Should You Buy a Commercial Vehicle for Your Company? [Tax Savings Calculation]
Question:
Hi, I’m Richard Lin, the co-founder of Home Transformasi Sdn Bhd, a renovation firm based in Petaling Jaya. As I write, I’m planning to buy a Toyota Hilux truck, as a branded commercial vehicle for my company.
| No. | Details | Cost (RM) |
|---|---|---|
| 1 | Cost of Vehicle, inclusive of accessories | 100,000 |
| 2 | Down Payment (10%) | 10,000 |
| 3 | Hire Purchase Loan | 90,000 |
| 4 | Hire Purchase Installment @ 3% Interest Rate for 5 Years | 1,725 / mth |
| 5 | Road Tax and Insurance | 600 / yr |
If I purchase a Hilux as the commercial vehicle for my company, my first instalment on it would fall on 1 December 2020 and the financial year-end for Home Transformasi Sdn Bhd falls each year on 31 December.
My question is, ‘How much tax savings will I generate from this truck purchased as a commercial vehicle assuming that Home Transformasi Sdn Bhd is paying a corporate tax rate of 17%?’
Read also: Company Car Benefit | Should I declare it on my income tax filing in Malaysia?
Answer:
Richard is able to claim capital allowances on his pickup truck used as a commercial vehicleand deduct expenses like the road tax, insurance, and interest costs paid in relations to the commercial vehicle from his business profits and thus, reducing his final payment on corporate taxes. Here, I list down 2 tax treatments to know to calculate the amount of his tax savings:
| Capital Allowances | Deduct in Full when Incurred |
|---|---|
| 1. Cost of Vehicle 2. Accessories | 1. Road Tax 2. Insurance 3. Interest Cost on Hire Purchase Loan |
Hilux, Bought as a Commercial Vehicle: Down Payment, Capital and Interest Portion of Hire Purchase Loan
For a start, Richard is able to claim RM 100,000 in total qualifying expenditures, comprising the cost of his commercial vehicle and accessories. This amount would be claimed in full in multiple stages on an annual basis.
Richard is planning to buy a commercial vehicle for his company by placing a 10% downpayment on the commercial vehicle and he will obtain a hire purchase loan to finance the 90% of its remaining cost. Hence, the 10% downpayment or RM 10,000 will be fully claimed as capital allowances in the year he bought the commercial vehicle. Meanwhile, Richard would claim his amount of hire purchase instalments he settled in a year as capital allowances. Thus,
| Down Payment | Capital Allowances |
| Capital Portion: Hire Purchase Loan | Capital Allowances |
| Interest Portion: Hire Purchase Loan | Deduct in Full when Incurred |
As such, Richard needs a breakdown between his capital and interest portion of the hire purchase loan.
| No. | Hire Purchase Details | Cost (RM) | Treatment |
|---|---|---|---|
| 1 | Capital Portion: (RM 90,000 / 60 months) | 1,500 | Capital Allowance |
| 2 | Interest Portion: (RM 90,000 x 3% a year / 12 months) | 225 | Deduct In Full |
| 3 | Total Hire Purchase Installment | 1,725 | – |
Under the Income Tax Act (ITA) 1967, Richard is able to claim for his commercial vehicle:
| Initial Allowances: From his qualifying expenditures in the 1st year | 20% |
| Annual Allowances: From his qualifying expenditures in subsequent years until it is fully claimed | 20% |
With the above, Richard could proceed to compute his amount of corporate tax savings that can be derived from the purchase of his commercial vehicle:
You may also want to read: Partnership Business in Malaysia | 3 Steps to Declare Income Tax if You’re Non-Profitable
Year Assessment 2020
Richard places RM 10,000 in downpayment and will settle 1 instalment in 2020 as his first instalment on the purchase of a commercial vehicle starts on 1 December 2020. So, for 2020, the number of capital allowances Richard will claim would be RM 4,600 and he will have accumulated qualifying expenditures of RM 6,900 which can be used in claiming capital allowances for subsequent years.
| No. | Items | Qualifying Expenditures Claimed in 2020 (RM) | Residual Expenditures In 2020 (RM) |
|---|---|---|---|
| 1 | Start: Annual Qualifying Expenditures | 0 | 0 |
| 2 | Initial Qualifying Expenditures – Down Payment (10,000) – Capital Portion (1 x 1,500) | 11,500 | 11,500 |
| 3 | Total: Annual Qualifying Expenditures in 2020 (1+2) | 11,500 | – |
| 4 | Total Capital Allowances Claimed – Initial Allowance (11,500 x 20% = 2,300) – Annual Allowance (11,500 x 20% = 2,300) | (4,600) | (4,600) |
| 5 | Residual Expenditures 2020: (1+2+4) | 6,900 | |
Thus, Richard’s tax savings would work out to be RM 829 for 2020 after he bought the commercial vehicle.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 4,600 |
| 2 | Interest Portion of Hire Purchase Loan(RM 225 x 1 month) | RM 225 |
| 3 | Pro-rate: Road Tax and Insurance (RM 600 / 12 months x 1 month) | RM 50 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 4,875 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2020) | RM 829 |
Year Assessment 2021
From above, after 2020, Richard’s annual qualifying expenditures is RM 11,500 and his residual expenditures are RM 6,900. Thus,
| No. | Items | Qualifying Expenditures Claimed in 2021 (RM) | Residual Expenditures In 2021 (RM) |
|---|---|---|---|
| 1 | Start: Qualifying Expenditures | 11,500 | 6,900 |
| 2 | Initial Qualifying Expenditures – Capital Portion (12 x 1,500) | 18,000 | 18,000 |
| 3 | Total: Annual Qualifying Expenditures in 2021 (1+2) | 29,500 | – |
| 4 | Total Capital Allowances Claimed – Initial Allowance (18,000 x 20% = 3,600) – Annual Allowance (29,500 x 20% = 5,900) | (9,500) | (9,500) |
| 5 | Residual Expenditures 2021: (1+2+4) | 15,400 | |
Out of which, Richard’s tax savings would work out to be RM 2,176 for 2021.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 9,500 |
| 2 | Interest Portion of Hire Purchase Loan(RM 225 x 12 month) | RM 2,700 |
| 3 | Pro-rate: Road Tax and Insurance (RM 600 / 12 months x 12 month) | RM 600 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 12,800 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2021) | RM 2,176 |
Year Assessment 2022
From above, after 2022, Richard’s annual qualifying expenditures is RM 29,500 and his residual expenditures are RM 15,400. Thus,
| No. | Items | Qualifying Expenditures Claimed in 2022 (RM) | Residual Expenditures In 2022 (RM) |
|---|---|---|---|
| 1 | Start: Qualifying Expenditures | 29,500 | 15,400 |
| 2 | Initial Qualifying Expenditures – Capital Portion (12 x 1,500) | 18,000 | 18,000 |
| 3 | Total: Annual Qualifying Expenditures in 2021 (1+2) | 47,500 | – |
| 4 | Total Capital Allowances Claimed – Initial Allowance (18,000 x 20% = 3,600) – Annual Allowance (47,500 x 20% = 5,900) | (13,100) | (13,100) |
| 5 | Residual Expenditures 2022: (1+2+4) | 20,300 | |
Out of which, Richard’s tax savings would work out to be RM 2,788 for 2022.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 13,100 |
| 2 | Interest Portion of Hire Purchase Loan(RM 225 x 12 month) | RM 2,700 |
| 3 | Pro-Rate: Road Tax and Insurance (RM 600 x 12/12 months) | RM 600 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 16,400 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2022) | RM 2,788 |
Year Assessment 2023
From above, after 2022, Richard’s annual qualifying expenditures is RM 47,500 and his residual expenditures are RM 20,300. Thus,
| No. | Items | Qualifying Expenditures Claimed in 2023 (RM) | Residual Expenditures In 2023 (RM) |
|---|---|---|---|
| 1 | Start: Qualifying Expenditures | 47,500 | 20,300 |
| 2 | Initial Qualifying Expenditures – Capital Portion (12 x 1,500) | 18,000 | 18,000 |
| 3 | Total: Annual Qualifying Expenditures in 2021 (1+2) | 65,500 | – |
| 4 | Total Capital Allowances Claimed – Initial Allowance (18,000 x 20% = 3,600) – Annual Allowance (65,500 x 20% = 13,100) | (16,700) | (16,700) |
| 5 | Residual Expenditures 2023: (1+2+4) | 21,600 | |
Out of which, Richard’s tax savings would work out to be RM 3,400 for 2023.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 16,700 |
| 2 | Interest Portion of Hire Purchase Loan(RM 225 x 12 month) | RM 2,700 |
| 3 | Pro-rate: Road Tax and Insurance (RM 600 / 12 months x 12 month) | RM 600 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 20,000 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2023) | RM 3,400 |
Year Assessment 2024
From above, after 2023, Richard’s annual qualifying expenditures is RM 65,500 and his residual expenditures are RM 21,600. Thus,
| No. | Items | Qualifying Expenditures Claimed in 2024 (RM) | Residual Expenditures In 2024 (RM) |
|---|---|---|---|
| 1 | Start: Qualifying Expenditures | 65,500 | 21,600 |
| 2 | Initial Qualifying Expenditures – Capital Portion (12 x 1,500) | 18,000 | 18,000 |
| 3 | Total: Annual Qualifying Expenditures in 2021 (1+2) | 83,500 | – |
| 4 | Total Capital Allowances Claimed – Initial Allowance (18,000 x 20% = 3,600) – Annual Allowance (83,500 x 20% = 13,100) | (20,300) | (20,300) |
| 5 | Residual Expenditures 2024: (1+2+4) | 19,300 | |
Out of which, Richard’s tax savings would work out to be RM 4,012 for 2024.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 20,300 |
| 2 | Interest Portion of Hire Purchase Loan(RM 225 x 12 month) | RM 2,700 |
| 3 | Pro-rate: Road Tax and Insurance (RM 600 / 12 months x 12 month) | RM 600 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 23,600 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2024) | RM 4,012 |
Year Assessment 2025
From above, after 2024, Richard’s annual qualifying expenditures is RM 83,500 and his residual expenditures are RM 19,300. In the year, Richard would settle 11 months of instalment for his commercial vehicle, thus, will pay his hire purchase loan in full. Hence,
| No. | Items | Qualifying Expenditures Claimed in 2025 (RM) | Residual Expenditures In 2025 (RM) |
|---|---|---|---|
| 1 | Start: Qualifying Expenditures | 83,500 | 19,300 |
| 2 | Initial Qualifying Expenditures – Capital Portion (11 x 1,500) | 16,500 | 16,500 |
| 3 | Total: Annual Qualifying Expenditures in 2021 (1+2) | 100,000 | – |
| 4 | Total Capital Allowances Claimed – Initial Allowance (16,500 x 20% = 3,300) – Annual Allowance (100,000 x 20% = 20,000) | (23,300) | (23,300) |
| 5 | Residual Expenditures 2024: (1+2+4) | 12,500 | |
Out of which, Richard’s tax savings would work out to be RM 4,475 for 2025.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 23,300 |
| 2 | Interest Portion of Hire Purchase Loan(RM 225 x 11 month) | RM 2,475 |
| 3 | Pro-rate: Road Tax and Insurance (RM 600 / 12 months x 12 month) | RM 600 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 26,375 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2025) | RM 4,484 |
Year Assessment 2026
From above, after 2025, Richard’s annual qualifying expenditures is as much as RM 100,000 and his residual expenditures are RM 12,500. There will be no initial qualifying expenditures as Richard has paid off his hire purchase loan. Thus,
| No. | Items | Qualifying Expenditures Claimed in 2025 (RM) | Residual Expenditures In 2025 (RM) |
|---|---|---|---|
| 1 | Start: Qualifying Expenditures | 100,000 | 12,500 |
| 2 | Initial Qualifying Expenditures – Capital Portion (11 x 1,500) | – | – |
| 3 | Total: Annual Qualifying Expenditures in 2021 (1+2) | 100,000 | – |
| 4 | Total Capital Allowances Claimed – Annual Allowance (100,000 x 20% = 20,000) – Restricted to RM 12,500 only. | (12,500) | (12,500) |
| 5 | Residual Expenditures 2025: (1+2+4) | 0 | |
Out of which, Richard’s tax savings would work out to be RM 2,227 for 2026.
| No. | Items | Amount |
|---|---|---|
| 1 | Capital Allowances | RM 12,500 |
| 2 | Interest Portion of Hire Purchase Loan (Fully Paid) | RM 0 |
| 3 | Pro-rate: Road Tax and Insurance (RM 600 / 12 months x 12 months) | RM 600 |
| 4 | Amount to be Deducted from Richard’s Business Profits | RM 13,100 |
| 5 | Corporate Tax Rate | 17% |
| 6 | Richard’s Corporate Tax Savings (2026) | RM 2,227 |
Year Assessment 2027 and Beyond
Starting from 2027, Richard would not be able to claim a capital allowance for his commercial vehicle but he can continue to deduct road tax and insurance costs for the commercial vehicle from his business profits for as long as he keeps his vehicle.
Read also: What Determines If Your Sdn Bhd Is an Investment Holding Company in Malaysia?
Conclusion, how Much Corporate Tax Savings Richard Can Save from 2020 to 2026 from the purchase of the commercial vehicle?
Let’s put it together:
From 2020 to 2016, Richard can save as much as RM 19,907 in corporate taxes from the purchase of his commercial vehicle.
The amount of corporate tax savings that Richard would receive are as follow:
| Year Assessment | Corporate Tax Savings (RM) |
|---|---|
| 2020 | 829 |
| 2021 | 2,176 |
| 2022 | 2,788 |
| 2023 | 3,400 |
| 2024 | 4,012 |
| 2025 | 4,475 |
| 2026 | 2,227 |
| Total (2020-2026) | 19,907 |
So, are you planning to buy a commercial vehicle under an Sdn Bhd presently? If that is you, you may consider talking to a qualified accountant to work out your amount of tax savings that you can get from your next purchase of a commercial vehicle. You may use Joolah.my
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