CHAPTER 5 RELIEF FOR CAPITAL EXPENDITURE PLANT AND MACHINERY YA 2021

CHAPTER 5

RELIEF FOR CAPITAL
EXPENDITURE: PLANT AND

MACHINERY

INTRODUCTION

• A person who is involves in a business activity would normally use assets in the course of
producing business income. Accountants recognize depreciation of the assets due to usage,
wear and tear.

• Depreciation is not recognizing as tax deductible expenditure because it really represents the
writing off a portion of the capital cost of asset over time.

• The tax payer is grant a capital allowance on qualifying expenditure incurred on assets such
as motor vehicle, plant and machinery and fixture and fitting for determining the taxable
income of business.

• Capital allowance is only given to business activity.
• Is given as deduction from business income in place of depreciation expenses incurred in

purchase of business.

• The person who has the right to claim capital allowance is the person who has expended on
the purchase or acquisition of the said asset. Examples of assets that are used in business are
motor vehicles, machines, office equipment’s, furniture, computers, and etc. assets.

• Rates of capital allowance are determined according to the types of assets
• The following conditions for must be fulfilling to claiming capital allowance:

➢ Operating a business;
➢ Purchase of business assets;

➢ Assets are being used in the business;
➢ Owner of the assets.

DEFINITION OF PLANT AND MACHINERY

• “whatever apparatus used by a businessman for carrying on his business, excluding his stocks
in trade which he buys or makes for sale; but include all goods and chattels, fixed or
moveable, lived or dead, which he keeps for permanent employment in his
business”.(Yarmouth v France (1887) 19 QBE 647).

• any capital expenditure incurred on the provision of machinery or plant for the purpose of a
business shall be qualified as qualifying expenditure on plant and machinery (QPE).

• This includes purchase price of the plant and machinery (cost of assets used in a business),
other incidental cost such as freight charges, custom duty and installation expenses of plant
and machinery. Expenditure on fishponds, animal pens, cages and other structures used for
agricultural.

• Qualifying for hire purchase assets is based on the amount of capital repayment made during
that basis period.

EXERCISE 1:

Salsa Sdn. Bhd. purchased a machine for the use of
production of goods. The cost of purchase is RM 75,000.
Salsa Sdn. Bhd. also incurred RM 4,750 to install the
machine at its factory. Calculate the qualifying expenditure
for the plant and machinery.

SOLUTION

Cost of machine RM75,000

Installation cost RM 4,750

Qualifying expenditure RM79,750

QUALIFYING PLANT EXPENDITURE UNDER PARAGRAPH 2, SCH. 3
ITA 1967

• Qualifying plant expenditure (QPE) is capital expenditure incurred on the
provision of machinery or plant used for the purposes of a business. Its
includes, among others:

• Expenditure incurred on the alteration of an existing building for the purpose of
installing that machinery or plant and other expenditure incurred incidentally to
the installation

• Expenditure incurred on preparing, cutting, tunneling or levelling land in order
to prepare a site of installation of that machinery or plant, if the expenditure
exceeds 10% of the aggregate of the costs of installation and cost of the plant,
such expenditure will not qualify as QPE.

PLANT AND MACHINERY UNDER “10% RULE” (PARAGRAPH 2(B) OF
SCHEDULE 3)

• Expenditure incurred in preparing, cutting, tunneling or leveling land in order to prepare the
site for the installation of that plant and machinery also qualify as capital expenditure.

• However, the cost of preparing the site for installation shall not exceed 10% of the aggregate
cost of the plant and machinery and cost of preparing the site. If such expenditure exceeds
10% of the aggregate of the costs of installation and cost of the plant, such expenditure will
not qualify as QPE.

EXAMPLE 1:

Mummy Sdn. Bhd. purchased a machine costing RM 205,000
and the company incurred RM 15,000 to prepare the site for
the installation of the machinery. Calculate the qualifying
expenditure for the plant and machinery.

SOLUTION:

Cost of machine RM 205,000

Cost of preparing the site RM 15,000

Aggregate cost RM 220,000

10% x RM 220,000 = RM 22,000.

The cost of preparing the site is less than 10% of the aggregate cost, therefore the cost
of preparing the site qualifies as expenditure incurred on plant and machinery. The
qualifying plant expenditure is RM 220,000.

EXERCISE 2:

Zaman Sdn. Bhd. purchased a machine costing RM 150,000 and the
company incurred RM 35,000 to prepare the site for the installation
of the machinery. Calculate the qualifying expenditure for the plant
and machinery.

PLANT AND MACHINERY UNDER SCHEDULE 3, PARAGRAPH
2A AND PARAGRAPH 2C, SCH. 3, ITA 1967

• Where the plant and machinery were bought for non-business purposes
but subsequently brought into business use, the qualifying expenditure
is the market value of plant and machinery at the time of transfer.

• Where the plant and machinery were use in business outside Malaysia
and brought into use in Malaysia, the qualifying expenditure is the lower
of net book value or market price.

MOTOR VEHICLE NOT LICENSED FOR COMMERCIAL TRANSPORTATION
(PARAGRAPH 2(2) OF SCHEDULE 3)

• The qualifying expenditure (QPE) incurred on or after the first day of the basis period
for the YA 1991 shall be limited to RM50, 000. Effective from 28 October, 2000, the
restriction on QPE for motor vehicles not licensed for commercial transportation has
been increased to RM100, 000.

• In order to claim for capital allowances on this restriction of RM100, 000, the motor
vehicles must be new when purchased and the cost of purchase does not exceed
RM150, 000. If these conditions are not complied with, the qualifying expenditure
continues to be restricted to RM 50,000.

• However, motor vehicles licensed or permitted by the appropriate authority for
commercial transport of goods and passengers are not subject to this limitation

EXERCISE 3:

On 30 June 2021, Morning Glory Sdn. Bhd. bought two new
cars, Honda and Toyota for the use of its manager. The cost of
the cars is RM 175,000 and RM 110,000 respectively. Both cars
are not licensed for commercial transportation.

Determine the qualifying expenditure of the cars.

Answer:

Qualifying expenditures:

1) Honda – RM50,000

2) Toyota – RM100,000

TYPES OF CAPITAL ALLOWANCES

I. Initial Allowances
II. Annual Allowance
III. Notional Allowance

INITIAL ALLOWANCES

• The Initial allowance is given for the first basis year for the year of assessment
in which the qualifying expenditure was incurred.

• The applicable rate is 20% on qualifying expenditure.
• However, under statutory order, certain business can claim higher initial

allowance.
• The following conditions must be fulfilled by a person who claims for initial

allowance:
➢The person claiming for initial allowance must be the owner who incurred

the qualifying expenditure.
➢The plant and machinery must be in used in business.
➢The plant and machinery must still be used at the end of the accounting

period.

ANNUAL ALLOWANCE

• The annual allowance commences in the basis year for the year of
assessment in which the qualifying capital expenditure is incurred and
will continue to be given in the following and subsequent years of
assessment until the qualifying expenditure is fully written off or when
the assets is sold.

• The conditions for giving annual allowance are similar to the conditions
stated for the initial allowance.

THE RATE FOR INITIAL ALLOWANCE AND
ANNUAL ALLOWANCE ARE AS FOLLOWS:

Type Of Asset Initial Allowance Annual Allowance

Heavy machinery 20 % 20 %

Motor vehicle 20 % 20 %

Plant and machinery 20 % 14 %

Computer and ICT equipment 20 % 20 %

Others 20 % 10 %

NOTES

• Heavy machinery - Bulldozers, cranes, ditchers, excavators, graders, loaders, rippers,
rollers, rooters, scrappers, shovels, tractors, vibrator wagons and so on.

• Motor vehicles - All types of motorized vehicles such as motorcycles, aero planes,
ships and so forth.

• Plant and machinery - General plant and machinery not included under heavy
machinery such as air conditioners, compressors, lifts, laboratory and medical
equipment, ovens and so forth.

• Others - Office equipment, furniture and fittings, etc.

• capital allowance for small value asset would be given a one of 100% allowance for
each asset of value not exceeding RM 1,300 each. The total value of such assets
should not exceed RM 13,000 in the relevant year. From year of assessment 2009,
small and medium enterprises are not subject to that maximum limit.

EXAMPLE 2: (Plant and Machinery Purchased by Cash)

Kitty Enterprise ends its accounting year on 31 December every year. Kitty
Enterprise purchased a machine on 16 June 2019 costing RM 50,000 for the use
of its business. The annual rate for the photocopy machine is 14%.
Compute the capital allowances for years of assessment 2019 till 2021.

SOLUTION:

YA 2019 Qualifying expenditure RM
Initial allowance (20% × RM 50,000) 50,000
YA 2020 Annual allowance (14% × RM 50,000) (10,000)
YA 2021 Residual expenditure (7,000)
Annual allowance (14% × RM 50,000) 33,000
Residual expenditure (7,000)
Annual allowance (14% × RM 50,000) 26,000
Residual expenditure (7,000)
19,000

NOTIONAL ALLOWANCE

• When a particular asset is not in use due to various reasons, a business
operator is not allowed to claim annual allowance for that particular
asset.

• Rate of notional allowance is same as annual allowance.
• Notional allowance must be computed in following condition:

➢ If annual allowance is not claim by the owner;
➢ If an asset which used in business before becoming disused (not

include temporarily disuse), than used back in business.

DUAL USAGE

• Where qualified expenditure has been incurred by a person in
relation to an asset used partly for the purpose of a business, and
partly for non-business purpose, the capital allowances claimed
shall be apportioned for the purpose of the business.

• The portion for non-business use is not allowed for capital
allowances.

EXERCISE 4

On 18 July 2019, Thomas Sdn. Bhd. purchased a motor vehicle costing
RM 65,000 for the use of its manager. The motor vehicle is not licensed
for commercial transportation. It was agreed that 2/5 of the car usage is
meant for private purposes. Thomas Sdn. Bhd. closes its accounting year
on 30 September each year. Compute the capital allowances available
for Thomas Sdn. Bhd. Up to year of assessment 2021.

SOLUTION RM Business used (3/5)

YA 2019 65,000 3/5 x 13,000 = 7,800
Qualifying expenditure -13,000 3/5 x 13,000 =7,800
(-) Initial allowance [20% X RM65,000] -13,000
(-) Annual Allowance [20% X RM65,000] 39,000
Residual expenditure
-13,000 7,800
YA 2020 26,000
(-) Annual Allowance [20% X RM65,000]
Residual expenditure -13,000 7,800

YA 2021 13,000
(-) Annual Allowance [20% X RM65,000]

Residual expenditure

PLANT AND MACHINERY PURCHASED UNDER HIRE PURCHASED

• The qualified expenditure for the basis period for a year of assessment shall be taken from
the capital portion of any installment payment made by him. In the case of motor vehicles
not licensed for commercial transportation, the restriction on qualified expenditure still
applies.

Capital Portion = Cash Price – Deposit
No. of installments

EXAMPLE 3

On 1 May 2018, En. Suman purchased a machine on hire purchased for the use of his business.
The following are information pertaining to the machine. The annual rate for machine is 14%.En.
Suman’s business accounting year ends on 31 December each year.

Cash price RM 100,000

Hire purchased price RM 120,000

Deposit paid RM 30,000

Number of installments 35 times

Payment for installment began on 1 June 2018. Compute the capital allowances available to En.
Suman for all the relevant years of assessment till year of assessment 2021.

SOLUTION





DISPOSAL OF PLANT AND MACHINERY

▪ Where a person disposes of the plant and machinery, balancing allowances or
balancing charges may arise.

▪ A disposal can come about under the following circumstances:
➢ When a plant and machinery is disposed of;
➢ The business permanently ceases but plant and machinery continues to
belong to the business;
➢ Plant and machinery permanently ceases to be used in the business.

▪ Balancing allowance arises when the residual expenditure of the plant and
machinery is greater than the disposal value.

▪ Balancing charge occur when the residual expenditure of the plant and machinery
is lower than the disposal value.

▪ Balancing charges shall not exceed the total capital allowances previously given.

EXAMPLE 4

On 5 January 2018, Mahsuri Furniture Sdn. Bhd. purchase a motor
vehicle costing RM 160,000 and not licensed for commercial
transport. Accounting year ended on 31 December each year. It sold
the motor vehicle for RM 52,000 on 18 September 2021. The annual
allowance rate for motor vehicles is 20%. Compute the capital
allowance and balancing charge (if any) for all the relevant year of
assessment.

SOLUTION

ASSETS DISPOSED WITHIN TWO YEARS (PARAGRAPH 71)

When a person has claimed for capital allowances and subsequently disposed of plant and
machinery within two years of acquisition, all capital allowances claimed shall be withdrawn and
would be treated as balancing charges.

EXERCISE 5

Chacha Sdn. Bhd. purchased a machine for RM 66,000 on 15 June
2020 and closes its accounting year on 30 September each year.
Chacha Sdn. Bhd. sold the machine on 21 February 2021 for
RM30,000. The annual allowance for the machine is 14%.
Calculate capital allowance and balancing charge (if any) for Chacha
Sdn. Bhd. up to year assessment 2021.

SOLUTION RM

YA 2020 66,000
Qualifying expenditure -13,200
(-) Initial allowance [20% X RM66,000] -9,240
(-) Annual Allowance [14% X RM66,000] 43,560
Residual expenditure
30,000
YA 2021 13,560
Sold 22,440
Balancing allowance
Balancing charge [13,200 + 9,240]

ASSETS USED FOR RESEARCH (PARAGRAPH 37D)

The taxpayer who incurs qualifying expenditures for the above
purpose is entitled to claim capital allowance provided the minister
approve the research, even though the research activities do not
relate to the business carried on the taxpayer.