tax 467 taxation 1
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TAX 467
TAXATION 1
TOPIC 4
CAPITAL ALLOWANCE
- INDUSTRIAL BUILDINGZalilawatiYaacob
UiTMPuncakAlam
LEARNING 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
01
0
2
03
04
05
06
INDUSTRIAL BUILDING ALLOWANCE
Eligibility, Rates
• Initial Allowance
• Annual Allowance
• Application
QBE
.Constructed
vs
Purchased
IB
Building/Structure
treated as an IB
DISPOSAL• Balancing charge
• Balancing
allowance
• Restriction
RESIDUAL EXPENDITURE
RULES
75% rule
10% rule.
FORMAT
RM
QBE X
YA XX Less: Initial Allowance (x)
Less: Annual Allowance
(x)
Residual Expenditure XX
CAPITAL ALLOWANCE –INDUSTRIAL BUILDING
ALLOWANCE
I N D U S T R I A L
B U I L D I N G
Sec 2 – building, any
structure erected on
land (not being plant
& machinery)
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 IBCategory Para IA AA
1. Dock, Wharf, JettyWarehouse let out to publicBuilding used by utilities & telecommunication supplierBuilding used in the working of a mine or farm
63 10% 3%
2. Factory, Mill workshop, building within same curtilage
64 10% 3%
3. Canteen, restroom, recreation room, lavatory, washroom for employeesPre-requisite: IB must exist.
65(1) 10% 3%
4. Building for welfare of workings and LA for employees working in farm
65(2) 10% 3%
5. Public road recoverable through toll. 67A 10% 6%
6. Building on built, lease transferred to Government approved by MOF
67B 10% 6%
OTHER TYPES OF IBCategory Para IA AA
7. Private hospital, maternity home, nursing home
37A 10% 3%
8. Building used for research/training. 37B 10% 3%
9. Warehouse used for storage of goods for export, imported goods to process/to re-export
37C - 10%
10. Building used in approved service sector.
37E 10% 3%
11. Hotel registered under MOTAC 37F 10% 3%
12. Airport 37G 10% 3%
13. Motor Racing Circuit 37H 10% 3%
14.Living accommodation [LA] for
employees – constructed building
Pre-requisite: IB must exist.
42(1) 40% 3%
15. LA for employees in manufacturing,
hotel or tourism business, approved
service sectors – constructed or
purchased.
42A(1) - 10%
OTHER TYPES OF IBCategory Para IA AA
16. Child care centre for employees -
constructed or purchased
42(2) - 10%
17. School or educational institution approved
by Minister of Education – constructed or
purchased (exclude tuition centre)
42B - 10%
18. Building for Industrial, technical or vocational training approved by MOF–constructed or purchased
42C - 10%
19. Old folks care centre – constructed or purchased
PU (A) 143/2003
- 10%
20. Building used by MSC status company PU(A)202/2006
- 10%
21. BioNexus status company PU (A) 374/2007
- 10%
Source: Malaysian Taxation, CKF 25th Edition, pp 347- 350
OTHER TYPES OF IB
Category Para IA AA
22. Privatisation project and private financing scheme
PU (A) 119/2010
10% 6%
23. Kindergarten – constructed or purchased PU(A) 1/2013
- 10%
24. Child care centre – constructed or purchased
PU(A)2/2013
- 10%
25. Tun Razak Exchange Marquee Status Company – w.e.f. YA2014
PU (A)27/2013
- 10%
PERSON ENTITLED
TO CLAIM IBA
Owner of a building APART from the buildings listed above leases or rents out
the building to another person (tenant) who uses the building as an industrial
building, [paragraph 60, Schedule 3 of the ITA]
Business Operator as the Owner of the Building(37A,37B,37C,
37E,37F,37G,37H,42A(1), 42A(2), 42B and 42(C) according to
Subparagraph 16B(1), Schedule 3 of ITA , but if rent out such building
then, Not entitled to claim IBA
Renovation cost incurred on rented premises,
entitle to claim IBA
The building must be in use for the
purposes of a business.
The taxpayer must have incurred capital
expenditure on any IB
QUALIFYING BUILDING EXPENDITURE
IBA is deducted against the
adjusted business income in
arriving at the statutory
business income.RM
Adj Business Income xx
Add: Balancing Charge xx
XX (A)
Less: Capital Allowances :
Unabsorbed CA b/f (xx)
Current year CA (xx)
Balancing Allowance (xx)(B)
Stat Business Income XX
The taxpayer is able to
claim industrial building
allowance [IBA] on such
QBE incurred.
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]
IBA can be carried
forward to be utilized in
future years.
QUALIFYING BUILDING EXPENDITURE
NON –QBEThe following are capital expenditure
on the construction of buildings which
are not included as QBE –
(i) cost associated with the acquisition
of site such as land cost, legal
charges, payment of stamp duty
and surveyor; (ii) the cost of
clearing the site of any previous
works or demolishing the previous
structure which was an industrial
building; and
(ii) (iii) the payment for compensation
to obtain the right to occupy or own
a property.
CONSTRUCTION OF BUILDING
QBECapital expenditure on the construction of a building that qualifies includes –
(a)architect’s fees for designing a plan of the industrial building;
(b) the cost of preparing plans and others in connection with obtaining approval
from local authorities for construction of the building;
(c) the cost in connection with the title to the building such as legal charges and
stamp duty;
(d) the cost of clearing the old site including the demolition of any old structure,
provided that the old structure was not an industrial building and that the new
building is situated precisely on the same site occupied by the old building;
(e) cost associated with works on the site such as piling, digging of foundations for
drains, water pipes and electricity cables;
(f) the cost of construction of the building which will include materials, labour,
haulage, management, supervision and other overhead charges directly related to
the construction;
(g) cost of installing fittings that form part of the building such as wiring for electric
supply;
(h)incidental expenditure on works which may be separately contracted such as
drainage system, installation of water and electricity; and
(i) cost of constructing additions, renovations and alterations to an existing building
which are capital in nature.
.
QUALIFYING BUILDING
EXPENDITURE
CONSTRUCTING ADDITIONS
constructing additions to a building
due to in sufficent space in the building
or other reasons in order to fulfill any
requirement or usage related to a
business is QBE for IBA claim
COST OF RENOVATIONS
Renovations include the
reconstruction of structures inside a
building without constructing an
additional new building or
reconstruction which involves
structural changes to a building and
improvements, qualify as QBE for
IBA claims
COST OF ALTERATIONS
Alteration is done to a building which is
used as an industrial building for the
purposes of improving the quality of
service and increasing the productivity
of a business.
For example: The expenditure on
removing the entire layer of a slippery
cement floor and replacing it with tiles
for safety reason and to smoothen the
work processes is an improvement to
the building, is QBE for the purpose of
claiming IBA
PURCHASE BUILDING
QBE = Purchase price of an
industrial includes legal fee, stamp
duty and other incidental expenses
incurred by the purchaser in
connection with the purchase but
does not include the price of any
land or an interest of any land
OTHER QUALIFYING
BUILDING EXPENDITURE
15
QUALIFYING BUILDING QBE
a. Constructed building Building expenditure incurred
b. Purchased buildingYA2005 and onwards
Prior to YA2005:(i) purchased building used as
IB 1 month prior to disposal (para 4)
(ii) purchased building not used as IB 1 month prior to disposal (para 5)
Purchase price
(i) RE + BC of vendor; or(ii) Purchase price
Lower amount of:(i) RE; or(ii) Purchase price
Qualifying Building Expenditure
(QBE)
PART OF BUILDING
NOT USE AS AN IB
The 10% rule applies
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.
Part of building an extension to a building is considered
as an industrial building if it is not used as an industrial
building does not exceed 1/10 (10%) of the overall
construction cost of the building or extension
The determination of capital expenditure for the
part or extension to a building is calculated based
on –
(a) total cost of construction;
(b) floor area; or
(c) other apportionment method that is considered
fair and reasonable by the Director General.
Part of a building is rented out by the
owner and the space rented out does
not exceed 10% of the floor area of
the whole building, the whole building
qualifies as an IB
The space rented out exceeds 10% of
the floor area of the whole building,
that part of the building rented out
does not qualify as an industrial
building. 8.3.4 The determination of
Refer example 9 and 10 of Public Ruling No. 3/2018 Date Of
Publicaton: 12 September 2018
DATE OF QUALIFYING
EXPENDITURE INCURRED
Constructed building
(a) QBE is deemed to have been incurred on the
day on which the construction of the building is
completed [paragraph 55(a), Schedule 3 of the
ITA].
(b) If the construction of a building is completed
before a business is about to carry on, the QBE
shall be deemed to be incurred on the date the
business commences [proviso to paragraph 55,
Schedule 3 of the ITA]
Purchased building
(a) QBE is deemed to have been incurred on
the day the expenditure becomes payable
[paragraph 55(b), Schedule 3 of the ITA].
(b) Purchase of a building occurs when there
is sale, transfer or assignment of a relevant
interest in the building [paragraph 58 of
Schedule 3 of the ITA]. (c) If the building is
purchased before commencement of a
business, the QBE shall be deemed to be
incurred on the date the business
commences [proviso to paragraph 55,
Schedule 3 of the ITA].
ELIGIBILITY TO CLAIM INDUSTRIAL BUILDING
ALLOWANCES
IA shall be allowed to a person who has incurred QBE
(construct/purchase) in the basis period for a year of
assessment for the purposes of his business and at the
end of the basis period for a Year of assessment –
(a) the person is the owner of the building;
(b) the building was in use or was about to be used as
an industrial building; and
(c) if the building was disposed of in that basis period,
the building must have been used as an industrial
building in the period prior to the disposal
IBA comprises of initial allowance (IA) and annual allowance (AA) or AA at the
rate prescribed for each type of industrial building
AA shall be allowed for a year of assessment
to a person who has incurred QBE on the
construction or purchase of a building and at
the end of the basis period for a year of
assessment –
(a) the person is the owner of the building;
and
(b) the building was in use for purposes of
the business.
IA AA
NOTIONAL ALLOWANCE (notional allowance which is equal to the annual
allowances )
Notional allowance (NA) is claimed when:
❑ the building is not used as an IB
❑ the building is not in used temporarily
TEMPORARY DISUSE
A building is deemed to be used as an industrial building even though it is not actually
being used if [paragraph 56 and 57, Schedule 3 of ITA] :
(a) the building was used for the purpose of a business immediately before disuse;
(b) during the period of disuse, the building is constantly maintained in readiness to be
brought back into use; and
(c) the period of disuse is temporary.
.
Example
Semerah Padi Sdn Bhd owned a building that was used as a factory and storage of
rice for distribution in the state of Kedah and Perlis. Due to the economic recession
factor, the factory was not used for a period of 2 years. During that period, the factory
was constantly being maintained in a proper manner such as cleaners were hired to
clean the factory building and its compound and was carried out pest control.
Semerah Padi Sdn Bhd is eligible to claim IBA for that period because the factory is
still properly maintained and ready to be used any time
DISPOSAL OF AN INDUSTRIAL
BUILDING
AN IB IS DISPOSED
a) sale, transfer, assignment of the relevant interest in
the building
b) Relevant interest depends on the duration of a
concession, the coming to an end of concession
c) Relevant interest is a leasehold interest, the
determination of the relevant interrst otherwise then
to the person entitled to there to acquiring the
reversion
d) The demolition of the building
e) The building ceased to be used as an IB
DISPOSAL DISPOSAL VALUE
Sale/transfer/assigned MV at date of transfer
Net proceeds of
sale/transfer/assignment
Whichever is greater
Insurance compensation MV
Insurance compensation
Whichever is greater
Demolished Net cost of demolition added
to Balancing Allowance
Building lease transfer to
GOVT
Zero
Received compensation,
reduce Residual Expre
❑ RE > Disposal value = BA
❑ Disposal value > RE = BC ( cannot exceed actual total IBA
given)
❑ Dispose < 2yrs = Clawed back all allowances
An industrial building which is disposed of after 50 years from the
date of construction or purchase would be imposed a balancing
charge except where the QBE has been determined in the manner
mentioned.as Special provision to paragraph 3 and 35 of Schedule 3
TEST NOV 2019 QQUESTION 2 B. Healthy Life Manufacturing Industries Sdn Bhd (accounting year end 30 June annualy), is
a company manufacturing wide range of health products, acquired a piece of land in
Bukit Jelutong, Shah Alam for RM 5 million in January 2016.
HLSB subsequently constructed a building consist of factory together with office at a cost
of RM2,850,000.The total built-up area of this building was 275,000 sq ft of which the
sales/administration office occupied 41,250 sq ft. The whole building was completed and
brought into use in April 2017. The whole building was sold for RM3,500,000 in May 2018
to Samporna Sdn Bhd (SSB), a freight forwarding company involved in the transportation
of goods. SSB used the whole building as a workshop to service and repair the
company’s lorries.
In March 2017, Healthy Life Sdn Bhd (HLSB) purchased a three storey building in
Petaling Jaya for RM 3 million and rented it to EduBest Sdn Bhd (ESB) for a monthly
rental of RM250,000. ESB use the building as an educational institution approved by the
Minister of Education.
Required:
a. Calculate the industrial building allowances, balancing allowances/charges (if any) for all
relevant years of assessment for Healthy Life Manufacturing Industries Sdn Bhd
b. Explain breifly whether EduBest Sdn Bhd is eligible to claim for industrial building
allowances.
c) Define the meaning of ‘within same curtilage’ in the context of industrial building
TEST NOV 2019 SB. a. Factory
RM
YA 2017 QBE ( 85% x 2,850,000) 2,422,500
IA (10%) (242,250)
AA (3%) (72,675)
RE 2,107,575
YA 2018 Disposal ( 85%√ x 3,500,000) 2,975,000
Balancing Charge 867,425
Office = 41,250/275,000 = 15% Therefore QBE = 85%√
However, since the asset was owned less than 2 years (Apr 2017 – May 2018) all capital allowances claimed will be clawed back. √Therefore the balancing charge is equal to RM 314,925.
b. Edubest Sdn Bhd is not eligible to claim IBA for the building because the building is a
rented building
c. The meaning of within the same curtilage is a building attached or adjacent to or within
the same enclosure as the other building