ZIM Taxation 2010

B. COMPT HONOURS DEGREE 2010

TAXATION – ZIMBABWE

`

B. COMPT HONOURS DEGREE 2010Taxation Module

2

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


3

INTRODUCTION

The Taxation syllabus is fairly wide and any attempt to spot a particular area from which thequestions will be set will have a very small probability of success. It is, therefore, in thecandidate’s interest to be familiar with virtually all areas of the syllabus. In any case thequestions are normally integrated and the candidates who have prepared for all possible topicsare 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 theexamination by going through summaries of the relevant legislation and working throughpractical examples/questions. A number of the questions actually come from past examinationpapers. It is in the best interest of students to genuinely attempt the questions before referringto solutions provided.

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

It must be made clear from the outset that to become a tax expert one requires furthercomprehensive study supported by sufficient practical experience. This package should setyou well on your way. Please note that the summaries have been prepared under thepresumption that you have already had an encounter with the study of Zimbabwean Tax Lawand Practice at undergraduate level, and will be based on legislation in effect as at 31 January2010.

Good luck in your endeavours.


4

1. ADMINSTRATIVE AND LEGAL FRAMEWORK

1.1 ADMINISTRATIVE FRAMEWORK(All references to sections and schedules in this section are in relation to theIncome 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 NationalRevenue Authority of Zimbabwe (ZIMRA), which Authority came intobeing with effect from 19 January 2001. The Commissioner-General ofTaxes is vested with the power and responsibility of administering the taxstatutes. He does this through regional offices and ports established acrossthe country.

1.1.2 Returns and Assessments

Every year, three to four months after the end of a tax year theCommissioner publishes a notice in the most commonly read press invitingtaxpayers to obtain tax returns from their nearest tax office; truthfullycomplete them and return them to the respective offices for assessment.Although Tax Offices may post some tax returns to taxpayers (on theirrecords), the duty to obtain a tax return rests with each individual taxpayerwho falls within the specifications outlined in The Commissioners publicnotice. Tax returns for the year ended 31 December 2009 have beennotified 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 thoseregistered or required to have registered under Category “C” for ValueAdded Tax (VAT) in terms of the VAT Act as at 31st December 2007 andthereafter or registered under the Banking Act or registered under theInsurance Act, are required to furnish self assessment returns within fourmonths from the end of the tax year. Employees paying PAYE under theFDS are not liable to furnish self assessment returns unless specificallyrequested to do so. Under the self assessment legislation, the return willconstitute an assessment on either the due date of furnishing the return oron the date that it is actually furnished.

Notwithstanding the lodgment of the self assessment return, theCommissioner General is still empowered to raise an assessment where hehas 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 submita tax return. The employer is responsible for deducting the correct amountof PAYE for the year, and no further return needs to be made to the taxdepartment by the employee.

The Commissioner of Taxes is empowered to estimate any taxpayer’staxable income if one fails to submit a return. In addition to the tax payable


5

the Commissioner is also empowered to impose penalties for any default.These penalties are 100% of the basic tax chargeable. Section 46 outlinessome grounds for penalties.

It is a legal requirement for Pay As You Earn (P.A.Y.E.) to be deductedfrom all emoluments payable to employees on a monthly basis. TheP.A.Y.E. withheld has to be remitted to the Commissioner within 15 daysfrom the end of the month to which such P.A.Y.E. refers. The penalty forlate payment of PAYE is 100% of the tax payable, and interest is alsocharged on late payment at a rate prescribed by statutory instrument. (Seesections 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 QuarterlyPayment Dates (Section 72). Under this scheme the taxpayers pay theirestimated tax liabilities, for the current tax year in which they are trading, infour instalments on dates allocated throughout the year, as follows:

25 March 10% of tax payable25 June 20% of tax payable25 September 25% of tax payable20 December 35% of tax payable

1.1.3 Representative Taxpayers

The duties and rights of representative taxpayers are outlined in the abovequoted sections. The Commissioner of Taxes also has remedies againstdefaulting representatives. Where a representative has met an obligation ofthe principal out of his resources, he is empowered by the Act to seekrestitution from the principal.

The administrative sections of the Act are fairly simple to read. Studentsshould read them in order to have an understanding of the overalladministrative framework.

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

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


6

1.2.1 Monthly rates of tax

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

Amount Rate of Amount of CumulativeWithin Bands Tax Tax Total

US$ US$ US$ % US$ US$- to 160 160 0 - -161 to 500 340 20 68 68501 to 1,000 500 25 125 193

1,001 to 1,500 500 30 150 3431,501 to and over 35

Taxable Income Bands

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 approvedtourist development zone (after being taxed at 0% for the firstfive years of his operation as such) ...................................................

25

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

20

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 andan AIDS levy of 3% of tax payable, giving an effective rate of 25.75%.


7

Capital Gains Tax

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

Capital gains arising from the sale of a principal private residence by an individualwho 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 upto $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 February2009 is subject to capital gains tax at 5% of the gross capital proceeds.

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

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

“Marketable security” is a defined term, which includes shares in privatecompanies. To be taxable, the proceeds must be from a source within Zimbabwe.

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

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

The main deductions which are allowed in the determination of a capital gain arethe cost of the asset together with any additions after acquisition and an allowance(calculated on cost and additions) determined by applying the Consumer PriceIndex (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


8

1.2.3 Donations to charitable trusts administered by the ministers responsible forSocial Welfare and Health, or by officials in those ministries in theirofficial capacities are deductible.

1.2.4 Assessed losses attributable to business operations by a taxpayer cannot beset 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 deductionfor tax purposes is $3 600.

Employee’s contributions maximum allowable deductions the lesser of7.5% of annual emoluments or :-

To Retirement Annuity Fund only $3 600To employer’s pension fund $3 600To both employer’s pension fund and RAF $3 600

NSSA contributions are regarded as contributions to employer’s pensionfund.

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 becharged, levied and collected income tax calculated on taxable income forthe 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 actfor 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 andcompanies) taxable income is as follows :-


9

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 Taxlegislation.

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 shouldbe 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 monetaryvalue. An example of a specific inclusion is motoring benefit [section8(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 ataxpayer in any specific tax year. The Act does not define the wordsreceived an accrued. Guidance has to be sought, therefore from legalprecedents (court cases).


10

The most celebrated cases on accrual of income are :

Delfos vs CIR in which the learned judge asserted that income accrueswhen it becomes “due and payable”.

In Lategan vs CIR the judge concluded that income accrues to a personwhen one becomes “entitled to..” the income. Section 10(7) of the Actaffirms the decision in the Lategan case.

Please refer to Students’ Guide to Tax in Zimbabwe 2006 published byZXNET (Pvt). Ltd. for detailed summaries of the above cases, as well as afew other relevant cases.

Deemed received or deemed accrued :

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

Section 10(2) provides that partnership business income accrues on theaccounting date. This provision reinforces the decision established in thecase Sacks v CIR. Sections 10(3) to 10(6) provide for the taxation ofincome 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 sourceor has been deemed to be from a Zimbabwean source (section 12). Sourceis one of the words used extensively in tax matters, but is not defined in theAct. Although there is no definition of “source” in the statutes, many legalprecedents have dealt with the word at length. Specific circumstancesunder which income is deemed to be from a Zimbabwean source areoutlined in section 12 of the Act. The most common examples are interestand dividends from outside Zimbabwe which are deemed to be from aZimbabwean 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) vCOT :-

“…. As a hard matter of fact the only proper conclusion appearsto be that the company received the sum in question from a sourcewithin the territory (Rhodesia), viz the claims they had acquiredand developed there for the very purpose of obtaining theparticular receipt….”

“…. Source means .. not a legal concept but something which thepractical man would regard as the real originating cause of theincome….”.


11

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

“ …. source of receipts, received as income, is not the quarterwhence they come, but the originating cause of their beingreceived as income …. the quid pro quo which he gives in returnfor which he receives them …. “

The following are some important legal precedents :-

Directors’ fees - ITC 235 (1932) 6 SATC 262 :- “It is quite clear that thedirector’s fees are derived from the fact that the appellant is a director ofthe company, and therefore must be assumed to have earned the fees at theheadquarters of the company. It is there only that he can make his voiceheard as a director.”

Interest - “ ….. Provision of credit is the originating cause hence the placewhere exercised is the source ….” This was the majoritydecision in CIR v Lever Bros and Unilever Ltd 1946, 14SATC1.

Sale of mineral rights/immovable property - Some mining claims werebought and sold in the Territory in a profit making scheme ….. source is theTerritory …. (where the immovable property was situated).

International Trade - Transvaal Association Hide & Skin Merchants vCOT Botswana Court of Appeal (May 1962 SATC 97). Company boughthides from a Botswana Abattoir via Botswana subsidiary, treated them withsalt and bound them into bales in Botswana. The company headquarters inJohannesburg marketed the hides and gave delivery instructions to theBotswana subsidiary to deliver direct to customers, whether in Botswana oroutside Botswana.

The decision was that there was two activities :- curing and marketing.Curing was the dominant activity, hence the source was deemed to beBotswana. However, it appears from ITC 1103 (1967) 29 SATC 35, that itis possible for the source of income to be found partly in one country andpartly 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 andthe undertaking of business. It was ruled that the dominant factor was thecarrying on of transactions hence the source was deemed to be London,where shares were bought and sold …., though under instruction fromSouth Africa.

Services Rendered - (COT V Shein 1958 14 SATC 12)

“ …. the source of earnings is the work done in return for thoseearnings …. It now seems settled law that generally the source ofsuch income is the place where the services for which the salary ispaid have been rendered.”

Royalties - Millin v CIR 1928 SATC 170The originating cause of theauthor’s royalties is the wit and labour exercised in writing the book in


12

South Africa, therefore the source is South Africa (not England were thebook was published).

Rental Income - COT v British United Shoe Machinery (SA) (Pty) Ltd1964 26 SATC 163

Immovable property : source is the country/place where property issituated.

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

1.3.3 Capital and Revenue : Accruals and outlays in general

The definition of gross income specifically excludes amounts proved by thetaxpayer to be capital in nature. Expenditures and losses to the extent towhich they are capital in nature are not allowable as deductions.

Of utmost importance is establishing just what constitutes a capital accrualor receipt ; and what constitutes a capital outlay. There are many courtcases dealing with the capital or revenue nature of amounts, because neitherterm is defined in the legislation.. The basic principle of determiningwhether an item is on capital or revenue account is to examine the intentionunderlying the transaction. Where there exists more than one intention thenthe dominant intention will determine nature. Any transaction undertakenfor a profit motive is taxable, despite the fact that it might be an isolatedtransaction. (Overseas Trust Corporation v CIR (1926) 2 SATC 71).

When analysing nature of expenditures, it is sometimes necessary toconsider the ensuing benefit. If the ensuing benefit is short term, thenexpenditure 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 capitalproductively employed …. capital …. might be said to be wealthused 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 anddisappears in the very process of production, for example raw materials.Fixed capital remains relatively intact for a number of years though there issome diminution in value due to wear and tear. Fixed assets used in abusiness are examples of fixed capital. Stock for sale on the other hand isfloating capital.

“ …. its use involved disappearance and the money obtained for itwas received as part of the ordinary revenue of the business …. thesale of fixed capital represents a realisation which should not beincluded in gross income.”

Please refer to the Students Guide to Taxation (EY) or Income Tax inZimbabwe (Hill) for more detailed commentary on capital and revenueconcepts.


13

1.3.4 Calculation of tax liabilities (2010 tax year)

Companies and Trusts %

Tax rate on taxable income 25.00Add 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 withheldin advance $

__

$__

Payable/(Refund) $

Please take care and internalise the chronology of the above steps and make sure you followthem exactly. A lot of students have come short because they rewrote the law relating to theabove steps.

Although you are only expected to know the legislation ruling as at 31 January 2010, it makesgoods 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 allembracing, paragraphs 8(1)(a) to 8(1)(t) outline various types of amountswhich must be included in gross income whether or not they may appearlike they are capital in nature.

Section 8(1)(a) :

Annuities/pension receipts :-


14

Definition :-

“…. an annual payment in perpetuity for the life of grantee or for alimited period …. ”. ITC 826 (1956) 21 SATC 189.

Characteristics :-

- claimable from another person or body

- must be a fixed annual amount (which can be divided intomonthly 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 orcredit allowed at or during time of payment of contributions.

Basic formula for determining taxable portion

(I) = (P*N)-A______

N

where: P = annual payments (gross annuity received per year)N = number of annual payments expectedA = purchase price of annuity (excluding any deductions

granted when making contributions).

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

Annuity from gift or legacy

This type of annuity is taxable in full, even if paid out of capitalfunds.

Annuity from services rendered

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


15

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 lumpsum accruing by reason of the termination of employment in terms of aGovernment 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 gainfulemployment.

Value of benefit is determined by reference to :

value to employees in the case of occupation of quarters, residence orfurniture

cost to employer in the case of any other benefit

Some examples :-

soft loans :- with effect from 1/01/10over $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 municipalareas value determined as 12,5% of salary or 7% of costof house.

furniture :- annual benefit is 8% of cost of furniture items.

passage :- see definition, apportion if dual purpose.


16

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

NB :- Benefits paid by the State to its employees are exempt (para 4(d) of3rd schedule).

Section 8(1)(g) :Timber or growing crops grown for sale, sold as part of land except wherethese 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 ofproperty formerly leased. Taxpayer can elect to spread taxation of theserecoupments 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 orpension fund is taxable.

Section 8(2) :Where amount accrued differs from amount actually received due tofluctuations in exchange rates, effect must be given to tax amount actuallyreceived.


17

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 considerationOr consideration in the nature of a premium

Paid for

The right of use or occupation of land or building ; orplant, 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 tradeor 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:- premiumdivided 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 usefor business, apportion as appropriate.

Notes :


18

(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 anyallowance in the tax year following acquisition.

(c) Any allowances previously claimed which have been applied inreduction of purchase price are recoupments brought into grossincome by Section 8(1)(l).

(d) Lessee can make an election to spread the recoupment mentionedabove in (c) over six years. If property is disposed of by lesseebefore the expiry of six years all outstanding instalments not yettaxed immediately become taxable in the year of disposal of suchproperty.

(e) The characteristics of a premium were laid out in the tax case : CIR vButcher 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 theimplications in relation to finance lease versus operating lease?

(i) For Value Added Tax (VAT) purposes a lease is an instalmentcredit agreement (defined) whose time of supply is the timethe goods are delivered or when any payment is received bythe 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 ofthe assets purchased for leasing, under both financial andoperating leases. The exception arises where the lessee orother person has an option to purchase the asset at the end ofthe 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 (madeup of both capital and finance charges). In the case of theleasing of a passenger motor vehicle, the deduction isrestricted to a maximum of $100 000. (Section 16(1)(k) ofIncomeTax Act).

(iv) Where the lessee or other person exercises the option topurchase the leased asset at the end of the lease period,


19

recoupment may arise if the asset is sold at a price which isless than the market value. This recoupment could be taxedover six years, if taxpayer so elects.

(v) Under a hire purchase agreement, VAT is payable on thecash value, or the amount at which the goods would in normalcircumstances be sold for cash (excluding finance charges).

(vi) Cost of leased vehicles to lessor under both operating andfinancial leases.

Any vehicle purchased for leasing purposes is not restricted incost, under both financial and operating leases. (Paragraph14(2)(c) of 4th schedule).

Under a financial lease (where lessor is not entitled to thereturn of the asset at the end of the lease period - i.e. optionexists), the lessor can only claim wear and tear on actual costwithout restriction. SIA is not available under this option.

Under an operating lease (where lessor entitled to the return ofthe asset at the end of lease period), SIA or wear and tear canbe claimed, again on the actual cost.

Please note that while the vehicles are not restricted in cost forthe lessor under both financial and operating leases, therestriction in cost (of passenger motor vehicles) do apply tolessees as provided for in Section 16(1)(k) of the Income TaxAct.


20

1.3.5.2 Lease Improvements

Gross income : Section 8(1)(e) Deduction : Section 15(2)(e)

Definition

An agreement for the right of useor occupation of land and buildings

For the right to have An obligation toimprovements effected effect improvements

Land or buildings must be usedfor the purposes of trade or in theproduction of income (apportionfor business and private use)

An amount or value per Expenditure actually incurred.agreement. The expenditure incurred shall

not exceed the amount per theagreement.

If no amount stipulated in the agreement,the amount should be such sum

as the Commissioner considers fairand reasonable value of such improvements

The amounts taxable in equal The amount is allowable inmonthly instalments from the equal monthly instalmentsdate the improvements were calculated from the date thecompleted to the end of lease improvements are first broughtor 10 years whichever lesser. into use, to the end of the lease

period or 10 years whicheverlesser

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 deemedto be 10 years.


21

Notes :

(a) On acquisition of ownership the lessee will cease to qualify for anyallowance in year of assessment following. On cessation of use ofproperty for purposes of trade or production of income, allowance tobe 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 effectedthere must be an obligation to erect such improvements. Anobligation, though not expressed in certain contracts, may be impliedas 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 ofnot less than $80 000 was to be constructed. When $60 000had been spent on construction, Ridgeway hotel approachedthe lessor (Government in this case) to alter the figure of$80 000 to $200 000 and this was agreed. The contention wasto decide which amount to use for calculating allowances forthe lessee. C J Clayden ruled that the variation clause enteredinto before completion of construction became part of thecontract 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 clauseentered into after completion of construction of the buildingwould not validate the change of amount used for calculatingallowances.


22

Question:

Tourism P/L entered into a lease agreement with the Masvingo Municipality effectivefrom 1st July 2009. The agreement in part stated that the lease was for a piece of landin Masvingo extending to 5 acres. The lease would commence on 1st July 2009 andwould be for a period of 99 years. The lessee was obliged to erect a hotel building to thevalue 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 boardinghouse for its benefit until the completion of construction of the hotel, when the hostelbuilding 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 Tourismapproached the Masvingo municipality with a proposal to change the building clausefrom $2 000 000 to $5 000 000. The municipality concurred and the hotel wascompleted in September 2001 at a total cost of $5 200 000. The hotel opened forbusiness with effect from 1st October 2010.

Required:

Set out the income tax deductions available to Tourism (Pvt) Ltd for the tax years ended31st December 2009 and 31st December 2010.

Suggested solution:

Tourism (Pvt)LtdIncome 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 becausethe variation to building clause was entered into before completion of construction.


23

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 ofamounts accruing under hire purchase and under credit sales. Under theseagreements the full amount of sale is receivable in instalments, which may stretchinto years. For tax purposes the full sale price is deemed to accrue on the date ofsigning of the sale agreement. This would mean that taxpayers are “taxable” onamounts not yet received.

However, sections 17 and 18 provide deductions which enable taxpayers to betaxable on profit which relate to amounts which have become due and payable ineach tax year. A calculation of the profit relating to amounts which are not yetdue is made and deducted. This amount is added back to gross income in thesubsequent year when a fresh calculation is then made.

In the case of hire purchase sales (section 17) the calculation is made inaccordance with the following formula :

D * (E - F+G)_____________

E

In which :

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

E = represents the total amount accrued under the agreement

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

G = represents that proportion of development and other chargeswhich the Commissioner considers is applicable to suchproperty.

DEPARTMENTAL PRACTICES NOTES number 32 and 33 give furtherdetails on how the Commissioner will treat sales under hire purchase and creditsales. Refer to these references please.

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

1.3.7 Construction Contracts

For income tax purposes income from construction contracts is taxable on thebasis of what is due and payable in the tax year, i.e. based on percentage ofcompletion and progress payments due. Amounts received in advance are held intrust and would not be taxable. Please refer to the provisions of section15(2)(cc).


24

1.4 EXEMPTIONS

Section 14 as read together with the third schedule outlines receipts and accrualswhich 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 POSBare not taxable.

- The emoluments of the President, and any allowances paid to a spouseof a President or a Vice President for duties performed on behalf of theState.

- allowances to civil servants.

- bonus not exceeding 10% of one’s remuneration or $400 (with effectfrom 01/11/09) whichever is lesser.

- bank interest.

- the first $5 000 or one third of approved retrenchment packagewhichever greater, subject to a maximum exemption of $15 000.

- value of medical treatment and medical contributions paid by theemployer 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 oftrade or in the production of income will be allowed as a deduction for taxpurposes. Apportionment of expenditure is permissible, where incurred partly forbusiness purposes, or partly for capital purposes. It is also useful to note thatwhere the expense incurred is different from the amount actually paid due to thefluctuations in exchange rates, then the amount actually paid will be allowed as adeduction. (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 andrelated case law for detailed reading.

One of the main tasks of a tax adviser is to analyse client circumstances in orderto take effective steps to minimise the client’s tax burden. This can be achievedonly when the tax adviser is familiar with legislative provisions, particularlydeductions available to taxpayers. The provisions in section 15 are important andevery student should make an attempt to read the provisions.


25

Tax planners should be aware of the Commissioner’s treatment of assessed lossesas outlined in section 15(3) and the fact that losses attributable to business cannotbe set off against employment income per section 15(8).

1.6 CAPITAL ALLOWANCES - SECTION 15(2)(C) AS READ TOGETHERWITH THE 3RD SCHEDULE

The 4th schedule outlines allowable deductions with regard to capital expenditureincurred for the purposes of trade in the relevant tax year. The allowancescovered 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 capitalallowances can be granted. It is essential to be familiar with these definitions inorder to correctly determine the asset’s classification for tax purposes.. Forexample, a canteen constructed within an industrial stand is defined as anindustrial building, and NOT a commercial building.

The allowances outlined in the Fourth Schedule can be manipulated to thetaxpayer’s advantage. In particular, paragraph 8 is useful in relation to disposal ofassets within group companies, or localisation of international group companies.There are some incentives which facilitate avoidance of recoupments to businessoperations 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


26

Staff housing (excluding miner’s housing)

Tax Year Allowable

Cost

Actual cost not

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 by25% accelerated wear and tear allowance for the following 3 years(was 50% followed by 25% accelerated wear and tear for thefollowing 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 anoption to lessee or any other person to acquire the asset at the end ofthe lease period.

- S.I.A. is not normally claimable on a commercial building, but if thecommercial building has been constructed in a growth point, thenS.I.A. can be claimed.

- S.I.A. is not apportionable between private and business, if an assethas 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 usedfor business, the Commissioner will automatically grant wear and tearallowances as follows :-

immovable assets :- generally 5% straight line except forcommercial building (2.5%).

movable assets :- generally 10% on reducing balance with someexceptions. (See Departmental Practice number40 for detailed schedule of rate).


27

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

1.6.3 Scrapping Allowance - paragraph 4

Scrapping allowances are the equivalent of losses on disposal of fixedassets used for trade. It arises when a scrapped asset is disposed of forproceeds which are less than the income tax value.

In order for scrapping allowance to be allowable, a decision to scrap musthave been made. A decision to scrap is to intimate that an asset is no longeruseful for business use.

When business organisations windup operations, scrapping allowances willbe allowed to the extent that it does not exceed the recoupment arising fromthe 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 theconstruction of a commercial building in a Growth PointArea.

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

(a) new commercial or industrial buildings, or staffhousing 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 PointArea.

1.6.6 Recoupments

Training Investment and Growth Point Investment Allowances are notsubject to recoupment.

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

(i) Proceeds or original cost whichever lower less income taxvalue of asset sold.

(ii) Deemed proceeds or deemed original cost whichever lowerless the income tax value.


28

The above formulae ensure that recoupments are restricted to allowancespreviously granted.

The restriction of amount recouped applies to all traders and businessesexcept mining concerns. The amount to be recouped is arrived at asfollows:-

(iii) Proceeds = recoupment, where asset cost wasnever restricted

(iv) Deemed Proceeds = recoupment, where asset cost wasoriginally restricted.

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

1.7 PROHIBITED DEDUCTIONS

Section 16 of the Act outlines cases in which no deduction is allowable for taxpurposes. 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 statutorydeemed cost,

- expenditures incurred in the production of non taxable income.


29

2. TAXATION OF INDIVIDUALS AND PARTNERSHIPS

Members of a partnership are taxable in their individual capacities on their share ofprofit as determined on the accounting date. In terms of section 37(15) of the IncomeTax Act, partners are required to submit a joint return with supporting accounts eachyear. For the establishment of the individual share of taxable income from partnershipbusiness operation, the accounts submitted will first be assessed as if they represented alegal persona. The taxable income established therefrom is then shared in the profitsharing ratio per the Partnership Deed.

Some important points to note when establishing taxable income of a partnershipbusiness are as follows :-

- expenses paid on behalf of partners by partnership are allowable to partnershipbut should be included in the computation of the individual partner’s taxableincome. 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 liveswith the partnership as beneficiary, are not allowable deductions and are notadded to partners’ individual computation. (By disallowing their deduction inpartnership partners are already being taxed).

- partnership profits accrue on the accounting date, or desolation date ofpartnership, on admission of new members, or resignation of new members ;or on the death of a partner. Where the partnership business is continuing aftera change in membership, the Commissioner does not normally requireaccounts to be drawn up. He will accept whatever method used to determineprofit share of the outgoing member. The partnership would then be expectedto draw up accounts at the usual time.

The actual taxation of an individual is simply to apply the rates of tax to the taxableincome established, after which the credits applicable to the individual are calculatedand subtracted. An AIDS levy of 3% of the remaining tax after credits is added, afterwhich 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.


30

EXAMPLE

David and Samuel practise as veterinary surgeons in Chinhoyi. Samuel joined thepractice when he qualified in July 2006. David has practised here for seven years. Theysubmit the following profit and loss account in support of income returns for the tax yearended 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 000David 10 000 26 000 Debenture interest 29 000

Medical aid contributions: Dividends Delta Corp Ltd 10 000David 5 200Samuel 3 200Staff 11 000 19 400

Staff salaries 680 000Annuity to widow of

deceased employee 21 000Interest on capital : David 48 000

Samuel 44 000Bad debts 97 000Trade subscriptions 1 000Legal expenses : debt collection 6 000Attendance at approved postgraduate course 90 000Depreciation 86 000Net Profit :

David 60% 1 798 560Samuel 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.


31

5. Bad debts are made up as follows :

$

Provisions for doubtful debts calculated at 5% of debtors 43 000Fees unpaid 26 000Loan to former manager now irrecoverable 28 000

______

97 000______

6. Attendance at post graduate course:

$Samuel 30 000David 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 areas follows :

Date OriginalDescription of Asset Acquired Cost

$______________________ _________ __________

Office Furniture and Equipment Jan 2004 15 000Surgery Equipment Jan 2009 70 000Truck (single cab) Jun 2007 70 000

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

(c) A sterilizer (cost $400 purchased in January 2009) was scrapped during theyear 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 retirementannuity funds.

10. Samuel travels extensively for the practice and provides his own transport. Herented a car for $9 000 a month for six (6) months from 1 January 2010 and on 1July 2010 purchased a car for $250 000. His running expenses for six months to31 December 2010 were $100 000. It has been established that his non-businesstravel has at all times been 10% of the total.


32

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

$

Dividends from companies registered in Zimbabwe 40 000Interest on tax reserve certificates fully utilised in payment on tax 2 400Rents from UK property 72 000

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

REQUIRED :

Calculate the tax payable for David and Samuel respectively.


33

SUGGESTED SOLUTION

Partnership David and Samuel

$Profit per accounts 2 997 600

Add : depreciation 86 000bad debts : general provision 43 000

: loan 28 000annuity excess 1 000joint life insurance 38 000recoupment 39 800 235 800

Less : bad debt recovered 6 000POSB interest 75 000Class C PUPS dividend 39 000Delta dividend 10 000PUPS dividend 12 000SIA 7 500Wear and tear 17 400 (166 900)

______ ________

3 066 500

David 60% 1 839 900Samuel 40% 1 226 600

________

3 066 500_________

Capital AllowancesCost Wear

ITV Add and (Scrap) ITVAsset Cost 31/12/09 (Disp) tear SIA Recoup 31/12/10

$ $ $ $ $ $ $______ ____ _______ _______ _______ _____ ______ _______

Office Furniture& Equipment2004 additions 15 000 NIL - - - - NIL

SurgeryEquipment2009 additions 70 000 35 000 (400) 17 400 (1) - (200) (1) 17 4002010 additions 10 000 - 2 500 - 2 500

MotorVehicles2007 additions 70 000 NIL - - - 40 000 (2) NIL2009 additions 500 000 5 000 (3) 5 000

_____________________________________________________________________

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


34

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

Proceeds nil

Scrapping allowance (200)

Equipment: Wear & Tear Calc:2009 additions 70 000Less : scrapped (400)

______

Cost of assets on hand 69 600______

Therefore acceleratedwear and tear @ 25% 17 400

______

2. Truck trade-inITV -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.


35

Individual Computations

David Samuel60% 40%

Share of taxable income 1 839 900 1 226 600

Add : life assurance policies 16 000 10 000medical aid society contribution 5 200 3 200interest on capital 48 000 44 000

________ ________

1 909 100 1 283 800

Less : interest on capital account 12 000RAF contribution limited to $3 600 3 600 3 600car rental 90% of $54 000 48 600SIA on $250 000 restricted to

$10 000 at 50% 5 000Running costs 90% of $100 000 90 000

________ ________

Taxable Income 1 815 500 1 214 600________ ________

Tax thereon at 25% 453 875 303 650_______

Less : CreditsDisabled child (900)Medical shortfall 50% x 6 000 (3 000)

_______ _______

Tax Chargeable 453 875 299 750Add 3% Aids Levy 13 616 8 993

_______ _______Tax Payable 467 491 308 743

_______ _______


36

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 thesame. Farmers have some extra deductions outlined in the 7th scheduleand the valuation of a farmer’s stock is also peculiar with regard tolivestock valuations. This valuation is by reference to fixed standardvalues as outlined in the second schedule. A farmer should normallycome up with his standard values which must then be approved by theCommissioner. Once approved, they must be used consistently forsubsequent years. Crops are valued at what the Commissioner considersfair and reasonable.


37

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 interms of the Natural Resources Act.

(f) New Fencing

Para 3 : Deals with the determination of taxable income/assessed lossfrom growing timer.

Para 4 : Re orchards and vineyards

Para 5 : Assessment of income when drought conditions force a farmerto sell livestock.

In this situation the taxable income emanating therefrom canbe taxable over three years if the taxpayer so elects. Thisincome is taxable at a special rate, which is the marginal rate.

The taxable income from drought sales is determined asfollows :-

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 farmnecessitates sale of livestock.

In this situation income emanating therefrom can be taxableover three years if the taxpayer so elects.


38

Para 6 : Restocking Allowance :

The restocking allowance is calculated as 50% of the cost oflivestock purchased to bring up the stock holding to theassessed carrying capacity of the farm.

3.2 Important Departmental Practices (DP)

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

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

No. 22 : Farm improvements exclude expenditures incurred under paragraph 2 ofthe 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 wearand tear can be claimed.

No. 24 : Sale of building by farm owner to company while retaining ownershipof 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 reapedproduce - value at estate valuation or market value, in any case use thesame value established in the hands of donor for tax purposes.

Departmental Practices make some interest reading and I would encourageevery student to refer to them as a matter of necessity.


39

EXAMPLE

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

$Land 970 000Fencing 101 000Farm 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 on01/06/2003)

Plant and equipment 205 000________

1 810 000________

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

$

Erection of fencing 600 000Sinking of boreholes 240 000Purchase of 2 new tractors on 31st October 4 800 000Purchase of 2 cattle transportation lorries on31st December 2 400 000Addition to farm dwelling 200 000

REQUIRED :

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


40

SUGGESTED SOLUTION

Longhorn Ranches (Pvt) Ltd

Para 2 Ranking Total7th Schedule Wear & tear SIA Allowance

$ $ $ $__________ _____________________ ________

Maximum deductions allowed :

FencingPurchased -Erected 600 000 600 000

Staff HousingFarm dwellingStaff 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________


41

4. TAXATION OF MINERS

4.1 The computation of taxable income for miners is basically the same as any otherclass of taxpayer. The determination of allowances on capital expenditure forminers 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 thetax year on surveys, boreholes, trenches, pits and other prospecting andexploratory works undertaken for the purpose of acquiring rights to minerals inZimbabwe.

A binding election is available to claim such expenditure from current incomefrom any source or carry forward the expenditure to be allowed against incomefrom 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, shaftsinking (including sumps, pump chambers, stations and ore bins accessoryto a shaft) ; expenditure incurred prior to commencement of trade onpreliminary surveys, boreholes, development, general administration andmanagement, interest on loans ; and, after 1/04/88 : includes expenditure onmine schools, nursing homes and clinics.

4.4.1 Methods of calculating capital redemption allowances :-

The redemption allowance can be calculated using either of three methodscommonly referred to as :-

Life of mine

Mixed method

New mine method


42

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 tothe balance of unredeemed capital expenditure brought forward at thecommencement of the current year of assessment. The total capitalexpenditure is then divided by the approved estimate life of the mine(in years), counting from the beginning of the current year ofassessment.

Companies not owning mines and other individuals

The capital redemption allowance will be based on Commissioner’sassessment of what is fair and reasonable. Any person who is theowner of a mine can use the life of the mine basis if she can submitthe estimate of the life of mine. In other cases the redemption isbased on the shorter of tribute period or life of mine.

With regard to individuals leasing mines, the Commissioner mayallow accumulated expenditure (shaft sinking and development) inthe first year of production. Thereafter the allowance is spread overremaining period and wear and tear allowed at 20%.

Mixed Method (paragraph 4(2))

Under this method this method the taxpayer can make an election toclaim a portion of unredeemed capital expenditure brought forwardat the beginning of the year, by applying the life of the mine methodto it. In addition to that portion, the whole of the capital expenditureincurred 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 anew mine as defined. The election of this method allows thetaxpayer to deduct all capital expenditure brought forward andcurrent in the first year of production. Thereafter, capital expenditureis allowed in the year in which it is incurred.

A new mine is defined as an undertaking which commenced regularproduction on or after 1/04/1968, or recommencement of a minewhich has changed ownership and has been reorganised withsubstantially new development and new plant.

4.5 Ring – Fencing

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


43

b) With effect from the year of assessment beginning on 1 January 2001deductions allowed per section 15 can only be claimed in respect of incometo which they relate.

c) Capital allowances can only be claimed in respect of expenditure or lossesattributable to a particular mining location and shall not be claimed inrespect of any other mining location.

d) Assessed Losses – No assessed loss carried forward will be allowed as adeduction unless a breakdown showing the extent to which such loss isattributable to each location must be submitted to the commissioner forapproval. An assessed loss from mining operations can not be offsetagainst other income.

4.6 Expenditure

The restrictions refer to :

i) A local branch of a foreign companyii) A local subsidiary of a foreign company

a) In the case of pre-production (etc.) expenditure: 0.75% of the company’stotal section 15 deductions for the year, after reducing the latter by :

i) admin and management expenditure paid outside Zimbabwe andii) CRA

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

c) The deductibility of interest payable by a mining company is limited if thedebt 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 nonproducingand non-contiguous mines against the income of the current producing mine. Thisparagraph has been repealed with effect from 1 January 2001.The election to claim capital expenditure of a non-contiguous non-producing mineagainst income of a producing mine has been removed. That is capitalexpenditure from a non-contiguous mine that is not yet in production must becarried forward until the mine is producing.

Paragraph 6 provides for an election to claim expenditure on any one renewal ofbuildings, works or equipment where cost does not exceed $10 000.

Paragraph 8: Provides that where there is a change of ownership of a mine, aschedule of allocation of the sale price to the assets is required. The section also


44

provides for postponement of taxation of recoupments if transfer is within groupcompanies/reconstructions; or between spouses. In these cases the assets aretransferred 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 bespread over four years for taxation purposes if taxpayer makes the election.


45

EXAMPLE

Rare Stone (Pvt) Ltd is a nickel mining company, which has been working some claimsin the Bindura area of Zimbabwe. The mine is controlled by three shareholders. Theunredeemed 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 thefollowing activities:-

$ $

Gross sales revenue of nickel 3 500 000

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

During the year the company undertook some further exploration and registered six newclaims at an average cost of $4 000 each. The company commenced working one of theclaims 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 themining sector the company began to speculate in claims and by the end of the year theyhad 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. Thisequipment 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 theyear (assume that for 2009 the cost of the clinic and nursing home were allowed infull)

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


46

SUGGESTED SOLUTION

Rare Stone (Pvt) LtdComputation of taxable income for the year ended 31st December 2009

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

Capital redemption allowance(mixed method)Unredeemed capex brought forward 350 000Less : 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 000New mining equipment 500 000Building renovations 200 000Mercedes for MD 10 000Mine clinic 600 000Nurse’s house 120 000

_______(1 530 000)

Non-contiguous mine -Sale of mining claims ** 260 000Cost 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


47

5. CAPITAL GAINS TAX

Capital Gains Tax

Authority for the levying and collection of capital gains tax is in terms of section 6 of theCapital Gains Tax Act(Chapter 23:01).

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

Capital gains arising from the sale of a principal private residence by an individualwho 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 upto $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 February2009 is subject to capital gains tax at 5% of the gross capital proceeds.

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

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

“Marketable security” is a defined term, which includes shares in privatecompanies. To be taxable, the proceeds must be from a source within Zimbabwe.

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

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

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


48

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 ispayable. 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 toexchange rates, effect shall be given to the amount actually received inZimbabwe dollars.

(b) Disposal other than by way of sale, Commissioner deems specified asset tohave 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.


49

Exemptions from capital gains tax (section 10)

(a) Disposals by bodies mentioned in paragraph 1,2 and 3 of 3rd schedule toincome tax act, except disposals by those bodies mentioned in paragraph2(a), (c) and (f) of 3rd schedule :- namely

(a) agricultural, mining and commercial institutions or societies notoperating for the private pecuniary profit or gain of the members

(b) building societies

(f) employees’ savings schemes or funds approved by theCommissioner.

(b) Realisation/distribution by executor of specified assets forming part of adeceased 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 areowned 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 anotherpetroleum operator, provided buyer would use property for petroleumpurposes.

(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 aninsurance company (recoupment by a insurance company in ademutualisation)

(j)

(k) Amounts received by or accruing to an employee from the sale or disposalof his shares or interest in an approved employee share ownership trustwhere such sale or disposal is to the trust.

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


50

(m) Amounts received by or accruing to a person who is of or over the age offifty-five years on the sale of any marketable security, other than amarketable security referred to in paragraph in respect of the $1 800received 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 ratevariation, 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 allowableas deductions for income tax purposes.

NB :- Asset acquired by inheritance - taxpayer deemed to have incurred cost equal toestate 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 ofacquisition, if acquired after 1st August 1981, cost is the gross capital amount asestablished in the hands of person from whom acquired.

Section 11(2)(b) :

Expenditure on additions, alterations or improvement of specified asset, excludingdeductions allowable for income tax purposes.

NB : In the case of capital amount arising from the sale of shares in a company whichowns immovable property, any expenditure incurred by seller on additions oralteration to the property shall be deemed to be expenditure incurred on additionto shares.

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

1) Amounts referred to in section 11(2)(a) other than amount relatingto 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 isallowable for income tax purposes, by way of allowance in terms ofthe 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, todate of sale.


51

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 theparagraph is merely academic) or less, an amount equal to such amount shall be allowedas a deduction.

Section 11(3) :

Taxpayers shall be allowed to deduct any assessed capital loss brought forward ; but notthose declared insolvent or had their property or estate assigned for the benefit ofcreditors.

A company registered under the Companies Act, which converts into a private businesscorporation 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 termsof section 8(1)(e) of the income tax act, shall be deemed to have incurred a cost equal tosuch 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.


52

Section 13 : Damage or destruction of specified asset

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

Section 14 : Determination of fair market price

The Commissioner has power to vary selling price or purchase price if he is ofthe 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 thecourse of group reconstructions, mergers and other similar business operations.

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

Election available (notwithstanding the terms of the sale) to transfer specified asset atthe amount equal to the deductions established in the hands of the seller. If asseteventually sold to someone outside the group then recoupment calculated as it theoriginal 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 electionas 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 beadded back the following year, when a fresh calculation is then made, if applicable.

Formulae : A*(B-C)_______

D

where : A = Portion of proceeds not yet due

(B-C) = Capital Gain accrued on sale

D = Total proceeds on sale


53

Section 21 : Provision for sales of principal private residence

Where a taxpayer sells a principal private residence and uses the total proceeds toacquire a new principal private residence, then capital gains tax shall not be chargeableon such sale. If the amount used is less than the actual proceeds then the capital gainwhich relates to the portion not used shall be subject to capital gains tax. When the newPPR is sold, the capital gain not subjected to tax previously shall be deducted from theamount 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 propertysatisfies the Commissioner that the entire proceeds will be utilised to construct orpurchase another business property within two tax years, capital gains tax shall not bechargeable ; provided that such capital gain will reduce the cost of the new propertywhen 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 andlastly the seller. In certain circumstances, taxpayers may apply for capital gainswithholding tax clearance certificates in order to eliminate their liability. What thisamounts to is the submission of the Capital Gains Tax liability together with theapplication form for the capital gains withholding tax clearance certificates.


54

6. TAX PLANNING

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

Planning implies arranging of one’s affairs well in advance. Taxpayers often approachtheir tax advisors after things have already gone wrong, for example when a taxinvestigator has knocked on the door. In such cases accountants, lawyers and taxconsultants can not do much planning but can attempt to minimise damage.Establishment of tax liabilities is normally based on facts, referenced to legislationexisting at the time. Tax consultants cannot change facts retrospectively and theCommissioner 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 provisionsof section 98 of Income Tax Act, which deal with tax avoidance. Tax avoidance is thearrangement of one’s affairs in a legal manner which results in minimisation of taxliabilities. Tax evasion on the other hand embraces all those activities that areundertaken by taxpayers to free themselves from paying tax, without regard for the law.Examples include falsification of records, misrepresentation, failure to submit returnswithout good reason and so on. Section 81 of 87 of the Income Tax Act outline types ofoffences and remedies the Commissioner can employ to counter such activities. Pleaserefer to those sections. The basic remedy provided by the statutes is the imposition of apenalty of 100% of the tax evaded. In many cases this can be profound and taxpayersneed 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, …. toarrange his legal relations to his business…. or property, as to enable the InlandRevenue to put the largest possible shovel into his stores. The Inland Revenue isnot slow – and quite rightly – to take every advantage which is open to it underthe taxing statutes for the purpose of depleting the taxpayer’s pocket. And, thetaxpayer is, in like manner, entitled to be astute to prevent, as far as he honestlycan, the depletion of his means by the Revenue ….”, so said Lord Clyde in theEnglish case Ayreshire Pullman Motor Services and D M Ritchie v IRC.

Lord Tomlin in Duke of Westminster v Inland Revenue Commissioners said thefollowing :-

“Every man is entitled if he can to order his affairs so that the tax attaching underthe appropriate Acts is less than it would otherwise be. If he succeeds in orderingthem so as to secure this result, then, however unappreciative the Commissionersof Inland Revenues or his fellow taxpayers may be of his ingenuity, he cannot becompelled to pay an increased tax.”

The above quotations make it clear that avoidance is the legal way of minimising one’stax burdens while evasion is illegal. The Acts give the Commissioner authority to undoany transaction if he is of the opinion that the transaction is abnormal and the purposewas to avoid paying tax. He can for instance invoke what he deems to be the fair marketprice 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 somequestions on next page).


55

Some scenarios requiring tax planning powers

(1) The managing director of a large company comes to you and asks whether it is advisableto form a consultancy company for purposes of limiting his personal tax. He earns wellin excess of $15 000 per year, and he says that a friend he met at the golf course advisedhim that he should form a consultancy company to which his salary would be paidwithout 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. Hewants to know whether he can invoke the roll over provisions with regard to capitalgains tax, if the company sold the house and constructed another one in a more affluentsuburb.

REQUIRED: Advise the taxpayer.

(3) An independent contractor whose income is on the rise would like to know his positionwith 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 capitalallowances. He has now formed a company in which the shareholding is spread equallybetween himself, his wife and his two children. The market value of the building isseveral million although it had originally cost about $50 000 to construct, ten yearspreviously.

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

(5) Mrs D is a widow who has been operating a furniture shop on a cash basis in Harare formany years. Due to the increases in supplier prices she has now decided to start sellingthe furniture on credit terms extending over two to three years. She has now made salesamounting 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 toknow whether or not there is tax relief available since she will only receive the bulk ofher income in future tax years.

REQUIRED: Advise

(6) The managing director of the local branch of an international group of companiesadvises 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 hadreceived a phone call from the Investigations unit of the ZIMRA for an appointment todiscuss the company’s tax affairs. He tells you that the contact with the overseas headoffice has over the years been on a visit to the country twice a year by the GroupFinance Director. The visits are normally of a week’s duration. The managing directoris 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 dealwith the situation.


56

TAX PLANNING SCENARIOS : SUGGESTED APPROACH

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

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

10% of (estimated) tax – 10 February25% of (estimated) tax – 25 June30% of (estimated) tax - 25 September35% of (estimated) tax – 20 December

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

(iii) Business expenses are claimable provided they pass the test as laid out in section15(2)(a), the general deduction formula.

As an employee (which includes a director) salaries, including benefits, are subject toP.A.Y.E, which is normally deducted every month. The calculation of P.A.Y.E is basedon the tax rates applicable to individuals according to the various bands.

Although the tax situation of the consultancy company / independent contractor may beadvantageous, 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 beinvoked by the Commissioner where it is evident that the only reason for making thechoice is solely and mainly because there is a lower tax regime pertaining, and that, inreality, an employer/employee relationship still exists. Penalties, and interest, maytherefore arise.

In order to avoid the invocation of s98, a written contract should be concluded betweenthe company / independent contractor and the “customer” (your previous employer).This contract must be normal, and be in line with prevailing practice, and should steerclear 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 thefollowing scenarios :

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

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

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


57

(3) An independent contractor is not an “employee”, as defined, for the purposes of the13th schedule which deals with Employee’s tax (PAYE). He is therefore not liable forPAYE, but is obliged to pay tax, based on his estimated annual taxable income, on thequarterly payment dates (see 1 above).

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

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

In addition, this section can only be invoked where the individual used the property forthe purposes of his trade, and where the company will continue to use it for the purposesof 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 thecase of instalment-credit sales (where transfer of ownership is immediate but payment isby instalments), the whole of the amount payable is deemed to have accrued to thevendor at the date on which the agreement was entered into. To prevent hardship to thevendor, however, an allowance, in respect of payments not yet received, may bededucted, in addition to the normal deduction for bad and doubtful debts.

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

(6) When dealing with investigating tax officials, always provide them with the informationand 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 expenditureresulting from bad business administration is deductible, the CommissionerGenereal is entitled to disallow excessive expenditure on the ground that it is notproperly classifiable as expenditure incurred for the purposes of trade or in theproduction of income, commonly because it is based on some non-business, oreven ulterior, motive.

(ii) Non residents’ tax on fees (NRTF) : this must be withheld from all fees paid tonon-residents. Therefore withholding tax on the management fees payable to thehead office should have been withheld, and paid over to the CommissionerGeneral within 15 days of payment of the fees. The rate of withholding taxamount is subject to any double taxation agreement with the country of residenceof the recipient of the fees, in this case, of the head office.

Documents

ZIM Taxation 2010