1. CAPITAL ALLOWANCES By: Associate Professor Dr. GholamReza Zandi zandi@segi.edu.my

2. 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. 2

3.  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). 3 Capital Allowances (Cont’d)

4.  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. 4 Capital Allowances (Cont’d)

5. 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. 5

6. 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% 6

7. 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. 7

8. 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 8

9. 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. 9

10. 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. 10

11. 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%. 11

12.  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). 12 Industrial Building Allowance (Cont’d)

13. 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 13

14. 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. 14

15. Rates of Agriculture Allowance 15 Qualifying ExpenditureRate of allowance Construction of buildings for staff welfare or accommodation 20% Other buildings for business10% Qualifying expenditure for other than buildings Example: clearing, planting etc. 50% Construction on farm of road or bridge 50%

16. The End