Capital Allowances Under Schedule 3, Worked End to End

The depreciation line in your accounts is worth nothing to LHDN. Paragraph 39(1)(e) of the Income Tax Act 1967 disallows any expenditure that is qualifying expenditure for the purposes of Schedule 3 — so the accounting charge is added back in full, and Schedule 3 decides, on its own terms, how much relief the asset actually earns and when.

The gap between the two systems is where the money is. This article follows one asset from the invoice to the scrap dealer.

The asset

Kilang Presisi Sdn Bhd, a resident manufacturer with a 31 December year end, buys a CNC machining centre in March 2026. The supplier invoices RM236,000. The company also pays RM9,000 to a contractor to alter a wall and run three-phase power to the machine, and RM5,000 to level a corner of the factory floor so it can be bolted down.

Everything below flows from that.

Step 1: what is the qualifying expenditure?

Paragraph 2(1) of Schedule 3 defines qualifying plant expenditure as capital expenditure on the provision of machinery or plant used for the purposes of a business, and expressly includes:

• (a) expenditure on altering an existing building to install the machinery, and other expenditure incidental to installation; and
• (b) expenditure on preparing, cutting, tunnelling or levelling land to prepare a site for the installation — but only if it does not exceed ten per cent of the aggregate of itself and the other qualifying plant expenditure for the business.

So Kilang Presisi’s qualifying plant expenditure is RM236,000 plus RM9,000 plus RM5,000 = RM250,000. The site preparation of RM5,000 is 2 per cent of the RM250,000 aggregate, comfortably inside the limit.

Had the site work cost RM60,000 against a RM236,000 machine, the calculation changes character entirely. The site cost would exceed 10 per cent, paragraph 2(1)(b) would not apply, and paragraph 67 would then bite: where site preparation exceeds 75 per cent of the aggregate, the machinery is treated as a building for Schedule 3 purposes for as long as it is used in the business. Between 10 and 75 per cent, the site expenditure simply falls out of qualifying plant expenditure altogether.

Three other rules commonly change the number:

• Hire purchase. Under paragraph 46 the buyer is treated as the owner, and the qualifying expenditure for each basis period is the capital portion of the instalments paid in that period. Interest is not capital expenditure and is dealt with under s.33(1)(a) instead.
• Non-resident installers. Paragraph 2D excludes from qualifying expenditure any amount paid to a non-resident for services connected with installing or operating the machinery where withholding tax under s.109B was not deducted and paid. Fix the withholding before you capitalise the invoice.
• Motor vehicles. Paragraph 2(2) caps qualifying plant expenditure on a non-commercial motor vehicle at RM50,000, increased to RM100,000 if the vehicle was unused before purchase and its total cost does not exceed RM150,000.

Step 2: is it plant?

This is the question that most often decides a real dispute, and the answer changed recently.

Until the year of assessment 2020 the Act contained no definition. Everything ran on case law and the two tests set out in Public Ruling No. 12/2014 — the functional test (is the asset the apparatus with which the business is carried on?) and the premise test (or is it merely the setting within which it is carried on?). The ruling’s examples are still the clearest guide available: mannequins in a boutique are plant, a ship converted into a restaurant is not, decorative lighting in a hotel is plant because ambience attracts guests, turf on a golf course is not because it is part of the course itself.

That framework produced genuine conflict. In SCPASB v DGIR (Special Commissioners, 22 September 2023) a car park operator — SCP Assets Sdn Bhd, which had acquired eight multi-storey car parks between 2013 and 2016 for some RM495 million — succeeded in claiming them as plant, relying on the Court of Appeal decision in KPHDN v Tropiland Sdn Bhd. The DGIR appealed, and in July 2026 the High Court (Justice Alice Loke) dismissed the appeal, affirming on the functionality test that the car parks are plant eligible for capital allowances. Four months before the Special Commissioners’ decision, in Horizon Hills Resort Berhad v DGIR (High Court, Kuala Lumpur, 23 June 2023), a golf and recreation club had lost on its golf course, pools, gymnasium, tennis courts and food and beverage outlets — all held to be the premises where the business was conducted rather than apparatus with which it was conducted.

Paragraph 70A now settles the argument by statute. Inserted with effect from the year of assessment 2021, it provides that plant means

an apparatus used by a person for carrying on his business but does not include a building or any asset used and that functions as a place within which a business is carried on

and gives the Minister power to prescribe further exclusions. A structure whose function is to be the place where the business happens is out, however specialised its construction.

Two consequences most guides miss. First, decisions like Tropiland and SCPASB concern years of assessment before 2021 and cannot be read across to a current claim without checking paragraph 70A — the courts in the SCP Assets line confirmed paragraph 70A is not retrospective, so it does not touch those pre-2021 years but must be applied afresh to a claim from the year of assessment 2021 onwards. Second, some commentary still quotes paragraph 70A as also excluding an intangible asset. Those words were in the original wording but are not in the current text — the reprint of the Act as at 21 May 2024 contains no such exclusion.

Step 3: initial and annual allowance

Two allowances, computed on the same qualifying expenditure, not on a reducing balance.

Initial allowance — paragraph 10 gives one-fifth of the qualifying expenditure, that is 20 per cent, in the year the expenditure is incurred. It is given once.

Annual allowance — paragraph 15 gives such proportion as may be prescribed. Public Ruling No. 12/2014 sets out the three classes and their rates, sourced to Schedule 3 and the Income Tax (Qualifying Plant Annual Allowances) Rules 2000:

Class	Examples	Initial	Annual
Heavy machinery and motor vehicles	Excavators, cranes, bulldozers, cars, vans, boats, aircraft	20%	20%
Plant and machinery	Compressors, lifts, medical and laboratory equipment	20%	14%
Others	Office equipment, furniture and fittings	20%	10%

The ruling is explicit that these three rates apply to any asset regardless of industry, and that they do not apply to assets qualifying for industrial building allowance, agriculture allowance or forest allowance, or to assets with a prescribed accelerated rate.

Both allowances depend on ownership and use at the end of the basis period. Paragraph 13(a) denies the initial allowance if, at the end of the basis period, the person was not the owner or the asset was not in use for the business. Paragraph 15 imposes the same condition on the annual allowance. And paragraph 18 caps the annual allowance at the residual expenditure, so the total relief can never exceed the cost.

The computation, year by year

The CNC machine is plant and machinery: 20 per cent initial, 14 per cent annual, on RM250,000.

Year of assessment	Allowance	Amount (RM)	Residual expenditure (RM)
2026	Initial 20%	50,000
2026	Annual 14%	35,000	165,000
2027	Annual 14%	35,000	130,000
2028	Annual 14%	35,000	95,000
2029	Annual 14%	35,000	60,000
2030	Annual 14%	35,000	25,000
2031	Annual, restricted to residual	25,000	0

Six years of assessment to write off a machine the accounts probably depreciate over ten. Residual expenditure is defined in paragraph 68 as cost less the initial allowance, less annual allowances made, and less any annual allowance that would have been made had it been claimed. An unclaimed year is not banked for later — it is gone, and the residual expenditure falls anyway.

The small value asset shortcut

The same factory buys twelve office chairs at RM650 each and four monitors at RM1,400.

Paragraph 19A gives an allowance equal to the whole of the qualifying plant expenditure, in the year it is incurred, for any asset whose value is not more than RM2,000 — in place of the normal initial and annual allowances. Public Ruling No. 3/2021 confirms both current figures: RM2,000 per asset and a RM20,000 ceiling on the total claim per year of assessment, both effective from the year of assessment 2020, up from RM1,300 and RM13,000 before that.

The ceiling disappears for a small and medium company. Paragraph 19A(3) removes it for 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 for that basis period. Paragraph 19A(4) then disqualifies a company where more than 50 per cent of the ordinary share capital is held in either direction by a related company (one with paid-up capital above RM2.5 million), or where both are more than 50 per cent held by a third company — and, under limb (d), where more than 20 per cent of the ordinary share capital is held by companies incorporated outside Malaysia or by non-citizen individuals.

That fourth limb is worth flagging, because Public Ruling No. 3/2021 predates it and does not mention it. A foreign-owned Malaysian subsidiary that has been claiming uncapped small value asset allowances on the strength of the ruling alone should recheck the statute.

The election is per asset. Paragraph 19A(2) prevents claiming both the special allowance and the normal allowances on the same expenditure, and Public Ruling No. 3/2021 treats a person as having elected simply by computing the allowance at the special rate.

Step 4: disposal, and the sting

Four years later Kilang Presisi replaces the machine. It is sold in the basis period for the year of assessment 2030 for RM90,000 — before the schedule above runs its course, so the 2030 and 2031 rows never arise.

First, no annual allowance arises for 2030 — the company was not the owner at the end of that basis period. Residual expenditure at the date of disposal is therefore RM60,000, the figure carried out of 2029, against total allowances of RM190,000 (the initial allowance plus the four annual allowances for 2026 to 2029).

Second, disposal value. Paragraph 62(1) takes market value at the date of disposal or, on a sale, the greater of market value and net proceeds. Where insurance or compensation money is received, disposal value is the greater of market value and those moneys. So an under-value sale to a friendly party does not reduce the charge.

Third, the reconciliation:

• Disposal value RM90,000 exceeds residual expenditure RM60,000, so paragraph 35 imposes a balancing charge of RM30,000, added to adjusted income for the year of assessment 2030.
• Had the machine fetched only RM40,000, paragraph 34 would instead give a balancing allowance of RM20,000.

Paragraph 37 caps any balancing charge at the total allowances made on the asset — RM190,000 here — so the charge can never exceed the relief given. Note also that disposal is wider than sale: paragraph 61 treats plant or machinery as disposed of if it is sold, discarded or destroyed, or if it ceases to be used for the purposes of the business. Mothballing a line and quietly leaving the asset on the fixed asset register is a disposal event.

Paragraph 61A adds a trap for anyone applying accounting standards faithfully: an asset classified as held for sale is deemed to have ceased to be used, with disposal value set by reference to market value at the date of classification or the net proceeds, whichever is greater.

The two-year rule that cancels everything

Paragraph 71 is the provision that turns a routine disposal into an assessment. Where a person has incurred qualifying expenditure on an asset owned for less than two years, no allowance is to be made, except by reason of that person’s death or any other reason the Director General thinks appropriate — and where allowances have already been made, a balancing charge equal to those allowances is imposed for the year of disposal.

In COSB v DGIR (Special Commissioners, 10 February 2023) a camera lens contract manufacturer closed its digital division and disposed of assets acquired less than two years earlier. It argued genuine commercial justification: the assets were redundant, bespoke, and unusable elsewhere in the company. The DGIR’s position was that permission must be sought from the Director General before disposal, that the closure decision had been taken by head office rather than the taxpayer, and that the taxpayer had continued buying assets after the closure decision was made. The appeal was dismissed and the penalty under s.113(2) upheld.

Read paragraph 71 as a procedural rule, not a substantive one. The discretion exists; it is exercised by the Director General, and it is exercised on an application, not on an explanation offered at audit.

Transfers within a group

Paragraphs 38 to 40 apply where the disposer controls the acquirer, the acquirer controls the disposer, a third person controls both, the disposal is part of a reconstruction or amalgamation, or it is by settlement, gift or death. In those cases the disposal is deemed to occur at the disposer’s residual expenditure, the acquirer inherits that figure as its qualifying expenditure, and no balancing adjustment arises on the transfer.

Control is defined in paragraph 38(2) and is deliberately broad — the power to secure, by shareholding, voting power or the constitutional documents, that the company’s affairs are conducted in accordance with a person’s wishes. In AHSB v DGIR (Special Commissioners, 22 November 2024) the taxpayer argued that the DGIR had failed to establish control, and that the general definitions in s.2 and s.139 could not be imported into paragraph 38. The DGIR pointed to an individual holding 90 per cent of the taxpayer while serving as managing director of both companies, and succeeded on indirect control. Controlled transfer is not something you elect into; it is something you fall into.

When there is not enough income

Paragraph 75 carries unabsorbed allowances forward to the first subsequent year of assessment in which there is adjusted income from that business, and onward until fully used. There is no time limit — this is the single most common error in competitor content, which frequently applies the ten-year business loss carry-forward cap to capital allowances as well.

Paragraph 75A does impose a condition on companies: the shareholders on the last day of the basis period in which the allowance was not made must be substantially the same as those on the first day of the basis period in which it would otherwise be used. Fail that test and the unabsorbed allowance is disregarded for subsequent years.

Common mistakes

Capitalising a non-resident installation invoice without checking withholding tax. Paragraph 2D strips that amount out of qualifying expenditure entirely if s.109B tax was not deducted and paid.

Claiming a specialised structure as plant. Since the year of assessment 2021, paragraph 70A excludes anything functioning as the place within which the business is carried on. Pre-2021 authorities are not a safe guide.

Claiming an annual allowance in the year of disposal. Paragraph 15 requires ownership and use at the end of the basis period.

Selling to a related company at book value and assuming that is the end of it. Paragraphs 38 to 40 substitute residual expenditure, and paragraph 62 substitutes market value where they do not apply.

Skipping a claim in a loss year to save preparation time. Paragraph 68(c) reduces residual expenditure by the annual allowance that could have been claimed. Paragraph 75 already carries the allowance forward, so there is nothing to gain and relief to lose.

Disposing of a recently bought asset without applying to the Director General. Paragraph 71 claws back the lot, and COSB shows that retrospective commercial justification does not work.

Treating small value asset relief as automatic for a foreign-owned subsidiary. The 20 per cent foreign-ownership limb in paragraph 19A(4)(d) removes the uncapped treatment, and the leading Public Ruling predates it.

What’s next

Run the plant test before anything else — if the asset is a building, Schedule 3 relieves it through industrial building allowance at a very different rate and only for a narrow list of uses. Check whether an accelerated capital allowance order applies to your asset class before settling for 14 per cent, since automation equipment, information and communication technology equipment and several other categories have their own gazetted rules. And keep the disposal side in view from the start: the balancing charge is computed on figures fixed years earlier, and the two-year rule punishes decisions that looked purely commercial at the time.