CAPITAL ALLOWANCES
By:
Associate Professor Dr. GholamReza Zandi
zandi@segi.edu.my
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
Capital Allowances (Cont’d)
 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)
 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
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
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
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
Scheme for Deduction of Capital Allowances
under Schedule 3
 Adjusted Income

Add Balancing Charges
XX
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
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
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
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
Industrial Building Allowance (Cont’d)
 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
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
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
Rates of Agriculture Allowance
Qualifying Expenditure
Rate of allowance
Construction of buildings for staff
welfare or accommodation
20%
Other buildings for business
10%
Qualifying expenditure for other
than buildings Example: clearing,
planting etc.
50%
Construction on farm of road or
bridge
50%
15
The End