Automation Capital Allowance incentives extended
Previous position
Pursuant to the Income Tax (Accelerated Capital Allowance) (Automation Equipment) Rules 2017 [P.U.(A) 252] and Income Tax (Exemption) (No. 8) Order 2017 [P.U.(A) 253], a manufacturing company is eligible for Automation Capital Allowance (Automation CA) on amounts incurred for the purchase of automation equipment, as follows (see Tax Alert No. 19/2017):
| Category 1 | Category 2 | |
| Type of industry | Qualifying project relating to rubber, plastic, wood, furniture and textile | Other than Category 1 |
| Effective Years of Assessment (YAs) | YA 2015 to YA 2017 | YA 2015 to YA 2020 |
| Application to the Malaysian Investment Development Authority (MIDA) | 1 January 2015 to 31 December 2017 | 1 January 2015 to 31 December 2020 |
Income Tax (Accelerated Capital Allowance) (Automation Equipment) Rules 2017 |
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| Incentive available: Accelerated Capital Allowance (ACA) | Initial allowance: 20% of the first RM4 million qualifying capital expenditure incurred Annual allowance: 80% of the first RM4 million qualifying capital expenditure incurred |
Initial allowance: 20% of the first RM2 million qualifying capital expenditure incurred Annual allowance: 80% of the first RM2 million qualifying capital expenditure incurred |
Income Tax (Exemption) (No. 8) Order 2017 |
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Incentive available: Income tax exemption |
A qualifying company will be exempted from payment of income tax in respect of the statutory income derived from a qualifying project for the respective effective YAs. The amount exempted will be equivalent to 100% of the ACA given under P.U.(A) 252/2017, to be set off against 70% of the statutory income for each YA. | |
Extension of incentives
In Budget 2018, to further encourage automation in the manufacturing sector, particularly in enhancing productivity and efficiency in the labour-intensive industries, it was proposed that the incentive period for Category 1 be extended for another three (3) years. This applies to applications received by MIDA from 1 January 2018 to 31 December 2020.
Thereafter, in Budget 2020, it was proposed that the period for the incentive in both categories be extended, until YA 2023. This applies to applications received by MIDA until 31 December 2023.
To legislate the above-mentioned proposals, the following were gazetted on 28 May 2020, and are deemed to be effective from YA 2018.
- Income Tax (Accelerated Capital Allowance) (Automation Equipment) 2017 (Amendment) Rules 2020 [P.U.(A) 173]
- Income Tax (Exemption) (No. 8) 2017 (Amendment) Order 2020 [P.U.(A) 172]
The Amendment Rules and Amendment Order provide that:
- To be a qualifying company eligible for the incentives, one of the conditions is that the company must have been in operations for 36 months. Previously, the company must have carried on a qualifying project for at least 36 months.
- The incentive period is from YA 2015 to YA 2023.
- The incentive will apply to applications received by MIDA from 1 January 2015 to 31 December 2023.
- The reference to “Section 127” of the Income Tax Act 1967 (ITA) under the non-application proviso is to be replaced with “Paragraph 127(3)(b) and Section 127(3A)” of the ITA. This is in line with Practice Note No. 2/2018 dated 1 June 2018, issued by the Inland Revenue Board (IRB) to provide guidance on the non-application proviso stipulated in the Income Tax Orders (ITO) and Income Tax Rules (ITR) (see Tax Alert No. 12/2018).
It is noted, however, that the Budget 2020 proposal for the scope of the Category 2 incentive to be expanded to the services sector for applications received by MIDA between 1 January 2020 and 31 December 2023, has not yet been legislated.
