Important Circular
Dear Value Clients and Associates
The following Public Rulings have been issued by the IRB recently:
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Public Ruling 10-2014 – Special Allowances for Small Value Assets (Issued 31 Dec 2014) Replaces PR 1-2008 (Issued 27 Mar 2008)
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Objective
Explains the special allowances (SA) accorded to small value assets (SVA).
Special Allowances for SVA under Schedule 3 of Income Tax Act 1967 (ITA)
The following table summarizes the contents of the PR relating to the claim of the SA for SVA under paragraph 19A of Sch. 3 of the ITA:
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Para No.
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Summary
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Para 4
Small Value Assets and the SA
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- SVA means plant or machinery used for a person’s business where the QPE of the asset is not more than RM 1,300 (RM1,000 prior to YA 2015), but does not include assets that have an expected life span of not more than 2 years.
- The rate of allowance for SVA is 100% of QPE incurred. The maximum amount of the SA which may be claimed is restricted to RM13,000 (RM10,000 prior to YA 2015) for a year of assessment. Any amount of QPE in excess of RM13,000 qualifies for capital allowance (CA) under para. 10 and 15 of Sch. 3 of the ITA, at normal rates. The claim for the SA is subject to general requirements for claim of CA as provided under Sch. 3 of the ITA.
- A person is given an option to claim the SA for SVA under para. 19A of Sch. 3 of the ITA, or normal CA under para. 10 and 15 of Sch. 3. If he elects for the latter, then normal rates must be consistently applied until total QPE is fully deducted. If he elects to claim the SA for SVA, he is not entitled to any claim under the latter provisions.
(Refer to Example 1 in the PR.)
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Para 5
SA for Small & Medium Companies
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- Small and medium companies (SMC) generally are not subjected to the restriction on the total amount of the SA claimed on SVA for a YA.
- SMC are companies resident in Malaysia which have paid-up capital in respect of ordinary shares not exceeding RM2.5 million at the beginning of the basis period for a YA.
(Refer to Example 2 in the PR.)
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Para 6
Restriction on the SA for certain SMC
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- The restriction on the total SA claimed would still apply to SMC where more than 50% –
o of the paid-up capital of the company’s ordinary shares are owned directly or indirectly by a related company; (Refer to Example 3 in the PR.)
o of the paid-up capital of the related company’s ordinary shares are owned directly or indirectly by the company; (Refer to Example 4 in the PR.)
o of the paid-up capital of the ordinary shares of the company and its related company are owned directly or indirectly by another company (Refer to Example 5 in the PR.)
- For purposes of above, share ownership (direct or indirect) is determined at the beginning of the basis period for a YA and shall be determined up to the level of the ultimate holding company. (Refer to Example 6 in the PR.)
- If shares are owned by an entity which is not an incorporated company, (e.g. an individual), the company is entitled to claim the SA without any restriction. (Refer to Example 7 in the PR.)
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Para 7
Person not eligible
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- The following persons are not eligible to claim the SA:
o A business trust or special purpose vehicle established for the purposes of asset-backed securitization in a securitization transaction approved by the Securities Commission.
o A person who has made an election to claim CA under para. 10 and 15 of Sch.3 of the ITA.
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Para 8
Hire-Purchase Assets
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- SVA acquired on hire purchase do not qualify for the SA, but qualify for normal CA.
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Para 9
Disposal of SVA
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- The disposal of SVA on which the SA has been claimed may give rise to a balancing charge in accordance with the provisions of para. 35 of Sch. 3, subject to the limit imposed under para. 37.
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Para 10. Record Keeping
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- Proper records must be kept to distinguish assets given the SA from those given normal CA.
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Public Ruling 12-2014 – Qualifying Plant and Machinery for claiming Capital Allowances (Issued 31 Dec 2014) Replaces PR 2-2001 (Issued 18 Jan 2001)
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Objective
Explain when an asset is a qualifying plant and machinery (QPM) for the purpose of claiming capital allowances (CA) in determining statutory income from a business.
Capital Allowances under Schedule 3 of the Income Tax Act 1967 (ITA) and subsidiary laws
This PR focuses on the principles of law in determining whether an asset qualifies as Qualifying Plant & Machinery (QPM).
The following is a summary of the contents of the PR:
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Para No.
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Subject and Summary
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5
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Types of assets and rates of CA
The prescribed rates of initial allowance (IA) and annual allowance (AA) under Sch. 3 of the ITA and P.U.(A) 52/2000 are as follows:
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Category of QPM
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IA (%)
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AA (%)
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Heavy machinery, motor vehicles
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20
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20
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Plant and machinery (P&M)
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20
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14
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Others
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20
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10
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There are no specific guidelines in classifying heavy machinery. In general it is determined by the nature of its usage. Heavy duty machinery such as cranes, bulldozers, excavating equipment and other similar machinery are considered as heavy machinery. For the above purposes, the category of heavy machinery excludes imported heavy machinery as provided in P.U. (A) 474/1997.
Motor vehicles include all types of vehicles that are powered by motors or engines such as cars, vans, motorcycles, aircrafts and boats. They may be categorized into (1) commercial vehicles (licensed vehicles used for business purposes) and (2) non-commercial vehicles which are not for commercial use.
General P&M does not fall under the above 2 classes of assets. Examples are compressors, elevators and laboratory equipment.
Office equipment and furniture and fittings fall under the category of “Others”.
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6
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Definition of P&M
A definition of P&M is not provided in the ITA but is guided by case law principles of precedent cases.
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7
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What is “Plant”?
In general, a plant is whatever equipment used by a person for carrying on his business but does not include stock- in- trade. The following are tests used to determine whether an asset is a plant:
1. Functional test
An asset is regarded as a plant if it meets the test of functioning as a tool which needs to be used in carrying on the business. The following examples of assets that qualify are provided in the PR:
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Example
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Assets that qualify as plant
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1
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Floor mats used in the business of company that provides floor mat renting service.
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2
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Antiques purchased by a company for exhibition in its museum. Tickets are sold to the public for entry into the museum.
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3
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Mannequins used in the business of a company that has several clothing and accessories boutiques in a shopping complex.
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4
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Assets used in the business of a company that carries on the business of operating a mini zoo (display of animals and birds in cages, etc.), such as aviaries and cages; aquariums including blower piping, over flow piping, drain piping and rocket multi stage water filtration system; watertank and fiber glass tank filter; pump.
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5
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Decorative assets installed in a hotel to attract customers to visit and stay in the hotel (e.g. decorative lights, paintings and sculptures). The decorative assets create an ambiance which is an important factor to attract customers to stay and dine in the hotel.
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6.
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A generator mounted on a telecommunication tower owned by a company whose source of business income is the rental from the lease of the tower to a telecommunication company. The generator is for transmitting telecommunication signals for the use of the telecommunication company.
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2. Premise test
An asset that is used as a premise or a setting within which a business is carried on is not eligible for CA. The following are examples from the PR, of assets that do not qualify as plant:
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Example
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Assets that do NOT qualify as plant
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7
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A ship which has been renovated and used as a restaurant.
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8
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Assets/infrastructures used in horse racing clubs such as grandstand, race track and stables.
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9
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Turfing and grass for the golf course of a company in the business of property management and golf resort
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10
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Artificial grass for an indoor football field used in the business of renting out the football field.
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11
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Training ground for driving lessons used by students taking driving lessons.
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12
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Infrastructure and training facilities provided by the operator of a training camp for team building activities (e.g. camp site, access roads, office building, etc.).
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13
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Lighting for clothes display, flooring with trendy tiles etc. used by the same company as in Example 3.
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14
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Electrical and water installation system including underground cable for office building of the same company as in Example 4. However, electrical and water installation system which are part and parcel of a plant and machinery which cannot be separated would be considered as plant (refer to examples in Example 14).
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15
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Statues placed in a place of worship used for the purpose of worship owned by a company operating a business of selling praying materials such as joss sticks, candles etc.
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8
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Other assets
The following are examples of assets that qualify / do not qualify as plant:
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Example
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Assets that qualify as plant
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16
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Demountable office partition that can be moved and relocated easily and it can be proved that it does not form an integral and fixed part of the permanent structure of the building.
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17
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A cabin which functions as a building, if it is used as living accommodation for workers working on a farm and other agricultural pursuits. *
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18
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Building built specifically for swiftlet farming.*
*Treated as plant under paragraph 2(1)(c) of Sch. 3 of the ITA.
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QE incurred on the costs of provision of computer software which are software systems or software packages as specified in the Schedule in P.U.(A) 358/2008 and P.U.(A) 217/2014 are eligible for CA.
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Example
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Assets that do not qualify as plant
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19
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Transportable camp and cabin in general. They are normally used as an office, store, laboratory, canteen and living accommodation for workers at or near to the construction site.
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20
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Payment for developing software such as consulting fees, right to use the software such as licence fee and other incidental charges as these are not part of the cost for the provision of computer software.
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21
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Cattle reared by a company engaged in breeding dairy cattle for sale (trading stock of the company).
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22
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Core deposit and credit card customer databases owned by a financial institution.
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Other Public Rulings issued and not summarised in our Alerts (since our last update on Public Rulings [SE Lai Alert 5-2014])
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Public Ruling
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Subject Matter
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Issue Date
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6-2014
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Taxation of Foreign Management Company
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4 Sept 2014
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7-2014
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Taxation of Unit Trust (Part II)
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4 Nov 2014
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8-2014
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Basis Period of Company, LLP, Trust Body, Co-Operatives
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1 Dec 2014
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9-2014
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Private Retirement Scheme
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24 Dec 2014
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11-2014
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Forest Allowances and Expenses relating to Timber Extraction
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31 Dec 2014
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1-2015
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Club, Association or Similar Organisation
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12 Jan 2015
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Note:
PDF copies of the Public Rulings 10-2014 and 12-2014 are attached for your kind attention and reference.
Other Public Rulings can be assessed from the LHDN website (under [Laws & Regulations / Public Rulings])
Relevant explanatory notes are extracted from technical alerts issued by the Chartered Tax Institute of Taxation, where applicable
Please do not hesitate to contact us should you require clarifications on the above.
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2 February 2015
