industrial building allowance-notes (tax370)

7/22/2019 Industrial Building Allowance-notes (TAX370)

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TAX370-Industrial Building Allowance

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CAPITAL ALLOWANCE – RELIEF ON CAPITAL EXPENDITURES

Schedule 2 Schedule 3• Qualifying forest expenditure • Qualifying expenditure on P & M

• Qualifying expenditure on industrialbuildings

• Qualifying agriculture expenditure

Schedule 4 Schedule 4A

• Qualifying prospecting expenditure • Qualifying farm expenditure onapproved agricultural project

Capital allowances – a review• Allowed as a deduction against income from abusiness source only;

• Types: - Initial allowance

- Annual allowance

- Balancing allowance

• Unabsorbed (unutilised) capital allowance canbe carried forward to future years;

• For Schedule 3 allow. deduction is to be madeagainst adjusted income.

Scheme of deduction for Sch. 3allowances

RM

Adjusted Business Income xxx

Add: balancing charge xxx

Less: Capital allowance (xxx)Adjusted Income @@@

Industrial building allowance(Schedule 3)– who will qualify?

• Allowance given for capital expenditureincurred on the construction or purchase ofindustrial buildings which are used for thepurpose of the respective business.

IndustrialBuilding

Allowance

What is

Industrial

Building

Types of

capital

allowances

Initial Allow.

Annual/notional allow.

Balancing allow.

Who would qualify?

Qualifying

expenditure

Purchased building

Constructed

building

Para. 4 OR

Para. 5

Prior to

YA2005- Use

From YA2005

QBE = P. Price

Balancing

chargeP&M-as

an IB

75%

Rule

Part of

Building

as an IB10%

Rule

All costs

incurred for

building

What is an industrial building?- Schedule 3,paragraph 63

includes:i. a factory,ii. a dock, wharf, jetty or other similar

buildings;iii. a warehouse let (rented) out to the public;iv. buildings used in the utility or

telecommunication business;v. buildings – used in the working of a mine or

farm;

vi. mill, workshop, in connection with mining.




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Factory

Definition: Section 3, para. 64:-• A mill;

• A workshop (for the repair of plant &machineries)

• Building used for housing plant & machineryused in manufacturing or power generation;

• Building (within same curtilage as factory)used as a store for raw materials,consumables or manufactured goods;

(adjacent to/within the same compound as)

Other types of buildings also qualifyingas industrial building – there must first

be an existing Industrial Building

• Canteens, rest-rooms, washrooms & buildings forworkers’ welfare;(para 65(1))

• Living accommodation on farms (para. 65(2));

• Constructed living accommodation of factoryworkers (para. 42)

• Living accommodation (purchased or constructed)for workers in the manufacturing sector, hotel ortourism projects (para. 42A);

• Building used for child care facilities for employees.

Other types of buildings that qualify asindustrial building

• School/educational institution & technicaltraining approved by the MOE (para 42B)

• Licensed private hospital, maternity home &nursing home (para 37A)

• Buildings used for research approved by theMinister

• Buildings used for storage of goods forexport (para 37C)

• Public road & ancillary structures (para 67A)

Other types of building that qualify asindustrial building – continue

• Building used in approved service project(para 37E)

• Building used for hotel (para 37E)

• Airport (para 37G)

• Motor racing circuit (para 37H)

• Old folks care centre

Types of industrial building allowances

Initial allowance• the standard rate is 10%. (There are however

exceptions. Refer to table at end of chapter).- Allowed ONCE only in the first year of

construction/purchase;- Applied on the Qualifying Building Expend.(QBE);- Prior to YA 2002, initial allowance is only allowed

for constructed building.- From YA 2002, both constructed & purchased IB

can enjoy initial allowance.

Types of industrial buildingallowances

Continue:Annual allowanceConstructed building• Prior to YA 2002, the standard rate was 2%

per annum• From YA 2002, the standard rate has been

increased to 3% per annum.• There are however exceptions to this rule.

(Refer to table at end of chapter).




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Rates - ExceptionsSch. 3 -

paraIA(%)

AA(%)

Public road recverable through toll 67A 10 (std.) 6

Building on built, lease transferred to the govt. 67B 10 (std.) 6

Bilding used for storage of imported goods forexport processed and re-export processed &distributed

37C Nil 10

Living accomodation for employees – constructedbuilding (Pre-requisite: an IB exist)

42(1) 40 3 (std.)

Living accomodation for employees – constructedbuilding (Pre-requisite: an IB exist)

42A(1) Nil 10

Child care centre – constructed or purchased 42(2) Nil 10

School or educ. Inst. Approved by MOE – constructed or purchased

42B Nil 10

Industrial, technical or vocational training – constructed or purchased

42C Nil 10

Old folks care centre PU(A)143/2003

Nil 10

Types of industrial buildingallowances

Continue:

Balancing allowance• Can arise on disposal of an industrialbuilding;

• Where the disposal value is below theresidual expenditure, the difference isknown as the balancing allowance;

• Balancing allowance is tax deductible, ie. canbe deducted against adjusted income.

Initial allowance – para 12 & 13

Qualifying criteria:• Person who has incurred QBE on the

construction or purchase of an IB AND;• The building was in used or about to be used as

an IB for the purpose of the person’s businessAND;

• The person is the owner of the building at theend of the basis period. ( in practice, even ifthe person owned the building for only part ofthe basis period, he/she is still allowed to claimthe initial allowance for the said building)

Annual allowance – para 16

Qualifying criteria:

• Person who has incurred QBE on theconstruction or purchase of an IB AND;

• The building was in used as an IB for thepurpose of the person’s business AND;

• The person is the owner of the building atthe end of the basis period.

Balancing charge

• Can arise on disposal of an industrial building;

• Where the disposal value is above theresidual expenditure, the difference is knownas the balancing charge;

• Balancing charge is taxable ie. must be addedto adjusted income;

• Balancing charge cannot exceed actual IBAalready claimed for the building.

Constructed building -Whatexpenditure would qualify?

• In general – all expenditure that relate tothe construction of the building and makingit operational;

• expenditure that relate to the acquisitionand enhancement of land would not qualify(such as land price, legal fees on landacquisition, terracing and leveling)




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QBE for a constructed building - includes

• Architect’s fees, cost of preparing building plans &obtaining approval from relevant authorities;

• Cost of clearing site; demolition cost of a NON-industrial building;

• ALL construction cost (materials, labour, haulage,management supervision, etc.)

• Incidental expenditure which may be sub-contracted(drainage, installation of water, electricity, internalcar park, fittings, charges related to building)

• Interest on loan used for the constructed building

• (Refer to handout 1)

Prior to YA2005

From YA2005

Used as an IB within 1 mth.

prior to disposal??

YES NO

Para 4Para 5

QBE =

Purchase Price

of Building

QBE = Lower of PP of building OR

(Res. Exp. + B. Charge of Vendor)

QBE = Lower of PP of

building OR (QBE for

vendor – AA – NA)

QBE – Purchased IB

Refer to handout 4

FOR INFO

ONLY

If only part of an industrial building isused for industrial purposes – (para 66)

•Use 10% Rule to test whether only part of thebuilding OR the whole building is to be treatedas an Industrial Building.

•Non-industrial use: office, administrative area,showroom. (Is it less or more than 10%?)

•How to apply the Rule…(Refer Handout 2 & 3)

non-industrial portion

(cost or floor area)

Exceeds 10%?? NO YES

Whole

building is

an IB

Part of the

building

(industrial

portion)

can claim

IBA

Plant & Machinery – when is itconsidered as an industrial building??

The AGGREGATE COST of the P & M will qualify

as an industrial building expenditure when the

capital expenditure incurred on site

preparation (preparing, cutting, tunneling &

leveling land) exceeds 75% of the aggregateof cost of the plant & machinery

Aggregate cost = Cost of P&M+ installation cost

+ cost of site preparation.

Plant & Machinery – when is it consideredas an industrial building??

Cost of Plant & Machinery P(includes installation, insurance, freight)

Add: Site preparation cost S(cutting, leveling, tunneling, breaking walls)

Aggregate Cost A• If S > 75% of A, P&M to be treated as IB (ie. QBE = A)

• If S <= 75% of A, P&M is not an IB. (but willqualify for capital allow. for P & M ie. QPE = P)

(Refer to handout 5)

Rented Premises

• Rental Expense is NOT a capital expenditure.It is a revenue expenditure. Hence rentalexpense per se does not qualify for capitalallowance;

• However, any capital expenditure incurredon rented premises used as an industrialbuilding shall be eligible for IBA on thecapital expenditure incurred such asrenovation cost, extension etc.




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Disposal of IB

• Sale, transfer or assignment of the relevantinterest of the building;

• Where the relevant interest has a durationperiod, the expiry of the period;

• Demolition or destruction of building;

• The building ceased to be used as an IB.

Meaning of “relevant interest”– para 49-51)

• The interest to which a person has in thebuilding in which the person has incurredqualifying building expenditure.

Disposal valuei) Equivalent to the : Greater of

a) its market value

OR

b) Net proceeds of sale, transfer orassignment

ii) Equivalent to the : Greater ofa) its market value

OR

b) Insurance compensation received

Demolished building

• If there is no insurance or compensationfor the building, Disposal value = 0.

• In such an event, the residualexpenditure will be increased by thedemolition cost less any scrap valuerecovered and this figure will be thebalancing allowance.

Industrial building owned less than 2 years

• All industrial building allowances claimedearlier would be clawed back;

• In the year of disposal, a balancing chargeequal to actual allowances claimed would beraised.

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