Capital Allowances in Malaysia and Their Impact on Taxation
Taxation is one of the most gruelling tasks in business. Aside from the tax laws continually updating, it also has many inclusions and exclusions you have to remember. As such, it is always good to research and update your knowledge about business taxation.
This article talks about capital allowances in Malaysia. It also aims to help business owners understand the concept of capital allowances in Malaysia and their impact on taxation. This is primarily to help small and starting businesses in easing through their tax filings and payments.
What Are Capital Allowances in Malaysia?
As in any regular taxation, individuals and businesses can claim allowable deductions from their taxable income. One of these deductions is the capital allowances in Malaysia. Capital allowances, specifically, are capital purchases like the acquisition of land and building that can be claimed as tax deductions.
Capital allowances in Malaysia are, therefore, deductible expenses. Companies can claim capital allowances on most asset purchases that are for use in business. Other eligible capital expenditures include plant and machinery, motor vehicles, and research and development of computer software packages.
Further, the capital expenditure must match the law’s conditions to qualify as allowable capital allowances in Malaysia. Firstly, the party claiming the allowance must be operating a business. Therefore, purely employed individuals cannot claim capital allowances.
Secondly, the capital expenditure must be a purchase or creation of business assets to be used in the business. As such, the acquisition of machinery for resale does not qualify as a capital allowance. Furthermore, the acquisition of non-durable items like office supplies does not qualify as capital allowances. Leasing of items, land, structures, and entertainment is also ineligible to claim capital allowances.
These capital purchases are classified. Each category will indicate whether the specific capital allowance can be claimed in full or in partial. It shall also specify whether such capital allowance is deductible in one year or for several years.
Computation of Capital Allowances
The computation of capital allowances depends on the category of capital asset purchase. The main categories of capital allowances include industrial buildings, plants, and machinery. Tax tables for the specific tax rates of specific capital allowances are available for ease of computation.
Small value assets with values not exceeding RM 2,000 are eligible for 100% capital allowance. However, the total capital allowance of all small-value items is capped at RM 20,000. General rates for the allowance of industrial buildings are 10% initial allowance and 3% annual allowance.
The capital allowance can either be calculated using the annual investment allowance (AIA) or the first year allowance. This depends on the asset and what method of computation is assigned to it.
Most assets are eligible for the annual investment allowance. Here, the business can claim the full cost of the asset as a deduction. Most forms of plants and machinery qualify under the AIA. Main exceptions include ordinary cars and plant and machinery purchased during the company’s last trading period.
On the other hand, the first-year allowances give starting businesses the chance to offset piling costs within the first year. A business can claim the first year allowance in addition to the AIA. This capital allowance is an incentive to encourage business owners to invest in energy-efficient equipment.
Easier Tracking of Capital Allowances
Keeping track of business expenses is crucial, most especially for taxation purposes. As expenses are generally deductible from taxable income, keeping proper track of them helps pay the right amount of taxes.
Do you need professional assistance and guidance on how to track and plan your taxes properly? 3E Accounting Malaysia is here to assist you with your tax needs. We offer Malaysia tax planning services to help guide your business through the complex tax system. Contact us today to get in touch with our tax experts.