Reinvestment Allowance is a tax incentive aimed at encouraging existing manufacturers to reinvest in their operations. Eligible companies can claim a deduction of 60% of qualifying capital expenditure incurred on approved assets used for expansion, modernization, automation, or diversification of production.
Unlike incentives for new investments, RA targets established companies, rewarding them for improving their productive capacity.
1. Does Your Business Qualify?
To claim RA under Schedule 7A of the Income Tax Act 1967 (ITA), your company must meet these core criteria:
- Residence: The company must be resident and incorporated in Malaysia.
- Minimum Period of Operation: The manufacturing business must have been in operation for at least 36 months prior to the year of assessment.
- Eligible Expenditure: Must have incurred capital expenditure on a factory, plant, or machinery used in Malaysia for a qualifying project.
- Qualifying Project: The expenditure must be for one of the following four purposes:
- Expansion: Increasing production capacity, including backward integration of earlier production stages.
- Modernization: Upgrading equipment and processes for greater efficiency or quality.
- Diversification: Expanding into new products within the same industry (e.g., producing a new product line related to existing operations).
- Automation: Installing automated plants or machinery to replace manual processes.
- Factory: A factory must be used for placing/operating plant or machinery, or storing raw materials or manufactured goods before sale. Storage space can qualify only if it does not exceed 10% of the total floor area dedicated to the qualifying project. Storage above 10% is excluded from RA claims.
2. Key Tax Benefits for RA
A. Preferential Tax Rates (Deduction Tiers)
- Allowance Rate: RA is granted at 60% of qualifying capital expenditure incurred during the basis period in a year of assessment.
- Utilisation Against Income:
- The RA deduction may be offset against up to 70% of the statutory income derived from the company’s trade in that year.
- A company may deduct RA up to 100% of statutory income (no 70% limit) if it satisfies the Process Efficiency criteria prescribed by the Minister of Finance.
PwC Tax Summaries
Disposal Rule: If qualifying assets are disposed of within five years, the allowance may be withdrawn or clawed back.
B. Qualifying and Claim Periods
RA is available for a 15‑year period commencing from the year of assessment in which qualifying capital expenditure is first incurred.
C. Carry Forward of Unabsorbed RA
Unabsorbed RA (i.e., RA not utilised against statutory income in a given year) may be carried forward for up to seven consecutive years after the end of the 15‑year qualifying period. After this 7‑year carry‑forward window, any unutilised balance will be disregarded.
3. Important Exclusions
Even if you are a manufacturer, you cannot claim RA for the following:
- Simple Activities: Processes that do not require special skills or machinery, such as simple packaging, bottling, or simple assembly of parts.
- Construction: Installation of machinery or equipment for the purpose of construction.
- Non-Manufacturing Assets: Plant and machinery provided for the use of directors, management, or administrative staff.
- Storage Limitations: If the storage area in an extension exceeds one-tenth (10%) of the total floor area, that storage portion may not qualify for RA.
Need more help?
Tax laws regarding qualifying projects and “active” vs “simple” manufacturing can be complex. If you are unsure about your project eligibility or capital expenditure calculations, please reach out to our support team or consult with a tax professional.
Source: Reinvestment Allowance (RA) & Criteria for Manufacturers (Public Ruling 10/2022)
