Industrial Building Allowance & Deductible Expenses Q5

1. Factory;
2. Dock, wharf, jetty and similar building;
3. Warehouse where the business consists of the hire and storage space to the public;
4. Business of water or electricity supplyor telecommunication services to the public;
5. Used with the working of the farm with or without other farms;
6. Used with the working of a mine with or without other mines;
7. Private hospital, maternity home, nursing home licensed under any written law for the registration of private hospital, maternity home or nursing home;
8. R & D approved by the Minister;
9. R & D undertaken by a company participating in industrial adjustment programme;
10. Training undertaken by company participating in industrial adjustment programme;
11. Research by contract R&D company and R&D company defined in the Promotion of Investment Act 1986;
12. Buildings or structures used for the operation of approved services projects;
13. Hotel building which has been registered with the Ministry of Culture, Artsand Tourism;
14. Business of construction, reconstruction or improvement of any public road and ancillary structures pursuance to an agreement with the government.

A special building allowance which is 1/10 of the expenditure incurred on the construction or purchase of the building is given for the following:

1. Warehouse buildings which are used for storing goods for exports and re-export;
2. Approved industrial training, technical or vocational training and education;
3. Accommodation of employees in manufacturing business, approved services project, hotel or tourism business;
4. Providing child care facilities to employees for sectors in (c);
5. School or an educational institutions;
6. Use for industrial , technical or vocational training.

Where industrial building is in use and a building is constructed for use as living accommodation, the initial allowance of 2/5 of the qualifying expenditure is granted.; and

Business of construction of a building on a build-lease-transfer basis pursuance to an agreement with the government is granted industrial building allowance equal to 3/5 of the qualifying expenditure.

Ref:
Industrial Building Allowance, Income Tax Act 1967, available at
Ministry of Finance Website 2014: http://www.treasury.gov.my/index.php?option=com_content&view=article&id=718&lang=en

Explanation of what are industrial buildings and types of expenditures that qualify for IBA

Although not all buildings qualify for capital allowances, Schedule 3 of the Income Tax Act 1967 provides for such allowances, known as industrial building allowances, to be given for qualifying capital expenditure incurred on buildings which are or are deemed to be industrial buildings.

Schedule 3 Paragraph 63 Sch. 3 Para 63 defines the following buildings to be industrial buildings if used for the purposes of a business:

1. A building used as a factory (see below for the definition “factory”).

2. A building used as a dock, wharf, jetty or other similar building.

3. A building used as a warehouse where the business consists or mainly consists of hire of storage space to the public.

4. A building (other than those specifically excluded below) used for the business of a water or electricity undertaking, which supplies water or electricity for consumption by the public.

5. A building (other than those specifically excluded below) used for the business of a telecommunication undertaking, which provides telecommunication services to the public.

6. A building (other than those specifically excluded below) used in connection with the working of a farm where the business consists or mainly consists of the working of a farm.

7. A building (other than those specifically excluded below) used in connection with the working of a mine where the business consists or mainly consists of the working of a mine.

However, this restriction only applies to the buildings described above and it does not apply to the buildings described below which are specifically deemed to be industrial buildings.

Building for storage of goods

A building or part of a building is deemed to be an industrial building if it is used by a person solely for the purpose of:

1) storage of goods for export; or

2) storage of imported goods which are to be processed and distributed or reexported.

The allowance for this building is given at the rate of 10% for 10 consecutive years.

Buildings used for Research and Development activities

A building or part of a building is deemed to be in use as an industrial building if it is in use for the purpose of:

i. research approved by the Minister for the purposes of Section 34A(1) of Income Tax Act 1967;

ii. research approved by the Minister within the meaning of Section 34B(4) of the Income Tax Act 1967. This refers to an approved research institute or approved research company;

iii. research undertaken by a research and development company. A research and development company is a company which provides research and development services in Malaysia to its related company or to any other company; or

iv. research undertaken by a contract research and development company.

A contract research and development company is a company which provides research and development services in Malaysia only to a company other than its related company.

Hotels, airports and motor racing circuits

A building or part of a building is treated as an industrial building if it is used by a person solely for the purpose of a hotel, provided that the hotel is registered with the Ministry of Tourism.

An airport is treated as an industrial building. Capital expenditure incurred in relation to the airport includes capital expenditure incurred on the construction, reconstruction, extension, improvement or purchase of any building, runway or ancillary structures.

A motor racing circuit approved by the Minister is treated as an industrial building, and the capital expenditure incurred in relation to motor racing circuit includes capital expenditure on the construction, reconstruction, extension or improvement of that motor racing circuit or ancillary structures.

Hospitals, old folks’ homes, schools, colleges and training centres

Private hospitals, maternity homes and nursing homes are treated as industrial buildings, provided that the hospital or home is licensed or, where there is no written law that relates to registration and licensing, approved by the Director General of Inland Revenue after consultation with the Director-General of Health.

Any building used as an old folks’ care centre approved by the Social Welfare Department is treated as an industrial building.

The allowance for this building is given at the rate of 10% for 10 consecutive years.

Any building constructed or purchased by a person for the purposes of his business for a school, or educational institution approved by the Minister of Education or Minister of Higher Education or any relevant authority is treated as an industrial building. The allowance for this building is given at the rate of 10% for 10 consecutive years.

The allowance for such buildings are given at the rate of 40% initial and 3% annual as opposed to the normal 10% for initial allowance and 3% for annual allowance.

For the purpose of this provision, the “employee” excludes a director, individuals having control of the business (such as the proprietor or the controlling shareholder), and an individual who is a member of management, administrative and/or clerical staff.

Other Building eligible for IBA are:

• Buildings constructed pursuant to an agreement with­ the government.
• Buildings used for an approved service project.
• Buildings occupied by approved MSC status companies.
• Buildings occupied by BioNexus companies.
• Plant and machinery treated as a building.
• Buildings on farms may qualify as Qualifying Plant Expenditure.

It is important to take note that when expenditure on any building satisfies the criteria to be Qualifying Plant Expenditure, the taxpayer cannot opt for such expenditure to be treated as Qualifying Building Expenditure.