How you can save up to 48% off your solar installation before 31 December 2023
Too good to be true?
Climate change is undeniability real and its effects are increasingly tangible. The recent floods in Malaysia followed by extreme heat are evidence of erratic weather patterns resulting from climate change.
Malaysia’s government has recognized this fact and has put in place very ambitious environmental goals for itself to fulfil. In 2021, the Ministry of Energy and Natural Resources of Malaysia (KeTSA) set a target of achieving 31% renewable energy by 2025 (that’s only 2 years away!) and 40% renewable energy by 2035. This means that for every 10 kilowatts of energy generated, 4 kilowatts must be generated through renewable sources like solar, hydro or wind, rather than fossil fuels. Ultimately, Malaysia aims to achieve carbon neutrality (net-zero emissions) by 2050, which is no easy task.
1. Green Investment Tax Allowance (GITA)
In furtherance of these goals, the Malaysian government has come up with the Green Investment Tax Allowance (GITA). This government-backed incentive program was introduced since 2014. It is designed to encourage businesses (Sdn Bhds and Bhds) to invest in environmentally-friendly Green Technologies, such as solar systems.
Since 1998, 100 companies have been responsible for 71% of global greenhouse gas emissions (Source: Carbon Disclosure Project (CDP)). Businesses are therefore by far the largest contributors to global warming out of every other institution or demographic. The Malaysian government has therefore rightfully targeted businesses as the quickest and most effective way to reduce greenhouse gas emissions.
Despite the glaring warning signs pointing towards the existential need for us to address climate change, it is ultimately the responsibility of higher management to ensure that any investment is financially justifiable. The Malaysian government is fully aware of this reality and GITA is testament to Malaysia’s commitment to achieving its sustainable development goals while catering to the needs of businesses.
How does it work?
Under GITA, businesses can enjoy a tax allowance of 100% of the cost of their solar system (“qualifying capital expenditure”) incurred up to 31 December 2023. This allowance can be offset against up to 70% of the company’s taxable income in the initial year of assessment. The remaining balance can be carried forward for 3 years until fully utilized.
For example, Company X has spent RM400,000 installing a solar system for their factory. At the end of the tax year, Company X has RM1,000,000 in taxable income. The total amount of tax savings is calculated as follows:
Total income tax payable without GITA = 24% x RM1,000,000 = RM240,000
Total income tax payable with GITA = 24% x (RM1,000,000 – RM400,000) = RM144,000
Final total amount of tax savings = RM240,000 – RM144,000 = RM96,000 (i.e. 24% of RM400,000)
In the above example, as the solar system cost was only 40% of taxable income (RM400,000 out of RM1,000,000), the full amount can be claimed within the first tax year.
As mentioned previously, if the solar system cost was more than 70% of the company’s statutory income, e.g. RM800,000 out of RM1,000,000 of taxable income, then the balance would be rolled over and is claimable the following tax year(s), up to a maximum of 3 years.
In another example, if Company Y has spent RM800,000 on solar system instead, and 70% of company’s statutory income is equivalent to RM700,000 only (i.e. 70% x RM1,000,000), then the total savings on each year of assessment are as follows:
Total amount of tax savings on Year One = 24% x RM700,000 = RM168,000
Total amount of tax savings on Year Two = 24% x (RM800,000 – RM700,000) = RM24,000
Final total amount of tax savings = RM168,000 + RM24,000 = RM192,000 (i.e. 24% of RM800,000)
That’s not all…
2. Capital Allowance (CA)
In Malaysia, Capital Allowance (CA) is for all businesses (Sdn Bhds and Bhds) to relieve the loss of depreciation of a purchased business asset to encourage investments in particular assets. This incentive allows businesses to deduct 100% of the cost of acquiring these assets from their taxable income, reducing their overall tax liability. Thankfully, solar systems fall under the category of “Plant & Machinery” and benefit for this tax allowance. Hence, businesses will therefore be able to save an additional 24% off the cost of their solar system from CA.
How does it work?
Businesses can claim an initial allowance of 20% in the first year of investment under CA. This provides an upfront deduction to help offset the initial cost of the asset. After claiming the initial allowance, businesses can then claim an annual allowance of 14% on the remaining balance over the course of 6 years until the full 100% is exhausted.
As per our previous example, assuming Company X’s final solar system cost is still RM400,000. The company will save additional 24% x RM400,000 = RM96,000 under CA, broken down over 6 years as follows:
|Year:||% savings:||Amount saved (RM):|
|1||20% (Initial Allowance) + 14% (Annual Allowance)||RM32,640|
|2||14% (Annual Allowance)||RM13,440|
|3||14% (Annual Allowance)||RM13,440|
|4||14% (Annual Allowance)||RM13,440|
|5||14% (Annual Allowance)||RM13,440|
|6||10% (Annual Allowance)||RM9,600|
Therefore, considering both GITA and CA incentives, Company X’s final total savings in the first tax year of their solar installation would be:
RM96,000 (24% GITA) + RM32,640 (Initial Allowance + Annual Allowance) = RM128,640
In other words, Company X has already saved 32% of the total cost of their solar installation cost in the first tax year, with the remaining 16% to be saved over the next 5 tax years.
The ability to save 48% off the capex of a company’s solar system is an unprecedented incentive that is a real statement from the Malaysian government of its commitment towards achieving its sustainability goals. With these incentives in place, the average Return On Investment (ROI) for companies investing in solar systems has been reduced to an average of around 3 years, which makes investing in solar systems extremely attractive.
However, the upfront cost payable for solar system installations is still substantial. To that extent, the government has complemented its generous incentives with a push on banks to provide Green Financing options for businesses. This is supported by Bank Negara’s RM1bn Low Carbon Transition Facility (LCTF) scheme, which encourages and supports businesses to adopt sustainable practices for business resilience. This has enabled banks to offer companies loans for the purposes of installing solar systems at favourable interest rates and terms.
It is fair to say that the government has put its best foot forward and is doing its best to encourage companies to reduce their carbon emissions. However, the government will not be able to do this forever as such incentives are a substantial strain on government coffers. In the meantime, companies should therefore make the most of these incentives for as long as they last, with revisions expected after the current cut-off deadline of 31 December 2023.
If your company would like to install solar systems and would like to understand more about its eligibility for GITA and CA, feel free to contact us for a free assessment and we would be happy to share more information on how we can help you achieve your sustainability goals.