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CHAPTER 2

INDUSTRIAL BUILDING ALLOWANCE

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Definition of Industrial BuildingDetermination Qualifying Building Expenditure

(QBE)– Constructed Building– Purchased Building

Person eligible to claim IBATypes of Industrial Building Allowance

• Initial Allowance• Annual Allowance

Temporary Disuse of Industrial BuildingDisposal of Industrial Building

– Balancing Charge– Balancing Allowance

Learning Outcomes

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1Introduction A taxpayer who has incurred expenditure on the

construction or purchase of a building, which is used for his business is entitled to claim Industrial Building Allowance (IBA).

IBA is deducted from the adjusted income in arriving at the SI of a business.

Para.75 (Sch. 3) – any IBA that cannot fully absorbed in a YA can be carried forward for subsequent YA until fully absorbed.

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1Meaning Of Industrial Building

Section 2, ITA 1967 defines building is any structure erected on land (not being plant and machinery).

• Schedule 3, para 63 specifies the types of building that qualify as an industrial building.

• Types of industrial building :– Used as a factory– Used as a dock, wharf, jetty or etc– Used as a warehouse– Used in the water, electricity and

telecommunication – Used in the working of a farm– Used in the working of a mine

(page 465-477)

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Meaning of Factory 1

Para 64, defines factory as to include a mill, a workshop and a building for the housing of plant and machinery.

Besides that, factory also include a building (within same cartilage as a building which is used as a factory) used for storage of raw material, fuel or stores necessary for the manufacture as well as a finished product before it has been sold.

Internal road, car parks, fences and bridges in same compound – industrial building.

Workshop used for repairing goods which is incidental to a business of selling those goods – NOT considered as industrial building.

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Example 1:Hi Five Sdn. Bhd is an authorized distributor of electrical equipment. The company has its own workshop to carry out their repair jobs for its customers. Will the w/shop be considered as industrial Building?

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Meaning Of “Within The Same Cartilage”

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A building attached or adjacent to or within the same enclosure as the other building.

Example 2: Mesra Bhd. is a manufacturing company. The factory is located at Klang. The warehouse to store raw materials is within the same compound as the factory. But the warehouse for finished product is located at Kajang. Are BOTH warehouse is considered as IB?

Answer: ONLY warehouse in Klang considered as IB as it is within the same curtilage as factory.

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Answer:

Example 3:Quicksave Bhd. is a retailing business company. It constructed a warehouse adjacent to its supermarket building. Can the company claim the warehouse as an industrial building?

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1Public Road and Ancillary Structures (Para 67A)

Where pursuant to an agreement with government – a person incurs capital expenditure on the construction, reconstruction, extension or improvement of any public road and ancillary structures which is recoverable through toll collection, such exp. Is eligible to claim IBA.

Initial allowance is at 10% whilst the annual allowance is 6%.

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1Non-industrial Building

• Under Para. 65(3) of Sch. 3 ITA 1967, building used for the following purposes are NOT treated as industrial buildings:– Dwelling house [not being for

accommodation of the kind mentioned in Para. 42 and 65(2)]

– Retail shop– Showroom– Office

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1Part Of Building Used As IB (Para 44 & 66)

Where part of the building or extension of a building is used as industrial building and the other part of the building is not used.

Rule: Application of1. 10% rule using cost of construction or2. 10% rule using the floor space area

Then, if the capital exp. incurred on the construction of the non-qualifying part does not exceed 10% of the total cost /space of the whole building, so the whole building qualifies as industrial building. (Para 66)

If the construction cost of non-qualifying part exceeds 10% of total cost/space incurred of the whole building, then only part of the such building is qualify for IBA.

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Example 4:Modern Furniture Bhd. Incurred an expenditure of RM400,000 of a construction of a factory to produce furniture. The factory space included an admin office, costing RM50,000. Factory building space 100,000 sq ft included 12,000 for admin.a) Application of 10 % rule using cost of construction.b) Application 0f the 10% rule using the floor space area.

Answer

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Answer

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2Qualifying Building Expenditure (Para. 3, Sch.

3) Qualifying Building Expenditure (QBE):– Cost of clearing the site– Cost of demolition any old building from the site where the new

building is to be sited. It MUST not be an industrial building– Architect fee on the design of the building– Cost of preparing the various plans for the purpose of obtaining

approval from authorities– Interest expense on loan borrowed to construct the building till its

completion– Actual costs of the construction – Incidental costs of the construction (plumbing, electrical, drainage)– Installation of fittings that form part of the building– Alterations and additions of a capital nature to an existing building– Other expenditures to an existing industrial building which will not

qualify as revenue expenses or as repairs & maintenance– Professional charges relating to the building (i.e legal fees)

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2Constructed Building

The qualifying building expenditure includes:• Cost of construction of building• Subsequent capital expenditure on construction,

extension, alterations and renovations• Initial repairs (which enhance the value) of the

building. Expenditure not qualifying for IBA:

Cost of the site/land Expenditure connected to the acquisition of the land Professional charges connected to the acquisition of

the land Cost of demolition an existing industrial building

Page 481-482

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2Plant and machinery: deemed IB

In the case where capital expenditure incurred on preparing, cutting, tunnelling or levelling land for purpose of installing plant and machinery exceed 75% of the aggregate cost of plant and machinery and the cost of installation, the total cost will be treated as an expenditure on a building. (para 67)

If the building qualify as an industrial building, then it will qualify for IBA.

Hence, the plant and machinery will not qualify for capital allowance.

Refer Example 12, 479

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Example 5:Mari Masak Sdn Bhd inccured the following expenses for the financial YE 31/5/2011 in relation to its manufacturing business:Cost of plant and machinery installed in a factory RM85kCost of preparing, cutting and levelling land to prepare a site for installation RM260k

Determine the QBE.

Answer

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Example 6: Star Bhd. Incurred the following expenditure to

construct a factory:– Cost of land RM280,000– Legal fees for acq. of land RM6,000– Cost of approving plan RM15,000– Construction cost RM180,000– Cost of demolishing an old factory

RM35,000

Required:Determine the QBE for the factory

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Answer:QBE for the factory:

– Cost of approving plan RM15,000– Construction cost RM180,000

RM195,000

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Purchased Industrial Building

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Prior t year of assessment 2005, to determine the qualifying building expenditure (QBE) for purchase building, we applied either Para. 4 or Para 5.

Effected from year of assessment 2005, in the case of a purchased building, the purchase price will be taken as the qualifying building expenditure (QBE).

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2Qualifying Building Expenditure (Para. 3, Sch. 3)

Purchase Building– The QBE depends on whether the building was in

use as an industrial building or not within one month before the purchase.

1) Purchased building in use within one month of purchase (Para 4)

– The QBE incurred by the purchaser on building shall be either the lower between:

» The purchase price» The RE at the date of the purchase plus

taxable BC of vendor.

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2Example 7:Mesra Bhd. is a manufacturer, incurred RM160,000 to construct a building on 1 May 2008. The building was used as a factory until 1 Sept. 2012 when it was sold to Budi Bhd. for RM135,000. Both adopt 31 Dec as their accounting date.

Mesra Bhd.YA 2008 QBE

RM160,000IA (10% )

(RM16,000)AA (2%)

(RM3,200)RE

RM140,800

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YA 2009 AA (2% x 160,000) (RM3,200)RE RM137,600

YA 2010-2011 AA (3%x160,000x2yrs) (RM9,600)RE RM128,000

YA 2012 Disposal value (RM135,000)Bal. charge RM7,000

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2) Not used as industrial building within one month before the purchase (Para 5, Sch. 3)

The QBE incurred by the purchaser on building shall be either the lower between: The purchase price The cost of construction less all allowances

including Notional allowance given if the building had been used as industrial building from the date of construction to the date of purchase.

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2Example 8:Jaya Bhd. constructed a building in 1997 at a cost of RM600,000. It was not used as industrial building. On 12 August, 2002, the building was sold to Melati Sdn. Bhd for RM510,000. Melati Sdn. Bhd is a manufacturing company and it uses the building as a factory. The accounting dates for both company are 31 December.

Answer:

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2DiscussionPurchase price RM510,000

OR

Cost of construction RM600,000

Less: Notional allowance (YA 97-02)

(2% x RM600,000 x 5) RM 60,000

RM540,000

Since the lower is the purchase price, thus QBE to Melati is RM510,000.

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2Date Of Expenditure Incurred

Expenditure on the construction of a building is deemed to be incurred on the day in which the building is completed.

In the case of a business that is about to commence, any expenditure incurred before the commencement of the business – deemed to have been incurred on the day the business commenced.

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Example 9:Lighting Sdn Bhd manufactures light bulb, construct a building and completed on 15/9/2011. They commenced trading on 1/2/2012 (Year ended 31/12). When the company can claimed the QBE?

Answer

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3Person Eligible To Claim IBA

To qualify for IBA, a person must qualify three conditions:– Must have incurred capital expenditure on the

construction of building (including reconstruction and rebuilding).

– The building must be industrial building.– Must be in use for the purpose of business.

In the case where a person who owns a building grants a lease and that building is used as an industrial building by lessee – then the lessor is eligible to claim IBA (para. 60).

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3Example 10:Steven Park constructed a building at qualifying exp. of RM3.2m. It leases the building to Jaya Bhd. who uses the building as a factory. Later, Jaya Bhd incurred RM200,000 to build another building at the leased building. The second building is used as an electricity power supply station for factory.

Answer:

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Relevant interest (para. 49 -51)Interest in the building to which the person who incurred the expenditure was entitled to when he incurred the said expenditure.

May refer to page 484 – 485 (example 14,15)

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4Initial Allowance (Para. 12 & 13)

Initial Allowance (IA) is given for the year in which the expenditure was incurred if:– The building was owned at the end of the basis

period.– Be the owner of the building at the end of basis

period.– The building is used or about to be used as ind.

building at the end of basis year.

If the building was disposed off in year in which it was constructed or purchased, the person will still qualify for IA if it was used as IB at some time before the disposal.

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Constructed BuildingThe rate for Initial Allowance (IA) is 10%.

Purchased BuildingA person who purchase an industrial building does not qualify for IA (prior YA 2002).However, for building fall under Para. 3A, the purchaser entitle to claim IA.

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4Annual Allowance (Para. 16 & 17)

An annual allowance (AA) will be given to a person who:– has incurred QBE on the construction/purchase of

industrial building.– is the owner of the building at the end of basis period.– the building was in use as industrial building for the

purpose of a business.

Constructed Building– The rate of annual allowance is 2% on a straight line

basis.– However, with the effect of YA 2002, the rate is 3% on a

straight line basis.

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Purchased BuildingThe rate is based on permitted fraction prior to YA 2002.However with the effect from YA 2002, annual allowance is based on permitted fraction or 3% of QBE, which ever is higher.

Refer Choong Kwai Fatt ( additional references)

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4Permitted Fraction

Formula for permitted fraction:– Year of assessment of construction of the

building was completed xxx– (+) 50 yrs

xxx– (-) Year of assessment the building

was purchased (xxx)

xxx– (+) 1 yr

xx_

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Example 11:Satellite Bhd constructed an industrial building on 1/1/95. In 2001, it sells the building to Settle-it which also uses it as an IB. Compute the permitted fraction which will be used by Settle-it for claiming annual allowance.

YA – construction 1995+ 50 yrs

2045(- ) YA - purchased (2001)

44+ 1 yr

45The number of years from YA2001 to YA2045 = 45

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4Special Allowance (Construction Building)

The taxpayers is not entitled to an initial allowance in the case of buildings provided as living accommodation for employees in the manufacturing, hotel or tourism sector or in an approved service project and other.

Special allowance of 10% in the basis for the year of assessment.

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5Temporary Disused (Para. 56 & 57)

An industrial building which is temporarily disused shall deemed to be in use for the purpose of the business if:– It was in use immediately before becoming

disused– During the period of disuse, it is constantly

maintained in readiness to be brought back into use.

Therefore in this case, the building is eligible for annual allowance, otherwise there will be no annual allowance given.

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6Balancing Charge & Balancing Allowance (Para.

33 To 37) When person disposes of an Ind . Building, a balancing adjustment can arise.

Where RE exceeds its disposal value – balancing allowance: [RE > Disposal value]

Where its disposal value exceeds RE– balancing charge: [RE < Disposal value]

Balancing charge imposed cannot exceed the total IBA actually given to the seller.

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Meaning Of Disposal (Para. 48) 6

The act defines disposal as:

– The sale, transfer or assignment of the relevant interest in the building.

– The termination of concession.– The demolition or destruction of the

building– The building ceases to be used as

industrial building.

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6Meaning Of Disposal Value (Para. 62)

Where a building is disposed of, its disposal value will be:– The market value at the date of the sale, transfer or

assignment or– The net proceeds of the sale, transfer or assignment,

whichever is greater.

Where a building is destroyed or demolished, the disposal value will be:– The compensation or insurance recovery received or– The market value, whichever is greater.

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6Building Owned For Less Than Two Years

When a person incurred qualifying expenditure in respect of an industrial and it owned for less than two years, the DG may direct that no allowances shall be given.

If allowances have already been given, they shall be withdrawn by imposing a balancing charge in the year of disposal.

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6Other Issues Building constructed for Government use (para. 67B, 16A,

Sch 3): Initial allowance of 10% Annual allowance of 6%Given against the lease income from the Government.

Example 12:TCD, a property developer company enter into Built-lease transfer contract with Malaysian Government in 2005 to construct an Office Complex in Putrajaya. The MoF approved that construction qualify as IB. The complex was completed in 2008 and was leased to the Government on 1.1.2009 for a lease rental of RM200,000 per month for 20 years. The QBE was RM3.5mil. On 1.2.2010, Malaysian Gov made a compensation of RM800,000 to TCD. Compute the IBA for YA2009 & 2010 (YE 31/12)

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Answer:QE 3,500YA2009

IA 10% (350)AA 6% (210)RE 2,940

YA2010 Compensation (800)2,140

AA (2010) 6% x 3,500 (210)RE 1,930

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Qualifying renovation or refurbishment expenditure (para. 8A, 32A): page 496, example 23

Renovation or refurbishment expenditure on a business premises is capital expenditure which is not taxable.

However, is the building use for business during 10.3.2009 to 31.12.2010 shall be given allowances of 50% in that year and 50% the following year but restricted to RM100,000.

THANK YOU

Q&A????

AMR2011/2012

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