Capital allowances in Malaysia: what you can actually claim on business assets

Where capital allowances sit in the computation

The order matters, because capital allowances are not an expense. They are deducted after your adjusted income has been arrived at, not before. The chain runs: accounting profit, add back depreciation and other non-deductible items, deduct any non-taxable income, and you have adjusted income. Capital allowances come off that to give statutory income for the business source.

This positioning has a practical consequence. Capital allowances can reduce a business source to nil but cannot create a loss that you set against your salary or rental income in the same year. If the allowances exceed your adjusted income, the excess becomes unabsorbed capital allowances and is carried forward against future income of the same business — not against your other sources.

For a sole proprietor filing the Form B, this all happens inside the business statement before the figure reaches your personal computation. Only then do your personal reliefs apply.

What qualifies — and what doesn't

Qualifying plant expenditure is capital spending on plant and machinery used for the purposes of the business. "Plant" has no statutory definition; the courts use a functional test — an item is plant if it performs a function in the business, rather than merely housing it. A commercial refrigerator in a café is plant. The shop lot it sits in is not.

Expenditure on installing the asset, and on preparing the site for it, generally forms part of the qualifying cost. The price of the land never does. Buildings have their own, much slower regime — industrial building allowance — and ordinary commercial premises such as a retail shop or a standard office usually get nothing at all.

• Qualifies: machinery, tools, computers and servers, office furniture and fittings, commercial vehicles, point-of-sale equipment, air-conditioning units, kitchen equipment.
• Industrial building allowance instead: factories, warehouses used in a manufacturing business, approved research buildings, hotels registered with the Ministry.
• Nothing: land, goodwill, ordinary shop and office buildings, and anything bought for private use.
• Partly: an asset used for both business and private purposes — the allowance is apportioned to the business-use share, and you should keep the basis of that split on file.

The rates: initial allowance plus annual allowance

An initial allowance (IA) is a one-off 20% of the qualifying cost, given in the year the expenditure is incurred and the asset is in use. An annual allowance (AA) is then given every year, including the first, until the cost is fully written off. The AA rate depends on what the asset is.

Small value assets: the shortcut worth knowing

Assets costing RM2,000 or less each can be written off in full in the year of purchase instead of being dragged out over six years. The ceiling is per asset, so ten office chairs at RM900 each are ten small value assets, not one RM9,000 asset.

There is a cap on the total: RM20,000 of small value assets per year of assessment for most businesses. That cap is lifted for an SME — broadly, a company resident and incorporated in Malaysia with paid-up ordinary share capital of RM2.5 million or less at the start of the basis period and gross business income not exceeding RM50 million. An SME can write off an unlimited amount of qualifying small value assets.

Sole proprietors and partnerships are not companies, so the RM20,000 annual cap applies to them. Where your small value assets exceed the cap, the excess is not lost — it simply goes back into the normal IA and AA pools at the ordinary rates.

Motor vehicles: the restriction that surprises everyone

A passenger car that is not licensed for commercial transport has its qualifying expenditure capped by statute, no matter what you paid. The cap is RM50,000. It rises to RM100,000 only if the vehicle was bought new and its on-the-road cost did not exceed RM150,000.

So a new RM180,000 SUV registered to the company gives you capital allowances on RM50,000 — IA of RM10,000 and AA of RM10,000 in year one, RM20,000 total — and the remaining RM130,000 of cost never produces a deduction. A new RM120,000 car gives you RM100,000 of qualifying expenditure and twice the allowance. A used car, whatever it cost, is restricted to RM50,000.

Commercial vehicles — lorries, vans licensed as goods vehicles, buses, taxis and other vehicles licensed for commercial transport — are outside this restriction entirely and get allowances on their full cost at the 20%/20% rates. If the business genuinely needs a vehicle, the licensing class of the one you buy is worth more tax than any structuring you do afterwards.

Assets bought on hire purchase

You do not wait until the hire purchase is settled, and you do not claim on the full cash price up front either. Capital allowances follow the capital portion of the instalments actually paid during the basis period, plus the deposit. The interest element is not capital — it is deducted separately as a normal business expense.

In practice this means the initial allowance on a hire-purchase asset is spread across the years of the agreement, each year computed on that year's capital payments. The hire purchase statement from the financier, which splits principal from interest per instalment, is the document your tax computation is built from — keep it with the invoice.

The car cost restriction applies on top of this: if the vehicle is a restricted passenger car, the qualifying expenditure is capped first, and the capital payments are then taken against the capped figure.

Selling the asset: balancing allowance and balancing charge

When you dispose of an asset on which capital allowances were claimed, there is a reckoning. Compare the sale proceeds against the residual expenditure — original qualifying cost less all allowances claimed to date. Sell for less than the residual figure and you get a balancing allowance, an extra deduction. Sell for more and you get a balancing charge, which is added back to your adjusted income as if it were income.

The balancing charge is capped at the total capital allowances previously claimed, so the system can never claw back more than it gave you. Anything above the original cost is a capital gain, outside this regime.

A trap worth naming: an asset written down to nil that is later sold for RM8,000 produces a balancing charge of RM8,000, taxed at your marginal rate. Clearing out old equipment at the end of a profitable year can create tax you did not plan for. The same thing happens when a sole proprietor incorporates and transfers assets into the new Sdn Bhd — that is a disposal, and transferring at book value by default is how people walk into an unexpected charge.

A worked example

A design studio operating as a sole proprietorship has adjusted income of RM120,000 for the year. During the year it bought a RM30,000 large-format printer (general plant), eight office chairs at RM900 each, and a used RM70,000 passenger car used 80% for business.

• Printer: IA 20% = RM6,000, AA 14% = RM4,200. Year-one allowance RM10,200.
• Chairs: RM7,200 total, each under RM2,000, within the RM20,000 cap — written off in full, RM7,200.
• Car: used, so qualifying expenditure is restricted to RM50,000. IA 20% = RM10,000, AA 20% = RM10,000, giving RM20,000 — then apportioned to 80% business use, RM16,000.
• Total capital allowances RM33,400. Statutory income falls from RM120,000 to RM86,600 before personal reliefs.
• The RM20,000 of car cost above the restriction, and the 20% private-use share, produce no deduction in this year or any later year.

Traps and timing

• The asset must be in use for the business by the end of the basis period. A machine still in its crate on 31 December produces no annual allowance that year.
• Claim it in the right year. A capital allowance that is claimable for a year of assessment and is not claimed is generally treated as forgone — you cannot bank it and claim it later when profits are higher.
• Keep ownership. The claimant must be the owner of the asset and must have incurred the expenditure. Equipment bought in the proprietor's personal name and never brought into the business books is a recurring audit finding.
• Unabsorbed capital allowances carry forward against the same business source only, and a company that becomes dormant must satisfy a continuity-of-shareholding test to keep them. Unabsorbed business losses are separately limited to ten consecutive years of assessment.
• Rental income assessed under Section 4(d) is not a business source, so capital allowances are generally unavailable against it — this is one of the real differences between letting a property passively and running it as a business.
• Accelerated schemes exist for specific categories — ICT equipment and software, automation equipment, green technology assets — and they change with each budget cycle. Check the current Income Tax Rules before assuming a faster write-off applies.
• A device claimed as a business asset cannot also be put into personal lifestyle relief. Pick one.

Caveats

This is general information on Schedule 3 of the Income Tax Act 1967, not tax advice. Whether a particular item is plant, how a mixed-use asset should be apportioned, which asset class applies and whether an accelerated allowance is available all turn on the specific facts and on LHDN's current Public Rulings — the main ones here are the Public Rulings on ownership and use of asset, qualifying plant expenditure, and computation of capital allowances.

The calculator below works on chargeable income for a resident individual. Work out your adjusted business income and capital allowances first, add your other sources, then use the tool for the tax estimate — and have a tax agent review the computation before you file if the asset values are significant.