In Malaysia’s thriving business landscape, where urban development and corporate expansion drive the need for modern workspaces, office renovations represent a significant capital investment. As of August 20, 2025, companies are increasingly focusing on upgrading their premises to enhance productivity, employee well-being, and sustainability, aligning with national initiatives like the Malaysia Digital Economy Blueprint. However, the financial implications extend beyond initial costs, particularly in terms of tax treatment. Unlike accounting depreciation, which is not deductible for tax purposes, Malaysia’s tax system uses capital allowances (CA) to provide relief on qualifying capital expenditures, including office renovations. This article delves into the depreciation rates—framed as capital allowance rates—for office renovations in Malaysia, explaining eligibility, calculation methods, and recent updates from Budget 2025. Understanding these rates helps businesses optimize tax savings and plan investments effectively.

Understanding Capital Allowances for Office Renovations

Capital allowances serve as Malaysia’s mechanism for tax depreciation, allowing businesses to deduct the cost of qualifying assets over time from their taxable income. Office renovations typically involve expenditures on fixtures, fittings, furniture, and structural improvements, which may be eligible as plant and machinery or industrial building allowances under Schedule 3 of the Income Tax Act 1967. Not all renovation costs are eligible; revenue expenditures like routine maintenance are deductible immediately, while capital expenditures on enhancements qualify for CA.

For office renovations, items such as air-conditioning systems, lighting fixtures, partitions, false ceilings, and office furniture are often classified as plant and machinery if they perform a functional role in the business. Structural renovations, like extensions or major alterations to business premises, may qualify for the industrial building allowance if the building is used for qualifying activities, such as manufacturing or storage, but pure office buildings typically do not. In cases where renovations improve an existing industrial building, they can be added to the building’s qualifying cost.

The standard structure for CA includes an Initial Allowance (IA) and an Annual Allowance (AA). The IA is a one-time deduction in the year the asset is acquired, while the AA is claimed annually on the reducing balance until the asset’s cost is fully recovered. Small-value assets (up to RM2,000 each, capped at RM20,000 total) qualify for 100% CA in the year of expenditure.

Standard Depreciation Rates for Office Renovations

The depreciation rates, or CA rates, vary by asset category as prescribed by the Inland Revenue Board (IRB):

1. Office Furniture and Fittings: This includes desks, chairs, cabinets, and shelving. IA is 20%, and AA is 10%. For a RM10,000 renovation on furniture, the IA would be RM2,000 in the first year, with AA of RM800 on the remaining RM8,000 in subsequent years.
2. Office Equipment and Machinery: Items like computers, printers, air-conditioners, and lighting systems fall here. IA is 20%, and AA is 14% for general machinery, but office equipment often gets 10% AA. For example, a RM50,000 air-conditioning installation would allow RM10,000 IA and RM5,600 AA in the first year (14% on RM40,000).
3. ICT Equipment and Software: In Budget 2025, accelerated CA has been introduced for ICT equipment and computer software packages, reducing the claim period from 3 years to 2 years, with IA 20% and AA 40%. This applies to expenditures from YA 2024 to YA 2025, benefiting office renovations involving digital upgrades like smart systems or software for hybrid work.
4. Industrial Building Allowance: For renovations to qualifying industrial buildings (e.g., factories or warehouses used for office purposes in industrial zones), IA is 10%, and AA is 3%. However, pure office renovations rarely qualify unless part of an industrial setup.
5. Special Deductions for Renovations: A special tax deduction of up to RM300,000 is available for renovation and refurbishment costs of business premises incurred between 1 March 2020 and 31 December 2022. For specific companies like TRX Marquee status firms, accelerated CA on renovation costs is extended until 31 December 2025. Budget 2025 also allows CA on capital expenditure for services sector companies in machinery, similar to the investment tax allowance.

Calculating Depreciation for Office Renovations

To calculate CA, determine the qualifying expenditure (cost minus any non-qualifying portions like aesthetic-only improvements). Apply IA in the year of acquisition, then AA on the residual value. Example: A RM100,000 office renovation on furniture and equipment (IA 20%, AA 10%):

• Year 1: IA RM20,000 + AA RM8,000 (10% of RM80,000) = RM28,000 deduction.
• Year 2: AA RM7,200 (10% of RM72,000).

This continues until fully depreciated. For accelerated CA on ICT, it’s faster: IA 20% + AA 40% in Year 1, then AA 40% in Year 2.

Businesses must maintain records, as CA is claimed in the tax return for the year of assessment (YA). Disposal of assets may trigger balancing allowances or charges.

Budget 2025 Updates and Incentives

Budget 2025 introduces measures to encourage investments, including accelerated CA for ICT to support digital transformation in offices. The claim period for unabsorbed CA is reduced from 3 to 2 years for YA 2024-2025, accelerating relief. For green renovations, incentives like CA on energy-efficient equipment remain, promoting sustainability. These updates make office renovations more tax-efficient, especially for tech-heavy upgrades.

Challenges and Considerations

Challenges include classifying expenditures correctly—e.g., decorative items may not qualify. Businesses should consult tax advisors or use the IRB guidelines. In a post-pandemic economy, renovations focusing on hybrid work qualify under standard rates.

In conclusion, Malaysia’s capital allowance system provides structured depreciation for office renovations, with rates like 10-14% AA for most items and accelerated options in Budget 2025. By leveraging these, businesses can reduce tax liabilities while modernizing workspaces.

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5 FAQs on Office Renovation Depreciation Rate in Malaysia

1. What is the standard capital allowance rate for office furniture in Malaysia?
   For office furniture and fittings, the initial allowance is 20%, and the annual allowance is 10% on the reducing balance.
2. How does Budget 2025 affect depreciation for ICT in office renovations?
   Budget 2025 provides accelerated capital allowance for ICT equipment and software, with IA 20% and AA 40%, claimable over 2 years for YA 2024-2025.
3. Do all office renovation costs qualify for capital allowances?
   No, only capital expenditures on qualifying plant like fixtures qualify; revenue costs like maintenance are deductible immediately, and non-functional items may not qualify.
4. What is the special deduction for renovation costs in 2025?
   A special deduction up to RM300,000 applies to costs incurred up to 31 Dec 2022; for TRX companies, accelerated CA extends to 31 Dec 2025.
5. How do I calculate the capital allowance for a RM50,000 office equipment renovation?
   IA: RM10,000 (20%); AA Year 1: RM4,000 (10% of RM40,000); continue AA on reducing balance until fully deducted.