What is Capital Allowance in Malaysia?

Running a business requires a lot of equipment to keep operations smooth.

This includes machines, office supplies, and even regular office renovations.

These things can be expensive, and you might think the taxes on them will be high too. But that’s not always the case.

Businesses can reduce their taxable income through capital allowance.

In simple terms, capital allowance is a tax relief that helps businesses recover the cost of certain assets over time.

Instead of deducting the full expense in one go, businesses spread out the deduction gradually. This way, cash flow stays balanced, and tax payments can be lower.

Want to learn more? Let's break it down in this article.

What is Capital Allowance?

Capital allowance is a tax deduction for businesses that purchase fixed assets used in operations.

Instead of treating these purchases as immediate expenses, businesses claim them in stages through capital allowance.

This tax relief benefits businesses in two main ways:

Reduce taxable income, which lowers the amount of tax payable.
Help businesses reinvest tax savings into operations.

Let’s say, a company purchases a delivery van. It cannot immediately deduct the full cost from taxable income.

Instead, it claims a portion of the cost each year until the asset’s value is fully written off.

This system helps businesses match asset costs with the revenue they generate over time

Who is Eligible for Capital Allowance?

Not all businesses qualify for capital allowance. To claim this tax relief, a business must meet the following conditions:

Registered business in Malaysia.
The business must have purchased and owned the asset.
The asset must be used for income-generating activities and not for personal use.
Businesses must have taxable profits, as capital allowance is deducted from taxable income.

If a restaurant owner buys kitchen equipment for business use, it qualifies for capital allowance. However, if the owner buys a personal car, it does not.

Types of Capital Allowance in Malaysia

Businesses can claim different types of capital allowance depending on how the asset is used and how long it remains in operation.

1. Initial Allowance (IA)

This is a one-time deduction given in the year an asset is purchased. The rate is 20 percent of the asset’s cost.

For example, if a company buys machinery for RM50,000, it can deduct RM10,000 in the first year.

2. Annual Allowance (AA)

This deduction is given every year after the initial allowance. The rate depends on the type of asset:

Motor vehicles: 20%
Machinery and equipment: 14 %
Office furniture: 10%

The deduction continues each year until the full cost of the asset is claimed.

3. Accelerated Capital Allowance (ACA)

Some industries qualify for faster capital allowance claims, such as small and medium enterprises (SMEs) and businesses investing in green technology.

This allows businesses to recover costs quickly and reinvest in new assets.

4. Balancing Allowance and Balancing Charge

When a business sells an asset before it finishes claiming capital allowance, the tax treatment needs to be adjusted.

If the sale price is less than the asset’s remaining value, the difference becomes a balancing allowance, which gives the business some extra tax relief.

But if the sale price is more than what’s left of the asset’s value, the extra amount is considered a balancing charge, and that amount gets added to the company’s taxable income.

Qualifying Expenditures for Capital Allowance

Not all purchases qualify for capital allowance. The government only permits businesses to claim tax relief on specific assets, including:

Machinery and equipment used for business operations.
Industrial buildings, such as warehouses, factories, and commercial spaces.
Motor vehicles, with certain limitations (explained below).
IT equipment and software, including computers, servers, and business-related applications.
Renovation and refurbishment expenses, subject to conditions set by tax authorities.

Motor Vehicles and Capital Allowance Rules

Vehicle Type	Qualifying Capital Allowance
Used vehicle costing below RM50,000	Full purchase price can be claimed
New vehicle costing below RM100,000	Full purchase price can be claimed
New vehicle costing RM100,000 – RM150,000	Maximum RM100,000 claimable
New vehicle costing above RM150,000	Maximum RM50,000 claimable

A company that buys a delivery truck for RM120,000 can claim the full amount under capital allowance.

However, if the company buys a luxury car for RM180,000, it can only claim RM50,000.

How to Calculate Capital Allowance

Capital allowance is calculated in two steps:

1. Initial Allowance (IA)

IA = Qualifying Expenditure × IA Rate

(Applied in the first year)

2. Annual Allowance (AA)

AA = Qualifying Expenditure × AA Rate

(Applied every year until the full amount is deducted)

Example:

A company buys a car for RM100,000.

Year 1:

IA = RM100,000 × 20 percent = RM20,000
AA = RM100,000 × 20 percent = RM20,000
Total deduction (Year 1): RM40,000

Year 2 Onward:

AA = RM20,000 per year until RM100,000 is deducted.

How to Claim Capital Allowance in Malaysia

To claim capital allowance in Malaysia, businesses need to go through a few important steps below:

Identify which expenses qualify. This means making sure the asset is eligible and keeping all the necessary receipts and supporting documents.
Depending on the asset type, calculate the capital allowance using the Initial Allowance (IA) and Annual Allowance (AA) rates.
Report the capital allowance in their annual tax return. This helps reduce their taxable income for the year.
Maintain proper records, such as invoices and payment details, in case LHDN requests to review the claim during an audit.

Capital Allowance vs Depreciation

Aspect	Capital Allowance	Depreciation
Purpose	Tax deduction to reduce taxable income	Accounting expense for financial reporting
Who Determines It?	Fixed by LHDN (tax authority)	Business decides depreciation rates
Tax Deductible?	Yes	No
Calculation Basis	Based on tax rules (Initial and Annual Allowance)	Based on company accounting policies

Capital Allowance lowers tax payments, while depreciation is just a financial record for company accounts.

FAQ

Who qualifies for capital allowance in Malaysia?

Capital allowance is available to businesses that meet the following conditions:

The business is registered in Malaysia and subject to income tax.
The business owns the asset (it is not rented or leased).
The asset is used solely for business operations and not for personal use.

What assets are eligible for capital allowance?

Businesses can claim capital allowance on assets that are essential for operations. These include:

Machinery and equipment
Motor vehicles
Office equipment
Industrial buildings
Renovation and refurbishment
IT equipment and software

Can businesses claim capital allowance on leased assets?

No, businesses cannot claim capital allowance on leased assets because they do not own them. Capital allowance applies only to business-owned assets that are purchased and used for generating income.

However, rental or lease payments for business assets may be deductible as an operating expense instead.

How do you calculate capital allowance for motor vehicles?

The capital allowance for motor vehicles depends on the vehicle’s price category:

Vehicle Type	Qualifying Capital Allowance
Used vehicle costing below RM50,000	Full purchase price can be claimed
New vehicle costing below RM100,000	Full purchase price can be claimed
New vehicle costing RM100,000 – RM150,000	Maximum RM100,000 claimable
New vehicle costing above RM150,000	Maximum RM50,000 claimable
Commercial Vehicles (e.g., lorry, van, bus)	Full purchase price can be claimed

Example:
A company buys a new car for RM120,000. The maximum claimable amount is RM100,000, and capital allowance is calculated based on:

Initial Allowance (IA) = 20% of RM100,000 = RM20,000 (first year only)
Annual Allowance (AA) = 20% of RM100,000 = RM20,000 per year (until the full RM100,000 is claimed).

What is the difference between capital allowance and depreciation?

Capital allowance helps businesses lower taxable income, while depreciation is an accounting method to spread asset costs over time. Only capital allowance provides tax savings.

Aspect	Capital Allowance	Depreciation
Purpose	Tax deduction to reduce taxable income	Accounting expense for financial reporting
Who Determines It?	Fixed by LHDN (tax authority)	Business decides on depreciation rates
Tax Deductible?	Yes	No
Calculation Basis	Based on tax rules (Initial and Annual Allowance)	Based on company accounting policies
Assets Covered	Only business-use assets	All fixed assets, including personal-use ones

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