Capital Allowance 1 Q3

Thomas Sim PEA2066

Q.
a. Capital allowance is an allowance allowed by the Inland Revenue Board to replace the fixed asset depreciation from the gross business income. Explain two (2) following components of capital allowances.

i. Initial allowance
ii. Yearly allowance
(10 marks)

b. Income arising from property, movable or immovable, situated in Malaysia is taxable under section 4(d) of the Income Tax Act 1967. Rental income has always been considered as a non-business source.

Using appropriate examples, explain what the deductible expenses from rental income are.
(15 marks)

(25 marks, 2011 Q3)

A.
a.

Capital Allowance : General
[In accounting, a purchase of vehicle is recorded as increase in fixed asset and not recorded as expense. The depreciation of the vehicle is charged to the value annually, and thus reduces the asset value over time. In taxation, the outgoing to purchase of fixed assets is given allowance to reduce business income (not available for deduction in individual tax) and they are divided into Initial Allowance and Annual allowance]. The law is Schedule 3 of the Income Tax Act 1967 and it has laid down several allowable deductions in the form of allowances, for the capital expenditures that have been incurred.
 
Capital allowance is only given to business activity. The person who has the right to claim capital allowance is the person who has expended on the purchase or acquisition of the said asset. Examples of assets that are used in business are motor vehicles, machines, office equipments, furniture, etc.
Claims for capital allowance can be made in the relevant column provided in the Return Form.
 
Capital Allowance : Type and Rate
 

Type Of Asset

 
Initial Allowance (%)
Annual Allowance (%)
Heavy Machinery / Motor Vehicle
20
20
Plant and Machinery
20
14
Computer and ICT Equipment
20
40
Others
20
10
 
Notes :
  1. Heavy Machinery - Bulldozers, cranes, ditchers, excavators, graders, loaders, rippers, rollers, rooters, scrappers, shovels, tractors, vibrator wagons and so on. 
  2. Motor Vehicles - All types of motorized vehicles such as motorcycles, aeroplanes, ships and so forth. 
  3. Plant and Machinery - General plant and machinery not included under heavy machinery such as air conditioners, compressors, lifts, laboratory and medical equipment, ovens and so forth. 
     
  4. Others - Office equipment, furniture and fittings. 
  5. In the case of motor vehicles, other than a motor vehicle licensed by the appropriate authority for commercial transportation of goods or passengers, the qualifying plant expenditure incurred shall be limited to a maximum of RM50,000 only. 
    Motor vehicles which are licensed for commercial transportation of goods or passengers such as lorry, truck, bus, mini bus, van, etc, are not included in those restrictions. 

     

    Nevertheless, starting from year of assessment 2001, the limitation amount for qualifying plant expenditure for motor vehicle, other than a motor vehicle licensed by the appropriate authority for commercial transportation of goods or passengers, which is bought on or after 28/10/2000, has been increased from RM50,000 to RM100,000 on condition :- 

     

    1. The motor vehicle bought is a new motor vehicle, and 
       
    2. The on the road purchase price does not exceed RM150,000.
    Ref:
    Lembaga Hasil Dalam Negeri at http://www.hasil.gov.my/goindex.php?kump=5&skum=1&posi=6&unit=1&sequ=1.