Chapter 2 iba


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Chapter 2 iba

  2. 2. Learning Outcomes Definition of Industrial Building Determination Qualifying Building Expenditure (QBE) – Constructed Building – Purchased Building Person eligible to claim IBA Types of Industrial Building Allowance • Initial Allowance • Annual Allowance Temporary Disuse of Industrial Building Disposal of Industrial Building – Balancing Charge – Balancing Allowance 2
  3. 3. Introduction 1  A taxpayer who has incurred expenditure on the construction or purchase of a building, which is used for his business is entitled to claim Industrial Building Allowance (IBA).  IBA is deducted from the adjusted income in arriving at the SI of a business.  Para.75 (Sch. 3) – any IBA that cannot fully absorbed in a YA can be carried forward for subsequent YA until fully absorbed. 3
  4. 4. Meaning Of Industrial Building 1  Section 2, ITA 1967 defines building is any structure erected on land (not being plant and machinery). • Schedule 3, para 63 specifies the types of building that qualify as an industrial building. • Types of industrial building : – Used as a factory – Used as a dock, wharf, jetty or etc – Used as a warehouse – Used in the water, electricity and telecommunication – Used in the working of a farm – Used in the working of a mine (page 465-477) 4
  5. 5. Meaning of Factory 1  Para 64, defines factory as to include a mill, a workshop and a building for the housing of plant and machinery.  Besides that, factory also include a building (within same cartilage as a building which is used as a factory) used for storage of raw material, fuel or stores necessary for the manufacture as well as a finished product before it has been sold.  Internal road, car parks, fences and bridges in same compound – industrial building.  Workshop used for repairing goods which is incidental to a business of selling those goods – NOT considered as industrial building. 5
  6. 6. 1 Example 1: Hi Five Sdn. Bhd is an authorized distributor of electrical equipment. The company has its own workshop to carry out their repair jobs for its customers. Will the w/shop be considered as industrial Building? 6
  7. 7. Meaning Of “Within The Same Cartilage” 1 A building attached or adjacent to or within the same enclosure as the other building. Example 2: Mesra Bhd. is a manufacturing company. The factory is located at Klang. The warehouse to store raw materials is within the same compound as the factory. But the warehouse for finished product is located at Kajang. Are BOTH warehouse is considered as IB? Answer: ONLY warehouse in Klang considered as IB as it is within the same curtilage as factory. 7
  8. 8. 1 Example 3: Quicksave Bhd. is a retailing business company. It constructed a warehouse adjacent to its supermarket building. Can the company claim the warehouse as an industrial building? Answer: 8
  9. 9. Public Road and Ancillary Structures (Para 67A) 1  Where pursuant to an agreement with government – a person incurs capital expenditure on the construction, reconstruction, extension or improvement of any public road and ancillary structures which is recoverable through toll collection, such exp. Is eligible to claim IBA.  Initial allowance is at 10% whilst the annual allowance is 6%. 9
  10. 10. Non-industrial Building 1 • Under Para. 65(3) of Sch. 3 ITA 1967, building used for the following purposes are NOT treated as industrial buildings: – Dwelling house [not being for accommodation of the kind mentioned in Para. 42 and 65(2)] – Retail shop – Showroom – Office 10
  11. 11. Part Of Building Used As IB (Para 44 & 66) 1  Where part of the building or extension of a building is used as industrial building and the other part of the building is not used.  Rule: Application of 1. 10% rule using cost of construction or 2. 10% rule using the floor space area  Then, if the capital exp. incurred on the construction of the non-qualifying part does not exceed 10% of the total cost /space of the whole building, so the whole building qualifies as industrial building. (Para 66)  If the construction cost of non-qualifying part exceeds 10% of total cost/space incurred of the whole building, then only part of the such building is qualify for IBA. 11
  12. 12. Example 4: Modern Furniture Bhd. Incurred an expenditure of RM400,000 of a construction of a factory to produce furniture. The factory space included an admin office, costing RM50,000. Factory building space 100,000 sq ft included 12,000 for admin. a) Application of 10 % rule using cost of construction. b) Application 0f the 10% rule using the floor space area. Answer 12
  13. 13. Answer 13
  14. 14. Qualifying Building Expenditure (Para. 3, Sch. 3) 2  Qualifying Building Expenditure (QBE): – Cost of clearing the site – Cost of demolition any old building from the site where the new building is to be sited. It MUST not be an industrial building – Architect fee on the design of the building – Cost of preparing the various plans for the purpose of obtaining approval from authorities – Interest expense on loan borrowed to construct the building till its completion – Actual costs of the construction – Incidental costs of the construction (plumbing, electrical, drainage) – Installation of fittings that form part of the building – Alterations and additions of a capital nature to an existing building – Other expenditures to an existing industrial building which will not qualify as revenue expenses or as repairs & maintenance – Professional charges relating to the building (i.e legal fees) 14
  15. 15. Constructed Building 2  The qualifying building expenditure includes: • Cost of construction of building • Subsequent capital expenditure on construction, extension, alterations and renovations • Initial repairs (which enhance the value) of the building.  Expenditure not qualifying for IBA:  Cost of the site/land  Expenditure connected to the acquisition of the land  Professional charges connected to the acquisition of the land  Cost of demolition an existing industrial building  Page 481-482 15
  16. 16. Plant and machinery: deemed IB 2  In the case where capital expenditure incurred on preparing, cutting, tunnelling or levelling land for purpose of installing plant and machinery exceed 75% of the aggregate cost of plant and machinery and the cost of installation, the total cost will be treated as an expenditure on a building. (para 67)  If the building qualify as an industrial building, then it will qualify for IBA.  Hence, the plant and machinery will not qualify for capital allowance.  Refer Example 12, 479 16
  17. 17. Example 5: Mari Masak Sdn Bhd inccured the following expenses for the financial YE 31/5/2011 in relation to its manufacturing business: Cost of plant and machinery installed in a factory RM85k Cost of preparing, cutting and levelling land to prepare a site for installation RM260k Determine the QBE. Answer 17
  18. 18. Example 6:  Star Bhd. Incurred the following expenditure to construct a factory: – Cost of land RM280,000 – Legal fees for acq. of land RM6,000 – Cost of approving plan RM15,000 – Construction cost RM180,000 – Cost of demolishing an old factory RM35,000 2  Required: Determine the QBE for the factory 18
  19. 19. 2 Answer: QBE for the factory: – Cost of approving plan – Construction cost RM15,000 RM180,000 RM195,000 19
  20. 20. Purchased Industrial Building 2  Prior t year of assessment 2005, to determine the qualifying building expenditure (QBE) for purchase building, we applied either Para. 4 or Para 5.  Effected from year of assessment 2005, in the case of a purchased building, the purchase price will be taken as the qualifying building expenditure (QBE). 20
  21. 21. Qualifying Building Expenditure (Para. 3, Sch. 3) 2 Purchase Building – The QBE depends on whether the building was in use as an industrial building or not within one month before the purchase. 1) Purchased building in use within one month of purchase (Para 4) – The QBE incurred by the purchaser on building shall be either the lower between: » The purchase price » The RE at the date of the purchase plus taxable BC of vendor. 21
  22. 22. Example 7: Mesra Bhd. is a manufacturer, incurred RM160,000 to construct a building on 1 May 2008. The building was used as a factory until 1 Sept. 2012 when it was sold to Budi Bhd. for RM135,000. Both adopt 31 Dec as their accounting date. Mesra Bhd. YA 2008 QBE IA (10% ) AA (2%) RE 2 RM160,000 (RM16,000) (RM3,200) RM140,800 22
  23. 23. YA 2009 AA (2% x 160,000) RE YA 2010-2011 AA (3%x160,000x2yrs) RE YA 2012 Disposal value Bal. charge (RM3,200) RM137,600 (RM9,600) RM128,000 (RM135,000) RM7,000 23
  24. 24. 2 2) Not used as industrial building within one month before the purchase (Para 5, Sch. 3) The QBE incurred by the purchaser on building shall be either the lower between:  The purchase price  The cost of construction less all allowances including Notional allowance given if the building had been used as industrial building from the date of construction to the date of purchase. 24
  25. 25. Example 8: Jaya Bhd. constructed a building in 1997 at a cost of RM600,000. It was not used as industrial building. On 12 August, 2002, the building was sold to Melati Sdn. Bhd for RM510,000. Melati Sdn. Bhd is a manufacturing company and it uses the building as a factory. The accounting dates for both company are 31 December. 2 Answer: 25
  26. 26. Discussion 2 Purchase price RM510,000 OR Cost of construction RM600,000 Less: Notional allowance (YA 97-02) (2% x RM600,000 x 5) RM 60,000 RM540,000  Since the lower is the purchase price, thus QBE to Melati is RM510,000. 26
  27. 27. Date Of Expenditure Incurred 2  Expenditure on the construction of a building is deemed to be incurred on the day in which the building is completed.  In the case of a business that is about to commence, any expenditure incurred before the commencement of the business – deemed to have been incurred on the day the business commenced. 27
  28. 28. Example 9: Lighting Sdn Bhd manufactures light bulb, construct a building and completed on 15/9/2011. They commenced trading on 1/2/2012 (Year ended 31/12). When the company can claimed the QBE? Answer 28
  29. 29. Person Eligible To Claim IBA 3  To qualify for IBA, a person must qualify three conditions: – Must have incurred capital expenditure on the construction of building (including reconstruction and rebuilding). – The building must be industrial building. – Must be in use for the purpose of business.  In the case where a person who owns a building grants a lease and that building is used as an industrial building by lessee – then the lessor is eligible to claim IBA (para. 60). 29
  30. 30. Example 10: Steven Park constructed a building at qualifying exp. of RM3.2m. It leases the building to Jaya Bhd. who uses the building as a factory. Later, Jaya Bhd incurred RM200,000 to build another building at the leased building. The second building is used as an electricity power supply station for factory. 3 Answer: 30
  31. 31. 3 Relevant interest (para. 49 -51) Interest in the building to which the person who incurred the expenditure was entitled to when he incurred the said expenditure. May refer to page 484 – 485 (example 14,15) 31
  32. 32. Initial Allowance (Para. 12 & 13) 4  Initial Allowance (IA) is given for the year in which the expenditure was incurred if: – The building was owned at the end of the basis period. – Be the owner of the building at the end of basis period. – The building is used or about to be used as ind. building at the end of basis year.  If the building was disposed off in year in which it was constructed or purchased, the person will still qualify for IA if it was used as IB at some time before the disposal. 32
  33. 33. 4 Constructed Building The rate for Initial Allowance (IA) is 10%. Purchased Building A person who purchase an industrial building does not qualify for IA (prior YA 2002). However, for building fall under Para. 3A, the purchaser entitle to claim IA. 33
  34. 34. Annual Allowance (Para. 16 & 17) 4  An annual allowance (AA) will be given to a person who: – has incurred QBE on the construction/purchase of industrial building. – is the owner of the building at the end of basis period. – the building was in use as industrial building for the purpose of a business.  Constructed Building – The rate of annual allowance is 2% on a straight line basis. – However, with the effect of YA 2002, the rate is 3% on a straight line basis. 34
  35. 35. 4 Purchased Building The rate is based on permitted fraction prior to YA 2002. However with the effect from YA 2002, annual allowance is based on permitted fraction or 3% of QBE, which ever is higher. Refer Choong Kwai Fatt ( additional references) 35
  36. 36. Permitted Fraction 4 Formula for permitted fraction: – Year of assessment of construction of the building was completed xxx – (+) 50 yrs xxx – (-) Year of assessment the building was purchased (xxx) xxx – (+) 1 yr xx_ 36
  37. 37. Example 11: Satellite Bhd constructed an industrial building on 1/1/95. In 2001, it sells the building to Settle-it which also uses it as an IB. Compute the permitted fraction which will be used by Settle-it for claiming annual allowance. YA – construction + 1995 50 yrs 2045 (- ) YA - purchased (2001) 44 + 1 yr 45 The number of years from YA2001 to YA2045 = 45 37
  38. 38. Special Allowance (Construction Building) 4  The taxpayers is not entitled to an initial allowance in the case of buildings provided as living accommodation for employees in the manufacturing, hotel or tourism sector or in an approved service project and other.  Special allowance of 10% in the basis for the year of assessment. 38
  39. 39. Temporary Disused (Para. 56 & 57) 5  An industrial building which is temporarily disused shall deemed to be in use for the purpose of the business if: – It was in use immediately before becoming disused – During the period of disuse, it is constantly maintained in readiness to be brought back into use.  Therefore in this case, the building is eligible for annual allowance, otherwise there will be no annual allowance given. 39
  40. 40. Balancing Charge & Balancing Allowance (Para. 33 To 37) 6  When person disposes of an Ind . Building, a balancing adjustment can arise.  Where RE exceeds its disposal value – balancing allowance: [RE > Disposal value]  Where its disposal value exceeds RE– balancing charge: [RE < Disposal value]  Balancing charge imposed cannot exceed the total IBA actually given to the seller. 40
  41. 41. Meaning Of Disposal (Para. 48) 6  The act defines disposal as: – The sale, transfer or assignment of the relevant interest in the building. – The termination of concession. – The demolition or destruction of the building – The building ceases to be used as industrial building. 41
  42. 42. Meaning Of Disposal Value (Para. 62) 6  Where a building is disposed of, its disposal value will be: – The market value at the date of the sale, transfer or assignment or – The net proceeds of the sale, transfer or assignment, whichever is greater.  Where a building is destroyed or demolished, the disposal value will be: – The compensation or insurance recovery received or – The market value, whichever is greater. 42
  43. 43. Building Owned For Less Than Two Years 6  When a person incurred qualifying expenditure in respect of an industrial and it owned for less than two years, the DG may direct that no allowances shall be given.  If allowances have already been given, they shall be withdrawn by imposing a balancing charge in the year of disposal. 43
  44. 44. Other Issues 6  Building constructed for Government use (para. 67B, 16A, Sch 3):  Initial allowance of 10%  Annual allowance of 6% Given against the lease income from the Government. Example 12: TCD, a property developer company enter into Built-lease transfer contract with Malaysian Government in 2005 to construct an Office Complex in Putrajaya. The MoF approved that construction qualify as IB. The complex was completed in 2008 and was leased to the Government on 1.1.2009 for a lease rental of RM200,000 per month for 20 years. The QBE was RM3.5mil. On 1.2.2010, Malaysian Gov made a compensation of RM800,000 to TCD. Compute the IBA for YA2009 & 2010 (YE 31/12) 44
  45. 45. Answer: QE YA2009 IA AA RE YA2010 AA RE 3,500 10% 6% (350) (210) 2,940 Compensation (800) 2,140 (2010) 6% x 3,500 (210) 1,930 45
  46. 46.  Qualifying renovation or refurbishment expenditure (para. 8A, 32A): page 496, example 23  Renovation or refurbishment expenditure on a business premises is capital expenditure which is not taxable.  However, is the building use for business during 10.3.2009 to 31.12.2010 shall be given allowances of 50% in that year and 50% the following year but restricted to RM100,000. 46
  47. 47. THANK YOU Q&A???? AMR2011/2012 47