Week 10

CAPITAL ALLOWANCES

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LEARNING OBJECTIVES

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 Introduction

● A person engaged in business activity would normally

use assets in the course of producing business income.

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

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 Continue
● 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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 Continue
● 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
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from the adjusted income of the business in arriving at
statutory income.
● It is provided for plant and machinery

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 Eligibility of capital allowances
● 3 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 qualifying plant &
machinery
● The machinery or plant must be used for
the purpose of the claimant’s business
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 Qualifying Plant Expenditure (QPE)
● Plant & machinery
● includes purchase price, incidental cost such as freight
charges, custom duty and installation exp.
● Alteration of existing building for the purpose of installing
plant & machinery (PM) and other incidental expenditure
● Preparing, cutting, tunneling, or levelling land to prepare a
site for installation of PM
● But if expenditure > 10% of aggregate QPE, this does
not apply
● Expenditure incurred on fish ponds, animal pens, chicken
houses, cages, buildings (but not on living accommodation
of directors/shareholders) & other structural improvements
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on lands
 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%, the cost of preparing
site does not qualify as QPE - only the cost
of PM qualifies. (See Example 1)
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 Plant and Machinery
under 10% Rule - Example
● Installation of a cutting machine in Klang factory for RM120,000.
● Cost of preparing site for installation = RM10,000
● Machine cost – RM120,000
● Installation cost – RM10,000
● Aggregate cost – RM130,000
● Since installation cost < 10% aggregate cost, cost of site preparation
will be part of QPE
● If cost of site preparation = RM15,000 > 10% then QPE is just
RM120,000.
● Note: this 10% rule does not apply to alteration of existing building
for installation of PM, i.e. full cost is considered QPE
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 Plant: Small items
● Small assets have a life span of < 2 years
● Small, cheap, in large quantities
● claimed on a replacement basis
● Initial cost - not deductible, subsequent replacement -
deductible as revenue expense
● E.g. bedding, linen, crockery, glassware, cutlery, utensils
● Disposal of replaced asset assessable as business
income
● EcoPark manufactures toys. It acquired new tools with a life
span of 1 year for RM6,000 & replaced old tools for
RM4,000. It expensed off RM10,000 to P&L.
● New tools RM6,000 not deductible
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● Replacement tools RM4,000 deductible
 Accelerated CA for Small Value
Assets
● E.g. cash register, TV, fax machine, telephone system
● Life span > 2 years (contrast with small value assets
with life span < 2 years, discussed previously)
● W.e.f. YA2020, one-off 100% allowance for each asset
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of value < RM2,000 each.
● The total CA claim on such assets < RM20,000 in the
relevant year.
● But for SME, threshold of RM20,000 is waived
● SME = ordinary shares < RM2.5m, gross income <
RM50m from all business sources

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 Exchange loss on acquisition

● May occur if PM purchased from overseas.

● Realised loss is taken as part of QPE.
● Any exchange gain will be reduced from QPE.

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 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).
● Not time apportioned.
● Certain businesses can claim higher IA such as mining
60% and construction 30%.
● Conditions (all must be satisfied) – incurred, in use for
the business & claimant is the owner at the end of YA
● Assets bought & sold in the same year can claim IA

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 Types of Capital Allowances:
Annual
• Claimed annually Allowance
on straight line basis
• Eligibility to claim: same as that for IA
• Commence in the basis year for the year of
assessment in which the qualifying capital
expenditure is incurred.
• 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 depends on the type of asset:

Types of asset Rate

Plant & Machinery 14%

Heavy machinery/ Motor vehicles 20%

Others (i.e. office equipment, furniture & fittings) 10%

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 Residual Expenditure

● 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)
● Any AA which could have been claimed, if the
asset had been in use for the purposes of business
for a YA

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 Notional Allowance/
Temporary disuse

● Cannot claim AA when PM is not in use

for the business.
● But if the asset is temporarily disused and
deemed to be in use for business purposes,
then annual allowance can be claimed.

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 Capital allowances
R RM
M
Qualifying capital expenditure xx
Year 1 – Initial Allowance xx
- Annual Allowance xx (xx)
Residual expenditure (tax written down value) xx
Year 2 – Annual allowance (xx)
Residual expenditure (tax written down value) xx

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 Capital allowances
• An ammonia & sulfur plant was bought by KWC Bhd in 2012 for
RM10 million. The accounts close on 31/12 each year. The initial &
annual allowances are 20% and 14% respectively. The claim of CAs is
as follows:
RM’ RM’
million million
Qualifying expenditure 10.0
YA201 Initial allowance (20%) 2.0
2
Annual allowance (14%) 1.4 (3.4)
Tax written down value 6.6
2013 Annual allowance (14%) 1.4
2014 Annual allowance (14%) 1.4
2015 Annual allowance (14%) 1.4
2016 Annual allowance (14%) 1.4
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2017 Annual allowance (14%) (restricted to) 1.0 (6.6)
 Plant and Machinery Purchased under
Hire Purchase
● If the person incurred cap exp on PM under hire
purchase agreement for business purpose – he is
deemed owner of the asset & can claim CAs
● But IA & CA will be computed by reference to the
deposit paid & the capital portion of any instalment
paid in that basis period
● Compute IA on new instalment paid
● Compute AA on accumulated QE
● HP interest is allowed as a revenue expense

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 Plant and Machinery Purchased under
Hire Purchase (1)
RM
Machine – HP 137,520
Machine – cash price 126,000
Deposit paid on 1/8/2021 30,000
HP amount
(137,520 HP – 30,000 deposit) 107,520
HP interest (137,520 HP – 126,000 cash price) 11,520
Term of repayment 24 months
First instalment of RM4,480 commenced on 1/9/2021
Year end: 30/6/2022 21
 Plant & Machinery Purchased under
HP (1)
Capital allowance computation for YA2022 RM
Amount financed under HP 107,520
Less: HP interest (11,520)
Capital portion of instalment 96,000
Term of HP 24 mths
Amount per month 4,000
QPE:
Deposit 30,000
Instalment paid in YA2022: 10 mths x RM4,000 40,000
70,000
IA 20% (14,000)
CA 14% (9,800)
EBF 3123
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Tax WDV/residual value SSA 46,200
 Plant and Machinery Purchased under
Hire Purchase (2)
RM
Office equipment – cost 15,000
Office equipment – interest 3,000
Hire purchase amount 18,000

Instalment Capital Interest

RM RM RM
YE 30.6.2021 6,000 5,000 1,000
YE 30.6.2022 12,000 10,000 2,000
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 Plant and Machinery Purchased under
Hire Purchase (2)
RM RM RM
Capital IA (20%) CA Total
(10%) allowances
YE 30.6.2021 5,000 1,000 500 1,500
YE 30.6.2022 10,000 2,000# 1,500@ 3,500

# 20% x 10,000
@ 10% x (5,000 + 10,000)

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 QE of Motor Vehicle Not Licensed for
Commercial Transportation
● Licensed for commercial use no QE limit
● E.g. bus, taxi, lorry, van
● New passenger vehicle
● E.g. car for general manager, salesmen
● Cost <= RM150K QE limit: RM100,000
● Cost > RM150K QE limit: RM50,000
● Secondhand passenger vehicle
● QE limit: RM50,000

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 Motor Vehicle – HP & Calculation of
Cash price CA 198,000
Deposit (48,000)
Hire purchase loan (capital portion) 150,000
Instalment amount RM2,850 per mth, 60 instalments commencing Feb 2022.
(YE 30.9.2022)
Passenger vehicle, new, cost > RM150K QE limit = RM50K
YA2022
QE: Deposits paid 48,000
QE: Capital instalments (RM150K/60 x 8) = RM20K 20,000
Total RM68K, but restricted to QE limit 50,000
IA – 20% (10,000)
AA – 20% (10,000)
RE @ 30.9.2022 30,000
YA2023-2024 AA x 20% x 2 (20,000)
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RE @ 30.9.2024 10,000

Date of Qualifying
Expenditure Incurred
● The basis period for the purpose of capital allowance is
a basis period for YA of that particular business source.
● Cap. exp incurred before the commencement of
business
● = QE deemed incurred when the business
commenced
● so basis period for YA is when the business
commenced.
● Cap. exp incurred after the commencement of business
● = date of purchase is treated as date of QE incurred.

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 Disposal of Plant and Machinery

● Dispose the PM – balancing allowances (BA)

and balancing charges (BC) may arise
● A disposal can come about under the following
circumstances
● When a PM is disposed of (sold, scrapped,
discarded, destroyed)
● The business permanently ceases but the PM
continue to belong to the business
● PM permanently ceases to be use in the business

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Balancing allowances (BA)/charges (BC)
• When a qualifying asset is disposed, balancing
adjustments will arise
• Sales proceeds > Residual expenditure/Tax WDV
balancing charge (taxable)
– BC is added to the adjusted income of the same
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business source
– But restricted to the actual CA previously claimed
• Sales proceeds < Residual expenditure/Tax WDV
balancing allowance
– BA is set off against adjusted income of the same
business source

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 Balancing allowances – Example
• Samuel commenced business on 1.5.2015 & closes
accounts to 31/12 each year. On 1.6.2016, he
ordered a plant costing RM20,000 but delivery was
only made on 1.2.2017. He began to use the plant
from that date.
• During the year ending 2018, the plant was not in use
and was not maintained for use. The plant was
brought back to use in 2019 and sold on 14.2.2022
for RM18,600.
• The annual allowance rate is 14%.

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 Balancing allowances – Example
RM RM Accumulated
IA/AA
Qualifying expenditure 20,000
YA2017 (1.1.2017 – 31.12.2017)
IA – 20% 4,000
AA – 14% 2,800 (6,800) 6,800
Residual expenditure @ 1.1.2018 13,200
YA2018: AA – 14%
(notional because plant not in use) (2,800)
Residual expenditure @ 1.1.2019 10,400
YA2019 – YA2021: AA 14% x 3 (8,400) 8,400
Residual expenditure @ 1.1.2022 2,000
YA2022: Sales proceeds (18,600)
Balancing charge 16,600 15,200
BC would be restricted to this amount 31
 Disposal Value

● Disposed by sale, transfer or

assignment
● Greater of:
●market value (insurance
proceeds, independent valuation),
OR
●net proceeds

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Disposal Value of Motor Vehicles
● Where there is restriction of QE, disposal value
= proportion to the same value as QE/actual cost
● E.g. Second hand passenger vehicle, cash price
RM52,000, disposed for RM26,000.
● QE limit = RM50,000
● Sales proceeds = 50,000/52,000 x 26,000 =
25,000
● Balancing charge = 25,000 – RE

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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.
● Effectively, no allowance is given
● Any balancing allowances (sales proceeds minus
RE) is disregarded
● Called a “clawback”

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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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 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:
• QPE = RM4,600

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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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 QE of Plant and Machinery under
Sch. 3, Para 2A, 2B, and 2C
• Para 2C – PM in use in business outside M’sia and
brought into use in business 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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 Statutory Income
RM
Adjusted Income: xx
Add: Balancing Charge xx
xx
Less: Capital allowance
Unabsorbed capital allowance xx
b/f
Current year capital allowance xx
Balancing allowance xx (xx)
Statutory Income xx

Note: Balancing adjustments and capital allowance apply to business

source only
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 Unutilised CA’s carried forward
• If total CA’s claimed in a year > adjusted income +
balancing charge can c/f to next year to be set off
against SAME business source
• If business source ceases to exist – unabsorbed CA’s
will be lost
• Budget 2019
– Unabsorbed CA’s will be zerorised after 7 years
– E.g. 2011 unabsorbed CA’s (unutilised losses) will
be lost if still unclaimed by 2018

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 Statutory Income – Example
• Jenny manufactures toys & trades in shoes. In YA2021,
relevant info is as follows:
Adjusted income Capital
RM allowances
RM
Business 1 – Manufacturing 10,000 12,000
Business 2 – Trading 7,000 5,000
Notice that CA
Statutory income: RM2,000
unutilised – will
Manufacturing – Adjusted income 10,000 be c/f to set off
against
Capital allowances (restricted) (10,000) (a) manufacturing
- business source

Trading – Adjusted income 7,000

Capital allowances (5,000)
2,000 (b) 41
Aggregate statutory income 2,000 (a) + (b)

Statutory income – with adjusted loss, balancing

charge & capital allowance
• Capital allowances do not increase an adjusted loss
• E.g. Tanin is a sole proprietor specializing in shoe
manufacturing
• For the year ended 30.6.2021, the following info was
recorded:
• Adjusted loss – shoe manufacturing: RM12,000
• Balancing charge – NIL
• Capital allowances – RM4,000

● Adjusted income = NIL

● Capital allowances will be c/f to future years to be set off
against income from the same business source
● Adjusted loss of RM12,000 can be set off against aggregate
income

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Statutory income – with adjusted loss, balancing charge
& capital allowance

• Balancing charge does not decrease an adjusted

loss
• Balancing charge would first be 1st set off
against capital allowances of the business to
arrive at statutory income.
• Adjusted loss is used to set off against
aggregate income in arriving at total income.

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 Statutory income – with adjusted loss, balancing
charge & capital allowance
• E.g. Results for the year ended 30.6.2021:
– Adjusted loss – RM8,000
– Balancing charge – RM6,000
– Capital allowances – RM10,000
– Unabsorbed capital allowances c/f = 10,000 – 6,000 =
4,000
– Adjusted loss can be set off against aggregate income in
arriving at total income

RM
Adjusted income (as it is an adjusted loss) -
Add: balancing charge 6,000
6,000
Less: capital allowances (restricted) (6,000)
Statutory income -
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 Exercise 1
• Triton Sdn Bhd has an accounting year end of 31
December, and on 1 January 2021 acquired a van for
RM90,000 which was registered as a commercial
vehicle licensed to transport goods. The company
acquired the van on hire purchase and paid a deposit
of RM10,000. The capital portion paid during the
year in addition to the deposit was RM80,000 and the
interest portion paid was RM1,000. What is the
qualifying expenditure that can be claimed for capital
allowances purposes in respect of the van for the year
of assessment 2021?
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 Answer 1
• Triton Sdn Bhd can claim capital allowances for the
amount of deposits and capital portion of the
instalments paid during the year of assessment 2021.
• There is no restriction on the cost as the van is a
licensed commercial vehicle.
• The qualifying expenditure for the van, that is
available for the claim of capital allowances, is
RM90,000.

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 Exercise 2
• During the year ended 31 December 2021,
ABC Sdn. Bhd. acquired office furniture
comprising table and chairs costing
RM100,000. It was confirmed that each asset
costs more than RM1,300 and the claim for
small value assets does not apply. The residual
expenditure for the brought forward assets was
nil.
• Calculate the capital allowances for the year.

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 Answer 2
• Capital allowances:
• Current year assets
• Cost/Qualifying Expenditure 100,000
Initial allowance 20% x 100,000 20,000
Annual allowance 10% x 100,000 10,000
30,000

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 Exercise 3
• The capital allowances for assets acquired by HSB prior to
the year of assessment 2021 have been computed at
RM1,300,000.
• There is a balancing charge of RM120,000 and balancing
allowance of RM20,000 for the year of assessment 2021.
• New acquisition of assets during the year:
– The total cost of the machinery acquired was
RM310,000 before any adjustment for foreign exchange.
– The foreign exchange gain on plant and machinery
represents a realised gain of RM10,000 on settling the
supplier’s credit related to the plant and machinery
acquired on 31 March 2021.
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 Answer 3
• Capital allowance on new assets RM
• Cost of plant and machinery 310,000
• Less: Foreign exchange gain (10,000) Qualifying
expenditure 300,000

• Initial allowance 20% 60,000

• Annual allowance 14% 42,000
•102,000

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 Answer 3 (Contd)
• Add: Balancing charge 120,000
• Less:
• Capital allowances for existing assets 1,300,000
Capital allowances for new asset 102,000
Balancing allowances 20,000

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