# Industrial Building Allowance: What Actually Qualifies

> The paragraph 63 definition and the buildings deemed industrial by extension, the letting restriction that took effect in 2016, and the qualifying expenditure trap on a purchased building.

- Category: taxation
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/taxation/industrial-building-allowance

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A company buys a factory for RM1.2 million and claims industrial building allowance on RM1.2 million. Two years later the audit adjusts the claim to a little over RM500,000, adds back the excess for every year since, and imposes a penalty. Nothing about the building changed. The company simply claimed on a number the statute never allowed it to use.

Industrial building allowance is the least generous relief in Schedule 3 — 3 per cent a year, thirty years to full write-off — and it is also the one most often overclaimed, because the two hard questions are asked at the wrong time.

## Which buildings qualify?

Paragraph 63 of Schedule 3 is short and closed. A building is an industrial building if it is used for the purposes of a business and:

- **(a)** used as a factory;
- **(b)** used as a dock, wharf, jetty or other similar building;
- **(c)** used as a warehouse, **and the business consists or mainly consists of the hire of storage space to the public**;
- **(d)** the business is a water or electricity undertaking supplying the public, or a telecommunication undertaking providing services to the public;
- **(e)** used in connection with the working of a farm, where the business mainly consists of working the farm; or
- **(f)** used in connection with the working of a mine, on the same basis.

Paragraph 64 expands *factory* to include a mill, workshop or other building housing machinery or plant for manufacturing, processing or generating power for that process — but expressly excludes a workshop used for repairing or servicing goods where that is done in conjunction with or incidentally to selling those goods. It also brings in a storage building **within the same curtilage** as the factory, holding raw materials, fuel, stores or processed product before sale.

Paragraph 65(1) treats a canteen, rest room, recreation room, lavatory, bathhouse or wash-room provided for employees of the business as an industrial building. Paragraph 65(3) then removes any doubt in the other direction: a **dwelling house, retail shop, showroom or office** is not and shall not be treated as an industrial building.

Paragraph 66 supplies the tolerance. Where part of a building is used as an industrial building and part is not, the whole qualifies if the construction cost of the non-qualifying part is **not more than one-tenth** of the whole. Above that, the expenditure is apportioned by floor area or as the Director General directs.

The definition is applied strictly but not narrowly. In *DGIR v Classic Japan (M) Sdn Bhd* the Court of Appeal, while overturning the taxpayer on a separate export incentive, affirmed that the taxpayer's factory was an industrial building within paragraph 63 and that the industrial building allowance was properly claimed.

## The buildings that qualify by extension

Most industrial building allowance claims in practice rest not on paragraph 63 but on the paragraphs that apply the industrial building provisions *mutatis mutandis* to something else:

| Paragraph | Building | Allowance |
| --- | --- | --- |
| 37A | Licensed private hospital, maternity home, nursing home | Standard; includes alteration of rented premises |
| 37B | Building used for approved research and development | Standard; includes alteration of rented premises |
| 37C | Warehouse used **solely** for storing goods for export, or imports to be processed and re-exported | One-tenth a year for ten years |
| 37E | Building for an approved service project under Schedule 7B | Standard |
| 37F | Hotel **registered with the Ministry of Tourism** | Standard |
| 37G | Airport, including runway and ancillary structures | Standard |
| 37H | Motor racing circuit approved by the Minister | Standard |
| 42 | Living accommodation for an employee, where an industrial building is in use | Initial allowance of **two-fifths** |
| 42A(1) | Staff accommodation in a manufacturing, hotel, tourism or approved service project business | One-tenth a year for ten years |
| 42A(2) | Childcare facilities for employees | One-tenth a year for ten years |
| 42B | School or approved educational institution | One-tenth a year for ten years |
| 42C | Industrial, technical or vocational training building | One-tenth a year for ten years |

Note the exclusions written into paragraphs 42(2) and 42A(4): for staff accommodation, *employee* does not include a director, an individual having control of the business, or a member of the management, administrative or clerical staff. Accommodation for the finance manager is not an industrial building.

## The letting restriction most guides still miss

From the year of assessment 2016, subparagraph 16B(1) provides that **no allowance shall be made under paragraphs 12 and 16** for expenditure relating to paragraphs 37A, 37B, 37C, 37E, 37F, 37G, 37H, 42A, 42B and 42C where the building or part of it is used by that person **for the letting of property**, including a business of letting.

The person claiming must be both the owner and the business operator. Subparagraph 16B(2) preserves the one-tenth tolerance: if the let portion is not more than one-tenth of the floor area of the whole building, the whole building still qualifies. Subparagraph 16B(3) restricts the allowance to the floor area not let where the tolerance is exceeded.

Public Ruling No. 3/2018 works this through with examples — a hospital that leases out a pharmacy and a cafeteria, a hotel that lets retail lots. The arithmetic is a floor-area percentage applied to the whole qualifying building expenditure, and it recurs every year the letting continues.

## The purchased-building trap

Subparagraph 3(1) makes qualifying building expenditure the capital expenditure on the **construction or purchase** of a building used as an industrial building. Subparagraph 3(2) then defines it for a purchase: the amount of the purchase price of that building.

Two adjustments turn that into the number you can actually claim.

**Paragraph 70 includes the incidentals and excludes the land.** Purchase price, in relation to an industrial building, includes any legal fee, stamp duty or other incidental expenditure incurred by the purchaser in connection with the purchase — but does **not** include so much of the price as is attributable to the land or an interest in the land. Building and land are treated as separate assets.

**Where the agreement does not split them, someone has to.** Public Ruling No. 3/2018 requires a valuation from the Valuation and Property Services Department or a professional valuer, and then apportions the incidental costs on the same ratio.

Take a purchase of RM1,200,000 with legal fees and stamp duty of RM36,000, where the sale and purchase agreement gives one figure. A valuation splits it: land RM700,000, building RM500,000.

| Item | RM |
| --- | --- |
| Cost of building per valuation | 500,000 |
| Legal fees and stamp duty attributable to the building (500,000 ÷ 1,200,000 × 36,000) | 15,000 |
| **Qualifying building expenditure** | **515,000** |

Initial allowance at 10 per cent is RM51,500; annual allowance at 3 per cent is RM15,450. First-year relief is RM66,950 on a RM1.2 million outlay — and the remaining expenditure runs off at RM15,450 a year for the next twenty-nine years of assessment.

That is the trap. It is not that the claim is disallowed; it is that the claimable base is roughly 43 per cent of what was paid, and the relief profile is thirty years long. Purchasers who model the tax effect on the headline price overstate first-year relief by a factor of two or more.

Paragraph 3A, paragraph 4 and paragraph 5 of Schedule 3 — which used to restrict qualifying expenditure on a purchased building by reference to what the seller had spent — were repealed with effect from the year of assessment 2005. Public Ruling No. 3/2018 confirms that they remain relevant only to buildings purchased before that year.

## The initial allowance can be taken back

Paragraph 13(c) denies the initial allowance where, at the end of the basis period, the person was not the owner or the building was not in use or about to be used as an industrial building. Paragraph 13(d) goes further: where an initial allowance **has** been made and the building was not in use or about to be used as an industrial building at some time in the basis period for the **next following** year of assessment, a balancing charge equal to the allowance is imposed for the year in which it was given.

Buying a building in December, claiming the initial allowance, and only fitting it out through the following year is enough to trigger this.

## Common mistakes

**Claiming on the whole purchase price.** Land is excluded by paragraph 70, and the incidental costs must be apportioned.

**Treating any warehouse as an industrial building.** Paragraph 63(c) requires the business to consist or mainly consist of hiring storage space **to the public**. A warehouse storing your own stock qualifies only under paragraph 64(b), within the same curtilage as a factory, or under paragraph 37C for export storage.

**Claiming on a shop lot or office.** Paragraph 65(3) is an outright exclusion, subject only to the one-tenth rule in paragraph 66.

**Ignoring paragraph 16B in a mixed-use building.** A hospital, hotel or school that lets out more than one-tenth of its floor area loses the allowance on the let portion, and the restriction repeats every year.

**Assuming the initial allowance is safe once claimed.** Paragraph 13(d) reverses it if the building is not in industrial use in the following year.

**Reading the seller's tax written down value across.** In an arm's length sale, the buyer's qualifying expenditure is the buyer's price. Only a controlled transfer under paragraphs 38 to 40 substitutes residual expenditure.

## What's next

Before signing a sale and purchase agreement for commercial premises, get the land and building values stated separately in the agreement itself — it is far cheaper than a valuation report obtained under audit pressure three years later. Check whether the intended use is on the paragraph 63 list or reaches industrial building treatment only through one of the extended paragraphs, because the letting restriction applies to the extended categories and not to paragraph 63 buildings. And confirm what is genuinely plant rather than building before splitting the cost, since plant runs off at 14 or 20 per cent a year against the building's 3.

## Sources

- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — https://www.hasil.gov.my/wp-content/uploads/20240521-akta-cukai-pendapatan-1967-akta-53.pdf (LHDN)
- Public Ruling No. 3/2018 — Qualifying Expenditure And Computation Of Industrial Building Allowance — https://www.hasil.gov.my/wp-content/uploads/pr_03_2018.pdf (LHDN)
- Public Ruling No. 8/2016 — Industrial Buildings Part I — https://www.hasil.gov.my/wp-content/uploads/PR_08_2016.pdf (LHDN)
- Public Ruling No. 10/2016 — Industrial Buildings Part II — https://www.hasil.gov.my/wp-content/uploads/PR_10_2016.pdf (LHDN)
- Director General of Inland Revenue v Classic Japan (M) Sdn Bhd — Court of Appeal case report on paragraph 63 — https://www.hasil.gov.my/wp-content/uploads/20210309-revenews-classic-japan.pdf (LHDN)

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