Accounting depreciation charged on buildings, plant and machinery, furniture, office equipment and motor vehicles is not deductible for tax purposes. The law however provides for corresponding deductions on expenditure incurred on certain assets used for the purpose of the business in the form of industrial building allowance, capital allowances, accelerated capital allowance and agriculture allowance.
Industrial building allowance (IBA)
- Qualifying expenditure (QE)
QE for purposes of IBA is the cost of construction of buildings or structures which are used as industrial buildings or certain special buildings. In the case of a purchased building, the QE is the purchase price.
- Buildings that qualify for IBA
An industrial building or a special building includes a building used as / for:
- a factory
- warehouse*
- a dock, wharf, jetty
- working a farm, mine
- airport*
- a hotel registered with the Ministry of Tourism*
- supplying water or electricity, or telecommunication facilities
- approved research*
- a private hospital, maternity home and nursing home which is licensed under the law*
- an old folks’ care centre approved by the Social Welfare Department
- childcare centre provided by an employer*
- a school or an educational institution approved by the Minister of Education / Higher Education / other relevant authority*
- industrial, technical or vocational training approved by the Minister of Finance (MoF)*
- motor racing circuit approved by the MoF*
- service project in relation to transportation, communications, utilities or any other sub-sector approved by the MoF*
- living accommodation for individual employed by manufacturing, hotel or tourism business or an approved service project*
- For items marked (*), where not more than one-tenth of the floor area of the whole building is used for letting of property, the whole building qualifies as an industrial building. Where more than one-tenth of the floor area of the whole building is used for letting of property, only the remaining part of the building which is not used for the purpose of letting of property qualifies as an industrial building.
- The MoF may prescribe a building used for the purpose of a person’s business as an industrial building.
- General rates of allowance for industrial building, whether constructed or purchased:
- Initial allowance (IA): 10%
- Annual allowance (AA): 3%
Capital allowances
- Qualifying expenditure (QE)
QE includes:
- cost of assets used in a business, such as plant and machinery, office equipment, furniture and fittings, motor vehicles, etc. “Plant” is defined to mean an apparatus used by a person for carrying on his business but does not include a building or any asset used and that functions as a place within which a business is carried on. W.e.f YA 2023, the MoF may prescribe any asset to be excluded from the definition of plant.
- the cost of construction and installation of plant and machinery (subject to payment of withholding tax where the installation is carried out by a non-resident)
- expenditure on fish ponds, animal pens, chicken houses, cages and other structures used for agricultural or pastoral pursuits
- where an asset is acquired on a hire purchase term, the QE for a particular basis period is based on the amount of capital repayment made during that basis period
- General rates of capital allowance
|
IA (%) |
AA (%) |
Heavy machinery |
20 |
20 |
General plant and machinery |
20 |
14 |
Furniture and fixtures |
20 |
10 |
Office equipment |
20 |
10 |
Motor vehicles |
20 |
20* |
ICT equipment, computer software including customised software |
20 (40)** |
20 |
** w.e.f YA 2024
* QE for non-commercial vehicle is restricted to the maximum amount below:
|
Maximum QE (RM) |
New vehicles purchased where the total cost is RM150,000 or less |
100,000 |
Vehicles other than the above |
50,000 |
- Expenditure on an asset with a lifespan of not more than 2 years is allowed on a replacement basis.
Accelerated capital allowances
Examples of assets which qualify for accelerated capital allowance rates:
|
IA (%) |
AA (%) |
Industrial buildings Public roads and ancillary structures where expenditure is recoverable through toll collection |
10 |
6 |
Buildings for the provision of childcare facilities / centre |
- |
10 |
Buildings used as living accommodation for employees by a person engaged in a manufacturing, hotel or tourism business or approved service project |
- |
10 |
Buildings used as a school or an educational institution approved by the Minister of Education or any relevant authority or for the purposes of industrial, technical or vocational training approved by the Minister |
- |
10 |
Building used as a warehouse for storage of goods for export or for storage of imported goods to be processed and distributed or re-exported |
- |
10 |
Buildings constructed under an agreement with the government on a build-lease-transfer basis, approved by the MoF |
10 |
6 |
Buildings constructed for the Government or statutory body under Private Financing Initiatives approved by the Prime Minister’s Department under build-lease-maintain-transfer basis where no consideration has been paid by the Government or statutory body |
10 |
6 |
| Buildings constructed or purchased, including renovation costs for each YA for approved private nursing homes for senior citizens, (QE incurred from 1 January 2024 to 31 December 2026) | 10 | |
Plant and machinery (P&M) Environmental protection equipment |
40 |
20 |
P&M for building and construction |
30 |
10, 14 or 20 |
P&M of a manufacturing company used exclusively for recycling wastes or further processing of wastes into a finished product |
40 |
20 |
P&M of agriculture / plantation companies |
20 |
40 |
P&M for controlling the quality of electric power |
20 |
40 |
Moulds used in the production of industrialised building system component |
40 |
20 |
Small-value assets not exceeding RM2,000 each are eligible for 100% capital allowances. The total capital allowances of such assets are capped at RM20,000 except for Small & Medium Enterprises (as defined).
Automation capital allowances for the manufacturing sector
Accelerated capital allowances |
IA (%) |
AA (%) |
High labour intensive industries (rubber products, plastics, wood, furniture and textiles) - first RM4 million QCE relating to automation equipment incurred from YA 2015 to YA 2023 (Applications received by 31.12.2023) |
20 |
80 |
Other industries - first RM2 million QCE relating to automation equipment incurred from YA 2015 to YA 2023 (Applications received by 31.12.2023) |
20 |
80 |
Income tax exemption equivalent to the above ACA, to be set-off against 70% of statutory income, is given. Therefore, the total allowances would amount to 200% of the capital expenditure.
The above is enhanced as follows:
i. Scope of automation to include the adaptation of Industry 4.0 elements;
ii. Scope of tax incentive is expanded to include agriculture sector; and
iii. Capital expenditure threshold for high labour intensive industries, other industries and agriculture be aligned and increased up to RM10 million
(Applications received from 1 January 2023 to 31 December 2027)
The scope is further expanded to include the commodity sector under the Ministry of Plantation and Commodities. (Applications received from 14 October 2023 until 31 December 2027)
Disposals
Balancing adjustments (allowance / charge) will arise on the disposal of assets on which capital allowances have been claimed. Generally, the balancing adjustment is the difference between the tax written down value and the disposal proceeds. The balancing charge is restricted to the amount of allowances previously claimed.
Capital allowances which have been previously granted shall be clawed back if the asset is sold within 2 years from the date of purchase, except by reason of death of the owner or other reasons the Director General of Inland Revenue thinks appropriate.
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.
Temporary disuse
Where an asset is temporarily disused for business purposes, it is still entitled for capital allowances provided the asset was in use immediately prior to the disuse and during the period of disuse it is constantly maintained in readiness to be brought back into use for business purposes.
If the disuse ceases to be regarded as temporary, the asset will be deemed to have ceased to be used and any allowances granted during the period of temporary disuse will be clawed back.
Assets held for sale (AHFS)
If an asset is classified as AHFS in accordance with generally accepted accounting principles during the basis period, such asset is deemed to have been disposed of.
Special treatment has been prescribed which may vary the disposal date and / or disposal value of such assets from the normal rules.
Unabsorbed capital allowances
Any unabsorbed capital allowances can be carried forward indefinitely to be utilised against income from the same business source. For a dormant company, the unutilised capital allowances will be disregarded if there is a substantial change in shareholders.
Agriculture allowances
Qualifying agriculture expenditure |
Rates (%) |
Clearing and preparation of land |
50 |
Planting (but not replanting) of crops on cleared land |
50 |
Construction of a road or bridge on a farm |
50 |
Building used as living accommodation or for welfare of a person employed in working a farm |
20 |
Any other building |
10 |
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