TAX370-Industrial Building Allowance

CAPITAL ALLOWANCE RELIEF ON CAPITAL EXPENDITURES

Schedule 2 Qualifying forest expenditure Schedule 3 Qualifying expenditure on P & M Qualifying expenditure on industrial buildings Qualifying agriculture expenditure Schedule 4 Qualifying prospecting expenditure Schedule 4A Qualifying farm expenditure on approved agricultural project

Capital allowances a review

Allowed as a deduction against income from a business source only; Types: Initial allowance Annual allowance Balancing allowance Unabsorbed (unutilised) capital allowance can be carried forward to future years; For Schedule 3 allow. deduction is to be made against adjusted income.

Scheme of deduction for Sch. 3 allowances

Adjusted Business Income Add: balancing charge Less: Capital allowance Adjusted Income RM xxx xxx (xxx) @@@

Industrial building allowance (Schedule 3) who will qualify?

Allowance given for capital expenditure incurred on the construction or purchase of industrial buildings which are used for the purpose of the respective business.

Initial Allow. What is Industrial Building Types of capital allowances Balancing charge Industrial Building Allowance Qualifying expenditure Purchased building Annual/notional allow. Balancing allow.

What is an industrial building?- Schedule 3, paragraph 63

includes: i. a factory, ii. a dock, wharf, jetty or other similar buildings; iii. a warehouse let (rented) out to the public; iv. buildings used in the utility or telecommunication business; v. buildings used in the working of a mine or farm; vi. mill, workshop, in connection with mining.

75% Rule

P&M-as an IB Part of Building as an IB

Who would qualify? All costs incurred for building Para. 4 OR Para. 5

10% Rule

From YA2005 QBE = P. Price

Constructed building Prior to YA2005- Use

TAX370-Industrial Building Allowance

Factory
Definition: Section 3, para. 64: A mill; A workshop (for the repair of plant & machineries) Building used for housing plant & machinery used in manufacturing or power generation; Building (within same curtilage as factory) used as a store for raw materials, consumables or manufactured goods;

Other types of buildings also qualifying as industrial building there must first be an existing Industrial Building
Canteens, rest-rooms, washrooms & buildings for workers welfare;(para 65(1)) Living accommodation on farms (para. 65(2)); Constructed living accommodation of factory workers (para. 42) Living accommodation (purchased or constructed) for workers in the manufacturing sector, hotel or tourism projects (para. 42A); Building used for child care facilities for employees.

(adjacent to/within the same compound as)

Other types of buildings that qualify as industrial building

School/educational institution & technical training approved by the MOE (para 42B) Licensed private hospital, maternity home & nursing home (para 37A) Buildings used for research approved by the Minister Buildings used for storage of goods for export (para 37C) Public road & ancillary structures (para 67A)

Other types of building that qualify as industrial building continue

Building used in approved service project (para 37E) Building used for hotel (para 37E) Airport (para 37G) Motor racing circuit (para 37H) Old folks care centre

Types of industrial building allowances

Initial allowance the standard rate is 10%. (There are however exceptions. Refer to table at end of chapter). - Allowed ONCE only in the first year of construction/purchase; - Applied on the Qualifying Building Expend.(QBE); - Prior to YA 2002, initial allowance is only allowed for constructed building. - From YA 2002, both constructed & purchased IB can enjoy initial allowance.

Continue: Annual allowance

Types of industrial building allowances

Constructed building

Prior to YA 2002, the standard rate was 2% per annum From YA 2002, the standard rate has been increased to 3% per annum. There are however exceptions to this rule. (Refer to table at end of chapter).

TAX370-Industrial Building Allowance

Rates - Exceptions
Sch. 3 para Public road recverable through toll Building on built, lease transferred to the govt. Bilding used for storage of imported goods for export processed and re-export processed & distributed Living accomodation for employees constructed building (Pre-requisite: an IB exist) Living accomodation for employees constructed building (Pre-requisite: an IB exist) Child care centre constructed or purchased School or educ. Inst. Approved by MOE constructed or purchased Industrial, technical or vocational training constructed or purchased Old folks care centre 67A 67B 37C IA (%) 10 (std.) 10 (std.) Nil 6 6 10 AA (%)

Continue:

Types of industrial building allowances

42(1) 42A(1) 42(2) 42B 42C

40 Nil Nil Nil Nil

3 (std.) 10 10 10 10 10

Balancing allowance Can arise on disposal of an industrial building; Where the disposal value is below the residual expenditure, the difference is known as the balancing allowance; Balancing allowance is tax deductible, ie. can be deducted against adjusted income.

PU(A)143/2 Nil 003

Initial allowance para 12 & 13

Qualifying criteria: Person who has incurred QBE on the construction or purchase of an IB AND; The building was in used or about to be used as an IB for the purpose of the persons business AND; The person is the owner of the building at the end of the basis period. ( in practice, even if the person owned the building for only part of the basis period, he/she is still allowed to claim the initial allowance for the said building)

Annual allowance para 16

Qualifying criteria: Person who has incurred QBE on the construction or purchase of an IB AND; The building was in used as an IB for the purpose of the persons business AND; The person is the owner of the building at the end of the basis period.

Balancing charge
Can arise on disposal of an industrial building; Where the disposal value is above the residual expenditure, the difference is known as the balancing charge; Balancing charge is taxable ie. must be added to adjusted income; Balancing charge cannot exceed actual IBA already claimed for the building.

Constructed building -What expenditure would qualify?

In general all expenditure that relate to the construction of the building and making it operational; expenditure that relate to the acquisition and enhancement of land would not qualify (such as land price, legal fees on land acquisition, terracing and leveling)

TAX370-Industrial Building Allowance

QBE for a constructed building - includes

Architects fees, cost of preparing building plans & obtaining approval from relevant authorities; Cost of clearing site; demolition cost of a NONindustrial building; ALL construction cost (materials, labour, haulage, management supervision, etc.) Incidental expenditure which may be sub-contracted (drainage, installation of water, electricity, internal car park, fittings, charges related to building) Interest on loan used for the constructed building (Refer to handout 1)

FOR INFO ONLY

QBE Purchased IB

Prior to YA 2005 Used as an IB within 1 mth. prior to disposal?? YES NO Para 5

From YA 2005 QBE = Purchase Price of Building

Para 4

QBE = Lower of PP of building OR (QBE for vendor AA NA)

Refer to handout 4

QBE = Lower of PP of building OR (Res. Exp. + B. Charge of Vendor)

If only part of an industrial building is used for industrial purposes (para 66)
Use 10% Rule to test whether only part of the building OR the whole building is to be treated as an Industrial Building. Non-industrial use: office, administrative area, showroom. (Is it less or more than 10%?) How to apply the Rule Part of the
(Refer Handout 2 & 3)

Plant & Machinery when is it considered as an industrial building??

The AGGREGATE COST of the P & M will qualify as an industrial building expenditure when the capital expenditure incurred on site preparation (preparing, cutting, tunneling & leveling land) exceeds 75% of the aggregate of cost of the plant & machinery Aggregate cost = Cost of P&M+ installation cost + cost of site preparation.

Whole building is an IB

non-industrial portion (cost or floor area) Exceeds 10%?? YES

NO

building (industrial portion) can claim IBA

Plant & Machinery when is it considered as an industrial building??

Cost of Plant & Machinery
(includes installation, insurance, freight)

Rented Premises
Rental Expense is NOT a capital expenditure. It is a revenue expenditure. Hence rental expense per se does not qualify for capital allowance; However, any capital expenditure incurred on rented premises used as an industrial building shall be eligible for IBA on the capital expenditure incurred such as renovation cost, extension etc.

P S

Add: Site preparation cost

(cutting, leveling, tunneling, breaking walls)

Aggregate Cost A If S > 75% of A, P&M to be treated as IB (ie. QBE = A) If S <= 75% of A, P&M is not an IB. (but will qualify for capital allow. for P & M ie. QPE = P)
(Refer to handout 5)

TAX370-Industrial Building Allowance

Disposal of IB
Sale, transfer or assignment of the relevant interest of the building; Where the relevant interest has a duration period, the expiry of the period; Demolition or destruction of building; The building ceased to be used as an IB.

Meaning of relevant interest para 49-51)

The interest to which a person has in the building in which the person has incurred qualifying building expenditure.

Disposal value
i) Equivalent to the : Greater of a) its market value OR b) Net proceeds of sale, transfer or assignment ii) Equivalent to the : Greater of a) its market value OR b) Insurance compensation received

Demolished building
If there is no insurance or compensation for the building, Disposal value = 0. In such an event, the residual expenditure will be increased by the demolition cost less any scrap value recovered and this figure will be the balancing allowance.

Industrial building owned less than 2 years

All industrial building allowances claimed earlier would be clawed back; In the year of disposal, a balancing charge equal to actual allowances claimed would be raised.
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