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Lecture 5

Capital allowances

zulkhairi@um.edu.
my

Capital Allowances
Industrial buildings (IB)
Types of industrial buildings
Determination of QBE
Computation of IBA and disposal of IB

Agriculture allowance
Implication of controlled transfer in a related party
transfer
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Types of Industrial buildings (IB)


Para 63, Sch 3 of ITA 1967

A factory (see next slide)


A dock, wharf, jetty or other similar building
A warehouse
Building used in the:
utility business (supplying water or electricity);
telecommunication services;
working of a mine or farm.
Mill, workshop, in connection with the working of mine
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Factory (definition)
A building consisting of a mill, workshop, housing of
machinery/plant , the generating of power;
A building used incidental to the manufacturing business
(i.e. canteen for employees)
An adjacent building used for the storage of:
any raw material or fuel,
stores used in the manufacturing/processing,
storing of completed goods.
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Other circumstances where buildings are IB


1.
2.
3.
4.

Building used for staff welfare - restrooms [para 65(1)]


Living accommodation on a farm [para 42(1)]
Living accommodation of employee quarters [para 42(1)]
Special buildings used for:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.

School/ educational institution and technical training


Private hospitals, maternity and nursing homes [para 42(1)]
Hotel approved by tourism industry [para 37F]
Approved research & service project [para 37B]
Research by a separate R&D company
Training
Child care facilities no IA, AA 10% [para 42A(2)]
Storage of goods for export - no IA, AA 10% [para 37C]
airport, runway[para 37G]
motor racing circuit [para 37H]
Old folks care centre - no IA, AA 10%
Public road and ancillary structures IA 10%, AA 6% [para 67A)]
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Bio-Nexus status company - no IA, AA 10%

Qualifying Building Expenditure (QBE)

Is capital expenditure incurred on the construction or


purchase of an industrial building.
Taxpayer would be able to claim industrial building
allowance (IBA) on such QBE incurred.

QBE
1. Architects fees
2. The cost of preparing plans, etc in connection with obtaining approval from
the local authority.
3. The cost of clearing the old site including the demolition of any existing
building.
4. The cost of construction which includes labor, materials, haulage,
management supervision and overhead charges,
5. Incidental expenditure on work which may be separately contracted e.g.
drainage scheme, installation of utilities.
6. The cost of installing fittings e.g. wiring for electric supply, fans, airconditioning equipment
7. Legal charges, stamp duty etc connected with the building
*The cost of the land and legal fees relating to the acquisition of the land are not
qualify for IBA
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Constructed Building
1. Cost of construction of building
2. Subsequent capital expenditure on construction,
extension, alterations and renovation
3. Initial repairs (which enhance the value) of the building.

Example 1
Safhel Sdn Bhd carries on the business of manufacturing safety helmet. In March 2016, it
completed the construction of its own factory. Compute the QBE available to the company.

RM000
Land cost

580

Legal fees for:


agreement for purchase of land

11

agreement with the building contractor

10

Consultants fees and building plan

80

Stamp duty for purchase of land

Construction cost

1,510

Total cost

2,200
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Part of building used as IB?


The whole building or extension is to be treated as IB if the
capital expenditure on the construction of that part of the
building which is not in use (non-qualifying part) is 10%
of the cost of constructing the whole building.
If the cost of construction of the non-qualifying part exceeds
10% of the cost of constructing the whole building, the IBA
is given on that proportion of the building that is in use
(qualifying part) as an IB.

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Example 2
ICA Sdn Bhd a company manufacturing paint has been
carrying on business for several years. A building complex in
PJ, used partly as a factory and partly as an office, was
constructed by the company. The building was completed &
brought into use in September 2016. The company use 1/11th
total area of the building as an office. The company makes up
its account to 31.12 each year.
Does the expenditure qualifies for IBA?
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The 75% rule


Where a capital expenditure is incurred on preparing, cutting,
tunneling or leveling land in order to prepare a site for the
installation of the machinery or plant to be used for the
purpose of a business and if such expenditure exceeds 75%
of the aggregate cost of that plant or machinery and the cost
of installation, then the aggregate expenditure is treated as
QBE.
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The 75% rule


The mathematical formula would be:
Plant and machinery cost

Add: cost of preparing, cutting, tunneling or


leveling land

L
E

If L>75% of E, then E will be treated as QBE.


If L<75% of E, and also <10% of E, then E will
qualify for QPE.
If L<75% of E, but >10% of E, then P will only
qualify for QPE. L would not be given any tax
relief
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Example - 75% rule


Permata SB is in business of manufacturing baby stroller. On
1.1.2016, the company bought one machinery at the cost of
RM 85,000, which is to be installed in the factory located at
PJ. The cost of leveling the site for such installation amounts
to RM260,000.
Calculate the allowances, if any, under Sch 3 of ITA 1967

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75% rule Solution


Machinery cost
Add: Cost of leveling site

P
L
E

RM85,000
RM260,000
RM345,000

Since L(RM260,000)/E(RM345,000) x 100% =


75.4% the total cost of the expenditure is deemed to
be QBE.
IBA is claimed for YA2016, in the year where
expenditure incurred.
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Initial allowance (IA) & Annual Allowance (AA)

An IA of 10% and an AA of 3% on QBE computed on a straight-linebasis is given for a YA to person who:

1.
2.
3.
.

Incurred QBE on the construction or purchase of an IB;


The building was in use or about to be used as IB for the purpose of business; and
The person owned the building at the end of the basis period.
Effective YA2016: a person no longer entitled to claim for IBA if the building/part
of the building is let/rented out to another person (para 16B Sch 3 of ITA 1967)

IA is given only once and annual allowance is given for each relevant
YA.
The set off of IBA is restricted to specific business source.
Any unabsorbed IBA can be carried forward to future years against the
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adjusted income from the same business source.

.
.

Disposal
IB is disposed on:
1. The sale, transfer or assignment of the relevant interest in the
building;
2. Where the relevant interest depends on the duration of a concession
- end of the concession;
3. Where the relevant interest is a leasehold interest reversion;
4. The demolition or destruction of the building; and
5. The building ceased to be used as an IB.

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Balancing Charge (BC) & Allowance (BA)


When a qualifying building is disposed, balancing adjustment would arise.
Balancing Charge (BC):
Where the sales proceeds exceeds the residual expenditure, the excess is a BC and it is
taxable
BC will be added to the adjusted income of that business source.
However, the amount of BA imposed is restricted to the actual capital allowance
previously claimed (IA plus all accumulated AA).
Balancing Allowance (BA):
In the event where the sales proceeds is less than the residual expenditure, the
difference is a BA.
BA is set off against adjusted income of the same business source.

BA or BC arise only where IA or AA have been claimed and the disposal is


not among related parties (controlled transfers).
In a controlled transfer situation, there will not be any balancing adjustments as the
sale proceeds are deemed equal to residual expenditure of the asset.
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Disposal Value
1. Where the building is sold, transferred or assigned: Its
market value at the date of sale, transfer or assignment; or
the net proceeds of sale, transfer or assignment; whichever
is greater
2. Where the building is destroyed/demolished: The disposal
value is the market value or the insurance compensation
moneys whichever is greater
3. If building has negative value [cost of demolition >value
recovered]: The net cost of demolition (cost amounts
received) may be added to the residual expenditure, thereby
increasing the balancing allowance.
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Agriculture Allowance
A person who incurs qualifying agriculture
expenditure (QAE) for the purpose of agriculture
business will be given agriculture allowance to set
off against the adjusted income from that agriculture
business to arrive at statutory income.

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Qualifying Agriculture Expenditure (QAE)


QAE

Clearing
and preparation
of land

New
planting

Construction
of road, bridge or
drain on farm

Used in
business

Construction
of farm &
building

Living
or accommodation
for employee

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Definition
Agriculture
Cultivation of crops (vegetable produce)
Animal farming
Aquaculture
Inland fishing
Reafforestation of timber
Farm land used for the purpose of agriculture.

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New Planting vs Replanting


New Planting
Planting new crops on virgin land
Replacing new crops on the old crops of different product
Purchasing land from previous owner by planting the same crops

Replanting replacement of the crop


If replanting with the same crop on the same area of land
can claim under land clearing cost and planting cost
Expenses that reduced adjusted income

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The Rate Of AA
Capital expenditure incurred on:

Clearing
and
preparation of land
(50%)

New planting
(50%)

Construction
Of road or bridge
on farm
(50%)

Any other building


smoke house,
estate office
(10%)

Construction
of farm
and building

or

Living
accommodation
for employee
(20%)

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Example 4
Oily Sdn. Bhd., an oil palm co has incurred the following capital
expenditure for the FY 31.8.2016. Compute the AA for YA2016.

RM000
Land clearing
Seedlings & fertilizing
Construction of: Labor quarters
Office building

100
240
80
60
480
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Claim Of AA
The person must be the owner at the end of the basis
period
The QAE is in used at the end of the basis period
In the year of disposal, the QAE must be in use within
one month before the transfer
The claim is up to the date of transfer or sale allocated
on time basis
The transferee would claim the remaining part
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Agriculture Charge (AC)


Akin to balancing change.
Grant from government/state government/ statutory
authority agriculture charge equal to the grant amount
would be computed.
If the disposal of QAE took place within 6 years from the
incurring of such expenditure, all the AA previously
claimed would be withdrawn as AC
Election to spread back can be made.
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Approved Agricultural Projects (AAP)


1. The claim of AA have limitation:
The set off is only against adjusted income of the
agriculture business
The amount claimed is subject to the rate
specified.
2. AAP allow the taxpayer to claim a deduction against
aggregate income for qualifying farm expenditure on
approved agriculture projects
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Qualifying Farm Expenditure (QFE)


QFE

Clearing
&
preparation
of land

New
planting

Construction
of road or
bridge
on farm

Construction
of farm
& building

Construction
of pond,
drainage
system

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Non-entitlement Of AAP
Where the total area of the land utilized for the approved AAP
is below the hectarage stipulated by the Minister .
Where a person has made an election for a deduction in
respect of an AAP, not entitled to make election for the same
crop/product.
Co enjoying pioneer status/investment tax allowance under
the promotion of investment Act 1986

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Controlled Transfers
No balancing adjustments will be made where assets are
transferred between persons/companies under common
control.
In such cases, the actual consideration for the transfer of the
asset is disregarded and the disposer/acquirer is deemed to
have disposed of/acquired the asset at the tax written down
value.

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Forest Allowances
Given to persons who are in the business of extracting timber
in a forest & incurred qualifying expenditure
Effective YA 2015 Qualifying Forest Expenditure (QFE) is
narrowed to capital expenditure incurred by a person who has
a consession or a licence to extract timber

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Forest Allowances
QFE:
capital expenditure incurred on a road/building used for the
purpose of a business which consists wholly or partly of the
extraction of timber from the forest
A building provided for the welfare of or as lvinig
accommodation for employees employed in or in connection
with such extraction

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Forest Allowances
QFE
Building provided for welfare/living
accommodation

Rate
AA
20%
Other types, including road or AA
other buildings
10%

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Forest Charge (FC)


Akin to balancing change.
Forest charge = aggregate of the forest allowances made to him
annually and on the permanent cessation of the extraction of timber
Disposal price is not relevant
If concession/licensed is transferred/assigned/surrendered to another
party no forest charge. However, the acquirer will not get any
forest allowance, except in the case of the acquirer incurred
expenditure on road/buildings
In case of controlled transfer, forest allowance is transferable
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