Masters of Financial PlanningTaxation Planning

CAPITAL ALLOWANCES

By: Associate Professor Dr. GholamReza Zandi

zandi@segi.edu.my

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Capital Allowances

Revenue Expenditure incurred in the Production of Gross

Income is allowed as deduction from Gross Income to arrive

at Adjusted Income [sec 33(1)].

Capital Expenditure is not deductible under sec 39(1)(c) as

there is no real loss to the taxpayer. Thus accounting

depreciation is not allowed as it represents capital cost of the

asset.

However, from an economic perspective, fixed assets

depreciate thus capital allowances are given.

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The ITA allows a deduction for the use of assets in the form of

capital allowances which are deductible from Adjusted Income

– sec 42 & Schedule 3

Qualifying Expenditure on Plant & Machinery

Qualifying Expenditure on Industrial Buildings

Qualifying Agricultural Expenditure

Qualifying Forest Expenditure

Allowances on qualifying Prospecting Expenditure is deductible

from Aggregate Income (Schedule 4/ Sections 43 and 44).

Capital Allowances (Cont’d)

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Capital allowances (CA) are not mandatory and are granted if

taxpayer makes a claim in writing each year of

assessment(YA).

Capital allowances are only given in respect of a business

source. Capital allowances cannot be claimed against

employment income.

CA is calculated for a YA.

CA are deducted from the Adjusted income to arrive at the

Statutory Income.

Capital Allowances (Cont’d)

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Plant and Machinery

Capital Allowances fall into the following categories for P&M:

Initial Allowance (IA)

IA is given for the first basis year of purchase.

Annual Allowance (AA)

AA is allowed in first year and every year until the qualifying

expenditure is fully written off or the asset is sold.

Balancing allowance and balancing charge are calculated

when the asset is disposed of.

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Rates of Capital Allowances for Plant and Machinery

Heavy machinery & motor vehicles - 20%

Plant & machinery (general) - 14%

Others (Example: office equipment, furniture & fittings) - 10%

Assets with life span not exceeding 2 years -

replacement basis

Accelerated depreciation allowance is given to certain

categories of plant and machinery.

Example: environmental protection equipment:

IA: 40% and AA: 20%

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Conditions to Claim capital Allowance

Person incurring the expenditure must be carrying

on a business

The capital expenditure must have been incurred

in providing the plant or machinery.

The plant /machinery must be used for the

taxpayer’s business.

The taxpayer must be the owner of the asset at

the end of the basis period.

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Scheme for Deduction of Capital Allowances under Schedule 3

Adjusted Income XX

Add Balancing Charges X

Less:

Capital allowances b/f from previous Y/A X

Capital allowances for Current Year X

Balancing allowances X (XX)

Statutory Income XX

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Carry Forward of Capital Allowances

Where CA claimed cannot be fully set off against the

Adjusted Income in any YA, they are carried forward

for set off against future profits from the same business

source (at the same statutory income stage).

CA from one business cannot be set off against the

profits of another business. So, if a business ceases

permanently, any unabsorbed allowances in relation to

that business are lost forever.

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Business Motorcars

The qualifying expenditure for motor cars is restricted to a

maximum of RM50,000. There is no limit for licensed for

commercial transportation of goods or passengers .

The initial allowance of 20% & annual allowance of 20% is based

on the notional cost ceiling of RM50,000, not the actual cost of the

car, up to a maximum capital allowance of RM50,000.

Capital allowance on business motor vehicles is increased to

RM100,000 if:

it has not been used prior to purchase (i.e. new); and

total cost of the vehicle does not exceed RM150,000.

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Industrial Building Allowance

IBA is granted to any person who incurs qualifying

expenditure on “the construction or purchase of an

industrial building/structure for use in a qualifying trade”.

IBA is not extended to cost of land and its incidental costs.

To be an ‘industrial building’ it is must be in use for a

business assessable under sec 4(a) and the business must

fall within any of the qualifying purposes mentioned in the

definition of building.

Initial allowance of 10% and annual allowance of 3%.

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IBA which cannot be fully set off can be carried forward and

set off against future business income from the same source.

Where capital expenditure is incurred on the land to prepare

site for installation of plant or machinery for use in business,

if expenditure exceeds 75% of total cost of plant or

machinery and installation, then total cost qualifies for IBA.

If expenditure is less than 75% or less of total cost, only the

P&M will qualify for CA (i.e no IBA).

Industrial Building Allowance (Cont’d)

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Agricultural Allowance

A person who incurs qualifying agriculture expenditure

will be given agriculture allowance

Cost of plant and machinery used in the farm would be

given normal capital allowances. Hence it would not

qualify as qualifying agricultural expenditure.

The land cost is excluded from the meaning of

qualifying agriculture expenditure

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Qualifying Agriculture Expenditure (Para 7, Schedule 3 ITA)

Clearing and preparation of land. Planting (but not replanting) of crops on land cleared

for planting. Construction on a farm of a road or bridge. Construction on a farm of a building used for the

purpose of a business provided for welfare of persons, or as living accommodation for a person, employed in that farm.

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Rates of Agriculture Allowance

Qualifying Expenditure Rate of allowance

Construction of buildings for staff welfare or accommodation

20%

Other buildings for business 10%

Qualifying expenditure for other than buildings Example: clearing, planting etc.

50%

Construction on farm of road or bridge

50%

The End