
[para 62, Sch 3]
charges (BC)
BC is added to the adjusted business income to derive
statutory income.

Maximum amount of BC is restricted to the capital

allowance that already claimed (initial allowance +
accumulated annual allowance)

23
Balancing Allowances
 Arises when qualifying asset is disposed and:
 Disposal value (DV) < RE
BA = RE – DV
 DV can be sale proceed or MV on the date of disposal, whichever
higher [para 62, Sch 3]
 In addition to disposal, also arise due to asset being scrapped,
exchanged or business permanently ceased.
 Balancing allowance is set off (deduct) against adjusted income of
the same business source
24
 Disposal of motor vehicles (non-commercial)
 Where there is a restriction of qualifying
expenditure, then when such asset is sold, the
disposal value will be at the same proportion to
the sales value as the qualifying expenditure
bears to the actual cost.

 Deemed DV =

FOR EDUCATION PURPOSES

Illustration 4
Mutiara Impian Bhd makes up its account to 31st of
March annually. The company acquired a used car on
1.7.2017 for RM75,000. The company disposed the
car on 30.3.2020 for RM39,000.
Which basis period??

Basis Period: 01.04.17 – 31.03.2018 YA 2018

FOR EDUCATION PURPOSES

Qualifying expenditure (restricted)
YA 2018 (current year basis) 31.3.2018
Initial allowance
Annual allowance
Residual expenditure
YA 2019 31.3.2019
Annual allowance
Residual expenditure
YA 2020: 31.3.2020
Sales proceeds: 39,000
Disposal value: (50,000/75,000*39,000)
????????
FOR EDUCATION PURPOSES
Illustration 5
Compute the BC or BA for the following:
 Disposal of a machinery with cost of RM180,000, RE of RM93,600 and sales
proceed of RM150,000.

 Disposal of a plant with cost of RM160,000 , RE of RM130,000 and sales

proceed of RM170,000

 Disposal of a private motor vehicle with cost of RM160,000, RE of RM20,000

and sales proceed of RM80,000. 

28
Capital Allowances
 Computation of CA is at the end of basis period.
 Qualifying asset acquired at any time during a basis period, would
be given a full year CA, no time apportionment is required.
 Claimant must be owner end or during a basis period.
 If asset disposed during the YA:
 IA allowed even if asset is disposed during the basis period
provided asset is in used sometime prior to disposal
 AA disallowed – asset is no longer in use at the end of basis
period.

29
HIRE
PURCHASE

30
Hire Purchase
 For tax payers who purchased an asset via a hire purchase agreement,
capital allowance will be accounted for installments paid.
 QE is computed by adding the deposit and the installments paid
which excluded the interest
 HP transaction:
 Capital payment (deposit and instalment)
Claim CA when
 Hire purchase charges aka interest charges payments are made

Revenue expenses deductible

against business income

31
 32

Illustration 6

Siew Lynn bought a machine through hire purchase on 31.12.2015 to

be used in her business. Cash price is RM80,000. She paid deposit of
RM11,000 on 1.1.2016. According to the hire purchase agreement, she
has to pay RM1,500 every month for 60 months from 1.2.2016.
On 23 September 2019, Siew Lynn sold the machine for RM 35,000.
Compute capital allowance, balancing allowance or balancing charge
(if any) for each year of assessment. (YA 2016 till YA 2019). The
company closes its accounts on 31 December every year.
 RM

Cash Price

Deduct :

Hire Purchase
Transaction Divided by:

Capital portion per month

OR

FOR EDUCATION PURPOSES

 RM RM
Deposit payment 11,000
Monthly installment (1,500*60 months) 90,000
101,000
Deduct : Cash price (80,000)
Interest portion * 21,000
*Interest
Monthly interest of hire purchase
21,000/60=RM350 per month
So, monthly capital expenditure is =RM1,500-RM350
= RM1,150
34
Machine capital allowance calculation Accumulate
d Q.E

Cost = 80,000
YA 2016
Deposit Payment (1.1.2016)
Capital installment 23,650
Initial allowance (23,650*20%)
Annual allowance (23,650*14%)
Residual expenditure

YA 2017
Capital installment
(1,150*12month)
Initial allowance
Annual allowance (13,800*20%)
(37,450 *14%)
Residual expenditure

FOR EDUCATION PURPOSES ONLY 35

 Accumulated
Q.E

YA 2018 (beginning RE) 37,450

Capital installment (1,150*12months) 13,800 13,800
35,206 51,250
Initial allowance
(13,800*20%) 2,760
Annual allowance
(51,250*14%) 7,175 (9,935)
Residual expenditure
25,271
YA 2019
Capital installment
(1,150*9months) 10,350 10,350
Initial allowance 35,621 61,600
Annual allowance---
(10,350*20%) 2,070
Residual expenditure
(asset already sold) nil 2,070
Disposal Value 33,551
35,000
Balancing Charge 1,449
36
Assets owns for less than 2 years

 When a qualifying asset is disposed off

in less than 2 years, para 71 of Sch 3
states that Director General is allowed to
imposed a ‘claw back’ of all allowances
claimed (IA & AA) within the two years
possession period in the form of
balancing charge.
 Reverse the CA claimed previously, that
is:
BC = CA claimed
37
Assets owns for less than 2 years

 Para 71 of Sch 3 claw back provision will not apply:

o to genuine disposal of asset that is not suitable for the business entity
or
o the intention of the disposal is to bring better efficiency to operation

38
Illustration 7

• Alan Sdn Bhd purchased (cash) an equipment at RM100,000

on 15 Apr 2017 (year end 31 Aug). Sold the equipment on 2
Feb 2018 for RM60,000. The CA and the BC for Alan Sdn
Bhd are:
• Basis period : 1/9/2016 – 31/8/2017
• YA2017 IA 20% & AA 14% RM34,000
• YA2018 BC (all CA claimed) RM34,000

FOR EDUCATION PURPOSES

Special Cases
If the plant or machinery was in use
for non-business purpose prior to
being used for the business:
If the plant or machinery was in use
for a business outside Malaysia and
is bought into use for the purpose of
a business in Malaysia (involve HQ
and branch (same owner))
FOR EDUCATION PURPOSES
QPE – Market value of the
machinery or plant on the
day it is brought into
business use. (Para 2A)
QPE - The market value or
net book value of the
machinery or plant;
whichever the LOWER; on the
day it is being brought into
business use. (Para 2C)
  Similar to QE for CA
 RE > disposal value = BA
 RE < disposal value = BC
 Disposal value determined
Balancing according to para 62, Sch 3
Adjustments
 BC restricted to the amount of
allowances claimed
 Claw back of allowances for
disposal less than 2 years

41