If you are starting a business, you will spend huge sum of monies on your office rental, furniture, computers, some machinery and etc. This is part of the initial costs for you to spend in order for you to have those "tools" to run your business.
You will then want to deduct these expenses expended for these "tools" so that your revenue can be further reduce, and taxable at that adjustable income tax rate.
However, you are not allowed to claim all those expenses in one go within that one year of assessment. These "tools" must be your company's plant in order for you to be entitled to claim for "capital allowance".
For basic understanding and lay man term, capital allowance, it is the tools/furnitures that you have expended your monies in one time off and not repetitive, therefore, the law only allows you to claim for the initial allowance, and or capital allowance. Below are some of the reported case laws on "capital allowance".
Horse can be considered a “plant”?
In the case of Yarmouth v France (1887)(Divisional Courts), it was a case where the Plaintiff (employee) claiming against the Defendant (employer) for compensation as a result of the injury suffered during the course of his employment. The Plaintiff has to prove that the Plaintiff’s injuries suffered was caused by the horse which forms a plant of the Defendant.
The issue becomes, can a horse be considered a plant? In manning businesses of horse and carts, they are the material or instrument which the employer must use for the purposes of carrying his business, without which he wouldn’t be able to carry at all.
The principal business activity of a wharfinger is to transport goods from the wharf to the houses or shops. It is for this reason that horses and carts are necessary for the carrying of business. To qualify as a plant, the apparatus (business usage) test applies. It does not involve stock in trade which the business buys or makes for sale. The “plant” can be a chattel or goods, fixed or moveable, live or dead, which the business can keep for permanent employment in his business.
Training Ground for Driving Institute
In the case of KPHDM v MSDC Sdn Bhd (2001)(High Court), the facts of the case was in relation to the Respondent (taxpayer company) trying to claim for capital allowance for its training ground for driving institutions (“training ground”). The moot point was whether the training ground is a plant. The High Court judge had decided that the training ground is applied and the reasons were as follows:
(i) the wording apparatus is not limited to machinery to the business
(ii) the apparatus is a plant which is related to the business as a whole and all its constituent parts and appurtenances must be viewed as a whole
(iii) the SCIT had made a finding of facts that the training ground was prepared for the carrying out of driving institute which forms the essential part of the business
(iv) the word plant is intended to be applicable to a much wider filled of activities in industry and commerce and the word itself at first reading, ie, law firm library to lawyer is part of the law firm’s plant.
Some of the example of plants for the following entities are as follow:
Restaurant - Stove , Gas tank
Bakery Shop - Ovens
Sport Gym - Equipment
Accounting firm - Calculator, Accounting apps
Construction Cost for Multi Storey Car Park
In the case of Tropiland Sdn Bhd v KPHDN, the issue arose was whether the capital expenditure incurred on the construction of the multi storey carpark is deductible as expenditure on the plant under Schedule 3 of the ITA 1967 for capital allowance. The SCIT had decided in favour of the LHDN. The reason was because the taxpayer company had failed to call in witnesses. In this case the Court had adopted the “premises test” based on the case of Wimpy International v Warland (1989). The High Court Judge has decided that it is a plant based on the reasons as follow:
(i) the terms of the privatization agreement given to the taxpayer agreement is a 30 years lease for the sole purpose of erecting a multi-storey carpark that at all time shall be used as a carpark
(ii) the function of the carpark is to service the users and occupiers of the complex of Tun Abdul Razak
(iii) the agreement also provides that the building shall be built in accordance to the plan drawn up by PDC, Architects, Engineers and Consultants.
(iv) the taxpayer company is also given the rights to operate the multistorey carpark for the prior of the lease and to surrender the building and land to PDC upon expiry of the lease
(v) the building essentially performed one primary function which is to provide the means by which the taxpayer company derive its revenue; it is an apparatus used by the taxpayer company in carrying on its business
(vi) without this building, the taxpayer company cannot carry out the business of a multistory carpark
(vii) the argument that the land can still be used as a carpark without the building is not an available option to the taxpayer. Under the privatization lease agreement, the taxpayer company must build a multistory carpark within the parameters and conditions set by PDC.
(viii) the improved infrastructure will improve the economic activity which will result in increased revenue generated by the taxpayer’s business which will increase the tax revenue collectable by the tax revenue
(viiii) the multistory carpark building is to be regarded as a tool of the trade rather than a mere setting
Telecommunication Towers
In the case of Infra Quest Sdn Bhd v KPHDN, the issues was whether the telecommunication towers is a plant which entitles the taxpayers company to claim for capital allowance under Sch 3 of the ITA. The judge had decided and asked:
(i) Did the telecommunication towers help the company to run its business of licensing the telecommunication towers to the telecommunication service providers?
(ii) The taxpayers’ business income was derived from the licensing of the telecommunication service providers who had affixed their antennas on the telecommunication towers. Therefore the telecommunication towers were found to be plants.
(iii) Without the telecommunication towers, the business of the appellant could not function.
Turfing and grass on a Golf Course
In the case of KPHDN v Resort Poresia, the issue was in relation to the taxpayer claiming for capital allowance on the turfing and grass on the golf course. The judge had disallowed as follows:
(i) Biologically turf and grass are plant, but the meaning of plant under income tax law is different.
(ii) In the instant case, the taxpayer’s income comes from its licensing fee, subscription and other court operations income from persons who come to enjoy the facility.
(iii) the golf course is the sum total of all its parts and components
(iv) the course and its layout with the course and the grass planted thereon are what makes it a golf course
(v) the grasses chosen are therefore an inseparable part and parcel of the golf course and therefore the golf course is premised to the business of the taxpayer
Expenditures to purchase, customize and improve computer equipment and software and the relevant consulting fees (costs paid to acquire the usage of a software)
In Cimb - Principal Asset Management Bhd v KPHDN, the issue was related to the cost paid to acquire the usage of a software - whether it is allowable for capital allowance. The court had held that:
(i) the taxpayer’s company doesn't need to prove that they own the software
(ii) the taxpayer company entering into the contract prohibiting the sale of the software doesn't make the Applicant any less as an owner;
(iii) Paragraph 8.2 of the Public Ruling is illegal and is a conflict with the 2014 Rules and also the main legislation, ie Schedule 3 of the ITA.
(iv) Since all cost incidental to the plant is claimable as CA, the taxpayer did not have to bring itself within the 2014 Rules to claim for the CA.
(v) Paragraph 2 of Schedule 3 of ITA is broad enough to cover software. Andilliary cost should form part and parcel of capital expenditure.
(vi) the taxpayer is free to re-sell the software to other 3rd party although it may result in the taxpayer company breaching the contract with the creator. It does not make the taxpayer less than an owner.
(vii) The taxpayer disputed capital expenditures incurred formed part and parcel of the plant which is the software.
(viii) The taxpayer has proven that it owns the software and that the incidental charges are claimable as CA.
Integrated Multi Storey Car Parks
In the case of KPHDN v Pulau Pinang Clinic Sdn Bhd, the issue was related to the claim for an integrated storey car park as part of the hospital for investment tax allowance. The High Court JC has decided as follows:
(i) the taxpayer company has fulfilled all the requirements under the Investment Tax Allowance (Exception) Order
(ii) If it was intended for the carparks to be disqualified for the ITA claim provided under the EO 2012, it would've been specifically spelt out.
(iii) Revenue has no basis to isolate the multi storey car parks from the taxpayer’s ITA claim
(iv) the taxpayer’s witness had testified that the multistory carpark is an intergrown part and forms part and parcel of the hospital building
Industrial building allowance
(i) Qualifying building expenditure is eligible for industrial building allowance (para 3 clause 1 of Schedule 3 ITA)
(ii) IBA is made under para 37A of Sch 3 of ITA.
(iii) hospital building is an industrial building and the capital expenditure incurred on it will be allowed for IBA claim. The only part in dispute is the multistory carpark.
(iv) In order to determine whether the multistory carpark is an industrial building, one must look at the entirety test and the functionality test.
(v) entirety test - the road system which links up the factory was integrated with the industrial building with the factory complex. Without the road system, the factory will not be able to function adequately.
(vi) Functionality test - Functionality test requires the items claimed to determine whether the items claimed is necessary and integral to the taxpayer's manufacturing activity.
(vii) The multistory carpark which is integrated to the hospital building is clearly part of the hospital building
(viii) there is no legal basis in disallowing the IBA on the multistory carpark when it's clearly an industrial building under the ITA
(viv) Para 66 of Schedule 3 of ITA is only applicable where there are parts of the building where it is not an industrial building. The multistory car park has been accepted as an industrial building.
(vv) the fact that the taxpayer had rented the multistory carpark to a 3rd party still allows them to claim for CA.
(vvi) The DGIR has no authority to dictate how a taxpayer should conduct its business
(vvii) the fact that the taxpayer outsource the management of parking doesn't negate the fact that the taxpayer had incurred capital expenditure and therefore is entitled to claim for ITA and IBA on its multi storey car park
31 Units of CISCO 1921 Router
In the case of Ene Melaka Sdn Bhd v KPHDN, the subject matter for the claim of CA is the purchase cost of 31 units of CISCO 1921 Routers. This case is an application for leave to commence judicial review. The merit of the hearing has not been heard yet. The taxpayer company has forwarded the following arguments at the leave stage:
(i) that it has a selling agency agreement whereby the area agent will supply all the relevant equipment for the purpose of a Number Forecast Operating (“NFO”) to the selling agent.
(ii) The routers are provided to the seller agent to be used by the Applicant in its business. There is an appeal before the SCIT which only relates to the imposition of penalty while the application for Judicial Review before this court involves different considerations and different reliefs.
Conclusion
Is anyone of the above cases related to your companies' claim on capital allowance?
This article is co-written by Dylan Chong & Lim Jia Kei. Credits to Ms. Lim Jia Kei for her thorough research.
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