ADVANCED_ZIMBABWE_TAX_MODULE_2011[1].pdf

2011

ICAZ ZCTA ADVANCED ZIMBABWE TAX TAXATION MODULE 2011

TAXATION COURSE - OUTLINE TOPIC 1

Introduction

2

Syllabus

3

Legislation Legislati on cut off for exam

4

Recent Amendments

5

Administrative Administr ative and legal framework -

Administration of Taxes in Zimbabwe Gross Income Capital and Revenue Accruals and Outlays Special Inclusions Exemptions General Deduction Formula Suspensive sales and credit sales Capital Allowances and Recoupments: • •

•

Special Initial Wear and Tear Scrapping


1.

INTRODUCTION The Advanced Taxation module has been prepared to meet the requirements of the UNISA B Compt Honours Honours degree. The study pack contains summaries of the relevant tax legislation and practical tax questions. The professional accountant is normally expected to understand taxation legislation, to interpret it, and to be able to give professional professional advice in the business business world. The taxation questions in the examination require candidates to demonstrate awareness of current taxation practices as well as ability to derive important facts and figures from given sets data. data. The taxation syllabus syllabus is fairly wide, wide, and candidates candidates must be well prepared, as an approach based on spotting can be an expensive exercise in self-deception. It is possible to score high marks in in tax examination examination questions. In order to score these high marks, one needs to demonstrate their tax knowledge, appropriate interpretation, application and production of well crafted solutions presented in a professionally professionally acceptable format. Examination technique, approach, clarity of expression and readable presentations are important aspects, which should not be ignored. Best wishes, and may you succeed in your endeavours.


Candidates should have: •

•

Knowledge and understanding of court interpretations interpret ations of significant significan t cases;

•

Knowledge and understanding understanding of administrative administrative interpretations;

•

Awareness of sectorial taxation provisions;

•

Awareness of taxation exceptions exceptions and exemptions

•

3

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

Ability to perform tax calculations, to determine associated liabilities from given information, and should develop the ability to contribute meaningfully meaningfully to clients’ and employers’ tax plans and financial affairs.

LEGISLATION CUT OFF FOR EXAM PURPOSES


TAX LEGISLATION YEAR ENDED 31ST DECEMBER 2010 The Tax questions in the 2011 Examination will be based on legislation relating to the year of assessment ended 31 st December December 2010. 2010. The following following tax rates apply:RATES OF TAX: EMPLOYMENT INCOME ANNUAL P.A.Y.E TABLE (US$) 1 JA JANU NUA ARY 20 2010 10 – 31 AUG UGUS UST T 20 2010 10 (U (USD SD)) Band of Taxable Amount Tax Amoun Cumulative Income within Rat t of Tax Band e Tax US$ US$ US$ % US$ 1 – 1 1 280 Nil Nil Nil 280 1 281 – 4 2 720 20 544 544 000


ANNUAL P.A.Y.E TABLE (US$) 1ST SEPTEMBER 2010 – 31ST DECEMBER 2010 (USD) Band of Taxable Amount Tax Tax Cumulative Income within Rat Tax Band e US$ US$ US$ US$ % 1 – 700 700 Nil Nil Nil 701 – 2 000 1 300 20 260 260


With effect from 1 November November 2009, a bonus tax free threshold threshold of US$400 per annum will be applicable. The tax free threshold is further increased to US$500 per annum with effect from 1 November 2010. RETRENCHMENT PACKAGES With effect from 1st January 2010, the tax-free portion of a retrenchment package is pegged pegged at the greater of US$5,000 US$5,000 or one third of of the retrenchment package provided it does not exceed US$15,000. PENSION CONTRIBUTIONS With effect from 1st January 2010, the monthly maximum amount allowable for employer and employee pension fund contributions is US$450 per month. TAX RATES The age for eligibility for the elderly persons’ credit is reduced from 59 years to 55 years with effect from 1 January 2010.


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

14(3)

Taxable income of manufacturing company which exports 50% or more of its output …………………………………………….

20

20

The rate of income tax that generally applies to companies is 25% of taxable income and an AIDS levy of 3% of tax payable, giving an effective rate of 25.75%. MOTOR VEHICLE BENEFITS With effect from 1st January 2010, the deemed motoring motoring benefit is revised as follows:Engine Capacity

2010 US$

1 500cc or less 1 501cc to 2 000cc

150 per month 200 per month


SIA will be limited to 50% of the cost of fiscalised electronic registers, the other 50% is allowed as VAT input. input. The 14 th Schedule, capital allowances in growth point areas is repealed with effect from 1 September 2010. CONTRIBUTIONS TO SCIENTIFIC AND EDUCATIONAL SOCIETY With effect from 1 January 2010, the double deduction on contributions to a scientific and educational society or institution is removed and only the actual amount contributed is allowed. PROVISIONS FOR DOUBTFUL DEBTS With effect effect from 1 January January 2010, the provision for the deduction debts is repealed. The allowance for actual bad debts incurred is still claimable.

of doubtful doubtful

4.3 MINING TAXATION REFORM TAX RATE With effect from 1 January 2010 the rate of tax on mining companies is


With effect from 1 January 2010, R.S.T. is payable by the 10 th day of the month following date of distribution. distribution. NON-RESIDENT SHAREHOLDERS’ TAX [N.R.S.T.] The rates of non-resident shareholders’ tax on dividends paid by Zimbabwean resident companies non resident shareholders are reduced as follows with effect from 1 January 2010:Payable by companies companies listed listed on the Zimbabwe Zimbabwe Stock Stock Exchange, Exchange, from 15% to 10% Payable by non listed entities, from 20% 20% to 15%. •

•

With effect from 1 January 2010, N.S.R.T. is payable by 10 th day of the month following date of distribution. distribution. RESIDENTS’ TAX ON INTEREST (R.T.I.) With effect from 1 January 2010, residents’ tax on Interest has been reduced from 20% to 15%. With effect from 1 January 2010, RTI is payable by the 10 th day of the month


WITHHOLDING TAX ON TENDERS With effect from 1 January 2010 withholding tax on contracts shall be payable by the tenth day of the month following that in which the payment was made. NON RESIDENTS TAX ON REMITTANCES With effect from 1st September 2010, the rate is 15%. PRESUMPTIVE TAXES With effect from 1 st January 2010 the following revised presumptive taxes will apply on commuter omnibuses per each vehicle, per quarter: Number of passengers 15-24 25-36 37 and above

Current fees US$ 200 400 650

Proposed fees US$ 175 300 450



Revenue Head

Current Payment Date

Vat

5th day of the following month.

Presumptive tax Small Scale Miners

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

10th day of the following month

Withholding Amounts Contracts

On or before the last day of the month following that in which payment was made. 20th day of the following month.

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

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

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

under

Excise Duty on Second Hand Motor Vehicles Non-Resident Shareholders’ Tax

Proposed Payment Date 10th day of the following month


Residents’ tax on interest Tobacco Levy

Automated Financial Transactions Tax

Informal Traders’ Presumptive tax

On or before the 15 th day of the month followin f ollowing g the month in which the payment was made. Within 30 days of the date of distribution or within such further time as the Commissioner General may for good cause allow. Not later than the 15 th day of the month followin f ollowing g the month in which the transaction in respect of which the tax is payable was effected. Within 30 days of the date on which he recovers it or within such further time as the Commissioner Commissioner General may for good cause allow.

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

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


Where there is a surviving spouse or minor child the value of a family home as defined is not subject to estate duty. Transfer duty is not chargeable where a property is transferred to a beneficiary beneficiary who is a spouse or blood-relative or adopted child of the deceased or to a trustee. Donations may be exempt if they were made 5 years or more prior to death. Payments from policies specifically taken out to pay estate duty are not taxable only to the extent of the duty payable. STAMP DUTY Stamp duty is imposed on bonds, broker’s notes, cheques, policies of insurance and registration in a Deeds Registry on the acquisition of immovable property. CUSTOMS DUTY Customs duty is levied on all goods imported. imported. The effective rates of duty duty range from 0% to 100%.Import tax is levied on most goods at the VAT standard rate of 15%. In general, Zimbabwe imposes restrictions on the


6.

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

7.1

Minimum amounts of tax not collectable collectab le by Commissioner

0.50

7.2

Minimum amounts of PAYE not refundable

0.50

8

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

10.

11. 12.

10 000

1 800

Valuation of farm trading stock (livestock):fixed standard values of livestock and stud livestock Restricted capital expenditure on permanent building used as: dwelling dwelling of staff employed at a school, hospital, nursing home or clinic in connection with mining operations Capital expenditure on school, hospitals, nursing homes clinics: Restriction Restricti on on staff housing

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

150 10 000

and

Expenditure incurred 10 000

works or

10 000


DEEMED LOAN BENEFITS Description Loan Benefit

of Statutory Interest Rate

Proposed Proposed Statutory Rate Threshold where no interest is Charged (US$)

Loan benefit below ZW$35 000

12.5%

$100

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

Loan benefit above ZW$35 000

16%

$100

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


5.

ADMINISTRATIVE ADMINISTRATIV E AND LEGAL FRAMEWORK 5.1

ADMINISTRATIVE FRAMEWORK (All references to sections and schedules in this section are in relation to the Income Tax Act [Chapter 23:06]). 5.1.1 Administration The administration of all taxation (Value Added Tax, Capital Gains Tax, Income Tax, e.t.c) now fall under the responsibility of the National Revenue Authority of Zimbabwe (ZIMRA), which Authority came into being with effect from 19 January 2001. The Commissioner-General of Taxes is vested with the power and responsibility of administering the tax statutes. He does this through regional offices and ports established across the country. 5.1.2 Returns and Assessments Every year, three to four months after the end of a tax year the Commissioner Commissioner publishes a notice in the t he most commonly read press inviting taxpayers to obtain tax returns from their nearest tax office; truthfully complete them and return them to the respective offices for assessment.


default. These penalties penalties are 100% 100% of of the basic tax chargeable. chargeable. Section 46 outlines some grounds for penalties. It is a legal requirement for Pay P ay As You Earn (P.A.Y.E.) to be deducted from all emoluments payable payable to employees on a monthly monthly basis. The P.A.Y.E. withheld has to be remitted to the Commissioner within 15 days from the end of the month to which such P.A.Y.E. refers. The penalty for late payment of PAYE is 100% of the tax payable, and interest is also charged on late payment at a rate prescribed by statutory instrument. (See sections 73 and 74 as read together with schedule 13.) Taxpayers who are not employees, but are in receipt of other income, (e.g. sole traders, consultants and companies), are required to be on Quarterly Payment Dates (Section 72). Under this scheme scheme the taxpayers taxpayers pay their their estimated tax liabilities, for the current tax year in which they are trading, in four instalments on dates allocated throughout the year, as follows: 25 March 25 June 25 September 20 December

10% of tax payable 20% of tax payable 25% of tax payable 35% of tax payable

5.1.3 Representative Taxpayers


5.2 LEGAL FRAMEWORK 5.2.1 Overview In terms of section 6 of the Income Tax Act (Cap 23:06) there shall be charged, levied and collected income tax calculated on taxable income for the benefit of the t he 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 assessment - the appropriate appropriate rates of tax per the charging charging act act for the year ; and and - the credits* credits* to which which taxpayer taxpayer is entitled to per the charging act act for that year. (section 7) * Only taxpayers who are natural persons are entitled to tax credits. The basic model for calculating any taxpayer’s (individuals, trusts and companies) taxable income is as follows :-


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 defines various various terms used used in the Act. Students should be familiar with the meanings attached to words such as “amount” and “person”. “Amount” for tax purposes embraces all receipts or accruals, whether deemed or actual as long as they have an ascertainable monetary value . An example of a specific specific inclusion inclusion is motoring motoring benefit benefit [section 8(1)(f)]. Received by or accrued to or in favour of a person : person : An amount is only taxable when it has been received by or accrued to a taxpayer in in any specific specific tax year. The Act does does not define the words received an accrued. Guidance has has to be sought, sought, therefore from legal precedents (court cases).


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

The following quotations quotations are from celebrated tax cases cases on source of income :(a)

Lord Atkin, Atkin, Privy Privy Council, UK UK :- in Rhodesia Rhodesia Metals (in liquidation) liquidation) v COT COT :“…. As a hard matter of fact the t he only proper conclusion appears to be that the company received the sum in question from a source within the territory (Rhodesia), viz the claims they had acquired and developed there for the very purpose of obtaining the particular receipt….” “…. Source means .. not a legal concept but something which the practical man would regard as the real originating cause of the income….”.


The decision was that there was two activities :- curing and marketing. Curing was the dominant activity, hence the source was deemed to be Botswana. However, it appears appears from ITC 1103 (1967) (1967) 29 SATC 35, that it is possible for the source of income to be found partly in one country and partly in another. another. (See Hill textbook textbook for details of this case.) case.) Gains on Stock Market - CIR v Black 1957 (3) SA 536 (A) 21 SATC 244. Important factors identified in this case were the employment of capital and the undertaking undertaking of business. It was ruled that the dominant dominant factor was the carrying on of transactions hence the source was deemed to be London, where shares were bought and sold …., though under instruction from South Africa. Services Rendered - (COT V Shein 1958 14 SATC 12 ) “ …. the source of earnings is the work done in return for those earnings …. It now seems settled law that that generally generally the source of such income is the place where the services for which the salary is paid have been rendered.” Royalties Royalties - Millin v CIR 1928 SATC 170The originating cause of the author’s royalties is the wit and labour exercised in writing the book in


expenditure could be considered considered to be on on revenue account. account. If it is long term (for example restraint of trade), then it is capital. “…. as a general rule …. income was revenue derived from capital productively employed employed …. capital …. might be said to be wealth used for the purpose of producing fresh wealth….”. as per Chief Justice Innes in CIR v George G eorge Forest Timber Co Ltd. Capital can be fixed or floating. Floating capital is consumed consumed and and disappears in the very process of production, for example raw materials. Fixed capital remains relatively relatively intact for a number of years though there is some diminution diminution in value value due to wear wear and tear. Fixed assets used used in a business are examples examples of fixed capital. Stock for sale on the other hand is is floating capital. “ …. its use involved disappearance and the money obtained for it was received as part of the ordinary revenue of the business …. the sale of fixed capital represents a realisation which should not be included in gross income.” Please refer to the Students Guide to Taxation (EY) or Income Tax in Zimbabwe (Hill) for more detailed commentary on capital and revenue


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

5.2.5 Specific Inclusions in Gross Income Although the definition of gross income outlined in section 8(1) is all embracing, paragraphs 8(1)(a) to 8(1)(t) outline various types of amounts which must be included in gross income whether or not they may appear like they are capital in nature. Section 8(1)(a) : Annuities/pension Annuities/pension receipts :Definition : :“…. an annual payment in perpetuity for the life of grantee or for a


NB :NB :- All amounts received after the expiry of the N years are taxable in full. Annuity from gift or legacy This type of annuity is taxable in full, f ull, even if paid out of capital funds.

Annuity from services rendered This annuity is taxable in full except where portions of contributions were disallowed as a deduction for tax purposes - in such cases the taxable portion is determined using the formulae in the purchased annuity section above. Section 8(1)(b) : Income for services rendered - e.g. salaries, commission, cash in lieu etc. The first $5 000 or or up to a maximum maximum of 1/3 of the first $45 000 of a lump lump


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 value ; outside municipal areas value determined as 12,5% of salary or 7% of cost of house. furniture :- annual benefit is 8% of cost of furniture items. passage :- see definition, apportion if dual purpose. any allowance :- taxable in full except portion utilised on employer’s business.


5.2.5.1 Lease premiums Lease Premiums Gross Income : Section 8(1)(d) Deduction : Section 15(2)(d) (in hands of lessor)

(in hands of lessee)


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 commences/ceases or cessation of use for business, apportion as appropriate.

Notes : (a)

For use of knowledge, Commissioner’s Commissioner’s discretion applied for period, period, normally not less than one tenth (1/10).

(b)

On acquisition acquisition of ownership ownership the lessee lessee will cease to qualify qualify for any allowance in the tax year following acquisition. acquisition.

(c)

Any allowances previously claimed which have been applied in reduction of purchase price are recoupments brought into gross income by Section 8(1)(l).


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

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

(iv)

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

(v)

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

(vi)

Cost of leased vehicles to lessor under both operating and financial leases.


5.2.5.2

Lease Improvements

Gross income : Section 8(1)(e)

Deduction : Section 15(2)(e)

Definition


period or 10 years whichever lesser

If the lease is for an initial period and can be renewed, only the initial period of the lease is taken into account. If the period of the lease is indefinite then it is deemed to be 10 years.

Notes : (a)

On acquisition acquisition of ownership ownership the lessee lessee will cease to qualify qualify for any allowance in year of assessment assessment following. following. On cessation of use of property for purposes of trade or production of income, allowance to be given only up to date of cessation - i.e. apportion.


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

Professional Profess ional Suites Ltd (1960) 24 SATC 573 In this case it was ruled that a variation of the building clause entered into after completion of construction of the building would not validate the change of amount used for calculating allowances.

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


____________________ ______________________________ ___________________ ___________________ ____________________ ___________________ _________ _ 2011 tax year : Lease premiums : (50 0000 / 120) * 12 months Rent : 10 0000 * 12 months Lease improvement : (5 200 000 / 120) * 3 months

5 000 120 000 13 000

____________________ ______________________________ ___________________ ___________________ ____________________ ___________________ _________ Notes : Dividing by 120 is simply establishing the monthly allowance over 10 years. $5 200 000 is accepted by the Commissioner for allowance calculation purposes because the variation to building clause was entered into before completion of construction. 5.2.6 Hire purchase and credit sales in general Section 17 and section 18 of the Income Tax Act outline the basis of taxation of


G = represents that proportion proportion of of development and and other charges charges which the Commissioner considers is applicable to such property. See paragraph 5.5 on calculation of allowances 5.2.7 Construction Contracts For income tax purposes income from construction contracts is taxable on the basis of what is due and payable in the tax year, i.e. based on percentage of completion and progress payments due. Amounts received in advance are held in trust and would not be taxable. Please refer to the provisions provisions of section 15(2)(cc).



(i) (ii)

(iii) (iv)

Expenditure and losses does does not refer to net loss as reflected in the Profit & Loss Account of of the taxpayer. Is not limited to cash outlays but would would include losses such as pilferage (theft), breakages, breakages, destruction etc. To the extent to which gives gives room for apportionment. apportionment. Where expenditure expenditure and losses are incurred partly for business and partly for private or partly capital and partly revenue, revenue, apportionment arises. arises. The apportionment apportionment must be fair and reasonable. Incurred means that there there is a legal legal liability liability to pay. Such expenditure expenditure is deductible from income even if payment occurs only at some later date. For the purposes of trade means for the purposes of enabling a person to carry on and earn profits profits in the trade. The ordinarily ordinarily recurrent expenses expenses of business, such as trading licence fees, audit fees, rates, secretarial fees, insurance premiums, business subscriptions and advertising costs will usually pass the test. test. Expenditure for the purposes purposes of trade may be categorised in 2 ways: is money voluntarily and designedly spent by  Designed expenditure is the taxpayer for the purpose of this trade.  Fortuitous expenditure is money involuntarily spent because of some mischance or misfortune, which has overtaken the taxpayer. A deduction is not allowable where the expenditure, which though arising out of the manner in which a taxpayer conducts his trade, falls upon him in his capacity as a law-breaker rather than as a businessman, e.g. traffic fines, customs fines or parking fines.


distinguished from improvements. improvements. The test for improvements improvements is whether whether a new asset has been created resulting in an increase in t he income earning capacity or whether the work undertaken merely represents the cost of restoring the asset to a state in which it will continue to earn income as before. Section 15(2)(g) Bad and Doubtful Debts Bad Debts Debts – A deduction can be claimed in respect respect of debts, debts, which which  are irrecoverable as long as all the following conditions are met: i) The debt must be due and payable to the taxpayer, ii) The debt debt must must be proved, to the satisfaction of the Commissioner, to be irrecoverable as at the end taxpayer’s financial year iii) The debt must have been included in the taxpayer’s income either in the current or any previous year of assessment. Section 15(2) (h) arw 6th Schedule – Pension and Retirement Annuity Fund Contributions If a member joined the fund on or after 1 July 1960 his deduction is restricted to the lesser of $72,000 per annum and 7½% of annual emoluments. For persons who who contribute to a retirement annuity annuity fund the Commissioner’s approach is that not more than the lesser of $72,000 per


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

=

the amount of the taxpayer’s contributions the amount incurred by the other person, which would have been allowed as a deduction in terms of section 15 (2)(m) above is the total amount of the expenditure incurred on experiment and research.

Section 15(2)(o) Scientific Research and Experimental Work – A deduction is also permitted of the sums which are contributed to approved scientific or educational bodies with the condition that they be used for industrial research or scientific experimental work connected with the


administered by the Minister responsible for either Social Welfare or Health. Section 15(2)(r1) Donations Donations – Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment to the State or to a fund approved by the Minister of Health for, f or, any of the t he following operated by the state, local authority or religious organisation: the purchase of medical equipment,  the construction, extension or maintenance of a hospital or  the procurement of hospital drugs (including ARVs)  Section 15(2)(r2) Donations Donations – Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment without any consideration at all to a research institution approved by the Minister responsible for higher or tertiary education. Section 15(2)(r3) Donations Donations – Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment, without any consideration at all, to the State or a fund approved by the Minister responsible for education, for any of the following operated by the state, local authority or religious organisation: the purchase of educational equipment  the construction, extension or maintenance of a school 


an amount equal to what the Commissioner considers as, at the date it was brought to hand or at the t he date it was acquired, the fair and reasonable value of such trading stock of the taxpayer acquired otherwise than in the course of trade. In the case of donated stock the deduction shall not exceed the value available from the person person from whom whom it was acquired. In the case of inheritance the deduction shall not exceed the valuation as shown in Final Liquidation and Distribution Account of the deceased. Section 15(2)(w) Conventions And Trade Missions – The cost of attending a convention or trade mission is allowed as a deduction subject to the following: f ollowing: The deduction deduction is is restricted restricted to US$2,500 of the amount spent in in any  one tax year and must relate to not more than one convention, which in the opinion of the Commissioner was in connection with the trade carried on by the taxpayer or one trade mission, approved by the Minister (not both). If the convention convention or trade mission mission commences commences in one year of  assessment and ends in another the deduction is allowed in the tax year it ends. If the person attending is a member member of a partnership and the 

ICAZ ZCTA ADVANCED ZIMBABWE TAX TAXATION MODULE 2011 

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

Section 15(2)(gg) Export Market Development Expenditure Expenditure – This paragraph provides for a 200% deduction of expenditure incurred by a taxpayer during the year of assessment on any ‘export market development’. Section 15(2)(hh) Tobacco Levy – Levy – The amount of any tobacco levy paid in the year of assessment in terms of Section 36A. Section 15(2)(jj) Approved Employee Share Option Scheme – This section allows for a deduction of the fair value of any stock, shares, debentures, units or other interest paid or given by the client to an employee of the client or for the benefit of an employee of the client or pursuant to an approved employee share ownership scheme or trust. Section 15(2)(kk) Maintenance On Behalf Of Local Government – Expenditure not exceeding US$100 million approved by the Minister responsible for local government on the maintenance of buildings, roads, bridges, water works, sanitation works, public works and any other utility, amenity or item of infrastructure.


Where an agreement provides that: ownership (movable assets) or transfer (immovable assets) shall be suspended or postponed pending fulfilment of certain conditions e.g. payment of the whole amount, the whole price (including finance charges) shall be deemed to have accrued to the vendor (seller) on the day the agreement is concluded and must thus be returned in the year in which the sales took place. The Act recognises, however that this may cause hardship (as not of the sale price will have been received by the year end) and t hus provides for the granting of certain allowances. allowances. Movables Assets (Hire Purchase Agreement etc.) The Commissioner gives an allowance which he thinks is fair and reasonable. The following methods are adopted in practice:  Full purchase price including finance charges must be returned by taxpayer as gross income in the year of accrual. doubtful debts in terms of Section 15(2) g (i) and (ii).  Allow bad and/or doubtful  Section 17 allowance = gross profit % of debtors not due and payable to taxpayer, i.e. not yet receivable, at the end of the Accounting year after allowing 15 (2)(g) forming part of such debtors, that is, deduct only bad and doubtful debts that are applicable to instalments not due and payable.

ICAZ ZCTA ADVANCED ZIMBABWE TAX TAXATION MODULE 2011  Allow

 

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

Gross HP sales xxxxxx Less: Cost of sales Gross profit Less: Section 17 allowances: allowances: Instalments not yet receivable Less: Bad debts forming part thereof xxxx Doubtful thereof xxxxxx

xxxxxx xxxxxx xxxxxx xxxx

xxxxxx Xxxxxx @ GP%

Taxable income

xxxxxx xxxxxx

Note: When gross profit percentage is determined in the trading account, the cost of sales will have have been allowed. allowed. Thus by allowing allowing for the profit profit relating to, instalment instalment not receivable receivable by the t he year end, the instalments receivable receivable is taxed. a) The allowance allowance granted in one year year must be included in the taxpayer’s taxpayer’s income in


Example 2 Suppose the outstanding debtors of $400,000 included doubtful debts of $20,000 which is for specific debtors what effect would this have on your taxable income. Solution: Gross H/P Sales during the year 600,000 Cost of sales . . . Gross profit % = Gross profit x 100 Gross Sales

450,000 150,000 150,000 x 100 600,000 = 25%

. . . Section 17 allowance [($400,000 [($400,0 00 – 20,000) x 25% Doubtful debts Taxable income

95,000 20,000 115,000


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

(a)

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

(b)

When the full selling stage is reached, any further development development or administration costs of the type referred to in paragraph (a) will not be


5.6

CAPITAL ALLOWANCES - SECTION 15(2)(C) AS READ TOGETHER WITH THE 3RD SCHEDULE The 4th schedule outlines allowable deductions with regard to capital expenditure incurred for the purposes purposes of trade in the relevant relevant tax year. The allowances allowances covered by the schedule are as follows:• •

• •

Special initial Wear and tear Scrapping Training Investment

Paragraph 1 of the 4 th schedule outlines the definitions of assets on which capital allowances allowances can be granted. It is essential essential to be familiar familiar with these definitions in order to correctly determine the asset’s classification for tax


(i)

Paragraph 15 (1)(b) (14) -

US$10,000 limit for school clinic or nursing home

(ii) Paragraph 15(2)

-

No limit on school, clinic etc. used in connection with taxpayer’s farming operations but

(iii) Paragraph 15(3)

-

Total cost of building used for housing staff not included in calculating allowances

Staff housing (school, nursing home, clinic housing) (Para 15(1)) Tax Year From 1 January 2009 to 31 December

Allowable

Actual cost

Cost

not more than

$10,000

$25 000

$10,000

$25 000

2010 From 1 January 2010 to 31 December 2011 It should be noted that if the cost of staff housing exceeds $25,000 then no


5.6.2 Wear and tear allowance - paragraph 3 Where the taxpayer has not made an election to claim S.I.A. on assets used for business, the Commissioner will automatically grant wear and tear allowances as follows :immovable assets :- generally 5% straight commercial building (2.5%).

line line

except

for

movable assets :- generally 10% on reducing balance with some exceptions. (See Departmental Departmental Practice number 40 for detailed schedule of rate). -

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

5.6.3 Scrapping Allowance - paragraph 4 Scrapping allowances are the equivalent of losses on disposal of fixed assets used for trade. It arises when a scrapped asset asset is disposed of of for proceeds which are less than the income tax value.


(ii)

Deemed proceeds or deemed original cost whichever lower less the income tax value.

The above formulae ensure that recoupments are restricted to allowances previously granted. The restriction of amount recouped applies to all traders and businesses except mining mining concerns. concerns. The amount amount to be recouped is arrived arrived at as follows:(iii)

Proceeds

= recoupment, where asset cost was never restricted

(iv)

Deemed Proceeds = recoupment, recoupment, where asset cost was originally restricted.

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


b) Domestic expenses, including travel between home and place of business or between two two entirely distinct trades. A taxpayer, who who caries on trade at home and travels to other places where he carries on the same trade may avoid both of these prohibition prohibitions. s. Domestic expenses expenses include wages wages paid to a domestic servant who was recruited to enable the taxpayer’s wife to take up employment. c) Any loss or expense, expense, which is recoverable recoverable under under any contract of insurance insurance or indemnity. d) Tax levied levied on income and and interest on on overdue overdue tax. There are nevertheless instances where tax may rank as a credit against other tax payable. e) Income carried carried to any any reserve reserve fund or capitalised capitalised in any way. The Commissioner accepts, however, that specific provisions for director’s fees and staff bonuses are deductible subject to the following conditions, i.e. that they are voted by the date of the relevant accounts or annual  general meeting and; that they accrue for tax purposes in, at the latest, the year of  assessment after that in which they are claimed as a deduction. f)

Expenditure incurred in respect of any amount received or accrued which is


clearly precluded in respect of the cost of, for example, a lunch for business associates, despite the host’s purpose being the furtherance of trade relationships. n) Expenditure incurred incurred in the production production of any income income arising arising from stocks or shares of any company. company. Dividends Dividends from foreign companies, which which are liable to income tax in the t he hands of a taxpayer ordinarily resident resident in Zimbabwe, aer taxable (at a flat rate; without any any deduction for related expenditure. expenditure. The latter could be a minor matter such as bank charges, or more substantial such as interest payable on monies borrowed to purchase the shares. o) Expenditure incurred in the production of of interest on any loan or deposit deposit with local financial institution.


6.

TAXATION OF INDIVIDUALS AND PARTNERSHIPS Members of a partnership are taxable in their individual capacities on their share of profit as determined on on the accounting accounting date. In terms of section 37(15) of of the Income Tax Act, partners are required to submit a joint return with supporting accounts each year. For the establishment establishment of the individual share of of taxable income from partnership partnership business operation, the accounts submitted will first be assessed as if they represented a legal persona. The taxable taxable income established therefrom is then shared in the profit sharing ratio per the Partnership Deed. Some important points to note when establishing taxable income of a partnership business are as follows :- expenses paid on on behalf of partners by partnership partnership are allowable to partnership but should be included in the computation of the individual partner’s taxable taxable income. income. Such expenses expenses include include school school fees, groceries, medical expenses, subscriptions and insurance premiums where partner’s estate is the beneficiary. beneficiary. - insurance premiums premiums on joint life policies policies and life policies policies on partner’s partner’s lives with the partnership as beneficiary, are not allowable deductions and are not added to partners’ individual individual computation. computation. (By disallowing disallowing their deduction in


EXAMPLE David and Samuel practise practise as Quantity Quantity Surveyors in Harare. Samuel joined joined the practice practic e when he qualified in July 2006. David has practised here for seven years. They submit the following profit and loss account in support of income returns for the tax year ended 31 December 2010. For the purposes of the question, the following amounts are stipulated at; Passenger motor vehicle cost for capital allowances purposes- $10 000 Blind, disabled, elderly persons’ credits - $900 p.a. Maximum annual deduction for contributions to approved pension fund - $5 400

• • •

US$ Insurance Insuran ce premiums: - loss of profit - fire - partnership joint life policy - life policies for benefit of : Samuel 16 000 David 10 000 Medical aid contributions: David 5 200

20 000 9 000 38 000 26 000

US$ Fees accrued 3 985 000 Bad debts recovered 84 000 Bank interest 75 000 Debenture interest 29 000 Dividends Delta Corp Ltd 10 000


5. Bad debts are made up as follows : US$ Provisions for doubtful debts calculated at 5% of debtors Fees unpaid Loan to former manager now irrecoverable

43 000 26 000 28 000 ______ 97 000 ______

6.

Attendance at post graduate course: Samuel David

US$ 30 000 60 000

This represented the cost of lectures including travelling and hotel bills. 7.

(a)

Fixed Assets in the hands of the partnership at the beginning of the year are as follows :


US$ Dividends from companies registered register ed in Zimbabwe 40 000 Interest on tax reserve certificates fully utilised in payment on tax2 t ax2 400 Rents from UK property 72 000 12.

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

REQUIRED : Calculate the tax payable by David and Samuel in respect of the tax year ended 31st December 2010.


SUGGESTED SOLUTION Partnership David and Samuel

$ Profit per accounts Add :

Less : SIA

2 997 600

depreciation 86 000 bad debts : general provision 43 000 : loan 28 000 annuity excess (S 15 (2) of (c) (21,000-200)20 (21,000-200)20 800 joint life insurance insurance (capital) 38 000 recoupment bad debt recovered Bank interest 5 000 Wear and tear Scrapping allowance

215 800 3 213 400

6 000 75 000 17 400 200

(113 600 3 099 800

David 60%

1 859 880


1.

Sterilizer scrapped Cost of asset scrapped ITV asset scrapped Proceeds Scrapping allowance Equipment: Wear & Tear Calc: 2009 additions Less : scrapped

US$ 400 200 nil (200)

70 000 (400) ______

Cost of assets on hand

69 600

ITV

34 800

Therefore accelerated wear and tear @ 25%

(17 400)


Individual Computations

David

Samuel

60%

40%

Share of taxable income

1 859 880

1 239 920

Add : life assurance policies medical aid society contribution interest on capital

16 000 5 200 48 000 ________

10 000 3 200 44 000 ________

1 929 080

1 297 120

Less :

interest on capital account

12

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

5 400

5 400 48 600 2 500

________

90 000


7.

TAXATION OF FARMERS 7.1 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.


The 7th schedule provides for the following :Para 2 :

Special deductions for farmers as 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 contributions thereto thereto in in terms of the Natural Resources Act.

(f)

New Fencing

Para 3 :

Deals with the determination of taxable income/assessed income/assessed loss from growing timer.


In this situation income emanating therefrom can be taxable over three years if the taxpayer so elects. Para 6 :

Restocking Allowance Allowance : The restocking allowance is calculated as 50% of the cost of livestock purchased to bring up the stock holding to the assessed carrying capacity of the farm.

7.2 Important Departmental Practices (DP) No. 20 : Chinchilla Chinchilla and crocodile breeders are treated as farmers and are covered in the 7 th schedule. No. 21 : Expenditure on crops in the ground ground - read. No. 22 : Farm improvements exclude expenditures incurred under paragraph 2 of the 7th schedule. No. 23 : Farm roads : temporary farm roads are allowable under section 15(2)(a) while permanent roads are farm improvements on which S.I.A or wear


EXAMPLE Longhorn Ranches (Pvt) Limited was incorporated on the 1 st January 2010 to acquire in the Belingwe district from that date the farm “Cowhaven” together with improvements thereon, thereon, for the sum of $1 810 810 000. According to the agreement agreement of sale, the terms of which are acceptable to the Commissioner of Taxes, the purchase price was made up as follows : Land Fencing Farm dwelling Staff housing Plant and equipment

$ 970 000 101 000 200 000 334 000

(erected 01/05/2004) 01/05/2004) (2 units of $62 000 each and 1 unit of $210 000 all erected on 01/06/2003)

205 000 ________ 1 810 000 ________

During the year ended 31 st December 2010 the company expanded and incurred the following capital expenditure: expenditure:


SUGGESTED SOLUTION Longhorn Ranches (Pvt) Ltd

Para 2 7th Schedule $ __________ __________

Ranking Wear & tear SIA $ $ ___________________ _____________________ __

Total Allowance $ ________

Maximum deductions allowed : Fencing Purchased Erected

60 000

60 000

Staff Housing Farm dwelling Staff housing Plant and equipment

205 000

51 250


8.

TAXATION OF MINERS 8.1

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

8.2 Relevant sections :-

Sale of mining claims held as stock - section 9

-

Definitions - section 2

-

Mining recoupments - section 8(1)(j)

-

Allowable Allowable deductions :prospecting expenses - section 15(2)(f)(ii) capital redemption - section 15(2)(f)(i) and 5 th schedule

8.3 Prospecting expenses


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 5 th schedule. Under this method the current year’s capital expenditure is added to the balance of unredeemed capital expenditure brought forward at the commencement commencement of the the current year year of assessment. assessment. The total capital expenditure is then divided by the approved estimate life of the mine (in years), counting from the beginning of the current year of assessment. Companies not owning mines and other individuals The capital redemption allowance will be based on Commissioner’s assessment of what what is fair and reasonable. reasonable. Any person person who is the owner of a mine can use the life of the mine basis if she can submit the estimate of of the life of of mine. In other cases cases the redemption redemption is based on the shorter of tribute period or life of mine. With regard to individuals leasing mines, the Commissioner may


b)

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

c)

Capital allowances can only be claimed in respect of expenditure or losses attributable to a particular mining location and shall not be claimed in respect of any other mining location.

d)

Assessed Losses – No assessed loss carried forward will be allowed as a deduction unless a breakdown showing the extent to which such loss is attributable to each location must be submitted to the commissioner for approval. An assessed loss from mining mining operations operations can not not be offset against other income.

8.6 Expenditure The restrictions refer to : i) A local branch of a foreign company ii) A local subsidiary subsidiary of a foreign company company


Paragraph 8: Provides that where there is a change of ownership of a mine, a schedule of of allocation of of the sale price to the assets is required. required. The section also provides for postponement of taxation of recoupments if transfer is within group companies/recon companies/reconstructions; structions; or between spouses. In these cases the assets are transferred at amounts equal to the deductions available. The estimated life of mine is subject to the following limitations:Type of mine

Maximum estimate

Lead and/or zinc mine

10 years

Iron

5 years

Any other mine

20 years

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


9.

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

-

Capital gains gains arising from the disposal disposal of immovable immovable property and marketable st securities, acquired after 1 February 2009 are taxed at a flat rate of 20%.

-

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

gains arising from the sale of marketable securities securities are exempt from tax - Capital gains up to $1,800 if the seller is fifty-five f ifty-five years or over on the date of sale. securities that were acquired acquired before 1 February February - The disposal of listed marketable securities 2009 is subject to capital gains tax at 5% of the gross capital proceeds.


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)


(d)

Sold in execution of court court order order - deemed deemed sold for price price realised.

(e)

Maturity or redemption redemption of specified specified asset - asset asset deemed deemed sold sold for maturity maturity amount or redemption value.

(f)

Transfer under a deed of sale.

Exemptions from capital gains tax (section 10) (a)

(b)

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

agricultural, mining and commercial institutions or societies societies not not operating for the private pecuniary profit or gain of the members

(b)

building societies

(f)

employees’ savings Commissioner.

schemes schemes

or

funds funds

approved approved

by

the

Realisation/distribution Realisation/distribution by executor of specified specified assets assets forming forming part part of of a


(k)

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

(l)

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

(m)

Amounts accruing from listed shares which are subject to the 10% withholding withholding tax.

DEDUCTIONS Section 11(1) : Where amount of liability incurred and amount actually paid differ due to exchange rate variation, then effect shall be made of the amount actually paid in Zimbabwe currency. Section 11(2)(a) :


respect of which which a deduction is 3) the amount of any expenditure in respect allowable for income tax purposes, by way of allowance in terms of the 4th schedule, 5th schedule, 7 th schedule paragraph 2(c), (e) or (f) in respect of each year or part thereof from the date of construction, acquisition, alteration, addition or deemed addition or alteration, to date of sale. NOTE: Section 39A 9(b) of the Finance Act which replaces section 11(2)(c) by an inflation allowance of 2½% per annum with effect from 1 st February 2009. 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.


Deed of sale deemed an acquisition. Section 12 : No deduction shall be allowed in connection with exempt disposals.

Section 13 : Damage or destruction of specified asset Any asset damaged or destroyed shall be deemed to have been sold for the amount of compensation receivable. receivable. Where the Commissioner Commissioner is satisfied that the whole amount amount of, or part of proceeds shall be expended within two years on purchase or construction of a further specified asset, or repair of damaged asset, then such amounts shall not be deemed proceeds of sale.

Section 14 : Determination of fair market price The Commissioner has power to vary selling price or purchase price if he is of the opinion that the price given is at variance with the fair market price. Section 15 : Elections postponing the payment of Capital Gains Tax


D where :

A = Portion of proceeds not yet due (B-C) = Capital Gain accrued on sale D = Total proceeds on sale

Section 21 : Provision for sales of principal private residence Where a taxpayer sells a principal private residence and uses the total proceeds to acquire a new principal private residence, then capital gains tax shall not be chargeable on such sale. If the amount used is less than the actual proceeds then the capital gain which relates to the portion not used shall be subject to capital gains tax. When the new PPR is sold, the capital gain not subjected to tax previously shall be deducted from the amount mentioned in section 11(2)(a), i.e. from cost.

Section 22 : Substitution of business property Where a business property is disposed of and the taxpayer disposing the property satisfies the Commissioner that the entire proceeds will be utilised to construct or purchase another business property within two tax years, capital gains tax shall not be chargeable ; provided that such capital gain will reduce the cost of the new property


10. 10. DECEASED ESTATES & TRUSTS 10.1

INTRODUCTION The provisions of the Income Tax Act in relation to estates and trusts contain important but sometimes convoluted definitions to which reference may in specific cases be necessary. These include, in Section 2, “beneficiary with a vested right”, and “income the subject of a trust to which no beneficiary beneficiar y is entitled”, and in Section 11 (1) in relation to deceased estates only, “ ascertained beneficiary”. beneficiary”. a)

As in the case of individuals individuals and companies it is possible also for an estate (deceased or insolvent, etc.) or a trust, to constitute a taxpayer and to be liable to tax on its taxable income.

b)

An estate is a legal persona which which comes into being by operation of law, as follows.

A deceased estate commences commences its existence existence with the death of an individual. individual. It consists of the whole whole of the deceased’s deceased’s property being being administered under the Administrator of Estates Estates Act (Chapter (Chapter 6:01) 6:01) by the executor executor or executrix. executrix. It terminates when the necessary realisation of assets has been effected and the Final Liquidation and Distribution Account has been approved by the Master of the High Court. Distributions, under an interim account, may have been made in the


10.2

DECEASED ESTATES

GENERAL On the death of a taxpayer an assessment is raised on the deceased’s taxable income accruing accruing to date date of death. A new taxpayer, the deceased deceased estate, estate, then comes into being and there arises the question of determining in which party’s hands the income accruing accruing in the post-death period should be taxed (the bequest of the asset itself never never giving rise to liability). Such parties are (1) the beneficiaries beneficiaries of the deceased. (2) the deceased estate itself or (3) any trust created in terms of the deceased’s will. The terms of the will are crucial, the basic rules as to who is taxable on income subsequently derived derived from assets in the estate being as follows: i) Where a specific asset is left to a specific individual (e.g. “my debentures to my son Sam”) the son is taxable on the income earned by that asset from the day after the date of death of the deceased. The son is in this respect an “ascertained beneficiary” i.e. “ a person named or identified in the will who acquires an immediate certain right to claim the present or future enjoyment of the income” arising from a


In cases of intestacy (i.e. where there is no will) the treatment is the same as that for a residue r esidue under a will.

10.3

FURTHER POINTS REGARDING ESTATES a)

Assessed losses Any assessed loss incurred by a deceased falls away, upon his death, and cannot be carried forward against the income of the estate or any other taxpayer. Similarly any any assessed loss incurred incurred by the estate in operations operations during the post-death falls away upon the winding up of the estate.

b)

Expenditure incurred against post-death income Expenditure (allowable under the general rules of deductibility) incurred during the period of administration of the estate, is allowable in the determination of the taxable income in the hands of the appropriate party, be it the estate or a beneficiary. beneficiary. Conversely Conversely inadmissible inadmissible expenditure is disallowed disallowed in the determination of the taxable t axable income of the party concerned.

c)

Marriage out of or in community


Any amount which accrues during the pre-death period is taxable in the assessment to date of of death. This includes salary earned, earned, a bonus already already voted, and contractual commissions commissions due at that stage. Amounts accruing after death and which are taxable in the assessment for the post-death period are those to which the deceased had a right, and which would have been taxable in his hands, had they accrued during his lifetime. These include cash in lieu of leave under a contract of employment, and contractual commissions falling due after date of death. Amounts accruing after death which are not taxable (in either period) are those to which the deceased had no right, such as non-contractual cash in lieu of leave (in the case of, for example, civil servants), a bonus voted after death and directors’ fees as are not fixed in the company’s Articles of Association. g)

Insolvent and Assigned Estates i)

Where an individual individual becomes insolvent insolvent during the year year of assessment assessment it is the Commissioner’s practice to raise two assessments on him for, f irstly the period from 1 January to the date of insolvency and, secondly, in respect of any income earned by the insolvent person in his own right, for


11. TAX PLANNING Tax planning is the process of organising a taxpayer’s affairs in a way that legally minimises the impact of taxation imposed by by the statutes. One should should always always remember that tax planning requires an analysis of all taxes, including income tax, capital gains tax and estate duty. A plan which which minimises income income tax but increases increases estate duty is not the best of plans. Planning implies implies arranging of one’s affairs well in advance. advance. Taxpayers often approach their tax advisors after things have already gone wrong, for example when a tax investigator has knocked knocked on the door. door. In such cases accountants, accountants, lawyers lawyers and tax consultants can not do much planning but can attempt to minimise damage. Establishment of tax liabilities is normally based on facts, referenced to legislation existing at the time. Tax consultants consultants cannot change change facts retrospectively retrospectively and the Commissioner is bound to implement the law as it existed at the time. Before commencing tax planning activities, activities, it is important to be aware of the provisions


was to avoid paying paying tax. He can for instance instance invoke what what he deems to be the fair market price in any transaction if he is persuaded to do so by the facts of the case. Please refer to the avoidance provisions in section 98 of the Act. (Refer to some questions on next page).

Some scenarios requiring tax planning powers (1)

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

(2)

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


managing director is uneasy with the visit of the tax officials and he wants you to be present in the meeting. REQUIRED: Advise the possible tax implications and suggest any strategy to deal with the situation.

TAX PLANNING SCENARIOS: SUGGESTED APPROACH (1) The major tax implications implications of forming forming a consultancy consultancy company (or operating operating as an independent independent contractor) are as follows : (i)

Business income is subjected to tax at a flat rate of 30% (plus 3% AIDS levy) on assessment. Tax, based on estimates ifif necessary, will however however still need to be paid on quarterly payment dates, during the year following the year of assessment, as follows : 10% of (estimated) tax – 25% of (estimated) tax – 30% of (estimated) (estimated) tax 35% of (estimated) tax –

10 February 25 June 25 September September 20 December


(ii)

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

In this case, the taxpayer is a company, so (i) does not apply, and, as the house is not used for the purposes of of the company’s trade, (ii) (ii) will also not apply. apply. The roll over provisions can therefore not be invoked. (3) An independent independent contractor contractor is not an “employee”, “employee”, as defined, defined, for the purposes of the th 13 schedule which which deals with Employee’s Employee’s tax (PAYE). (PAYE). He is therefore not liable for PAYE, but is obliged to pay tax, based on his estimated annual taxable income, on the quarterly payment dates (see 1 above). (4) The relevant relevant provision, provision, in this case, case, is section section 17 17 of the Capital Capital Gains Tax Act. Act. Where an individual transfers any immovable property to a company controlled by him, through holding a majority of its shares or otherwise, the parties may elect, under this section, to transfer the property at a value, for tax purposes, the effect of which is that no capital gains tax arises. arises. Full liability liability is swept up on any resale to a purchaser other other than a company under the same control. In this case, although the shareholding of the company will be spread equally between the taxpayer, his wife and his 2 children i.e he will hold only 25% of the shares (not the


(ii)

production of income, commonly because it is based on some non-business, or even ulterior, motive. Non residents’ tax on fees (NRTF) : this must be withheld from all fees paid to non-residents. Therefore withholding withholding tax on the management management fees payable payable to the head office should have been withheld, and paid over to the Commissioner General within within 15 days days of payment payment of the fees. The rate of of withholding withholding tax amount is subject to any double taxation agreement with the country of residence of the recipient of the fees, in this case, of the head office.


QUESTION 1 On 30th June 2010,Mr Jones who was 66 years old, retired from employment after 25 years of service with a pharmaceutical company. His remuneration in respect of the period 1st January 2010 to 30th June 2010 was: US $ Gross salary

18,000


500 Toyota Vigo twin cab Office furniture

Notes 1.

2.

200

50,000

May 2009

30,000

20,000

1,000

June 2009

800

500

Mr Briggs whose total pension entitlement amounted to $150,000 opted to commute a portion of the pension and received a lump sum of $40,000 . His monthly pension from 1st July 2010 is $350. Mr Briggs also received the following income:

Company dividends received from Botswana

800

Less: tax withheld at source

(120) 680

Bank interest received from Botswana

1,000

Less: tax withheld at source

(150)


QUESTION 2 The income statement of G.Tours (Pvt) Ltd, a travel agency and trading company for the year ended 31st December 2010 was: $ Gross profit Profit on sale of motor vehicle

$ 7,032,000 2,000


The motor vehicle was sold in Zambia Interest received Bank interest

5,000

Overdue debtors

9,500 14,500

Agents Commission This was paid to sub-agents in South Africa who arranged package tours for tourists to Zimbabwe

Annuity to retired employee The annuity of $50,000 was paid voluntarily by the company to an employee who had retired at the age of 47 years on the grounds of ill health. The company does not contribute to any pension scheme except the statutory social security N.S.S.A. Bad debts 10% provision agreed with auditors as doubtful

95,000


(ii) $50,000 rent for a vacant stand

Interest payable The interest related to a loan used to buy shares in OK Zimbabwe Ltd. FIXED ASSETS The motor vehicle sold at a profit of $2,000 was a Mazda 3 sedan which had been acquired in December 2009 for $18 000 for a sales rep. It was sold in the current year for $20,000. A replacement Mazda BT50 sedan was acquired for $30,000. Other assets acquired during the year were:

Computers Mercedes benz for director

12,000 120,000

REQUIRED Calculate the minimum taxable income or loss of the company for the year ended


QUESTION 3 Peachy Mines (Private) Limited is a 70% subsidiary of an Australian mining conglomerate Peach Holdings Limited Headquartered in Sidney, Australia. Peachy Mines (Private) Limited operates a gold mine in the Shamva area of Zimbabwe. During the year ended 31st December 2010, Peachy Mines (Private ) Ltd borrowed Usd $50 million from the holding company to finance an expansion programme for the mine . The parent company seconded a mining engineer from Australia to oversee the expansion programme.


1. Debt to equity ratio ratio The average debt to equity ratio of Peachy Mines (Pvt) Ltd during the year ended 31st December 2010 was 5 : 1 2. Exchange gains This amount was made up of $90,000 unrealised exchange gains and $30,000 realised exchange gains relating to the mining operations.

3. General expenses This amount was paid to the Bindura Mayor's Christmas Cheer Fund. 4. Profit on sale of asset A generator which was purchased by the company for $5,000 in April 2009 was sold during the year for $40,000

5. Interest payable to parent company The amount was paid to the holding company through the company's foreign currency account. 6. Management fees payable to parent company


REQUIRED (i) Compute the capital redemption allowance the year ended 31st December 2010 using the new mine basis. 9 MARKS (ii) Calculate the minimum tax payable by the company company for the year ended 31st December 2010. 14 MARKS (iii) Discuss the withholding tax implications associated wit h the payment of interest and management fees to the holding company. 4 MARKS QUESTION 4

Farmind Enterprises (Pvt) Ltd has been conducting farming operations in Karoi for the past 10 years. The company's accounts are prepared up to 31st December. December. In October 2010, the Minister of Finance issued a statutory instrument declaring the farm to be an epidemic area due to an outbreak of blackfoot disease. LIVESTOCK The livestock on hand on 1st January 2010 was :


25 tolllies to oxen 70 heifers to cows Purchases 1 bull for Us 900 12 cows for Us $7,000. Livestock expenses were Us$ 5,000

FIXED ASSETS The income tax values (ITV's) of assets as at 1st January 2010 were:

COST

YEAR PURCHASED

I.T.V. AT 1 JANUARY


a) Draw up a livestock reconciliation statement to show the livestock on hand as at 31st December 2010; 9 MARKS b) Compute the minimum tax payable by the Company in respect of the year ended 31st December 2010; 15 MARKS

QUESTION 5 Mr Joram is ordinarily resident in Zimbabwe. During the year ended 31st December 2010 , he sold s old the following shares : a) 5,000 Econet Wireless Zimbabwe (Pvt) Ltd shares were sold in May 2010 at US$$4,70 a


QUESTION 6


No tax payments have yet been made to ZIMRA in respect of any tax payable.

5 MARKS

4. The company paid director's fees to the following non executive directors: $ Mr Kilo (Zambian resident) 3,000 Mrs A Andrews (Zimbabwean resident) 3,000 Mrs J Jones (Zimbabwean resident) 3,000

9,000

No tax was deducted on the payments.

6 MARKS

5. During the year ended 31st December 2010, Plastics (Pvt) Ltd contracted a South African based


TAX 7


(26 MARKS)



SUGGESTED SOLUTIONS TAX 1 MR JONES Tax computation Tax year ended 31st December 2010

US$ Gross salary

MARKS 18,000

1

1,500

1

36,000

1

Housing allowance

1,200

1

Entertainment allowance

1,000

Cash in lieu of leave

9,000

Bonus Gratuity

Lump sum payment from pension fund Less: exempt portion

40,000 (40,000)

1


MR JONES Taxable income from trade/investment: 31 December 2010 Tax payable: 31st August 2010 Up to: Less:

US$ 67,620 67,620

Less: Medical credit (50% of 1,200)

@35%

MARKS

23,667

1

(1,456)

1

22,211 (600)

1

21,611 Add: 3% aids levy

648

1/2

22,259 Less: P.A.Y.E. paid

(22,500)

1/2


US$ MARK Company dividends received from Botswana

Taxable income from trade/investment

800

1

10,800

Tax on taxable income from trade/investment

Rental income from Zimbabwean property (9,000 * 30%) Botswana bank interest (1,000 * 30%)

2,700

1

300

1

3,000 Add: 3% drought levy

90 3,090

Botswana company dividend (800 * 20%)

160

1


SUGGESTED SOLUTION : TAX 2 TAX COMPUTATION + $

Net profit per accounts

$

MARKS

5,000

1

150,000

1

2,000

1

3,936,500

Exempt bank interest Exempt Zimbabwe company dividend Profit on sale of motor vehicle Annuity [S 15 (2) q ]

(50,000 - 500)

49,500

1

Bad debts[S 15(2) g]

:not proven to be bad)

95,000

1

: capital

25,000

1

25,000

1

-

1

Bursary [S 15 (2) p ] Donations

: ZTC: allow 15 (2) (a)


SUGGESTED SOLUTION : TAX 2 Capital allowances MARKS

Mazda BT50 : Actual cost Deemed cost

30,000 10,000

25% S.I.A. I.T.V.31.12.2010

(2,500) 7,500

Computers: Cost

12,000

25% S.I.A. I.T.V.31.12.2010

(3,000) 9,000

Mercedes benz Actual cost Deemed cost 25% S.I.A. I.T.V.31.12.2010

2,500

1

3,000

1

2,500

1

120,000 10,000 (2,500) 7,500


Peachy Mines (PVT) LTD Computation of tax Year ended 31st December 2010 $ Profit before tax Add: Depreciation Interest payable to parent company :Section16(1)q Management fees payable to parent company :Section 16(1)r General expenses : not for purposes of trade Recoupment from capital expenditure

$ 500,000

MARKS

1/2 3 5 1/2 1

26,000 96,000 179,710 10,000 40,000 351,710 851,710

less: Capital redemption allowance Bank interest received-net of withholding tax Profit on sale of machinery : capital Unrealised exchange gains capital

615,000 6,000 35,000 90,000

1 1 1


Notes Maximum allowances allowed are pegged at the 5th Schedule allowances for schools, clinics, staff housing and passenger motor vehicles.

Mine clinic, school House for nurs, teacher Passenger motor vehicle

50,000 50,000 50,000


SUGGESTED SOLUTION TAX 3

MARKS

Peachy Mines (PVT) LTD Computation of disallowable portion of interest interest (s 16 (1) (q) Allowable portion is the debt to equity ratio 3 : 1

1

Allowable portion is therefore =

1

=

3/5 * 240,000 144,000

Interest paid

240,000

Allowable portion of interest Disallowed portion of interest

(144,000) 96,000

Computation of allowable portion of management fees (s 16(1)(r) Deductible portion is restricted to 1% of [ A - (B + C) ]

1 3


WITHHOLDING TAX IMPLICATIONS The interest on the loan is not subject to withholding tax.

1

The management fee payable to the parent company is subject to a 15% non residents tax on fees payable in terms the 17th Schedule to the Income Tax Act.

1

The tax is payable within 10 days of the date of payment. Interest at 10% per annum and penalties of up to 100% are payable for late payment.

1 1

4

SUGGESTED SOLUTION TAX 4 FARMIND ENTERPRISES (Pvt) Ltd LIVESTOCK RECONCILIATION STATEMENT 31st DECEMBER 2010 MARKS

Bulls

Opening stock 1 Jan 2010

4

Cows

Oxen

Heifers

Steers

Tollies

Calves

Total

100

30

70

20

25

80

329

1

90

90

1

13

1

(16)

1

163

1

Births Purchases

1

12

Deaths Promotions in

(4) 70

25

33

35

(12)


Promotions out

(70)

Sales : Normal

(1)

Sales : Epidermic

(1)

(50)

3

132

Closing stock as at 31st Dec 2010 Fixed standard values

(20)

800

500

Opening stock 1 Jan 2010

3,200

Closing stock as at 31st Dec 2010

2,400

35

(25)

(68)

(10)

33

10

31

90

450

400

200

150

100

50,000

13,500

28,000

4,000

3,750

8,000

66,000

15,750

13,200

2,000

4,650

9,000

(163)

1

(31)

1/2

(51)

1/2

334 1/2 110,450

1/2

113,000 8

CAPITAL ALLOWANCES Farm trailer

US$

MARKS

I.T.V. @ 01.01.2010

2,500

Current year 25% W & T

(1,250)

I.T.V. @ 31.01.2010

US$

1,250

1

3,750

1

1,250

Farm tractor I.T.V. @ 01.01.2010

7,500


(3,750)

I.T.V. @ 31.01.2010

3,750


Toyota corolla I.T.V. @ 01.01.2010

4,000


(2,000)

I.T.V. @ 31.01.2010

2,000

House for farm employee

US$

Cost

10,000

Current year 25% S .I.A.

(2,500)

2,000

1

US$

MARKS

2,500

1

-

1

12,000

1

7,500 House for farm manager Cost of house exceeds USD 25,000; it does not qualify as staff housing Dam 100% paragraph 2 allowance of 7th Schedule


Fencing 100% paragraph 2 allowance of 7th Schedule

2,000

1

23,500

7

SUGGESTED SOLUTION TAX 4 FARMIND ENTERPRISES (Pvt) Ltd TAX COMPUTATION 31st DECEMBER 2010

US$

MARKS


(23,500) 11,150 Epidemic sales c/fwd

(2,287)

Taxable income

8,863

Tax @ 25.75%

2,282

Epidemic sales

US$

Epidemic sales Less: Cost at FSV:

50 cows @ 500

1

MARKS

30,000

1

(25,000)

1/2


SUGGESTED SOLUTION TAX 5 Mr Joram Capital Gains Tax computation Year ended 31st December 2010


years (400)

Capital gain

6,600

Capital gains tax @ 20%

1,320

Capital gains withholding tax 15%

1

(750)

CGT due

570

1

The capital gains withholding withholding tax is due to Zimra within 3 working working days from date of payment. The final CGT liability is due within 30 days from date of payment. c) House

US$

MARKS


SUGGESTED SOLUTION 6


interest outstanding.

2.

Deemed benefit

Section 8(1) (f) of the Income Tax Act (Chapter 23:06) brings into tax an amount equal to the value of an advantage or benefit in respect of employment.

1

The value of the grant of an advantage or benefit other than a payment by way of an allowance, shall be determined : (i)

in the case of occupation or use of quarters,residence or furniture by reference to its value to the employee; 1

(ii)

in the case of any other advantage or benefit by reference to the cost to the employer. 1

In this particular case, the products cost the employer $50,000 and the employee is required to pay $56,000. Since the employees pay an amount which is greater than cost to the employer, it is submitted that there is no taxable benefit that accrues in terms of section 8(1) f. SUGGESTED SOLUTION TAX 6 (cont)

1


4

Directors' fees The fees payable to Mr Kilo are subject to a 20% withholding tax in terms of the 17th Schedule. Tax on the fees should be payable within 10 days of the date of payment. Interest at 10% per annum as well as penalties of up to 100% are payable for any late payment. The fees payable to the Zimbabwean directors are subject s ubject to a 20% non-executive directors fees tax in terms of the 33rd Schedule to the Income Tax Act. The tax is payable to ZIMRA within ten date of payment.

5

1 1 1 1

Interest at 10% per annum as well as penalties of up to 100% are payable for any late payment.

1 1

Technical fees In terms of paragraph 1 (1)(d) of the definition of fees in the 17th Schedule, any amount payable in respect of the repair of goods outside Zimbabwe is not subject to the withholding tax.

1



Tax payable Gross profit % =

89,481

1

25%

Year ended 31st December 2011

Gross sales

(50 x $15,000)

750,000

1

Cost of sales

(50 x $9,000)

(450,000) 300,000

1

Add: Interest on outstanding instalments Section 17 allowance : 2010

19,088

1

112,500

1 131,588 431,588

Less: Administration expenses

(12,000)

1



Interest on outstanding instalments

-

Section 17 allowance : 2006

30,000

1 1

30,000 Less: Administration expenses Section 17 allowance : 2007

(25,000)

1

-

1 (25,000)

Taxable income

5,000

Tax payable at 25% 3% aids levy

1,250 36

Tax payable

1,285

1 10

SUGGESTED SOLUTION : TAX 7 PLOT DEVELOPERS (Pvt) Ltd COMPUTATION OF S17 ALLOWANCE

150 stands Amount due Amount paid Amount outstanding

31st Dec 2010

31st Dec 2011

1,800,000 (1,350,000) 450,000

450,000 (270,000) 180,000

50 stands Amount due Amount paid Amount outstanding

-

750,000 (565,500) 187,500

31st Dec 2012

31st Dec 2013

180,000 (180,000) -

187,500 (112,500) 75,000

Total amount outstanding

450,000

367,500

75,000

Gross profit% =

25%

40%

40%

(1,800,000)

75,000 (75,000) -

(750,000)


S17 allowance

112,500

147,000

30,000

INTEREST OUTSTANDING Interest on $450.000 Interest on $180.000 Interest on $187.500 Interest on $ 75.000

18,000 14,400 4,688 18,000

19,088

7,500 7,500

-

ADVANCED_ZIMBABWE_TAX_MODULE_2011[1].pdf

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