Industrial Building Allowance (IBA), available under Malaysian law, allows qualifying property owners to offset part of their building costs against taxable income.
While your accountant will handle the tax filing, this knowledge will empower you to make more informed property decisions and help lighten your tax burden.
Note: This guide is for informational purposes. We specialise in helping you choose the right property, but your accountant should handle the specifics of IBA claims.
What is industrial building allowance (IBA)?
Industrial Building Allowance is a form of capital allowance granted to a person who has incurred qualifying expenditure on the construction or purchase of an industrial building.
If the capital expenditure incurred is related to qualifying industrial activities, it may be eligible under IBA regulations.
Essentially, it allows businesses to deduct a portion of the building's cost from their taxable profits over time.
This reduces your overall tax liability, freeing up capital that can be reinvested into the business.
The purpose of IBA is to stimulate industrial development by making it more financially viable for companies to build or acquire properties used for specific industrial activities.
Some projects may also qualify if they are categorised as an approved service project.
For property buyers, choosing an IBA-eligible building can lead to greater long-term tax efficiency and enhanced investment returns.
Public Ruling and Guidelines in Malaysia
In Malaysia, the Industrial Building Allowance is governed by the Income Tax Act 1967 and further detailed in Public Rulings (PR) from the Inland Revenue Board of Malaysia (LHDN).
The key document, Public Ruling No. 3/2018, titled Qualifying Expenditure and Computation of Industrial Building Allowance, provides crucial definitions and interpretations.
These rulings clarify what constitutes an "industrial building", what expenses are considered "qualifying expenditure," and the conditions for making a claim.
Eligibility Criteria
An industrial building is defined by its use. Eligible properties generally include:
- Factories, mills, or manufacturing plants.
- Warehouses, storage facilities, or logistics hubs for goods intended for processing or manufacturing.
- Cold storage or food processing facilities.
- Buildings used for research and development approved by the Minister.
- Docks, jetties, or other port infrastructure.
- Buildings used in agriculture, forestry, or fishery businesses.
- Hotels registered with the Ministry of Tourism, Arts and Culture.
- Private hospitals, maternity homes, or nursing homes.
- Educational institution approved by the authorities, including schools and vocational training centres.
It is important to note that buildings used as offices, showrooms, retail shops, or living accommodation are generally excluded.
An exception exists if they are an ancillary structure part of the main industrial building and do not exceed 10% of the total construction cost.
Facilities such as a staff recreation room may be considered if they fit within the scope of ancillary use.
Additionally, IBA can sometimes apply to properties developed on a build lease transfer basis, frequently seen in government-related and infrastructure development projects.
Claiming Procedures
- Incur Qualifying Expenditure: The process begins when you incur costs for the construction or purchase of an eligible industrial building. Maintain detailed records of the Sale & Purchase Agreement (SPA), all payments, contracts, and invoices.
- Use the Building for Business: The building must be in use for your qualifying business activity at the end of the basis period for a year of assessment.
- Complete the Tax Return Form: The claim is made when filing your company's annual income tax return (Form C). This involves completing the specific capital allowance schedules with the necessary computations.
- Provide Supporting Documentation: While not all documents are submitted with the return, they must be kept for a potential audit by the LHDN. Essential documents include proof of ownership, construction contracts, architect certificates, and payment receipts.
The claim must be made in the first year of assessment in which the expenditure was incurred, and the building is in use.
Failing to claim it in the first eligible year may result in losing the right to claim the initial allowance.
Industrial Building Allowance Rates
The IBA is provided in two parts, in which the rates depend on the type of industrial building and when the expenditure was incurred. The standard rates are:
- Initial Allowance: 10% of the qualifying expenditure. This is a one-time allowance granted in the first year the building is used.
- Annual Allowance: 3% of the qualifying expenditure. This is claimed annually, starting from the first year, until the full qualifying expenditure is written off.
This allows the business to write off the building's cost over approximately 30 years.
Certain promoted activities or sectors may be eligible for accelerated rates, so it is always best to check the latest guidelines.
Calculation and Examples
For example, a factory built for RM5,000,000.
- Qualifying Building Expenditure (QBE): RM5,000,000
- Initial Allowance in the first year: 10% of RM5,000,000 = RM500,000
- Annual Allowance each subsequent year: 3% of RM5,000,000 = RM150,000
The company can deduct the Initial Allowance from its statutory income in the first year.
For the year onwards, the company can continue to claim the Annual Allowance until the entire Qualifying Building Expenditure is claimed.
Capital Allowance and Industrial Building Allowance
Can a business claim both Capital Allowance (CA) and Industrial Building Allowance (IBA)? The answer is generally no, not on the same asset.
The distinction is crucial for maximising your total tax relief.
- Industrial Building Allowance (IBA) is claimed on the building structure itself, including walls, floors, roof, and foundations.
- Capital Allowance (CA) is claimed on plant and machinery. Fixtures, fittings, plant, and machinery within the building—such as manufacturing equipment, air conditioning systems, or lifts—are eligible for CA, which often has more accelerated write-off rates.
Make Full Use of Industrial Building Allowance
Proper planning and meticulous record-keeping are the keys to a successful claim. Are you looking to invest in or develop an industrial property in Malaysia?
At Industrial Malaysia, we specialise in helping businesses find the perfect location to grow and thrive.
Our team specialises in industrial real estate and can help you find properties that meet your needs while offering financial benefits like the IBA.
Connect with our experts today to unlock your business's full potential.
