Tutorial: IBA

1. DIA Manufacturing Industries Sdn. Bhd. acquired a piece of land in the town of Shah Alam for
RM1,500,000 in order to construct its factory and other buildings.
In the financial year ended 31 December 2017, the company incurred expenses on the construction of
a factory cum office block at a cost of RM1,200,000. The total built-up area of this block was 225,000
sq. ft. of which the sales/administration office occupied 33,750 sq. ft.

The company also incurred RM420,000 on the preparation of a site for the installation of plant and
machinery, which cost RM105,000.

Accommodation for the worker was constructed at a cost of RM450,000 (construction of

accommodation started a year after factory). (The accommodation was in use after the factory was in
used).

In addition, a staff recreation room, canteen and showroom block was built at a cost of RM270,000.
The showroom and recreation room occupied 9% and 11% of the total floor space respectively.

A warehouse for the storage of raw materials and finished goods as well as a workshop were also
constructed at a cost of RM250,000.

The company also required premises for carrying on approved industrial training. It managed to lease
a shop house near its business premises at an annual rental of RM96,000. An amount of RM75,000
was incurred in renovating the shop house to carry out the industrial training.

The construction of all building was completed in 2017 and were put into use in 2017.

Required:

Compute the Industrial Building Allowance for the year of assessment 2017.

(15 marks)

2. CA Sdn. Bhd. signed a concession agreement with a State Government whether it will construct an
expressway at its own cost, operate and collect toll for a period of 30 years and thereafter transfer to
the State Government at a nominal consideration. The company incurred a total cost of RM300
million in constructing the expressway,
Required:

State, with reasons, whether the expenditure incurred by CA Sdn. Bhd. qualify for industrial building
allowances. (2marks)

3. Talent Sdn Bhd is in the construction business located in Puchong Perdana. The company’s year-end is
30 September. For the year ended 30 September 2017, the company has constructed few industrial
buildings and leased out to few tenants as follows:

Building A
(cost RM1.5 million) was leased to Mr Lee at yearly rental of RM540,000 and was used by Mr Lee as
an exclusive restaurant.
Building B
(cost RM1.8 million) was leased to Mr Kumar at yearly rental of RM480,000 and was used by Mr
Kumar as a Research Center.

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Building C
(cost RM 2 million) is a 10-storey building, only one floor was let out to Mr Joe (a sole proprietor) who
used it as a café serving local food.
The rest of the floor was used by Talent Sdn Bhd as factory manufacturing instant noodles. Mr Joe is
required to pay monthly rental of RM30,000.

Building D
(cost RM 2.3 million) was leased to Apple Sdn Bhd at a yearly rental of RM800,000. The tenant used
this building as a hotel registered under Tourism Ministry.
Required:

Explain who is entitled to claim for Schedule 3 allowances for the year of assessment 2017.

4. BC Medical Center Sdn Bhd (the company) is a local resident company incorporated in 2011 to carry on
the business of providing medical services. It closes its account to 30 June each year.
In the year 2013, the company acquired a piece of land and constructed its own hospital building
(licensed), completed and brought into use in December 2015. The relevant expenditure incurred is as
follows:

Particulars of expenditure RM

Cost of land 134,459

Legal fee for transfer of land 14,986

Cutting and levelling land 113,562

Excavation and preparation site for construction 36,415

Piling and foundation works 633,449

Construction of building 4,582,850

Construction of perimeter wall 13,292

Architect fee for hospital building design 60,944

Legal services for obtaining various building approval 27,845

Subcontract charges for installation of wiring and plumbing 35,205

Landscaping charges 33,157

TOTAL 5,686,164

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The company also obtained a 30-year lease on an adjoining building in April 2016 and renovate it at a
cost of RM 820,500 for business purposes with the permission of the owner. The renovation was
completed in May 2016 and was brought to use in early June 2016. Four-fifth (4/5) of the leased
renovated building was used as a medical facility while one-fifth (1/5) was used for administrative
purposes.

Required:

With reference to Income Tax Act 1967 (as amended), compute the industrial building allowances due to
BC Medical Centre Sdn Bhd for the years of assessment 2016 and 2017 and explain the treatment for
leased building used as administrative office.

(10 marks)

5.

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Solution

Question 1

Basis period – 1/1/2017 to 31/12/2017

Land
Not part of QPE /QBE. Not qualify to claim any allowance under Sch 3 Allowance

Office = 33750/225,000 = 15%>10%, therefore office does not qualify to claim IBA

QBE for factory (85% x 1,200) 1,020,000

YA 2017
IA (10%) (102,000)
AA(3%) (30,600)
RE 887,400

Cost of preparing site for installation of plant and machinery

Site preparation 420,000

Plant and machinery 105,000
Aggregate costs 525,000

420/525 = 80% >75%

Therefore qualifies to claim industrial building allowance

QBE 525,000
YA 2017
IA (10%) (52,500)
AA (3%) (15,750)
RE 456,750

Accommodation for workers (construction of liv acc of employees of manufacturing company)

QBE 450,000
YA 2017
IA (40%) 180,000
AA(3%) 13,500
RE 256,500

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Staff recreation room, canteen and showroom

Canteen and staff recreation room are considered as IB as there is an IB in used.
Showroom (non-IB) 9%<10%
So entire building qualifies to claim IBA

QBE 270,000
YA 2017
IA (10%) (27,000)
AA (3%) (8,100)
RE 234,900

Warehouse and workshop

Since warehouse is within the curtilage of the factory, therefore qualify as an industrial building
whereby the applicable rate for IA and AA is 10% and 3% respectively.

Workshop, however is not entitled as industrial building if the workshop is used for the repair or
servicing of goods, carried out in conjunction with or incidentally to the business of selling those goods.
If the workshop is other than mentioned above, then it is industrial building qualifies to claim IA 10%
and AA 3%.

Approved training centre

QBE (based on renovation cost since this is a rented premise) 75,000

YA 2017
IA nil
AA (10%) (7,500)
RE 67,500

Question 2

The expenditure incurred by CA Sdn Bhd qualifies for industrial building allowance because the
expressway falls under deemed industrial building since tolls can be collected from the public during the
leasing period of 30 years. The rate for IA is 10% and AA is 6%.

Question 3

Building A: Talent Sdn Bhd is not entitled to claim IBA because a restaurant is not treated as an IB. Mr.
Lee is not entitled to claim because he did not incur qualifying expenditure.

Building B: Talent Sdn Bhd is not entitled to claim IBA because a research centre is not treated as an IB.
Tenant is not entitled to claim because he did not incur qualifying expenditure.

Building C: Talent Sdn Bhd is only entitled to claim IBA on the 9 storey building because café/restaurant
is not an industrial building. Tenant is not entitled to claim because he did not incur
qualifying expenditure.

Building D: Under new tax treatment, since the tenant leased the whole building (>10% of the whole
building) and used it as hotel, Talent Sdn Bhd is not entitled to claim IBA on the whole

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building. Tenant is not entitled to claim because he did not incur the qualifying
expenditure

Question 4

Determination of qualifying building expenditure RM

Cost of land NIL

Legal fee for transfer of land NIL √

Cutting and levelling land NIL

Excavation and preparation of site for construction 36 415 √

Piling and foundation works 633 449 √

Construction of building 4 582 850 √

Construction of perimeter wall 13 292 √

Architect fee-hospital building design 60 944 √

Legal services for obtaining various building approval 27 845 √

Subcontract charges for installation of wiring and plumbing 35 205 √

Landscaping charges NIL √

Qualifying building expenditure 5 390 000

Constructed Building

YA 2016 RM

QBE 5 390 000 √

IA 10% 539 000 √

AA 3% 161 700 √ (700 700)

RE 4 689 300

YA 2017

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AA 3% (161 700) √

RE 4 527 600

Leased building – used as licensed hospital

YA 2016 RM

QE (80% of 820 500) 656 400 √

IA 10% 65 640 √

AA 3% 19 692 √ (85 332)

571 068

YA 2017

AA 3% (19 692) √

Residual expenditure 551 376

Leased building – used as administrative office

- The office occupied more than 10% of total area. Therefore the capital expenditure incurred is
not treated as QBE √√. No IBA can be claim √

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Machine A RM Reason
Cost of machine 10,000
Foreign loss 2,000 Qualifying expenditure because it is realised
QPE 12,000
YA11 (-) IA (20%) (2,400)
AA (20%) (1,680)

Machine B
Initial payment 50,000
Capital Instalments (10,000 x 9) 90,000 Qualifying expense because it is capital expenditure
Interest portion (1,000 x 9) Nil Non-qualifying expense because it is revenue expense

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QPE 140,000
YA11 (-) IA (20%) (28,000)
AA (14%) (19,600)

Land (including legal fees) Nil

Construction cost 810,000

Office (non-IB) 4,000/30,000 x 100% = 13% > 10% of whole building. Therefore; office is not part of QBE
QBE (810,000 x 26,000/30,000) 702,000
(-) IA (10%) YA 2007 (70,200)
(-) AA (3%) YA 2007-2010 (84,240)
RE 547,560

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