ACC424 MALAYSIAN TAXATION

Question 1

Taxable people can incur two types of expenses which are directly related to income
sources. They are capital expenditure incurred by a business expected to bring future long term
benefits and revenue expenditure is costs incurred in the daily operations of the business with
short term benefits. Examples of capital expenditures are purchase of land, plant and machinery,
permit fees to access land extraction and commissions paid to obtain any fixed assets. Under
section 39 of the Income Tax Act 1967 (thereafter it will be as ITA 1967), capital expenditure is
non- deductable. This is because it will incur a double claim. Section 39(1) (e) ITA 1967 serves
as a preventive section, preventing double claim of deduction of the same expenses of the gross
income. Since the capital expenditure can either be given capital allowance under Schedule 3 or
specific deduction against aggregate income, deductions are non allowable (Choong K. F,
2010) . However, capital expenditure related to income recognized only under Section 4(a)
ITA1967 which is business income is eligible for capital allowance. Any other sources of income
falling under Section 4(b) –Section 4 (f) ITA 1967 is not eligible for capital allowance. Hence it
is right to say that capital expenditure spent by the taxpayers can help reduce their tax liability
only if it is wholly and exclusively incurred for business purposes through claim of capital
allowances.
Capital allowances are claimed on certain purchases or investments in the company
which offer by the government under the Capital Allowances Act 2001.Company can claimed
capital allowance on capital assets such as car, van, certain buildings and plant and machinery
which are purchased in the accounting period. According to the rules of Revenues and Custom, if
the owner of the company wants to purchase any assets or improve the particular assets, the
owner of the company can claim capital allowance to offset the expenditure of new assets against
the revenue which earned by the company. Although all of the assets of the company can be
claimed to offset the acquisition expenses, but capital allowance just can be claimed for every
single assets once in their lifetime.
Initial allowance can be claimed for one property or asset for 100%. If the property is not
for business used before it was sold for another businessman for business purpose, the owner can
claim the initial allowance for the relevant property.
Annual allowance is a tax deduction for a person who runs the company with eligible
property. Franchise or goodwill is one of the eligible capital properties which can be claim by the
owner of the company. For example, the franchise of KFC which gives KFC can run its business
for an infinity period.
Balancing charge is an adjustment when the owner of the company sells or stops using
equity in his business use if the amount of the selling price over its written down value. Written
down value is the cost less the capital allowance to date of the particular equity. The balancing
value will be subject to tax for each assets and equity.
Persons entitled to Capital Allowance
Capital allowances are approved only to a person who incurs qualifying expenditure on
the provision of machinery or plant used for the purpose of a business. For instance the person

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receiving income from employment will not be able to claim capital allowances. For example, a
doctor claimed an allowance for wear and tear of his car which he used for professional
purposes. Due to the Board, he is not entitled for the allowances because he was an employee of
the practice where he worked and he was not carrying a business. In following, the person who is
capable to claim capital allowances must normally be the owner of the assets and also used for
the purpose of the claimant’s business. Even though the plant machinery is used by a lessee, the
lessor is entitled to allowances. In the case, of hire-purchase transactions, the hirer of the plant
and machinery is supposed to be the owner and he/she is entitled to capital allowances on the
capital portion installment payments made by him/her in the relevant period.(as in Schedules 3
paragraph 46). However, In the case of partnership stated that the individual partners are entitled
to a share of the capital allowances on the assets owned by the partnership. The capital
allowances are allocated between the partners at the end of relevant basis period according to the
profits sharing ratio of the partnership. For instances there is a changes made in partnership,
capital allowances are calculated as if the business was carry out by the same persons. For the
summary of who is entitled for the capital allowances are the person must be the owner of the
asset at the end of basis period which incurring the allowances must be carrying out the business,
the allowances must be incurred in providing the plant or machinery and also used for the
purpose business.(issued Public Ruling 1/2001)

Characteristics of Qualifying Expenditure

Qualifying expenditure on plant or machinery is regarded as the capital expenditure incurred in
the cause of carrying out the business activity. In line with Para 2, Sch 3, qualifying expenditure
includes:
(1) Expenditure incurred on the alteration of installing that machinery or plant and other
expenditure incurred incidentally due to the installation thereof; and

(2) Expenditure incurred on preparing, cutting, tunneling or leveling land in order to prepare
a site for the installation of that machinery or plant, but if the expenditure exceeds 10% of
the aggregate of itself and any other expenditure (being qualifying plant expenditure)
incurred for the purposes of the business this sub-paragraph shall not apply.

For example: A generator costing RM 200,000 has been installed in a factory and
incurred RM 80,000 for cost of preparing the site. Therefore the qualifying expenditure
for capital allowance is RM 200,000. This is due to the cost of preparing the site has
exceeded 10% of the total aggregate cost of RM 280,000. If the cost of preparing the site
was RM 20,000 than the total cost of RM 220,000 is deemed to be qualifying
expenditure.

(3) Expenditure incurred on fish ponds, animal pens, chicken houses, cages, buildings (other
than those used wholly or partly for the living accommodation of a director, an individual
having control of that business or an individual who is a member of the management,

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administrative or clerical staff engaged in the business), and other structural

improvements on land which are used for the purposes of poultry farms, animal farms,
inland fishing industry or other agricultural or pastoral pursuits.

Under Section 34A, it states that IRB had approved to include the capital expenditure on
machinery or plant which is being used in research as the qualifying plant expenditure.

There are situations where qualifying expenditure on plant or machinery have an effect on the
exchange differences. For instance when a company purchase machineries from Japan and an
exchange loss is suffered on payment, it follows that such a loss to be considered as capital in
nature. Hence, it will be added to the purchase price of the machinery when computing the
capital allowances. In contrast if there is a gain through the exchange difference than the
qualifying expenditure will be reduced.
In addition, expenditure incurred on positioning machinery from one floor to another or shifting
the machinery to another floor in the same building can be taken into account as capital
expenditure in nature for claiming capital allowances.
There are certain conditions that need to be fulfilled when a person is claiming for capital
allowance. A person owning an asset of which he is both the beneficial and legal owner for the
purpose of his business has to fulfill the following conditions to claim for allowance; he should
have been carrying on the business during the basis period and incurred the expenditure because
of the main purpose of the business. He also need to have used the asset for the purpose of the
business during the basis period and remained the owner until the end of the period while being
used for the main purpose of the business. (Public ruling No 1/2001) For example; in computing
Thomson’s the statutory income of his furniture shop where at 21.06.2000 he purchases a van,
registers it under his name and uses it for his furniture business. His accounts are prepared to 31
December every year and until this date the van was still being used. Thomson hence has
qualified for capital allowance since he fulfilled all the above compulsory conditions.
A different situation may arise where an asset is used for the purpose of the business of
the beneficial owner but registered in the name of another person; the person may be able to
claim capital allowance if he was the one who incurred the qualifying plant expenditure and used
the asset for the main purpose of the business during the basis period until the end. For example;
if Sarah purchases an oven in the basis year 1998 and registers it under her Ali Ahmed’s name
her husband and used the oven for her bakery business, she can claim capital allowance for the
basis year 1998 when computing her statutory income from her business as long as she has
fulfilled the required conditions stated above. Ali nevertheless is not permitted to claim any
capital allowance since he did not incur qualifying plant expenditure.
Another situation may also arise when an asset is registered under the name of a person
and used it for the purpose of the business of more than one beneficial owner. The different
owners are entitled to claim for capital allowance if they have fulfilled that more than one person
incurred qualifying plant expenditure and used the asset for the business purpose at the beginning
of the basis period and still used at the end of the basis period. The asset although has to be

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registered under only one beneficial owner or another different person. Example; Annabel and
Grace who own their own separate business contributed to purchase a Limo on 1.06.2002 where
Annabel contributes Rm500, 000 while Grace, Rm300, 000 to the total cost of Rm800, 000 and
was registered under Annabel’s name. In the basis period for the year of assessment, the limo
was used in both the businesses therefore both owners can claim capital allowances in
appropriate proportion determined by their respective share of the qualifying plant expenditure
incurred. After the deduction of let’s say an initial allowance of 20% and an annual allowance
for that year also at 20%, both Annabel and Grace will remain with residual expenditure of
Rm200,000 and Rm120,000 respectively hence they can claim for Rm300,000 and Rm180,000
for capital allowance each.
However there is a scenario that should be avoided by a taxpayer in order to qualify for
claiming capital allowance that is when the asset is registered and used for the business of the
legal owner but the qualifying plant expenditure was incurred by another person(beneficial
owner), both parties cannot claim capital allowance. This is because neither of them has fulfilled
the prescribed value.
Example:
Suria Sdn Bhd bought a van and registers it under Maria Sdn Bhd, its subsidiary. The van is used
by Maria Sdn. Bhd. for its business purposes. Neither company is eligible for claiming capital
allowance over the asset for:-

 Although Suria Sdn Bhd incurred a capital expenditure, it did not spend for the purpose
of its business and the van was not used for its own business activities.
 Although Maria Sdn Bhd used the van for its business activities, it did not incur any
capital expenditure.

A taxpayer could also claim capital allowance when the asset is used for dual purpose (i.e.
personal and business use). It is subject to the decision of the Director General based on the
circumstances of the case. The claim must be reduced by the amount of the private use .Take for
instance a car, if it is used for both business and private purpose, the claim should only be based
on the usage for business purposes.
Besides that if an asset is used for two types of income sources, that is business and
employment; the asset should be bought under the business name and kept in the premises of the
business even though it is used for employment purposes. Take for example, a shelf is needed for
employment purposes but if it bought under the business and kept in the office, and both
materials related to business and employment is stored, then it is still eligible for capital
allowance.

There is also accelerated capital allowance (ACT) that can tremendously reduce
taxpayers’ tax liability. ACT is available for computers and information technology which
includes equipments used in gathering, processing and communication of information through
computerization and telecommunications combined such as bank systems, access control

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systems and computer components. It is also available for computer software, plant and
machinery that assist in the process of recycling waste or for further processing of it to make
finished goods, reinvesting in qualifying projects, assets used for controlling power quality and
equipments used to generate renewable energy (C. K. Fatt, 2008). However, this incentive is not
extended to pioneer status companies, investment tax allowance or reinvestment allowance.

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Question 2 (a)

RubberCock Sdn. Bhd. was incorporated on 1st January2001 for the purpose of rubber plantation.
The first year of assessment is the year 2002. However, in this scenario, the basis period does not
follow the financial year end of the company but depends on the commencement date of business
which is the date whereby essential works start. In this case, commencement of business is the
date of the completion of seedling activities that is on 15 th March 2001. Therefore the basis
period for the first year of assessment is 15th March 2001- 14th March 2002. The date of purchase
of land is not considered as the commencement of business for it is preparatory to
commencement of the agricultural work (Birmingham and District Cattle by Product v. CIR).

Question 2 (b)
RubberCock Sdn. Bhd had purchased a piece of land amounting to RM 200,000 on 3
February 2001.Even if it is a capital expenditure in nature, it cannot be treated as plant and
machinery (P & M) or an industrial building allowance (IBA) as it does not meet the
requirements of Qualifying plant expenditure (QPE) which entails incurring a capital expenditure
on the provision of machinery or plant used for business purpose. As a consequence,
RubberCock Sdn.Bhd is not eligible to claim for capital allowance which comprise of initial and
annual allowance.
The first seedling activities were completed on 15th March 2001 for the purpose of
operating a rubber plantation and are qualified for 50% capital expenditure incurred on planting
of new crops on the land as granted by Agriculture Allowance. As a result, there is no initial
allowance given for qualifying agriculture expenditure.
There was disposal of the rubber plantation by the company in 2005 to a property
developer, TT development Sdn.bhd at RM 500,000 market value. When there is a qualifying
asset being disposed off, there are adjustments to be made in the balancing allowance and
balancing charge. However there is no capital allowance it is not eligible to claim balancing
allowance and balancing charge. Even if it was acquired by TT, a property developer, the land is
still considered an agricultural land for it was not used for any property development purpose,
hence it purpose remains as it pioneer use.It may also be possibly a financial agreement between
the two companies for Rubbercock Sdn. Bhd. would have been in financial difficulties. Hence it
would have agreed to buy back the land for a certain price after a period of time.
On 1st January 2006, Rubbercock Sdn Bhd reacquired the idle agriculture land for
RM800, 000 being revenue expenditure to it. An Extraordinary General Meeting was held on
15th January 2006 resulting in the change of Rubbercock’s objective of becoming a property
developer. A property developer is defined in Public Ruling No.1/2009 as a company, an
individual, a partnership, a co-operative society, a body of persons, who or which engages in or
carries on or undertakes or causes to be undertaken property development. On 15th May 2009, the
company completed the construction of 100 units of shop lots at a cost of RM10 million. This is

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not considered a disposal of asset (no balancing charge/ balancing allowance) for the shop lots
are considered as mere products/inventory of the firm. Hence, it is being in the normal course of
its business. The gross income from its business source is derived as below:-

Business Gross Income

Sales RM23.75 million
(-) COGS

Cost of land 95% x RM800,000 = RM760,000

Building Cost 95 x (RM10,000,000/100) = RM9.5 million RM10.26 million
Gross Income RM13.49 million

With effect from YA 2010, Real Property Gain Tax (RPGT) was reintroduced at a flat rate of 5%
on the gain on disposal ( i.e. sell, transfer) of real property. RPGT is taxed on people/bodies that
sell real property within Malaysia. Therefore, real property company fall within the rank of
eligible persons of being taxed RPGT. RPGT will be imposed on any gain on disposal of
property, meaning that Rubbercock Sdn Bhd is eligible for RPGT.

Proposed events

Rubbercock Sdn Bhd intends to rent out 3 units of shop lot for investment purpose. The letting of
these real properties would fall under Section 4 (d) of the Income Tax Act 1967 for it is a non
business income, and hence will be treated as a rental income. This is ascertained by the
ownership and type of the property. If four and above units of shop lots are rented out, then it
would be considered as a business source. However, in this scenario, Rubbercock Sdn Bhd is
planning on renting out 3 units only. There are certain expenses that are allowable for deductions
from the gross income under Section 33 such as interest on loan facilities, quit rent, legal costs
and other subsequent expenses. Any forms of initial expenses are non- deductable for it is capital
in nature. Since it is classified under Section 4(d), the properties rented out are not allowable for
claim of capital allowances.

Rubbercock Sdn Bhd also proposed on converting the balance two shop lots into administrative
office. These buildings are considered as capital expenditure to the company. However, it is not
qualified to be an industrial building and industrial building allowance (IBA) cannot be claimed.
This is because it is used for administrative purpose and not for employee welfare, employees
living accommodation/ quarters, any sort of approved service project or as child care
infrastructure. Therefore, no deductions/ allowance is allowed over these two buildings if it is
used for administrative purposes. It is stated that if a part of an industrial building is used for
non qualifying industrial building purpose, that part is given IBA only if it covers 10% or less of
the construction cost of the whole building. If not, only the part used as qualifying industrial
building purpose can be charged IBA. However, in this case, this rule does not apply because the
whole of both buildings are used for non qualifying (administrative) purpose.
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