TAR UC (FAFB) – RAC Year 3 (ACADEMIC YEAR 2020/2021)

BBFT3014/BBFT3013 ADVANCED TAXATION

Tutorial 2: Tax Incentive – PS & ITA

Suggested answer to Q1

RAC Tax Consultant Sdn. Bhd.

No. 1, Jalan Utama
50000 Kuala Lumpur.

2 July 2020

The Board of Directors

MyCo. Sdn. Bhd.
81C, Jalan Pelaburan
40000 Shah Alam,
Selangor.

Dear Sirs/Madam,

Pioneer Status

Further to your letter dated 29 June 2020 received from your finance manager with the
projected income and expenditure for the years of assessments (YA) 2019 to 2024, we
have the pleasure of advising your board on the above tax incentive as follows:

(a) Mechanism of giving incentive

The incentive is given by direct exemption of statutory income from the pioneer
business at the prescribed rate of 70%. The other 30% of the statutory income
will be deemed to be total income and taxable at the tax rate of 24% for the
relevant year of assessment.

(b) Capital allowance and business loss for the pre-pioneer business
The unabsorbed capital allowance of RM5,500,000 (from pre-pioneer) can be
carried forward into the pioneer period and can be deducted against the adjusted
income from the pioneer business.

The unabsorbed business loss of RM200,000 (RM300,000 – RM100,000 rental

income) from pre-pioneer can only be carried forward to the post-pioneer
period and to be given deduction against the statutory income from the post-
pioneer business.

The unabsorbed capital allowance and unabsorbed business loss (if any)
after the end of the pioneer period (post pioneer period) has to be utilized within
7 consecutive YAs (YAs 2025 to 2031). Any unabsorbed / unutilized amount
which is not deducted at the end of the period of 7 consecutive YAs shall be
deemed as Nil / disregarded.
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Suggested answer to Q1(cont’d)

(c) Pioneer business loss for YA 2020

The pioneer loss for YA 2020 has to be carried forward (during/within the
pioneer period) and must be deducted against the abated statutory income
from the pioneer business before crediting the latter (abated statutory income) to
an exempt income account. It cannot be deducted against the aggregate income
from all sources (business and non-business) in arriving at the total income.

(d) Total chargeable income and total exempt income for the pioneer period
For the pioneer period from YAs 2020 to YA 2024, the total chargeable income
would be RM5,076,000 and total exempt income would be RM10,510,000.
Please refer to the Appendix A attached.

(e) The possibility of claiming reinvestment allowance for YA 2025 onwards

After the end of the pioneer period, for YA 2025 to YA 2039 (15 consecutive
YAs), it is possible for your company to claim reinvestment allowance, provided
the following conditions would be fulfilled:

1. Your company must be resident in Malaysia;

2. It has a qualifying project whereby it undertake to expand, modernize,

automate its business activity or diversify into a related product within
the same industry (manufacturing); and

3. It must incur qualifying capital expenditure on factory, plant and

machinery in the basis period for the relevant YA’s in respect of its
qualifying project.

Noted that your company would have operated for more than 36 months by
then on 1.11.2024, the beginning of the basis period for YA 2025 (basis period:
1.11.2024 to 31.10.2025).

We hope the above information is helpful. Please do not hesitate to contact us if you need
further information.

Thank you.

Yours faithfully,

MY (signature)

Michael Yeo, Tax Director

RAC Tax Consultant Sdn. Bhd.
BBFT 3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q2

(a) General situations

MyBest Sdn. Bhd. (MBSB) should opt for pioneer status if its business of
manufacturing the promoted product has high profits and qualifying capital
expenditure on factory, plant and machinery is not substantial at the initial years
(the first 5 years). The company should not have pioneer business loss as it will
affect the future year abated statutory income (exempt income). It should not
have a non-pioneer business and pioneer business in the same company. For the
abated statutory income from pioneer business will be reduced if the non-
pioneer business suffers business losses in the current year.

MBSB should opt for investment tax allowance (ITA) if its business of
manufacturing the promoted product has a long gestation period and the
business profits are low or even business loss(es) are expected for the initial
years. The company can have more than one business as the business loss will
not reduced the amount to be credited to the tax exempt income account of the
investment tax allowance in the current year. The qualifying capital
expenditure on factory, plant and machinery is substantial at the initial years
(the first 5 years).

(b) (i) Mechanism of the tax incentive

For pioneer status is given by direct exemption of statutory income from
the pioneer business at the prescribed rate of 70%.

For ITA, the incentive is given by way of allowance based on 60% of

qualifying capital expenditure incurred (in the basis period of a year of
assessment) over a period of 5 years from the date of approval by Malaysian
Investment Development Authority (MIDA). For the ITA utilized which is
up to 70% of statutory income in a YA, equal amount of statutory income
(from the business involving a promoted product) is abated/exempt.

(ii) The duration / period of incentive

For pioneer status, the incentive is granted for 5 years from the date of
production stated in the pioneer certificate issued by Malaysian
Investment Development Authority (MIDA).

For ITA, the incentive is granted for 5 years from the date of approval by
MIDA.
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Suggested answer to Q2 (cont’d)

(iii) The tax treatment of the current year business loss, if any
For pioneer status, the current year pioneer loss has to be carried
forward and it must be deducted against the abated statutory income
from the pioneer business for the subsequent YA onwards (within the
pioneer period) before crediting the abated statutory income to an
exempt income account. It cannot be deducted against the aggregate
income from all sources (business and non-business income) in
arriving at the total income.

For ITA, business loss in the current year can be deducted against the
aggregate income from all sources (business and non-business
income) in arriving at the total income under Section 44(2). Any
unabsorbed business loss can be carried forward to subsequent years of
assessment and to be deducted against the aggregate income from all
businesses under Section 43(2).

(c)(i) The likely ITA and exempt income would be as follows:

RM
Factory (RM14 million – RM4 million for land) 10,000,000
Plant and machinery 20,000,000
Total qualifying capital expenditure 30,000,000
ITA at 60% 18,000,000

When the ITA is fully utilized, there would be an equal amount of exempt
income, that would be RM18,000,000.

(ii) The pioneer status would be more tax-efficient if the total exempt income
for the pioneer period is more than RM18,000,000. This would mean that
the total exempt income equal to 70% of the total statutory income (for the
years of assessment 2020 to 2024) exceeds RM18,000,000 (i.e. the total
statutory income is more than RM18,000,000 x 100/70 = RM25,714,286).

(iii) The tax relief period is from YA 2020 to YA 2024, for either pioneer
period or ITA opted as the tax incentive. Hence, for YAs 2023 and 2024,
it will not be possible for MBSB to claim reinvestment allowance (RA) as
RA and pioneer status (or ITA) are mutually exclusive.

For YA 2025, it will be possible for MBSB to claim RA, provided the
following conditions would be fulfilled:

1. It will be resident in Malaysia;

2. It will have a qualifying project whereby it undertaken to expand,

modernize, automate or diversify its business activity
(manufacturing); and
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Suggested answer to Q2 (cont’d)

3. It would incur qualifying capital expenditure on factory, plant and

machinery in the basis period for YA 2025 in respect of its
qualifying project.

Noted that MBSB would have fulfilled the requirement of having been in
operation of not less than 36 months (3 years) after the pioneer period (or the tax
relief period for ITA).

Suggested answer to Q3

RAC Tax Consultant Sdn. Bhd.

11, Jalan USJ4/1A,
UEP Subang Jaya
47610 Selangor.

7 July 2020

The Board of Directors

MyVictory Sdn. Bhd.
No. 123, Jalan Universiti,
40000 Petaling Jaya, Selangor

Dear Sirs/Madam,

Tax incentive - Investment Tax Allowance

We understand that your company has commenced manufacturing a promoted product

and had been granted ‘investment tax allowance’ (ITA) incentive. We have the pleasure
of advising your company in respect of this tax incentive on aspects as follows:

(a) The period of the incentive

The period of the incentive is 5 years from the date of approval (by MIDA), that
is from 1 September 2019 to 31 August 2024.

(b) Qualifying capital expenditure and Non-qualifying capital expenditure

ITA can be given on qualifying capital expenditure incurred on factory /
industrial building / plant and machinery directly in use for the purpose of the
promoted product.

ITA would not be given in respect of capital expenditure incurred on plant,

machinery and living quarters that are used by the director(s) or any member of
the management, administrative or clerical staff. The land for the
factory/industrial building will not qualify for ITA.
BBFT3014/BBFT3013 ADVANCED TAXATION
Suggested answer to Q3 (cont’d)

(c) The rate of ITA and its deduction

The rate of ITA is 60% on qualifying capital expenditure incurred in the basis
period for a year of assessment. ITA will be deducted against the 70% of
statutory income from business.

(d) Exempt income RM80K

For the amount of ITA deducted, equal amount of statutory income is abated and
can be credited to an exempt account. Dividends that are paid out of this account
are tax exempt.

(e) ITA and Exempt income

The estimated amount of ITA claimable and exempt income for each year of
assessment from YA 2020 to YA 2024 are as follows:

Year of 2020 2021 2022 2023 2024

Assessment
RM’000 RM’000 RM’000 RM’000 RM’000
ITA 11,400 0 900 5,400 0
Exempt income 0 0 0 3,920

Please refer to the Appendix I.

(f) Option: Pioneer status or Investment tax allowance

If pioneer status is opted, the abated statutory income at 70% after deducting
pioneer loss brought forward RM160,000 from YA 2020 which can be credited
to the exempt account for the pioneer period in YA 2024 would be:
RM5,600,000 (SI) x 70% of SI = RM3,920,000 - RM160,000 (pioneer business
loss b/f from YA 2020) = RM3,760,000

For the investment tax allowance (ITA) opted, the amount of ITA at 60% of the
qualifying capital expenditure incurred on the factory and plant & machinery
would be RM17,700,000 (refer to Appendix I). When the ITA is fully utilized,
the amount of abated statutory income would be RM17,700,000.

Hence, it (MVSB) should not opt for pioneer status in preference to investment
tax allowance as the exempt income under ITA is higher than pioneer by
RM17,700,000 – RM3,760,000 = RM13,940,000.

We hope the above information and advice are helpful. Please do not hesitate to contact
us for any further information or clarification.

Thank you.

Yours faithfully,

Ivan Lee, Tax Consultant

RAC Tax Consultant Sdn. Bhd.
BFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q4

(a) (i) I would advise MyTask Sdn. Bhd. (MTSB) to opt for pioneer status (PS)
if it is carrying on a business of manufacturing a promoted product and
the business profits are high and qualifying capital expenditure is not
substantial at the initial years (the first 5 years). The company should
not have pioneer loss as it will affect the future year abated statutory
income (exempt income). It should not have a non-pioneer business and
pioneer business in the same company. For the abated statutory income
from pioneer business will be reduced if the non-pioneer business
suffers business losses in the current year.

(ii) I would advise MTSB to opt for investment tax allowance (ITA) if it is
carrying on a business of manufacturing a promoted product and the
business profits are expected to be low or to suffer losses and qualifying
capital expenditure is substantial at the initial years (the first 5 years
from the date of approval by MIDA). The company can have more than
one business as the business loss will not reduced the amount to be
credited to the tax exempt income account of the investment tax
allowance in the current year.

(iii) I would advise MTSB to opt for reinvestment allowance (RA) if it is

a resident company and has been in business operation for not less than
36 months, and it had undertaken a qualifying project in expanding,
automating or modernizing its manufacturing activities or diversifying
into a related product within the same manufacturing activity in the basis
period for a year of assessment.

(c) (iv) For pioneer status is given by direct exemption of statutory income from
the pioneer business at the prescribed rate of 70%.

For ITA, the incentive is given by way of allowance based on 60% of

qualifying capital expenditure incurred (in the basis period of a year of
assessment) over a period of 5 years from the date of approval by
Malaysian Investment Development Authority (MIDA). For the ITA
utilized in a YA, equal amount of statutory income (from the business
involving a promoted product) is abated / exempt.

For RA, the incentive is given by way of allowance based on 60% of

qualifying capital expenditure incurred (in the basis period of a year of
assessment) for a period of 15 consecutive years of assessment, from the
first YA in which basis period qualifying plant expenditure was first
incurred on industrial building, plant and machinery for purpose of the
qualifying project. For the RA utilized in a YA, equal amount of
statutory income (from the business involving a qualifying project is
abated/exempt.
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Answer to Q4 (cont’d)

(b) (v) The period of incentive

For pioneer status, the incentive is granted for 5 years from the date of
production stated in the pioneer certificate.

For ITA, the incentive is granted for 5 years from the date of approval
by MIDA.

For RA, the incentive is given for 15 years of assessment, from the first
year of assessment in which the basis period of the qualifying capital
expenditure on industrial building, plant or machinery was first incurred
directly in use for the purpose of a qualifying project.

(vi) The withdrawal of the tax incentive

For pioneer status, there is no provision to withdraw an exemption of
statutory income from pioneer business.

The ITA / RA granted can be withdrawn if the relevant plant/machinery

concerned is disposed of within five (5) years from the date of its
acquisition. The withdrawal is by adding an equal amount to the
statutory income for the year of assessment in which basis period it was
disposed of.

(vii) The tax treatment of the current year business loss, if any.
For pioneer status, the current year pioneer loss has to be carried
forward and it must be deducted against the abated statutory income
from the pioneer business for the subsequent YA onwards (within the
pioneer period) before crediting the abated statutory income to an
exempt income account.

For ITA, the current year business loss can be deducted against the
aggregate income from all sources (business and non-business income)
in arriving at the total income under Section 44(2). Any unabsorbed
business loss can be carried forward to subsequent YA(s) and to be
deducted against the aggregate income from all businesses under
Section 43(2).

For RA, the current year business loss is treated similarly as in the case
of ITA.