Forest Allowance

CHAPTER 4

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LEARNING OUTCOME

• Definition of Forest

• Determination Qualifying Forest Expenditure (QFE)

• Rate of forest allowance

• Permanent cessation (Para. 31, Sch. 3)

• Forest Allowance and Forest Charge

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INTRODUCTION

Forest allowance is given to a person who is carrying on the business of extracting timber in a forest and have incurred qualifying forest expenditure.

Paragraph 29, Sch. 3 – specifies that a person who is entitled to forest allowance in respect of any expenditure shall not be entitled to any other allowances under Sch. 3 in respect of the same expenditure.

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DEFINING A ‘FOREST’

Paragraph 8(2) Sch. 3 Forest means a forest in respect of which a

person has a concession or a license to extract timber there from for the purpose of a business of his which consists wholly or partly of that extraction.

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QUALIFYING FOREST EXPENDITURE (QFE)

QFE is capital expenditure incurred by a person on the construction in a forest, such as:

A road or building used for the purpose of a business of his which consists wholly or partly of the extraction of timber from the forest; or

A building provided for the welfare of persons or as living accommodation for a person, employed in or connection with such extraction, and which if the forest ceases to be used for such extraction, would be likely to be of little or no value to any person. 5ATXB223; Sem 2, 2013/2014

Rate of Forest Allowance

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Paragraph 30, Sch. 3 identifies the rates of forest allowance on QFE.

It should be noted that there is no initial allowance on QFE. The rates are as follows:

QFE Rate (%)

Building provided for welfare/living accommodation for employees

20% [Para.30(a)]

Road/building used for business 10% [Para.30(b)]

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Example 1

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Timber Sdn. Bhd (accounting year ends on 31 Dec) is a company involved in timber extraction business. The company incurred the following expenditures:

Required: Compute the FA available for all the years of assessment up to YA 2012.

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Date Expenditure RM

2/3/2007 Construction of road 28,000

4/5/2008 Constr. Of office 35,000

6/7/2009 Constr. Of labour quarters. 67,000

Answer

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Road Office Quarters

Permanent Cessation (Para. 31, Sch 3)

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Where there is a permanent cessation of the business to extract timber from a forest, a forest allowance for final YA is equal to the excess of QFE over total forest allowances given.

There is no entitlement to any allowance after the cessation of the business.

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Example 2

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Refer Example 1 except that Timber Bhd permanently ceased its timber extraction business on 3 Nov 2011. Compute the forest allowance due to company.

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Answer

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Road Office Quarters

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Forest Charge (Para. 32, Sch 3)

When person involved in extraction of timber and has incurred qualifying forest exp disposes of that forest, a forest charge is made for YA for which disposal took place.

The forest charge – equal to the total amount of forest allowance given to that person in relation to that QFE.

Where a person disposed a forest after the end of the basis period in which business has permanently ceased, the disposal will be deemed to have been made in the basis period in which cessation took place.

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Forest Charge (Cont…)

The consideration received or sales proceeds has no bearing on the computation of forest charge.

The acquirer of the forest is not entitled to claim any forest allowance.

In order to claim forest allowance, the acquirer must have. incurred qualifying forest allowance

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Spreading Back of Forest Charge (Para. 32(1), Sch. 3)

This para. provides that a person can make an election to spread back the forest charge over the YA in which forest allowances were claimed.

The election must be made in writing three months (or such further period as the DG may allow) of the beginning of the YA for the basis period in which forest is disposed of.

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Spreading Back of Forest Charge (Para. 32(1), Sch. 3)

This para. provides that a person can make an election to spread back the forest charge over the YA in which forest allowances were claimed.

The election must be made in writing three months (or such further period as the DG may allow) of the beginning of the YA for the basis period in which forest is disposed of.

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Example 3 Kembara Bhd (accounting year ends 31 Dec)

commenced a timber extraction business in March, 2007. The company incurred the following expenditure in the forest:

Date Expenditure RM

1/6/07 Road 42,000

7/7/07 Labour quarters 60,000

On 12 Dec 2011, the company ceased the timber extraction business permanently and disposed of the forest on 15 Jan 2012 for RM130,000.

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Required:Calculate the FA and FC due to Kembara Bhd for all relevant YA under each following circumstances:

i. The company did not make an election under Para 32 (1), Sch 3.

ii. The company did make an election under Para 32 (1), Sch 3.

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Answer (i)

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Road Quarters

*When a forest is disposed – the disposal is deemed to have been made in the basis of cessationSale proceed – no bearing on the computation of FC

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Answer (ii)

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Road FC(election) Quarters FC(election)

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Example 4MyForest carries on a business of timber extraction in Muadzam and has an annual accounting date of 31 December. The following expenditure was incurred:YE 31/12/08 - construction of road RM20,000

- const.of living accommodationRM40,000YE 31/12/09 - construction of road RM100,000

- const.of living accommodationRM60,000The company ceased the extraction of timber from the forest on 30.09.10 of the sale proceed, RM15,000 related to capital expenditure in 2008 and RM60,000 related to expenditure in 2009.State the allowances and charges (if any) for the relevant years of assessment, assuming that an election was made.ATXB223; Sem 2, 2013/2014

Thank youQ&A

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