Focus update: Reinvestment allowance


  1. KPHDN v Nulogitec Industries Sdn Bhd (High Court)


This case concerns the taxpayer’s claim for reinvestment allowance (RA) used to purchase a factory and machineries. The taxpayer had in the year 2004 relocated to a new and larger factory to house its manufacturing business.

  1. The RA was refused as the factory was a first-time purchase of a factory by the taxpayer

The overall contention by the tax authorities was that the factory does not sit well with its view of the circumstances in which a factory is eligible for RA. Pursuant to Public Ruling 2/2008, the tax authorities were of the view that “a company moving from a rented factory to its own factory… does not qualify for RA”.

The flaw in the above argument is threefold. Firstly, the operative and governing words in para 8(a) of Schedule 7A are the words “its existing business”. Therefore, reinvestment must be made in the existing business and not the existing factory. This is fulfilled as the taxpayer had invested in the business for many years by operating in an alternate factory prior to this purchase.

Secondly, the Public Ruling is inapplicable as it was stipulated in para 13 that “This Ruling is effective for the year of assessment 2008 and subsequent years of assessment.” Therefore, the Public Ruling does not apply to the taxpayers as the acquisition was made in 2004.

  1. The RA should be refused as the revenue did not rise but plummeted after the acquisition

Although agreeing on the point that there were automation, modernization and expansion, the tax authorities raised the objection of whether RA should be allowed since sales did not increase after the acquisition.

To this, the Court stated that there was no statutory provision that expressly stipulates proof of increased sales post-reinvestment. It would be unfair to impose such a burdensome condition in the vaguer of the economic climate.


  1. Lavender Confectionery and Bakery Sdn Bhd v KPHDN (High Court):


The case involves the claimant’s claim for RA and Industrial Building Allowance (IBA). For the claim under RA, the claimant made the claim on the following items:

  1. Sinmag spiral mixer – RM16,000
  2. Sinmag autobun divider – RM40,000
  3. 2 units of electric donut fryers – RM4,590
  4. 2 units of electric donut fryers – RM3,500

Paragraph 1 of Schedule 7A of the Income Tax Act 1967 stipulates the conditions for a company to qualify to claim RA:

  1. In operation of not less than 36 months
  2. Had incurred capital expenditure on a factory, plant and machinery used in Malaysia for the purposes of the qualifying project.

Qualifying project would, in turn, mean a project undertaken in expanding, modernising, or automating its existing business of manufacturing. Public rulings further clarify that not all plant and machinery are eligible for RA such as those for packaging purposes.

  1. The RA was refused due to illegality

The basis in which the RA was refused is due to the fact that they were not used in the factory but rather they were used in one of the claimant’s outlets, the 1 Utama outlet did not carry a license for manufacturing pursuant to Industrial Co-ordination Act 1975 (‘ICA 1975’) and/or they were not part of a qualifying activity. Therefore, the RA should be refused according as it should not be regarded as “business of manufacturing” due to an element of illegality.

In determining whether it is a factory, the court alluded to the use of the “functionality test” in determining the word “factory”. The test then becomes the functionality of the claimed items in the overall context of production in the manufacturing process ought to be taken as a valid factor. The requirement for a license under the ICA 1975 has no application in the instant case as the IRB should not be reading into the act to impose further conditions.

  1. The RA was refused due to the fact that the machineries were not used in the factory

The court held that RA is not limited to ‘production area’ as such criteria was not stipulated within the act but only as internal guideline of the IRB. As long as the plant and machineries were used for expansion, modernisation, automation or diversification, the RA claim should be allowed.

Additionally, reinvestment allowance should be allowed as long as it is used in the taxpayer’s existing business as in Nulogitec Industries Sdn Bhd.

Additionally, the relevant statute provides that RA is available where it is incurred on “a factory, plant and machinery” which suggests that each element is independent. Therefore, in so far as the expenditure is made on either a factory OR a plant OR a machinery and it is for the purposes of a qualifying project, RA should be allowed.

Based on the above points, the taxpayer’s claim for RA was allowed. The decision was upheld in the Court of Appeal as well.


In 2012, the word ‘factory’ was given a new definition vide the Finance Act 2012, which provides that

“factory” means portion of the floor areas of a building or an extension of a building used for the purposes of qualifying project to place or install plant machinery or to store any raw material, or goods or materials manufactured prior to sale”

I am of the opinion that the definition does not materially affect the both taxpayer’s ability to claim Reinvestment Allowance as the taxpayer is entitled to claim as long as it is a qualifying project in the business.

I think Lavender Bakery is a good example of how, for the purposes of claiming RA, the plant and machinery need not be used in the factory as long as it is used to expand the business. Additionally, RA is also available where a continuing part of the manufacturing process albeit in a different place from the factory.