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B.

COMPT HONOURS DEGREE 2010

TAXATION – ZIMBABWE
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B. COMPT HONOURS DEGREE 2010
Taxation Module

TAXATION COURSE - OUTLINE

TOPIC

1 Administrative and legal framework


- Administration of Taxes in Zimbabwe
- Gross Income
- Capital and Revenue Accruals and Outlays
- Special Inclusions
- Exemptions
- General Deduction Formula
- Capital Allowances and Recoupments:
 Special Initial
 Wear and Tear
 Scrapping
 Growth Point Investment
 Recoupments
- Prohibited Deductions

2 Taxation of Individuals and Partnerships


- General scheme of taxation
- Accrual of partnership profit and salaries
3 Taxation of Farmers
- Special Deductions
- Valuation of Stock
- Drought Sales and Restocking
- Sales due to Land Acquisitions

4 Taxation of Miners
- Prospecting Expenditure
- Capital Redemption Allowances
- Sale of Mining Claims

5 Capital Gains Tax


- Specified Assets
- Exemptions
- Deductions
- Suspensive Sales and Roll – Overs
- Withholding Taxes & Tax on Shares
6 Tax Planning

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INTRODUCTION

The Taxation syllabus is fairly wide and any attempt to spot a particular area from which the
questions will be set will have a very small probability of success. It is, therefore, in the
candidate’s interest to be familiar with virtually all areas of the syllabus. In any case the
questions are normally integrated and the candidates who have prepared for all possible topics
are the ones likely to be successful in their endeavours.

The notes and questions in this study pack are designed to assist the student prepare for the
examination by going through summaries of the relevant legislation and working through
practical examples/questions. A number of the questions actually come from past examination
papers. It is in the best interest of students to genuinely attempt the questions before referring
to solutions provided.

The professional accountant is involved in the interpretation and application of tax law
procedures and must be able to recognise potential tax planning opportunities; and contribute
to the evaluation of existing ones. The accountant’s approach to tax matters should be
tempered with the recognition that the State is legally entitled to all taxes imposed upon
taxpayers by the statutes, but taxpayers are under no obligation to pay more than the legal
minimum of such taxes imposed upon them. This must be borne in mind at all times when
working through questions, which touch on the aspects of advice to clients on planning their
tax affairs.

It must be made clear from the outset that to become a tax expert one requires further
comprehensive study supported by sufficient practical experience. This package should set
you well on your way. Please note that the summaries have been prepared under the
presumption that you have already had an encounter with the study of Zimbabwean Tax Law
and Practice at undergraduate level, and will be based on legislation in effect as at 31 January
2010.

Good luck in your endeavours.

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1. ADMINSTRATIVE AND LEGAL FRAMEWORK

1.1 ADMINISTRATIVE FRAMEWORK


(All references to sections and schedules in this section are in relation to the
Income Tax Act [Chapter 23:06]).

1.1.1 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.

1.1.2 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 2009 have been
notified to be due by 30 April 2010.

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 taxpayer’s


taxable income if one fails to submit a return. In addition to the tax payable

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the Commissioner is also empowered to impose penalties for any 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

1.1.3 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.

1.2 COMMENTARY ON THE FINANCE (NO. 3) ACT OF 2009 AND


STATUTORY INSTRUMENTS

The Tax questions in the 2009 Examination will be based on legislation ruling up
to and including 31st January 2010. Some of the changes in legislation brought
into effect with which you should be concerned with are outlined below:-

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1.2.1 Monthly rates of tax

Individuals :- 1/1/10 to 31/12/10

Amount Rate of Amount of Cumulative


Taxable Income Bands Within Bands Tax Tax Total
US$ US$ US$ % US$ US$
- to 160 160 0 - -
161 to 500 340 20 68 68
501 to 1,000 500 25 125 193
1,001 to 1,500 500 30 150 343
1,501 to and over 35

An Aids Levy of 3% of tax payable, before deduction of credits, is imposed on the


above tax giving an effective top rate of 36.05%.

%
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
25
five years of his operation as such) ...................................................
Operator of a tourist facility where 60% or more of the turnover 20
from such operations is in foreign currency ……………………...
14(3) Taxable income of manufacturing company which exports 50%
or more of its output ……………………………………………. 20

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%.

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Capital Gains Tax

- Capital gains arising from the disposal of immovable property and marketable
securities are taxed at a flat rate of 20%.

- Capital gains arising from the sale of a principal private residence by an individual
who has attained fifty-five years on or before the date of sale are exempt from tax.

- Capital gains arising from the sale of marketable securities are exempt from tax up
to $1,800 if the seller is fifty-five years or over on the date of sale.

- The disposal of marketable securities listed that were acquired before 1 February
2009 is subject to capital gains tax at 5% of the gross capital proceeds.

- The disposal of marketable securities listed on the Zimbabwe Stock Exchange that
were acquired after 1 February 2009 is exempt from capital gains tax but subject to
a capital gains withholding tax of 1% of the gross capital proceeds.

- The disposal of marketable securities that are not listed and were acquired after 1
February 2009 is subject to capital gains tax at 20% (and capital gains withholding
tax of 10%).

- “Marketable security” is a defined term, which includes shares in private


companies. To be taxable, the proceeds must be from a source within Zimbabwe.

- The disposal of immovable property that was acquired before 1 February 2009 is
subject to capital gains tax at 5% of the gross capital proceeds.

- The disposal of immovable property that was acquired after 1 February 2009 is
subject to capital gains tax at 20% of the gross capital proceeds (and capital gains
withholding tax of 15%)..

- The main deductions which are allowed in the determination of a capital gain are
the cost of the asset together with any additions after acquisition and an allowance
(calculated on cost and additions) determined by applying the Consumer Price
Index (CPI) as provided by the Central Statistical Office.

1.2.2 Motoring Benefits

With effect from 01/01/10, deemed benefits are as follows :-

engine capacity deemed annual benefit

up to 1 500cc 1,800

1 501 to 2 000cc 720

2 001 to 3 000cc 960

3 001 and above 1,200

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1.2.3 Donations to charitable trusts administered by the ministers responsible for


Social Welfare and Health, or by officials in those ministries in their
official capacities are deductible.

1.2.4 Assessed losses attributable to business operations by a taxpayer cannot be


set off against income accruing to taxpayer under contract of employment

1.2.5 Pension contributions to pension funds (6th schedule)

Employer’s maximum contributions per employee allowable as a deduction


for tax purposes is $3 600.

Employee’s contributions maximum allowable deductions the lesser of


7.5% of annual emoluments or :-

To Retirement Annuity Fund only $3 600


To employer’s pension fund $3 600
To both employer’s pension fund and RAF $3 600

NSSA contributions are regarded as contributions to employer’s pension


fund.

1.2.6 With effect from 01/11/09 bonus exemption is now 10% of emoluments or
$400 whichever is smaller.

1.3 LEGAL FRAMEWORK

1.3.1 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 taxpayer’s 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*2 to which taxpayer is entitled to per the charging act


for that year. (section 7)
2
* Only taxpayers who are natural persons are entitled to tax credits.
The basic model for calculating any taxpayer’s (individuals, trusts and
companies) taxable income is as follows :-

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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.

1.3.2 Gross Income

Gross Income is defined as :-

the total amount ..

received by or accrued to or in favour of a person..

or deemed received or accrued..

in any year of assessment…

from a source within or deemed to be within Zimbabwe…

excluding amounts proved by the taxpayer to be of 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).

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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. 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….”.

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(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
director’s 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.

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


author’s royalties is the wit and labour exercised in writing the book in

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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.

1.3.3 Capital and Revenue : Accruals and outlays in general

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
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.

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Taxation Module

1.3.4 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) $

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.

Although you are only expected to know the legislation ruling as at 31 January 2010, it makes
goods sense to follow developments that affect taxes which occur during the course of 2010.

1.3.5 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 :-

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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
______

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).

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.

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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 :-
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.

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any allowance :- taxable in full except portion utilised on employer’s


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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1.3.5.1 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.

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 :

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(a) For use of knowledge, Commissioner’s 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
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,

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Taxation Module

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 operating 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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B. COMPT HONOURS DEGREE 2010
Taxation Module

1.3.5.2 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
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.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

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
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.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

Question:

Tourism P/L entered into a lease agreement with the Masvingo Municipality effective
from 1st July 2009. 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 2009 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 2009.
In April 2010 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 2001 at a total cost of $5 200 000. The hotel opened for
business with effect from 1st October 2010.

Required:

Set out the income tax deductions available to Tourism (Pvt) Ltd for the tax years ended
31st December 2009 and 31st December 2010.

Suggested solution:

Tourism (Pvt)Ltd
Income Tax Deductions for 2009 and 2010 tax years

2009 tax year:

Lease premium : (50 000 / 120) * 6 months 2 500

Rent : 10 000 * 6 months 60 000

Lease improvements : nil

_____________________________________________________________________

2010 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.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

1.3.6 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)
_____________

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

G= represents that proportion of development and other charges


which the Commissioner considers is applicable to such
property.

DEPARTMENTAL PRACTICES NOTES number 32 and 33 give further


details on how the Commissioner will treat sales under hire purchase and credit
sales. Refer to these references please.

Please refer to the examples and workings : Income Tax in Zimbabwe by L W


Hill.

1.3.7 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).

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B. COMPT HONOURS DEGREE 2010
Taxation Module

1.4 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 one’s 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 details.

1.5 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 client’s 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.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

Tax planners should be aware of the Commissioner’s 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).

1.6 CAPITAL ALLOWANCES - SECTION 15(2)(C) AS READ TOGETHER


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 asset’s classification for tax purposes.. For
example, a canteen constructed within an industrial stand is defined as an
industrial building, and NOT a commercial building.

The allowances outlined in the Fourth Schedule can be manipulated to the


taxpayer’s advantage. In particular, paragraph 8 is useful in relation to disposal of
assets within group companies, or localisation of international group companies.
There are some incentives which facilitate avoidance of recoupments to business
operations which arise during reorganisations of group operations.

Other notable provisions to know are as follows:-

Para 14 : Limitation of cost of passenger motor vehicles

Tax Year Allowable Cost


From 1 January 2009 to 31 December 2009 10 000
From 1 January 2010 to 31 December 2010 10 000

Para 15 : Limitation of cost of schools, nursing homes and staff housing

Schools/clinics - Farmers/miners

Tax Year Allowable Cost


From 1 January 2009 to 31 December 2009 unlimited
From 1 January 2010 to 31 December 2010 unlimited

25 
B. COMPT HONOURS DEGREE 2010
Taxation Module

Staff housing (excluding miner’s housing)

Tax Year Allowable Actual cost not


Cost more than
From 1 January 2009 to 31 December 2010 unlimited 25 000
From 1 January 2010 to 31 December 2010 unlimited 25 000

1.6.1 Special Initial Allowance (S.I.A) - paragraph 2 of 4th schedule

- With effect from 1 January 2010, SIA is 25% of cost followed by


25% accelerated wear and tear allowance for the following 3 years
(was 50% followed by 25% accelerated wear and tear for the
following 2 years).

- taxpayer must make an election for it to be granted

- it is claimable on capital expenditure incurred on the

(a) construction of farm improvements, industrial buildings,


railway lines, staff housing,

(b) additions or alterations to existing assets mentioned in (a)


above,

(c) the purchase of articles implements and machinery

- S.I.A. will not be granted on movable leased assets where there is an


option to lessee or any other person to acquire the asset at the end of
the lease period.

- S.I.A. is not normally claimable on a commercial building, but if the


commercial building has been constructed in a growth point, then
S.I.A. can be claimed.

- S.I.A. is not apportionable between private and business, if an asset


has qualified, then it is deductible in full.

1.6.2 Wear and tear allowance - paragraph 3

Where the taxpayer has not made an election to claim S.I.A. on assets used
for business, the Commissioner will automatically grant wear and tear
allowances as follows :-

immovable assets :- generally 5% straight line except for


commercial building (2.5%).

movable assets :- generally 10% on reducing balance with some


exceptions. (See Departmental Practice number
40 for detailed schedule of rate).

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B. COMPT HONOURS DEGREE 2010
Taxation Module

- Where S.I.A. has been granted in the first year of use, then
accelerated wear and tear (at 25% on cost) is granted in the
subsequent three years.

1.6.3 Scrapping Allowance - paragraph 4

Scrapping allowances are the equivalent of losses on disposal of fixed


assets used for trade. It arises when a scrapped asset is disposed of for
proceeds which are less than the income tax value.

In order for scrapping allowance to be allowable, a decision to scrap must


have been made. A decision to scrap is to intimate that an asset is no longer
useful for business use.

When business organisations windup operations, scrapping allowances will


be allowed to the extent that it does not exceed the recoupment arising from
the business closure.

1.6.4 Training Investment Allowance - paragraph 5

Repealed effective 1 January 2001

1.6.5 Growth Point Area Allowances - (14th schedule)

Paragraph 2 : S.I.A. can be claimed on capital expenditure incurred in the


construction of a commercial building in a Growth Point
Area.

Para 3 : 15% investment allowance on the cost of :-

(a) new commercial or industrial buildings, or staff


housing erected by taxpayer,

(b) additions or alterations to above mentioned assets,

(c) new or unused articles, implements, and machinery


(excluding motor vehicles), used in the Growth Point
Area.

1.6.6 Recoupments

Training Investment and Growth Point Investment Allowances are not


subject to recoupment.

Recoupments arise when assets which were being used for business are sold
for proceeds in excess of the income tax value. The formulae for
calculating recoupment are as follows:-

(i) Proceeds or original cost whichever lower less income tax


value of asset sold.

(ii) Deemed proceeds or deemed original cost whichever lower


less the income tax value.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

The above formulae ensure that recoupments are restricted to allowances


previously granted.

The restriction of amount recouped applies to all traders and businesses


except mining concerns. The amount to be recouped is arrived at as
follows:-

(iii) Proceeds = recoupment, where asset cost was


never restricted

(iv) Deemed Proceeds = recoupment, where asset cost was


originally restricted.

Recoupments are generally set off against capital allowances for all other
businesses except miners. For miners the recoupment established is first set
off against the unredeemed capital expenditure before calculation of the
year’s redemption allowances.

1.7 PROHIBITED DEDUCTIONS

Section 16 of the Act outlines cases in which no deduction is allowable for tax
purposes. These prohibited deductions included :-

- expenditures in maintaining oneself and household,

- domestic or private expenses of a taxpayer,

- expenditure incurred in travelling between home and business,

- entertainment expenses

- lease expenses of passenger motor vehicles in excess of statutory


deemed cost,

- expenditures incurred in the production of non taxable income.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

2. TAXATION OF INDIVIDUALS AND PARTNERSHIPS

Members of a partnership are taxable in their individual capacities on their share of


profit as determined on the accounting date. In terms of section 37(15) of the Income
Tax Act, partners are required to submit a joint return with supporting accounts each
year. For the establishment of the individual share of taxable income from partnership
business operation, the accounts submitted will first be assessed as if they represented a
legal persona. The taxable income established therefrom is then shared in the profit
sharing ratio per the Partnership Deed.

Some important points to note when establishing taxable income of a partnership


business are as follows :-

- expenses paid on behalf of partners by partnership are allowable to partnership


but should be included in the computation of the individual partner’s taxable
income. Such expenses include school fees, groceries, medical expenses,
subscriptions and insurance premiums where partner’s estate is the beneficiary.

- insurance premiums on joint life policies and life policies on partner’s lives
with the partnership as beneficiary, are not allowable deductions and are not
added to partners’ individual computation. (By disallowing their deduction in
partnership partners are already being taxed).

- partnership profits accrue on the accounting date, or desolation date of


partnership, on admission of new members, or resignation of new members ;
or on the death of a partner. Where the partnership business is continuing after
a change in membership, the Commissioner does not normally require
accounts to be drawn up. He will accept whatever method used to determine
profit share of the outgoing member. The partnership would then be expected
to draw up accounts at the usual time.

The actual taxation of an individual is simply to apply the rates of tax to the taxable
income established, after which the credits applicable to the individual are calculated
and subtracted. An AIDS levy of 3% of the remaining tax after credits is added, after
which P.A.Y.E. is applied in reduction of the tax liability established.

Relevant sections of the Act include: Section 37(15) : Joint returns

Section 51(5) : Separate assessments

Accrual of partnership profits - on accounting date (Legal precedent Sacks v CIR)

Accrual of partnership salaries - monthly as established in COT v Newfield.

29 
B. COMPT HONOURS DEGREE 2010
Taxation Module

EXAMPLE

David and Samuel practise as veterinary surgeons in Chinhoyi. Samuel joined the
practice when he qualified in July 2006. David has practised here for seven years. They
submit the following profit and loss account in support of income returns for the tax year
ended 31 December 2010.

For the purposes of the question, the following amounts are stipulated at;
 Passenger motor vehicle cost for capital allowances purposes- $10 000
 Blind, disabled, elderly persons’ credits - $900 p.a.
 Maximum annual deduction for contributions to approved pension fund - $3 600

$ $

Insurance premiums: Fees accrued 3 934 000


- loss of profit 20 000 Bad debts recovered 84 000
- fire 9 000 POSB interest 75 000
- partnership joint life policy 38 000 Zimbabwe Building Society:
- life policies for benefit of : Dividends : PUPS 12 000
Samuel 16 000 Interest : “C” Class shares 39 000
David 10 000 26 000 Debenture interest 29 000
Medical aid contributions: Dividends Delta Corp Ltd 10 000
David 5 200
Samuel 3 200
Staff 11 000 19 400
Staff salaries 680 000
Annuity to widow of
deceased employee 21 000
Interest on capital : David 48 000
Samuel 44 000
Bad debts 97 000
Trade subscriptions 1 000
Legal expenses : debt collection 6 000
Attendance at approved post
graduate course 90 000
Depreciation 86 000
Net Profit :
David 60% 1 798 560
Samuel 40% 1 199 040
________
2 997 600
________ ________

4 183 000 4 183 000


________ ________

1. Partners drawings were Samuel $800 000 and David $900 000.
2. Bad debts recovered include an amount of $6 000 on account of a loan previously
written off as bad and not allowed as a deduction for tax purposes.
3. PUPS Residents’ tax on interest $2 400 withheld. The debentures were in a farming
company.
4. The gross dividend from Delta Corporation Ltd is $12 500 from which $2 500
resident shareholders tax has been deducted at source.

30 
B. COMPT HONOURS DEGREE 2010
Taxation Module

5. Bad debts are made up as follows :

Provisions for doubtful debts calculated at 5% of debtors 43 000


Fees unpaid 26 000
Loan to former manager now irrecoverable 28 000
______

97 000
______

6. Attendance at post graduate course:

$
Samuel 30 000
David 60 000

This represented the cost of lectures including travelling and hotel bills.

7. (a) Fixed Assets in the hands of the partnership at the beginning of the year are
as follows :

Date Original
Description of Asset Acquired Cost
$
______________________ _________ __________

Office Furniture and Equipment Jan 2004 15 000


Surgery Equipment Jan 2009 70 000
Truck (single cab) Jun 2007 70 000

(b) During the year the truck was traded in for a second-hand land cruiser. A
trade in value of $40 000 was given on the truck and the cost of the land
cruiser was $500 000.

(c) A sterilizer (cost $400 purchased in January 2009) was scrapped during the
year 2010, and a new one purchased for $10 000.

(d) The partnership elects to claim SIA.

8. Samuel borrowed money to purchase his share in the partnership practice.


Interest payable during the year amounted to $12 000.

9. David and Samuel paid $30 000 and $55 000 respectively to approved retirement
annuity funds.

10. Samuel travels extensively for the practice and provides his own transport. He
rented a car for $9 000 a month for six (6) months from 1 January 2010 and on 1
July 2010 purchased a car for $250 000. His running expenses for six months to
31 December 2010 were $100 000. It has been established that his non-business
travel has at all times been 10% of the total.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

11. Samuel is unmarried but has a disabled child aged 5. In addition to his income
from the partnership, he had the following income :
$

Dividends from companies registered in Zimbabwe 40 000


Interest on tax reserve certificates fully utilised in payment on tax 2 400
Rents from UK property 72 000

12. David is married with two children, and during the year his medical aid shortfalls
were $6 000.

REQUIRED :

Calculate the tax payable for David and Samuel respectively.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

SUGGESTED SOLUTION

Partnership David and Samuel

$
Profit per accounts 2 997 600

Add : depreciation 86 000


bad debts : general provision 43 000
: loan 28 000
annuity excess 1 000
joint life insurance 38 000
recoupment 39 800 235 800

Less : bad debt recovered 6 000


POSB interest 75 000
Class C PUPS dividend 39 000
Delta dividend 10 000
PUPS dividend 12 000
SIA 7 500
Wear and tear 17 400 (166 900)
______ ________

3 066 500

David 60% 1 839 900


Samuel 40% 1 226 600
________

3 066 500
_________

Capital Allowances
Cost Wear
ITV Add and (Scrap) ITV
Asset Cost 31/12/09 (Disp) tear SIA Recoup 31/12/10
$ $ $ $ $ $ $
______ ____ _______ _______ _______ _____ ______ _______

Office Furniture
& Equipment
2004 additions 15 000 NIL - - - - NIL

Surgery
Equipment
2009 additions 70 000 35 000 (400) 17 400 (1) - (200) (1) 17 400
2010 additions 10 000 - 2 500 - 2 500

Motor
Vehicles
2007 additions 70 000 NIL - - - 40 000 (2) NIL
(3)
2009 additions 500 000 5 000 5 000
_____________________________________________________________________

TOTAL 155 000 35 000 509 600 17 400 7 500 39 800 24 900
_____________________________________________________________________

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B. COMPT HONOURS DEGREE 2010
Taxation Module

1. Sterilizer scrapped
Cost of asset scrapped 400
ITV asset scrapped 200

Proceeds nil

Scrapping allowance (200)

Equipment: Wear & Tear Calc:


2009 additions 70 000
Less : scrapped (400)
______

Cost of assets on hand 69 600


______

Therefore accelerated
wear and tear @ 25% 17 400
______

2. Truck trade-in
ITV -
Proceeds 40 000
______

Recoup 40 000
______

3. Land cruisers are specifically included in the definition of “passenger motor vehicle”,
and are therefore subject to the $10 000 cost limit.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

Individual Computations

David Samuel
60% 40%

Share of taxable income 1 839 900 1 226 600

Add : life assurance policies 16 000 10 000


medical aid society contribution 5 200 3 200
interest on capital 48 000 44 000
________ ________

1 909 100 1 283 800

Less : interest on capital account 12 000


RAF contribution limited to $3 600 3 600 3 600
car rental 90% of $54 000 48 600
SIA on $250 000 restricted to
$10 000 at 50% 5 000
Running costs 90% of $100 000 90 000
________ ________

Taxable Income 1 815 500 1 214 600


________ ________

Tax thereon at 25% 453 875 303 650


_______

Less : Credits
Disabled child (900)
Medical shortfall 50% x 6 000 (3 000)
_______ _______

Tax Chargeable 453 875 299 750


Add 3% Aids Levy 13 616 8 993
_______ _______
Tax Payable 467 491 308 743
_______ _______

35 
B. COMPT HONOURS DEGREE 2010
Taxation Module

3. TAXATION OF FARMERS

3.1 SUMMARY OF RELEVANT SECTIONS :-

Section 2 :

definition

Section 8(1)(I) :

Taxation of closing stock.

Section 15(2)(u) :

Deduction for stock.

2nd schedule :

Valuation of farm trading stock.

The valuation of farm trading stock is based on Fixed Standard Values (FSVs)
that are set by the Commissioner from time to time.

7th schedule :

Special deductions for farmers, drought induced relief, and restocking allowance.

Finance Act: s 14(3)(c) :

Special rate for taxation of drought sales.

4th schedule :

Capital allowances.

Section 15(2)(y) :

Special deductions for agricultural co-operatives.

The establishment of taxable income for all taxpayers is virtually the


same. Farmers have some extra deductions outlined in the 7th schedule
and the valuation of a farmer’s stock is also peculiar with regard to
livestock valuations. This valuation is by reference to fixed standard
values as outlined in the second schedule. A farmer should normally
come up with his standard values which must then be approved by the
Commissioner. Once approved, they must be used consistently for
subsequent years. Crops are valued at what the Commissioner considers
fair and reasonable.

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B. COMPT HONOURS DEGREE 2010
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The 7th schedule provides for the following :-

Para 2 : Special deductions for farmers as follows :-


(This expenditure is not subject to recoupment.)

(a) the stumping and clearing of lands

(b) works for the prevention of erosion

(c) the sinking of boreholes and wells

(d) aerial and geophysical surveys

(e) any water conservation works or contributions thereto in


terms of the Natural Resources Act.

(f) New Fencing

Para 3 : Deals with the determination of taxable income/assessed loss


from growing timer.

Para 4 : Re orchards and vineyards

Para 5 : Assessment of income when drought conditions force a farmer


to sell livestock.

In this situation the taxable income emanating therefrom can


be taxable over three years if the taxpayer so elects. This
income is taxable at a special rate, which is the marginal rate.

The taxable income from drought sales is determined as


follows :-

Proceeds from drought sales XX

Less :

(a) number of sold * fixed standard value XX

(b) total no. sold * livestock expenses


___________________________ XX
Average stock
___

XX

Average stock = (opening stock + closing stock) / 2

New Par : Assessment of income when compulsory acquisition of farm


necessitates sale of livestock.

In this situation income emanating therefrom can be taxable


over three years if the taxpayer so elects.

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B. COMPT HONOURS DEGREE 2010
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Para 6 : Restocking Allowance :

The restocking allowance is calculated as 50% of the cost of


livestock purchased to bring up the stock holding to the
assessed carrying capacity of the farm.

3.2 Important Departmental Practices (DP)

No. 20 : Chinchilla and crocodile breeders are treated as farmers and are covered
in the 7th schedule.

No. 21 : Expenditure on crops in the ground - read.

No. 22 : Farm improvements exclude expenditures incurred under paragraph 2 of


the 7th schedule.

No. 23 : Farm roads : temporary farm roads are allowable under section 15(2)(a)
while permanent roads are farm improvements on which S.I.A or wear
and tear can be claimed.

No. 24 : Sale of building by farm owner to company while retaining ownership


of land - is not legally possible.

No. 26 : Timber and wattle plantations - read.

No. 27 : Orchards and vineyards, tea and coffee plantations - read.

No. 28 : Farm improvements and plant : security items - security screens,


security lighting, fire extinguishers rank for capital allowances.

No. 29 : Valuation of donated or inherited livestock, growing crops and reaped


produce - value at estate valuation or market value, in any case use the
same value established in the hands of donor for tax purposes.

Departmental Practices make some interest reading and I would encourage


every student to refer to them as a matter of necessity.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

EXAMPLE

Longhorn Ranches (Pvt) Limited was incorporated on the 1st January 2009 to acquire in
the Belingwe district from that date the farm “Cowhaven” together with improvements
thereon, for the sum of $1 810 000. According to the agreement of sale, the terms of
which are acceptable to the Commissioner of Taxes, the purchase price was made up as
follows :

$
Land 970 000
Fencing 101 000
Farm dwelling 200 000 (erected 01/05/2004)
Staff housing 334 000 (2 units of $62 000 each and 1
unit of $210 000 all erected on
01/06/2003)
Plant and equipment 205 000
________

1 810 000
________

During the year ended 31st December 2009 the company expanded and incurred the
following capital expenditure:

Erection of fencing 600 000


Sinking of boreholes 240 000
Purchase of 2 new tractors on 31st October 4 800 000
Purchase of 2 cattle transportation lorries on
31st December 2 400 000
Addition to farm dwelling 200 000

REQUIRED :

To calculate the maximum amount of deductions to which the company is entitled for
the year ended 31st December 2009.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

SUGGESTED SOLUTION

Longhorn Ranches (Pvt) Ltd

Para 2 Ranking Total


7th Schedule Wear & tear SIA Allowance
$ $ $ $
__________ _____________________ ________

Maximum deductions allowed :

Fencing
Purchased -
Erected 600 000 600 000

Staff Housing
Farm dwelling
Staff housing

Plant and equipment 205 000 102 500

2 new tractors 4 800 000 2 400 000

2 cattle Lorries 2 400 000 600 000

Sinking of boreholes 240 000 240 000


________

3 942 500
________

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B. COMPT HONOURS DEGREE 2010
Taxation Module

4. TAXATION OF MINERS

4.1 The computation of taxable income for miners is basically the same as any other
class of taxpayer. The determination of allowances on capital expenditure for
miners are outlined in the 5th schedule.

4.2 Relevant sections :-

- Sale of mining claims held as stock - section 9

- Definitions - section 2

- Mining recoupments - section 8(1)(j)

- Allowable deductions :-

prospecting expenses - section 15(2)(f)(ii)

capital redemption - section 15(2)(f)(i) and 5th schedule

4.3 Prospecting expenses

Section 15(2)(f)(ii) provides for the deduction of expenditure incurred during the
tax year on surveys, boreholes, trenches, pits and other prospecting and
exploratory works undertaken for the purpose of acquiring rights to minerals in
Zimbabwe.

A binding election is available to claim such expenditure from current income


from any source or carry forward the expenditure to be allowed against income
from mining operations in any subsequent year.

4.4 Capital redemption allowances - (5th schedule)

Capital expenditure for mining purposes is defined as :-

Expenditure on buildings, works or equipment, lease premiums, shaft


sinking (including sumps, pump chambers, stations and ore bins accessory
to a shaft) ; expenditure incurred prior to commencement of trade on
preliminary surveys, boreholes, development, general administration and
management, interest on loans ; and, after 1/04/88 : includes expenditure on
mine schools, nursing homes and clinics.

4.4.1 Methods of calculating capital redemption allowances :-

The redemption allowance can be calculated using either of three methods


commonly referred to as :-

 Life of mine

 Mixed method

 New mine method

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The taxpayer has to make an election of the method preferred.

Life of Mine (paragraph 2)

The life of the mine is outlined in paragraph 2 of the 5th schedule.


Under this method the current year’s capital expenditure is added to
the balance of unredeemed capital expenditure brought forward at the
commencement of the current year of assessment. The total capital
expenditure is then divided by the approved estimate life of the mine
(in years), counting from the beginning of the current year of
assessment.

Companies not owning mines and other individuals

The capital redemption allowance will be based on Commissioner’s


assessment of what is fair and reasonable. Any person who is the
owner of a mine can use the life of the mine basis if she can submit
the estimate of the life of mine. In other cases the redemption is
based on the shorter of tribute period or life of mine.

With regard to individuals leasing mines, the Commissioner may


allow accumulated expenditure (shaft sinking and development) in
the first year of production. Thereafter the allowance is spread over
remaining period and wear and tear allowed at 20%.

Mixed Method (paragraph 4(2))

Under this method this method the taxpayer can make an election to
claim a portion of unredeemed capital expenditure brought forward
at the beginning of the year, by applying the life of the mine method
to it. In addition to that portion, the whole of the capital expenditure
incurred in the current year is allowed in full.

New Mine Method (paragraph 4(4))

This method is only available to those carrying on operations in a


new mine as defined. The election of this method allows the
taxpayer to deduct all capital expenditure brought forward and
current in the first year of production. Thereafter, capital expenditure
is allowed in the year in which it is incurred.

A new mine is defined as an undertaking which commenced regular


production on or after 1/04/1968, or recommencement of a mine
which has changed ownership and has been reorganised with
substantially new development and new plant.

4.5 Ring – Fencing

a) With effect from the year of assessment beginning on 1 January 2001 the
computed taxable income or loss for the year from each mine location of a
particular operator must be separately calculated. Thus a loss on
operations in one mine would not be available for set off against taxable
income from another but would be carried forward.

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b) With effect from the year of assessment beginning on 1 January 2001


deductions allowed per section 15 can only be claimed in respect of income
to which they relate.

c) Capital allowances can only be claimed in respect of expenditure or losses


attributable to a particular mining location and shall not be claimed in
respect of any other mining location.

d) Assessed Losses – No assessed loss carried forward will be allowed as a


deduction unless a breakdown showing the extent to which such loss is
attributable to each location must be submitted to the commissioner for
approval. An assessed loss from mining operations can not be offset
against other income.

4.6 Expenditure

The restrictions refer to :

i) A local branch of a foreign company


ii) A local subsidiary of a foreign company

a) In the case of pre-production (etc.) expenditure: 0.75% of the company’s


total section 15 deductions for the year, after reducing the latter by :

i) admin and management expenditure paid outside Zimbabwe and


ii) CRA

b) In the case of post-production (etc.) expenditure : 1%, instead of 0.75%, of


the above.

c) The deductibility of interest payable by a mining company is limited if the


debt causes the company’s debt:equity ratio to exceed 3:1.

4.7 Income Tax Rate

The income tax rate for mining companies is 25% effective from 1 January 2010
(was 15%).

4.5 Other provisions

Paragraph 5 provides an election to claim expenditure incurred on nonproducing


and non-contiguous mines against the income of the current producing mine. This
paragraph has been repealed with effect from 1 January 2001.
The election to claim capital expenditure of a non-contiguous non-producing mine
against income of a producing mine has been removed. That is capital
expenditure from a non-contiguous mine that is not yet in production must be
carried forward until the mine is producing.

Paragraph 6 provides for an election to claim expenditure on any one renewal of


buildings, works or equipment where cost does not exceed $10 000.

Paragraph 8: Provides that where there is a change of ownership of a mine, a


schedule of allocation of the sale price to the assets is required. The section also

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provides for postponement of taxation of recoupments if transfer is within group


companies/reconstructions; or between spouses. In these cases the assets are
transferred at amounts equal to the deductions available.

The estimated life of mine is subject to the following limitations:-

Type of mine Maximum estimate

Lead and/or zinc mine 10 years

Iron 5 years

Any other mine 20 years

Section 9 of the Act :- Income emanating from sale of mining claims can be
spread over four years for taxation purposes if taxpayer makes the election.

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EXAMPLE
Rare Stone (Pvt) Ltd is a nickel mining company, which has been working some claims
in the Bindura area of Zimbabwe. The mine is controlled by three shareholders. The
unredeemed capital expenditure balance on company books as at 1st January 2009 was
$350 000. During the tax year ended 31st December 2009 the company undertook the
following activities:-

$ $
Gross sales revenue of nickel 3 500 000
Shaft extensions and refurbishment 100 000
New mining equipment 500 000
Mine office building renovations 200 000
Administration expenses 900 000
Mercedes sedan bought for managing director 50 000
Construction of mine clinic 600 000
Construction of house for nurse in charge at clinic 120 000

During the year the company undertook some further exploration and registered six new
claims at an average cost of $4 000 each. The company commenced working one of the
claims near Mount Darwin and although this claim was still not producing by 31st
December 2009, the company had incurred $50 000 on it. Due to the boom in the
mining sector the company began to speculate in claims and by the end of the year they
had sold three of the registered claims for a total amount of $260 000.

Some used mining equipment was sold for $30 000 to some indigenous miners. This
equipment had cost $25 000 two years previously.

The estimated life of the nickel mine is said to be 9 years from 1st January 2009.

REQUIRED:

 Compute the taxable income of the company for the year ended 31st December 2009,
taking all opportunities in the Income Tax Act to minimise its taxable income for the
year (assume that for 2009 the cost of the clinic and nursing home were allowed in
full)

(Attempt this question before looking at the suggested solution on next page).

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B. COMPT HONOURS DEGREE 2010
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SUGGESTED SOLUTION

Rare Stone (Pvt) Ltd


Computation of taxable income for the year ended 31st December 2009

$ $
Mineral sales 3 500 000
Administration expenses (900 000)

Capital redemption allowance


(mixed method)
Unredeemed capex brought forward 350 000
Less : Recoupment ( 30 000)
_______

320 000

Portion claimable 320 000 / 10* ( 32 000) ( 32 000)


_______

UCE balance carried forward 288 000


_______
Current capex allowed as follows:

Shaft refurbishment 100 000


New mining equipment 500 000
Building renovations 200 000
Mercedes for MD 10 000
Mine clinic 600 000
Nurse’s house 120 000
_______
(1 530 000)
Non-contiguous mine -
Sale of mining claims ** 260 000
Cost for 3 at $4 000 ( 12 000)
_______

248 000

Section 9 election : 248 000 / 4 62 000 62 000


_______

Minimum taxable income $976 000


_______

Non-Contiguous Mine

Pre-production expenditure carried forward 50 000

Notes :-
* add 1 cover current year
** speculative therefore taxable at normal rates

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5. CAPITAL GAINS TAX

Capital Gains Tax

Authority for the levying and collection of capital gains tax is in terms of section 6 of the
Capital Gains Tax Act(Chapter 23:01).
- Capital gains arising from the disposal of immovable property and marketable
securities are taxed at a flat rate of 20%.

- Capital gains arising from the sale of a principal private residence by an individual
who has attained fifty-five years on or before the date of sale are exempt from tax.

- Capital gains arising from the sale of marketable securities are exempt from tax up
to $1,800 if the seller is fifty-five years or over on the date of sale.

- The disposal of marketable securities listed that were acquired before 1 February
2009 is subject to capital gains tax at 5% of the gross capital proceeds.

- The disposal of marketable securities listed on the Zimbabwe Stock Exchange that
were acquired after 1 February 2009 is exempt from capital gains tax but subject to
a capital gains withholding tax of 1% of the gross capital proceeds.

- The disposal of marketable securities that are not listed and were acquired after 1
February 2009 is subject to capital gains tax at 20% (and capital gains withholding
tax of 10%).

- “Marketable security” is a defined term, which includes shares in private


companies. To be taxable, the proceeds must be from a source within Zimbabwe.

- The disposal of immovable property that was acquired before 1 February 2009 is
subject to capital gains tax at 5% of the gross capital proceeds.

- The disposal of immovable property that was acquired after 1 February 2009 is
subject to capital gains tax at 20% of the gross capital proceeds (and capital gains
withholding tax of 15%)..

- The main deductions which are allowed in the determination of a capital gain are
the cost of the asset together with any additions after acquisition and an allowance
(calculated on cost and additions) determined by applying the Consumer Price
Index (CPI) as provided by the Central Statistical Office.

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The framework for establishing capital gain is as follows :-

Total receipts or accruals (deemed or actual) from a Zimbabwean Source


(deemed or actual) from the sale or disposal of a specified asset

Less

amounts of a gross income nature and recoupments of section 11(2) allowances

== Gross Capital Amount

Less

Exemptions (section 10 of CGT Act)

== Capital Amount

Less

Allowable Deductions (section 11 of CGT Act)

== CAPITAL GAIN

If the total computed aggregate gain in a year of assessment is $50 of less no tax is
payable. A computed loss may generally be carried forward against future gains.

5.2 Specified assets are :

 immovable property ; and

 any marketable security.

Deemed sales [section 8(2)]

(a) Where amount accrued and amount actually received varies due to
exchange rates, effect shall be given to the amount actually received in
Zimbabwe dollars.

(b) Disposal other than by way of sale, Commissioner deems specified asset to
have been sold at market price of such asset.

(c) Expropriations - asset deemed sold at expropriation/compensation price.

(d) Sold in execution of court order - deemed sold for price realised.
(e) Maturity or redemption of specified asset - asset deemed sold for maturity
amount or redemption value.

(f) Transfer under a deed of sale.

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Exemptions from capital gains tax (section 10)

(a) Disposals by bodies mentioned in paragraph 1,2 and 3 of 3rd schedule to


income tax act, except disposals by those bodies mentioned in paragraph
2(a), (c) and (f) of 3rd schedule :- namely

(a) agricultural, mining and commercial institutions or societies not


operating for the private pecuniary profit or gain of the members

(b) building societies

(f) employees’ savings schemes or funds approved by the


Commissioner.

(b) Realisation/distribution by executor of specified assets forming part of a


deceased estate.

(c) Sales of marketable security being bond or stock in respect of :-

- any loan to the state, or any company all the shares of which are
owned by the state,

- local authority

- a statutory corporation

(d) Insurance business re factor F or G in paragraph 6 of eighth schedule.

(e) Disposal of shares in the Zimbabwe Development Bank.

(f) Disposal of immovable property by petroleum operator to another


petroleum operator, provided buyer would use property for petroleum
purposes.

(g) Receipts and accruals from sale of specified assets by licensed investor.

(h) Receipts and accruals of an industrial park developer.

(i) Amounts received or accrued on disposal of shares withheld by an


insurance company (recoupment by a insurance company in a
demutualisation)

(j)

(k) Amounts received by or accruing to an employee from the sale or disposal


of his shares or interest in an approved employee share ownership trust
where such sale or disposal is to the trust.

(l) Amounts received by a person on the sale of his or her principal private
residence if such person was, on the date of the sale, of or over the age of
fifty-nine years.

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(m) Amounts received by or accruing to a person who is of or over the age of


fifty-five years on the sale of any marketable security, other than a
marketable security referred to in paragraph in respect of the $1 800
received by or accruing to him or her in the year of assessment concerned.

DEDUCTIONS

Section 11(1) :

Where amount of liability incurred and amount actually paid differ due to exchange rate
variation, then effect shall be made of the amount actually paid in Zimbabwe currency.

Section 11(2)(a) :

Costs of acquisition of specified asset which has been sold, excluding amounts allowable
as deductions for income tax purposes.

NB :- Asset acquired by inheritance - taxpayer deemed to have incurred cost equal to


estate valuation.

Asset acquired otherwise than by way of purchase of inheritance - if acquired prior to 1st
August 1981, taxpayer deemed to have incurred cost equal to market value at time of
acquisition, if acquired after 1st August 1981, cost is the gross capital amount as
established in the hands of person from whom acquired.

Section 11(2)(b) :

Expenditure on additions, alterations or improvement of specified asset, excluding


deductions allowable for income tax purposes.

NB : In the case of capital amount arising from the sale of shares in a company which
owns immovable property, any expenditure incurred by seller on additions or
alteration to the property shall be deemed to be expenditure incurred on addition
to shares.

Section 11(2)(c) :
An amount determined by applying the Consumer Price Index at the times of sale and
purchase on;

1) Amounts referred to in section 11(2)(a) other than amount relating


to Building Societies, and

2) amounts referred to in section 11(2)(b), and

3) the amount of any expenditure in respect of which a deduction is


allowable for income tax purposes, by way of allowance in terms of
the 4th schedule, 5th schedule, 7th schedule paragraph 2(c), (e) or (f)
in respect of each year or part thereof from the date of construction,
acquisition, alteration, addition or deemed addition or alteration, to
date of sale.

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Section 11(2)(d) :

selling expenses

Section 11(2)(e) :

Bad Debts from previous or current disposal of specified asset.

Section 11(2)(f) :

High Court Costs where appeal was fully or substantially successful.

Section 11(2)(g) :

Supreme Court costs where appeal fully or substantially successful.

Section 11(2)(h) :

After above deductions, where profit is $50 (the effective amount is nil and the
paragraph is merely academic) or less, an amount equal to such amount shall be allowed
as a deduction.

Section 11(3) :

Taxpayers shall be allowed to deduct any assessed capital loss brought forward ; but not
those declared insolvent or had their property or estate assigned for the benefit of
creditors.

A company registered under the Companies Act, which converts into a private business
corporation can carry forward its loss ; and vice versa.

Section 11(4) :

A taxpayer shall claim a deduction only under one provision of the Act.

Section 11(5) :

Owners of immovable property who have been taxed on value of improvements in terms
of section 8(1)(e) of the income tax act, shall be deemed to have incurred a cost equal to
such amounts as have been taxed.

Section 11(6) :

Deed of sale deemed an acquisition.

Section 12 :

No deduction shall be allowed in connection with exempt disposals.

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Section 13 : Damage or destruction of specified asset

Any asset damaged or destroyed shall be deemed to have been sold for the amount of
compensation receivable. Where the Commissioner is satisfied that the whole amount
of, or part of proceeds shall be expended within two years on purchase or construction of
a further specified asset, or repair of damaged asset, then such amounts shall not be
deemed proceeds of sale.

Section 14 : Determination of fair market price

The Commissioner has power to vary selling price or purchase price if he is of


the opinion that the price given is at variance with the fair market price.

Section 15 : Elections postponing the payment of Capital Gains Tax

Transfer of specified assets between companies under the same control in the
course of group reconstructions, mergers and other similar business operations.

The following elections must be made by the time the returns for assessment are
submitted.

Election available (notwithstanding the terms of the sale) to transfer specified asset at
the amount equal to the deductions established in the hands of the seller. If asset
eventually sold to someone outside the group then recoupment calculated as it the
original seller was selling.

Section16 :

Transfer between spouses - election to transfer at amount equal to deductions available.

Section 17 :

Transfer of specified asset by individual to company under his control - same election
as above available.

Section 18 : Sale of immovable property under suspensive conditions

Capital gain relating to amounts not due at year end allowed as a deduction, but to be
added back the following year, when a fresh calculation is then made, if applicable.

Formulae : A*(B-C)
_______

where : A = Portion of proceeds not yet due

(B-C) = Capital Gain accrued on sale

D = Total proceeds on sale

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Section 21 : Provision for sales of principal private residence

Where a taxpayer sells a principal private residence and uses the total proceeds to
acquire a new principal private residence, then capital gains tax shall not be chargeable
on such sale. If the amount used is less than the actual proceeds then the capital gain
which relates to the portion not used shall be subject to capital gains tax. When the new
PPR is sold, the capital gain not subjected to tax previously shall be deducted from the
amount mentioned in section 11(2)(a), i.e. from cost.

Section 22 : Substitution of business property

Where a business property is disposed of and the taxpayer disposing the property
satisfies the Commissioner that the entire proceeds will be utilised to construct or
purchase another business property within two tax years, capital gains tax shall not be
chargeable ; provided that such capital gain will reduce the cost of the new property
when it is eventually sold.

Capital Gains Withholding Tax

Sale proceeds are liable to capital gains withholding tax at the following rates :

Immovable property 15%


Listed marketable securities 1%
Other marketable securities 10%

The responsibility for withholding such amount rests primarily with the “depositary”.
Should the depositary fail to withhold the amount, responsibility passes to the agent and
lastly the seller. In certain circumstances, taxpayers may apply for capital gains
withholding tax clearance certificates in order to eliminate their liability. What this
amounts to is the submission of the Capital Gains Tax liability together with the
application form for the capital gains withholding tax clearance certificates.

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6. TAX PLANNING

Tax planning is the process of organising a taxpayer’s affairs in a way that legally
minimises the impact of taxation imposed by the statutes. One should always remember
that tax planning requires an analysis of all taxes, including income tax, capital gains tax
and estate duty. A plan which minimises income tax but increases estate duty is not the
best of plans.

Planning implies arranging of one’s affairs well in advance. Taxpayers often approach
their tax advisors after things have already gone wrong, for example when a tax
investigator has knocked on the door. In such cases accountants, lawyers and tax
consultants can not do much planning but can attempt to minimise damage.
Establishment of tax liabilities is normally based on facts, referenced to legislation
existing at the time. Tax consultants cannot change facts retrospectively and the
Commissioner is bound to implement the law as it existed at the time.

Before commencing tax planning activities, it is important to be aware of the provisions


of section 98 of Income Tax Act, which deal with tax avoidance. Tax avoidance is the
arrangement of one’s affairs in a legal manner which results in minimisation of tax
liabilities. Tax evasion on the other hand embraces all those activities that are
undertaken by taxpayers to free themselves from paying tax, without regard for the law.
Examples include falsification of records, misrepresentation, failure to submit returns
without good reason and so on. Section 81 of 87 of the Income Tax Act outline types of
offences and remedies the Commissioner can employ to counter such activities. Please
refer to those sections. The basic remedy provided by the statutes is the imposition of a
penalty of 100% of the tax evaded. In many cases this can be profound and taxpayers
need to be aware.

The following quotations are topical in the discussion of tax planning :-

“…. No man in this century is under the smallest obligation, moral or other, …. to
arrange his legal relations to his business…. or property, as to enable the Inland
Revenue to put the largest possible shovel into his stores. The Inland Revenue is
not slow – and quite rightly – to take every advantage which is open to it under
the taxing statutes for the purpose of depleting the taxpayer’s pocket. And, the
taxpayer is, in like manner, entitled to be astute to prevent, as far as he honestly
can, the depletion of his means by the Revenue ….”, so said Lord Clyde in the
English case Ayreshire Pullman Motor Services and D M Ritchie v IRC.
Lord Tomlin in Duke of Westminster v Inland Revenue Commissioners said the
following :-
“Every man is entitled if he can to order his affairs so that the tax attaching under
the appropriate Acts is less than it would otherwise be. If he succeeds in ordering
them so as to secure this result, then, however unappreciative the Commissioners
of Inland Revenues or his fellow taxpayers may be of his ingenuity, he cannot be
compelled to pay an increased tax.”
The above quotations make it clear that avoidance is the legal way of minimising one’s
tax burdens while evasion is illegal. The Acts give the Commissioner authority to undo
any transaction if he is of the opinion that the transaction is abnormal and the purpose
was to avoid paying tax. He can for instance invoke what he deems to be the fair market
price in any transaction if he is persuaded to do so by the facts of the case.

Please refer to the avoidance provisions in section 98 of the Act. (Refer to some
questions on next page).

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Some scenarios requiring tax planning powers

(1) The managing director of a large company comes to you and asks whether it is advisable
to form a consultancy company for purposes of limiting his personal tax. He earns well
in excess of $15 000 per year, and he says that a friend he met at the golf course advised
him that he should form a consultancy company to which his salary would be paid
without P.A.Y.E. being deducted.

REQUIRED: What are the tax issues in the above scenario ?

(2) A owns the majority of shares in a company which owns the house he is residing in. He
wants to know whether he can invoke the roll over provisions with regard to capital
gains tax, if the company sold the house and constructed another one in a more affluent
suburb.

REQUIRED: Advise the taxpayer.

(3) An independent contractor whose income is on the rise would like to know his position
with regard to pay as you earn, or any other tax obligation.

REQUIRED: Advise him.

(4) A taxpayer has in the past operated the business of a general dealer at a growth point.
He was operating from a building that he owns on which he had been claiming capital
allowances. He has now formed a company in which the shareholding is spread equally
between himself, his wife and his two children. The market value of the building is
several million although it had originally cost about $50 000 to construct, ten years
previously.

REQUIRED: What are the tax consequences of transferring the building to the
company ?

(5) Mrs D is a widow who has been operating a furniture shop on a cash basis in Harare for
many years. Due to the increases in supplier prices she has now decided to start selling
the furniture on credit terms extending over two to three years. She has now made sales
amounting to $10 000 and she estimates her profit to be more than $5 000.
She vaguely remembers that she is taxable on all profit made in any year. She wants to
know whether or not there is tax relief available since she will only receive the bulk of
her income in future tax years.

REQUIRED: Advise

(6) The managing director of the local branch of an international group of companies
advises that the local branch has been paying a large amount of management fees (40%
of profits) to the overseas head office for the past five years. On Friday last week he had
received a phone call from the Investigations unit of the ZIMRA for an appointment to
discuss the company’s tax affairs. He tells you that the contact with the overseas head
office has over the years been on a visit to the country twice a year by the Group
Finance Director. The visits are normally of a week’s duration. The managing director
is uneasy with the visit of the tax officials and he wants you to be present in the meeting.

REQUIRED: Advise the possible tax implications and suggest any strategy to deal
with the situation.

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TAX PLANNING SCENARIOS : SUGGESTED APPROACH

(1) The major tax implications of forming a consultancy company (or operating as an
independent contractor) are as follows :

(i) Business income is subjected to tax at a flat rate of 30% (plus 3% AIDS levy) on
assessment. Tax, based on estimates if necessary, will however still need to be
paid on quarterly payment dates, during the year following the year of assessment,
as follows :

10% of (estimated) tax – 10 February


25% of (estimated) tax – 25 June
30% of (estimated) tax - 25 September
35% of (estimated) tax – 20 December

(ii) You will be required to register for Valued Added Tax should your turnover be
within the registration threshold and the services are taxable.

(iii) Business expenses are claimable provided they pass the test as laid out in section
15(2)(a), the general deduction formula.

As an employee (which includes a director) salaries, including benefits, are subject to


P.A.Y.E, which is normally deducted every month. The calculation of P.A.Y.E is based
on the tax rates applicable to individuals according to the various bands.

Although the tax situation of the consultancy company / independent contractor may be
advantageous, as opposed to that of an employee, before the choice is made section 98,
which is an anti-avoidance section, must be taken into account. This section may be
invoked by the Commissioner where it is evident that the only reason for making the
choice is solely and mainly because there is a lower tax regime pertaining, and that, in
reality, an employer/employee relationship still exists. Penalties, and interest, may
therefore arise.

In order to avoid the invocation of s98, a written contract should be concluded between
the company / independent contractor and the “customer” (your previous employer).
This contract must be normal, and be in line with prevailing practice, and should steer
clear of any wording which may indicate that you are still an employee of the company.

(2) The roll over provisions with regard to capital gains tax can only be elected in the
following scenarios :

(i) Where an individual sells his sole or main residence i.e. his principal private
residence, and purchases or constructs a replacement residence before the end of
the next assessment year ;

(ii) Where a taxpayer (including a company) sells immovable property used for the
purposes of his trade, and expenditure on a replacement property is incurred
within the time limit as in (i).

In this case, the taxpayer is a company, so (i) does not apply, and, as the house is not
used for the purposes of the company’s trade, (ii) will also not apply. The roll over
provisions can therefore not be invoked.

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B. COMPT HONOURS DEGREE 2010
Taxation Module

(3) An independent contractor is not an “employee”, as defined, for the purposes of the
13th schedule which deals with Employee’s tax (PAYE). He is therefore not liable for
PAYE, but is obliged to pay tax, based on his estimated annual taxable income, on the
quarterly payment dates (see 1 above).

(4) The relevant provision, in this case, is section 17 of the Capital Gains Tax Act. Where an
individual transfers any immovable property to a company controlled by him, through
holding a majority of its shares or otherwise, the parties may elect, under this section, to
transfer the property at a value, for tax purposes, the effect of which is that no capital
gains tax arises. Full liability is swept up on any resale to a purchaser other than a
company under the same control.

In this case, although the shareholding of the company will be spread equally between
the taxpayer, his wife and his 2 children i.e he will hold only 25% of the shares (not the
majority), it may still be shown that the taxpayer will have control of the company (by
way of voting powers etc). The section does state that the taxpayer may control the
company by holding the majority of the shares, or otherwise.

In addition, this section can only be invoked where the individual used the property for
the purposes of his trade, and where the company will continue to use it for the purposes
of its trade. In this case, these conditions are fulfilled.

(5) Sections 17 and 18 of the Income Tax Act are relevant under Mrs D’s scenario. In the
case of instalment-credit sales (where transfer of ownership is immediate but payment is
by instalments), the whole of the amount payable is deemed to have accrued to the
vendor at the date on which the agreement was entered into. To prevent hardship to the
vendor, however, an allowance, in respect of payments not yet received, may be
deducted, in addition to the normal deduction for bad and doubtful debts.

The allowance is determined by the Commissioner. In the case of movable property the
method of calculation is set out in departmental practice 33. (See example in prescribed
textbook Students’ Guide to Tax in Zimbabwe 2006) The allowance granted must be
brought in as income in the following year and, at that year end, a new allowance
calculated.

(6) When dealing with investigating tax officials, always provide them with the information
and documents that they request. Do not be aggressive.

In this case, the following issues could be raised :

(i) Deductibility of the full management fees : although excessive expenditure


resulting from bad business administration is deductible, the Commissioner
Genereal is entitled to disallow excessive expenditure on the ground that it is not
properly classifiable as expenditure incurred for the purposes of trade or in the
production of income, commonly because it is based on some non-business, or
even ulterior, motive.
(ii) Non residents’ tax on fees (NRTF) : this must be withheld from all fees paid to
non-residents. Therefore withholding tax on the management fees payable to the
head office should have been withheld, and paid over to the Commissioner
General within 15 days of payment of the fees. The rate of withholding tax
amount is subject to any double taxation agreement with the country of residence
of the recipient of the fees, in this case, of the head office.

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