ALLOWANCES-ADVANCED TAXATION

Andy Lee
andylee@ums.edu.my
BP34203
TAXATION II
SPE, UMS

Week 3 Allowances
Malaysian Taxation
SPE, UMS

Lecture outline
Agriculture Allowances
Forest Allowances
Mining Allowances
Prospecting Expenditures
SPE, UMS

Allowances Chp 13
Schedule 3 of ITA
Capital Allowance on Plant & Machinery
Industrial Building Allowance
Agriculture Allowance (p. 542) √
Forest Allowance (p. 549) √
Schedule 4A of ITA
Approved Agriculture Project (p. 549) [Deleted]
Schedule 2
Mining Allowance (p. 529)
Schedule 4 of ITA
Prospecting Expenditure (p. 539)

Agriculture Allowances
Overview
Allowances given to a person carrying agriculture
activities including cultivation of crops, animal
farming, aquaculture, inland fishing and other
agriculture activities (S. 18 ITA 1967)
Computation of agriculture allowance is provided
under Schedule 3 of ITA 1967
Similar to Capital Allowance, agriculture
allowance is deducted from adjusted income to
get statutory income
Agriculture allowance not fully absorbed in a YA
is c/fwd to the following YA

Qualifying Agriculture Expenditure (QE)
Clearing and preparation of land for the purpose
of agriculture
Planting (not replanting) of crops on land cleared
for planting
Construction on a farm of a road or bridge
Construction on a farm of a building used for the
purpose of business (wholly or partly for the
farm), a building for the welfare of persons or as a
living quarters for a person, employed in
connection of that farm – if the farm ceases to
work, such buildings have little or no value to the
other person

Note:
Subsidies given by the government (such as
subsidy for fertilizer) is not deductible in the
income statement
Agriculture allowance is only given upon
agriculture expenditure incurred for new
planting. Any agriculture expenditure incurred in
respect of replanting will be treated as revenue
expenditure and deductible from gross income

Agriculture Allowance
Eligibility
The company or individual must be owner at the
end of basis period
QE was spent during the basis period
A taxpayer who is entitled to an agriculture
allowance shall not qualify for other allowances
on the same expenditure

Rate of allowances
Building used for the welfare of persons or as
living accommodation for a person employed to
work on the farm (20% p.a. of the expenditure
incurred)
Other buildings (10% p.a. of the expenditure
incurred)
QE other than buildings (50% p.a. of the
expenditure incurred)
Note: No Initial Allowance for QE

Rate of allowances (E.g. 1)
Syarikat KelapaMas Sdn Bhd incurred qualifying
agriculture expenditure for coconut plantation for
year 2008
Purchase of land 150,000
Clearing and preparation of land 25,000
Planting of crops 60,000
Construction of workers quarters 20,000
Construction of office building 10,000

Required:
 Calculate the qualifying expenditure and
agriculture allowances for Syarikat KelapaMas
Sdn Bhd for year of assessment 2008. The
company closes its accounts on 31 December
2008.

Answer:
All expenditure except purchase of land qualifies
as Qualifying Expenditure for agriculture
allowance. The calculation of Qualifying
Expenditure and Agriculture Allowance for
Syarikat KelapaMas Sdn. Bhd. for YA 2008 is as
follows:

Answer:
Clearing and
preparation of
land
Plantin
g of
crops
Worker
quarter
s
Office
building
Rates
50% 50% 20% 10%
Qualifying Expenditure 25,000 60,000 20,000 10,000
for YA 2008
12,500 30,000 4,000 1,000
Balance of Agriculture
Expenditure on
31.12.08
12,500 30,000 16,000 9,000

No allowances are to be given if the taxpayer is
not the owner of the asset at the end of basis
period, or the asset was not in use for business
No allowances will be given where the asset is
transferred in the basis year and not in use for the
business within one month before the transfer
In the event of sale or transfers of an asset, an
apportionment of the allowances is made on a
time basis to the vendor/seller and the purchaser

E.g. 2: Continue from E.g. 1 (Syarikat KelapaMas
Sdn. Bhd.). On 1 July 2009, Syarikat KelapaMas
Sdn. Bhd. sold the workers quarters to KKCoconut
Berhad, another coconut planter next to its
plantation. The price was RM100,000. Compute
the agriculture allowances for both companies for
YA 2009 and 2010. KKCoconut Berhad which
closes its account on 30 September.

Answer:
Syarikat KelapaMas Sdn Bhd
YA 2008 (20% x 20,000) 4,000
YA 2009 (20% x 20,000) x 6/12mths 2,000
YA 2010 NIL
KKCoconut Bhd
YA 2009 (20% x 20,000) x 6/12mths 2,000
YA 2010 (20% x 20,000) 4,000

Note:
Sale price of RM100,000 is not considered
Agriculture Allowance is based on old/cost price
of RM20,000
Apportionment between Syarikat KelapaMas Sdn
Bhd and KKCoconut Bhd in YA 2009 is based on
number of months, which Syarikat KelapaMas
Sdn Bhd had used (i.e., 6 months: 01.01.09 –
01.07.09)

Example 3: Continue from Example 2 (Syarikat
KelapaMas Sdn. Bhd.). If the sale of the worker
quarters was 1 Oct 2009, what would be
calculation of Agriculture Allowance for both
companies?

Answer:
Syarikat KelapaMas Sdn Bhd
YA 2008 (20% x 20,000) 4,000
YA 2009 (20% x 20,000) x 9/12mths 3,000
YA 2010 NIL
KKCoconut Bhd
YA 2009 (20% x 20,000) x 3/12mths 1,000
YA 2010 (20% x 20,000) 4,000

Agriculture Charge
Agricultural charge is the withdrawal of
agriculture allowance claimed (similar to
balancing charge)
It arises (1) when grants or subsidies from the
government or statutory body is received by the
taxpayer – the receipt is to be included as a charge
in the assessable income
If subsidies received after the taxpayer ceased
to operate a farm – the amount received will be
included in the income of the basis period of
cessation of operation

Agriculture Charge (cont’)
It arises (2) when an asset upon which an
agriculture allowance has been made, is disposed
off within a period of 6 years
A taxpayer is given an option to spread the
agriculture charges over the year of assessment for
which the allowances were made

Agriculture Charge (e.g.)
Example 3: Lohan Sdn. Bhd., established, on
1.4.2005 is in the business of cultivating oil palm.
The company closes its accounts on 30 June each
year. The agriculture expenditure for the company
is as follows:

Date Expenditure Amount
24.05.2005 Land cost 350,000
27.07.2005 Land clearing 100,000
14.02.2006 Road construction 200,000
18.03.2006 Oil palm planting 150,000
29.08.2006 Workers quarters
construction
70,000
31.08.2006 Store construction 40,000

On 24.09.2006, the company received a subsidy from
the state government for RM40,000 for oil palm
planting.
On 31.12.2010, the oil palm plantation was sold to Damai
Sdn Bhd, an oil palm plantation company for
RM750,000
Required:
Calculate the agriculture allowance/charge for Lohan
Sdn. Bhd. for the relevant years of assessment until year
of assessment 2011.

Land
clearing
Road Oil Palm
planting
Worker
quarters
Store
Rate 50% 50% 50% 20% 10%
QE 100,000 200,000 150,000 70,000 40,000
YA2006 – AA 50,000 100,000 75,000 - -
YA2007 – AA
– AC
50,000
-
100,000
-
75,000
(40,000)
14,000 4,000
YA2008 – AA - - - 14,000 4,000
YA2009 – AA - - - 14,000 4,000
YA2010 – AA - - - 14,000 4,000
YA2011 – AA (*)
YA2011 – AC (**)
-
(100,000)
-
(200,000
)
-
(110,000)
7,000
(63,000)
2,000
(18,000)

Notes -
* In YA2011, Lohan Sdn. Bhd only entitled to 1/2
agriculture allowance because the plantation was sold.
**Alternatively, subject to a written request and DGIR’s
approval, Lohan Sdn. Bhd may spread the agriculture
charge to the previous YA’s as follows:
 Land clearing: RM100,000 / 2 = RM50,000 in YA 2006 and 2007
 Road: RM200,000 / 2 = RM100,000 in YA 2006 and 2007
 Oil Palm Planting: RM110,000 / 2 = RM55,000 in YA 2006 and 2007
 Workers Quarters: RM63,000 / 5 = RM12,600 in YA 2007, 2008,
2009, 2010 and 2011
 Store: RM18,000 / 5 = RM3,600 in YA 2007, 2008, 2009, 2010 and
2011

Approved Agriculture Projects
Definition:
An approved agricultural project is an alternative
to Schedule 3 Allowance
A taxpayer carrying on an approved agricultural
project can elect that the capital expenditure
incurred be deducted against his aggregate
income
Qualifying expenditure – Schedule 4A, ITA 196
Deleted with effective from YA2006

Forest Allowance
Given to person involved in timber industry
Under para. 8, 30 and 31, sch 3, ITA 1967
Forest – means forest in Malaysia in respect of
which a person has a concession or license to
extract timber and conducting business of
extracting timber from the forest

Forest Allowance
Allowance
• 10% - QE incurred on roads and buildings
which are used for the purposes of the business
of extracting timber from the forest
• 20% - QE incurred on buildings provided for
the welfare or living accommodation of
employee engaged in the extraction of timber

Forest Allowance
Permanent cessation – the whole balance of
capital expenditure which has not been allowed
will be given
Forest charges – when the forest is disposed of
and the amount of charges is equal to the
allowances made to the taxpayer
Disposal of forest – transfer or assigns the
concession (license) or surrenders that concession
(license) for a valuable consideration
In a transfer, apportionment of the allowances is
made on a time basis to the vendor/seller and the
purchaser

Forest Allowance
E.g. 4: TM Timber Sdn Bhd, a timber company, closes
its accounts every 31 December. The following are
expenditure on the timber operations:
01.01.06 – 31.12.06 Road Construction 1 40,000
01.01.06 – 31.12.06 Workers Quarters 1 80,000
01.01.07 – 31.12.07 Road Construction 2 200,000
01.01.07 – 31.12.07 Workers Quarters 2 120,000

Forest Allowance
The company stopped its operations on 30.11.2009
and disposed all the company's asset on 01.01.2010.
From the sale, the company obtained RM30,000
for 2006 expenditure and RM20,000 for 2007
expenditure.
Required: Calculate the forest allowance and/or
forest charge for the relevant years of assessment.
Show your workings clearly.

Forest Allowance
Answer:
Road
1
Workers
quarters
1
Road
2
Workers
quarters
2
Rate 10% 20% 10% 20%
Qualifying Exp 40,000 80,000 200,000 120,000
YA2006 – FA 4,000 16,000 - -
YA2007 – FA 4,000 16,000 20,000 12,000
YA2008 – FA 4,000 16,000 20,000 12,000
YA2009 – FA 28,000 32,000 160,000 96,000
YA2009 – FC (*) (40,000
)
(80,000) (200,000
)
(120,000)

Forest Allowance
Note:
(*) Alternatively, subject to a written request and
DGIR’s approval, TM Timber Sdn. Bhd may spread
the agriculture charge to the previous YA’s.
The disposal price is not considered

Mining Allowances
Overview
Provided under Sch 2 of ITA 1967
Mining allowance is treated as revenue
expenditure (deductible expense) and is deducted
from the gross income of a mining business (S.
34(6)(c) ITA 1967)
Treatment of adjusted loss from mining operation
is similar to business loss. The excess of mining
allowance over the gross mining income for a YA
can be offset against the aggregate income for
that YA

Mining Allowances
Rationale
Certain capital assets used in mining operations
would no longer be of use (no value) once the
mining operations ceased
The deduction would assist the mining operator
to be more competitive

Mining Allowances
Definition
Mine
Source of minerals over which mining operations
are, have been or can lawfully be, carried on
Minerals & deposits
precious metals, stones and non-precious
minerals excluding common clay, sand, sand
stones, mineral oils
Mining operations
Every method or process by which minerals are
obtained

Mining Allowances
Qualifying Expenditure (QE)
• Site and rights – *cost of site, acquiring mineral
rights, land to be used for mining works
• Prospecting (successful or not) – cost of
searching, discovering, testing deposit or winning
access thereto
• Works – construction work which is likely to be
little or no value when the deposits are worked
out. Example – tunneling, water supply, roads,
railways, building including staff quarters
• Non-productive expenditure – management,
administration and development expenditure
before the commencement of actual production

Mining Allowances
Computation
Residual expenditure at the end of basis period
Residual life at the beginning of basis period
• Where account are made up for more or less
than 12 months, mining allowances are
computed by increasing or decreasing them
proportionately.
• Existing mining company which starts new
mining operation : entitled for the whole year
allowance

Mining Allowance
Residual Expenditure
• Total qualifying mining expenditure reduced by
any deductions which have already been given in
respect of mining allowances and any amount or
consideration received in respect of capital
expenditure (i.e compensation or recoupment)
Recovered expenditure
• Any consideration (money or non monetary
received for sale or transfer of mining asset)
• Deducted for purposes of arriving at the residual
value

Mining Allowances
Life of mine
• The number of years during which the extraction
of minerals from the mine can be expected
• Determined by the mine operator immediately
after the works started. Provide with details
calculation on how the period is determined. If
not the DG will use his/her discretion

Mining Allowances
Life of mine (cont’)
Common formula:
Total acreage of deposits available for mining
(a) -----------------------------------------------------
Expected acreage to be mine annually
Total estimated deposits in tons
(b) ---------------------------------------------------
Expected rate of annual production in tons

Mining Allowances
E.g. 1
MMC Sdn. Bhd. (accounting period ends on 31/12)
started a mining operation on 1/7/2002.
Expenditures incurred in the year 2002 were
1/5/02 Cost of site 350,000
1/5/02 – 30/6/02 Prospecting exp. 20,000
Roads and bridges 10,000
Labour quarters 10,000
1/5/02 – 31/12/02 Others dev. cost 10,000
Expected life of the mine is 8 years

Mining Allowances
Required:
 Compute mining allowances for MMC Sdn. Bhd.
for years of assessment 2002 to 2004.

Mining Allowances
Answer: MMC Sdn. Bhd.
As all expenses qualify as mining expenditure, total
Qualifying Mining Expenditure is RM400,000.
Calculation of mining allowance is below:
Qualifying Mining Expenditure 400,000
YA 2002 Mining Allow.
Residual Exp
(400,000/8) (50,000)
350,000
Residual Exp.
(350,000/7) (50,000)
300,000
Residual Exp.
(300,000/6) (50,000)
250,000

Mining Allowances
Two or more mines
• Should be treated separate mine
Cessation of a mine (Para 15, Sch2 ITA)
• Permanently ceases to work a mine (other than on
death or transfer of a mine) – any recovered
expenditure received after the cessation is treated
as being received on the date of cessation. An
election can be made by the taxpayer to have the
mining allowances recomputed for the preceding
five basis period. If less than 5 years, use the
actual number of years

Mining Allowances
 Continue from previous e.g. (MMC Sdn. Bhd.).
Due uneconomic deposits, operations of the mine
was terminated on June 2007.
Required:
a) Compute mining allowances for MMC Sdn.
Bhd. for YA 2002 to YA 2007.
b) If an election is made under para 15 Sch 2 of
ITA 1967, what would be the effect on your
calculation?

Mining Allowances
Answer:
YA 2002 Mining Allow
Residual Exp
(400,000/8) (50,000)
350,000
Residual Exp
(350,000/7) (50,000)
300,000
Residual Exp
(300,000/6) (50,000)
250,000
Residual Exp
(250,000/5) (50,000)
200,000
Residual Exp
(200,000/4) (50,000)
150,000
YA 2007 Mining Allow(6
mths)
Residual Exp
(150,000) (150,000)
Nil

Mining Allowances
Answer:
Residual Exp
(400,000/( 5 + 6/12)) (72,727)
327,273
Residual Exp
(327,723 /( 4 + 6/12)) (72,727)
254,546
Residual Exp
(254,546/( 3 + 6/12)) (72,727)
181,819
Residual Exp
(181,819/( 2 + 6/12)) (72,727)
109,092
Residual Exp
(109,092/( 1 + 6/12)) (72,727)
36,365
YA 2007 Mining Allow(6
mths)
Residual Exp
(36,365) (36,365)
Nil

Prospecting Expenditure
Under Schedule 4 ITA 1967
Allowable as deduction to against aggregate
income
Includes searching for, discovering, or winning
access to deposits or minerals in an eligible area,
or testing such deposits

Excludes the following:
Cost of the site of resources
Cost of the site of any works which are likely to
be of little or no value when the source is no
longer worked
The cost of acquiring any rights in or over any
such site and/or deposit
Qualifying expenditure includes the market value
of plant and machinery used in prospecting even
though such asset was not originally bought for
that purpose

Qualifying prospecting expenditure is deductible
against aggregate income after adjusting for the
following receipts:
• Consideration received on sale of plant &
machinery
• Amount received or receivable from the use of
plant and machinery
• Market value of unsold plant and machinery at
the date of cessation
• Sale of rights or other benefits arising from or
connected with the area
• Grant or payment received or receivable from
the government, statutory authorities

 The prospector has two choices:
1) Deduct the expenditure when it is incurred
(P5(a), Sch 4). Writing claim should be
submitted to the DGIR three months after the
beginning of a year of assessment
2) Accumulate the expenditure up to maximum
of 10 years and deduct it at the end of the
basis year (P5(b), Sch 4) when the prospecting
becomes abortive

 If an election is made under (1) and the
prospecting is successful, the whole expenditure
will be added back to the aggregate income and
mining allowance will be given when the works
start
 If an election is made under (2) and the
prospecting is successful, the prospecting
expenditure becomes qualifying mining
expenditure and mining allowance will be given
when the works starts

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