Malaysian Tax - How Do You Compute Balancing Charge

When a company disposes of its assets, it must make a tax adjustment to the capital allowance by computing the balancing allowance (Elaun Imbangan) or balancing charge (Kenaan Imbangan). In this article, we will only discuss Balancing Charge. 

Formula:

Balancing charge (hereinafter BC) = Disposal value > Residual value

A company purchased a machine for RM100,000. for its business use and claimed capital allowance (CA) over the years at, say, 20% each year. After five years, and the residual value = rm NIL. The company then sold the machine to a third party for RM5,000. Hence, the BC = RM5,000 (Disposal value) - RM NIL (residual value) = RM5,000.

Think of it this way - the asset was allowed for a tax deduction as a capital allowance in your previous years' tax computation. Now it should be deductible if you earn a profit from it. This is when we compute BC to adjust the tax payable when the disposal of the asset occurs. However, BC can never be higher than the total claimed CA-

Using the same example as above, the machine was disposed of at RM150,000 instead of RM5,000. Therefore, BC = RM100,000 only because the previously claimed CA was only RM100,000. The tax authority will the only clawback whatever tax deduction you made but not exceeding that.

We will talk more about the tricky parts of BC in the next post.