TAX 467

TAXATION 1
TOPIC 4
CAPITAL ALLOWANCE
- INDUSTRIAL BUILDING
ZalilawatiYaacob
UiTMPuncakAlam

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LEARNING OUTCOME
▪ Identify the industrial Building
▪ Identify persons entitled to IBA
▪ Determine the Qualifying Building Expenditure
(QBE) for constructed IB and purchased IB
▪ Determine certain building/structure treated as IB
▪ Compute the industrial building allowances.
▪ Compute Balancing Charges or balancing
allowances
▪ Determine the period and the effect of temporary
disuse.
▪ Identify building owned less than 2 years
▪ Apply the IBA and charges in the computation of
income tax liability
 CAPITAL ALLOWANCE –INDUSTRIAL BUILDING
ALLOWANCE
IB
01 Building/Structure
QBE treated as an IB
. Constructed 0
vs 2 INDUSTRIAL BUILDING ALLOWANCE
Purchased
Eligibility, Rates
03 • Initial Allowance
RESIDUAL EXPENDITURE • Annual Allowance
FORMAT
RM
• Application
QBE X 04
YA XX Less: Initial Allowance (x)
Less: Annual (x) DISPOSAL
Allowance • Balancing charge
Residual Expenditure XX
05 • Balancing
RULES allowance
• Restriction
75% rule
10% rule. 06
INDUSTRIAL
B U I L D I N G  A factory (para 64);
Sec 2 – building, any  A dock, wharf, jetty or other
structure erected on similar building;
land (not being plant  A warehouse let out to the public;
& machinery)  Building used in the utility
business (supplying water or
electricity) or telecommunication
services;
 Building used in the working of a
mine or farm;
 Mill, workshop in connection with
the working of mine
MEANING OF IB
‘within the same
curtilage’
Means the building
attached or adjacent to
or within the same
enclosures as other
building
 OTHER TYPES OF IB
Category Para IA AA
1. Dock, Wharf, Jetty 63 10% 3%
Warehouse let out to public
Building used by utilities &
telecommunication supplier
Building used in the working of a mine
or farm
2. Factory, Mill workshop, building within 64 10% 3%
same curtilage
3. Canteen, restroom, recreation room, 65(1) 10% 3%
lavatory, washroom for employees
Pre-requisite: IB must exist.
4. Building for welfare of workings and LA 65(2) 10% 3%
for employees working in farm
5. Public road recoverable through toll. 67A 10% 6%
6. Building on built, lease transferred 67B 10% 6%
to Government approved by MOF
 OTHER TYPES OF IB
Category Para IA AA
7. Private hospital, maternity home, 37A 10% 3%
nursing home
8. Building used for research/training. 37B 10% 3%
9. Warehouse used for storage of 37C - 10%
goods for export, imported goods
to process/to re-export
10. Building used in approved service 37E 10% 3%
sector.
11. Hotel registered under MOTAC 37F 10% 3%
12. Airport 37G 10% 3%
13. Motor Racing Circuit 37H 10% 3%
14.Living accommodation [LA] for 42(1) 40% 3%
employees – constructed building
Pre-requisite: IB must exist.
15. LA for employees in manufacturing, 42A(1) - 10%
hotel or tourism business, approved
service sectors – constructed or
purchased.
 OTHER TYPES OF IB
Category Para IA AA
16. Child care centre for employees - 42(2) - 10%
constructed or purchased
17. School or educational institution approved 42B - 10%
by Minister of Education – constructed or
purchased (exclude tuition centre)
18. Building for Industrial, technical or 42C - 10%
vocational training approved by MOF–
constructed or purchased
19. Old folks care centre – constructed or PU (A) - 10%
purchased 143/2003
20. Building used by MSC status company PU(A)202/ - 10%
2006
21. BioNexus status company PU (A) - 10%
374/2007

Source: Malaysian Taxation, CKF 25th Edition, pp 347- 350

 OTHER TYPES OF IB
Category Para IA AA
22. Privatisation project and private PU (A) 10% 6%
financing scheme 119/2010
23. Kindergarten – constructed or purchased PU(A) - 10%
1/2013
24. Child care centre – constructed or PU(A) - 10%
purchased 2/2013
25. Tun Razak Exchange Marquee Status PU (A) - 10%
Company – w.e.f. YA2014 27/2013
PERSON ENTITLED
TO CLAIM IBA
The taxpayer must have incurred capital
expenditure on any IB

The building must be in use for the

purposes of a business.
Renovation cost incurred on rented premises,
entitle to claim IBA
Business Operator as the Owner of the Building(37A,37B,37C,
37E,37F,37G,37H,42A(1), 42A(2), 42B and 42(C) according to
Subparagraph 16B(1), Schedule 3 of ITA , but if rent out such building
then, Not entitled to claim IBA

Owner of a building APART from the buildings listed above leases or rents out
the building to another person (tenant) who uses the building as an industrial
building, [paragraph 60, Schedule 3 of the ITA]
 QUALIFYING BUILDING EXPENDITURE
Qualifying building
expenditure [QBE] :
- capital expenditure
incurred on the
construction or purchase
of a building used for
business at any time after
its construction or purchase
as an industrial building
[IB]
IBA is deducted against the
adjusted business income in
arriving at the statutory
business income.
RM
Adj Business Income xx
Add: Balancing Charge xx
XX (A)
Less: Capital Allowances :
Unabsorbed CA b/f (xx)
Current year CA (xx)
Balancing Allowance (xx)(B)
Stat Business Income XX

IBA can be carried

The taxpayer is able to
forward to be utilized in
claim industrial building
allowance [IBA] on such future years.
QBE incurred.
 QUALIFYING BUILDING EXPENDITURE
CONSTRUCTION OF BUILDING

QBE NON –QBE

Capital expenditure on the construction of a building that qualifies includes –
(a)architect’s fees for designing a plan of the industrial building; The following are capital expenditure
(b) the cost of preparing plans and others in connection with obtaining approval
from local authorities for construction of the building;
on the construction of buildings which
(c) the cost in connection with the title to the building such as legal charges and are not included as QBE –
stamp duty; (i) cost associated with the acquisition
(d) the cost of clearing the old site including the demolition of any old structure,
provided that the old structure was not an industrial building and that the new of site such as land cost, legal
building is situated precisely on the same site occupied by the old building; charges, payment of stamp duty
(e) cost associated with works on the site such as piling, digging of foundations for and surveyor; (ii) the cost of
drains, water pipes and electricity cables;
(f) the cost of construction of the building which will include materials, labour,
clearing the site of any previous
haulage, management, supervision and other overhead charges directly related to works or demolishing the previous
the construction; structure which was an industrial
(g) cost of installing fittings that form part of the building such as wiring for electric building; and
supply;
(h)incidental expenditure on works which may be separately contracted such as (ii) (iii) the payment for compensation
drainage system, installation of water and electricity; and to obtain the right to occupy or own
(i) cost of constructing additions, renovations and alterations to an existing building
which are capital in nature. a property.
QUALIFYING BUILDING
EXPENDITURE
CONSTRUCTING ADDITIONS
.
constructing additions to a building
due to in sufficent space in the building
or other reasons in order to fulfill any COST OF ALTERATIONS
requirement or usage related to a
business is QBE for IBA claim
Alteration is done to a building which is
used as an industrial building for the
purposes of improving the quality of
service and increasing the productivity
COST OF RENOVATIONS of a business.
For example: The expenditure on
Renovations include the removing the entire layer of a slippery
reconstruction of structures inside a cement floor and replacing it with tiles
building without constructing an for safety reason and to smoothen the
additional new building or work processes is an improvement to
reconstruction which involves the building, is QBE for the purpose of
structural changes to a building and claiming IBA
improvements, qualify as QBE for
IBA claims
 OTHER QUALIFYING
PURCHASE BUILDING
BUILDING EXPENDITURE
QBE = Purchase price of an
industrial includes legal fee, stamp
duty and other incidental expenses
incurred by the purchaser in
connection with the purchase but
does not include the price of any
land or an interest of any land
15
Qualifying Building Expenditure
(QBE)
QUALIFYING BUILDING QBE
a. Constructed building Building expenditure
incurred
b. Purchased building
YA2005 and onwards Purchase price

Prior to YA2005:
(i) purchased building used as
IB 1 month prior to disposal
(para 4)
(ii) purchased building not used
as IB 1 month prior to
disposal (para 5)
(i) RE + BC of vendor; or
(ii) Purchase price
Lower amount of:
(i) RE; or
(ii) Purchase price
 PART OF BUILDING
NOT USE AS AN IB
Part of building an extension to a building is considered
as an industrial building if it is not used as an industrial
building does not exceed 1/10 (10%) of the overall
construction cost of the building or extension
The determination of capital expenditure for the
part or extension to a building is calculated based
on –
(a) total cost of construction;
(b) floor area; or
(c) other apportionment method that is considered
fair and reasonable by the Director General.

The 10% rule applies

Whole building is treated as IB if non IB (i.e. office, showroom)
is ≤10% of the total floor space.
Example:
Showroom & Office (NIB) 5%
Factory (IB) 95%
QBE RM750,000

Since the non IB does not exceed 10% of the total floor space, the
whole building is treated as an IB. Therefore, QBE = RM750,000.
Part of a building is rented out by the
owner and the space rented out does
not exceed 10% of the floor area of
the whole building, the whole building
qualifies as an IB
The space rented out exceeds 10% of
the floor area of the whole building,
that part of the building rented out
does not qualify as an industrial
building. 8.3.4 The determination of

Refer example 9 and 10 of Public Ruling No. 3/2018 Date Of

Publicaton: 12 September 2018
 DATE OF QUALIFYING
EXPENDITURE INCURRED
Constructed building
(a) QBE is deemed to have been incurred on the
day on which the construction of the building is
completed [paragraph 55(a), Schedule 3 of the
ITA].
(b) If the construction of a building is completed
before a business is about to carry on, the QBE
shall be deemed to be incurred on the date the
business commences [proviso to paragraph 55,
Schedule 3 of the ITA]
Purchased building
(a) QBE is deemed to have been incurred on
the day the expenditure becomes payable
[paragraph 55(b), Schedule 3 of the ITA].
(b) Purchase of a building occurs when there
is sale, transfer or assignment of a relevant
interest in the building [paragraph 58 of
Schedule 3 of the ITA]. (c) If the building is
purchased before commencement of a
business, the QBE shall be deemed to be
incurred on the date the business
commences [proviso to paragraph 55,
Schedule 3 of the ITA].
 ELIGIBILITY TO CLAIM INDUSTRIAL BUILDING
ALLOWANCES
IA AA
IBA comprises of initial allowance (IA) and annual allowance (AA) or AA at the
rate prescribed for each type of industrial building

IA shall be allowed to a person who has incurred QBE

(construct/purchase) in the basis period for a year of
assessment for the purposes of his business and at the
end of the basis period for a Year of assessment –
(a) the person is the owner of the building;
(b) the building was in use or was about to be used as
an industrial building; and
(c) if the building was disposed of in that basis period,
the building must have been used as an industrial
building in the period prior to the disposal
AA shall be allowed for a year of assessment
to a person who has incurred QBE on the
construction or purchase of a building and at
the end of the basis period for a year of
assessment –
(a) the person is the owner of the building;
and
(b) the building was in use for purposes of
the business.

NOTIONAL ALLOWANCE (notional allowance which is equal to the annual

allowances )
Notional allowance (NA) is claimed when:
❑ the building is not used as an IB
❑ the building is not in used temporarily
 TEMPORARY DISUSE
A building is deemed to be used as an industrial building even though it is not actually
being used if [paragraph 56 and 57, Schedule 3 of ITA] :
(a) the building was used for the purpose of a business immediately before disuse;
(b) during the period of disuse, the building is constantly maintained in readiness to be
brought back into use; and
(c) the period of disuse is temporary.
.

Example

Semerah Padi Sdn Bhd owned a building that was used as a factory and storage of
rice for distribution in the state of Kedah and Perlis. Due to the economic recession
factor, the factory was not used for a period of 2 years. During that period, the factory
was constantly being maintained in a proper manner such as cleaners were hired to
clean the factory building and its compound and was carried out pest control.
Semerah Padi Sdn Bhd is eligible to claim IBA for that period because the factory is
still properly maintained and ready to be used any time
 DISPOSAL OF AN INDUSTRIAL
BUILDING
AN IB IS DISPOSED
DISPOSAL DISPOSAL VALUE
Sale/transfer/assigned MV at date of transfer
Net proceeds of
sale/transfer/assignment
Whichever is greater
Insurance compensation MV
Insurance compensation
Whichever is greater
Demolished Net cost of demolition added
to Balancing Allowance
Building lease transfer to Zero
GOVT Received compensation,
reduce Residual Expre
a) sale, transfer, assignment of the relevant interest in
the building
b) Relevant interest depends on the duration of a
concession, the coming to an end of concession
c) Relevant interest is a leasehold interest, the
determination of the relevant interrst otherwise then
to the person entitled to there to acquiring the
reversion
d) The demolition of the building
e) The building ceased to be used as an IB
❑ RE > Disposal value = BA
❑ Disposal value > RE = BC ( cannot exceed actual total IBA
given)
❑ Dispose < 2yrs = Clawed back all allowances
An industrial building which is disposed of after 50 years from the
date of construction or purchase would be imposed a balancing
charge except where the QBE has been determined in the manner
mentioned.as Special provision to paragraph 3 and 35 of Schedule 3
 QUESTION 2 B. Healthy Life Manufacturing Industries Sdn Bhd (accounting year end 30 June annualy), is
TEST NOV 2019 Q a company manufacturing wide range of health products, acquired a piece of land in
Bukit Jelutong, Shah Alam for RM 5 million in January 2016.

HLSB subsequently constructed a building consist of factory together with office at a cost
of RM2,850,000.The total built-up area of this building was 275,000 sq ft of which the
sales/administration office occupied 41,250 sq ft. The whole building was completed and
brought into use in April 2017. The whole building was sold for RM3,500,000 in May 2018
to Samporna Sdn Bhd (SSB), a freight forwarding company involved in the transportation
of goods. SSB used the whole building as a workshop to service and repair the
company’s lorries.

In March 2017, Healthy Life Sdn Bhd (HLSB) purchased a three storey building in
Petaling Jaya for RM 3 million and rented it to EduBest Sdn Bhd (ESB) for a monthly
rental of RM250,000. ESB use the building as an educational institution approved by the
Minister of Education.

Required:
a. Calculate the industrial building allowances, balancing allowances/charges (if any) for all
relevant years of assessment for Healthy Life Manufacturing Industries Sdn Bhd
b. Explain breifly whether EduBest Sdn Bhd is eligible to claim for industrial building
allowances.

c) Define the meaning of ‘within same curtilage’ in the context of industrial building
 B.
TEST NOV 2019 S a. Factory

RM
YA 2017 QBE ( 85% x 2,850,000) 2,422,500
IA (10%) (242,250)
AA (3%) (72,675)
RE 2,107,575
YA 2018 Disposal ( 85%√ x 3,500,000) 2,975,000
Balancing Charge 867,425

Office = 41,250/275,000 = 15%

Therefore QBE = 85%√
However, since the asset was owned
less than 2 years (Apr 2017 – May
2018) all capital allowances claimed will
be clawed back. √Therefore the
balancing charge is equal to RM
314,925.

b. Edubest Sdn Bhd is not eligible to claim IBA for the building because the building is a
rented building

c. The meaning of within the same curtilage is a building attached or adjacent to or within
the same enclosure as the other building