tax-capital allowance

1. CHAPTER 7
CAPITAL ALLOWANCES
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2. LEARNING OBJECTIVE
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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 & Sons
Moveable 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 test
Dry 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 test
The business test
The stock in trade test
Anchor International Ltd v CIR (2003)
Artificial football pitch is not a ‘plant’

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Eligibility of capital allowances
4 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

10. 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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11. Persons Eligible for Capital Allowance
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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 Purchase
Partnership

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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:

17. QE of Plant and Machinery under Sch. 3,
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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:

19. Licensed for commercial use – QE no limit
Not 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 new
If MV worth than RM150,000, QE limited to
RM50,000
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QE of Motor Vehicle Not Licensed for
Commercial Transportation

20. Other Qualifying Capital Expenditure
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Fish pond, animal pens etc. [Para. 2(1)( c )]
Machinery or plant used for research (approved by
the minister)

21. Date of Qualifying
Expenditure Incurred
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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)

22. Types of Capital Allowances:
Initial Allowance
 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%
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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.

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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.

24. 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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Types of Capital Allowances:
Annual Allowance
Rate depend on the type of asset:
 To claim AA, the same conditions are applied
*accelerated CA

25. Notional Allowance
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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.

26. Residual Expenditure
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The written down value of a QE
Arrived at after reducing the following:
Initial allowance that is given
Annual allowance that is given
Notional allowance (if any)

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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
circumstances
 When a PM is disposed of;
 The business permanently ceases but the PM continue belong
to the business
 PM 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 CA
 When 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 RM70,000
Hire 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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Q & A
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