Maximizing Tax Benefits on Capital Expenditure

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Overview

Mr Saravana is an experienced and famous tax lawyer in Malaysia

Businesses in Malaysia are suffering financial difficulties and may undergo cost-cutting measures such as downsizing and retrenchment for survival.

On 7/4/2020 we attended Saravana tax seminar ((2 hours 30mins) organized by Learnable. Glad we can share our reflection from this seminar as below

Key takeaways

In this part of blog, we will share Mr Saravanan tax insights on capital allowance, building allowance (IBA) and Reinvestment Allowance (RA).

Summary of learning

1.1 Capital Allowance

Generally, capital allowance is eligible for plant and machinery, or tools and equipment for business.

What are tools and equipment？

Mr Saravana gave us some examples of the case law to enhance our understanding.

KPHDN v Tropiland Sdn Bhd (2012) (Court of Appeal)

The argument here is whether the 7-storey car park is a tool and equipment to the business?
The taxpayer is a property developer and constructed a multi-story car park before letting it out. They claim a capital allowance for the car park.
The taxpayer’s income was derived from the rental of the car park. Without the multi-story car park, the taxpayer could not have generated an income from the land.

Hence, they can claim the capital allowance for the car park.

1.2 Industrial Building Allowance(IBA)

If you own or rent a factory for your business, you may claim the qualifying expenditures under Industrial Building Allowance (IBA).

1.3 Reinvestment Allowance(RA)

The definition given by MIDA, RA is available for existing companies engaged in manufacturing and selected agricultural activities that reinvest for expansion, automation, modernization, or diversification into any related products within the same industry on condition.

Lavender Confectionery & Bakery Sdn Bhd V KPHDN

Lavender is a manufacturer, distributor and dealer in cakes, confectionery, bread and biscuits.

In YA 2011, the company claimed Industrial Building Allowance (IBA) for the additional demolition of substructures and renovation and Reinvestment Allowance (RA) for plant and machinery for JB factory and KL Outlet.

However, it had been rejected due to one of the demolition cost before constructing the buildings which did not form part of the Lavender’s factory. Company is also disallowed to claim under RA due to the items are not used in the factory.

For IBA claim of the Company, the decision of the Court is the Company can claim for the IBA since they fulfilled the IBA claim requirement of building used for purpose of business and used as a factory.

The Company can claim for RA as they fulfilled the RA claim requirement as

* The Company must be the resident of Malaysia

* An operation for more than 36 months

* Incurred capital expenditures are for the expansion of their business.

As their outlet in KL continues the manufacturing process of bread and confectionaries in the principle factory at Plentong.

The capital expenditures incurred for plant and machinery that leads to the expansion of Company’ business is entitled to RA.

Reflection

From the above, we can understand that the determining factor between Capital allowance and Industrial building allowance is whether it is a “tool” to generate income or it is a "building" that is used as an industrial business purpose.

Qualified expenditure can be the assets itself and also the incidental cost incurred on the assets. To maximize your claim, we can always go back to the ruling or act to look at the definition.

Sources

KPHDN v Tropiland Sdn Bhd (2012) (Court of Appeal)

Lavender Confectionery & Bakery Sdn Bhd V KPHDN

Qualifying Expenditure and Computation of Industrial Building Allowances

Qualifying Expenditure And Computation Of Capital Allowances

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