Clarification on Definition of Factory for Reinvestment Allowance Purposes

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Schedule 7A of the ITA refers to "factory" as the portions of floor area of a building or an extension of a building used for the purposes of a qualifying project to place or install a plant or machinery or to store any raw material, goods or materials manufactured prior to sale, provided that said portion of the building or extension of the building used for the storage of raw material, goods and/or materials, must not be more than one tenth of the total floor area of that building or extension. 

The IRBM has recently clarified that only the portion used for the purpose of a qualifying project fulfils the definition of a "factory" for reinvestment allowance purposes under Schedule 7A of the Income Tax Act 1967 (ITA). 
  

The clarification provided by the IRBM under the Practice Note No.1/2022 is set out below: 

  • In calculating a Reinvestment Allowance claim under Schedule 7A of the ITA, the use of space for the purpose of storing raw materials and/or other goods in excess of one tenth of the total floor area of a factory will not be taken into account. This tax treatment also applies in case of an extension or addition made to an existing factory building.
  • Where a portion of the extension to the building is used for various purposes other than for a qualifying project, reinvestment allowance is only available for the portion of the extension to a building used for the purpose of a qualifying project.
  • The area of storage space for raw materials, goods or materials or both must not exceed 10 percent of the total area of the extension to the building used for the purpose of a qualifying project. 
  • The taxpayer must exclude the total area of sales office space for the purpose of determining a "factory" or space used for the purpose of a qualifying project. This is required as a sales office is not included in the definition of a "factory". 

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