If you run a business in Malaysia, understanding the Malaysia Capital Allowance (Sch 3 ITA) is crucial. Capital expenditure and depreciation are not deductible, but businesses can claim Capital Allowance (CA) as tax relief.
1. What is Capital Allowance?
- Capital expenditure on asset acquisition is not tax deductible.
- Depreciation under accounting is replaced with Capital Allowance under tax rules.
- Governed by Schedule 3 ITA, deductible against adjusted income.
- Only applicable to business income sources.
2. Key Features of Capital Allowance
- Restricted to aggregate adjusted income.
- Excess (unabsorbed CA) → carried forward to next YA.
- Deduction restricted to same business source.
- IA (Initial Allowance): claimed in 1st year / year of disposal.
- AA (Annual Allowance): claimed yearly until disposal, but not in disposal year.
- Notional Allowance: applies when asset not in use, reduces residual expenditure only.
3. Qualifying Conditions
Capital Allowance is claimable if:
- Business is carried on.
- Incurred qualifying plant/building expenditure.
- Asset is used in business (not private).
- Life span > 2 years.
- Taxpayer is asset owner at basis period end.
- Applies to plant hire businesses.
4. Qualifying Plant Expenditure (QPE)
Includes:
- Machinery/plant used in business.
- Alteration of building for installation.
- Site preparation (≤10% of cost, else becomes QBE).
- Fish ponds, animal pens, cages, chicken houses.
- Excludes living accommodation for directors/shareholders.
3 Tests: Functional Test, Premise Test, Moveable vs Immovable.
5. MFRS 116 (Recognition of PPE)
Asset cost includes:
- Purchase price, import duties, non-refundable taxes.
- Direct costs to bring asset into use.
- Initial dismantling/restoration costs.
6. Special Rules for Used Plant & Machinery
- Para 2A: Non-business use → QPE = Market value on business use date.
- Para 2C: Brought from overseas → QPE = Lower of market value or NBV.
👉 No Initial Allowance; only AA claimable. - Adjust QPE for foreign exchange difference.
Capital Allowance Rates
| Asset Category | Initial Allowance | Annual Allowance |
|---|---|---|
| Heavy Machinery and Motor Vehicles | 20% | 20% |
| Plant and Machinery | 20% | 14% |
| Others | 20% | 10% |
7. Small Value Assets (SVA)
- 100% CA claim allowed if ≤ RM2,000 per asset.
- Max RM20,000 for non-SME.
- No restriction for SMEs.
📌 Key Takeaways
- CA replaces depreciation for tax purposes.
- IA claimable in 1st year; AA yearly until disposal.
- QPE includes machinery, site prep, structural improvements.
- Excess CA carried forward.
- SMEs enjoy unlimited SVA claims.
FAQ on Malaysia Capital Allowance
Q1: Can private-use assets claim Capital Allowance?
No, assets must be used for business purposes.
Q2: What happens if asset is idle?
A notional allowance applies, reducing residual expenditure.
Q3: Are foreign-bought assets eligible?
Yes, but QPE is based on lower of market value or NBV, with no IA claim.
Q4: Is there a benefit for SMEs?
Yes, SMEs have no restriction on Small Value Assets claims.
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