## Question 3 Solution ### a. Compute XYZ Berhad’s Capital Allowance (CA) under Schedule 3 for Year of Assessment 202 #### **Step 1: Identify Qualifying Expenditure (QE)** **Only certain expenditures qualify for capital allowance** under Malaysian tax law (Schedule 3 of the Income Tax Act). Generally, QE includes costs incurred for: - Constructing/Acquiring industrial buildings (factory, storage, etc.) - Plant and machinery used for business - Excludes: Cost of land, stamp duty, legal fees on land purchase, living quarters for administrative staff, etc. #### **1. Industrial Building Allowance (IBA)** **Qualifying Expenditure:** | Description | Amount (RM) | Include as QE? | |----------------------------------------------|------------|--------------------| | Factory | 300,000 | Yes (Industrial) | | Storage building (for finished products) | 54,000 | Yes (Industrial) | | Canteen and restrooms | 36,000 | Yes (Industrial) | | Living quarters for factory worker | 90,000 | Yes (Industrial) | | Living quarters for admin staff | 120,000 | **No** | | Legal charges on contract (for construction) | 10,000 | Yes (Industrial) | | Architect fees (for building) | 20,000 | Yes (Industrial) | **Total Qualifying Expenditure (QE) for IBA:** ``` = 300,000 + 54,000 + 36,000 + 90,000 + 10,000 + 20,000 = RM 510,000 ``` *(Living quarters for admin staff is NOT qualifying.)* #### **2. Plant and Machinery Allowance** - **Machinery (purchased Jan 202):** RM800,000 - **Cutting and levelling land (preparing site for machinery installation):** RM75,000 (to be included as part of machinery QE) **Total QE for Plant and Machinery:** ``` = 800,000 + 75,000 = RM 875,000 ``` #### **Step 2: Compute Capital Allowance for YA 202** #### **Industrial Building Allowance (IBA):** - **Initial Allowance:** 10% - **Annual Allowance:** 3% **Since the building was put to use in March 202 (same YA), both allowances are claimable in YA202.** | Description | QE (RM) | Initial (10%) | Annual (3%) | Total CA 202 | Residual value c/f | |---------------------|---------|---------------|-------------|--------------|--------------------| | Industrial Building | 510,000 | 51,000 | 15,300 | 66,300 | 443,700 | --- #### **Plant & Machinery Allowance:** - **Initial Allowance:** 20% - **Annual Allowance:** 14% - *Machinery used from March 202.* | Description | QE (RM) | Initial (20%) | Annual (14%) | Total CA 202 | Residual value c/f | |----------------------|---------|---------------|--------------|---------------|--------------------| | Plant & Machinery | 875,000 | 175,000 | 122,500 | 297,500 | 577,500 | --- #### **Summary Table** | Asset Type | QE (RM) | CA 202 (RM) | Residual Expenditure c/f (RM) | |--------------------|---------|--------------|-------------------------------| | Industrial Building| 510,000 | 66,300 | 443,700 | | Plant & Machinery | 875,000 | 297,500 | 577,500 | --- ### b. **Treatment of Cutting and Levelling Land Cost** - The RM75,000 incurred for cutting and levelling land was for preparing the site for heavy machinery. - **Tax Treatment:** - This cost is **capitalized as part of the cost of plant and machinery** (NOT land or building). - It qualifies for capital allowance together with the machinery. - **Reference:** Para 55, Schedule 3, Income Tax Act 1967 – expenditure "for the purposes of preparing, cutting, tunnelling or levelling land in order to install plant and machinery" is included as qualifying expenditure for capital allowance. --- ## **Final Summary** - **Capital Allowance Claims for YA202:** - **Industrial Building:** QE = RM510,000; CA = RM66,300; Residual = RM443,700 - **Plant & Machinery:** QE = RM875,000; CA = RM297,500; Residual = RM577,500 - **Cutting and levelling land cost (RM75,000)** is treated as part of plant and machinery cost and qualifies for capital allowance. **Note:** Cost of land, stamp duty, legal fees on land purchase, and living quarters for admin staff do **not** qualify for capital allowance.

## Summary of Question 3 ### a. Capital Allowance Calculation XYZ Berhad's qualifying expenditure for capital allowance includes RM510,000 for industrial buildings and RM875,000 for plant and machinery. The total capital allowance for the year of assessment 2020 is RM66,300 for industrial buildings and RM297,500 for plant and machinery. ### b. Treatment of Cutting and Levelling Costs The RM75,000 spent on cutting and levelling land is capitalized as part of the cost of machinery and qualifies for capital allowance. This treatment aligns with Malaysian tax law, which allows such preparatory expenses to be included in the qualifying expenditure for capital allowance.