ATXB213 Malaysian Taxation 1 1

CHAPTER 7

CAPITAL ALLOWANCES

ATXB213 Malaysian Taxation 1 2

LEARNING OBJECTIVE

Definition of plant and machinery

Determine of qualifying expenditure

Types of Allowance

To explain the treatment on disposal of assets and other treatment of capital allowances

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Introduction

A person engaged in business activity would normally use assets in the course of producing business income.

Therefore depreciation provision is made in the accounts to reflect the true profits of the business.

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However, accounting depreciation is not recognized as tax-deductible expenditure by the tax laws simply because it really represents the writing off of a portion of the capital cost of asset over time.

The taxpayer is granted a tax depreciation or “capital allowances” on qualifying expenditure incurred on assets for the purpose of determining the taxable income of business.

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Capital allowances are given only in respect of a business source and only for the person who incurs the qualifying capital expenditure

Computed for a year of assessment and are deducted from the adjusted income of the business in arriving at statutory income.

It is provided for plant and machinery

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Definition of Plant and Machinery

ITA 1967 does not define the word ‘plant and machinery’.

Case of Yarmouth vs France – plant is whatever apparatus used by businessman for carrying his business including all goods and chattels, fixed or moveable, live or dead but exclude his stock in trade which he buys or makes for sale which he keeps for permanent employment in his business.

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Jarrold v John Good & SonsMoveable partition is a ‘plant’Where the moveable partition is part of a setting, it is not

a ‘plant’CIT v Taj Mahal Hotel

Sanitary and pipeline setting is part of ‘plant’CIR v Barclay, Curle & Co. Ltd.

The functional testDry dock is a ‘plant’

Cooke v Beach Station Caravans Ltd (1974)Swimming pool is a ‘plant’

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Ketua Pengarah hasil Dalam Negeri v MSDC (2003)The taxpayers has satisfied the following conditions:

The premises testThe business testThe stock in trade test

Anchor International Ltd v CIR (2003)Artificial football pitch is not a ‘plant’

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Eligibility of capital allowances4 conditions to be eligible for capital allowances:

The person incurring capital expenditure must be carrying on a business

The capital expenditure must have been incurred on the provision of machinery or plant

The machinery or plant must be used for the purpose of the claimant’s business

The person must be the owner of the asset at the end of the basis period

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Persons Eligible for Capital Allowance

Capital allowances are granted only to a person who incurs qualifying expenditure on the provision of machinery or plant for the purpose of business.

The capital allowances on plant and machinery are given against adjusted income from a business source.

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Persons Eligible for Capital Allowance

A person deriving employment income will not be able to claim capital allowances on plant and machinery from that employment income.

The person must be the owner of the assets at the end of the basis period.Hire PurchasePartnership

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Qualifying Expenditure on Plant and Machinery

Any capital incurred on the provision of machinery or plant for the purpose of business – qualify for QE on plant and machinery.

This includes purchase price, incidental cost such as freight charges, custom duty and installation exp.

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Plant and Machinery under 10% Rule

Para 2(b) exp. incurred in preparing, cutting, tunneling or leveling land in order to prepare the site for the installation of plant – qualify for QPE.

But such costs should not exceed 10% of the aggregate cost of PM and cost preparing site.

If exceed than 10%, cost preparing site not qualify as QPE but only the cost of plant. (See Example 1)

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QE of Plant and Machinery under Sch.3, Para 2A, 2B and 2C

• Para 2A – PM bought for non-business purposes, then brought to business – QPE = market value of PM at the time of transfer.

• Example:Mr. James bought a refrigerator for private use in 2007. However, on 2 March 2009, the refrigerator was brought into his business use for storage of raw material. The net book value of the refrigerator was RM5,500. However, the market value was only RM4,600.

• Answer:

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QE of Plant and Machinery under Sch.3, Para 2A, 2B and 2C

• Para 2B – PM was in use during tax exempt period and continued to use after the tax exempt period – QPE = the lower of the NBV or MV of PM.

• Example:– Intan Bhd as given tax exemption from the basis year 2001 to

2009. The company purchased a plant and machinery in the year 2008 for business use. The plant continued to be used after the expiry of tax exemption period. The net book value is RM55,000 and the market value at the time of expiry of tax exemption period was RM60,000.

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• Discussion: Determine the qualifying plant expenditure?

• Answer:

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QE of Plant and Machinery under Sch. 3, Para 2A, 2B, and 2C

• Para 2C – PM in use in buss. o/side M’sia and brought into use in buss. in M’sia - QPE = the lower of the NBV or MV of PM.

• Example:• In the basis year 2007, Meranti Bhd purchased a machine for the

use of its business in Thailand. The machine cost RM70,000 and its is being depreciated by 20% using straight line basis. In the basis year 2009, Meranti decided to bring the machine back for the use of its business operation in Malaysia. The market value at the time of transfer is RM43,000.

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Discussion

• Required: Determine the qualifying expenditure for this machine?

• Answer:

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Licensed for commercial use – QE no limitNot licensed for commercial use – QE = RM100,000

(w.e.f 20.10.2000), provided:Total cost of MV must be more than RM100K and

does not exceed RM150,000.The MV must be newIf MV worth than RM150,000, QE limited to

RM50,000

QE of Motor Vehicle Not Licensed for Commercial Transportation

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Fish pond, animal pens etc. [Para. 2(1)( c )]Machinery or plant used for research (approved by

the minister)

Other Qualifying Capital Expenditure

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The basis period for the purpose of capital allowance is a basis period for YOA that particular business sources.

Cap. exp incurred before the commencement of business = QE deemed incurred when the business commenced – so basis period for YOA is when the business commenced.

Cap. exp incurred after the commencement of business =

date of purchase is treated as date of QE incurred.

Refer to example 2 (pg.448)

Date of Qualifying Expenditure Incurred

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Sch. 3, Para 10 – the rate of IA 20% on QPE.Only claim in the first year (year of cap. exp is incurred).Certain buss. can claim higher IA such as mining 60%

and construction 30%.Conditions (all must be satisfied) – incurred, in use for

the business and PM must still use at the end of accounting period.

Types of Capital Allowances: Initial Allowance

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Types of Capital Allowances: Annual Allowance

• Claimed annually on straight line basis• The annual allowances commence in the basis year

for the year of assessment in which the qualifying capital expenditure is incurred.

• It will continue to be given in the following and subsequent years of assessment until the qualifying expenditure is fully written off OR when the plant and machinery is sold.

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Types of Capital Allowances: Annual Allowance

Rate depend on the type of asset:

To claim AA, the same conditions are applied*accelerated CA

Types of asset Rate

Plant & Machinery 14%

Heavy machinery/ Motor vehicles 20%

Computer hardware and software* 40%

Others (i.e. office equipment, furniture & fittings)

10%

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Cannot claim AA when PM is not in use for the business.

But if the asset is temporarily disuse and deemed to be in use for buss. purpose, then annual allowance must be computed.

Notional Allowance

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The written down value of a QEArrived at after reducing the following:

Initial allowance that is givenAnnual allowance that is givenNotional allowance (if any)

Residual Expenditure

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Dual Usage

When incurred QE for the purpose of business and partly for non-business purposes.

Cap. Allowance claimed shall be apportioned for the purpose of business only.

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Disposal of Plant and Machinery

Dispose the PM – balancing allowances (BA) and balancing charges (BC) may arise (see example 3 & 4, pg 491).

A disposal can come about under the following circumstancesWhen a PM is disposed of;The business permanently ceases but the PM continue belong

to the businessPM permanently ceases to be use in the business

BA arises when RE > disposal value.BC arises when RE < disposal value (restricted)

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Assets Disposed within Two Years (Para 71)

Claimed for CA and subsequently disposes of PM within 2 years of acquisition – all CA shall be withdrawn and treated as BC.

See Example 7

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Unabsorbed CAWhen the amount of CA claimed exceeds the

adjusted income from the same source, the excess is to be carried forward and allowed against the adjusted income from the same business source for the following year of assessment

When a business ceases permanently, unabsorbed CA is permanent loss

Wef YA2006: unabsorbed CA cannot be carried forward if there is a change of more than 50% in its shareholding (continuity of ownership); pg 456

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Plant and Machinery Purchased under Hire Purchase

If the person incurred cap. Exp on PM under hire purchase agreement for the buss. purpose – QE shall be taken from capital portion of any installment made.

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Example:Tegar Sdn. Bhd purchased a tractor under a hire purchase agreement on 10 July 2008. The information regarding the hire purchase is as follows:

Cash price RM70,000Hire purchase price RM120,000

The payment is made by monthly installment of RM2,000 for a period of Five (5) years (payable at the end of month). A deposit of RM10,000 was paid on the day the tractor was purchased and the first installment was due on 31 July 2008.

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Discussion:Calculate the capital allowances entitled to Tegar Sdn. Bd. For the year of assessment 2008 and 2009.

Answer:

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Treatment of Small Value Assets

From year of assessment 2006, capital allowance on small assets would be given a one-off 100% allowance for each asset of value not exceeding RM1,000 each.

The total value of such assets not exceed RM10,000 in the relevant year.

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