e B O O K - 2 0 2 3 QUALIFYING PLANT EXPENDITURE SITI ZALEHA BINTI IDRIS Jabatan Perdagangan
QUALIFYING PLANT EXPENDITURE
Table Of Contents LEARNING OUTCOMES Introduction DATE OF QUALIFYING EXPENDITURE INCURRED PAGE 1 2 3 qualifying expenditure for motor vehicle 11 12 Qualifying Expenditure for Hire Purchase Asset EXERCISES ARTICLES 14 29 QUALIFYING EXPENDITURE ON PLANT AND MACHINERY REFERENCES 19 30
i DECLARATION OF COPYRIGHT All right reserved. No part of this publication may be produced, distributed, or transmitted in any room or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of publisher, except in the case of brief quotation embodies in critical reviews and certain other noncommercial uses permitted by copyright law. Published by: Politeknik Mukah K.M 7.5 Jalan Oya, 96400 Mukah, Sarawak Printed by: Politeknik Mukah K.M 7.5 Jalan Oya, 96400 Mukah, Sarawak 2023
ii ACKNOWLEDGEMENTS It is pleasure for me to introduce this eBook entitled Qualifying Plant Expenditure, written by Siti Zaleha Binti Idris lecturer of the Commerce Department, Politeknik Mukah. This eBook is valuable contribution to the department. It is suitable for students taking course Malaysian Taxation 1 and Malaysian Taxation 2. This eBook is written in simple and clear explanations to achieve the learning outcome of this topic. Its reviewed and edited by Mrs Siti Zakiah Binti Abu Bakar and Mr. Adi Jaya Bin Adam. I believe students should be provided with a good understanding of this topic in preparing them for future courses. This eBook fulfills the role by guiding and assisting students toward this goal. The writer of this book should be commended for their dedication and effort in coming up woth this eBook. Prepared by: Siti Zaleha binti Idris Reviewd by: Siti Zakiah Binti Abu Bakar Edited by: Adi Jaya Bin Adam
iii ABSTRACT The notes are cheap if compared with reference book sin the market. The Notes were prepared based on the needs of the Polytechnic Syllabus, and fully follow the guidelines from the Ministry of Higher Education. The notes are complete with varied examples and solutions. The notes provide the students with current additional articles for further reading. The content of the note is written in simple English language. QUALIFYING PLANT EXPENDITURE covers the introduction on the qualifying expenditure, the date of qualifying expenditure incurred and the determination of qualifying plant expenditure for plant and machinery bought for business use. In business, there are various types of plant and machineries and some of them were bought on hire purchase term. Hence, the determination of assets bought on cash and hire purchase for the respective year of assessment would be different. This eBook is a part of an innovation idea for experienced the Learning and Teaching Process because: We hope that this book will benefit all students and help them to achive the excellent results.
Learning Outcomes To understand the concept and importance in determining the qualifying plant expenditure for plant and machinery 1. 1 2. Ascertain the qualifying plant expenditure for motor vehicle 3. Ascertain the qualifying plant expenditure for hire purchase asset
Introduction A person carrying on business normally purchases assets in the course of his business. As the assets are capital in nature, they are not allowed as tax deduction in arriving at adjusted business income. These assets would also depreciate over time and accountants would deduct an amount referred to as depreciation from gross business income. However, in taxation depreciation is treated as non-deductible under laws due to the nature of expenses that it is provision and does not represent qualifying expenditure incurred on the assets. 2
Introduction Thus, relief in the form of capital allowances on plant and machinery are given to reduced the adjusted business income in arrive at the statutory business income. Capital allowance can be defined as a relief a claimable by a taxpayer who incurs qualifying plant expenditure (QPE) during a basis period in respect of assets use for the purpose of trade or business at the end of basis period. Capital allowance are only given in respect of a business source and only for the person who incurs the qualifying capital expenditure. 3
Qualifying Expenditure on Plant and Machinery Plant and machinery are not defined under the ITA 1967. Generally, plant and machinery refers to all tangible fixed assets except land and buildings. However, case law provide some guidance on items which fall under the meaning of plant and machinery. The basic characteristics of machinery is that it has moving parts and machinery easily determined compared to plant. A plant is whatever equipment used by a person for carrying on his business but does not include stock in trade. 4
5 Qualifying Expenditure on Plant and Machinery Under Paragraph 2, Sch. 3 of ITA 1967, any capital incurred on the provision of machinery or plant for the purpose of business qualify for qualifying expenditure on plant and machinery. This to include the incidental expenses as the following: Expenditure incurred on the alteration of an existing building for the purpose of installing that machinery or plant and any other expenditure incurred incidentally during the installation. Expenditure incurred on preparing, cutting, tunneling or leveling land to prepare a site for the installation of the plant and machinery (10% rule). Expenditure incurred on fish ponds, animal pens, chicken houses, cages, building, 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.
Expenditure incurred on the alteration of an existing building for the purpose of installing that machinery or plant and any other expenditure incurred incidentally during the installation. Example 1 Qualifying Expenditure on Plant and Machinery Jelita Sdn Bhd bought a new machine with a price of RM80,000. To prevent loud noise of the engine being heard on other floors, the existing building needed to be altered to install sound-proof walls. The alteration cost was RM10,000. Compute the qualifying expenditure for the machine. Answer : The costs of the machine and the costs of the alteration are qualify for qualifying expenditure. Thus the qualifying expenditure is RM90,000. 6
Expenditure incurred on preparing, cutting, tunneling or leveling land to prepare a site for the installation of the plant and machinery (10% rule). Example 2 Qualifying Expenditure on Plant and Machinery The cost of preparing, cutting, tunneling or leveling land in order to prepare the site for the installation of plant and machinery is qualify for qualifying plant expenditure (QPE), provided such expenditure does not exceed 10% of the aggregate of the cost of machinery and the cost of preparing the site. Example 2 : Mentada Sdn Bhd has installed a machine in the factory and the following costs incurred : Machine cost RM120,000 Installation cost RM10,000 Compute the qualifying expenditure for the machine. 7
Example Qualifying Expenditure on Plant and Machinery Answer : Machine cost RM120,000 Installation cost RM10,000 Aggregate cost RM130,000 10% of the aggregate cost = 10% x RM130,000 = RM13,000 Installation cost (RM10,000) is less than 10% of the aggregate cost (RM13,000). Therefore, the cost of preparing the site will be treated as qualifying plant expenditure. Qualifying Plant Expenditure (QPE) is RM130,000. 8
If cost of preparing (cost of preparing, cutting, tunneling or leveling land in order to prepare the site for the installation of plant and machinery) exceed than 10%, thus the cost of preparing does not qualify for qualifying expenditure. The cost of the plant and machinery is the qualifying plant expenditure (QPE). Example 3 Qualifying Expenditure on Plant and Machinery Mentadu Sdn Bhd has installed a machine in the factory and the following costs incurred : Machine cost RM120,000 Installation cost RM20,000 Compute the qualifying expenditure for the machine. Answer : Machine cost RM120,000 Installation cost RM20,000 Aggregate cost RM140,000 10% of the aggregate cost = 10% x RM140,000 = RM14,000 Installation cost (RM20,000) is more than 10% of the aggregate cost (RM14,000).Therefore, the cost of preparing the site will not be treated as qualifying plant expenditure. Qualifying Plant Expenditure (QPE) is RM120,000. 9
10 Example Qualifying Expenditure on Plant and Machinery Expenditure incurred on fish ponds, animal pens, chicken houses, cages, buildings and other structural improvements on land which are used for the purposes of poultry farms, animal farms, inland fishing industry and other agricultural or pastoral pursuits. This provision does not apply if the building is used as a living accommodation of a director, an individual having control of the business, an individual who is a member of the management, and administrative or clerical staff. A company carrying on an activity of inland fishing spent RM45,000 for the purchase of pumps for mixing fish medicines and water purification, and fish food processing machine. The cost of RM45,000 is QE. Example 4
Date of Qualifying Expenditure Incurred The basis period for the capital allowance is a basis period of year of assessment that particular business sources. Capital expenditure shall be deemed incurred on the day when the plant is capable of being used for purpose of the business or when a person commences business. In the situation if: 1.When capital expenditure incurred before the commencement of business, qualifying expenditure deemed incurred when the business commenced. For example, if a plant was purchased in November 2022 but the business only commence in January 2023, the capital expenditure is deemed incurred in January 2023; or 2.When capital expenditure incurred after the commencement of business, therefore the date of purchase is treated as date of qualifying expenditure incurred. For example, if a plant was purchased in December 2022 but was only installed in January 2023 the capital expenditure is deemed incurred in January 2023. 11
Qualifying Expenditure for Motor Vehicle Motor vehicles can be categorized into commercial vehicles and non-commercial vehicles. Commercial Vehicle Non-Commercial Vehicle A non-commercial vehicle is a vehicle that is not used for commercial purpose such as car and multi-purpose vehicle for private use. The qualifying expenditure for motor vehicle, other than motor vehicle licensed or permitted by the road transport authority for commercial transportation of goods or passengers is restricted to RM 50,000. However, the Finance (No. 2) Act 2000 increases the qualifying expenditure for non-commercial motor vehicle is restricted to the maximum of RM100,000, provided that : ·The total cost of the vehicle and does not exceed RM150,000 (≤ RM 150,000); ·The vehicle has not been in use prior to purchase (must be new vehicle); and ·The vehicle is purchased on or after 28 October 2000. A commercial vehicle is a licensed vehicle used for business purpose. The owner has a permit for the transportation of goods and passengers such as lorry, truck, bus, taxi and van. The restricted QPE of RM50,000 or RM100,000 does not apply to commercial vehicle. 12
In the case if the car was reconditioned (refers to a used vehicle that is reconditioned by replacing some or all spare parts with new or almost new ones), the qualifying expenditure is also restricted to RM50,000. Therefore, if the motor vehicle (noncommercial purpose) is worth more than RM150,000, then the qualifying expenditure is restricted to RM50,000. Qualifying Expenditure for Motor Vehicle Lata Resources Trading involved in trading books and stationeries. The accounting period for the company ended on 31 December each year.The company bought the new car on 1 February 2023 for its marketing manager’s use. The new car cost RM89,000. Determine the qualifying expenditure for the motor vehicle. Answer : The qualifying expenditure RM89,000 because fulfill the following conditions : i.Cost of the car < RM150,000 ii.The car is new iii.The car is purchased after 28 October 2000 Example 1: 13
FORMULA Capital portion (instalment without interest) : Cash price – Deposit Number of instalments Qualifying Expenditure for Hire Purchase Asset The owner (hirer) of the asset is entitled to claim capital allowance as long as the asset is used for business purpose. Taxation rules specified that qualifying expenditure incurred is the deposit paid and capital portion of any installments paid during the basis period. Thus, the amount of capital allowance is based on deposit paid and the capital portion of any installment paid in the basis period. Interest payment cannot be part of the qualifying expenditure, but it is deductible to arrive at adjusted business income. The interest should be excluded in calculating the qualifying expenditure of the asset. 14
Example 1: Perry Laundry acquired laundry machines on hire purchase terms as follows : Cash price of machine : RM 96,000 Deposit paid on 1.8.2022 : RM 30,000 Instalment per month : RM 3,230 Term of repayment : 24 months The first instalment commenced on 1.9.2022 The company closes its accounts to 31 December every year. The annual allowance rate is 14% per annum. Calculate the capital portion. Answer : Capital Portion = (Cash Price - Deposit) / Number of Installment = (RM96,000 - RM30,000) / 24 months = RM2,750 Qualifying Expenditure for Hire Purchase Asset 15
.....continued Calculate the qualifying expenditure for the year of assessment 2022 and 2023 Answer : Qualifying expenditure for the year of assessment 2022: Deposit RM30,000 Installment (RM2,750 x 4 months*) RM11,000 Qualifying expenditure RM41,000 *Sept2022-Dec2022 Qualifying expenditure for the year of assessment 2023: Installment (RM2,750 x 12 months) RM33,000 Qualifying expenditure RM33,000 **Jan2023-Dec2023 Qualifying Expenditure for Hire Purchase Asset 16
Qualifying Expenditure for Hire Purchase Asset Example 2 Answer: *The motor vehicle acquired for the use of general manager is a passenger vehicle, it is a non-commercial vehicle. Thus, the qualifying expenditure will be restricted to RM50,000. Capital portion = (Cash price - Deposit)/No of installment = (RM198,000-RM48,000)/60 = RM2,500 Qualifying Expenditure (YA2023) Deposit RM48,000 Installment (RM2,500 x 11 months) RM27,500 But will be restricted to.....* RM2,000 Qualifying Expenditure (YA2023) RM50,000 Capital portion Qualifying expenditure for the year of assessment 2023 Kelinchi Sdn Bhd, a manufacturing company, acquired a BMW car for the use of the general manager on 1.2.2023 on hire purchase. The company closes its account to 31 December every year. Cash price RM 198,000 Deposit paid RM 48,000 Hire purchase loan RM150,000 Instalment per month RM 2,850 Term of repayment 60 months The first instalment commenced on 1.2.2023 Calculate the: 1. 2. 17
Qualifying Expenditure for Hire Purchase Asset Example 3 Answer: *The motor vehicle acquired for the use of manager is a passenger vehicle, it is a non-commercial vehicle. Thus, the qualifying expenditure will be restricted to RM50,000. Capital portion = (Cash price - Deposit)/No of installment = (RM198,000-RM48,000)/60 = RM2,500 Qualifying Expenditure (YA2022): Deposit RM48,000 Installment (RM2,500 x 11 months) RM27,500 But will be restricted to.....* RM2,000 Qualifying Expenditure (YA2022) RM50,000 Qualifying Expenditure (YA2023)** NIL **Even though the business has 12 month installment for the year 2023, but under taxation rule, those installment cannot be calculated as QPE due to the rule of QPE restricted of RM50,000 (refer *) Capital portion Qualifying expenditure for the year of assessment 2022 and 2023 Babap Sdn Bhd, a manufacturing company, acquired a Tayata car for the use of the manager on 1.2.2022 on hire purchase. The company closes its account to 31 December every year. Cash price RM 198,000 Deposit paid RM 48,000 Hire purchase loan RM150,000 Instalment per month RM 2,850 Term of repayment 60 months The first instalment commenced on 1.2.2022 Calculate the: 1. 2. 18
Exercises 19 Question 1 - Fill in the blank Instruction : Complete the following using an appropriate answers. QPE for __________________ vehicle restricted to RM100,000 subject to the following conditions: (i) the vehicle is ____________; and (ii) the total cost of the vehicle does not exceed ______________. If the above conditions are not met, the QPE is restricted to ________________. The restricted QPE of RM50,000 or RM100,000 does not apply to __________________________ such as taxi, bus, lorry or van.
20 Question 2 -TRUE / FALSE Question Instruction : Choose the correct answer by circling the answer. a. Expenditure incurred on the acquisition of land is treated as QPE TRUE / FALSE b. Depreciation is treated as non-deductible due to the nature of the expenses that it is provision TRUE / FALSE c. Any incidental cost related to the acquisition of assets cannot be treated as part of QPE. TRUE / FALSE d. "10% Rule" is applicable in determining the cost of preparing the site TRUE / FALSE e. QPE for commercial vehicle will be restricted to either RM50,000 or RM100,000. TRUE / FALSE
21 f. QPE for non-commercial vehicle will be restricted to either RM50,000 or RM100,000. TRUE / FALSE g. Bulldozers, tractors, rollers and excavators are part of category motor vehicle . TRUE / FALSE h. Expenditure on fish ponds, animal pens, cages and structures used for agriculture qualify for QPE. TRUE / FALSE i. Bus, lorry and taxi are example of non-commercial vehicles used in the business . TRUE / FALSE j. QPE for hire purchased assets consist of the deposit paid and the capital portion of the installment. TRUE / FALSE
22 the assets bought by the business owner the assets are capital in nature the assets bought for the business the assets are revenue in nature the tax rebate will be calculated based on the QPE the capital allowance will be calculated based on the QPE the personal relief will be calculated based on the QPE the business income exemption will be calculated based on QPE Question 3 - Objective Question Instruction : Choose the correct answer by circling the answer. 1.Assets are not allowed as a tax deduction in arriving at adjusted business income because.. a. b. c. d. 2. It is important on how to determine the QPE because... a. b. c. d.
23 sedan car super car private boat lorry 3. Followings are non commercial vehicle EXCEPT for a. b. c. d. 4. The following are plant and machinery EXCEPT a. heavy machinery b. motor vehicle c. office equipment d. land and building 5. The QPE for non-commercial vehicle is restricted to the maximum of RM100,000 due to the following conditions EXCEPT a. The vehicle used for private purpose b. The total cost not exceeding RM150,000 c. The vehicle must be new d. The total cost more than RM100,000
24 RM110,000 RM10,000 RM60,000 RM50,000 6. Assume the cost of the car is RM60,000 and bought for business use. If the car was reconditioned, the qualifying expenditure is_________ a. b. c. d. 7. The business bought non-commercial vehicle worth RM160,000. The qualifying expenditure forthe vehicle is _________ a. RM50,000 b. RM150,000 c. RM160,000 d. RM100,000 8. The business bought new car cost RM89,000 for the use of the manager. How much the qualifying expenditure for the vehicle? a. RM150,000 b. RM50,000 c. RM89,000 d. RM100,000
25 capital allowance given in respect of business source capital allowance given for person incurs the QPE capital allowances to increased the adjusted business income capital allowance is a relief claimable by business owner 9. Followings describe the capital allowance EXCEPT a. b. c. d. 10. Case law provide the basic characteristics machinery which is ____________ a. it has iron wheel b. it has moving parts c. it has steel parts d. it has steel wheel
26 1. On 1 May 2023, Mr Amin purchased a machine on hire purchased for the use of his business. The following are information pertaining to the machine: Cash price RM100,000 Hire purchased price RM120,000 Deposit paid RM30,000 Number of installment 35 times Payment for installment began on 1 June 2023. You are required to compute: a. Capital portion of the machine. b. QPE for the year of assessment 2023. Question 4 - Structured Question
27 2. MP Sdn Bhd is a nursery company in Kedah with a financial year ended 31 December each year. It bought Toyota Harrier on Cash price RM 200,000 Deposit paid RM 48,000 Hire purchase loan RM150,000 Instalment per month RM 2,850 Term of repayment 60 months The first instalment commenced on 1.2.2022 Calculate the: a. Capital portion b. Qualifying expenditure for the year of assessment 2022 and 2023
28 3. Pusaka Bhd bought machine pallet force cost RM5,000 on 1 May 2023. Before the machine can be used, the site must be prepared. The cost of levelling the land is RM900. You are required to determine the qualifying expenditure for the year of assessment 2023 4. Sinar Bhd carries on a textile manufacturing business. Sinar Bhd acquired heavy machinery to be installed at factory on 1 April 2023. The purchase price and the installation cost of the heavy machinery are RM100,000 and RM10,000 respectively. You are required to determine the qualifying expenditure for the year of assessment 2023. 5. On 8 September 2023, Iwan Sdn Bhd purchased a new car costing RM177,000 from Naza Auto Bhd. Determine the qualifying expenditure of the car if; a. The car was not licensed for commercial transportation. b. The car was licensed for commercial transportation.
References Public Ruling No.6/2015 https://phl.hasil.gov.my/pdf/pdfam/PR_6_2015.pdf Fatt, C. K. (2019). Malaysian Taxation Principles and Practice (25th ed.). Infoworld Fatt, C. K. (2019). Advanced Malaysian Taxation Principles and Practice (20th ed.). Infoworld. Josef, V. (2018). Malaysia Master Tax Guide 2018 (35th ed.). Malaysia: CCH (Malaysia) Sdn Bhd. Kasipillai, J. (2015). A Guide to Advance Malaysian Taxation (3rd ed.). McGraw Hill. Kasipillai, J. (2019). A Guide to Malaysian Taxation (5th ed.). Malaysia: Oxford Fajar Sdn. Bhd. 29
Please refer the following articles for your further reading... Capital Allowances https://www.pwc.com/my/en/publications/mtb/capitalallowances.html Malaysia Clarifies Qualifying Plant and Machinery for Claiming Capital Allowances — Orbitax Tax News & Alerts https://orbitax.com/news/archive.php/Malaysia-Clarifies-Qualifying- -7914 Capital Allowance https://www.sql.com.my/accounting-software/capital-allowance/ 30