ADVANCED_ZIMBABWE_TAX_MODULE_2011[1].pdf

2011

B. COMPT HONOURS DEGREE ZIMBABWE CERTIFICATE IN THEORY OF

ACCOUNTING

ADVANCED ZIMBABWE TAXATION MODULE

ICAZ ZCTA ADVANCED ZIMBABWE TAX TAXATION MODULE 2011

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TAXATION COURSE - OUTLINE TOPIC 1 Introduction 2 Syllabus 3 Legislation cut off for exam 4 Recent Amendments 5 Administrative and legal framework - Administration of Taxes in Zimbabwe - Gross Income - Capital and Revenue Accruals and Outlays - Special Inclusions - Exemptions - General Deduction Formula - Suspensive sales and credit sales - Capital Allowances and Recoupments:

Special Initial Wear and Tear Scrapping Growth Point Investment Recoupments

- Prohibited Deductions 6 Taxation of Individuals and Partnerships - General scheme of taxation - Accrual of partnership profit and salaries 7 Taxation of Farmers - Special Deductions - Valuation of Stock

- Drought Sales and Restocking - Sales due to Land Acquisitions

8 Taxation of Miners - Prospecting Expenditure - Capital Redemption Allowances

- Sale of Mining Claims 9 Capital Gains Tax - Specified Assets - Exemptions - Deductions

- Suspensive Sales and Roll Overs - Withholding Taxes & Tax on Shares

10 Deceased Estates 11 Tax Planning 12 Practice Questions


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1. INTRODUCTION

The Advanced Taxation module has been prepared to meet the requirements of the UNISA B Compt Honours degree. The study pack contains summaries of the relevant tax legislation and practical tax questions. The professional accountant is normally expected to understand taxation legislation, to interpret it, and to be able to give professional advice in the business world. The taxation questions in the examination require candidates to demonstrate awareness of current taxation practices as well as ability to derive important facts and figures from given sets data. The taxation syllabus is fairly wide, and candidates must be well prepared, as an approach based on spotting can be an expensive exercise in self-deception.

It is possible to score high marks in tax examination questions. In order to score these high marks, one needs to demonstrate their tax knowledge, appropriate interpretation, application and production of well crafted solutions presented in a professionally acceptable format. Examination technique, approach, clarity of expression and readable presentations are important aspects, which should not be ignored.

Best wishes, and may you succeed in your endeavours.

2. SYLLABUS

The following statutes embrace the main areas of the tax law and practice syllabus in Zimbabwe. The provisions of the statutes are augmented, expanded and explained in detail in legal precedents embodied in the South African Tax Cases Reports.

STATUTES

The Income Tax Act (Chapter 23:06)

The Capital Gains Tax Act (Chapter 23:01)

Extract from the Financial Act (Chapter 23:04)

Candidates should be aware of the general provisions of the following

statutes as well.

Value Added Tax (Chapter 23:12)

Estate Duty Act (Chapter 23:03)

In addition to the above the existing textbook on taxation in Zimbabwe is Income Tax in Zimbabwe, by LW Hill.

Although the statutes mentioned above are the main sources of tax legislation in Zimbabwe, legal precedents (case law) form an integral part of tax law and practice in Zimbabwe. The case summaries contain some useful analogies, interpretations and clarifications.


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Candidates should have:

An understanding of the various taxation statutes and relevant case law together with the principles contained therein and the interaction between them;

Knowledge and understanding of court interpretations of significant cases;

Knowledge and understanding of administrative interpretations;

Awareness of sectorial taxation provisions;

Awareness of taxation exceptions and exemptions

Ability to perform tax calculations, to determine associated liabilities from

given information, and should develop the ability to contribute meaningfully to clients and employers tax plans and financial affairs.

3 LEGISLATION CUT OFF FOR EXAM PURPOSES The questions will be based on legislation in force as at 31 December 2010. For

planning type questions, candidates should also be aware of the legislative changes which have recently been promulgated, following the parliamentary approval of the National Budget presented by the Minister of Finance to parliament in November 2010.

4 RECENT CHANGES IN LEGISLATIVE PROVISIONS

The changes outlined below are mainly effective from 1 January 2010 unless otherwise indicated.


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TAX LEGISLATION YEAR ENDED 31 ST DECEMBER 2010 The Tax questions in the 2011 Examination will be based on legislation relating

to the year of assessment ended 31st December 2010. The following tax rates apply:-

RATES OF TAX: EMPLOYMENT INCOME ANNUAL P.A.Y.E TABLE (US$)

1ST JANUARY 2010 31ST AUGUST 2010 (USD) Band of Taxable

Income

US$

Amount within Band US$

Tax Rate

%

Amount of Tax

US$

Cumulative Tax

US$

1 1 280

1 280 Nil Nil Nil

1 281 4 000

2 720 20 544 544

4 001 8 000

4 000 25 1 000 1 544

8 001 12 000

4 000 30 1 200 2 744

12 001 and above

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Aids levy of 3% of tax is payable

MONTHLY P.A.Y.E TABLE (US$)

1ST JANUARY 2010 31ST AUGUST 2010 (USD) Band of

Taxable Income US$


Tax Rate

%

Amount of Tax US$

Cumulative Tax US$

1 160 160 Nil Nil Nil 161 500 340 20 68 68 501 1 000 500 25 125 193 1 001 1 500 500 30 150 343 1 501 and above 35

Aids levy of 3% of tax is payable


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ANNUAL P.A.Y.E TABLE (US$)

1ST SEPTEMBER 2010 31ST DECEMBER 2010 (USD) Band of Taxable

Income

US$


Tax Rate

%

Tax

US$

Cumulative Tax

US$

1 700 700 Nil Nil Nil 701 2 000

1 300 20 260 260

2 001 4 000

2 000 25 500 760

4 001 6 000 2 000 30 600 1 360 6 001 and above

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MONTHLY P.A.Y.E TABLE (US$)

1ST SEPTEMBER 2010 31ST DECEMBER 2010 (USD) Band of Taxable

Income US$

Amount In Band

US$

Tax Rate

%

TAX US$

Cumulative Tax US$

1 175

175 Nil Nil Nil

176 500

325 20 65 65

501 1 000

500 25 125 190

1 001 1 500

500 30 150 340

1 501 and above 35 4.1 INCOME TAX INDIVIDUALS TAX FREE BONUS


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With effect from 1 November 2009, a bonus tax free threshold of US$400 per annum will be applicable. The tax free threshold is further increased to US$500 per annum with effect from 1 November 2010.

RETRENCHMENT PACKAGES

With effect from 1st January 2010, the tax-free portion of a retrenchment

package is pegged at the greater of US$5,000 or one third of the retrenchment package provided it does not exceed US$15,000.

PENSION CONTRIBUTIONS

With effect from 1st January 2010, the monthly maximum amount allowable for employer and employee pension fund contributions is US$450 per month.

TAX RATES

The age for eligibility for the elderly persons credit is reduced from 59 years to 55 years with effect from 1 January 2010.

%

14(2)(b) Taxable income of individual from trade or investment 25 14(2)(d) Taxable income of pension fund from trade or

investment 15

14(2)(e) Taxable income of licenced investor (taxed at 0% up to the fifth year of his operations as such) ...

25

14(2)(f) Taxable income of holder of special mining lease..

15

14(2)(g) Taxable income of company or trust derived from mining operations

25

14(2)(h) Taxable income of person engaged in approved BOOT or BOT arrangement: First five years of the arrangement ...

0

Second five years of the arrangement .

15

14(2)(i) Taxable income of industrial park developer (after being taxed at 0% for the first five years of his operations as such)

25

14(2)(j) Taxable income of operator of a tourist facility in approved tourist development zone (after being taxed at 0% for the first five years of his operation as such) ...................................

25


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Operator of a tourist facility where 60% or more of the turnover from such operations is in foreign currency ...

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14(3) Taxable income of manufacturing company which exports 50% or more of its output .

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The rate of income tax that generally applies to companies is 25% of taxable income and an AIDS levy of 3% of tax payable, giving an effective rate of 25.75%.

MOTOR VEHICLE BENEFITS

With effect from 1st January 2010, the deemed motoring benefit is revised as follows:-

Engine Capacity 2010

US$ 1 500cc or less 150 per month 1 501cc to 2 000cc 200 per month 2 000cc to 3 000cc 300 per month Above 3 000cc 400 per month

PAYE REMITTANCE PERIOD

PAYE remains payable on or before the third day of the month following that of deduction. This due date is revised to the 10th day of the following month with

effect from 1st September 2010. RATE OF INTEREST

With effect from 1 January 2010 the rate of interest on unpaid taxes including customs duty and outstanding refunds has been placed at 10% per annum.

Previously the rate was based on 5% plus LIBOR rate. 4.2 INCOME TAX: - COMPANIES, TRUSTS , INDIVIDUAL

TRADE OR INVESTMENT CORPORATE TAX

With effect from 1st of January 2010, the corporate tax rate will be reduced to 25% plus 3% Aids Levy, effectively reducing the rate from 30,9% to 25,75%. .

INCOME FROM TRADE OR INVESTMENTS

The tax rate for income from trade or investment is also reduced from 30% to 25% plus 3% AIDS LEVY.

CAPITAL ALLOWANCES The rate of special initial allowance SIA is reduced from 50% to 25% with effect

from 1 January 2010 up to the year of assessment ending on 31 December 2013.


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SIA will be limited to 50% of the cost of fiscalised electronic registers, the other

50% is allowed as VAT input. The 14th Schedule, capital allowances in growth point areas is repealed with effect from 1 September 2010.

CONTRIBUTIONS TO SCIENTIFIC AND EDUCATIONAL SOCIETY

With effect from 1 January 2010, the double deduction on contributions to a scientific and educational society or institution is removed and only the actual amount contributed is allowed.

PROVISIONS FOR DOUBTFUL DEBTS

With effect from 1 January 2010, the provision for the deduction of doubtful debts is repealed. The allowance for actual bad debts incurred is still claimable.

4.3 MINING TAXATION REFORM

TAX RATE

With effect from 1 January 2010 the rate of tax on mining companies is increased from 15 % to 25%. The taxable income of a holder of a special mining lease remains at 15%.

MINING CLAIMS

With effect from 1st January 2010 the election to spread the taxable income derived from the sale of mining claims is repealed and such income will be taxable in full in the year of receipt.

An election to spread the income from the sale of mining claims over four

years, made prior to 1 January 2010 shall not be subject to the new changes.

ROYALTIES

ROYALTY RATES

It is proposed that the rate of royalties on precious metals be increased from 3% to 3,5% with effect from 1 January 2010.

4.4 WITHHOLDING TAXES: RESIDENTS / NON RESIDENTS RESIDENT SHAREHOLDERS TAX [R.S. T.]

The rates of resident shareholders tax on dividends paid by Zimbabwean resident companies to non-resident individuals, trusts and partnerships are reduced as follows with effect from 1 January 2010:-

Payable by companies listed on the Zimbabwe Stock Exchange, from 15% to 10%

Payable by non listed entities, from 20% to 15%.


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With effect from 1 January 2010, R.S.T. is payable by the 10th day of the month following date of distribution.

NON-RESIDENT SHAREHOLDERS TAX [N.R.S.T.]

The rates of non-resident shareholders tax on dividends paid by Zimbabwean resident companies non resident shareholders are reduced as follows with effect from 1 January 2010:-

Payable by companies listed on the Zimbabwe Stock Exchange, from 15% to 10%

Payable by non listed entities, from 20% to 15%. With effect from 1 January 2010, N.S.R.T. is payable by 10th day of the month following date of distribution.

RESIDENTS TAX ON INTEREST (R.T.I.)

With effect from 1 January 2010, residents tax on Interest has been reduced from 20% to 15%.

With effect from 1 January 2010, RTI is payable by the 10th day of the month following date of payment.

NON-RESIDENTS TAX ON INTEREST (NRTI)

The 10% NRTI was repealed with effect from 1st August 2009.

NON-RESIDENTS TAX ON FEES (NRTF)

With effect from 1 January 2010, the rate of withholding tax on fees is reduced from 20% to 15%.

The tax is imposed on fees paid to non-residents in respect of technical, managerial, administrative or consultative services. This includes directors fees.

With effect from 1 January 2010, NRTF is payable by the 10th day of the month following date of payment.

NON-RESIDENTS TAX ON ROYALTIES (NRTROY)

With effect from 1 January 2010, the rate of withholding tax on royalties is reduced from 20% to 15%.

The withholding tax is chargeable on royalties paid to non-residents for the use of patents, trade marks, formulae, equipment, motion picture etc.

With effect from 1 January 2010, NRTROY is payable by the 10th of the month following date of payment.


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WITHHOLDING TAX ON TENDERS

With effect from 1 January 2010 withholding tax on contracts shall be payable by the tenth day of the month following that in which the payment was made. NON RESIDENTS TAX ON REMITTANCES With effect from 1st September 2010, the rate is 15%.

PRESUMPTIVE TAXES

With effect from 1st January 2010 the following revised presumptive taxes will apply on commuter omnibuses per each vehicle, per quarter: -

Number of passengers Current fees Proposed fees US$ US$ 15-24 200 175 25-36 400 300 37 and above 650 450

Restaurants and Bottle Stores

With effect from 1 January 2010, operators of restaurants or bottle stores not registered for tax purposes will pay a presumptive tax of US$300 per quarter.

Cottage Industry Operators

With effect from 1 January 2010, operators of cottage industries not registered for tax purposes will pay a presumptive tax of US$300 per quarter.

The definition of cottage industry includes:-

Furniture making or upholstery Metal fabrication

BANKING INSTITUTION LEVY The 5% Banking Institution Levy has been repealed with effect from 1 January

2010.

4.5 INTEREST FOR LATE PAYMENT OF CAPITAL GAINS TAX

With effect from 1 January 2010, the interest rate for late payment of capital gains tax shall be 10% per month. No interest shall be payable for the first thirty days after the date from which the tax becomes due.


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4.6 TAX PAYMENT DATES

TAX PAYMENT DATES


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It is intended that payment dates for various other taxes be standardized as shown below:-

Revenue Head Current Payment Date Proposed Payment Date

Vat 5th day of the following month.

10th day of the following month

Presumptive tax Small Scale Miners

20th day of the following month in which payment was made.


Withhold ing Amounts under Contracts

On or before the last day of the month following that in which payment was made.

By the 10th day of the month of payment on contracts with state and statutory corporations.

Excise Duty on Second Hand Motor Vehicles

20th day of the following month.


Non-Resident Shareholders Tax

Within 30 days of the date of distribution or within further time as the Commissioner General may for good cause allow.

By the 10th day of the month following date of distribution.

Resident Shareholders Tax

Within 15 days of the date of distribution or within such further time as the Commissioner General may for good cause allow.

By the 10th day of the month following date of distribution.

Non-Residents Tax on fees

Within 15 days of the date of payment or within such further time as the Commissioner General may for good cause allow.

By the 10th day of the month following date of payment.

Non-Residents Tax on Remittances

Within 15 days of the date of payment or within such further time as the Commissioner General may for good cause allow.

By the 10th day of the month following date of remittances.

Non-Residents Tax on Royalties

Within 15 days of the date of distribution or within such further time as the Commissioner General may for good cause allow.

By the 10th day of the month following date of payment.


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Residents tax on interest

On or before the 15th day of the month following the month in which the payment was made.

By the 10th of the month following date of payment.

Tobacco Levy Within 30 days of the date of distribution or within such further time as the Commissioner General may for good cause allow.

By the 10th of day of the month following date of payment.

Automated Financial Transactions Tax

Not later than the 15th day of the month following the month in which the transaction in respect of which the tax is payable was effected.

By the 10th day of the month following month in which the transaction in respect of which the tax is payable was effected.

Informal Traders Presumptive tax

Within 30 days of the date on which he recovers it or within such further time as the Commissioner General may for good cause allow.

By the 10th of the month following date of recovery.

Intermediated money transfer tax

Not later than the 15th day of the month following the month in which the transaction in respect of which the tax is payable was effected.

By the 10th of the month following month of transaction.

Non-Executive Directors Fees

Within 15 days from the end of month of payment.

By the 10th of the month following month of payment.

Property for Insurance omission Tax

On or before the last day of the month following the month on which payment was made or within such further time as the Commissioner General may for good cause allow.

By the 10th of the month following month of payment.

4.7 ESTATE DUTY

Estate duty is chargeable on the net value of a deceased persons estate. The applicable rates vary on a sliding scale from 1.02% per $100 or part thereof, up to a maximum of 5% where the dutiable amount is USD$50,000 or above.

EXEMPTIONS


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Where there is a surviving spouse or minor child the value of a family home as defined is not subject to estate duty.

Transfer duty is not chargeable where a property is transferred to a beneficiary who is a spouse or blood-relative or adopted child of the deceased or to a trustee.

Donations may be exempt if they were made 5 years or more prior to death.

Payments from policies specifically taken out to pay estate duty are not taxable only to the extent of the duty payable.

STAMP DUTY

Stamp duty is imposed on bonds, brokers notes, cheques, policies of insurance and registration in a Deeds Registry on the acquisition of immovable property.

CUSTOMS DUTY

Customs duty is levied on all goods imported. The effective rates of duty range from 0% to 100%.Import tax is levied on most goods at the VAT standard rate of 15%. In general, Zimbabwe imposes restrictions on the importations of a range of goods which require import permits or licences e.g. agricultural products and explosives.

CONVERSION OF SPECIFIED AMOUNTS INTO FOREIGN CURRENCY

Description of Item Proposed amounts allowable annually (US$)

1. Arrear pension contributions: as a deduction

1 800

Annuity, allowance or pension paid to former employee

500

Annuity, allowance of pension paid to former partner

200

Annuity, allowance or pension paid to a dependent of a former employee or partner

200

2. Payments to the Public Private Partnership Fund

50 000

3. Payments to the Destitute Homeless Persons Rehabilitation Fund

50 000

4. Co-operative societies: Deductions allowed in respect of income derived by a co-operative, agricultural company or co-operative society

500

5. Expenditure allowed on maintenance of roads, buildings, bridges or water, public or sanitation works managed by the local authority

50 000


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6. Passenger motor vehicle (PMV): Maximum amounts allowable on leasing a passenger motor vehicle

10 000

7.1 Minimum amounts of tax not collectable by Commissioner

0.50

7.2 Minimum amounts of PAYE not refundable

0.50

8 Lump sum payments (Pensions) which shall not be included in gross income.

1 800

Valuation of farm trading stock (livestock):fixed standard values of livestock and stud livestock

150

10. Restricted capital expenditure on permanent building used as: dwelling of staff employed at a school, hospital, nursing home or clinic in connection with mining operations

10 000

11. Capital expenditure on school, hospitals, nursing homes and clinics:

Expenditure incurred

12. Restriction on staff housing

10 000

13.1 Renewal or Replacement expenditure on buildings, works or equipment (mining)

10 000

13.2 Renewal or Replacement expenditure on buildings, works or equipment: mine is owned, tributed, or leased by a company under the control of not more than 4 individuals.

4 000

14.1 Allowable Benefit Fund contributions by employers

1 500

14.2 Allowable employee pension contributions

5 400

14.3 Allowable employer pension contributions

5 400

15. An amount paid by way of a wage to domestic worker. The amount should not exceed a monthly minimum wage

150

16. Resident Shareholders Tax on dividends and interest income refundable where taxpayer is over 55 years of age

600

17. Resident Shareholders Tax on dividends and interest income refundable where taxpayer is below 55 years of age

480

18. Presumptive Tax of 10% is charged in informal traders: An Informal trader is an individual who carries on trade for his own account from which he derives a gross income

less than

6 000

19. Assessed loss that is written off in any year

100

20. Exemptions from CGT on marketable securities to persons over 55 years old

1 800

21 Amounts to be deducted where the final CGT is a small 50


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DEEMED LOAN BENEFITS

Description of Loan Benefit

Statutory Interest Rate

Proposed Threshold where no interest is Charged (US$)

Proposed Statutory Rate

Loan benefit below ZW$35 000

12.5%

$100

Difference between interest charged by the employer and the Statutory rate of interest of 5% above Libor

Loan benefit above ZW$35 000

16%

$100

Difference between interest charged by the employer and the Statutory rate of interest of 5% above Libor


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5. ADMINISTRATIVE AND LEGAL FRAMEWORK 5.1 ADMINISTRATIVE FRAMEWORK (All references to sections and schedules in this section are in relation to the

Income Tax Act [Chapter 23:06]). 5.1.1 Administration The administration of all taxation (Value Added Tax, Capital Gains Tax,

Income Tax, e.t.c) now fall under the responsibility of the National Revenue Authority of Zimbabwe (ZIMRA), which Authority came into being with effect from 19 January 2001. The Commissioner-General of Taxes is vested with the power and responsibility of administering the tax statutes. He does this through regional offices and ports established across the country.

5.1.2 Returns and Assessments Every year, three to four months after the end of a tax year the

Commissioner publishes a notice in the most commonly read press inviting taxpayers to obtain tax returns from their nearest tax office; truthfully complete them and return them to the respective offices for assessment. Although Tax Offices may post some tax returns to taxpayers (on their records), the duty to obtain a tax return rests with each individual taxpayer who falls within the specifications outlined in The Commissioners public notice. Tax returns for the year ended 31 December 2010 will be due by 30 April 2011.

Self assessment legislation was introduced with effect from 1 January 2007. Taxpayers, so specified by the Commissioner General as being those registered or required to have registered under Category C for Value Added Tax (VAT) in terms of the VAT Act as at 31st December 2007 and thereafter or registered under the Banking Act or registered under the Insurance Act, are required to furnish self assessment returns within four months from the end of the tax year. Employees paying PAYE under the FDS are not liable to furnish self assessment returns unless specifically requested to do so. Under the self assessment legislation, the return will constitute an assessment on either the due date of furnishing the return or on the date that it is actually furnished. Notwithstanding the lodgment of the self assessment return, the Commissioner General is still empowered to raise an assessment where he has justifiable reasons for doing so.

All employers have been placed on the Final Deduction System (FDS). Under the FDS, any employee who receives employment income only (i.e. has no source of income other than remuneration), does not need to submit a tax return. The employer is responsible for deducting the correct amount of PAYE for the year, and no further return needs to be made to the tax department by the employee.

The Commissioner of Taxes is empowered to estimate any taxpayers taxable income if one fails to submit a return. In addition to the tax payable the Commissioner is also empowered to impose penalties for any


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default. These penalties are 100% of the basic tax chargeable. Section 46 outlines some grounds for penalties.

It is a legal requirement for Pay As You Earn (P.A.Y.E.) to be deducted

from all emoluments payable to employees on a monthly basis. The P.A.Y.E. withheld has to be remitted to the Commissioner within 15 days from the end of the month to which such P.A.Y.E. refers. The penalty for late payment of PAYE is 100% of the tax payable, and interest is also charged on late payment at a rate prescribed by statutory instrument. (See sections 73 and 74 as read together with schedule 13.)

Taxpayers who are not employees, but are in receipt of other income, (e.g.

sole traders, consultants and companies), are required to be on Quarterly Payment Dates (Section 72). Under this scheme the taxpayers pay their estimated tax liabilities, for the current tax year in which they are trading, in four instalments on dates allocated throughout the year, as follows:

25 March 10% of tax payable 25 June 20% of tax payable 25 September 25% of tax payable 20 December 35% of tax payable 5.1.3 Representative Taxpayers The duties and rights of representative taxpayers are outlined in the above

quoted sections. The Commissioner of Taxes also has remedies against defaulting representatives. Where a representative has met an obligation of the principal out of his resources, he is empowered by the Act to seek restitution from the principal.

The administrative sections of the Act are fairly simple to read. Students

should read them in order to have an understanding of the overall administrative framework.


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5.2 LEGAL FRAMEWORK 5.2.1 Overview In terms of section 6 of the Income Tax Act (Cap 23:06) there shall be

charged, levied and collected income tax calculated on taxable income for the benefit of the consolidated revenue fund.

The calculation of a taxpayers tax liability shall be made by reference to :- - taxable income of taxpayer in year of assessment - the appropriate rates of tax per the charging act for the year ; and - the credits* to which taxpayer is entitled to per the charging act for

that year. (section 7)

* Only taxpayers who are natural persons are entitled to tax credits. The basic model for calculating any taxpayers (individuals, trusts and

companies) taxable income is as follows :-

Total receipts and accruals in tax year less Amounts proved by taxpayer to be capital in nature = Gross Income (section 8) less Exemptions (section 14 and 3rd schedule) = Income

less Allowable Deductions (section 15 and various schedules)

= Taxable Income Sections 8, 14 and 15 are cornerstones of Zimbabwe Income Tax

legislation. 5.2.2 Gross Income Gross Income is defined as :- the total amount .. received by or accrued to or in favour of a pers on..


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or deemed received or accrued.. in any year of assessment from a source within or deemed to be within Zimb abwe excluding amounts proved by the taxpayer to be o f a capital

nature. Section 2 of the Act defines various terms used in the Act. Students

should be familiar with the meanings attached to words such as amount and person. Amount for tax purposes embraces all receipts or accruals, whether deemed or actual as long as they have an ascertainable monetary value. An example of a specific inclusion is motoring benefit [section 8(1)(f)].

Received by or accrued to or in favour of a person :

An amount is only taxable when it has been received by or accrued to a taxpayer in any specific tax year. The Act does not define the words received an accrued. Guidance has to be sought, therefore from legal precedents (court cases). The most celebrated cases on accrual of income are :

Delfos vs CIR in which the learned judge asserted that income accrues

when it becomes due and payable. In Lategan vs CIR the judge concluded that income accrues to a person

when one becomes entitled to.. the income. Section 10(7) of the Act affirms the decision in the Lategan case.

Please refer to Students Guide to Tax in Zimbabwe 2006 published by ZXNET (Pvt). Ltd. for detailed summaries of the above cases, as well as a few other relevant cases.

Deemed received or deemed accrued :

The Commissioner will invoke receipt or accrual under the circumstances outlined in section 10, although the income might not have been physically received. An amount will be deemed to have accrued to a person if it has been invested on behalf of the person.

Section 10(2) provides that partnership business income accrues on the accounting date. This provision reinforces the decision established in the case Sacks v CIR. Sections 10(3) to 10(6) provide for the taxation of income that accrue from donated assets.

From a source in, or deemed in Zimbabwe :

Income is not taxable in Zimbabwe unless it is from a Zimbabwean source or has been deemed to be from a Zimbabwean source (section 12). Source is one of the words used extensively in tax matters, but is not defined in the Act. Although there is no definition of source in the statutes, many legal precedents have dealt with the word at length.


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Specific circumstances under which income is deemed to be from a Zimbabwean source are outlined in section 12 of the Act. The most common examples are interest and dividends from outside Zimbabwe which are deemed to be from a Zimbabwean source in terms of section 12(2).

The following quotations are from celebrated tax cases on source of income :- (a) Lord Atkin, Privy Council, UK :- in Rhodesia Metals (in liquidation) v COT :-

. As a hard matter of fact the only proper conclusion appears to be that the company received the sum in question from a source within the territory (Rhodesia), viz the claims they had acquired and developed there for the very purpose of obtaining the particular receipt.

. Source means .. not a legal concept but something which the practical man would regard as the real originating cause of the income..

(b) Watermayer CJ in CIR v Lever Bros and Unilever Ltd 1946 AD 441 :-

. source of receipts, received as income, is not the quarter whence they come, but the originating cause of their being received as income . the quid pro quo which he gives in return for which he receives them .

The following are some important legal precedents :- Directors fees - ITC 235 (1932) 6 SATC 262 :- It is quite clear that the

directors fees are derived from the fact that the appellant is a director of the company, and therefore must be assumed to have earned the fees at the headquarters of the company. It is there only that he can make his voice heard as a director.

Interest - .. Provision of credit is the originating cause hence the place

where exercised is the source . This was the majority decision in CIR v Lever Bros and Unilever Ltd 1946, 14 SATC1.

Sale of mineral rights/immovable property - Some mining claims were

bought and sold in the Territory in a profit making scheme .. source is the Territory . (where the immovable property was situated).

International Trade - Transvaal Association Hide & Skin Merchants v COT Botswana Court of Appeal (May 1962 SATC 97). Company bought hides from a Botswana Abattoir via Botswana subsidiary, treated them with salt and bound them into bales in Botswana. The company headquarters in Johannesburg marketed the hides and gave delivery instructions to the Botswana subsidiary to deliver direct to customers, whether in Botswana or outside Botswana.


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The decision was that there was two activities :- curing and marketing. Curing was the dominant activity, hence the source was deemed to be Botswana. However, it appears from ITC 1103 (1967) 29 SATC 35, that it is possible for the source of income to be found partly in one country and partly in another. (See Hill textbook for details of this case.)

Gains on Stock Market - CIR v Black 1957 (3) SA 536 (A) 21 SATC 244.

Important factors identified in this case were the employment of capital and the undertaking of business. It was ruled that the dominant factor was the carrying on of transactions hence the source was deemed to be London, where shares were bought and sold ., though under instruction from South Africa.

Services Rendered - (COT V Shein 1958 14 SATC 12) . the source of earnings is the work done in return for those

earnings . It now seems settled law that generally the source of such income is the place where the services for which the salary is paid have been rendered.

Royalties - Millin v CIR 1928 SATC 170The originating cause of the

authors royalties is the wit and labour exercised in writing the book in South Africa, therefore the source is South Africa (not England were the book was published).

Rental Income - COT v British United Shoe Machinery (SA) (Pty) Ltd

1964 26 SATC 163 Immovable property : source is the country/place where property is

situated. Movable property : source is the country where lessor carries out his

business. 5.2.3 Capital and Revenue : Accruals and outlays in gener al The definition of gross income specifically excludes amounts proved by the

taxpayer to be capital in nature. Expenditures and losses to the extent to which they are capital in nature are not allowable as deductions.

Of utmost importance is establishing just what constitutes a capital accrual

or receipt ; and what constitutes a capital outlay. There are many court cases dealing with the capital or revenue nature of amounts, because neither term is defined in the legislation.. The basic principle of determining whether an item is on capital or revenue account is to examine the intention underlying the transaction. Where there exists more than one intention then the dominant intention will determine nature. Any transaction undertaken for a profit motive is taxable, despite the fact that it might be an isolated transaction. (Overseas Trust Corporation v CIR (1926) 2 SATC 71).

When analysing nature of expenditures, it is sometimes necessary to

consider the ensuing benefit. If the ensuing benefit is short term, then


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expenditure could be considered to be on revenue account. If it is long term (for example restraint of trade), then it is capital.

. as a general rule . income was revenue derived from capital

productively employed . capital . might be said to be wealth used for the purpose of producing fresh wealth..

as per Chief Justice Innes in CIR v George Forest Timber Co Ltd. Capital can be fixed or floating. Floating capital is consumed and

disappears in the very process of production, for example raw materials. Fixed capital remains relatively intact for a number of years though there is some diminution in value due to wear and tear. Fixed assets used in a business are examples of fixed capital. Stock for sale on the other hand is floating capital.

. its use involved disappearance and the money obtained for it

was received as part of the ordinary revenue of the business . the sale of fixed capital represents a realisation which should not be included in gross income.

Please refer to the Students Guide to Taxation (EY) or Income Tax in

Zimbabwe (Hill) for more detailed commentary on capital and revenue concepts.

5.2.4 Calculation of tax liabilities (2010 tax year) Companies and Trusts % Tax rate on taxable income 25.00 Add 3% AIDS Levy 0.75 _____ Tax liability 25.75 _____ Individuals Tax rates on taxable income $ Less credits $ __ Tax payable on taxable income $ Less : PAYE $ Double taxation relief $ Any applicable tax withheld in advance $ __ $ __ Payable/(Refund) $


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Please take care and internalise the chronology of the above steps and make sure you follow them exactly. A lot of students have come short because they rewrote the law relating to the above steps. 5.2.5 Specific Inclusions in Gross Income

Although the definition of gross income outlined in section 8(1) is all embracing, paragraphs 8(1)(a) to 8(1)(t) outline various types of amounts which must be included in gross income whether or not they may appear like they are capital in nature.

Section 8(1)(a) : Annuities/pension receipts :- Definition :- . an annual payment in perpetuity for the life of grantee or for a

limited period . . ITC 826 (1956) 21 SATC 189. Characteristics :- - claimable from another person or body - must be a fixed annual amount (which can be divided into monthly

or weekly payments) - must be repetitive for a period ITC 761 (1952) 19 SATC 103 Types :- Purchased annuity - only interest content is taxable if there was no tax deduction or

credit allowed at or during time of payment of contributions. Basic formula for determining taxable portion (I) = (P*N)-A ______ N where: P = annual payments (gross annuity received per year) N = number of annual payments expected

A = purchase price of annuity (excluding any deductions granted when making contributions).


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NB :- All amounts received after the expiry of the N years are taxable in full.

Annuity from gift or legacy

This type of annuity is taxable in full, even if paid out of capital funds. Annuity from services rendered

This annuity is taxable in full except where portions of contributions were disallowed as a deduction for tax purposes - in such cases the taxable portion is determined using the formulae in the purchased annuity section above.

Section 8(1)(b) : Income for services rendered - e.g. salaries, commission, cash in lieu etc. The first $5 000 or up to a maximum of 1/3 of the first $45 000 of a lump

sum accruing by reason of the termination of employment in terms of a Government approved scheme is exempt from taxation.

Section 8(1)(c) : Lump sum receipts or accruals from pension or benefit funds (1st

schedule). Section 8(1) (d) and (e) : Premiums and lease improvements. Section 8(1) (f) : Advantages or benefits from employment, service, office or gainful

employment. Value of benefit is determined by reference to : value to employees in the case of occupation of quarters, residence

or furniture cost to employer in the case of any other benefit Some examples :- soft loans :- with effect from 1/01/10 over $100 - benefit is 5% plus LIBOR p.a. less any interest paid motoring :-


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Engine Capacity Deemed monthly benefit

up to 1 500cc 150

1 501 to 2 000cc 200

2 001 to 3 000cc 300

3 001 and above 400

housing :- in municipal areas - market value ; outside municipal areas value determined as 12,5% of salary or 7% of cost of house.

furniture :- annual benefit is 8% of cost of furniture items. passage :- see definition, apportion if dual purpose. any allowance :- taxable in full except portion utilised on employers

business. NB :- Benefits paid by the State to its employees are exempt (para 4(d) of

3rd schedule). Section 8(1)(g) : Timber or growing crops grown for sale, sold as part of land except where

these assets have been inherited or received as a donation. Section 8(1)(h) : closing stock Section 8(i) : mining recoupments Section 8(j) - (k) : Recoupments re capital expenditure and concessions. Section 8(1)(1) : Recoupments of rent premium where this arises as a result of acquisition

of property formerly leased. Taxpayer can elect to spread taxation of these recoupments over six years.

Section 8(1)(m) : grants or subsidies Section 8(1)(n) and (r) : Any portion above one third commutation from retirement annuity or

pension fund is taxable. Section 8(2) : Where amount accrued differs from amount actually received due to

fluctuations in exchange rates, effect must be given to tax amount actually received.


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5.2.5.1 Lease premiums Lease Premiums Gross Income : Section 8(1)(d)

Deduction : Section 15(2)(d) (in hands of lessor) (in hands of lessee) Definition A premium Or like consideration Or consideration in the nature of a premium Paid for The right of use or occupation of land or building ; or plant, or machinery ; or patent, design, trade mark, copyright, model, plan, secret process or formula ; or any similar property, films, sound recording or advertising matter, imparting of any knowledge etc., Used/occupied for the purposes of trade or in the production of income (apportion between business and private use) Taxation (Income) Deduction (Expense) Tax in full in the year of accrual Yearly allowance:- premium divided by period of lease, or 10 years, whichever lesser.


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Where period of lease not stated, use ten years Where period extended, use initial period only in calculations In year in which lease commences/ceases or cessation of use for business, apportion as appropriate. Notes : (a) For use of knowledge, Commissioners discretion applied for period,

normally not less than one tenth (1/10). (b) On acquisition of ownership the lessee will cease to qualify for any

allowance in the tax year following acquisition. (c) Any allowances previously claimed which have been applied in

reduction of purchase price are recoupments brought into gross income by Section 8(1)(l).

(d) Lessee can make an election to spread the recoupment mentioned

above in (c) over six years. If property is disposed of by lessee before the expiry of six years all outstanding instalments not yet taxed immediately become taxable in the year of disposal of such property.

(e) The characteristics of a premium were laid out in the tax case : CIR v

Butcher Bros (Pty) (1945) 13 SATC 21 as follows :- consideration must have an ascertainable money value must pass from lessee to lessor whether in cash or otherwise distinct from and in addition to, or in lieu of rent. (f) Leasing of passenger motor vehicles

What is more tax efficient, to lease a passenger motor vehicle, purchase it on hire purchase or borrow funds and pay for it outright? What are the specific tax implications of each; and what are the implications in relation to finance lease versus operating lease?

(i) For Value Added Tax (VAT) purposes a lease is an instalment

credit agreement (defined) whose time of supply is the time the goods are delivered or when any payment is received by the supplier and will be subject to VAT on the cash value (excluding finance charges).

(ii) The lessor can claim SIA or wear and tear on the full cost of

the assets purchased for leasing, under both financial and


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operating leases. The exception arises where the lessee or other person has an option to purchase the asset at the end of the lease; in that case only wear and tear can be claimed. (Paragraph 2(iii) of 4th schedule).

(iii) The lessee can claim deduction of the lease premiums (made

up of both capital and finance charges). In the case of the leasing of a passenger motor vehicle, the deduction is restricted to a maximum of $100 000. (Section 16(1)(k) of IncomeTax Act).

(iv) Where the lessee or other person exercises the option to

purchase the leased asset at the end of the lease period, recoupment may arise if the asset is sold at a price which is less than the market value. This recoupment could be taxed over six years, if taxpayer so elects.

(v) Under a hire purchase agreement , VAT is payable on the

cash value, or the amount at which the goods would in normal circumstances be sold for cash (excluding finance charges).

(vi) Cost of leased vehicles to lessor under both operat ing and

financial leases. Any vehicle purchased for leasing purposes is not restricted in

cost, under both financial and operating leases. (Paragraph 14(2)(c) of 4th schedule).

Under a financial lease (where lessor is not entitled to the

return of the asset at the end of the lease period - i.e. option exists), the lessor can only claim wear and tear on actual cost without restriction. SIA is not available under this option.

Under an operating lease (where lessor entitled to the return of

the asset at the end of lease period), SIA or wear and tear can be claimed, again on the actual cost.

Please note that while the vehicles are not restricted in cost for

the lessor under both financial and operating leases, the restriction in cost (of passenger motor vehicles) do apply to lessees as provided for in Section 16(1)(k) of the Income Tax Act.


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5.2.5.2 Lease Improvements Gross income : Section 8(1)(e) Deduction : Section 15(2)(e) Definition An agreement for the right of use or occupation of land and buildings For the right to have An obligation to improvements effected effect improvements Land or buildings must be used

for the purposes of trade or in the production of income (apportion for business and private use)

An amount or value per Expenditure actually incurred. agreement. The expenditure incurred shall not

exceed the amount per the agreement.

If no amount stipulated in the agreement, the amount should be such sum as the Commissioner considers fair and reasonable value of such improvements The amounts taxable in equal The amount is allowable in monthly instalments from the equal monthly instalments date the improvements were calculated from the date the completed to the end of lease improvements are first brought or 10 years whichever lesser. into use, to the end of the lease


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period or 10 years whichever lesser

If the lease is for an initial period and can be renewed, only the initial period of the lease is taken into account. If the period of the lease is indefinite then it is deemed to be 10 years. Notes : (a) On acquisition of ownership the lessee will cease to qualify for any

allowance in year of assessment following. On cessation of use of property for purposes of trade or production of income, allowance to be given only up to date of cessation - i.e. apportion.

(b) The balance will be taxable in the hands of lessor on date of : cancellation or cessation of the agreement the sale of the land and buildings on the death or insolvency, liquidation of lessee (c) Recoupment is considered under Section 8(1)(l). Case Law on Improvements Lease improvements For a taxpayer to claim a deduction for lease improvements effected

there must be an obligation to erect such improvements. An obligation, though not expressed in certain contracts, may be implied as per Rex Tea Room Cinema (Pty) Ltd vs CIR (1946) 14 SATC 76.

Variation of the Building Clause (a) COT vs Ridgeway Hotel Ltd (1961) 24 SATC 616 Under the original 99 year lease agreement a hotel building of

not less than $80 000 was to be constructed. When $60 000 had been spent on construction, Ridgeway hotel approached the lessor (Government in this case) to alter the figure of $80 000 to $200 000 and this was agreed. The contention was to decide which amount to use for calculating allowances for the lessee. C J Clayden ruled that the variation clause entered


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into before completion of construction became part of the contract and therefore the amount to be used was $200 000.

(b) Professional Suites Ltd (1960) 24 SATC 573 In this case it was ruled that a variation of the building clause

entered into after completion of construction of the building would not validate the change of amount used for calculating allowances.

Question:

Tourism P/L entered into a lease agreement with the Masvingo Municipality effective from 1st July 2010. The agreement in part stated that the lease was for a piece of land in Masvingo extending to 5 acres. The lease would commence on 1st July 2010 and would be for a period of 99 years. The lessee was obliged to erect a hotel building to the value of not less than $2 000 000. The lessee was also obliged to pay a premium of $50 000 up front and monthly rentals of $10 000 until the end of the lease.

On the piece of land let there was a municipal hostel which Tourism used as a boarding house for its benefit until the completion of construction of the hotel, when the hostel building was to be demolished. Construction of the hotel commenced on 15th July 2010. In April 2011 when $1 500 000 had been expended on the construction Tourism approached the Masvingo municipality with a proposal to change the building clause from $2 000 000 to $5 000 000. The municipality concurred and the hotel was completed in September 2011 at a total cost of $5 200 000. The hotel opened for business with effect from 1st October 2011.

Required:

Set out the income tax deductions available to Tourism (Pvt) Ltd for the tax years ended 31st December 2010 and 31st December 2011.

Suggested solution:

Tourism (Pvt)Ltd Income Tax Deductions for 2010 and 2011 tax years US$ 2010 tax year: Lease premium : (50 000 / 120) * 6 months 2 500 Rent : 10 000 * 6 months 60 000 Lease improvements : nil


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_____________________________________________________________________ 2011 tax year : Lease premiums : (50 0000 / 120) * 12 months 5 000 Rent : 10 0000 * 12 months 120 000 Lease improvement : (5 200 000 / 120) * 3 months 13 000 ____________________________________________________________________ Notes : Dividing by 120 is simply establishing the monthly allowance over 10 years. $5 200 000 is accepted by the Commissioner for allowance calculation purposes because the variation to building clause was entered into before completion of construction.

5.2.6 Hire purchase and credit sales in general

Section 17 and section 18 of the Income Tax Act outline the basis of taxation of amounts accruing under hire purchase and under credit sales. Under these agreements the full amount of sale is receivable in instalments, which may stretch into years. For tax purposes the full sale price is deemed to accrue on the date of signing of the sale agreement. This would mean that taxpayers are taxable on amounts not yet received.

However, sections 17 and 18 provide deductions which enable taxpayers to be

taxable on profit which relate to amounts which have become due and payable in each tax year. A calculation of the profit relating to amounts which are not yet due is made and deducted. This amount is added back to gross income in the subsequent year when a fresh calculation is then made.

In the case of hire purchase sales (section 17) the calculation is made in

accordance with the following formula : D * (E - F+G) _____________ E In which :

D = represents that portion of the amount accrued which is not due or receivable at the end of the current accounting year/(tax year).

E = represents the total amount accrued under the agreement

F = represents the cost to the taxpayer of the property so disposed of


35

G = represents that proportion of development and other charges which the Commissioner considers is applicable to such property.

See paragraph 5.5 on calculation of allowances 5.2.7 Construction Contracts For income tax purposes income from construction contracts is taxable on the

basis of what is due and payable in the tax year, i.e. based on percentage of completion and progress payments due. Amounts received in advance are held in trust and would not be taxable. Please refer to the provisions of section 15(2)(cc).

5.3 EXEMPTIONS Section 14 as read together with the third schedule outlines receipts and

accruals which are exempt from taxation. Please refer to the schedule and the Students Guide to Tax in Zimbabwe book for detailed reading.

It is important to be familiar with the following :- - Receipts of statutory corporations such as the Reserve Bank and POSB

are not taxable. - The emoluments of the President, and any allowances paid to a spouse

of a President or a Vice President for duties performed on behalf of the State.

- allowances to civil servants. - bonus not exceeding 10% of ones remuneration or $400 (with effect

from 01/11/09) whichever is lesser. - bank interest. - the first $5 000 or one third of approved retrenchment package

whichever greater, subject to a maximum exemption of $15 000.

- value of medical treatment and medical contributions paid by the employer etc.

Please refer to the Third Schedule for more deta ils.


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5.4 GENERAL DEDUCTION FORMULA Section 15(2)(a) outlines the general deduction formula. In terms of this section,

expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of income will be allowed as a deduction for tax purposes. Apportionment of expenditure is permissible, where incurred partly for business purposes, or partly for capital purposes. It is also useful to note that where the expense incurred is different from the amount actually paid due to the fluctuations in exchange rates, then the amount actually paid will be allowed as a deduction. (Section 15(1)).

Subsections 15(2)(b) to 15(8) outline specific deductible expenditures and

losses. A lot of the sections are amplified in schedules. Please refer to the book and related case law for detailed reading.

One of the main tasks of a tax adviser is to analyse client circumstances in order

to take effective steps to minimise the clients tax burden. This can be achieved only when the tax adviser is familiar with legislative provisions, particularly deductions available to taxpayers. The provisions in section 15 are important and every student should make an attempt to read the provisions.

Tax planners should be aware of the Commissioners treatment of assessed losses as outlined in section 15(3) and the fact that losses attributable to business cannot be set off against employment income per section 15(8). Section 15 (2)(a) General Deduction Formula The deductions allowable shall be expenditure and losses, to the extent to which, they are incurred for the purposes of trade or in the production of income except to the extent to which they are expenditure or losses of a capital nature.


37

(i) Expenditure and losses does not refer to net loss as reflected in the Profit & Loss Account of the taxpayer. Is not limited to cash outlays but would include losses such as pilferage (theft), breakages, destruction etc.

(ii) To the extent to which gives room for apportionment. Where expenditure and losses are incurred partly for business and partly for private or partly capital and partly revenue, apportionment arises. The apportionment must be fair and reasonable.

(iii) Incurred means that there is a legal liability to pay. Such expenditure is deductible from income even if payment occurs only at some later date.

(iv) For the purposes of trade means for the purposes of enabling a person to carry on and earn profits in the trade. The ordinarily recurrent expenses of business, such as trading licence fees, audit fees, rates, secretarial fees, insurance premiums, business subscriptions and advertising costs will usually pass the test. Expenditure for the purposes of trade may be categorised in 2 ways:

Designed expenditure is money voluntarily and designedly spent by the taxpayer for the purpose of this trade.

Fortuitous expenditure is money involuntarily spent because of some mischance or misfortune, which has overtaken the taxpayer. A deduction is not allowable where the expenditure, which though arising out of the manner in which a taxpayer conducts his trade, falls upon him in his capacity as a law-breaker rather than as a businessman, e.g. traffic fines, customs fines or parking fines.

(v) Capital Nature In the same way as accruals of a capital nature are generally not subject to income tax, expenditure and losses to the extent that they are of a capital nature are not deductible from income. In trying to draw a distinction between revenue and capital expenditure Judge Innes CJ brought up the following valuable dictum in C.I.R. v. George Forest Timber Co. Ltd. 1 S.A.T.C. 20: Money spent in creating or acquiring an income-producing concern must be capital expenditure. It was invested to yield future profit and while the outlay did not recur, the income did. There was a great difference between money spent in creating or acquiring a source of profit, and money spent in working it. The one was capital expenditure, the other was not... Revenue Expenditure is the cost of performing the income earning operations and costs of merely maintaining the operating income earning structure. Expenses which are necessary for the performance of the business operation, or expenses which are attached to the performance of the business operation by chance or expenses which are in good faith incurred for the more efficient performance of such business operations, are all deductible provided they are so closely connected with the performance of the business operation that it would be proper, natural or reasonable to regard them as part of the cost of performing the operation. Section 15(2)(b) Repairs to articles, implements, machinery and utensils used, and to property occupied for the purpose of trade and repairs resulting from the letting of property. Repair is restoration by renewal or replacement of subsidiary parts of the whole i.e. restoring an asset to its original state at the time it was first owned by the taxpayer. It is not necessary, however that the materials used should be identical with the materials replaced. Repairs are to be


38

distinguished from improvements. The test for improvements is whether a new asset has been created resulting in an increase in the income earning capacity or whether the work undertaken merely represents the cost of restoring the asset to a state in which it will continue to earn income as before. Section 15(2)(g) Bad and Doubtful Debts Bad Debts A deduction can be claimed in respect of debts, which

are irrecoverable as long as all the following conditions are met: i) The debt must be due and payable to the taxpayer, ii) The debt must be proved, to the satisfaction of the

Commissioner, to be irrecoverable as at the end taxpayers financial year

iii) The debt must have been included in the taxpayers income either in the current or any previous year of assessment.

Section 15(2) (h) arw 6 th Schedule Pension and Retirement Annuity Fund Contributions If a member joined the fund on or after 1 July 1960 his deduction is restricted to the lesser of $72,000 per annum and 7% of annual emoluments. For persons who contribute to a retirement annuity fund the Commissioners approach is that not more than the lesser of $72,000 per annum and 7% of annual emoluments is allowed as deduction. Annual emoluments refer to earnings on which the ordinary contributions are calculated. Where a taxpayers contributions were only in respect of a retirement annuity fund policy the deduction allowable shall not exceed $36,000. No contributions to a retirement annuity fund shall be allowed as a deduction to a member of such fund, who was not ordinarily resident in Zimbabwe at the time he made the contribution unless, He was ordinarily resident in Zimbabwe at the time he first became a

member of the fund, and He became a member of the fund before 1 April 1967, and No amount in respect of the contribution is allowed as a deduction in

terms of any law imposing a tax on income, which is in force in a country other than Zimbabwe.

Section 15(2)(i) Arrear Pension Fund Contributions Payments in respect of past service, may be deducted in the year of payment, subject to restrictions reflecting the ceilings applicable to deductibility in past years. Interest charged thereon is not allowable as a deduction for tax purposes. Section 15(2)(j) Medical Aid Societies The amount of any contributions paid to a Medical Aid Society by an employer in respect of his employees or their dependants. Section 15(2)(m) Experiments and Research A taxpayer may deduct expenditure incurred during the year in carrying out experiments and research relating to his trade, other than expenditure of a capital nature incurred on plant, machinery, land or premises or on the acquisition of rights.


39

Section 15 (2)(n) Experiments and Research The principle is extended to sums, which the taxpayer contributes to other persons carrying out such experiments and research relating to the taxpayers trade or a proportion of such contributions if the other persons expenditure is not wholly of this nature. The amount allowable as a deduction shall be determined by the formula: A x B C Where A. = the amount of the taxpayers contributions B. = the amount incurred by the other person, which would have

been allowed as a deduction in terms of section 15 (2)(m) above

C. = is the total amount of the expenditure incurred on experiment and research.

Section 15(2)(o) Scientific Research and Experiment al Work A deduction is also permitted of the sums which are contributed to approved scientific or educational bodies with the condition that they be used for industrial research or scientific experimental work connected with the taxpayers trade. Section 15(2)(p) Educational Grant, Bursary or Scho larship A deduction is allowed of grants, bursaries, scholarship paid for a person undergoing technical education, provided that: the course is related to the taxpayers trade and that the beneficiary is not the taxpayer, his spouse or near relative of either spouse. If the taxpayer is a company, the beneficiary should not be a near relative of the individual controlling the company, his spouse or near relative of the spouse unless the director works full time for the company and controls not more than 5% of the share votes. Section 15 (2)(q) Voluntary Payments To Former Empl oyees And/Or their Dependants Any amount paid during the year of assessment by way of an annuity, allowance or pension is deductible subject to the following: the employee must have retired because of ill health, infirmity or old

age. the amount allowed is restricted to US$500 per tax year for each

former employee. in the case of payments to dependants or persons who were

dependant on a retired or deceased former employee the annual restriction is US$200 in respect of all dependants of each ex-employee.

In all cases the amount allowed is reduced by any obligatory payments (e.g. pension or annuity) received during the year by the ex-employee or dependant from any fund of the former employer. Persons whose employment was of a domestic or private nature are excluded in all contexts. Section 15(2)(r) Donations A deduction shall be granted for payments made to the National Scholarship Fund, National Bursary Fund or a trusts


40

administered by the Minister responsible for either Social Welfare or Health. Section 15(2)(r1) Donations Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment to the State or to a fund approved by the Minister of Health for, any of the following operated by the state, local authority or religious organisation: the purchase of medical equipment, the construction, extension or maintenance of a hospital or the procurement of hospital drugs (including ARVs) Section 15(2)(r2) Donations Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment without any consideration at all to a research institution approved by the Minister responsible for higher or tertiary education. Section 15(2)(r3) Donations Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment, without any consideration at all, to the State or a fund approved by the Minister responsible for education, for any of the following operated by the state, local authority or religious organisation: the purchase of educational equipment the construction, extension or maintenance of a school the procurement of school books or other educational materials Section 15(2)(r4) Donations Any amount not exceeding US$50,000 paid by a taxpayer during the year of assessment without any consideration to the Public Private Partnership Fund. Section 15(2)(r5) Donations Any amount not exceeding US$50,000 paid by a taxpayer during the year of assessment without any consideration to the Destitute Homeless Persons Rehabilitation Fund established by the Ministry of Finance under the Audit and Exchequer Act. Section 15(2)(s) Subscriptions A deduction is allowed for subscriptions paid by a taxpayer in respect of his continued membership to any business, trade, technical or professional association. Entrance fees are not allowable. Section 15(2)(t) Expenditure Prior To Commencement Of Business A deduction is allowed from business income, which was incurred by the taxpayer, 18 months prior to commencement of

business, in the course of establishing the business, and would have been allowed as a deduction had it been incurred after

beginning the business and is claimed in the year of assessment in which business commences

Section 15(2)(u) Opening Stock Accounting principles are recognised

and the taxpayer is allowed to deduct the value of the trading stock, which was on hand at the end of the preceding year of assessment, i.e. opening stock.

Section 15(2)(v) Trading Stock Acquired Other Than In the Ordinary

Course Of Trade A deduction shall be allowed from the income derived by the taxpayer in a year of assessment, from the carrying on of a trade,


41

an amount equal to what the Commissioner considers as, at the date it was brought to hand or at the date it was acquired, the fair and reasonable value of such trading stock of the taxpayer acquired otherwise than in the course of trade.

In the case of donated stock the deduction shall not exceed the value

available from the person from whom it was acquired. In the case of inheritance the deduction shall not exceed the valuation as shown in Final Liquidation and Distribution Account of the deceased.

Section 15(2)(w) Conventions And Trade Missions The cost of attending a convention or trade mission is allowed as a deduction subject to the following: The deduction is restricted to US$2,500 of the amount spent in any

one tax year and must relate to not more than one convention, which in the opinion of the Commissioner was in connection with the trade carried on by the taxpayer or one trade mission, approved by the Minister (not both).

If the convention or trade mission commences in one year of assessment and ends in another the deduction is allowed in the tax year it ends.

If the person attending is a member of a partnership and the partnership bears the expense, each partner is allowed to deduct an amount in proportion to his share of profits. In such a case the limit of $2,500 is applicable to one visit by each partner.

Section 15(2)(aa) Legal Costs On Income Tax Appeals Taxpayers who appeal against any decision made by the Commissioner and whose appeal is allowed in full in the Special Court or the High Court, may deduct their legal costs (allowed by the registrar of the court as being in accordance with the proper scale for such costs) in the year of assessment in which the costs are so taxed. If the appeal is allowed to a substantial degree the court may direct that the costs be deductible. Section 15(2)(bb) Legal Costs On Income Tax Appeals Should an appeal be taken further (by either partly) to the Supreme Court, and the taxpayers case be upheld in full or to a substantial degree the court may, at its discretion, permit the costs to be deducted. Section 15(2)(cc) Expenditure Not Yet Incurred Expenditure may normally be claimed as a deduction only in the year in which it is incurred. An exception is provided in cases where income accrues in one year of assessment in respect of services to be rendered or goods to be delivered in a subsequent year and it is known that expenditure related to such income will be incurred in subsequent years. An allowance for such expected costs may be claimed in the year of accrual of the income but subject to the following: the amount of the allowance will be at the discretion of the

Commissioner (not subject to objection or appeal). expenditure of a capital nature is ignored current expenditure, which relates directly to future tax years income

and which would have been claimable in the current tax year, is set off against the allowance and


42

any allowance granted is brought back into income in the following tax year.

Section 15(2)(gg) Export Market Development Expendi ture This paragraph provides for a 200% deduction of expenditure incurred by a taxpayer during the year of assessment on any export market development.

Section 15(2)(hh) Tobacco Levy The amount of any tobacco levy paid in the year of assessment in terms of Section 36A.

Section 15(2)(jj) Approved Employee Share Option Sc heme This section allows for a deduction of the fair value of any stock, shares, debentures, units or other interest paid or given by the client to an employee of the client or for the benefit of an employee of the client or pursuant to an approved employee share ownership scheme or trust.

Section 15(2)(kk) Maintenance On Behalf Of Local Go vernment Expenditure not exceeding US$100 million approved by the Minister responsible for local government on the maintenance of buildings, roads, bridges, water works, sanitation works, public works and any other utility, amenity or item of infrastructure.

Section 15(3) Assessed Losses Where a taxpayer has income from one business activity but sustains a loss on another, the latter is set off and only the balance is taxable. If the deduction exceeds the income the excess is defined as the assessed loss. Assessed loss determined in the previous year of assessment is deductible.

Except in the case of mining no assessed loss shall be carried forward after the expiry of six (6) years from the end of the year of assessment in which it was determined.

5.5 SUSPENSIVE SALES AND CREDIT SALES

Section 17 Suspensive Or Hire Purchase Sales

This section deems all proceeds from a suspensive sale to accrue on the date of the signing of the agreement. It dealt with special provisions relating to Hire Purchase Agreements and other Agreements referring to property sold.


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Where an agreement provides that: ownership (movable assets) or transfer (immovable assets) shall be suspended or postponed pending fulfilment of certain conditions e.g. payment of the whole amount, the whole price (including finance charges) shall be deemed to have accrued to the vendor (seller) on the day the agreement is concluded and must thus be returned in the year in which the sales took place.

The Act recognises, however that this may cause hardship (as not of the sale price will have been received by the year end) and thus provides for the granting of certain allowances.

Movables Assets (Hire Purchase Agreement etc.)

The Commissioner gives an allowance which he thinks is fair and reasonable. The following methods are adopted in practice: Full purchase price including finance charges must be returned by taxpayer

as gross income in the year of accrual. Allow bad and/or doubtful debts in terms of Section 15(2) g (i) and (ii). Section 17 allowance = gross profit % of debtors not due and payable to

taxpayer, i.e. not yet receivable, at the end of the Accounting year after allowing 15 (2)(g) forming part of such debtors, that is, deduct only bad and doubtful debts that are applicable to instalments not due and payable.

The Section 17 allowance is added back in the following year of assessment. The calculation in effect achieves an estimate of profit applicable to instalments not yet due and payable and this amount constitutes the allowance.

No allowance in year in which taxpayer cedes or otherwise cancels the agreement.

The allowance is merely an estimate of the profit applicable to all instalment debtors not yet receivable at the year end / accounting period.

The allowance is at the Commissioners discretion and is calculated as follows:-

Gross HP Sales xxxx Less: Cost of Sales xxxx Gross profit xxxx

Gross Profit % = Gross Profit x 100

Gross HP sales Less: Profit applicable to instalments not yet receivable

(i.e. GP% x Instalment not due & payable = allowance) xxxx Taxable income xxxx

Variation where there are bad and doubtful debts forming part of both instalment debtors receivable and not yet receivable:


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Allow bad and doubtful debts (subject to normal tests) on both instalment debtors receivable and not receivable under section 15 (2) (g)(i) and (ii) in the profit and loss account; and

Then calculate the allowance as follows:

Gross HP sales

xxxxxx Less: Cost of sales xxxxxx Gross profit xxxxxx Less: Section 17 allowances: Instalments not yet receivable xxxxxx Less: Bad debts forming part thereof xxxx Doubtful thereof xxxx xxxxxx xxxxxx Xxxxxx @ GP% xxxxxx Taxable income xxxxxx Note: When gross profit percentage is determined in the trading account, the cost of sales will have been allowed. Thus by allowing for the profit relating to, instalment not receivable by the year end, the instalments receivable is taxed. a) The allowance granted in one year must be included in the taxpayers income in

the following year. Treatment is similar to that of doubtful debts. b) If the agreement is ceded or otherwise disposed of for valuable consideration

then the allowance ceases in such year of session etc. c) The allowance for credit sales in section 18 is calculated in a similar manner. Example 1 Gross H/P Sales during the year 600,000 Cost of sales 450,000 Outstanding H/P debtors at end of year 400,000 Solution: Gross H/P Sales during the year 600,000 Cost of sales 450,000 150,000 . . . Gross profit % = Gross profit x 100 150 000 x 100 Gross Sales 600 000 = 25% . . . Section 17 allowance [$400,000 x 25%] 100,000 Taxable income 50,000


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Example 2 Suppose the outstanding debtors of $400,000 included doubtful debts of $20,000 which is for specific debtors what effect would this have on your taxable income. Solution: Gross H/P Sales during the year 600,000 Cost of sales 450,000 150,000 . . . Gross profit % = Gross profit x 100 150,000 x 100 Gross Sales 600,000 = 25% . . . Section 17 allowance [($400,000 20,000) x 25% 95,000 Doubtful debts 20,000 115,000 Taxable income 35,000 Example 3 Gross H/P Sales Year 1 800,000 Cost of sales 500,000 Outstanding H/P debtors at year 1 450,000 Calculate taxable income after allowing section17 allowance. The allowance under this section in the previous year was $100,000. Solution: Gross H/P/ Sales during the year 800,000 Cost of sales 500,000 300,000 Add: Allowable from previous year 100,000 400,000 . . . Gross profit % = Gross profit x 100 300,000 x 100 Gross Sales 800,000 = 37% . . . Section 17 allowance [$450,000 x 37%] 168,750 Taxable income 321,250


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Immovable Assets (Hire Purchase Agreement etc.) With regards to immovable property the second proviso permits an allowance which is deducted each year and included in income in the following tax year. It has the effect of bringing to account the profit on the sale over the period of the agreement in the same ratio as the instalments bear to the selling price. In this case also, if the agreement is ceded or otherwise disposed of, no allowance is made in the year of sale or other disposal. In practice a township developer selling land under suspensive conditions would be assessed in the following manner: 1. (a) The land which the owner of the township holds is considered to

constitute floating capital and thus trading stock in his hands, as it will have been acquired for resale at a profit. Expenditure on development, such as roads, water, light, tree planting, laying out of parks, etc., and on administration which is incurred prior to the land reaching the full selling state, will be capitalised and added to the cost of the land except to the extent that it is allowable in terms of section 15 (2) (v).

(b) When the full selling stage is reached, any further development or

administration costs of the type referred to in paragraph (a) will not be capitalised, as it is considered that all such expenditure is allowable as a deduction from income in terms of section 15 (2)(a) of the Act, in the year when such expenditure is incurred.

1. The allowances to be determined in terms of section 17 will be calculated in the

same manner. The cost to the Client of the immovable property referred to in proviso (ii) will only include development and other charges which have been added to the cost of the land prior to the full selling stage being reached.

2. The allowance is calculated using the following formula:

D x [E + G)] i.e. E

i.e. Instalments not yet due and payable x (Selling price Cost of sales) Selling price Section 18 - CREDIT SALES This section relates to the taxation of income accruing from sales made on credit with the price being paid in instalments. It removes the doubt of the date of accrual of such income by bringing the full selling price to account at the date of the agreement. Proviso (i) enables the Commissioner to make any allowance that he considers reasonable. The allowance to be granted will be the same as that given in respect of movables sold under hire purchase agreements. Proviso (ii) ensures that the allowance granted is brought in as income in the following year of assessment.


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5.6 CAPITAL ALLOWANCES - SECTION 15(2)(C) AS READ TOGET HER WITH

THE 3RD SCHEDULE

The 4th schedule outlines allowable deductions with regard to capital expenditure incurred for the purposes of trade in the relevant tax year. The allowances covered by the schedule are as follows:-

Special initial Wear and tear Scrapping Training Investment

Paragraph 1 of the 4th schedule outlines the definitions of assets on which

capital allowances can be granted. It is essential to be familiar with these definitions in order to correctly determine the assets classification for tax purposes.. For example, a cante

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