Practice Note 1/2022 was issued by IRB on the explanation in relation to the definition of factory for the purposes of Reinvestment Allowance “RA” claim under Schedule 7A of the Income Tax Act 1967.
“Factory” is defined as portion of the floor areas of a building or an extension of a building used for the purposes of a qualifying project to place or install plant or machinery (production area) or to store any raw materials, or goods or materials manufactured prior to sale (storage area).
Provided that in respect of portion of the building or extension of the building used for the storage of raw materials, or goods or materials, or both, it shall not be more than one-tenth of the total floor areas for the building or the extension to that building.
An extension / addition to an existing factory building
Company A constructs an extension to the existing factory building for an expansion project to the manufacturing operation carried out. The total area of the extension to the building is 10,000 square feet (sq. ft). A portion of the extension with an area of 3,000 sq. ft is used to store raw materials while the remaining is used as a space to place plant or machinery.
The capital expenditure incurred for the construction of the portion of space to place or install the plant or machinery in this expansion project (7,000 sq. ft) qualifies for RA.
The raw materials storage space (3,000 sq. ft) does not qualify for RA claim because it does not meet the definition of ‘factory’ as the area exceeds one-tenth (1/10) which is 30% (3,000 sq. ft / 10,000 sq. ft x 100%) of the total area of the extension to the existing building.
A portion of the extension / addition to an existing factory building is used for various purposes
Company B expands the production area of manufactured product by making an extension to an existing factory building. The additional area of the extension is 100,000 sq. ft. Apart from placing plant or machinery, a portion of the extension to the building is also used as a sales office and another part is used as storage space for finished goods.
Sales office space is not included in the ‘factory’ definition in paragraph 9 Schedule 7A of the ITA. Therefore, the total area of sales office space should be taken out for the purpose of determining ‘factory’ or space used for the purpose of a qualifying project. As the sales office does not fulfil the meaning of ‘factory’, hence, the expenditure for sales office space is not a qualifying expenditure for the purpose of Schedule 7A of the ITA.
Determination of RA eligibility for finished goods storage space shall be based on the ratio of the said storage space area (8,000 sq. ft) with the total area of the expansion project, namely the finished goods storage space and the space to place or install plant or machinery (8,000 sq. ft + 67,000 sq. ft).
As the finished goods storage space area has exceeded one-tenth (1/10) which is 10.67% (8,000 sq. ft / 75,000 sq. ft x 100%) of the total area of the expansion project, the said storage space does not fulfil the meaning of ‘factory’ and is not eligible for RA.
Only the construction cost for the area used to place or install plant or machinery (67,000 sq. ft) is eligible to be given RA claim subject to stipulated conditions.
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