Maximising Capital Allowances for Business Growth

Capital Allowance (CA) is a tax-deductible expense that businesses can claim against their adjusted income, with the aim to reduce their tax liability. The primary purpose of CA is to encourage businesses to invest in new plant and machinery, thereby expanding their businesses and stimulating economic growth.

CA maximisation refers to the process of maximising the tax benefits that a business can claim through CA. This can be achieved by making strategic investments in building, plant and machinery by carefully managing the timing and value of these investments, and ensuring that the business is making full use of the available CA.
In addition, analysing the detailed cost breakdown of an asset (i.e. newly acquired hotel building, factory, etc.) may accelerate the CA claim of a business.

To maximise CA, it is important for businesses to have a good understanding of the tax rules and regulations that govern CA, as well as a sound knowledge of the company's own financial situation and the types of investments that are likely to generate the largest tax benefits. 

In this article, we will discuss the basics of CA, industrial building allowance (“IBA”), objectives and effects in maximising the CA of a business.

 Start with the basics

What is CA?

 In computing the adjusted income from a business source for a basis period:

• Tax deduction is not allowed on capital expenditure and accounting depreciation of assets used in generating the gross income of a business. This is due to capital expenditure and accounting depreciation of assets not being revenue expenditure.
• Accounting depreciation is not considered as a tax-deductible expense as it is merely a write off of the cost of fixed assets over a period of time. 
• However, Schedule 3 of the Income Tax Act 1967 (“ITA”) provides for a mechanism to claim tax deduction in the form of CA on capital expenditure incurred for asset acquisition. 
• The CA claim is restricted to its individual business source and cannot be used to set off against adjusted income of another business source. 
• The conditions for a taxpayer to claim CA are as follows:
  • Asset was used for the purpose of business during the basis period;
  • Incurred qualifying expenditure (i.e. plant, machinery, office equipment, etc.) during the basis period;
  • The taxpayer was the owner of the asset at the end of the basis period;
  • Asset was in use by the owner at the end of the basis period.

The CA Rates

• Initial allowance (“IA”)
  A fixed rate of 20% based on the original cost of the asset at the time when the capital expenditure was incurred.
• Annual allowance (“AA”)
  A flat rate is given every year based on the original cost of the asset. 

AA rates vary according to the types of assets and the rates are tabulated as follows:

What is IBA?

IBA is the qualifying capital expenditure incurred on the construction or acquisition of a building.

A company is allowed to claim IBA on the qualifying capital expenditure incurred for the construction or acquisition of a building if the capital expenditure is incurred for business purposes. The general IBA rates are 10% IA and 3% AA.

However, not all capital expenditure incurred for the construction or acquisition of the building qualifies for IBA. Schedule 3 of the ITA provides that such IBA should be given for qualifying capital expenditure incurred on building which is an industrial building or a special building such as the following:

• Factory
• Warehouse
• Airport
• Dock, wharf, jetty
• Hotel registered with the Ministry of Tourism, Arts and Culture
• Private hospital, maternity home and nursing home licensed under the relevant laws
• Motor racing circuit approved by the Minister of Finance
• Etc.