Beginner’s Guide to Capital Allowance in Malaysia

Capital allowance is a tax deduction that lets Malaysian businesses claim part of the cost of certain assets used to generate income.

Think of it as the tax version of depreciation, but instead of being for your accounting books, it’s specifically for reducing your tax bill.

Unlike depreciation, which follows accounting standards, capital allowance is set under the Income Tax Act 1967 (Schedule 3) and enforced by LHDN.

Key Points:

• It’s claimed every year until the asset’s value is fully “written off” for tax purposes.
• Only available to businesses, not individual taxpayers.
• You must own the asset and actively use it for your business.

Why This Matters for Your Business

Claiming capital allowance can significantly (and we do mean significantly) reduce how much tax you pay each year.

It’s not just for big companies buying heavy machinery or assets, even SMEs investing in laptops, office equipment, or delivery vehicles can benefit from this.

Example:

You bought a RM100,000 piece of equipment, and instead of claiming it all at once, you deduct a portion each year (based on LHDN rates) until the full cost is claimed.

This frees up cash for:

• Hiring staff
• Expanding your operations
• Upgrading more assets in the future

Who Can Claim Capital Allowance in Malaysia?

Capital allowance is only available to Malaysian businesses, not individuals. It is used to purchase qualifying assets to generate business income.

It applies to:

• Companies (private limited, public listed, etc) registered in Malaysia
• Partnerships carrying on a business in Malaysia
• Sole proprietors running a registered business locally

LHDN Eligibility Requirements

To qualify for a claim, your situation must meet all of these conditions:

• Business ownership: The asset must be owned by your business (not leased from another company unless ownership transfers).
• Active use in operations: The asset must be in use for producing income,  not sitting idle in storage.
• Qualifying asset definition: The asset must meet LHDN’s definition of “plant” under Schedule 3 of the Income Tax Act 1967.
• Exclusions: No claims allowed for assets bought for personal use, investment holding, or as part of a private residence.

Typical Businesses That Benefit Most

• SMEs upgrading or expanding with new machinery, computers, or office equipment.
• Service providers investing in ICT systems, e-invoicing software, or company vehicles.
• Manufacturers purchasing automation and production equipment to improve efficiency.
• Firms upgrading for compliance with industry regulations (food safety, energy efficiency).

What Assets Qualify for Capital Allowance?

Only certain business assets qualify,  mainly those classed as “plant” or “machinery” in the eyes of LHDN.

Qualifying Examples:

• Motor vehicles (with QE caps)
• Heavy machinery & plant
• Office equipment
• Furniture & fixtures
• ICT equipment & customised software

Non-Qualifying Examples:

• Land and buildings
• Intangible assets (patents, trademarks)
• Assets not actively used in business operations

What Are the Capital Allowance Rates in Malaysia

Disclaimer: This article is for general information only as of 2025 and is not tax advice. Tax incentives change; consult a licensed tax advisor or LHDN guidance for your facts.

Special Rule for Non-Commercial Vehicles:

• QE capped at RM100,000 if new and costs ≤ RM150k.
• QE capped at RM50,000 for all others.

What Is Accelerated Capital Allowance (ACA)?

ACA lets you claim qualifying asset costs faster than standard IA/AA rates. It is the government’s way to encourage investment in certain industries or technologies that aligns with the national blueprint.

As of 2025, ACA applies to:

• Green Technology incentives (GITA/GITE)
• Approved automation machinery
• ICT & e-invoicing systems

ACA schemes may change with each Budget, confirm eligibility before purchase and keep a close eye.

When Should You Claim Capital Allowance?

You must claim capital allowance in the year your asset is first put into business use, not simply when it’s purchased.

This timing rule is set by LHDN and applies to all eligible businesses.

• Year of use matters: The asset must be installed and actively used in your business to start claiming.
  
• Same-year claims: If you buy and start using the asset before your financial year ends, you can claim both Initial Allowance (IA) and Annual Allowance (AA) for that year.
  
• Late-year purchases: If an asset is bought but not used until the next year, claims start in the following year of assessment.

Deferring a Claim

• Businesses can choose to defer claiming capital allowance to future years for tax planning purposes.
• This can help match deductions with higher-income years for maximum benefit.
• Deferrals must be properly documented in your tax records to avoid issues during audits.

“For year-end tax savings, aim to have new assets in use before your closing date, not just delivered or paid for. LHDN will only approve claims if you can prove operational use within the claim year.”

How Do You Calculate Capital Allowance in Malaysia?

Capital allowance is based on the asset’s qualifying expenditure (QE), minus any residual value.

In other words. 

You buy an asset for your business → you claim part of the cost each year → you keep claiming until you’ve claimed the full cost. 

The formula is as follows:

Capital Allowance = (QE × IA% in Year 1) + (QE × AA% each year until written off)

1. Identify the QE. Purchase price of the asset minus grants, subsidies, or non-qualifying costs (installation of non-permanent structures).
   
2. Apply Initial Allowance (IA) in Year 1. One-time deduction percentage (usually 20% for most assets, higher for ICT/e-invoicing).
   
3. Apply Annual Allowance (AA) in the same year and subsequent years. Recurring deduction until QE reaches zero or asset is disposed of.
   
4. Stop claiming if an asset is sold or scrapped before fully written off,  this triggers a balancing adjustment.

Confusing? Here’s an example: 

Heavy Machinery

• Bought machinery for RM200,000
• Year 1: Claim RM40,000 (IA) + RM40,000 (AA) = RM80,000
• Year 2 & onwards: Claim RM40,000 per year until cost is fully claimed

If you don’t use the full claim in a year, you can carry it forward, but only against the same business income.

Balancing Charges & Balancing Allowances

This only happens if you sell or get rid of the asset before you’ve claimed all the cost.

• Balancing Charge = You sell it for more than the leftover value → you pay tax on the difference.
  
  
• Balancing Allowance = You sell it for less than the leftover value → you get an extra deduction.

Example:

• Leftover value: RM40,000
• Sell for RM50,000 → RM10,000 is added to your taxable income (Balancing Charge).
• Sell for RM30,000 → RM10,000 is deducted from your taxable income (Balancing Allowance).

How Do You Claim Capital Allowance?

Claiming capital allowance is like ticking off a short checklist, you just need to prove you bought the asset, you’re using it for your business, and you’ve done the math right.

1. Check if your asset qualifies

Look at LHDN’s Schedule 3 list,  assets must be “plant” or “machinery” used for your business.

2. Work out the qualifying cost (QE)

Start with the purchase price, minus any grants or subsidies.

3. Apply the right rates

Use the Initial Allowance (IA) and Annual Allowance (AA) that match your asset type.

4. Keep all proof

Invoices, receipts, payment proofs, asset register, and photos showing it’s in use.

5. Include it in your tax filing

Report it in Form C and store all records for at least 7 years.

Required Documents:

• Purchase invoice & payment proof
• Asset register with usage date
• LHDN forms for capital allowance claims

What Are the Penalties for Wrong Capital Allowance Claims?

Under Section 113(1)(a) of the Income Tax Act 1967, taxpayers who submit incorrect tax returns (including overclaimed capital allowance) may face:

• A fine between RM1,000 and RM10,000, and
• An additional penalty of up to 200% of the undercharged tax.

In practice, LHDN/IRBM often applies tiered penalty rates based on the severity and intent of the error, as summarised in the Tax Audit Framework:

• 15%: Voluntary disclosure before audit notification
• 30%: Voluntary disclosure after audit notification but before audit starts
• 45%: Errors discovered during an audit without prior disclosure
  

• Failure to Keep Proper Records
  If you can’t provide adequate documentation, especially the mandatory 7-year asset records, LHDN can impose fines up to RM10,000 or even 1 year of imprisonment

Quick Summary Table

Conclusion on Capital Allowance

Capital allowance isn’t just a compliance exercise; it’s a powerful tax-saving lever for Malaysian businesses in 2025. 

By understanding the right categories, rates, and accelerated schemes, you can reduce taxable income, free up cash flow, and reinvest in growth.

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