Capital allowances (Schedule 3 ITA 1967) are the tax deduction for business assets — machinery, computers, vehicles, furniture. Claim Initial Allowance (IA) of 20% in year of purchase, then Annual Allowance (AA) at LHDN's prescribed rate: 40% per year for computers, 20% for plant/machinery and motor vehicles, 10% for office furniture. Accounting depreciation is NOT deductible — add it back in your tax computation and claim capital allowances instead. Filed in the HARTA MODAL section of Form C via MyTax.
Why Depreciation Costs You Money at Tax Time
Every Sdn Bhd charges depreciation in its accounts. Your bookkeeper records it monthly. Your P&L looks right. But at tax time, that depreciation does nothing for you — and if you forget to add it back in your tax computation, LHDN will catch it and issue an additional assessment.
Malaysian SMEs in Kuala Lumpur, Shah Alam, and Johor Bahru routinely overpay LHDN because they treat accounting depreciation as a tax deduction. It is not. Never has been. The Income Tax Act 1967 gives you something different: capital allowances under Schedule 3 — but only if you claim them correctly.
This guide covers the full capital allowance framework: the depreciation add-back rule, Initial and Annual Allowance rates by asset class, the Accelerated Capital Allowance for ICT and energy efficiency assets, what happens when you dispose of equipment, and how to claim on Form C. Read our Tax Deductions Malaysian SMEs Always Miss guide alongside this — capital allowances are the most underused relief on that list.
Capital Allowance vs Accounting Depreciation — The Difference That Matters
These two calculations coexist in your accounts but operate completely independently. Conflating them is the most expensive mistake on Malaysian SME tax computations.
| Factor | Accounting Depreciation | Tax Capital Allowance |
|---|---|---|
| Governed by | MFRS 116 / MPERS — accounting standards | Schedule 3, Income Tax Act 1967 |
| Rate determined by | Your company (based on estimated useful life) | LHDN — fixed rates per asset class |
| Tax deductible? | No — must be added back in tax computation | Yes — deducted when computing chargeable income |
| Method | Straight-line or reducing balance (company choice) | Initial Allowance (20%) + Annual Allowance (prescribed) |
| Where it appears | P&L statement, Fixed Asset Schedule | Form C — HARTA MODAL section |
| Effect | Reduces accounting profit | Reduces taxable (chargeable) income |
In your tax computation: start with accounting profit, add back depreciation (not allowed), then deduct capital allowances (allowed). The two numbers will almost certainly differ — that's correct. A Penang manufacturer with RM80,000 depreciation and RM110,000 in capital allowances has a RM30,000 swing in their favour — but only if the capital allowance schedule is prepared properly.
How Capital Allowances Work — IA and AA Explained
Schedule 3 capital allowances have two layers. Both apply to the same asset, in different years.
Initial Allowance (IA) — 20% in Year One
Claimed in the year of assessment when you first acquire the asset and put it into business use. One-time only. You cannot defer it or carry it forward. Buy a machine in November, your financial year ends in December — claim the full 20% IA in that year's Form C even though you used the machine for only two months.
Annual Allowance (AA) — Ongoing Write-Down
Claimed every year thereafter at the rate LHDN prescribes for that asset class. Applied to the reducing residual expenditure (cost minus all allowances already claimed). Continues until the asset is fully written off or disposed of.
Together, IA and AA determine how fast you recover the asset's cost for tax purposes. A Shah Alam manufacturer buying a RM50,000 machine claims RM10,000 IA in year one, then 20% AA on the reducing balance each subsequent year.
Capital Allowance Rates — Schedule 3 ITA 1967 Asset Class Table
LHDN prescribes different Annual Allowance rates depending on the asset's nature. Here are the standard rates for common Sdn Bhd asset categories:
| Asset Class | Initial Allowance (IA) | Annual Allowance (AA) | Approx. Full Write-Off |
|---|---|---|---|
| Computers & software | 20% | 40% per year | ~2 years |
| Plant & machinery | 20% | 14–20% per year | 4–6 years |
| Motor vehicles (commercial) | 20% | 20% per year | ~4 years |
| Office furniture & fittings | 20% | 10% per year | ~8 years |
| Industrial buildings | 10% | 3% per year (IBA) | ~30 years |
| Renovation of business premises | — | 10% per year (renovation allowance) | ~10 years |
Note on motor vehicles: LHDN caps the qualifying expenditure for private passenger cars at RM50,000 per vehicle (or RM150,000 for cars costing over RM150,000 from a principal hub company). Don't assume the full purchase price qualifies if directors drive premium vehicles. Commercial lorries and vans are not subject to the same cap.
Note on renovation: Up to RM300,000 of renovation costs per three-year period can be claimed as a revenue deduction under Section 60F — not as a capital allowance. Amounts above RM300,000 are capitalised and written off at 10% per year under the renovation allowance. Talk to your accountant about the correct split before filing.
Accelerated Capital Allowance — Claim 100% in Year One
For qualifying ICT and energy efficiency assets, you don't have to wait years to write off the cost. The Accelerated Capital Allowance (ACA) programme allows a 100% write-off in year one — instead of the standard 20% IA spread over years.
ACA for ICT assets: Computer hardware, software, and qualifying peripheral equipment under MIDA's ICT incentive programme can claim 100% capital allowance in year one. The qualifying asset list is updated periodically — verify with MIDA or your tax agent before filing.
ACA for energy efficiency equipment: Under Malaysia's Green Technology Tax Incentive scheme, energy-efficient machinery, solar panels, and certain industrial equipment qualify for accelerated write-off. SMEs investing in energy efficiency upgrades to their premises should actively explore this — the tax savings are front-loaded in year one.
A KL tech company purchasing RM200,000 in qualifying servers and software can claim the full RM200,000 in year one under ACA — versus RM40,000 IA + RM64,000 AA spread over multiple years under standard rates. The cash flow difference is material for growing SMEs.
Not sure which of your assets qualifies?
Our team helps Malaysian Sdn Bhds build accurate capital allowance schedules — asset classification, IA/AA computation, ACA eligibility checks, and Form C preparation. Talk to us — no commitment, no jargon.
How to Claim on Form C — The HARTA MODAL Section
Capital allowances are claimed in the HARTA MODAL (Capital Assets) section of Form C, filed via the MyTax portal at mytax.hasil.gov.my. For a full walkthrough of Form C submission, see our Corporate Tax Malaysia SME guide.
The process in practice:
- Prepare a capital allowance schedule — a working document listing each qualifying asset, acquisition cost, date of purchase, IA claimed, AA rate, cumulative allowances to date, and residual expenditure. Your accountant maintains this year by year.
- Add back depreciation in your tax computation — non-negotiable. Every ringgit of depreciation charged in the accounts must be reversed before capital allowances are applied.
- Compute total capital allowances for the year — IA for newly acquired assets, plus AA for all existing assets still in use.
- Enter total capital allowances in Form C, HARTA MODAL section — this deduction reduces adjusted income to arrive at statutory income.
- Retain the capital allowance schedule for 7 years — LHDN can audit up to 5 years from date of assessment; 7 years is the safe minimum retention period.
One practical habit: file your capital allowance schedule alongside Form C even when LHDN doesn't explicitly request it. It creates a clean audit trail and speeds up query resolution significantly if LHDN ever queries your capital expenditure claims.
Disposing of an Asset — Balancing Allowance or Balancing Charge?
When you sell, scrap, or otherwise dispose of a business asset, LHDN requires a disposal adjustment in that year's Form C. Two outcomes are possible:
Balancing Allowance: If disposal proceeds are less than the remaining residual expenditure (the unwritten-off tax balance), you receive an additional deduction for the shortfall. This is the common outcome when assets are scrapped or sold cheaply at end of working life. For an Ipoh SME scrapping old manufacturing equipment with RM8,000 residual value but zero scrap proceeds — a RM8,000 Balancing Allowance is claimable.
Balancing Charge: If disposal proceeds exceed the residual expenditure, a Balancing Charge arises. It is treated as taxable income — it recaptures excess capital allowances previously claimed beyond the asset's actual economic depreciation. This occurs when you've written an asset down to near-zero over the years but sell it for a reasonable sum. Example: office equipment with RM3,000 residual value sold for RM8,000 — a RM5,000 Balancing Charge is taxable.
Always update your capital allowance schedule for every disposal and report it correctly in Form C. Omitting a Balancing Charge is under-declaring income — an LHDN audit risk you don't want.
Common Mistakes That Trigger LHDN Disallowance
| Mistake | Why It Matters | Correct Treatment |
|---|---|---|
| Claiming depreciation as a deduction | LHDN disallows and issues additional assessment with penalties | Add back all depreciation; claim capital allowances under Schedule 3 instead |
| Missing IA in year of purchase | IA is one-time only — missing it is a permanent loss of relief | Claim 20% IA in the year of assessment when asset is first put into use |
| Wrong asset class rate | Overclaiming triggers audit; underclaiming overpays tax | Match each asset to its Schedule 3 class — verify rates before filing |
| Claiming on non-business assets | Personal vehicles, home furnishings, and personal gadgets are disallowed | Asset must be used wholly or principally for income-producing business purposes |
| Applying full cost for passenger cars | Passenger cars have a qualifying expenditure cap — excess is disallowed | Use the RM50,000 QE cap per car (or RM150,000 for qualifying principal hub cases) |
| Not reporting disposal adjustments | Omitting a Balancing Charge is under-declaring income | Update capital allowance schedule for every disposal; enter in Form C HARTA MODAL |
Frequently Asked Questions
What is a capital allowance in Malaysia?
A capital allowance is the tax deduction for capital expenditure on business assets — machinery, computers, vehicles, and furniture — under Schedule 3 of the Income Tax Act 1967. You claim an Initial Allowance of 20% in the year of purchase, then an Annual Allowance at LHDN's prescribed rate each subsequent year until the asset is fully written off or disposed of.
Is accounting depreciation deductible for corporate tax in Malaysia?
No. Depreciation must be added back in your tax computation. It is not a recognised deduction under the Income Tax Act 1967. In its place, claim capital allowances at LHDN's prescribed rates. The tax write-off schedule and your accounting depreciation schedule will differ — that's expected and correct. Most SME tax errors in this area come from missing the depreciation add-back step.
What is the Annual Allowance rate for plant and machinery in Malaysia?
Plant and machinery generally qualifies for a 14% to 20% Annual Allowance per year under Schedule 3, depending on the specific equipment type. Combined with the 20% Initial Allowance in year one, a machine is typically fully written off over 4–6 years. Computers get 40% AA (write-off in ~2 years). Office furniture gets 10% AA (write-off in ~8 years).
Can I claim capital allowances on a car used for business?
Yes — but private passenger cars are subject to a qualifying expenditure cap. LHDN limits the QE for passenger cars to RM50,000 per vehicle. Capital allowances are only computed on the first RM50,000 of the car's cost, regardless of what you paid. Commercial vehicles like lorries and company vans are not subject to this cap. The Annual Allowance rate for motor vehicles is 20%.
What is a Balancing Charge and when does it apply?
A Balancing Charge arises when you dispose of an asset and the sale proceeds exceed the remaining residual expenditure (the written-down tax value). The excess is treated as taxable income — it recaptures capital allowances previously claimed. Always compute the disposal adjustment in your capital allowance schedule and report it in Form C. Failing to do so is under-declaring income.
Where do I claim capital allowances on Form C?
Capital allowances are entered in the HARTA MODAL (Capital Assets) section of Form C, filed via the MyTax portal. Your accountant prepares a capital allowance schedule — listing each asset's cost, IA, AA rate, cumulative allowances, and residual expenditure. This schedule is your supporting document and must be retained for 7 years in case LHDN audits your returns.
Does the Accelerated Capital Allowance apply to all computer purchases?
Not automatically. The ACA for ICT assets applies to qualifying equipment under MIDA's ICT incentive guidelines — standard computers and commercial software typically qualify, but specialised hardware may require confirmation. A separate green technology ACA also applies to energy efficiency equipment and solar installations. Check the current qualifying asset list with MIDA or your tax agent before claiming 100% write-off in year one.
Get your capital allowances right this year.
Our team prepares accurate capital allowance schedules for Malaysian Sdn Bhds — asset classification, IA/AA computation, ACA eligibility, and Form C preparation. Talk to us today.