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Malaysian Taxation 2 Topic 2 DIS 2020

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Published by CtZakiah Abu Bakar, 2021-03-23 00:56:13

TOPIC 2 IBA

Malaysian Taxation 2 Topic 2 DIS 2020

June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

CHAPTER 2:
INDUSTRIAL BUILDING ALLOWANCE

AND OTHERS

At the end of this chapter, you should be able to:

1.1 understand industrial building allowance
1.2 understand the computation of qualifying building expenditure
1.3 understand the temporary disuse and notional allowance
1.4 know other allowances

1.1 UNDERSTAND INDUSTRIAL BUILDING ALLOWANCE

2.1.1 Meaning of Industrial Building under Paragraph 63, Sch. 3, ITA 1967

A building is classified as an industrial building if it is used for the purpose of a business and:
a. It is used as a factory
b. It is used as a dock
c. It is used as a warehouse and the business consists of the hire of storage space to the
public
d. The business is that of a water or electricity undertaking, supplying water or
electricity for the consumption of the public
e. The business is that of a telecommunications under taking providing
telecommunications service to the public
f. In connection with the working of a farm and the business consists or mainly consists
of the working of the farm with or without other farm
g. It is used in connection with the workings of a mine and the business consists or mainly
consists of the workings of a mine, with or without other mines
h. Includes capital expenditure incurred pursuant to an agreement with the government
on the construction of public roads and ancillary structures where expenditure is
recoverable through toll collection (Paragraph 67A)

2.1.2 Certain buildings treated as industrial buildings
a. A mill,
b. A workshop
c. A building for the housing of machinery or plant of any description for:
i) The manufacture of any product or
ii) The subjection of goods or material to any process or processes,
iii) The generation of power used for the purpose of that manufacture or process,

d. Licensed private hospital, maternity home and nursing home
e. Building used for research (Paragraph37B, Schedule 3 of the ITA)

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

f. Building used for warehouse (Paragraph37C, Schedule 3 of the ITA)
g. Building used for approved service project (Paragraph 37E, Schedule 3 of the ITA)

h. Building used for hotel (Paragraph 37F, Schedule 3 of the ITA)

i. Airport (Paragraph 37G, Schedule 3 of the ITA)
j. Motor racing circuit (Paragraph 37H, Schedule 3 of the ITA)
k. A child care centre (Subparagraph 42A(2), Schedule 3 of the ITA)
l. A school building or an educational institution (Paragraph 42B, Schedule 3 of the

ITA)
m. Building for the industrial, technical or vocational training (Paragraph 42C, Schedule

3 of the ITA)
n. Public roads under privatisation (Paragraph 67A, Schedule 3 of the ITA)

o. Building on a build-lease-transfer basis (Paragraph 67B, Schedule 3 of the ITA)

p. A building (within the same cartilage as a building which is used as a factory) used for:
i) The storage of any raw material, fuel or stores necessary for the manufacture
or processing or product; or
ii) The storage of a finished product prior to the sale thereof.

Internal road, car parks, fences and bridges in the same compound are also considered as
industrial building.

However, it should be noted that a workshop used for the repairs or servicing of goods, which
is carried out in conjunction with or incidental to a business of selling those goods, will not be
considered as an industrial building.

2.1.3 Part of a Building used as Industrial Building under Para 66, Sch. 3, ITA 1967

Where part of building or an extension of a building is used as an industrial building and the
other part of the building or extension is not used so, if the building capital expenditure
incurred on the construction of the non-qualifying part does not exceed 10% of the whole
building, the whole building qualifies as an industrial building.

RULE <10%

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Non industrial building X 100% < > 10%
Total building

= Non IB ≤ 10%

= Whole Building Qualifies As IB

If the construction cost of the non-qualifying part exceeds 10% of the total cost incurred of
the whole building, the only the part that is used as an industrial building will qualify for an
industrial building allowance.

Non industrial building X 100% < > 10%
Total building

= Non IB > 10%

= Part of Building Will Be Qualifies As IB another Part Will Be Non IB

EXAMPLE 2.1:

Bunga Sdn Bhd incurred RM 3 million to construct a complex to be used as a factory and an
office. RM 290,000 of the construction cost is related to the office. Determine whether the
office will be considered as an industrial building.

Solution:

Non industrial building X 100% < > 10%
Total building

290,000 X 100% <>10%
3,000,000

9.67% < 10%

= Whole building is treated as IB

QBE = IB
NON IB

EXAMPLE 2.2:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Cuber Sdn Bhd constructed a six-storey building. Five floor are used as a factory and one floor
as an office. The total cost of the building is RM 1.2 million. Determine whether the office
qualifies as an industrial building expenditure.

Solution:

Office 1/6 x 100% < > 10%

16.7% > 10%

=> The office portion will not qualify as IB because it occupies more than 10% of total
area.

EXERCISE 1:

Geliga Sdn Bhd constructed a factory cum office and showroom block at cost of RM 2.4 million.
The total built up area of the building is 190,000 square feet of which 19,600 square feet is
used as an office and 11,000 square feet is used as showroom.

Does the whole building qualify as an industrial building?

2.1.4 Other Buildings Treated as Industrial Building under Para 65, Sch. 3, ITA 1967

1. Building used for staff welfare [Paragraph 65(1)]
Where there is an industrial building in existence, any building provided as a canteen,
restroom, recreation room, lavatory, bathhouse, bathroom, or washroom for staff
employed in the business of such a building is considered as an industrial building.

2. Building used as living accommodation of employees
a. A building provided for the welfare of employees, or as living accommodation for
employees, employed in connection with the working of a farm and the building is
likely to be of little or no value to any person except in connection with the
workings of that farm or of another farm is treated as an industrial building
[Paragraph 65(2)]
b. A building constructed and provided as living accommodation for the employees is
also treated as an industrial building is already in existence (Paragraph 42)
c. Where a person is carrying on a manufacturing, hotel or tourism business or an
approved service project under Schedule 7B which has incurred expenditure on
the construction or purchase of a building living accommodation for employees in
the manufacturing, hotel or tourism business or an approval service project under
Schedule 7B, such a building shall be treated as an industrial building [Paragraph
42A(a)]

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

However, “employee” under (b) and (c) do not include a director, an individual having control
of that business or an individual who is a member of the management, administrative or
clerical staff engaged in that business.

2.1.5 Deemed Building under Paragraph 67, Sch. 3, ITA 1967

When a person incurs capital expenditure on preparing, cutting, tunneling or leveling land in
order to prepare a site for installation of machinery or plant, and if that expenditure exceeds
75% of the aggregate of that expenditure is deemed as an expenditure on an industrial
building, the total expenditure will qualify for industrial building allowance.

RULE > 75 %

Cost of preparing site to install P&M X 100% < > 75%
Total cost of Plant and Machinery

Cost of preparing site to install P&M > 75%
 Total cost of plant and machinery is deemed to be an expenditure on IB

Cost of preparing site to install P&M X 100% < > 75%
Total cost of Plant and Machinery

Cost of preparing site to install P&M < 75%

 Total cost of plant and machinery is excluded from expenditure on IB
 Plant and machinery will calculate using capital allowance

EXAMPLE 2.3:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Serai Food Manufacturing Sdn Bhd purchased machinery for RM 150,000. The cost of
preparing the site to install the machinery was RM 460,000. Determine the amount that will
be considered as an industrial building.

Cost of machinery RM 150,000
Cost of preparing site for installation of machine RM 460,000
Total cost of machinery RM 610,000

Solution:

RM 460,000 X 100% < > 75%
RM 610,000

= 75.4% > 75 %

 Total cost of machinery will include in IB

1.2 UNDERSTAND THE COMPUTATION OF QUALIFYING BUILDING EXPENDITURE
2.2.1 Date when the expenditure is incurred (Paragraph 55, Schedule 3, ITA 1967)

QBE

In the case of any expenditure incurred on the construction of a building, the day on which
that expenditure is incurred is the day on which the construction of the building is completed.
However, where a person incurs expenditure for the purpose of a business of his which he is
about to carry on, that expenditure shall be deemed to be incurred on the day he commences
to carry on the business.

QPE

In all other cases, qualifying building expenditure is incurred on the day on which the amount
of any expenditure becomes payable. Thus, in the case of a purchased building, the
expenditure is incurred on the day it becomes payable. A building is purchased by a person
on the sale, transfer or assignment to him of a relevant interest in the building (Paragraph 58,
Schedule 3)

The date of sale, purchase, transfer or transmission shall be:

a. The date of completion of the sale, purchase, transfer or transmission, or
b. The date when possession of the asset is given, whichever is earlier (Paragraph 59,

Schedule 3)

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Therefore, if a person purchases a building, the expenditure is deemed to be incurred on the
day on which the sale is completed or the possession of the building is given to him, whichever
is earlier.

DETERMINE THE YEAR ASSESSMENT & PERIOD OD ACCOUNTING

EXAMPLE 2.4:

Alpha Sdn Bhd, a manufacturing company, constructed a building during 2013. It closes its
accounts on 30 June each year. The building cost RM4,000,000 and was completed on 5 May
2016. It was brought into use as an industrial building on 9 September 2016.

Solution:

The expenditure is deemed to be incurred on 5 May 2016 and the company can
commence claiming industrial building allowance from year assessment 2016.

EXAMPLE 2.5:

Coco Sdn Bhd constructed an industrial building at a cost of RM 1,700,000 which was
completed on 11 November 2014 but only commences business on 2 January 2016. Coco Sdn
Bhd closes its account on 31 December annually.

Solution:

The expenditure is deemed to be incurred on 2 January 2016 and industrial building
allowance will be given commencing from year of assessment 2016.

2.2.2 Qualifying building expenditure on constructed building

The qualifying expenditure will include the following item:
1. Cost of preparing plans and obtaining approval for the plans from the local authority.
2. Cost of preparing, cutting, tunneling, leveling or piling the land in connection with the
construction of the industrial building.
3. Cost of demolishing an existing building which is not an industrial building (e.g. shop).
The industrial building must be located at the same site as the existing building which
is non-industrial building.
4. Architect’s fees
5. Cost of construction building materials, labor and overheads.
6. Incidental expenditure on the installation of fittings forming part of the building such
as electricity, water and drainage system.
7. Stamp duties and legal charges related to the building.(excluded land)

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Non-qualifying building expenditure:
1. Cost of the land site
2. Legal fees and stamp duties in respect of the land
3. Cost of demolishing an existing industrial building (e.g. factory, warehouse)

EXERCISE 2:

LEKAS Sdn Bhd incurred the following expenditure to construct a factory:

Cost of land RM
Legal fees and stamp duty (RM 6,000 relates to acquisition of 260,000
land)
Architect’s fees 20,000
Cost of approving plan
26,000
Cost of demolishing squatter houses 10,000
Construction cost (materials, labour and overheads) 70,000
2,000,000
Road and car park within the factory complex 60,000
Wiring and plumbing 70,000

Determine the qualifying building expenditure for the factory.
Answer:

2.2.3 Qualifying building expenditure on purchased building = QPE
1. Used as an industrial building within one month before the purchases (Para4, Sch3)

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

The qualifying building expenditure incurred by the purchaser on the building shall be
either the lower between:

Purchases price (PP) < > Residual expenditure (RE) + taxable balancing charge (BC)

EXERCISE 3:

SGM Sdn Bhd constructed the building and used it as a factory from 1 January 2000 to
31 August 2003 when the company sold it to DMC Sdn Bhd. DCM Sdn Bhd continued
to use the building as a factory. Both companies make up their accounts to 31
December annually.

Assuming that the residual expenditure at 31 December 2003 was RM 300,000,
calculate the qualifying expenditure to DMC Sdn Bhd if the building was sold for:

a. RM 270,000
b. RM 450,000

Answer:

2. Not used as an industrial building within one month before the purchases (Paragraph
5, Schedule 3)
The qualifying building expenditure incurred by the purchaser on the building shall be
either the lower between:
Purchases price (PP) < > Residual expenditure (RE)

EXERCISE 4:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

DHL Sdn Bhd constructed the building and used it as a factory from 1 January 2000 to
31 August 2003. From 1 September 2003 until 30 November the building was not used
as an industrial building. The building was sold to BCC Sdn Bhd on 1 October 2003 and
BCC Sdn Bhd continued to use the building as a factory. Both companies make up their
accounts to 31 December annually.

Assuming that the residual expenditure at 31 December 2003 was RM 400,000,
calculate the qualifying expenditure to BCC Sdn Bhd if the building was sold for:

a. RM 370,000
b. RM 450,000

Answer:

With effect from year assessment 2005
The qualifying expenditure for a purchased building shall be the amount of the
purchase price of the building.
QPE = Purchases Price (PP) (not include cost of land)

EXERCISE 5:
A factory was constructed by PPM Sdn Bhd in year assessment 2002 at a cost of RM 1.2
million. PPM Sdn Bhd used the factory for business purposes until 30 November 2005
when it was sold to BBM Sdn Bhd for RM 1.35 million including RM 250,000 for cost of
site.

Answer:

2.2.4 Initial Allowance Schedule 3, Paragraphs 12 and 13

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Initial allowance is given for the year in which the expenditure was incurred if:

i) The building was owned at the end of the basis period, and
ii) The building is used or about to be used as an industrial building at the end of the basis

period.

If the building was disposed of in the year which it was constructed, the person will still qualify
for initial allowance if it was used as an industrial building some time before disposal.

a) Initial allowance for constructed building

An initial allowance at the rate 10% of the qualifying expenditure incurred on the
construction of building. In the case of a building that is constructed and provided as living
accommodation for employees, the initial allowance is 40%.

b) Initial allowance for purchased building

A person who purchases building does not qualify for initial allowance however with effect
from year assessment 2002 where a building is purchased for used as an industrial building
from a person who has constructed that building. A person who purchases building was
qualify for initial allowance of 10% of the qualifying expenditure

2.2.5 Annual Allowance Schedule 3, Paragraph 16 and 17

To claim annual allowance, the following condition must be fulfilled by the person:

i) At the end of the basis period, he was the owner of the building, and
ii) The building was in use as an industrial building for the purpose of the business.
iii) He has incurred qualifying building expenditure on the construction or purchase of an

industrial building

a) Annual allowance for constructed building

The rate of annual allowance is 2% on a straight line basis. However with effect from year
assessment 2002, the rate of annual allowance is 3% on a straight line basis.

EXAMPLE 2.6:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Wi Fi Sdn Bhd (accounting year ends 30 June) constructed an industrial building in April 2001.
The qualifying building expenditure incurred was RM 350,000.

The computation of initial allowance and annual allowance for Wi Fi Sdn Bhd for the relevant
years of assessment up to year of assessment 2007 is as follow:

Solution:

YA 2001 QPE 350,000
(1/7/00 – IA (10% X RM 350,000) 35,000
30/6/01) AA (2% X RM 350,000) 7,000 (42,000)
308,000
RE (63,000)
YA 2002 – 2007 AA (3% X RM 350,000) X 6 YRS 245,000

RE

b) Annual allowance for purchased building
Before year of assessment 2002, the annual allowance rate shall be the higher between:

Permitted Fraction < > 2%

With effect from year of assessment 2002, the annual allowance rate shall be higher between:

Permitted Fraction < > 3%
Formula for permitted fraction

1 / (YA construction completion + 50 – YA building was purchased +1) VS 3%

(Which is higher)

It should be noted that the permitted fraction is calculated based on basis year, i.e. calendar
year.

*A person is no longer entitled to claim IBA if the building or part thereof
is used by that person for the purpose of letting to another person –

Para 16B of schedule 3 ITA1967

EXAMPLE 2.7:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

DON Sdn Bhd constructed a building on 4 April 2003. It was used as an industrial building
until 3 Jun 2005 when it was sold to PJS Sdn Bhd. DON Sdn Bhd and PJS Sdn Bhd close their
annual accounts on 31 December and 30 June respectively.

Calculate annual allowance for PJS Sdn Bhd.

Solution:

PJS Sdn Bhd

Year of assessment of construction completion of the building 2003
(+) 50
(-) Year of assessment the building was purchased
(+) 2053
(2005)

48
1

49

Permitted Fraction < > 3 %
1/49 X 100 < > 3 %
2.04% < 3 %

The annual allowance = 3%

2.2.6 Disposal of an Industrial Building

The act defines as:

a. The sale, transfer or assignment of the relevant interest in the building,
b. Where the interest depends on the duration of the concession.
c. Where the interest is a leasehold interest, the termination of the lessee’s interest of the

building except where the termination occurs as a result of the lessee’s acquisition of
the freehold interest,
d. The demolition or destruction of the building,
e. The building ceases to be used as an industrial building.

a) Balancing Allowance

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Where the residual expenditure of the industrial building exceeds its disposal value, a
balancing allowance is given to the seller.

RE > DV = BA

b) Balancing Charge
Disposal value exceeds the residual expenditure, a balancing charge is imposed.

RE < DV = BC (restricted to actual allowance given)

EXERCISE 6:

PLQ Sdn Bhd (accounting date 31 December) started to construct a building at a cost of RM 3
million on 9 April 2015 and completed it on 16 December 2015. The building was used as an
industrial building. On 9 January 2017, it was sold for RM 2.5 million.

Compute the industrial building allowance which can be claimed by PLQ Sdn Bhd and any
balancing adjustment on disposal.

Answer:

EXERCISE 7:

Using the same fact as in Exercise 6, except that the disposal value is RM 1 million, compute
the industrial building allowance which can be claimed by PLQ Sdn Bhd and any balancing
adjustment on disposal

Answer:

1.3 UNDERSTAND TEMPORARY DISUSE AND NOTIONAL ALLOWANCE

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2.3.1 Temporary disuse (Paragraphs 56 and 57, Schedule 3)

An industrial building which is temporarily disused shall be deemed to be in use for the
purposes of the business if:

i. It was in use immediately before becoming disused, and
ii. During the period of disuse it is constantly maintained in readiness to be brought back

into use

In such circumstances, the building is eligible for annual allowance, otherwise there will be
no annual allowance given. However, for the purpose of calculating the residual expenditure
of the building, notional allowance is given. Notional allowance is not allowed as a deduction
from the adjusted income.

EXAMPLE 2.8:
Cermat Sdn Bhd constructed a building and incurred a qualifying expenditure of RM
7,800,000 on 16 March 2013. The building was used as a factory until 13 October 2014 when
a fire destroyed part of the roof. The factory was being repaired during the period 1 November
2014 to 31 January 2015. From 1 February 2016, the factory was brought back into use.
Cermat Sdn Bhd closes its accounts on 31 December each year.

Compute the industrial building allowances for Cermat Sdn Bhd for all years concerned up to

year assessment 2017.

Solution:

RM RM

YA 2013 QBE 7,800,000

IA (10% X RM 7,800,000) 780,000

AA(3% X RM 7,800,000) 156,000 (936,000)

RE 6,864,000

YA 2014 AA(3% X RM 7,800,000) (156,000)

RE 6,708,000

YA 2015 AA(3% X RM 7,800,000) (156,000)

RE 6,552,000

YA 2016 AA(3% X RM 7,800,000) (156,000)

RE 6,396,000

YA 2017 AA(3% X RM 7,800,000) (156,000)

RE 6,240,000

It should be noted that at the end of the basis period for year assessment 2014 and 2015, the

building was not in use as an industrial building. However, it was used as an industrial

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

building immediately before disuse and was maintained in readiness to be brought back into
reuse. The disuse is considered temporary disuse and therefore annual allowance can be
given.

EXAMPLE 2.9:
Cermat Sdn Bhd constructed a building and incurred a qualifying expenditure of RM
7,800,000 on 16 March 2013. The building was used as a factory until 13 October 2014 when
a fire destroyed part of the roof. After the fire on 13 October 2015, the building was not in use
as and not maintained. On 11 November 2016, it was reused as an industrial building.
Subsequently, the factory was demolished and the company received RM 7,500,000 as
insurance on 12 January 2017.

Solution:

YA 2013 QBE RM RM
IA (10% X RM 7,800,000) 7,800,000
YA 2014 AA(3% X RM 7,800,000) 780,000
YA 2015 RE 156,000 (936,000)
YA 2016 NA(3% X RM 7,800,000) 6,864,000
YA 2017 RE (156,000)
NA(3% X RM 7,800,000) 6,708,000
RE (156,000)
AA(3% X RM 7,800,000) 6,552,000
RE (156,000)
Disposal Value 6,396,000
Balancing Charge 7,500,000
1,104,000

1.4 KNOW OTHER ALLOWANCES

2.4.1 Definition of Agriculture Allowance

Agriculture allowance is a type of capital allowance given to persons who have incurred
qualifying agriculture expenditure in the working of a farm. Agriculture allowance can be
deducted from the adjusted income in arriving at the statutory income of a business.

Agriculture is defined under Section 18 of the Income Tax 1967. It includes any of the
following agricultural activities:

i. Cultivation crops

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ii. Animal farming
iii. Aquaculture
iv. Inland fishing
v. Other agricultural or pastoral pursuits

Farm means any land used for the purpose of agriculture.

Crops mean any form of vegetable produce.

2.4.2 Qualifying Agriculture Expenditure (Paragraph 7, Schedule 3)

Qualifying agriculture expenditure is capital expenditure incurred by a person on the
following items:

a. The clearing and preparation of land for the purpose of agriculture
This expenditure includes the following costs:
i. Removing existing trees and clearing the land
ii. Constructing the drainage and irrigation system
iii. Fertilizing the land

b. The planting (but not replanting) of crops on land cleared for planting
c. The construction on a farm of a road or bridge
d. The construction on a farm of a building:

i) Used for the purpose of a business of that person which consists wholly or
partly of the working of the farm, or

ii) Provided for the welfare a living accommodation for a person employed in or
in connection with the working of that farm and which, if the farm ceases to be
worked, is likely to be of little or no value to any person except in connection
with the working of another farm.

If should be noted that qualifying agriculture expenditure does not include expenditure
incurred in acquiring plant and machinery used on the farm. Expenditure on plant and
machinery is eligible for capital allowance under plant and machinery.

2.4.2.1 Date of incurred of Qualifying Agriculture Expenditure is incurred

The day qualifying agriculture expenditure is deemed to incur is stated in Paragraph 55 of
Schedule 3, that is:

a. In the case of any expenditure incurred on the construction of building, the day on
which that expenditure is incurred is the day on which the construction of the building
is completed.

b. In any other case, the day qualifying agriculture expenditure is incurred is the day on
which the amount of any expenditure become payable.

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

It should be noted that where a person incurs expenditure for the purposes of a business of
his which he is about carry on the business.

2.4.2.2 Rates of Allowances

Qualifying Agriculture Expenditure Rate (%)
50% (Paragraph 23)
Clearing and preparing land for the purpose of agriculture 50% (Paragraph 23)
50% (Paragraph 23)
Planting of crops on land cleared for planting 20% (Paragraph 22(a))

Construction on a farm of a road or bridge 10% Paragraph 22(b))

Construction of a building provided for the welfare or as living
accommodation for persons employed in the working of a farm
Any other building used in the business (e.g smoke house)

There is no initial allowance given on qualifying agriculture expenditure.

Any agriculture allowance that cannot be fully absorbed in a year of assessment is carried
forward to the following year of assessment.

EXAMPLE 2.10:

Merbau Sdn Bhd (accounting year ends 30 September) acquired a piece of land and
commenced a coconut plantation business on 1 April 2014.
The following expenses were incurred:

Date Expenditure RM

17 July 2014 Cost of land 300,000

20 October 2014 Cost of clearing land 130,000

2 March 2015 Cost of construction of road 120,000

13 May 2015 Planting coconut seedlings 150,000

20 January 2016 Costs of constructing a store for fertilizer and tools 30,000

Required:

Calculate the agriculture allowance due to Merbau Sdn Bhd up to year assessment 2017.

Solution:

Allowance rate Clearing land Road Planting Store

50% 50% 50% 10%

RM RM RM RM

Qualifying agriculture expenditure 130,000 120,000 150,000 30,000

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YA 2015 Agriculture allowance 65,000 60,000 75,000 -
YA 2016 Agriculture allowance 65,000 60,000 75,000 -
YA 2017 Agriculture allowance 3,000
YA 2018 Agriculture allowance - - - 3,000
- - -

EXERCISE 8:
Tegap Bhd (accounting year ended 31 December) owns an estate in Machang, Kelantan of
which 60% was planted with rubber and the balance of 40% was uncleared forest land. In
2013, the company decided to plant cocoa trees to reduce the size of the rubber plantation
and to replant some rubber trees.
The company incurred the following expenditure:

Date Expenditure RM
May 2014 Clearing the forest land for plantation of cocoa seedlings 240,000
August 2014 Planting cocoa seedlings 230,000
March 2015 Clearing the remaining old rubber seedlings for 260,000
replanting young rubber seedlings
April 2015 Planting young rubber seedlings 155,000
May 2015 Construction of labourers’ quarters for estate workers 220,000
July 2015 Construction of a building for the storage of tools and 136,000
harvested cocoa

Required:
Calculate the agriculture allowance due to Tegap Bhd up to year assessment 2017.

2.4.3 Qualifying Forest Expenditure (Paragraph 8(2), Schedule 3)

Forest allowance is given to a person who is carrying on the business of extracting timber in
a forest and has incurred qualifying forest expenditure. Paragraph 29, Schedule 3 of the
Income Tax Act 1967 specifies that a person who is entitled to forest allowance in respect of

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

any expenditure shall not be entitled to any other allowances under Schedule 3 in respect of
the same expenditure.

2.4.3.1 Meaning of Forest

A forest is defined in Paragraph 8(2), Schedule 3 as a forest in Malaysia in respect of which a
person has a concession or a license to extract timber there from for the purpose of a business
of his which consists wholly or partly of that extraction.

2.4.3.2 Qualifying Forest Expenditure

Consists of capital expenditure incurred by a person on construction in a forest, such as:

a. A road or building used for the purposes of a business of his which consists wholly or
partly of the extraction of timber from the forest, or

b. A building provided by him for the welfare of persons, or as living accommodation for
persons employed in or in connection with such extraction.

The roads or building would likely to be of little or no value to any person if the forest ceases
to be used for timber extraction, except in connection with the extraction of timber from
another forest or with a business which consists wholly or partly of the working of a farm.

Expenditure incurred on plant and machinery used to extract timber is eligible for capital
allowance under plant and machinery.

2.4.3.3 Date Qualifying Forest Expenditure is incurred

Paragraph 55 of Schedule 3 determines the date qualifying forest expenditure is incurred.
Qualifying forest expenditure is incurred on the day the expenditure become payable. In the
case of a constructed building, qualifying expenditure is incurred on the day construction of
the building completed

3.4.2.4 Rates of Allowances Rate (%)
Qualifying Forest Expenditure

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Building provided for the welfare of or as living 20% (Paragraph 30(a))
accommodation for employees 10% (Paragraph 30(b))
Roads or other buildings

It should be noted that there is no initial allowance on qualifying forest expenditures.

EXAMPLE 2.11:

Timberland Bhd (accounting year ends 31 December) is a company involved in the timber
extraction business. The company incurred the following expenditures:

Date Expenditure RM

2 March 2016 Construction of a road 28,000

4 May 2017 Construction of an office building 35,000

6 July 2017 Construction of laborers’ quarters 67,000

Required:
Compute the forest allowances available to the company for all the years of assessment up to
year of assessment 2017.

Solution: Road Office building Laborers’ quarters
Rate of allowance 10% 10% 20%
RM RM RM
Qualifying forest expenditure 28,000 35,000 67,000
YA 2016 Forest Allowance 2,800 - -
YA 2017 Forest Allowance 2,800 3,500 13,400
YA 2018 Forest Allowance 2,800 3,500 13,400
YA 2019 Forest Allowance 2,800 3,500 13,400
YA 2020 Forest Allowance 2,800 3,500 13,400

EXERCISE 9:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Kenari Bhd (accounting year ends 31 December) commenced a timber extraction business in
March 2016. The company incurred the following expenditures in the forest:

Date Expenditure RM

1 June 2017 Road 42,000

7 July 2017 Labourers’ quarters 60,000

Required:
Compute the forest allowances available to the company for all the years of assessment up to
year of assessment 2017.

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

TUTORIAL EXERCISES

QUESTION 1:

Zambit Bhd, a manufacturing company, ends its account on 30 June each year. The company

began to construct a building in March 2014. The details of expenditure were as follows:

Cost of site RM 460,000

Construction work 970,000

Cost of demolishing an old factory 20,000

Architect’s fees 35,000

Legal fees (RM 3,600 for acquisition of land) 17,000

Wiring and plumbing 21,000

The building was completed on December 2015 and it was immediately used as a factory and
office. 2/12 of the building was used as an office and 1/12 of the building was used as a
showroom.
In April 2018, owing to the decline in its manufacturing business, Zambit Bhd sold the whole
building to Paper Clips Sdn Bhd for RM 2,500,000 including RM 700,000 for the land. Paper
Clips Sdn Bhd’s accounting year ends on 31 December annually.
Paper Clips Sdn Bhd incurred RM 125,000 on preparing a site to install machinery. The cost
of machinery was RM 40,000. Paper Clips Sdn Bhd used the whole building as a factory.

Required:
Calculate the industrial building allowances and balancing charge/allowance (if any) for
Zambit Bhd and Paper Clips Sdn Bhd for all relevant year of assessment up to and including
year of assessment 2018.
ZAMBIT = QBE =RM 1,039,400 – IB =RM779,550 –NON IB = RM 259,850
BALANCING CHARGE = RM 900,921
PAPERCLIP= QBE = RM 1,800,000

QUESTION 2:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Budiman Sdn Bhd commenced business in 2010. In 2011 the company constructed a factory

for its business operations. The following expenditure was incurred:

RM

15 May 2011 Cost of land 40,000

29 August 2012 Piling and foundation 84,000

1 December 2013 Architect’s fees 20,500

2 April 2013 Contractor’s fees 470,000

1 February 2014 Wiring and plumbing 5,600

15 March 2014 Stamp duty and legal fees 15,500

(RM 5,000 related to land)

The construction of the factory was completed in April 2014 and it was immediately used as

a factory and office. 1/8 of the building was used as an office.

On 1 December 2016, owing to the decline in its manufacturing business, Budiman Sdn Bhd

sold the whole building to Dermawan Sdn Bhd who used it wholly as a factory. The

consideration was as follows:

Land : RM 600,000

Building : RM 900,000

Dermawan Sdn Bhd also built an extension to the building that was completed and brought

into use as a factory in March 2017. The cost of the extension was RM 350,000.

Budiman Sdn Bhd’s accounting year ends on 31 March and Dermawan Sdn Bhd’s accounting

year ends on 31 December.

Required:

For all relevant years of assessment until year of assessment 2018, calculate the industrial

building allowances and balancing charge (if any) due to Budiman Sdn Bhd and Dermawan

Sdn Bhd.

BUDIMAN= QBE = RM 590,600- IB=RM516,775, NON IB = RM73825

DERMAWAN = QBE = RM 900,000. EXTENSION = RE 20XX = RM 273,000

QUESTION 3:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

Syarikat Maju Sdn Bhd, a manufacturing company, ends its accounts on 31 December each

year. The company began to construct a building in June 2012. The following expenditures

were incurred in the construction of the building:

Year ended 31 Dec 2012 Cost of site/land RM 500,000

Construction work 900,000

Architect’s fees 30,000

Cost of demolishing an old factory 26,000

Legal fees (RM 3,000 for acquisition 13,000

of land)

Year ended 31 Dec 2013 Construction work 420,000

Architect’s fees 6,000

Year ended 30 June 2014 Construction work 940,000

Architect’s fees 15,000

The building was completed in June 2014 and was used as a factory and administrative office

till 25 July 2017. Twenty percent of the building space was used as the administrative office.

On 1 September 2017, the building was sold to Syarikat Kaya Sdn Bhd for RM 3,900,000

(excluding the price of land). Immediately after the building was purchased, Syarikat Kaya

Sdn Bhd incurred RM 70,000 cost of preparing site for installation of machine. The cost of the

machinery was RM 100,000, the building was fully used as a factory by Syarikat Kaya Sdn Bhd,

whose accounting year ends 30 June each year.

Required:

a. Compute the qualifying building expenditure

b. Compute the allowances and charges (if any) for Syarikat Maju Sdn Bhd and Syarikat

Kaya Sdn Bhd for all relevant year of assessment up to and including year of

assessment 2018

SYARIKAT MAJU QBE= RM 2,321,000, IB = RM 1,856,800, NON IB = RM 464,200
SYARIKAT KAYA QBE = RM 3,900,000
QUESTION 4:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

a. Homemade Appliance Sdn. Bhd., a household goods manufacturer, invested capital
expenditure of RM 1.3 million on the construction of new building. Included in the cost
incurred are cost of site RM 300,000; legal fee RM 20,000; architect’s fee RM 30,000;
construction cost RM 850,000; consultant fee RM 50,000 and plumbing & wiring RM
50,000.The building was completed on 1st June 2016 which comprise of 17,500 sq.
meters of factory space, 2,000 sq. meters of office and 500 sq. meters of showroom.

You are required to:

Determine qualifying building expenditure for the purpose of industrial building
allowance.

b. Megatrend Sdn. Bhd. A manufacturing company purchased a new machine on 1st July
2016 at a cost of RM 50,000 and incurred RM 170,000 on preparing and leveling site
for the installation of the machine.

You are required to :

Determine the qualifying expenditure for the year assessment 20XX

QUESTION 5:

Great Wall Sdn. Bhd. (accounting year ends on 31st December) proposed to build a new factory
costing RM 1,000,000 (including RM 100,000 as cost of site). The construction started on 1st
March 2009 and completed on 30th September 2010. The operation of the building was
started on 1st November 2010 with the usage of the building is 85% as a factory and 15% as
an office.

In June 2011, the company planned to build an additional building next to the existing building
with cost RM 570,000 (including RM 70,000 as cost of site). Construction was commenced on
1st August 2011 and completed on 30th July 2012. Once the building was completed, it was
used as a factory.

Due to an economic down turn and decrease in sales, the company sold the entire building to
Max Manufacturing Sdn. Bhd. (accounting year ended 30th June) for RM 2,000,000 (including
RM 350,000 as cost of site) on 1st August 2016. Max Manufacturing Sdn Bhd used 5% of the
building as an office while others as a factory.

You are required:

Determine industrial building allowance and balancing charge (if any) for both companies for
the relevant years of assessment until year assessment 20XX.

QUESTION 6:

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June 1, 2020 DPA5033 MALAYSIAN TAXATION 2

a. One Sdn Bhd is rubber manufacturer. Its write up its financial account to 31 December
annually. One Sdn Bhd decided to construct a new factory building in Mukah, Sarawak.
The company has also bought a piece of land to be used as a site to construct the factory
building. The expenses that have been incurred are as follows:

Cost of land RM
Legal fee for the land acquisition 150,000
Legal fee (factory) 13,500
Cost of demolished a non-factory building 20,000
Construction cost 62,000
Drainage and irrigation 574,500
Labour and transportation cost 50,000
Cost of levelling the site and terracing 250,000
Cost of plant 62,500
Cost of preparing a site to install the plant 65,000
100,000

The company used 1/8 of the factory building as an administrative office

You are required to calculate the QBE for Syarikat One Sdn Bhd based on relevant
rules:

b. JSB Sdn Bhd bought a factory to process dried food at 31 October 2014 with a cost of
RM 1,450,000 (including RM 320,000 for land). JSB Sdn Bhd used 1/11 of the building
as an office.

In November 2016, the company has built an extension to the building with the cost of
RM 570,000 (including RM 70,000 as cost of site). The extension was complete and the
building is used as a factory in August 2013.

JBS Sdn Bhd’s accounting year ends on 31 September.

You are required to calculate industrial building allowance for relevant year’s
assessment until year assessment 2018.

27


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