TAX 317

TAXATION 1

CAPITAL ALLOWANCES
INDUSTRIAL BUILDING ALLOWANCE
 LEARNING
•Ability to:
OUTCOME
 Identify the industrial Building
 Identify persons entitled to IBA
 Determine the Qualifying Building Expenditure (QBE) for
constructed IB and purchased IB
 Determine certain building/structure treated as IB
 Compute the industrial building allowances.
 Compute Balancing Charges or balancing allowances
 Determine the period and the effect of temporary disuse.
 Identify building owned less than 2 years
 Apply the IBA and charges in the computation of income tax
liability.
 INTRODUCTION

Qualifying building expenditure [QBE] :

- capital expenditure incurred on the construction
or purchase of a building used for business at any
time after its construction or purchase as an
industrial building [IB].
 The taxpayer is able to claim industrial building
allowance [IBA] on such QBE incurred.
 IBA is deducted against the adjusted business
income in arriving at the statutory business
income.
 IBA can be carried forward to be utilized in future
years.
 INDUSTRIAL BUILDING
Sec 2 – building, any structure erected on land (not
being plant & machinery)
Para 63, Sch 3 – Industrial Building [IB] includes:
A factory (para 64);
A dock, wharf, jetty or other similar building;
A warehouse let out to the public;
Building used in the utility business
(supplying water or electricity) or
telecommunication services;
Building used in the working of a mine or
farm;
Mill, workshop in connection with the working
of mine
MEANING OF IB
‘within the same
curtilage’
Means the building
attached or adjacent
to or within the same
enclosures as other
building
 OTHER TYPES OF IB
Category Para IA AA
1. Factory 64 10% 3%
2. Canteen, restroom, recreation room, 65(1) 10% 3%
lavatory, washroom for employees
Pre-requisite: IB must exist.

3. Public road recoverable through toll. 67A 10% 6%

4. Building on built, lease transferred 67B 10% 6%
to Government.
5. Private hospital, maternity home, 37A 10% 3%
nursing home.
6. Building used for research/training. 37B 10% 3%
7. Building used for storage of imported 37C - 10%
goods for export processed and re-
export.
8. Building used in approved service 37E 10% 3%
sector.
 OTHER TYPES OF IB
Category Para IA AA
9. Hotel 37F 10% 3%
10. Airport 37G 10% 3%
11. Motor Racing Circuit 37H 10% 3%
12. Living accommodation [LA] for 42(1) 40% 3%
employees – constructed
building
Pre-requisite: IB must exist.

13. LA for employees in 42A(1) - 10%

manufacturing, hotel or tourism
business, approved service
sectors – constructed or
purchased.

14. Child care centre- constructed 42(2) - 10%

or purchased
15. School or educational 42B - 10%
institution approved by Minister
of Education – constructed or
purchased
 OTHER TYPES OF IB
Category Para IA AA
16. Industrial, technical or vocational training 42C - 10%
– constructed or purchased

17. Old folks care centre PU (A) - 10%

143/2003

18. BioNexus status company PU (A) - 10%

374/2007

19. Privatisation project and private PU (A) 10% 6%

financing scheme 119/2010

20. Tun Razak Exchange Marquee Status PU (A) - 10%

Company – w.e.f. YA2014 27/2013 (for a
period of
10 YAs)

Source: Malaysian Taxation, CKF 20 th Edition, pp 332-337

 PERSONS ENTITLED TO CLAIM IBA

The taxpayer must have incurred capital

expenditure on any IB and the building must be in
use for the purposes of a business

Para 60, Sch 3 – person owns a building grants a

lease and that building is used as an IB by lessee,
then the lessor is eligible to claim IBA

 Any renovation cost incurred on IB entitle to claim

IBA i.e. a building leased and renovated to be used
as training center
 QUALIFYING 10 BUILDING
QBE means capitalEXPENDITURE (QBE)
outlay incurred on the building and
incidental cost exclusively related to the building. It
includes the following:
 Architect’s fees;
 Cost of preparing plans, in connection with obtaining approval from the
local authority;
 Cost of clearing the site including cost of demolition of existing building
(non-IB)
 Cost of construction includes labour, materials, haulage, overhead, etc
 Interest expenses on loan borrowed to construct the building till its
completion
 Incidental expenditure i.e. drainage scheme, installation of water &
electricity
 Cost of installing fittings i.e. wiring for electric supply, fans, air
conditioning
 Legal charges, stamp duty , connected with the acquisition of building.

Note: Cost of land & legal fees connected to the acquisition of the land, legal
expense on loan borrowed to construct the building is NOT QUALIFY FOR IBA
QUALIFYING BUILDING EXPENDITURE (QBE)
11

QBE for constructed  QBE for purchased

building: building
Cost of construction  Purchase price
 Subsequent capital
expenditure on
construction, extension,
alterations and
renovation
 Initial repairs (which
enhance the value) of
the building
 12

QUALIFYING BUILDING
EXPENDITURE
QUALIFYING BUILDING QBE(QBE)
a. Constructed building Building expenditure
incurred
b. Purchased building
YA2005 and onwards Purchase price

Prior to YA2005:
(i) purchased building used as (i) RE + BC of vendor; or
IB 1 month prior to disposal (ii) Purchase price
(para 4)
(ii) purchased building not used Lower amount of:
as IB 1 month prior to (iii) RE; or
disposal (para 5) (iv) Purchase price
 Cost of the land
13
NON QBE
 Legal fees and stamp duties – relating to the acquisition
 of the land
 Cost of demolition an existing IB i.e. old factory
 75% RULE
14

 Capital expenditure incurred on preparing, cutting, tunneling or

leveling land (COPTS) – cost of preparing a site for installation
machinery or plant to used for business:-
Plant & Machinery (P)
COPTS (L)
Aggregate Cost AC

 COPTS [L] > 75% of Aggregate cost [AC], then

Aggregate Cost [AC] qualified as QBE.

 COPTS [L] ≤ 75% of Aggregate cost [AC], then

Aggregate Cost is not qualified as QBE. P will be
qualify for QBE
 15
10% RULE
 Whole building is treated as IB if non IB (i.e. office,
showroom) is ≤10% of the total floor space.
Example:
Showroom & Office (NIB) 5%
Factory (IB) 95%
QBE RM750,000

Since the non IB does not exceed 10% of the total floor space,
the
whole building is treated as an IB. Therefore, QBE =
RM750,000.
 16
10% RULE
 If non IB is > 10% of the total floor space, the QBE
must be apportioned accordingly.
Example:
Showroom & Office (NIB) 15%
Factory (IB) 85%
QBE RM750,000

Since the non IB occupied > 10% of the total floor space of
the building, therefore QBE = RM637,500 (85% x RM750,000).
 INITIAL & ANNUAL ALLOWANCE

IA Rate AA rate
a. Constructed IB 10% 3% (YA2002
onwards)
2% (Prior to
YA2002)

b. Purchased IB:
YA2002 and subsequent YAs 10% 3%
Prior to YA2002 - Permitted
fraction

Source: Malaysian Taxation, CKF 17 th Edition, p 341-342

 BALANCING CHARGE, BALANCING ALLOWANCE &
NOTIONAL ALLOWANCE
18

RE > Disposal value = BA

Disposal value > RE = BC ( cannot exceed actual total
IBA given)
 Notional allowance (NA) is claimed when:
 the building is not used as an IB
 the building is not in used
temporarily
Jan 2018

B. Masco Plastic Sdn Bhd is a company manufacturing quality plastic containers. The
company makes up its account to 31 December each year. A building was constructed
by the company at the following costs:

Capital Expenditure RM

Cost of land 1,000,000.00

Architect fees 35,500.00

Cost of internal roads and drainage system 64,500.00

Construction cost 975,000.00
Wiring and plumbing 45,000.00
Legal fee and stamp duty on acquisition of land 10,500.00

The building was completed and brought to use on 1 March 2016. The company used
25% of the built up area as an office while the balance as a factory.

Required:

Calculate the industrial building allowances that can be claimed by Masco Plastic Sdn
Bhd for the year of assessment 2016 and 2017.
 SUGSTED SOLUTION

B.
Factory RM
Qualifying Building Expenditure:
Architect fees 35,500√
Cost of internal roads and drainage system 64,500√
Construction cost 975,000√
Wiring and plumbing 45,000√
1,120,000
Since 25% of the total built up area of the building was used as an
office, only 75% of the QBE qualify for IBA. √
QBE (75% x 1,120,000) 840,000√
YA 2016√ IA (10%)√ (10% x RM840,000) (84,000) √
AA (3%)√ (3% x RM840,000) (25,200) √
RE 730,800
YA 2017√ AA (3%) (3% x RM840,000) (25,200) √
RE 705,600