CAPITAL

ALLOWANCES AND INDUSTRIAL

BUILDING ALLOWANCE

ZB BKAT2013 A221
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Term Meaning

Capital Allowance Amount from capital expenditure that can be deducted from adjusted
(CA) income
Qualifying Expenditure incurred on the provision, construction or purchase of
Expenditure (QE) P&M used for the purpose of a business other than assets that have an
expected life span of less than two (2) years.

Residual Balance of capital expenditure after deducting IA,AA or NA. (QE – IA,
Expenditure (RE) AA@NA)
Balancing Charge the difference where the disposal value of an asset is more than the
(BC) residual expenditure.
Balancing the difference where the disposal value of an asset is less than the
Allowance (BA) residual expenditure.
Notional Allowance equal to the annual allowance if claimed or could have been claimed. It
(NA) cannot be deducted after Adj. Income.
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• The ITA only allows revenue expenses in
determining adjusted business income
• Depreciation is not a deductible expense since it is
merely an accounting allocation of cost
• However, the ITA provides a relief of capital
expenditure (capital allowance) in arriving at
statutory business income

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Capital Allowance Cont’d

ADJUSTED BUSINESS INCOME

CAPITAL ALLOWANCE

STATUTORY BUSINESS INCOME

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How to treat CA to arrive at Statutory
Business Income

Adjusted Income XXX

+ balancing charges XXX
YYY
- capital allowance XX
- balancing allowance XX (XX)
Statutory Income YYY

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• CA is given only for a person who is carrying
on a business (S4a) & incurred qualifying
expenditure
• CA is calculated on straight line method on the
basis of a prescribed rate of allowance
• CA is given in the year in which the expense is
incurred & continue to be given in subsequent
years until the expenditure become nil/ disposed

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 Treatment of CA cont’d

• unabsorbed CA are carried forward in future years

• CA do not increase the adjusted loss
• CA in respect of one business cannot be set off against
the profit of other business
• balancing allowance/charge may arise on disposal
• CA is deducted from Adjusted Business Income to
arrive at Statutory Business Income.
• In the case CA > Adjusted Business Income; or business
suffers loss, CA cannot be absorbed in that particular
year

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• Type of capital expenditure qualify for CA:
 Plant & Machinery Sch 3
Tax 1
 Industrial buildings Sch 3
 Agriculture expenditure Sch 3
 Forest Expenditure Sch 3
 Mining Expenditure Sch 2
 Prospecting Expenditure Sch 4
 Approved agricultural project Sch 4A
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• Coverage
 Meaning of P & M
 Persons entitled to capital allowance
 Qualifying expenditure
 Types of allowance
 Residual Expenditure
 Balancing allowance/charge
 Other Considerations

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• Originally not defined in the Act
• Case law provides some guidance
• Defined in the Act, starting 2021
• Example of P & M
 books of practicing lawyer
 knives & lasts of shoe manufacturer
 concrete dry dock
 swimming pool
 movable office partition ... etc

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Persons entitled to CA

• The qualifying capital expenditure must have been

incurred

• The asset must be in use for the purpose of

the relevant business
• The claimant must be the owner of the asset
at the end of the relevant basis period

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• Qualifying expenditure is capital expenditure
incurred on the provision of P & M used for the
purposes of a business & includes:
 expenditure incurred on the alteration of an
existing building for the purpose of installing the
P & M & other incidental expenses incurred on
such installation
 expenditure incurred in preparing, cutting,
tunneling / leveling land to prepare a site for the
installation of P & M
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 expenditure incurred in preparing, cutting, tunneling
/ leveling land to prepare a site for the installation of
P&M
 provided that such expenditure (i.e. costs of
preparing site for installation) does not exceeds 10%
of the aggregate of such cost & the cost of P & M
 The 10% rule

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 P & M (The 10% Rule)

Example
Cost of Machinery RM200,000
Cost of preparing site 80,000

= 80,000 / (200,000 + 80,000)

= 28.6% (exceeds 10%)
QCE = RM200,000
(RM80,000 does not qualify)
• Other Example
 See e.g. 6.1 (pg. 194-195)
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QE = 160,000 QE = 150,000

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Qualifying Expenditure cont’d

• expenditure incurred on fish ponds, animal

pens, chicken cops, cages, building (other than
living accommodation to director, member of
management, admin/clerical staff) & other
structural improvements on lands
• QE for non-commercial vehicle is restricted
to RM100,000 (provided that the cost of
such vehicle does not exceeds RM150,000)
otherwise the amount of QE is restricted to
RM50,000)
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Types of Allowance

• Initial Allowance
• Annual Allowance

Initial Allowance
• IA is a once-for-all allowance granted in the first
basis year
• IA is given at the rate of 20% on QE

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YA2020
Qualifying Expenditure XXX
- Initial Allowance XX
- Annual Allowance XX (XX)
Residual Expenditure YYY
YA2021
- Annual Allowance XX (XX)
Residual Expenditure YYY

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• Balancing Allowance (BA) or Balancing Charge (BC)
may arise on the disposal of the assets

BA = Disposal Price < Residual

Expenditure
(Loss – deduct from Adjusted Income)

BC = Disposal Price > Residual Expenditure

(Profit – add to Adjusted Income)

(Note: BC is restricted to actual CA claimed)

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 Initial Allowance cont’d

• Certain types of P & M are subject to different rate of IA

 40% - waste recycling plant and machinery
 40% - conservation of energy P & M
 20% - power quality equipment
 20% - P & M used in agriculture business
 20% - ICT equipment and software
 40% - buses using natural gas
 10% - imported heavy machinery
(building & construction industry only)
 60% - tin mining/timber industry*
 30% - building & construction industry*

* taxpayer may elect in writing to claim an IA of 20%

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Initial Allowance cont’d

• Condition for IA
 The QE must have been incurred
 The asset was used for the purposes of the
business
 The claimant must be the owner of the asset the
end of the basis period

• IA is not given to assets stipulated in para 2A, 2B

& 2C of Sch. 3

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Annual Allowance

• Annual allowances are continuing allowance made

every year
• granted on a straight-line basis by applying a fixed
percentage on the QE until it is completely written
down to nil
• The amount of AAs each year is the same
• condition for AA
 similar to IA

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 Annual Allowance cont’d

• The AA rates:
 20% - Heavy machinery & motor vehicles
 14% - Plant & Machinery (general)
 10% - Others (office equipment, furniture etc.)
 Special case (e.g.)
 20% - ICT equipment and software packages
 20% - buses using natural gas
 40% - renovation on building at TRX (2014-2020)

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Example 1

• Amat (Y/E 31/12), bought a van on 1/5/2018

for RM30,000
• It was disposed of at RM10,000 on 3/10/2021

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Example 1: Solution

YA2018
Qualifying Expenditure 30,000
- I A (20%) 6,000
- AA (20%) 6,000 (12,000)
Residual Expenditure 18,000
YA2019
- AA (6,000)
Residual Expenditure 12,000

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Example : Solution

Residual Expenditure 12,000

YA2020
- AA (6,000)
Residual Expenditure 6,000
YA2021
- Disposal Price (10,000)
Balancing Charge 4,000

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 Other Consideration :
Small value assets (PR 3/2021)

• Small value assets (up to RM2,000 each; WEF

YA2020) to be given a full (100 percent) allowance
in the year of purchase.
• However, total of such allowance is restricted to a
maximum of RM20,000 per year.
• This limit is not applicable for SME companies
(YA2009)-limitless
• Taxpayers are given option to either claim the CA
100% or the normal CA
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 Other Consideration :
Dual Purpose

• The full amount of CA is deducted in arriving at the

RE
• However, the CAs are apportioned on the basis of
business use
• BA is restricted on the basis of business use
• BC is not restricted in accordance with private use

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Example 2

• Facts same as Eg. 1

 Amat (Y/E 31/12), bought a van on 1/5/2018 for

RM30,000
 It was disposed of at RM10,000 on 3/10/2021

• 1/3 of the usage was for private purposes

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 Example 2: Solution
YA2018
Qualifying Expenditure 30,000
- IA + AA (40%) (12,000) x 2/3 = 8,000
Residual Expenditure 18,000
YA2019 : AA (6,000) x 2/3 = 4,000
Residual Expenditure 12,000
YA2020 : AA (6,000) x 2/3 = 4,000
Residual Expenditure 6,000
YA2021 : Disposal (10,000)
Balancing Charge 4,000
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 Example 3

• Facts same as E.g. 2 , except

 The van was disposed of at RM3,000 on
3/10/2021

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 Example 3: Solution
YA2018
Qualifying Expenditure 30,000
- IA + AA (40%) (12,000) x 2/3 =
Residual Expenditure 8,000
18,000
YA2019 : AA (6,000)
Residual Expenditure 12,000 x 2/3 = 4,000
YA2020 : AA (6,000)
Residual Expenditure 6,000 x 2/3 = 4,000
YA2021 : Disposal (3,000)
Balancing Allowance 3,000 x 2/3 = 2,000
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 Other Consideration :
Hire Purchase Agreement
• P & M is deemed to be owned by the taxpayer
• However, the CAs (IA & AA) would be given based on
the capital portion of any installment paid
• The interest element is deductible in arriving at
adjustment income

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 Example 4

AA bought a car on the following terms:

Cash price RM24,000
HP Price 30,000
Deposit (paid on 1/7/2019) 12,000
Monthly installment (24 months) 750
(starting 31/7/2019)

Year end 31/12

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 Example 4: Working

Monthly Interest
= (HP price - Cash price)/24 months
= (30,000 - 24,000)/ 24
= 250
Monthly principal
= 750 - 250 = 500
Installment 2019 = 500 x 6 = 3,000
installment 2020 = 500 x 12 = 6,000
installment 2021 = 500 x 6 = 3,000
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Example 4:

YA2019
Qualifying Expenditure
Deposits 12,000
Installment 2019 3,000
15,000
- I A (20% x 15,000) 3,000
- AA (20% x 15,000) 3,000 (6,000)
Residual Expenditure 9,000

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Example 4: cont’d

Residual Expenditure 9,000

YA2020
Installment 2020 6,000
15,000
- I A (20% x 6,000) 1,200
- AA (20% x 21,000)
21,000 4,200 (5,400)
Residual Expenditure 9,600

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Example 4: cont’d

Residual Expenditure 9,600

YA2021
Installment 2021 3,000
12,600
- I A (20% x 3,000) 600
- AA (20% x 24,000)
24,000 4,800 (5,400)
Residual Expenditure 7,200

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Example 4: cont’d

Residual Expenditure 7,200

YA2022
- AA (20% x 24,000) (4,800)
Residual Expenditure 2,400
YA2023
- AA (20% x 24,000) (2,400)
Residual Expenditure -

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 Other Consideration :
Temporary Disuse

• P & M must be in use/deemed to be in use for the

purposes of a business in order to claim CA
• However, temporary disuse can be ignored, provided
that:
 the asset was in use in the business immediately
prior to disuse &
 During the period of disuse, the asset is
constantly maintained

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 Other Consideration :
Assets owned for < 2 years

• The DG may withdraw the CA given by way of

balancing charge in the year of disposal
• unless reasonable explanation/ commercial justification
is provided

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 Other Consideration :
Non-commercial vehicle

• QE for non-commercial vehicle is restricted to

RM100,000 (provided that the cost of such vehicle
does not exceeds RM150,000) otherwise the amount of
QE is restricted to RM50,000
• In this case, the disposal price shall be reduced
accordingly (restricted) as follow:
= (Restricted QE/ Actual cost) x Sale proceeds
• See example – 6.14 (pg. 214-215)

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• Coverage
 Meaning of IBA
 Persons entitled to IBA
 Qualifying Building expenditure
 The 75% rule
• The 10% rule
 Types & Rate of allowance

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Para 63, Sch 3 – Industrial building (IB) includes:
 A factory;
 A dock, wharf, jetty or other similar building;
 A warehouse let out to the public;
 Buildings used in the utility business (supplying water
or electricity) or telecommunication services;
 Building used in the working of a mine or farm;
 Mill, workshop, in connection with the working of
mine;
read more on - PR 8/2016, PR10/2016, PR 3/2018

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 Living accommodation of employees, child care facilities,
licensed private hospital.
 Building used for research and training;
 Building used for approved industrial training;
 Warehouse for storage of goods for export of for storage
or imported goods for processing and re-export;
 Buildings used or approved service projects;
 Building constructed on a build-lease-transfer basis;
 Hotel; airport; motor racing circuit; or old folks care
centre.

More, see page 229

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 The person must have incurred the QBE on the
construction or purchase of an industrial building
(which may not be the same basis period).
 The person was the owner of the building at the end
of basis period.
 The building was in use as an industrial building for
the purpose of a business.

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 QBE is capital expenditure incurred on the construction
(or purchase) and incidental cost exclusively related to
the building. It includes:
1. Architect’s fees;
2. Cost of preparing plan;
3. Cost of clearing the old site including the demolition of any
existing building;
4. Cost of construction, includes labour, materials, haulage,
management, supervision, etc.
5. Interest expenses (until the building is completed)
6. Incidental expenditure on work (i.e. separately contracted for
drainage, installation water, electricity)
7. Cost of installing fittings
8. Legal charges, etc.
 See example – 6.15 (pg. 233-234)
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 The following cost does not qualify for
1. cost of land
2. legal fees relating to acquisition of land
3. legal expense on loan for construction

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 QBE: the 75% rule
 Where capital expenditure incurred on preparing,
cutting, tunneling or leveling land in order to prepare
a site for installing of plant and machinery to be used
for a purpose of business and if such expenditure
exceeds 75% of the aggregate cost of that plant and
machinery and cost of installation, THEN
 the aggregate expenditure will be treated as QBE.

 See example – 6.17 & 6.18 (pg. 235-236)

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QBE: Partial use of building (the 10% rule)
IF part of a building or an extension of a building is used as
an IB and the other part of the building or extension is not
so used. Then
If the capital expenditure incurred on the construction of
the non-qualifying part does not exceed 10% of the total
cost of the whole building, the whole building qualifies as an
industrial building.
If the construction cost of the non-qualifying part exceeds
10% of the total cost incurred of the whole building, then
only the part that is used as an industrial building will
qualify for an IBA.
See example – 6.16 (pg. 235)
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 Generally, IA at 10% of the QBE incurred on the
construction or purchased building.
 Is given to a person if ALL the following conditions
fulfilled:
1. He incurred QBE on the construction or purchase of
an industrial building;
2. The building is used or about to be used as an
industrial building for the purpose of business; and
3. The person owned the building at the end of the basis
period

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 AA is given to a person who:
1. has incurred QBE on the construction or
purchase of an industrial building.
2. Is the owner of the building at the end of the
basis period; and
3. the building was in use as an industrial
building for the purposes of the business.
 If no election is made in any one year, an amount
equal to AA will be imputed known as notional
allowance (i.e. dummy).

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 Purpose IA AA
Building used as
-Factory etc.
-Airport
-Hotel
-Motor racing circuit 10% 3%
-Private hospital etc.
-Research & Training
-Approved service project
-Canteen, restroom, recreation room etc.
(pre-requisite – an existing IB)
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 Purpose IA AA
Building used as living accommodation for
employees in manufacturing, hotel @
tourism business, approved service
Building used for storage of goods for
export or storage for imported goods for
processed/distributed/re-exported None 10%
Building for kindergarten; child care centre;
old folks care centre; school or education
inst; industrial, technical or vocational
training
Special status (TRX Marquee; bioNexus)
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 Purpose IA AA
Public roads recoverable through toll
Building on built, lease transferred to 10% 6%
government
Privatisation project & private financing
scheme
Constructed building used as living
accommodation for employees 40% 3%
(Pre-requisite: an existing IB)

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 See comprehensive illustration Question- pg
237-241

ZB BKAT2013 A221
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