Custom Software Is a Capital Allowance in Malaysia — 40% in Year One

If your company pays to have software built specifically for its business, that cost qualifies for capital allowance in Malaysia. You claim 40% in the first year and 20% a year after that, writing the cost off in full. Most finance teams treat a custom build as a sunk cost. It is not — it reduces your tax bill.

Which rules apply today

The governing instrument is the Income Tax (Capital Allowance) (Development Cost for Customised Computer Software) Rules 2024.pdf), cited as P.U. (A) 327. It was made on 22 October 2024, gazetted on 30 October 2024, and has effect from year of assessment 2024.

Here is the part almost every secondary source gets wrong. Rule 7 **revokes the earlier P.U. (A) 274/2019 rules**. Search this topic today and you will find advisory summaries, firm newsletters and agency blogs still quoting a 20% initial allowance from the 2019 instrument. That rate no longer applies. The initial allowance has doubled.

What you can claim each year

Rule 4 grants an initial allowance equivalent to two-fifths of the development cost incurred. Rule 5 grants an annual allowance equivalent to one-fifth. Both are calculated on the original cost, not a reducing balance.

Worked example: an RM50,000 system

Say an Sdn Bhd pays RM50,000 for a custom inventory system that becomes usable during YA 2026. Assume the company qualifies for SME rates and its chargeable income sits in the 17% band.

The true cost to the company falls from RM50,000 to roughly RM41,500. That saving moves with your tax band — RM12,000 at 24%, RM7,500 at 15%. Current SME bands are 15% on the first RM150,000, 17% from RM150,001 to RM600,000, and 24% above that, subject to paid-up capital and gross income tests. Confirm your band with your tax agent.

What counts as development cost

Rule 2 defines "development cost for customised computer software" narrowly — three things only:

• **Consultation fee** — what you pay the party building the software
• **Payment for rights of software ownership** — what you pay for rights over the software itself
• **Incidental fee** relating to the development of that software

Who can claim

Rule 3(1) sets two conditions: you must be **a resident in Malaysia**, and the cost must be incurred from a source consisting of your business. Software for personal use does not qualify.

Rule 3(2) governs **when** the claim starts. The cost is deemed incurred in the year of assessment in which the software is **capable of being used** for the purposes of your business — not the year you paid the deposit, and not the year you signed the contract. Pay a deposit in December 2026 for a system that goes live in March 2027 and the claim begins in YA 2027.

When you are disqualified

Rule 6 lists seven circumstances that rule out a claim. These rules do not apply if, for the same development cost, you have:

1. 1Been granted any incentive under the Promotion of Investments Act 1986
2. 2Claimed a deduction under section 33 of the Income Tax Act
3. 3Claimed a deduction under section 34A (research and development expenditure)
4. 4Claimed reinvestment allowance under Schedule 7A
5. 5Claimed investment allowance for the service sector under Schedule 7B
6. 6Claimed accelerated capital allowance under any rules made under section 154
7. 7Been granted an exemption under paragraph 127(3)(b) or subsection 127(3A)

The principle is simple: one cost, one tax treatment. If the expenditure has already been relieved elsewhere, you cannot claim capital allowance on it again.

How to invoice so the claim holds up

The rules do not prescribe documentation, but a queried claim comes back to the same things every time. Ask your vendor for:

• An invoice that **itemises** consultation fee, ownership rights and incidental fees separately — not a single line reading "website project"
• A written scope showing the software was built for you, not a repackaged off-the-shelf product
• An agreement stating who owns the source code and what the usage rights are
• A record of the date the software became usable in your operation — a handover email, UAT sign-off, or deployment log

A warning about paying overseas developers

If you engage a non-resident developer, the payment may attract withholding tax under section 109 or 109B of the Income Tax Act. Failing to withhold and remit within the prescribed period carries a penalty and can affect your capital allowance claim on that expenditure. This is one practical reason working with a Malaysian-resident developer keeps the tax side simpler — but confirm the treatment of your specific arrangement with your tax agent, not with this article.

The bottom line

If you are weighing whether to commission a system, this changes the arithmetic. An RM50,000 system that relieves RM8,500 of tax is a different proposition from one that relieves nothing. But the incentive does not turn a badly scoped system into a good investment — it only makes the right system cheaper.

To see real numbers for your scope, our quote calculator gives a range without asking for personal details, and the Custom Web Systems and Windows Software Development pages set out what each tier includes.