chapter 3b iba[1]

7/28/2019 Chapter 3B IBA[1]

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INDUSTRIAL BUILDING

ALLOWANCE.

By

Philip Lim


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Qualifying Building Expenditure

Paragraph 3, Schedule 3, ITA 1967 QBE is capital expenditure incurred on the

construction or purchase of a building which is beingused at any time after its construction or purchase asan industrial building

Para 63, Sch 3 Industrial Building is defined as

A factory

A dock, wharf, jetty or other similar building

A warehouse let out to public

Building used in the utility business or telecommunicationservices

Building used in the working of a mine or farm

Mill, workshop in connection with the working of mine


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Factory is defined as: A building consisting of a mill, workshop or other

building for the housing of machinery or plant used inthe manufacture of any product or the subjection of

goods or materials to any process or the generatingof power used for the purposes of that manufacture orprocess

A building used incidental to the manufacturingbusiness

A workshop used for the repair or servicing of goodswhich is carried out in conjunction with or incidental toa business of selling those goods is not considered asa workshop for the purpose of industrial buildingsallowance


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A building (within the same curtilage as a

building which is used as factory) used for the

storage of any raw material, fuel or stores

necessary for the manufacture of that productor the processing of those goods or materials,

or the storage of that product or those goods

or materials when processed prior to the sale

of those goods or materials


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Certain building treated as IB

Buildings used for staff welfare [Para 65(1)]

Canteen

Recreational facilities

Conditions:

Must have the existence of an industrial building

Additional building for the benefits of the

employees


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Living Accommodation for

employees

Farm (Para 65(2))

Where a building is used for the welfare of persons,

or as living accommodation for a person, employed in

connection with working of a farm, then the building isan industrial building provided the building is likely to

be of little or no value to any person except in

connection with the working of that farm or of another

farm

Can claim agriculture allowance on the building cost

instead


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Construction of employees quarters (Para

42(1))

Where an industrial building is in used in a business

and an additional building is constructed for livingaccommodation of employees employed in that

business, that additional building is treated as an

industrial building.

Initial allowance is 40% Employees are factory workers excluding directors or

individuals having control of that business or a person

who is a member of management, administrative or

clerical staff engaged in that business


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Manufacturing, hotel, tourism, approvedservice projects (Para42A(1))

A person carrying on the business of manufacturing,hotel or tourism business or an approve serviceproject (Schedule 7B) incurring qualifying capitalexpenditure on the construction or purchase of abuilding for living accommodation of employees, such

buildings shall be deemed as an industrial building. No initial allowance will be given and the annual

allowance is 10%.

For purchased building the purchase price shall be

treated as qualifying expenditure.


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Child care facilities (Para 42A (2))

A person carrying on a business n incurred

expenditure on the construction or purchase

of a building used as child care facilities foremployees employed in the business, such

building shall be deemed as an industrial

building

There is no IA rate and the AA rate is 10%


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School, educational institution &

technical training (Para 42B & C)

Where a person has constructed or

purchased a building for use as a school or an

educational institution approved by the

Education Minister for the purpose of the

business, such building shall be treated as anIndustrial Building.

Rate:- A.A = 10%


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Licensed private hospital, maternity and

nursing home (Para 37A)

Research (Para 37B) A building used for the purpose of research approved

by the Minister within the meaning of Section 34A(1)

Research by an approved Research Company or

institute under Section 34B

Research by an R&D company or Contract R&D

company as defined under Section 29D & 29E of the

PIA 1986)


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Storage of Goods for Export (Para 37C)

Building used for storage of goods for export or for

the storage of imported goods which are to be

processed and distributed or re exported. (AA 10%) Public Road & Ancillary Structures (Para

67A)

Where pursuant to an agreement with the Govt, a

person incurs capex on the constructionreconstruction extension or improvement of any

public roads and ancillary structures which is

recoverable through toll collection. (IA 10% & AA 6%)


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Building used in Approved serviceProject (Para 37E)

A building used solely for the purpose of the

provision of services and modernisation ofoperations in relation to an approve serviceproject will qualify for IBA

Approved service project are projects

undertaken by service sector intransportation, communications, utilities orany other sub-sector which are approved bythe Minister of Finance under schedule 7B


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Hotel building (Para 37F)

Approval by Minister of Tourism

Airport (Para 37G)

Capex on construction, reconstruction,

extension, improvement or purchase of any

building, runway or ancillary structures in

relation to an airport shall be treated as an IB


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Motor racing circuit (Para 37H)

Capex incurred on construction,

reconstruction, extension & implementation of

motor racing circuit or ancillary structures inrelation to a motor racing circuit as approved

by the Minister is deemed an IB

Old Folks care centre [PU(A) 143/2003]

-Approved by Social Welfare Department

- Rate of AA 10%


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It includes the following:- Architects fees

Cost of preparing plans, etc in connection with obtaining approvalfrom the local authority for the erection of the building

Cost of clearing the old site including the demolition of anyexisting building

Cost of construction which includes labour, materials, haulage,management, supervision and other overhead charges

Incidental expenditure on work which may be separatelycontracted eg drainage scheme, installation of water & electricity

facility Cost of installing fittings example electrical supply wiring, air

conditioning fans other equipment


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(cont) Legal charges, stamp duty etc connected with the building

Interest expenses on loan borrowed to construct building till itscompletion

Does not include cost of land and incidental expenses related to

the land


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75% Rule (Para 67)

If the cost of preparing, cutting, tunelling orlevelling land in order to prepare a site forthe installation of machinery or plant to be

used for the purpose of a business, then ifthat expenditure amounts to more than75% of the aggregate of that expenditureand the capital expenditure incurred on

that machinery & plant, the machinery orplant shall as regards that aggregateexpenditure be treated as a building.


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Plant & machinery cost P

Add : Cost of preparing,

cutting, tunneling/leveling land L

E

If L>75% of E E=QBEIf L75% of E P = QPE

(no tax relief for L)


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20 Capital allowances

Industrial building (IB)IB include:

Factory (refer definition Para 64)

Dock, wharf, jetty or similar building

Warehouse for mainly public storage

Building for

- farm business- mine business

- water, electricity or telecommunication business (for thepublic)


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Industrial building (IB)Special IB include:

Licensed private hospital, maternity/nursing home [Para 37A]

Building used for approved research or research undertaken

by approved R&D company or contract R&D company [Para

37B] Warehouse export / processing of imported goods

[Para 37C]

Building used for approved service project [Para 37E]

Hotel [Para 37F] Airport [Para 37G]

Motor racing circuit [Para 37H]

Living accommodation for non-management workers and child

care facilities [Para 42 and 42A]


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Industrial building (IB)Special IB include (contd):

Approved school and educational institution [Para 42B]

Approved industrial, technical, vocational training [Para42C]

Public road and ancillary structures which expenditure isrecoverable through toll collection [Para 67A]

Approved building constructed pursuant to agreement with

Government on a build-lease-transfer basis [Para 67B]

Retail shop, office, showroom DO NOT QUALIFY ASINDUSTRIAL BUILDING

Is this list complete??


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Initial Allowance (Para 12 & 13)

IA of 10% on QBE for constructed/ purchasedIB if:-

a) QBE incurred on construction/ purchase of an

IB;b) Building was in use/ about to be used as IB for

the purpose of business; and

c) Owner of the building at the end of the basis

period.


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Annual Allowance

(Para 16, Sch. 3)

W.e.f YA 2002 AA = 3%

Prior YA 2002 AA = 2%

Conditions:-

a) QBE incurred on construction/ purchase of anIB;

b) Building was in used as IB for the purpose ofbusiness; and

c) Owner of the building at the end of the basisperiod.


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Part of Building Used as IB

(Para 66, Sch. 3)

If cost of construction of non-qualifying part 10% of total construction cost of buildingQBE = proportion of building in used for

qualifying activity


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MD Trading Co bought the following assets in2004. Computers RM4,500

Motor vehicle (new) costing RM157,000 under hire

purchase. The tenure of the HP is 5 years and thedown payment is RM57,000

Electricity generator RM5,000

Used bus costing RM155,000.

Compute the initial and annual allowance forYA2004 and 2005.

If the MV is sold in 2006 for RM100,000,calculate the BC/BA.


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Shoes-R-Us Sdn Bhd which makes up its accounts to 31 Decemberannually, commenced its shoe manufacturing business on 1February 2004 in rented premises. The company completed theconstruction of a new factory in March 2005, incurring expenditureas follows:

RM Land 150,000

Architects design fees 35,750

Legal fees for purchase of land 1,800

Civil and structural works 411,000

Electrical and plumbing works 53,250

The factory was used in the shoe manufacturing business from June2005.

In respect of the new factory, determine the qualifying

industrial building expenditure, calculate the capital allowancesfor the year of assessment 2005 and state the residualexpenditure of the industrial building at the end of the year ofassessment 2005.


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In March 2004 Shoes-R-Us purchased a new motor car for its productionmanager. The relevant details were as follows:

RM

Total cost of motor car 145,800

Down payment 45,000

Hire purchase loan 100,800

Terms of hire purchase: Total number of monthly instalments 36

Number of instalments paid in 2004 9

Number of instalments paid in 2005 12

Principal repayment in each instalment payment 2,800

Calculate the capital allowances for the motor car acquired under hirepurchase for the years of assessment 2004 and 2005, and state theresidual expenditure of this asset at the end of the year of assessment2005.

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