CAPITAL ALLOWANCE

(QUALIFIYING CAPITAL
EXPENDITURE)

TOPIC OUTLINE:
1.
2.
3.
4.
5.
6.
7.

Introduction
Qualifying expenditure
Types and eligibility
Residual expenditure
Hire purchase assets
Asset with a life span <2 years
Partial use of assets

OBJECTIVES OF STUDY:
To identify the qualifying plant expenditure
To determine the eligibility and types of
capital allowances

Introduction

Depreciation is not allowed under ITA

1967
Replaced with capital allowance as
highlighted in Schedule 3 ITA 1967
To encourage investment
Deducted against adjusted income to
arrive at statutory income

The computation of statutory

income

Adjusted income

xx

Add: Balancing charge

xx

Less: Capital Allowance:

Unabsorbed cap. allowance

Current year cap. Allowance
Balancing allowance
x

x
x
(x)

Statutory income

xx

The set off of CA is restricted to the aggregate of

adjusted income and balancing charge. Access can
be carried forward to the subsequent years.

Eligibility of capital
allowance
Must satisfy all the following conditions:
1. The person has incurred QCE on the
provision of plant and machinery in the
basis period for a year of assessment
2. The asset must be in use for the purpose
of the business
3. The person is the owner of the asset at
the end of the basis period for a year of
assessment

Qualifying Plant and machinery

Expenditure
(Para 2, Sch 3)
Inclusive
of:
1. Expenditure incurred on the alteration of an existing
building for the purpose of installing that machinery or
plant and other incidental expenses incurred on such
installation.
2. The expenses incurred to install the plant and
machinery e.g. preparing, cutting, tunneling or leveling
land, but those expenses must not exceed 10% of the
aggregate of the cost of itself and the cost of preparing
the site (QCE).
E.g 1:
Machine cost
RM120,000
Installation cost
RM 10,000
Aggregate =
RM130,000

Installation cost
= [10,000/130,000] x 100
= 8%
Thus, the installation cost is treated as QCE, and the total
QCE is RM130,000.
What if the installation cost is RM20,000?
3.

Expenditure incurred on fish ponds, animal farms,

chicken houses, cages, building (other than those used
wholly or partly for the living accommodation of a
director, an individual having control of that business or
an individual who is a member of the management,
admin or clerical staff engaged in the business), and
other structural improvements on land which are used
for the purposes of poultry farms, animal farms, inland
fishing industry or other agricultural or pastoral pursuits .

4. In respect of motor vehicles, the QCE (other than

licensed or permitted by the road transport
authority for commercial transportation of
goods or passengers, in which no restriction )
is restricted to RM50,000. However, the QCE will
increase to RM100,000 if the vehicle:
a. has been purchased on or after 28 October
2000
b. is not been used prior to purchase
c. does not exceed RM150,000 (total cost)
However, starting from 2002 the QCE on a new
private motor vehicle, used for business has been
increased from RM50,000 to RM100,000 provided
the
on-the-road price of the vehicle does not exceed
RM150,000.

Examples:

ABC owns the following vehicles:

Waja for manager, cost RM61,000, bought on 5 Sept.
2000. (QCE max=RM50,000)
Lorry for delivery of business products, cost RM64,000,
bought on 10 April 2001. (QCE=RM64,000)
Honda Civic for Director of company, cost RM120,000,
bought on 18 May 2001. (QCE=RM100,000)
Toyota Camry for Managing Director, cost RM120,000,
bought on May 2002. (QCE=RM100,000)
What if the car is BMW and the cost is RM350,000?
(QCE=RM50,000)

Types of Allowance

Initial allowance (IA)

Annual allowance (AA)
Notional allowance (NA) and
Balancing allowance (BA) &
balancing charge (BC)

Allowances
INITIAL ALLOWANCES

Given when a person first acquired qualifying

plant for the business
Generally, 20% on the QCE
For timber and mining industry, 60% on QCE

Example:
Jenny opens a bookshop in Changlun and closes its
account on 31 May each year. She acquired a fax
machine costing RM1,500 on Feb 2003.
For YA 2003 (year ending 31 May 2003),
IA claimed=RM300 (20% x RM1,500)

Allowances cont.
ANNUAL ALLOWANCES

Given every year to the taxpayer as long as the asset is

in use at the end of the basis period.
It is computed on straight line basis by reference of the
full amount of QCE.
The rate varies according to industries and types of asset.
AA rates (with effect from YA 2001):
Office equipment, furniture and fittings 10%
Plant and machinery (general)
14%
Heavy machinery, motor vehicle 20%

Allowances cont.

Accelerated AA Rate
Accelerated annual rate of 40% would be
available for:
Computer & information technology
equipment (eff. YA 1996)
Computer software (YA1999)
The IA rates for the above cases remain at 20%.

Example:

The principal activity of DEF Sdn Bhd is processing

the instant noodles. The company closes its
accounts to 31 Dec. 2003. The company acquired
office equipment comprises the following:
Cost
Acq. date
Telephone system
80,000
01/04/2003
Office equipment
20,000
23/06/2003

A full year cap. Allowance would be computed

notwithstanding the ownership period is less than a
year. IA=20% & AA=10%.

Notional allowances

If there is no claim of annual allowance and the

asset is not in use for several years (except for
temporary disuse)
To reduce residual expenditure (RE)
Rate: same with the annual allowance
Is not allowed as a deduction to arrive at
statutory income

Disposal of plant and machinery

Balancing allowances/charges will arise if the disposal

value is different compared to RE
Balancing allowances will be deducted from adjusted
income
Balancing charges will be added up to adjusted
income and the amount cannot be greater than the
total amount of initial and annual allowance claimed

Residual Expenditure (RE)

RE (unutilised portion of QPE) at any date in

relation to an assets is the total qualifying
expenditure incurred by a person on the
provision, construction or purchase of the asset
before that date, less:
Any IA made to that person in respect of the asset;
Any AA made to that person in respect to the asset;
Any annual allowances which could have been
claimed, if the asset had been used for the purposes
of the business for a YA (I.e. NA).

Example
AAA makes up its accounts to
December 31 annually. The company
acquired an office equipment on July 1,
2001 for RM50,000. The office
equipment was not used for the
business during 2003. The company
disposes the office equipment on April
19, 2005 for RM55,000.

Y/A
RM
2001 QCE
50,000
IA (20% x 50K)
(10,000)
AA (10% x 50K)
(5,000)
RE
35,000
2002 AA
(5,000)
RE
30,000
2003 NA
(5,000)
RE
25,000
2004 AA
(5,000)
RE
20,000
2005 DV
55,000
BC
35,000
(limited to initial & Annual allowance claimed
=RM10K+5K+5K+5K = RM25,000)

ASSETS OWNED LESS THAN 2 YEARS

The CA given will be drawn back by the way of BC
in the year of disposal unless commercial
justification can be provided for disposing the
asset in such short period of time such as fire
damage, technology obsolescence and etc.
EXAMPLE
Business bought a machine for RM60,000 on 1
May 2001. On 1 April 2003, the machine had
been disposed for RM40,000.
How much is the CA, CC or BC for the business?

Computation:
2001 QCE
IA (20% x 60K) 12,000
AA (14% x 60K) 8,400
RE
2002

AA (14% x 60K)
RE

2003

DV
BC (40K 31,200)
+ CA drawn back
(20,400 + 8,400)
BC

60,000
(20,400)
39,600
( 8,400)
31,200
40,000
8,800
28,800
37,600

Hire Purchase Transaction

The IA and AA would be computed by
reference
to the deposit paid and the capital portion
of any
installment paid in that basis period
The deposit and every new installment paid
(capital portion) would be entitled to claim
IA and
AA on accumulated QCE

EXAMPLE
On 1/1/2003 BBB bought a heavy
machinery on hire purchase for the
business purpose. The relevant information
is as follows:
Cash price
RM43,000
Deposit
RM 3,000
Hire purchase amount
RM48,400
Hire purchase period 84 months

Computation:
H/P amount ( total installment amount)
H/P amt. 48,400
Deposit
3,000
H/P price 51,400
Cash price 43,000
Installment 8,400

Cash price
Deposit
Loan
Installment
H/P amt.

Mthly inst. (8,400/84)

= 100
Premium (48,400-8,400)/84 = 476

43,000
3,000
40,000
8,400
48,400

Y/A
RM
Acc.(RM)
2003Deposit
3,000
Installment (476x12)
5,712
QCE
8,712
8,712
IA(20% x 8,712) (1,742)
AA(20% x 8,712)
(1,742)
RE 5,228
2004 Installment

(476x12)
10,940
IA(20% x 5,712) (1,142)
AA(20% x 14,424) (2,885)
RE 6,913

5,712

14,424

Example
Business had purchase a machine on hire
purchase in 2003. The details are as
follows:
Cash price RM40,000
Deposit
13,000
Hire purchase amt. (mthly)
1,000
1st installment 1 Mac 2003
Hire purchase period
36 months
Computation for YA 2003 & 2004?

Computation:
Total inst. (1,000 X 36 mths)
RM36,000
Deposit
13,000
Hire purchase price
49,000
Cash price
40,000
Interest
9,000
Mthly interest (9,000 /36) = RM250
Premium (1,000 - 250)
= RM750

YA

Acc(RM)
2003 Deposit
Inst. (750 x 10mths)
QCE for 2003
20,500
IA (20% x 20,500)
AA (14% x 20,500)
RE
2004 Inst. (750 x 12mths)
29,500
IA (20% x 9,000)

RM
13,000
7,500
20,500
( 4,100)
( 2,870)
13,530
9,000
22,530
( 1,800)

Multi Or Dual Purpose

The CA claimed must be portioned among the

businesses
according to the rate of the usage

Example
Fairuz has 3 furniture shops. He has 1 lorry for
business purpose. The lorry was bought in 2003
for RM80,000. The usage of the lorry as follows:
Business A : 50%
Business B : 30%
Business C : 20%
Compute CA for YA 2004?

Computation:
YA
RM
2003 QCE
IA (20% x 80K)
AA (20% x 80K)
RE
2004 AA (20% x 80K)
RE

80,000
(16,000)
(16,000)
48,000
(16,000)
32,000

CA for 2004: Biz A (50% x 16K) RM 8,000

Biz B (30% x 16K)
4,800
Biz C (20% x 16K)
3,200

The computation of statutory

income

Adjusted income

xx

Add: Balancing charge

xx

Less: Capital Allowance:

Unabsorbed cap. allowance
Current year cap. Allowance
Balancing allowance
x

x
x
(x)

Statutory income

xx

The set off of CA is restricted to the aggregate of adjusted

income and balancing charge. Access can be carried forward
to the subsequent years.

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Business Income