Capital Allowance Calculation Malaysia | Example of Capital Allowance

Capital Allowance

Capital Allowance is used as a subsidy to for the depreciation of fixed assets. Capital allowance is given to reduce the tax payable for the capital.

What is Capital Allowance?

Capital Allowance is used as a subsidy to for the depreciation of fixed assets. Capital allowance is given to reduce the tax payable for the capital.

Capital allowance is only applicable for businesses and not individuals. The nature of the capital and the purpose of the capital must be for the use of a business.

Examples of capital allowance claims and property types

Examples of claims and property types:

  • The purchase of new or second hand property.
  • The repair, refurbishment , or extension of properties like :
    • Offices
    • Retail and shopping centres
    • Restaurants
    • Factories
    • Hospitals
    • Hotels
    • Banks
    • Rental properties – apartments and houses
    • Landlord repair works

How to calculate capital allowance?

Capital allowances consist of an initial allowance (IA) and annual allowance (AA).

Initial allowance

IA is fixed at the rate of 20% based on the original cost of the asset at the time when the capital was obtained.

Annual allowance

Annual allowance is a flat rate given annually according to the original cost of the asset. The annual allowance is distributed each year until the capital expenditure has been fully written off.

Annual allowance rates depend on the types of assets. The rates are as follow:

  • Motor vehicle is 20%
  • Plant and Machinery is 14%
  • Other assets like furniture and office equipment is 10%
How to calculate Capital Allowance - SQL Account
motor vehicle-1000

Capital allowance for motor vehicle

Motor vehicle for Capital Allowance is classified into 2 categories.

  1. Passenger / private vehicle
  2. Commercial vehicle (van, lorry, and bus)
What is eligible for capital allowance?

Eligible for capital allowance:

  • Basic Accessories and registration fees which is required by the road transport department (RTD)

What is not eligible for Capital allowance but are tax deductibles are:

  • Road tax, insurance, and hire purchase interest

Not eligible for capital allowance and are non-tax deductibles:

  • Car reserve price, and tender and service fees are These are private expenses and are prohibited under Subsection 39 of the act

Qualifying expenditure for private motor vehicles: We can simplify it by splitting it into 4 categories.

  1. Used motor vehicle which cost less than RM50,000 the qualifying expenditure is full amount. [View Example 1]
  2. New motor vehicle which cost less than RM100,000 the qualifying expenditure is full amount.
  3. New motor vehicle which cost more than RM100,000 but less than RM150,000 the qualifying expenditure is RM100,000.
  4. New motor vehicle which cost more than RM150,000 the qualifying expenditure is RM50,000. [View Example 2]
For commercial vehicles, the qualifying expenditure is the total cost incurred. It is important to note that a person driving a company vehicle is subjected to Benefit In Kind. In order to fully utilize tax and operational opportunities available, businesses should conduct a cost and benefit analysis.

How to calculate Capital Allowance?

Adjusted Income X
Add: Balance Charge X
X
Less: Capital Allowance
Unabsorbed Capital Allowance b/f (X)
Current Year Capital Allowance
- Initial Allowance (X)
- Annual Allowance (X)
- Special Allowance (X)
- Balance Allowance (X)
Statutory Income X

* Any unabsorbed capital allowance will be carried forward to next year. Do note that any deduction of capital allowance is only restricted to the same business source. 

Source A Source B Source C
Adjusted Income X X X
Add: Balance Charge X X X
X X X
Less: Capital Allowance
Unabsorbed Capital Allowance b/f (X) (X) (X)
Current Year Capital Allowance

Example of Capital Allowance Calculation

Example 1: Motor vehicle with Full Amount Qualifying Expenditure

ACB SDN BHD acquired a car worth RM100,000 in 2018.

Q1: What is the maximum capital allowance allowed to claim?

Answer: RM100,000

Q2: After 2 years (2020), what is the Residual Expenditure (RE)?

Answer: RM20,000

Year 3
Qualifying Expenditure (QE) 100,000
Initial Allowance 20% (Yr 1) (20,000)
Annual Allowance 20% (Yr 1 + 2 + 3) (60,000)
Residual Expenditure (RE) 20,000

Q3: He decided to dispose his car for RM98,000 in 2020. Any Balancing Charge or Allowance?

Deemed Disposal Value = RM98,000
Since Disposal Value > RE,
Balancing Charges = Disposal Value - RE
= RM98,000 - RM20,000
= RM78,000

Answer: Balancing charges is RM78,000

Example 2: Motor vehicle with Limited Qualifying Expenditure

ACB SDN BHD acquired a car worth RM198,000 in 2018.

Q1: What is the maximum capital allowance allowed to claim?

Answer: RM50,000

Q2: After 2 years (2020), what is the Residual Expenditure (RE)?

Answer: RM10,000

Year 3
Qualifying Expenditure (QE) 50,000
Initial Allowance 20% (Yr 1) (10,000)
Annual Allowance 20% (Yr 1 + 2 + 3) (30,000)
Residual Expenditure (RE) 10,000

Q3: He decided to dispose his car for RM98,000 in 2020. Any Balancing Charge or Allowance?

Deemed Disposal Value = (Disposal Price / Purchase Price) x QE
= (RM98,000 / RM198,000) x RM50,000
= RM24,747
Since Disposal Value > RE,
Balancing Charges = Disposal Value - RE
= RM24,747 - RM10,000
= RM14,747

Answer: Balancing charges is RM14,747

Benefit of claiming capital allowance - SQL Account

Benefits of claiming capital allowance?

Claiming capital allowance is an immediate tax / cash benefit. This can help to increase your cash low and keep cash in your business. By claiming capital allowance, you also reduce you tax liability. There is not restriction on high earners for this allowance and it is not a specified relief.

Who can claim capital allowance?

Anyone who has built/ bought property or has gained a capital expenditure on a non-current asset which is used for the purpose of trade or businesses.

Who can claim capital allowance - SQL Account

Common mistakes made when claiming capital allowance:

  • Insufficient supporting documents to support your claim
  • Over-claim: incorrect inclusion of expenditures
  • Under-claim: accidentally excluding some qualified expenditures.

Effects of incorrect capital claims:

If you underclaimed you capital allowance, you loose out on the actual amount of tax savings that you are entitled to.

If you overclaimed your capital allowance, you run the risk of repayment for underpaying your taxes, penalties and also being charged for tax fraud.

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