Multi-Storey Car Park Constitutes A Plant & Eligible For Capital Allowance
Capital expenditure refers to the cost incurred by a taxpayer to acquire, upgrade and maintain fixed assets such as property, plants and buildings. Generally, capital expenditure is not deductible as a business expense per se. However, Schedule 3 of the Income Tax Act 1967 (ITA) provides relief in respect of capital allowance and industrial building allowance. Qualifying capital expenditure incurred by a taxpayer would be eligible for initial allowance and annual allowance.
In a recent tax appeal before the Special Commissioners of Income Tax (SCIT), a taxpayer company sought to claim capital allowance on the capital expenditure amounting to nearly RM 500 million which was incurred to purchase eight multi-storey car parks in the city area. The Revenue disallowed the taxpayer’s claim for capital allowance on the premise that the multi-storey car parks were not a plant and instead were buildings used as a place of business.
The SCIT ruled in favour of the taxpayer and allowed the taxpayer to claim capital allowance on the capital expenditure incurred for the purchase of the eight multi-storey car parks. The taxpayer was successfully represented in this appeal by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar together with Associate, Felicia Wong Sie Ying.
This ruling provides businesses with much-needed guidance on the eligibility of multi-storey car parks as a plant qualifying for capital allowance and reaffirming the Court of Appeal’s ruling in Ketua Pengarah Hasil Dalam Negeri v Tropiland Sdn Bhd (2013) MSTC 30-054.
Background Facts
The taxpayer was in the business of owning and operating multi-storey car parks. They spent nearly RM 500 million to purchase eight multi-storey car parks between 2013 and 2016. As per its business operations, the taxpayer recognised the multi-storey car parks as fixed assets in its accounts. Without these multi-storey car parks, the taxpayer would not be able to operate its business and earn revenue in the form of payments made by the car park bay users. In other words, albeit being large buildings, the multi-storey car parks were the tools with which the taxpayer operated its business.
In light of the earlier Court of Appeal’s decision in the Tropiland case, which recognised multi-storey car parks as a plant qualifying for capital allowance, the taxpayer wrote to the Revenue for a ruling as to whether the capital expenditure incurred by them on the eight multi-storey car parks would be eligible for capital allowance. The Revenue responded stating that capital allowance would not be allowed as the multi-storey car parks operated as a premise for the taxpayer to carry out its business. The Revenue further stated that the Tropiland case was not applicable but did not elaborate further as to why the case was not applicable.
The taxpayer decided to act prudently by not claiming capital allowance and proceeded to lodge an appeal to the SCIT pursuant to Section 99(4) of the ITA.
Legal Position
As a general rule, in order to qualify for capital allowance, a taxpayer must demonstrate that the expenditure was incurred on a plant or machinery which was owned and used by the taxpayer in the course of business. In the landmark English case of Yarmouth v France [1887] QBD 647, the court defined a plant to have the following features:
(a)It is an apparatus used for carrying on the business
(b)It is not stock in trade
(c)It is kept for permanent employment in the business
This definition was adopted by the Court of Appeal in the Tropiland case where in upholding the decision of the High Court, the Court of Appeal also considered the following to determine whether an asset can be considered as a plant:
(a)Business test – where one has to consider the type of business conducted and the role of the asset in the business activity. If the asset satisfies the function as a tool that must be used in the business, then the asset qualifies as a plant.
(b)Premise test – this test is used to determine whether the asset functions as a premise or a setting within which a business is carried on and if the asset is regarded as a premise or a setting, then the asset is not eligible for capital allowances.
The Revenue’s Position
Firstly, the Revenue made reference to the recently introduced paragraph 70A of Schedule 3 of the ITA via the Finance Act 2020. Paragraph 70A defines plant as an apparatus used for business purposes but it explicitly excludes buildings, intangible assets, or assets functioning as places within which business operations are conducted. The Revenue contended that the multi-storey car parks, as buildings, do not fall within the definition of plant.
The Revenue further argued that the multi-storey car parks were purchased solely to provide parking spaces for customers and certain improvements were made by the taxpayer to attract customers. The improvements included the installation of CCTV cameras, providing shelter and security for occupants, and facilitating easy access to connecting buildings. Based on these features, the Revenue contended that the multi-storey car parks were buildings and not plant for the purposes of capital allowance. According to the Revenue, there was no difference between the multi-storey car parks and operators of open or covered space car parks. Regardless of the nature of the parking space, customers will invariably use them to park their vehicles.
Additionally, the Revenue attempted to distinguish the present appeal from the Tropiland case by highlighting that the former did not involve a lease agreement mandating the construction of a multi-storey car park and the subsequent requirement to return multi-storey car park to the land owner upon the expiration of lease.
The Taxpayer’s Position
At the outset, the taxpayer contended that the definition of plant under paragraph 70A of Schedule 3 was not applicable in the present appeal. This is because the definition of plant was only introduced recently and was not applicable retrospectively. This position was supported by the High Court ruling in Tenaga Nasional Berhad v Ketua Pengarah Hasil Dalam Negeri [2022] 1 LNS 450 which emphasised on the protection of taxpayer's rights against retrospective application of new definitions.
Additionally, the taxpayer highlighted to the SCIT to the several key similarities between the Tropiland case and the present appeal to illustrate the applicability of legal principles enunciated in the Tropiland case:
(a)Both taxpayers owned and operated multi-storey car parks
(b)The multi-storey car parks were exclusively used as parking facilities and not for any other purpose
(c)The multi-storey car parks did not form as part of the taxpayer’s stock in trade
(d) The multi-storey car parks were not mere physical settings, considering the taxpayer’s business as a car park operator
(e) Income was generated from the car park operations
Notably, the Tropiland case has also been recently followed by the High Court in the matter of Ketua Pengarah Hasil Dalam Negeri v CIMB Bank Berhad (2019) MSTC 30-301, further strengthening the taxpayer’s argument.
Regarding the issue of shelter and security within the multi-storey car parks, the taxpayer made reference to Commonwealth cases such Schofield (H.M Inspector of Taxes) v R & H Hall Ltd 49 TC 538 and Wangaratta Woollen Mills Limited v The Commissioner of Taxation of the Commonwealth of Australia [1969] 119 CLR 1, where it was held that a building should not be excluded as a plant simply because the building also served for operational purposes or due to its size. The taxpayer’s business operations must be examined holistically to arrive at the conclusion whether a building (despite its huge size) can qualify to be a plant.
Conclusion
The SCIT allowed the taxpayer’s appeal and held that the multi-storey car parks were a plant and accordingly, the capital expenditure by the taxpayer was eligible for capital allowance. This decision further underlines the continued significance of the legal principle established in the Tropiland case in relation to capital allowance claim.
5 December 2023