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 Calculations for ITA benefits

Investment Tax Allowance (ITA) is an incentive given to companies to encourage them to invest in EE and RE projects. This incentive is in addition to the Capital Allowance (CA) granted for investment in plant and machinery required for conducting the activity/project .


The benefit of ITA as an addition to CA for any company that invests in BIPV for generating RE for its own consumption is shown in the hypothetical example in Tables 2 and 3 below.


Capital Allowance (CA) is seen as a deduction from “adjusted income” for certain types of capital expenditure provided under Schedule 3 of the Income Tax Act 1967. It comprises the following types of provisions:

  • Initial Allowance (IA – for the first year allowance),
  • Annual allowance (AA - for subsequent years until the full amount is availed),
  • Balancing allowance, and
  • Balancing charge.

For the examples in this document, only the IA and AA shall be considered for simplicity, as the other provisions are not relevant for the example. They apply only if the assets under the qualifying investment are disposed off before the CA is fully availed. Rates of IA & AA for selected products and equipment are as shown in the Table 1 below.

Table 1 – Sample Rates of Capital Allowances

 

Type of Asset

Initial All. Rate (%)

Annual All. Rate (%)

1.

Motor vehicles, heavy machinery

20

20

2

Plant and machinery

20

14

3.

Others

20

10

Note:  PV system components fall under item 2 – “plant and machinery”
The hypothetical case considered is based on the assumption that there are no other elements of CA to be accounted for and the business results for the year when the investment in RE plant for their own use is made are as in Table 2 below.

General elements of CA
Assumptions for the calculations are shown in Table 2 below

Table 2 – Business Revenue & Expenditure

Business income for the year:           

RM 1,000,000

Operating expenditure for the year

RM 800,000

Adjusted income – AI

RM 200,000

Capital investment in RE for own use

RM 100,000

Example 1.
Capital Allowance savings
Based on item 2 of Table 1, the business statistics shown in Table 2 above and the respective corporate tax rates in effect, the CA provisions are calculated as below.
Corporate tax rate for year 1 (2008) is 26% and for year 2 onwards (2009 and beyond) is 25%.
Capital Allowance and Investment Tax Allowance savings for the example in Table 2 are shown in Table 3 below

Table 3 – Capital Allowance Tax Savings

Year

Tax rate %

CA %

CA value RM

CA tax saving RM

Cumulative tax saving RM

1 (2008)

26

IA – 20
AA – 14

IA – 20,000
AA – 14,000

5,200
3,640

8,840

2 (2009)

25

AA – 14

AA – 14,000

3,500

12,340

3 (2010)

25

AA – 14

AA – 14,000

3,500

15,840

4 (2011)

25

AA – 14

AA – 14,000

3,500

19,340

5 (2012)

25

AA – 14

AA – 14,000

3,500

22,840

6 (2013)

25

AA – 10

AA – 10,000 *

2,500

25,340

Note: CA for year 6 is 10% to make total of 100% over the period.

Investment Tax Allowance (ITA) savings are as below:
The tax saving from ITA for the investment in plant to generate RE for own use, based on 100% of the qualifying investment at the corporate tax rate of 26% in 2008, becomes 26% of (100% of the investment) i.e. RM (0.26*100,000) = RM 26,000
Investment Tax Allowance (ITA) savings are tabulated as below:

Table 4 – Investment Tax Allowance Savings

Year

1 (2008)

2

3

4

AI total RM

200,000

 

 

 

SI after CA RM

166,000

 

 

 

ITA eligibility RM

100,000 *

0

0

0

Tax rate %

26

25

25

25

Tax savings RM

26,000

0

0

0

Note: ITA eligibility fully utilised in year 1.
Adjusted Income (IA) – Capital Allowance (CA) = Statutory Income (SI).
Therefore the total tax savings for example 1 become:

Table 5 – Total Tax (Fiscal) Savings

Year

1

2

3

4

5

6

Total

CA value RM

34,000

14,000

14,000

14,000

14,000

10,000

100,000

Tax rate %

26

25

25

25

25

25

N/A

Tax saving RM – CA

8,840

3,500

3,500

3,500

3,500

2,500

25,340

Total ITA savings RM

26,000

0

0

0

0

0

26,000

Total tax savings RM

34,840

3,500

3,500

3,500

3,500

2,500

51,340

Therefore the total corporate tax savings is RM51,340  and net investment by the  investor is only RM48, 660 as shown in table 6 below.

Table 6 – Investment in RE for Own-Use - RM 100,000
(Statutory Income RM 200,000)

Qualifying capital investment

Corporate tax savings

Net investment by owner

100,000

51,340

48,660

Percentage

51.3%

48.7%

Example 2.
This example shows the tax saving calculations if the SI for the year that the RE investment was made is insufficient to cover the full ITA as shown in Table 7 below.

Table 7 – Business Revenue & Expenditure


Business income for the year:           

RM 1,000,000

Operating expenditure for the year

RM 900,000

Adjusted income – AI

RM 100,000

Capital investment in RE for own use

RM 100,000

The company that invests RM 100,000 in GCPV installation to generate RE for their own use will need more than 1 year to avail its ITA benefits. This is based on the reduced SI after accounting for the CA benefits as detailed below.
Capital Allowance savings
Based on item 2 of Table 1 above and the respective corporate tax rates in effect, the CA provisions are tabulated below.

Table 8 – Capital Allowance Tax Savings

Year

Tax rate %

CA %

CA value RM

CA tax saving RM

Cumulative tax saving RM

1 (2008)

26

IA – 20
AA – 14

IA – 20,000
AA – 14,000

5,200
3,640

8,840

2 (2009)

25

AA – 14

AA – 14,000

3,500

12,340

3 (2010)

25

AA – 14

AA – 14,000

3,500

15,840

4 (2011)

25

AA – 14

AA – 14,000

3,500

19,340

5 (2012)

25

AA – 14

AA – 14,000

3,500

22,840

6 (2013)

25

AA – 10

AA – 10,000 *

2,500

25,340

Note: CA for year 6 is 10% to make total of 100% over the period
Investment Tax Allowance (ITA) savings are as below:

Table 9 – Investment Tax Allowance Savings

Year

1 (2008)

2

3

4

AI total RM

100,000

100,000

100,000

100,000

CA availed RM

34,000

14,000

14,000

14,000

SI after CA RM

66,000

86,000

86,000

86,000

SI availed for ITA RM

66,000

34,000

 

 

Tax rate %

26

25

25

25

Tax savings RM

17,160

8,500

0

0


The total tax savings become:
Table 10 – Total Tax (Fiscal) Savings

Year

1

2

3

4

5

6

Total

Total RM

34,000

14,000

14,000

14,000

14,000

10,000

100,000

Tax rate %

26

25

25

25

25

25

N/A

Tax saving RM – CA

8,840

3,500

3,500

3,500

3,500

2,500

25,340

Total ITA savings RM

17,160

8,500

0

0

0

0

25,660

Total tax savings RM

26,000

12,000

3,500

3,500

3,500

2,500

51,000

Table 11 – Investment in RE for Own-Use - RM 100,000
(Statutory Income RM 100,000 a year)

Qualifying capital investment

Corporate tax savings

Net investment by owner

100,000

51,000

49,000

Percentage

51.0%

49.0%

 



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