Definition of “repair”

“Repair” means to restore an asset to its original state by renewing or replacing the damaged parts without any element of improvement, addition and alteration.

Categories of repair expenses

a. Restore assets to their original condition
  • Expenditure incurred in maintaining an asset (which is employed in generating income from a source) to enable it to function properly and efficiently.
  • Deductible as it has no element of improvement (revenue expenditure).

Example

ABC Sdn Bhd incurred expenses on repairs on roofing that destroyed by strong wind. The company had replaced the original metal roofing sheet with the same quality material. The replacement is to restore the roofing to its original state, the repair expenses thus are allowed as a deduction.

b. Initial repairs of asset
  • When the asset is acquired in a state of disrepair and has not been used for a long time or in an unusable state, the expenditure incurred is considered as initial expense and not allowed for tax deduction

Example

XYZ Sdn Bhd purchased a shop lot in a lower price due to the bad state of disrepair and the company need to do some repair works before the shop lot can be used in the business. The expenses incurred is an initial expenses which is capital in nature and is not allowed as a deduction.

c. Replacement of the entirely or part of the entirety of an asset
  • Replacement of entire asset is not allowable for deduction while replacement of minor part of asset is allowable for deduction
  • When the replacement resulted in a changes and improvement of the entire asset, the expenses incurred shall be regarded as capital expenditure

Example

OPQ Bakery Sdn Bhd made some replacement of spare parts of dough mixer. The expenditure allowed for tax deduction because it is revenue expenditure. However, if the dough mixer was not repaired but instead the company replaced it with a new dough mixer, the expenditure cannot be allowed as a tax deduction as it is capital expenditure.

d. Implements, utensils or articles with a life span of less than two years
  • No deductible when incurred for the first time (capital expenditure)
  • Deductible when incurred for second time (revenue expenditure)

Example

Orange Confectionery Sdn Bhd (OC) has been in operation since 2014 and had incurred expenses of RM20,000 for purchase 2,000 units of baking tray for the first time. In year 2017, OC had replaced some of the existing tray as that is cracked. For the first purchase of 2000 units is not allowed for deduction as it regarded as capital allowance. However, the subsequent replacement is allowed for tax deduction as it is incurred for the second time.

e. Replacement or improvement
  • Replacement of part of an asset is allowable for tax deduction if no improvement on the structure or function of the asset.
  • Where repair or replacement involves improvement which causedchanges to asset, the expenditure is a capital expenditure and not allowed for tax deduction.

Example

SOS Sdn Bhd made some modification on the spoilt embroidery machine. The embroidery machine become more efficient and   produces more outputs as compared to the original state. The   repair provided a better features and is an improvement of asset.   Therefore, the cost of replacement is a capital expenditure and is   not allowed as deductions.