Taxation (Bs211)

TAXATION (BS211)

1.0 INTRODUCTION

• Taxation is the means by which the government collect revenue for financing public expenditure.

• Tax is also levied to discourage demand of demerit goods i.e. tobacco, alcohol etc, and promote or protect local industries

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Features (Principles) of a good tax system

a) Equity principle- every member of society should pay tax according to his or her ability to pay. i.e tax payers in the same economic circumstance should receive the same tax treatment and those earning more should pay more tax

b) Simplicity principle-system should be in simple and easy to understand language. Should also be stable and inexpensive to administer.04/18/2023 By Mabhungu I 3

c) Tax neutrality / efficiency principle- should ensure that economic decisions are diverted to best locationsd)Flexibility/certainty principle- system should be able to accommodate changes in business, markets or technologye) Effectiveness principle- ability to achieve the desired goalf) Consistency –transactions with the same commercial result should have the same tax result.

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2. TYPES OF TAXES

• Direct taxes

• Indirect taxes


Direct Taxes

• These are taxes levied on income and wealth of individuals and companies. The burden of these taxes is borne by the person or organisation responsible for paying taxes,

• Direct taxes are progressive in nature. The more you earn the more tax you pay.

Examples:• Corporate tax –tax on business income

(profits)By Mabhungu I 604/18/2023

Direct Tax (contd)

• Pay as you earn- tax earned by individuals from employment

• Investment income –tax on dividends and interest

• Capital gains tax- tax on sale of immovable property and shares

• Estate duty tax- on the property of a deceased person etc.


Indirect Tax

• Are levied on one set of individuals or organisations, but may be partly or wholly passed onto others and are largely related to consumption.

• The person who is charged the tax is not the one responsible for paying it to the authorities

• Indirect taxes are regressive. i.e they have a relatively greater impact on the poor


Indirect Tax (contd)

Examples: • Value Added Tax;• Sales Tax;• Customs and Exercise duty


ADMINISTRATIVE FRAMEWORK

1. ADMINISTRATION• Administration of all taxation fall under the

responsibility of ZIMRA.• 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.


2. Returns and Assessments

• Commissioner publishes a notice in the most commonly read press inviting taxpayers to obtain tax returns from their nearest tax office; truthfully complete them and return them to the respective offices for assessment

• The duty to obtain a tax return rests with each individual taxpayer who falls within the specifications outlined in The Commissioners public notice.


Returns and Assessments (Contd)

• Employees paying PAYE under the FDS are not liable to furnish self assessment returns

• The employer is responsible for deducting the correct amount of PAYE for the year,

• Commissioner is empowered to estimate any taxpayer’s taxable income if one fails to submit a return and also to impose penalties for any default


Returns and Assessments (Contd)

• 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

• 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(QPDs)


Returns and Assessments (Contd

• the taxpayers pay their estimated tax liabilities, for the current tax year in which they are trading, in four instalments on dates allocated throughout the year, as follows:

25 March 10% of tax payable 25 June 25% of tax payable 25 September 30% of tax payable 20 December 35% of tax payable


LEGAL FRAMEWORK

• calculation of a taxpayer’s tax liability is based on the following:

a) taxable income of taxpayer in year of assessment

b) the appropriate rates of tax per the charging act for the year

c) the credits* to which taxpayer is entitled to per the charging act for that year. (section 7


Legal Framework (contd)

• Only taxpayers who are natural persons are entitled to tax credits.


TAX CREDITS

• These are concessions granted to taxpayers

due to certain life disadvantages, notably: a) physical and mental disability, b) Illness, c) Old age, d) Blindness.


Physical and mental disability

• Applicable to a disability of a taxpayer, spouse or child only

• The credit is transferable between spouses where the disabled person is not working, but his/her spouse is working


Physical and mental disability(Contd)

• Where the spouse is working but with insufficient income to cover the credit in full only the portion not covered is transferable.

• The disability must be substantial and of permanent nature, excluding disability of persons whose treatment is still in progress


Blind person’s credit

• Applicable to a blindness of a taxpayer and spouse only.

• The credit is transferable between spouses where the blind person is not working, but his/her spouse is working.

• Where the spouse is working but with insufficient income to cover the credit in full only the portion not covered is transferable.


Elderly person’s credit

• Applicable to an elderly working taxpayer only, and is over the age of 55 years


Medical expenses credit

• Applicable to medical expenditure of a taxpayer, spouse and child only

• Each case is granted 50% of expenditure incurred

• A medical doctor should prescribe the medical expenditure.


Medical expenses credit (contd)

• Not applicable on medical expenses recovered or capable of being recovered from a medical aid society or paid by an employer or some one on behalf of the taxpayer


Medical contributions

• No credit is granted where the medical aid cover is for the benefit of some other persons other than the taxpayer, spouse or child.

• No credit is awarded on contributions made by someone else including the employer for the benefit of taxpayer, spouse or child.


Summary of credits

Type of Credit

Apportion Transferable Non -residents

Blind No Yes YesElderly Yes No YesDisabled No Yes NoMed. Exp No No NoMed. Con No No Yes

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Example: credits

Mr Moyo, who is a 58 year old disabled university employee received a salary of $28 000 during the current year of assessment. He is married to Lisa who is blind. During the year they paid $220, medical contribution to CIMAS and bought a wheel chair worth $1 000 for their son who had been temporarily injured.PAYE paid during the year amounted to $4 550.

Required: To compute his tax refund or payable.04/18/2023 By Mabhungu I 26

Solution

Cumulative tax up to $18 000 $4 104 ($28 000-$18 000) x 35% $3 500 $7 604 Less credits:Elderly person(Mr Moyo) $900Disabled person(Mr Moyo) $900Blind person (Spouse) $900Cimas (50%x $220) $110Medical expenses(50%x $1000) $500 04/18/2023 By Mabhungu I 27

Solution(contd)

Total credits $3 310.00 Tax liability $4 294.00 Add 3% Aids levy($4 294x0.03) 128.82 $4 422.82 Less PAYE $4 550.00 Tax refund $127.18


AIDS LEVY 3%

• Aids levy is applied on tax liability after deducting tax credits


Calculation of Taxable Income

Total receipts and accruals in tax yearless Amounts proved by taxpayer to be capital in

nature

= Gross Income less Exemptions = Incomeless Allowable Deductions

= Taxable Income


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


Key elements in definition of Gross incomea) Amount-Means money or property capable

of being expressed in monetary termsb) Received by-Means received by the taxpayer

for his benefit or by someone on his behalf and the taxpayer has a legal right to claim the amount

• Stolen items or those held in custody for another person or collected for the benefit of someone would never constitute gross income


Key elements gross income(contd)

in the hands of the taxpayer.c) A person-refers to a natural person and artificial persons notably :• Individuals• Companies and trust• Private business corporations• Deceased estates etc


Key elements :Gross Income(cont)

• A partnership is not regarded as a person, but a group of persons making up the partnership. It is not taxable, but the people constituting the partnership on their individual share of profits

d) Accrued-means due and payable or entitled to.• an item becomes due and payable when date

of settlement (payment or receiving) has been reached.04/18/2023 By Mabhungu I 34

key elements:Gross income(contd)


• one becomes entitled to something on the date of agreement or contract (date of signing

sale agreement) no matter whether payment has been received or not.e) Source of income-means the originating cause of income , i.e what gave rise to the income.


f) Capital nature-proceeds received by a taxpayer on sale of a fixed asset or his income generating machinery.• A disposal of such items will not attract any

income tax, unless they constitute trading stock to the taxpayer.

• The intention of the taxpayer is also material in deciding whether an item is a receipt of a capital nature or not.



• Also not taxable are items like, proceeds from insurance policies, lottery wins or amounts accruing as a result of a hobby, or amounts received in restraint of trade.


Source of specific income

a) Dividend income: Where shares are located i.e the registered office of the company or the country in which the company is incorporated.

b) Profits from business operations-the place where the operations are being carried out or conducted


Source of specific income(contd)

c) Partnership income-the place where the services to earn partnership income are rendered.d) Sale or rental of immovable property-is the country where the property is situatede) Rent from movable property-the place where the lessee uses the asset.


source of specific income(contd)

f) Service rendered-place where the services were renderedg) Directors’ remuneration-where the head office is situated.h) Royalties -the place where these items were created or perfected.i) Interest-place where the credit or loan was provided


Specific inclusions in Gross income

Specific inclusions in Gross income04/18/2023 By Mabhungu I 41

1. ANNUITIES [(S8(1)(a)]

Annuity- an annual payment in perpetuity for the life of grantee or for a limited period ….Characteristics• claimable from another person or body• must be a fixed annual amount (which can be

divided into monthly or weekly payments)


Specific inclusions(S8) (contd)

• must be repetitive for a period.• An annuity can arise from the following:i. Purchased from an insurance company i.e.

retirement annuityii. Granted by way of gift or legacyiii. Granted as a consideration for the sale of

business, of an asset or surrender of a right.iv. For services rendered(pension).


Purchased annuity

• only interest content is taxable if there was no tax deduction or credit allowed at or during time of payment of contributions.

I =(PXN)-A N I = interestP= Annual payments(annuity received per year)N = number of annual payments expected


Purchased Annuity(contd)

A = purchase price of annuity (excluding any deductions granted when making contributions).Example :Mr Amos purchased a retirement annuity fund (RAF), from Old Mutual. Over the years he contributed $2400 to purchase it, the contributions were not allowed as deduction. The policy matured beginning of current tax year and is entitled to $300 p. a. His life expectancy is said to be 10years.


Purchased Annuity (contd)

Required : Calculate the amount to be included in gross income Solution I = (300X10)-2400 = 60 10 Only 60 is taxable but for only 10 years and thereafter the whole annual amount (300) will be taxable.


Annuity from gift or legacy

• This type of annuity is taxable in full, even if paid out of capital funds.


Annuity from services rendered

taxable portion is determined using the formulae in the purchased annuity section above.



• This type of an annuity is the pension receivable upon one’s retirement.

• It is the fruit of the contributions made by employee, and employer on behalf of the employee s 15 (2) (h).

• 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.


2. Income for service rendered (from employment) [(S8(1)(b)]

This section is the authority for taxing amounts received from employment, whether during employment or on termination of employment.• Examples: Salaries and wages, awards from an

employer, such as Christmas bonuses or gratuities on retirement, cash in lieu of leave, retrenchment packages, including gifts or tips received from customers as a result of employment

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Income for services rendered

• All items received from employment i.e. under this section are taxable in full subject to certain exemptions as provided by the 3rd schedule or other provisions.


Employment Benefits [S8(1)(f)]

Allowances granted by an employer to the employee or to a director, which is paid over and above the person’s salary • Examples :i. Occupation of quarters or a residenceii. The use of furniture or a motor vehicleiii. The use or enjoyment of any property

whatsoever, including free interest loan


Employment Benefits (contd)

• all benefits granted to civil servants or persons employed by the state are exempted

• licensed investor employees (In an EPZ) are also exempted but up to a maximum of 50% of total remuneration paragraph 4(q), 3rd

schedule.


Valuation of benefits

• Generally benefit to the employee is the cost to the employer except in the following where it is value to employees :

a) Housing Benefit;b) Furniture Benefit;c) Loan Benefit;d) Motoring Benefit;e) Entertainment Allowances;f) Passage Benefit;04/18/2023 By Mabhungu I 55

Housing Benefit

• A house granted to an employee as a place to live by employer is a benefit to the employee as follows:

1) The open market rentals for a house located in municipal area;

2) 12.5% of salary of the employee for a house located outside municipal areas;

3) In the absence of above, the benefit is 7% of cost of construction of the house


Housing benefit(contd)

• The benefit is reduced by any rentals paid by employee to the employer.

• There is no benefit where the taxpayer pays rentals above the market rate


Furniture Benefit

• Where the employer provides furniture to the employee free of charge ;

• Annual benefit is 8% of cost of furniture items.


Loan Benefit

• The benefit in respect of a loan free interest from employer or his associate to an employee.

Over $100 - benefit is 5% plus LIBOR p.a. less any interest paid (LIBOR is currently around 5.3%)The benefit is reduced where period of the

loan is less than a year.


Loan benefit(contd)-libor rate

Definition: LIBOR is the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for London Inter Bank Offered Rate. This rate is that which is charged by London banks, and is then published and used as the benchmark for bank rates all over the world.


http://useconomy.about.com/od/glossary/g/Interest_Rate.htm

http://useconomy.about.com/od/glossary/g/Banking.htm

Loan Benefit (contd)

• There is no benefit in respect of loans granted for:

i. Education of taxpayer, spouse or childii. Technical education of taxpayer, spouse or

childiii. Medical treatment of taxpayer, spouse or

child


Example: Soft loan benefit

A lecturer employed by BUSE, was granted loan by his employer amounting to $6 000 on 1 Jan 2011 at 8% p.a. He utilized the loan as follows:• 20% for the purchase of medical drugs for his

sister.• 30% for the education of his son at a college• 10% for medical treatment of spouse• The rest used to complete construction of a

house 04/18/2023 By Mabhungu I 62

Example: Soft loan(contd)

The loan was repaid on 31 August 2011.Assume the LIBOR rate was 5.26%%RequiredCalculate the lecturer’s loan benefit to be included in the gross income


Solution: Soft loan benefit

Loan borrowed - $6 000Medical drugs for sister (not exempt) -For education of son ($1 800)Medical treatment of spouse ($ 600) Soft loan $3 600


Solution :Soft loan (contd)

Loan benefit=(3 600)[(5.26%+5%)-8%](8/12) =(3 600)(2.26%)(8/12) = $54.24


Motoring Benefit

• It is the benefit to an employee on use of a company car

• The figures below represent a full year’s benefit, and are reduced proportionately where the period of use is less than a year, or where the car is used for both business and private use


Motoring benefit (contd)

Deemed benefits for year ended 31 December 2010


Engine Capacity Benefit ($/p.a)Up to 1 500cc 1 800

1 501cc to 2 000cc 2 4002 001cc to 3 000cc 3 6003 001cc and above 4 800

Example :Motoring benefits

• An employee was provided with a motor vehicle with an engine capacity of 2 700cc by his employer. He ascertained that 80% of the usage is private. He joined the company on 1 February 2010 and was employed up to the end of the year.

RequiredCalculate motoring benefit taxable in the employee’s hands(i.e to be included in gross income)04/18/2023 By Mabhungu I 68

Solution: Motoring benefits

Deemed annual benefit on 2 700 cc - $ 3 600 Les s Business usage(20% x$3 600) - $720 $ 2 880 Less Period not used(1/12 x2 880) $240 Taxable income $ 2 640


Entertainment Allowances benefit

• It is an expenditure of hospitality of some nature incurred by the employer.

• It covers expenditure on groceries for employees, drinks for business clients etc.

• The employee is taxed on amount consumed by him, his spouse or child privately, excluding so much as has been expended on business of employer or business clients.


Entertainment Allowances (contd)

• The cost of a normal daily meal, office teas whether there is a canteen or not, are exempted benefits.


Passage Benefit

This is the cost of any journey undertaken by an employee, his/her spouse or child as is paid by an employer such as;i. A journey for taking up employmentii. A journey on termination of employmentiii. A journey made during employment, i.e.

business trips, holiday trips.


Exempted passage benefits (non-taxable)

a) The first journey for taking up employment by the employee with each employer.

b) The first journey on termination of employment with each employer.

c) All journeys made by employee on the business of the employer.


Passage Benefits(contd)

• A benefit will only arise where the journey does not benefit the employer, but the employee, his/her spouse or child.

• Where the journey made during employment is both private and business there will be an apportionment and only the private component is part of gross income.


Passage Benefits(contd)

• Where the period spent on the business exceeds 10% of the total period of the journey, the amount of an employee’s passage benefit applicable to the period spent on business will be exempt from tax and will be determined in accordance with the following formula

A x B C04/18/2023 By Mabhungu I 75

Passage benefit(contd)

A is the number of days spent on business B is the amount of passage benefit money applicable to the employee C is the total days spend on the journey• If the time spent on business does not exceed

10% of the total period ,the whole of the passage benefit is taxed, whether paid for the employee, his/her spouse or child.


Example: Passage benefit

Mr Mari was sent on a business trip to USA for 10 days. He however decided to pass through UK, where he spent 5 days seeing his girl friend. The total amount for the trip paid by the employer was $5 000.RequiredCalculate the amount to be included in Mr Mari’s gross income


Solution: Passage benefit

Total passage benefit $5 000Less spent on business (10 x5 000) - $3 333 15

Taxable income = $ 1 667


Other benefits

• Subscriptions in respect of an employee’s continued membership of business, trade, technical or professional i.e. ACCA, CIS etc paid on behalf of the employee by the employer are exempted and therefore not part of gross income

• Subscriptions to clubs such as sports clubs are included in gross income and therefore taxable .


Other benefits

• An employee who receives ownership of a motor vehicle or some other property as a gift from his employer in respect of services rendered is taxable on the market value of the car, or property, after reducing it by amount paid by employee towards acquiring it if any.


4. PENSION RECEIPTS

[ S8(1)(a) S8(1)(c),S8(1)(n),S8(1)(r)]

i. Pension on retirement –s8 (1) (a)ii. Pension on retirement –s8 (1) (n)iii. Pension on retirement –s8 (1) (r)iv. Pension on withdrawal –s8 (1) (c)


Pension on retirement –s8 (1) (a) (From Pension fund)

• The sum is taxable in equal streams in each year until the person dies.

• The pension is taxable in full on receipt or accrual basis, subject to a certain adjustment.

• The amount which was (disallowed contribution) not allowed as deduction during the time of contribution will be received tax free where it is included in the pension being received


Pension on retirement –s8 (1) (a)

• The disallowed portion should be deducted equally over the life of the pension from the annual pension being received


Example : s8 (1) (a)

A bus driver at BUSE turned 65 years on 31 March 2010 and had to retire since he had reached the compulsory retirement age.BUSE contributes 80% to Old mutual for its employees. Over the years the driver’s contribution exceeded the limit by $3 500. He will be receiving $500 per month in arrears with effect from 25 April 2010. His life expectancy is 20 years. Compute his taxable income for 2010 tax year.04/18/2023 By Mabhungu I 84

Solution

Gross pension accrual/receipt [$500x9]- $4 500.00Less Disallowable(9/240months)x$3 500 131.25Taxable income 4 368.75


Commutation of pension from retirement Annuity Fund[S8(1)(n)• This is where a taxpayer elect to receive from

a retirement annuity fund a lump sum amount in the year of retirement and a reduced stream of equal pension until he dies.

• The amount to be taxable is arrived at after taking off 1/3 of the member’s pension entitlement in the first year of receiving the lump sum amount.


Commutation of pension(contd) (Retirement Annuity Fund)

• The 1/3 of pension entitlement is referred to as a commutation and is regarded to be of a capital nature

• Where a reduced pension is received afterwards it is taxable in full in the year of accrual or receipt.


Example :Commutation

A lecturer from BUSE retired on 30 July 2010, and received lump sum payment $250 000 from a retirement annuity fund as pension. His pension entitlement was $570 000.

Required: Calculate the lecturer’s taxable income in 2010 if he elects to be availed commutation


Solution: Commutation

Lump sum payment $250 000Less 1/3 of pension $190 000 Taxable income $60 000


Pension on retirement –s8 (1) (r) (Commutation: Pension fund)

• the source of the pension is the pension fund and not retirement annuity fund.

• A pension fund is the fund to which both the employer and employee contributes during the employee’s working life.

• The commutation is 1/3 of the member’s pension entitlement


Example: Commutation: Pension fund

A Professor from BUSE retired on 1 July 2010 and elected to commute his pension.BUSE is a contributor to Old mutual pension fund. The Professor received $200 000 on 31 July 2010, and a reduced monthly pension of $1600 in arrears with effect from 27 August 2010. His total pension entitlement is $420 000. Required: Compute his taxable income.


Solution: Commutation Pension fund

Lump sum payment $200 000Less 1/3 of pension $140 000 $60 000 Add monthly pension(1 600x5mnths) 8 000 Taxable income 68 000


Lease Premiums[S8(1)(d)]

• A lease premium is paid by a lessee to a lessorfor the right of use of the lessor’s property and is distinct from rent , and is paid over and above the normal rent.• A lease premium is gross income in the hands

of the lessor, and is taxed in full in the year of accrual or receipt, and is never spread.


Example: Lease premiums

A lessor entered into a lease agreement on 1March 2010 for the leasing of his property for a period of 11 years commencing 1 April 2010. The terms of the lease agreement requires the lessee to pay monthly rentals of $6 000 and $5000 as deposit on inception of the lease. The deposit is a premium paid over and above the nominal rent. Required: To show the tax implication in the lessor’s books for 2010 &2011 tax years.04/18/2023 By Mabhungu I 94

Solution: Lease Premiums

a) Taxable income for the year ended 31December 2010

Lease premium (taxable in full) - 5 000Add Rentals [6000x9) 54 000Taxable income 59 000


Solution-lease premium

b) Taxable income for the year ended 31December 2011Lease premium - -------Add Rentals [6 000 x12) 72 000Taxable income 72 000


Lease Improvements [S8(1)(e)]

• Refers to a structure put up by the lessee on the premises owned by someone else(the lessor).

• The structure will benefit the lessee during the period of lease and eventually the lessor on termination of the lease agreement.

• Not all structures will qualify as lease improvements but only those structures with a value agreed between the lessor and the lessee.04/18/2023 97

Treatment of lease improvements in the hands of lessor

• The lessor is taxed on the value per agreement but this is spread over the unexpired period of the lease or 10 years whichever is the lesser. The period of construction is disregarded.

• The lessor is taxed from the date of completion of the improvements.

• Where the value is not stated in the agreement the actual cost of the improvements will be taxed.


Treatment of lease improvements(contd)

• Where the agreement is silent on the lease period use 10 years.

• Where the value of the improvements is varied prior to completion of the building the actual amended value is used.

• Where the value is varied after completion of the building, only the original value will qualify.


Treatment of lease improvement

• If the actual cost ends being less than the value per agreement ,the lessor is taxable on the value per agreement.

• Where no variation is effected to the agreement and the building costs are more than the value per agreement, but it meets specifications or it is a specific building then the actual cost of the building will be taxable in the hands of the lessor.

04/18/2023 By Mabhungu I 100

Lease improvement(contd)

• Where the initial period is renewed only the initial period of the lease is considered.

04/18/2023 By Mabhungu I 101

Example: lease improvement

Two parties entered into a fifteen-year lease agreement on 1 January 2012. The lessee agrees to construct a building to the value of $15000.Prior to completion of the building the value is amended to $20 000.If the Buildings is completed in 6 months and put into use on 1 November 2012,calculate the taxable income in the hands of the lessor.

04/18/2023 By Mabhungu I 102

Solution: lease improvement

Value of improvement - $20 000Unexpired period(120mths-6mths) -114monthsValue to be taxable per month- 20 000/114mths =$175.44 Taxable in 2012 =(6x$175.44) =$1 052.64

Taxable in 2013=(12x$175.44)=$2 105.28

04/18/2023 By Mabhungu I 103

Recoupment in leasing –s8(1)(l)

• On the acquisition of the ownership of the property previously let, the lessee will cease to qualify for any allowance in the tax year following the acquisition.

• Any allowances (rent, premium or improvements) previously claimed which have been applied in reducing the purchase price is brought into gross income, and may be taxable over a period of 6 years upon election by the taxpayer.04/18/2023 By Mabhungu I 104

Recoupment in leasing(contd)

• All outstanding instalments are brought into gross income if the property is disposed off before the expiry of six years

04/18/2023 By Mabhungu I 105

Timber or growing crops grown for sale [S8(1)(g)]

04/18/2023 By Mabhungu I 106

closing stock [S8(1)(h)

• This paragraph brings into gross income, closing stock on hand at the end of the period of assessment including any stock disposed of otherwise than in the ordinary course of trade

• There are three methods used in the valuation of stocks namely, market value, replacement value and cost.

04/18/2023 By Mabhungu I 107

Closing stockTYPE OF STOCK METHOD OF VALUATIONOrdinary closing stock Cost, market value or replacement

value

Donated Cost, market value or replacement value

Consumed by taxpayer (drawings) Cost or market valueAttached by court order Cost, market value or replacement

value

Sold together with business Selling price (market value)

Work in progress Fair and reasonable price

04/18/2023 By Mabhungu I 108

Closing Stock

• All above types of stocks are regarded to be gross income in terms of s 8 (1) (h), notwithstanding the fact that some of it will no longer be available at the year-end.

• Cost price includes freight; insurance, duty and other expenses paid in acquiring the stock

04/18/2023 By Mabhungu I 109

mining recoupments [S8(1)(i)]

04/18/2023 By Mabhungu I 110

Recoupment/scrapping allowance [S8(1)(J-K)• Recoupment is a term used by the taxman to

refer to profit on the sale of an asset• It is the difference between the selling price of

an asset and the income tax value of an asset. (NBV).

• The income tax value (ITV) is arrived at after deducting from cost the taxman depreciation i.e. capital allowances

04/18/2023 By Mabhungu I 111

Recoupment

• Where an asset had its cost restricted for purposes of calculating allowances, its selling price must also be restricted for purposes of calculating recoupment, as follows:

Deemed cost x Actual selling price Actual cost

04/18/2023 By Mabhungu I 112

Recoupment/scrapping allowance

• Scrapping allowance is the taxman’s loss on the sale of assets

RECOUPMENT/SCRAPPING ALLOWANCE

04/18/2023 By Mabhungu I 113

Asset SP ITV P/R All0 A/RA XX XX XX XX XXB XX XX XX XX XXC XX XX XX XX XX

Recoupment/Scrapping allowance

KEYP/R= Potential Recoupment = Selling price – ITV;A/R =Actual recoupment = the lesser of allowances and potential recoupment;Allo = tax depreciation (capital allowances claimed in previous periods) .I .e Cost – ITV.

04/18/2023 By Mabhungu I 114

Recoupment(contd)

• Potential recoupment is the difference between selling price(s/price) and ITV.

• Actual recoupment(A/recoupment) is the lesser of allowances and potential recoupment

• Selling price should be restricted in order to match the deemed cost.

• Usually the commissioner’s practice is not to grant allowances in the year of sale.

04/18/2023 By Mabhungu I 115

Recoupment (cont)

• Deemed costs used are in respect of the year of purchase of the assets.

04/18/2023 By Mabhungu I 116

Example :Recoupment with deemed cost

A taxpayer purchased the following assets in the 2011 tax year, a passenger motor vehicle for $15000,staff housing 1 unit $20 000. During 2012-tax year he sold them for $20,000 and $50000 respectively.Required: To calculate his recoupment to be included in gross income. Assume no SIA was claimed.

04/18/2023 By Mabhungu I 117

Solution: Recoupment with deemed cost

04/18/2023 By Mabhungu I 118

Asset Motor Vehicle

Staff House

Actual Cost US$15 000 US$20 000Deemed Cost US$10 000 US$10 000Wear & Tear rate 20% 5%Wear & tear allow (US$2 000) (US$500)Income tax value US$8 000 US$9 500

Solution: Recoupment with deemed cost

Calculation of selling Prices:PMV = 10 000X 2O OOO = 13 333.33 15 000 Staff housing = 10 000 x 50 000 = 25 000 20 000

04/18/2023 By Mabhungu I 119

Solution: Recoupment deemed cost

Asset Deemed Selling Price

Income Tax Value

Potential Recoupm

Capital allowanc

Actual Recoupm

PMV 13 333 8 000 5 333 2 000 2 000Staff Housin

25 000 9 500 15 500 500 500

Totl Recoup

2 500

04/18/2023 By Mabhungu I 120

Example: Recoupment-No deemed cost

A company sold the following assets during the year ended 31 December 2010.

04/18/2023 By Mabhungu I 121

Asset Selling Price

Original Cost

ITV

Bus 60 000 100 000 45 000Tractor 25 000 45 000 30 000Building 60 000 35 000 30 000Total 145 000 180 000 105 000

Example (contd)

Required: Calculate recoupment/scrapping allowance to be included in gross income.

04/18/2023 By Mabhungu I 122

Solution: Recoupment/Scrapping allowance

Asset Selling Price

Income Tax Value

Potential Recoupment

Allowances Claimed

Actual Recoupment

Bus 60 000 45 000 15 000 55 000 15 000Tractor 25 000 30 000 (5 000) 15 000 (5 000)Building 60 000 30 000 30 000 5 000 5 000Total 15 000

04/18/2023 By Mabhungu I 123

Recoupment/scrapping allow (contd)

NB • Recoupment of an asset is the lesser of profit

as per the taxman and the actual capital allowances claimed on the asset

• The above determination of recoupment applies to all types of business except mining.

04/18/2023 By Mabhungu I 124

Grants or subsidies [S8(1)(m)]

• Any subsidies or grant paid in respect of expenditure allowed or allowable as a deduction is gross income in terms of s8 (1) (m).

04/18/2023 By Mabhungu I 125

Designated Area Grants [sect 8 (1) (o)]

• Grants or payments awarded to farmers in terms of such a scheme are gross income for the purposes of this section.

04/18/2023 By Mabhungu I 126

Exchange gains [sect 8 (2)

• Any profit resulting from changes in exchange rate is gross income in terms of this section. The gain shall be taxable in the year of assessment in which they are realised.

04/18/2023 By Mabhungu I 127

DEEMED ACCRUALS [S 10]

• It is income, which the taxpayer, has not received, but which remains taxable in his

hands. • Deemed means assumed or considered to be.

04/18/2023 By Mabhungu I 128

EXEMPTIONS [SECT 14 3RD SCHEDULE]

• Exemptions are accruals and receipts of revenue nature, which are free of income tax.

Examples are revenue of:1) State owned companies2) Non-profit organisation3) Foreign governments and world

organisations,etc

04/18/2023 By Mabhungu I 129

Exemtions:State owned companies

All receipts and accruals earned by all companies whose shares are held by the state or the Reserve Bank of Zimbabwe are non-taxable including profits of local authorities and such other organisations like:• (a) POSB• (b) Reserve Bank of Zimbabwe• (c) The Zambezi River Authority• (d) The Natural Resources Boarded04/18/2023 By Mabhungu I 130

Non-profit organisation

Companies not operating for gain and whose objective is that of enhancing the welfare of its members are not taxable on their profits:• Church organizations, education institution of

a public character.• Trade Unions, trusts of a public character.• Building societies, benefit funds.• CIS, ACCA, ZAAT, IAC ,commercial farmers

union, clubs, societies i.e. Cimas04/18/2023 By Mabhungu I 131

Foreign governments and world organisations

Among the foreign organization the following are not taxable on profits earned by them;• Any agency of any government• Any international organization i.e. FAO ,WHO,

UN etc• International financial organization• African Development Bank• South African Reserve Bank etc

04/18/2023 By Mabhungu I 132

Exemptions for employed persons

• All individuals providing services for the state are exempted on benefits granted to them by the state.

• Bonus including performance related bonus not exceeding 10% of one’s remuneration or $400 (with effect from 01/11/09) whichever is lesser.

• The salary and benefits paid to the President and his domestic workers paid out of his salary.04/18/2023 By Mabhungu I 133

Exemption-Employed person

• Any benefits or allowances granted to a minister, spouse of President or a Vice President(s) in respect of state duty, the leader of opposition party etc.

• An allowance payable to a chief or headman• Value of a scholarship, bursary paid on behalf

of a student to a college, school or universityprovided that such any amount is not paid as compensation for services rendered by the student or his/her near relative,04/18/2023 By Mabhungu I 134

Exemption-Employed person

• Benefits granted to persons employed by a licensed investor up to 50% of total remuneration.

• the first $5 000 or one third of approved retrenchment package whichever greater, subject to a maximum exemption of $15 000

• 1/3 of retrenchment package up to $1 800

04/18/2023 By Mabhungu I 135

Exemption-Presidential pension

• Any pension or allowance payable to any President of Zimbabwe and which is provided to him upon his retirement is exempted from tax.

04/18/2023 By Mabhungu I 136

Pension for specified groups

Certain groups of people have been specified in the Act to be exempted of tax on any pension or such like allowance as is received by them:a) War disability pensionb) Pension or compensation to any person or

his dependants as is paid by Wankie Disaster Relief Fund.

c) War Veteran gratuity with effect from 1997

04/18/2023 By Mabhungu I 137

Compensation for injury, sickness or death

Any receipt or accrual received by a person, his/her spouse, dependants or his/her deceased estate as compensation for injury, sickness or death is not taxable provided that such amounts are paid by:a) A trade unionb) Benefit fund orc) An insurance company in respect of a policy

covering death, accident or sicknessd) A medical aid societyBy Mabhungu I

138

Exemption: Medical aid assistance

• Any value of medical aid or traveling to obtain medical aid treatment as is paid by an employer is free of income tax in the hands of the employee, whether provided to the employee, or any dependant of the employee.

• Also exempted are medical aid contributions to an approved medical aid society paid by an employer for his employees or dependants of an employee.

04/18/2023 By Mabhungu I 139

Dividends from local companies

• Dividends from any company incorporated in Zimbabwe which is liable to pay tax, are free of income tax in the hands of the recipient. However, all dividends from companies exempted from paying tax i.e. building societies, benefit funds are taxable in the hands of the recipient.

04/18/2023 By Mabhungu I 140

Dividends from local companies(contd)

NB: Withholding tax of 15% is charged on all dividends accruing from a company incorporated in Zimbabwe which is liable to pay tax on its profits, whether the dividend is paid to a resident or non-resident of Zimbabwe.

04/18/2023 By Mabhungu I 141

Interest for locals

To be exempted is any interest paid on:a) Sums deposited with POSB accountb) Any tax reserve certificate issued by ZIMRA.c) Any loan raised by the state i.e. treasury bills,

agribonds etcd) Class C permanent shares issued by a

building society

04/18/2023 By Mabhungu I 142

Interest accruing to foreigners

Any interest received or accruing to a non-resident who does not carry out business in Zimbabwe shall be exempted from tax, provided that it is in respect of a loan made to:a) Any person carrying mining operationsb) The state or a company whose share are fully

controlled by the state.c) A local authority or such like bodiesd) statutory corporation04/18/2023 By Mabhungu I 143

Interest accruing to foreigners(contd)

e) Building society provided it was made before 16 July 1976NB:The interest is exempt provided the amount will be taxable in the taxpayer’s home country by reason of its being exempted from this country.

04/18/2023 By Mabhungu I 144

Maintainance - Alimony

• Amount paid for the maintenance of wife, husband or dependents in terms of the court is exempted from tax in the hands of the beneficiary.

04/18/2023 By Mabhungu I 145

Exempt: Entertainment allowance

• Any amount received as entertainment allowance as is used by an employee on the business of employer is exempted in the hands of an employee.

• However, where the taxpayer has used the amount for private purpose it is a taxable benefit under section 8(i) (f). In both cases, i.e. whether used for business or private, an employer is not granted a deduction in, terms of such expenditure. By 146

ALLOWABLE DEDUCTIONS[S15(2)]

• Deduction allowable shall be expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of income except to the extent to which there are expenditure or losses of a capital nature.

• There will be apportionment where the expenditure is incurred for both private and business purposes and the private component dissallowed.

04/18/2023 By Mabhungu I 147

Expenditure for purpose of trade

This is an expenditure normally expected to be incurred in a business set up. An example includes salaries and wages, telephones rentals etc.a) Designed expenditure-This is an expenditure

normally expected to be incurred in a business set up. An example includes salaries and wages, telephones rentals etc.

04/18/2023 By Mabhungu I 148

Expenditure for purpose of trade

b) Undersigned/ fortuitous expenditure-This type of expenditure is usually not expected by the taxpayer and occurs as result of some misfortunes or mischance.e.g. crops destroyed by army worms, or cyclones, theft by employees,etcc) Expenditure for the efficient running of the business.

04/18/2023 By Mabhungu I 149

Capital nature

This is an expenditure incurred on acquisition of fixed assets or income generating units of an organization and is not allowable as deduction. This includes any expenditure necessary to bring the asset to its working condition like traveling cost to purchase the asset, installation cost , freight charge on the asset, VAT or import tax chargeable on the asset etc.

04/18/2023 By Mabhungu I 150

Repairs sect 15 (2) (b)

• Any form of repair undertaken on articles, plant, equipment, property used or occupied for purposes of trade is an allowable deduction.

• In the event that an item being repaired is used for dual purpose, the expenditure is apportioned and the business portion allowable deduction.

04/18/2023 By Mabhungu I 151

Bad debts[S15 (2) (g)]

A deduction for irrecoverable debts as long as all the following conditions are met:i) The debt must be due and payable to the taxpayer,ii) The debt must be proved, to the satisfaction of the Commissioner, to be irrecoverable as at the end taxpayer’s financial yeariii) The debt must have been included in the taxpayer’s income either in the current or any previous year of assessment.04/18/2023 By Mabhungu I 152

Bad debts(contd)

• A claim in respect of debts sold together with business will not succeed

• A claim on debts sold with a condition that the taxpayer was obliged to repossess and reimburse the purchaser for debts which the purchaser was unable to collect within a specified time is allowed

04/18/2023 By Mabhungu I 153

Pension contributions s15 (2) (h)

• Contributions made by employers and employees for the benefit of the member (employee) to an approved pension fund, retirement annuity fund (RAF), NSSA, or benefit fund.

• Aggregate maximum contributions to all above per employee per year is $5 400.

04/18/2023 By Mabhungu I 154

Pension contributions(contd)

• No contribution by employer to a retirement annuity fund is allowable as a deduction

• No contribution by employee to a benefit fund is allowable as a deduction.

• NSSA contributions are allowable to both the employer and employee subject to rates fixed by the authority from time to time.

04/18/2023 By Mabhungu I 155

Medical aid contribution or expenses [S15 (2) (j)]

• An employer is granted a deduction on any amount of contribution paid to an approved medical aid society paid by him, including medical expenses paid on behalf of his employees, their spouses and dependants.

04/18/2023 By Mabhungu I 156

Research and experiments [S 15 (2) (m)]

A taxpayer may deduct expenditure incurred during the year in carrying out experiments andresearch relating to his trade, other than expenditure of a capital nature incurred on plant, machinery, land or premises or on the acquisition of rights.The taxpayer should personally carry out the research.

04/18/2023 By Mabhungu I 157

Experiments and Research [S15 (2) (n)]

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 as a deduction shall be determined by the formula: A x B C04/18/2023 By Mabhungu I 158

Experiments and Research [S15 (2) (n)]

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

04/18/2023 By Mabhungu I 159

Scientific Research and Experimental Work [S15(2)O• 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 taxpayer’s trade.

04/18/2023 By Mabhungu I 160

Educational Grant, Bursary or Scholarship[S15(2)(p)]

Deduction is allowed of grants, bursaries, scholarship paid for a person undergoing technical education, provided that: • The course is related to the taxpayer’s trade

and that the beneficiary is not the taxpayer, his spouse or near relative of either spouse.

04/18/2023 By Mabhungu I 161

Educational Grant, Bursary or Scholarship(contd)

• If the taxpayer is a company, the beneficiaryshould not be a near relative of the individual controlling the company, his spouse or near relative of the spouse unless the director works full time for the company and controls not more than 5% of the share votes.

04/18/2023 By Mabhungu I 162

Voluntary Payments To Former Employees and/ or their

dependants• Also called Ex-Gratia Payments• Any amount paid during the year of

assessment by way of an annuity, allowance or pension is deductible subject to the following:

a) The employee must have retired because of ill – health, infirmity or old age.

b) The amount allowed is restricted to US$500 per tax year for each former employee.

04/18/2023 By Mabhungu I 163

Voluntary Payments/Ex-Gratia Payments (contd)

c) In the case of payments to dependants or persons who were dependant on a retired or deceased former employee the annualrestriction is US$200 in respect of all dependants of each ex employee.

04/18/2023 By Mabhungu I 164

Voluntary Payments/Ex-Gratia Payments (contd)

NB• In all cases the amount allowed is reduced by

any obligatory payments (e.g. pension or annuity) received during the year by the ex-employee or dependant from any fund of the former employer.

• Persons whose employment was of adomestic or private nature are excluded in allcontexts.04/18/2023 By Mabhungu I 165

Donations[S15(2)(r)]

• A deduction shall be granted for paymentsmade to the National Scholarship Fund, National Bursary Fund or a trusts administered by the Minister responsible for either Social Welfare or Health.

04/18/2023 By Mabhungu I 166

Donations-Health [S15(2)(r1)]

Any amount not exceeding US$100,000 paid by a taxpayer during the year of assessment to the State or to a fund approved by the Minister of Health for, any of the following operated by the state, local authority or religious organisation:a) the purchase of medical equipment,b) the construction, extension or maintenance

of a hospital orc) the procurement of hospital drugs (incl ARVs)04/18/2023 By Mabhungu I 167

Donations-Education [S15(2)(r2)

Any amount not exceeding US$100,000paid 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:a) The purchase of educational equipment

04/18/2023 By Mabhungu I 168

Donations-Education(contd)

b) the construction, extension or maintenance of a schoolc) the procurement of school books or other educational materials.

04/18/2023 By Mabhungu I 169

Donations-Public Private Partnership Fund[15(2)(r4)]

Any amount not exceeding US$50,000 paid by a taxpayer during the year of assessment without any consideration to the Public Private Partnership Fund.

04/18/2023 By Mabhungu I 170

Donations[S15(2)(r5)]

Any amount not exceeding US$50,000 paid by a taxpayer during the year of assessment without any consideration to the Destitute Homeless Persons Rehabilitation Fund established by the Ministry of Finance under the Audit and Exchequer Act.

04/18/2023 By Mabhungu I 171

Subscriptions [S15(2)(s)]

• A deduction is allowed for subscriptions paid by a taxpayer in respect of his continued membership to any business, trade, technical or professional association. Entrance fees are not allowable.

04/18/2023 By Mabhungu I 172

Expenditure Prior To Commencement Of

Business[S15(2)t

A deduction is allowed for expenses incurred by the taxpayer 18 months prior to commencement of business, in the course of establishing the business, and would have been allowed as a deduction had it been incurred after beginning the business and it is claimed in the year of assessment in which business commences.

04/18/2023 By Mabhungu I 173

Opening Stock [S15(2)(u)]

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

04/18/2023 By Mabhungu I 174

Trading Stock Acquired Other Than In the Ordinary

Course Of Trade [S15(2)v]

A deduction shall be allowed equal to what the Commissioner considers as the fair and reasonable value of such trading stock at the date it was brought to hand or at the date it was acquired.

04/18/2023 By Mabhungu I 175

Closing stock(contd)

• In the case of donated stock the deduction shall not exceed the value available from the person from whom it was acquired.

• In the case of inheritance the deduction shall not exceed the valuation as shown in Final

Liquidation and Distribution Account of the deceased.

04/18/2023 By Mabhungu I 176

Conventions And Trade Missions[15(2)(w)]

The cost of attending a convention or trade mission is allowed as a deduction subject to the following:• The deduction is restricted to US$2,500 of the

amount spent in any one tax year and must relate to 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).04/18/2023 By Mabhungu I 177

Conventions And Trade Missions(contd)

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

• If the person attending is a member of a partnership and the partnership bears the expense, each partner is allowed to deduct an

amount in proportion to his share of profits. In such a case the limit of $2,500 is applicable to one visit by each partner.04/18/2023 By Mabhungu I 178

Legal Costs On Income Tax Appeals[S15(2)(aa), S15(2)(bb)]]

Taxpayers who appeal against any decision made by the Commissioner and whose appeal is allowed in full in the Special Court or the High Court, may deduct their legal costs for such costs in the year of assessment in which the costs are so “taxed”.• Should an appeal be taken further (by either

partly) to the Supreme Court, the court may, at its discretion, permit the costs to be deducted.04/18/2023 By Mabhungu I 179

Expenditure Not Yet Incurred[15(2)(cc)]

Deduction allowed where income accrues in one year of assessment in respect of services to be rendered or goods to be delivered in a subsequent year and it is known that expenditure related to such income will be incurred in subsequent years subject to the following:

04/18/2023 By Mabhungu I 180

Export Market Development Expenditure [S15(2)gg

This paragraph provides for a 200% deduction of expenditure incurred by a taxpayer during the year of assessment on any ‘export marketdevelopment’.

04/18/2023 By Mabhungu I 181

Tobacco Levy 15(2)(hh)

The amount of any tobacco levy paid in the year of assessment in terms of Section 36A.

04/18/2023 By Mabhungu I 182

Maintenance On Behalf Of Local Government .[S15(2)

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.

04/18/2023 By Mabhungu I 183

Assessed Losses [S15(3)

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

04/18/2023 By Mabhungu I 184

Assessed Losses [S15(3)

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

04/18/2023 By Mabhungu I 185

Expenditure Not Yet Incurred[15(2)(cc)]

• the amount of the allowance will be at the discretion of the Commissioner (not subject to objection or appeal).

• expenditure of a capital nature is ignored• current expenditure, which relates directly to

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

04/18/2023 By Mabhungu I 186

NON ALLOWABLE EXPENSES[S 16]

a) Maintenance of a taxpayer & his family [sect. 16(1) (a)]

b) Domestic and private expenses [sect. 16(I) (b)]

c) Losses recovered under insurance contract [sect. 16 (I) (c)]

d) Tax and interest thereon [sect. 16 (I) (d)]e) Transfers to reserves [sect. 16(1) (e)]f) Restraint of trade [sect. 16(1) (j)]04/18/2023 By Mabhungu I 187


g) Lease payments for passenger motor vehicle [sect. 16(1) k]h) Cost of shares [sect.16 (1) (l)i) Expenditure for exempt income [sect.16 (1)

(f)]j) Contributions to unapproved funds [sect. 16(1) (g)]k) Private rent or repairs etc [sect. 16 (1) (I)]l) Restraint of trade [sect. 16(1) (j)]04/18/2023 By Mabhungu I 188


m) Entertainment Expenditure [sect. 16 (1) (m)]n) Expenditure on foreign dividends [sect. 16 (I) (n)]p) Expenditure on interest payable [sect. 16(1) (o)]

04/18/2023 By Mabhungu I 189

Maintenance of a taxpayer & his family [sect. 16(1) (a)]

• No deduction shall be permissible for the cost incurred by the taxpayer in maintaining himself, his family or establishment.

• All private expenses i.e. medical costs, rent for own accommodation, groceries etc are not allowable as deduction.

04/18/2023 By Mabhungu I 190

Domestic and private expenses [sect. 16(I) (b)]

• All domestic and private expenses are not allowable. In addition, traveling cost incurred by the taxpayer between home and place of work or traveling between two places of business, which are distinct in nature, is not an allowable deduction. However, traveling between two places of business, which

are similar in nature, would rank as a deduction.

04/18/2023 By Mabhungu I 191

Losses recovered under insurance contract [sect. 16 (I) (c)]

• No deduction shall be permissible for any loss or expense, which is recoverable under any insurance company or indemnity.

04/18/2023 By Mabhungu I 192

Entertainment Expenditure [sect. 16 (1) (m)]

• A deduction shall be prohibited of any expenditure incurred by the taxpayer on entertainment.

• Entertainment includes the concept of hospitality in any form, such as provision of lunch to customers, directors, staff members etc. However deduction shall be permissible in respect of cost of canteen meals provided to members of staff including senior members.

04/18/2023 By Mabhungu I 193

CAPITAL ALLOWANCES

• The cost of acquiring assets used in trading is an expenditure of a capital nature, which is not allowable as a deduction. Depreciation is also not an expense to the taxman. It is replaced by the following capital allowances:

a) Special Initial Allowance (SIA)b) Wear & Tear (W&T)c) Scrapping allowance (loss on disposal of asset

04/18/2023 By Mabhungu I 194

Assets qualifying for allowances

To qualify for allowances an asset must be used for purposes of trade. It follows therefore that all residential buildings will never qualify for allowances, but leased block of flats does. Land generally does not qualify for either depreciation or capital allowances.

04/18/2023 By Mabhungu I 195

Commercial Building

• A building constructed on or after 1 April1975• A building used 90% or more of its floor area

for purposes of trade• A hotel without liquor licenseThe following are not commercial buildings:• A farm improvement, industrial building,staff housing etc• A building used 10% or more of its floor area

for residential purposes04/18/2023 By Mabhungu I 196

Industrial Building

Is a building used mainly in connection with manufacturing or industrial research including: • Licensed hotels• Fencing , tarmac concrete or sealing

surrounding such industrial building• Building used in connection with computer

international or data capture• Storage building used by the taxpayer for

storing goods manufactured by him04/18/2023 By Mabhungu I 197

Industrial Building

• Toll bridges and roads e. g Limpopo river bridge

• Staff welfare buildings i.e. canteens, garages , drawing offices etc

• A hotel with a liquor license including permanent structures used together with it i.e. swimming pool

• Tennis courts(permanent), golf courses and bowling greens

04/18/2023 By Mabhungu I 198

Industrial Building

*NB :• Warehouse does not qualify as an industrial

building if they store goods, which have not been manufactured by the taxpayer.

• Showrooms are regarded to be commercial buildings.

04/18/2023 By Mabhungu I 199

Staff Housing

• Means any permanent building used by the taxpayer for the purposes of his trade wholly or mainly for the housing of his employees, excluding any building erected after 1 January 2003, which comprises or incorporates any residential unit the cost that exceeds $25 000. Thus for a staff housing to qualify as a staff housing its cost must not exceed $25 000, but allowances are calculated on a deemed cost of $10 000

04/18/2023 By Mabhungu I 200

Staff Housing

The existence of a unit or units in a residential block, which cost more than $25 000, will result in the whole block being disqualified

04/18/2023 By Mabhungu I 201

Passenger Motor vehicle

Means any motor vehicle propelled by mechanical or electrical power and intended or adapted for use or capable of being used on roads mainly for conveyance of passengers i.e. luxury type of cars. E.g:• Estate car, Pajero, Twin cabs• Station wagon, Mercedes Benz

04/18/2023 By Mabhungu I 202


It excludes:• Vehicles used to convey passengers for gain

i.e. taxis, commuter buses• Vehicles used by hotels for conveyance of its

guests• Vehicle carrying 15 or more passengers

excluding the driver• Vehicle purchased by lessor for leasing

purposes04/18/2023 By Mabhungu I 203


The deemed cost is $10 000 and there is no limit in the qualifying amount.

04/18/2023 By Mabhungu I 204

Farm improvements

This refers to expenditure on permanent farm roads, clinic or hospital and school constructed on the farm or mine. The restricted cost for purposes of calculating allowances for a hospital/clinic or school is $10 000

04/18/2023 By Mabhungu I 205

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

• With effect from 1 January 2010, SIA is 25% of cost followed by 25% accelerated wear and tear allowance for the following 3 years

• Taxpayer must make an election for it to be granted

• S.I.A. will not be granted on movable leased assets where there is an option to lessee or any other person to acquire the asset at the

end of the lease period.04/18/2023 By Mabhungu I 206

Special Initial Allowance (S.I.A)

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

• S.I.A. is not apportionable between private and business, if an asset has qualified, then it is deductible in full.

04/18/2023 By Mabhungu I 207

Special Initial Allowance (S.I.A)

• S.I.A 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

04/18/2023 By Mabhungu I 208

.Wear and tear allowance -

paragraph 3• Where the taxpayer has not made an election

to claim S.I.A. on assets used for business, the Commissioner will automatically grant wear and tear allowances as follows :-

• immovable assets :- generally 5% straight line except for commercial building (2.5%).

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

04/18/2023 By Mabhungu I 209

Wear and tear allowance

• 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.

04/18/2023 By Mabhungu I 210

Scrapping Allowance - paragraph 4

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

04/18/2023 By Mabhungu I 211

PAY AS YOU EARN-EMPLOYMENT INCOME

Determination of tax liability for the year Tax there on xxxLess Credits xxxTax liability xxxAdd 3% Aids levy [3%of tax liability] xxxLess PAYE xxxTax payable (refund) xxx

04/18/2023 By Mabhungu I 212

INVESTMENT INCOME

This is income derived by individuals and companies from trade and investments, other than business operations –notably interest, dividends, fees or rentals.

04/18/2023 By Mabhungu I 213

Rental Income

Rental income is treated in the same way as profits from business operations. It is taxable at the rate of 25% plus 3% aids levy. However, only rental income from an immovable propertysituated in Zimbabwe is taxable.

04/18/2023 By Mabhungu I 214

Interest Income

• Generally, interest from trade and investments is taxable at the rate of 25% plus 3% aids levy effectively making it 25.75%. Accordingly interest on debentures, loan stock or other form of indebtness accruing to non-residents and residents alike from a source within Zimbabwe is taxed at 25%. Also taxable at that rate is income from a foreign source accruing to Zimbabwean residents-s12 (2).

04/18/2023 By Mabhungu I 215

Dividend income

• Dividends from a source in Zimbabwe are exempted in the hands of the shareholder because tax is withheld by the distributor (payer) at the time of distribution.

• Dividends from a foreign source accruing to Zimbabwean residents –s12 (2) are also taxable at the rate of 15% in the hands of the recipient.

04/18/2023 By Mabhungu I 216

Taxable income :Trade or company

Net profit as per statement xxxAdd backDepreciation xxxFines and penalties xxxCharitable donations xxxCompany formation expenses xxxAlterations and improvements to fixed assets xxx

Interest on loan used to purchase shares xxxProvision for bad debts xxx04/18/2023 By Mabhungu I

PARTNERSHIP

A partnership is not a legal person. In practice the taxable income of the partnership is first determined on the basis that it is a separate taxable person and the profits are then apportioned based on their profit-sharing ratio as is agreed in the partnership agreement and each partner is liable individually on his or her own share of profits.

04/18/2023 By Mabhungu I 218

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

04/18/2023 By Mabhungu I 219

ACCRUAL OF PARTNERSHIP INCOME

• Partnership income accrues to the partners at the end of tax year / agreed accounting period.

• Partnership income may also accrue to the partners on date of dissolution unless this has been varied by any other agreement.

04/18/2023 By Mabhungu I 220

Admission of new partner

If taxpayer has been trading as a sole trader and admits a partner into his business he will be considered as having sold his assets to the partnership and hence he is liable on anyrecoupment which may arise from the deemed disposal of such assets. The recoupmentwould be the difference between ITV of assets on date of deemed sale and the value atwhich assets were transferred.04/18/2023 By Mabhungu I 221

Payment of insurance premiums – joint life policy

• If a partnership takes out a policy on the joint lives of the partnership and charges the premium as an expense in the partnership account, the amount of such premium is not an allowable deduction where the partnership is the beneficiary.

04/18/2023 By Mabhungu I 222

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

04/18/2023 By Mabhungu I 223

Separate policies on partners lives

If each partner separately takes out a policy for his own benefit and the premiums are paid by the partnership; this is considered as allocation of partnership profits. The premium will be allowed as a deduction in computing the partnership’s taxable income. Each partner becomes taxable on the premium paid on his policy. The same treatment is accorded to Accident Policies

04/18/2023 By Mabhungu I 224

Private expenditure incurred on behalf of a partner

Expenses paid on behalf of partners by partnership are allowable to partnership but should be included in the computation of the individual partner’s taxable income. Such expenses include school fees, groceries, medical expenses, subscriptions and insurance premiums where partner’s estate is the beneficiary.

04/18/2023 By Mabhungu I 225

Private expenditure incurred on behalf of a partner

• Private expenditure of a partner incurred by the partnership is allowable to the partnership and taxable in the hands of the benefiting partner.

• Partner’s salaries are also allowable to the partnership and taxable in the hands of the benefiting partner. Also taxable in the partner’s hands is rent received for the use of his asset by the partnership, which is an expense to the partnership.04/18/2023 By Mabhungu I 226

Subscriptions

• The subscription is always allowed to the partnership and taxable in the hands of the partner. The partner can then seek a deduction in respect of the amount. A prerequisite of its deductibility is that the partner should establish that his membership is dictated by business consideration.

04/18/2023 By Mabhungu I 227

Where dual usage can be established the partner will be called upon to submit his estimate of business and private usage with a view to allow the partner deduction in respect of his business usage only.

04/18/2023 By Mabhungu I 228

Medical aid contribution

A contribution to a medical aid society by the partnership on behalf of a partner is an allowable deduction to the partnership, and taxable in the hands of a partner. The partner can claim a credit in respect of those amounts.

04/18/2023 By Mabhungu I 229

Passage benefits

• Where a partnership bears the costs of a partners’ business trip and the partner takes the opportunity to take a holiday after the business trip has been concluded, no amount is taxable in the partner’s hands.

• But where a partnership bears the cost of a holiday for a partner this will be considered as disbursement of partnership profit, and such cost is allowable in the hands of partnership but taxed in the partner’s hands.04/18/2023 By Mabhungu I 230

Attendance at trade conventions 15(2)(w)

Expenditure incurred by the partnership in respect of not more than one convention attended by a member of such partnership shall be allowed to the partner up to a maximum of $2 500. This being allowed to partners in their profit sharing ratios.

04/18/2023 By Mabhungu I 231

TAXATION OF FARMERS

• A farmer is taxable in terms of provisions stated in the 2nd & 7th schedules, as stated below. .

04/18/2023 By Mabhungu I 232

LIVESTOCK VALUATION

• At every tax year-end there is valuation of livestock closing stock and the method most commonly used by the commissioner is the fixed standard Value method (FSV). Where this method is adopted each farmer is required to come up with his standard value for each class of herd, which must be approved by the

commissioner. Once this method has been accepted the taxpayer should apply it consistently from year to year.04/18/2023 By Mabhungu I 233

Livestock valuation

The other methods occasionally used are:a) Cost and maintenance value method (CMV).b) Purchase price value method (PPV)The purchase price value (PPV)method is commonly used in the valuation of stud livestock and bulls. While cost and maintenance value is used as an alternative to fixed standard value method for the valuation of ordinary livestock.04/18/2023 By Mabhungu I 234

Stock acquired other than through purchase.

This is when a taxpayer acquires livestock either through donation or inheritance. In such circumstances there is nothing paid on acquisition of the stock. The farmer will not be taxable on their subsequent disposal if sold immediately on acquisition. However, if the taxpayer introduce the livestock into existing farming operations or commences farming with them, proceeds accruing on sale of such livestock attract income tax.04/18/2023 By Mabhungu I 235

Stock acquired other than through purchase.

Where the livestock are taxable the cost on acquisition shall be :a) The amount which would have been deductible in the donor’s hands had he sold the livestock, in the case of a donation.b) The fair market price for which the valuation in the estate concerned will be used, in the case of inherited livestock.

04/18/2023 By Mabhungu I 236

Timber or crops acquired together with land

• The cost of timber or crops acquired together with the farm is an allowable deduction to the purchaser, and gross income in the hands of the seller.

• The cost will be regarded to be of a capital nature to the buyer where he immediately sells the stock without conducting farming operation with it.

04/18/2023 By Mabhungu I 237

Timber or crops acquired together with land

• On the other hand, donated stocks, consumed for private purposes or timber felled by the taxpayer for private purposes are gross income in terms of s 8 (1) (h).

04/18/2023 By Mabhungu I 238

EXAMPLE:FARMINGA farmer commenced livestock farming on 1 January 2011 and his first year return showed the following:Purchases:

04/18/2023 By Mabhungu I 239

Number 1 5 20 10 15 30

Herd bull cows oxen heifers tollies calvesCost each 500 300 400 350 200 150

It cost him $1 500 to maintain the herd to the end of the year. There was no movement in the herd during the year and the same number was still in stock as at 31 December 2011He chooses PPV for the bulls and FSV for other livestock when valuing closing stock

04/18/2023 By Mabhungu I 240

Required:a) To compute his closing stock valueb) To compute his taxable income

04/18/2023 By Mabhungu I 241

Herd Cows Oxen Heifers Tollies CalvesFSV each

600 460 450 300 200

Solution

a) Closing stock valuation

04/18/2023 By Mabhungu I 242

Class No in stock

FSV/PPV($) Value($)

Bull 1 500 500Cows 5 600 3000Oxen 20 460 9200Heifers 10 450 4500Tollies 15 300 4500Calves 30 200 6000Total 81 27 700

b)Taxable incomeLivestock trading a/c for the year ended 31 Dec

04/18/2023 By Mabhungu I 243

Purchases: Sales ---------

Bull(1x500) 500 Closing stock 27 700

Cow(5x300) 1500

Oxen(20x400) 8000

Heifers(10x350) 3500

Tollies(15x200) 3000

Calves(30x150) 4500

Total Purchases 21 000

Direct expenses 1 500

Profit 5 200 ---------

27 700 27 700

• FSV are used for valuing closing stock• Purchases are recorded at original purchase

price or cost• Sales are shown at actual selling price• Deaths are not valued at all

04/18/2023 By Mabhungu I 244

Movement in the herd

• This is the progression of animals from a lower category to an upper category.

• Thus calves will grow into heifers, which in turn grow into cows.

• This natural movement affects the closing stock and therefor before a trading account is prepared, livestock reconciliation must be prepared.

04/18/2023 By Mabhungu I 245

Example

A farmer commenced business on 1 Jan 2011 and submitted the following accounts for the year ending 31 Dec 2011.a) Livestock purchases during the year:

04/18/2023 By Mabhungu I 246

Number 2 100 90 50 70 40

Herd bull cows oxen heifers Tollies calves

Total($) 900 40000 40500 21000 17500 6000

b) The commissioner adopted the following FSVs

c)There were 30 births,4 deaths(2 tollies and 2 cows),30 heifers become cows,15 tollies became oxen, and of the 20 calves half became tollies and half heifers04/18/2023 By Mabhungu I 247

Herd cows oxen heifers tollies calvesFSV each

600 460 400 300 200

d)100 herd was sold for $57 000, of which 70 were oxen and 30 were cowse)Direct herd expenses amounted to $2 300Required:a)To compute a reconciliation accountb)Compute the taxpayer’s taxable income

04/18/2023 By Mabhungu I 248

Solution

a) Livestock Reconciliation Account

04/18/2023 By Mabhungu I 249

Details bulls

Cows Oxen Tollies

heifers

calves total

Purch 2 100 90 70 50 40 352

Births 30 30

Pro in 30 15 10 10 65

Total 2 130 105 80 60 70 447

Death 2 2 4

Pro out 15 30 20 65

sales 30 70 100

c/stock 2 98 35 63 30 50 278

Ppv/Fsv 450 600 460 300 400 200

Value($000)

0.9 58.8 16.1 18.9 12 10 116.7

b)Trading profit a/c for the year end 31 DecSales 57 000Less cost of sales:Opening stock -----------Purchases 125 900Less closing stock (116 700) 9 200 Gross profit 47 800 Less livestock expenses 2 300Net profit 46 800l 04/18/2023 By Mabhungu I 250

Special concessions applicable to farmers04/18/2023 By Mabhungu I 251

a) 7th Schedule paragraph 2

A farmer shall be entitled to deduct in full any expenditure incurred by him during the year of assessment on:• Stumping and clearing of land and fencing• Works for the prevention of soil erosion• Sinking of bore holes and wells• Aerial and geophysical surveys• Any water conservation work and any

amounts paid by him towards cost of such works.04/18/2023 By Mabhungu I 252

• The expenditure in respect of any of the above work is deducted in full, and is non-recoupable. Where any of the above has been acquired together with a farm or land no deduction shall be provided in terms this paragraph.

04/18/2023 By Mabhungu I 253

b) 7th schedule paragraph 5: Relief from Enforced Sales.

• Taxable income from a sale by a farmer of his livestock due to stress of drought, epidemic disease or farm acquisition, may upon election be taxable over 3 years in equal installments

• The taxable income is calculated as follows:

04/18/2023 By Mabhungu I 254

Drought, epidemic or farm acquisition sale xxxLess : cost of salesPurchases [number sold x FSV] xxxDirect expenses* xxx Taxable income xxx

04/18/2023 By Mabhungu I 255

*Direct expenses are arrived at as follows: = Number sold x livestock expenses Average stock Average stock =(opening stock + closing stock)/2• Only those direct expenses related to the

keeping of animals are included in the computation.

• Average stock is expressed in physical quantities

04/18/2023 By Mabhungu I 256

Example: Forced sales

A Farmer sold 10 cows and 25 oxen in an epidemic area and realized $40 000 .The F.S.Vs for oxen and cows which had been on hand at the beginning of the year were $130 and $150 respectively. Opening stock was 260 herds and closing stock 210.The direct livestock expenses were estimated at $4500.Calculate minimum taxable income from epidemic sales.

04/18/2023 By Mabhungu I 257

SOLUTION

Epidemic sales $40 000Less: Cost of herd soldCows: 10 at $150 1 500Oxen: 25 at 130 3 250 4 750Less: Expenses related to herd sold 670 5 420Profit 34 580

04/18/2023 By Mabhungu I 258

Taxable income: 34 580= 11 526 per year. 3

04/18/2023 By Mabhungu I 259

c) 7th schedule paragraph 6: Restocking Allowance.

• In the event of a taxpayer restocking the herd depleted by circumstances outlined above he is granted an allowance of 50% of the cost of each livestock purchased.

• The allowance is over and above the normal purchase price which is generally an allowable deduction. The allowance is, however, restricted where he exceeds the assessed carrying capacity of the land (ACCL).

04/18/2023 By Mabhungu I 260

• In the event of him exceeding the assessedcarrying capacity of the land the maximum restocking allowance granted is: B x A x 50% CA = cost of the livestock purchasedB = difference between ACCL and stock on hand immediately before purchase.C = the number of livestock purchased

By Mabhungu I 261

Example: Restocking allowance

Due to favorable weather conditions, a Farmer restocked his herd which was depleted by drought. He purchased 300 herd for $93 000.The ACCL as approved was 500 herds. The herd on hand before purchases was 300.

Calculate the restocking allowance.

04/18/2023 By Mabhungu I 262

Solution

Restocking allowance = B x A x 50% C

(500-300) x $93 000 x 50% 300 =$31 000

04/18/2023 By Mabhungu I 263

TAXATION OF MINERS

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

04/18/2023 By Mabhungu I 264

Prospecting expenses

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

04/18/2023 By Mabhungu I 265

Capital redemption allowances - (5th schedule)

Capital expenditure for mining purposes is defined as expenditure on buildings, works or equipment, lease premiums, shaft sinking (including sumps, pump chambers, stations and ore bins accessory to a shaft) ; expenditure incurred prior to commencement of trade on preliminary surveys, boreholes, development, general administration and management, interest on loans ; and, after 1/04/88 includes expenditure on mine schools, nursing homes and clinics.04/18/2023 By Mabhungu I 266

Capital redemption allowances replaces most allowances, allowable to other tax payers i.e. SIA, wear and tear, scrapping allowances, allowances in respect of lease premiums and pre-production expenditure (s15 (2)(t).

04/18/2023 By Mabhungu I 267

calculation of capital redemption allowances

The redemption allowance can be calculated using either of three methods commonly referred to as :-• Life of mine• Mixed method• New mine methodThe taxpayer has to make an election of the method preferred.

04/18/2023 By Mabhungu I 268

Life of mine (paragraph 2)

• Under this method the current year’s capital expenditure is added to the balance of unredeemed capital expenditure brought forward at the commencement of the current year of assessment.

• The total capital expenditure is then divided by the approved estimate life of the mine (in years), counting from the beginning of the current year of assessment.

04/18/2023 By Mabhungu I 269

The taxpayer must make an estimate of the life span of the mine, and submit it for approval by the commissioner.Capital redemption allowance:=Capital expenditure ranking for CRA Life of mine or

04/18/2023 By Mabhungu I 270

Unredeemed bal of CE b/f -recoupmnt +CE Life of mineWhere CE =Capital expenditure

04/18/2023 By Mabhungu I 271

Determination of CRA for the year

endedUnredeemed balance of CE b/f xxxLess Recoupment (xxx) xxxAdd Current year CE xxxTotal capital expenditure xxxLess* CRA (xxx)Unredeemed balance of CE c/f xxx

04/18/2023 By Mabhungu I 272

*CRA = Balance b/f –recoupment + CE Life of minePlease note:1) The method relate to mine owning

individuals and companies’

04/18/2023 By Mabhungu I 273

2) In the case of a company, which is not, the owner of the mine CRA is calculated based on the shorter of life of mine and period of tribute.3) In respect of an individual who is not the owner of the mine, the commissioner recognizes accumulated shaft sinking and development costs in the first productive year and thereafter the allowance is spread over remaining period and wear and tear allowed at 20%.04/18/2023 By Mabhungu I 274

4) No allowance is calculated until production stage is reached.5) Life of mine is computed from the beginning of the year of assessment

04/18/2023 By Mabhungu I 275

Estimated life of mine

Means the numbers of years during which mining operations are expected to continue after the beginning of the year of assessment i.e the life span of the mine.Provided that, the life of mine must not exceed(a) In the case of a mine producing lead or zinc 10 years(b) In respect of a mine producing iron, five years(c) Any other mine, twenty years.04/18/2023 By Mabhungu I 276

New Mine Method (paragraph 4(4))

• This method is only available to those carrying on operations in a new mine as defined.

• A new mine is defined as an undertaking which commenced regular production on or after 1/04/1968, or recommencement of a mine which has changed ownership and has been reorganised with substantially new development and new plant.

04/18/2023 By Mabhungu I 277

A person who conducts mining operations in a new mine may elect to deduct in the year ofassessment in which production commences, both the Accumulated capital expenditure incurred prior to commencement and that expenditure incurred subsequent to commencement in that year (current year capital expenditure).

04/18/2023 By Mabhungu I 278

This basis is available to both individual and companies, and applies regardless of whether the taxpayer owns or tributes the mine.

Capital Redemption allowance is calculated as follows:CRA= balance of CE b/f + Current expenditure

04/18/2023 By Mabhungu I 279

Mixed Method (paragraph 4(2))

• This is a mixture of the new mine basis and life of mine basis.

The effect is to grant current capital expenditure in full, while capital expenditure brought forward less recoupment is spreadover the life of the mine.

04/18/2023 By Mabhungu I 280

Unredeemed balance of CE b/f xxxLess Recoupment (xxx)Sub total xxxAdd Current year expenditure (CE) xxxTotal capital expenditure xxxLess *CRA (xxx)Unredeemed balance of CE c/f xxx

04/18/2023 By Mabhungu I 281

*CRA = Balance b/f –recoupment + CE Life of mine

04/18/2023 By Mabhungu I 282

Other provisions about mining

04/18/2023 By Mabhungu I 283

Recoupment-s 8(1)(i)

Miner’s recoupment is not restricted to allowances previously granted. It is simply sale proceeds less ITV. In most cases a miner’s recoupment is equal to sale proceeds. Recoupment is brought into gross income when expenditure has been claimed using new mine basis, but would first be off set against unredeemed balance of capital expenditure in the case of the other two methods the excess recoupment is then brought into gross income.04/18/2023 By Mabhungu I 284

• In respect of damage to or destruction of an asset, the recoupment is restricted to allowances previously granted.

04/18/2023 By Mabhungu I 285

Ring – Fencing

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

04/18/2023 By Mabhungu I 286

b) With effect from the year of assessment beginning on 1 January 2001 deductions allowed per section 15 can only be claimed in respect of income to which they relate.c) Capital allowances can only be claimed in respect of expenditure or losses attributable to a particular mining location and shall not be claimed in respect of any other mining location

04/18/2023 By Mabhungu I 287

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 forapproval. An assessed loss from mining operations can not be offset against other income

04/18/2023 By Mabhungu I 288

Income Tax Rate

The income tax rate for mining companies is 25% effective from 1 January 2010

04/18/2023 By Mabhungu I 289

Example: Capital Redemption Allowances

Korokoza Mining (Pvt.) Ltd situated 20kms Northwest of Zvishavane, incurred the following capital expenditure, year 1 and 2 being pre-production. Production stage was reached in thecurrent year i.e. year 3.

04/18/2023 By Mabhungu I 290

YEAR 1 & 2 $Plant and Machinery 40 000Shaft Sinking 10 000Mine Building 30 000Salaries and wages 50 000 130 000

04/18/2023 By Mabhungu I 291

CURRENT YEARSalaries and wages 60 000Passenger Motor Vehicle 16 000Lease premiums 10 000 86 000Life of mine is 3 years from the end of year 3. Required :Calculate Capital Redemption Allowance based on each of the three methods

04/18/2023 By Mabhungu I 292

Solution :NEW MINE BASIS

Balance b/f from previous year: $Plant and Machinery 40 000Shaft Sinking 10 000Mine Building 30 000Salaries and wages (pre-production) 50 000 130 000Add Current capital expenditureSalaries and wages (Post-production) -------04/18/2023 By Mabhungu I 293

Passenger motor vehicle (restricted cost) 10 000Lease premiums 10 000Total 150 000

NB:The whole amount is provided as a deduction in respect of capital redemption allowance.

04/18/2023 By Mabhungu I 294

Solution: Life of mine method

Balance b/f from previous year:Plant and Machinery 40 000Shaft Sinking 10 000Mine Building 30 000Salaries and wages (pre-production) 50 000 130 000Add Current capital expenditureSalaries and wages (Post-production) -04/18/2023 By Mabhungu I 295

Passenger motor vehicle (restricted cost) 10 000Lease premiums 10 000 150 000Less CRA 37 500Unredeemed balance of CE C/F 112 500

04/18/2023 By Mabhungu I 296

CRA = Balance b/f –recoupment + CE Life of mine

= 150 000 4 years =37 500*NB Life of mine is counted from the beginning of the year of assessment concerned i.e. currentyear.04/18/2023 By Mabhungu I 297

Solution: Mixed Basis

Unredeemed balance of capital expenditure b/f:- Plant and machinery 40 000- - Shaft Sinking 10 000- Mine Building 30 000- Salaries and wages 50 000 130 000Add current year capital expenditure :- Salaries and wages (post production) --------04/18/2023 By Mabhungu I 298

Passenger motor vehicle (restricted cost) 10 000- Lease premiums 10 000 150 000Less CRA 52 500 Unredeemed balance of capital expend 97 500

04/18/2023 By Mabhungu I 299

*CRA = Balance b/f –recoupment + CE Life of mine

= $130 000 + 20 000 = $52 500 4NB life of mine is counted from the beginning of current year of assessment. Under this methodcurrent capital expenditure is claimed in full.

04/18/2023 By Mabhungu I 300

VALUE ADDED TAX ACT [Chapter 23:12]04/18/2023 By Mabhungu I 301

SOME IMPORTANT TERMS

‘Trade’ means any activity or business which is carried on continuously or regularly in or partly in Zimbabwe by any person of which goods or services are supplied for a consideration, whether or not for profit.‘Exempt supplies’ means supplies which are immune from VAT in terms of Section 11 ofthe VAT Act.

04/18/2023 By Mabhungu I 302

‘Input Tax’ is the tax a registered operator is charged on goods or services acquired or imported for the purposes of making taxable supplies‘Output Tax’ is the tax charged by a registered operator on the supply of taxable goods orservices

04/18/2023 By Mabhungu I 303

Consideration’ includes any payment made or to be made for a supply of goods andservices made by the registered operatorZero-rated supplies’ means supplies of goods or services where the rate of 0% is applied.‘Standard-rated supplies’ means supplies of goods or services where the rate of 15% isapplied.

04/18/2023 By Mabhungu I 304

‘Taxable supply’ means supplies of goods or services taxed at the rate of 0%, 15% and thespecial rate of 22.5%.‘VAT Return’ is the form used to declare the value of supplies, output and input tax of aregistered operator to the Commissioner.

04/18/2023 By Mabhungu I 305

‘Registered Operator’ means any person who has registered or is required to register forVAT purposes.‘Tax periods’ means regular intervals in which registered operators are required to submitreturns and account for VAT,

04/18/2023 By Mabhungu I 306

‘Entertainment’ means the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a registered operatorwhether directly or indirectly to any one in connection with the trade carried on by him.

04/18/2023 By Mabhungu I 307

WHAT IS VAT?

VAT is an indirect tax which is levied on:• local supplies of goods and, or services made by a registered operator;• Goods imported into Zimbabwe.It is collected at each stage of production, distribution and importation.

04/18/2023 By Mabhungu I 308

Where a person donates or gives any amount of money to someone without receiving anything in return, there will be no VAT implications on such donations.• Only persons carrying out trade should be

registered for VAT

04/18/2023 By Mabhungu I 309

The following requirements must be met for one to be deemed to be carrying on trade:• The activities must be carried on continuously or regularly.• The business activities must be carried on in Zimbabwe or partly in Zimbabwe.• The goods or services must be supplied to other persons for a consideration, i.e payment

04/18/2023 By Mabhungu I 310

The following activities shall not be regarded as trade for VAT purposes:• Services supplied by an employee to an

employer for which remuneration received is subject to Pay As You Earn (PAYE)• The activities of a branch permanently

located outside Zimbabwe• Hobbies and private activities• Any activities to the extent that it involves the making of exempt supplies04/18/2023 By Mabhungu I 311

How does VAT work?

• All registered operators are required to charge output tax to both registered and non-registered operators.

• Registered operators are entitled to claim input tax on purchases of goods and/or services, which are for use in making taxable supplies.

04/18/2023 By Mabhungu I 312

Calculation of VAT

OUTPUT TAX – INPUT TAX =VAT Payable/Refundable

04/18/2023 By Mabhungu I 313

Example

Suppose a supermarket buys a bar of soap from a manufacturer for $1.It will pay VAT of 15cents ($1 x 15%) on the purchase. The total purchase price will be $1.15. The 15cents VAT becomes the supermarket’s input tax and the manufacturer’s output tax. If the supermarket sells the bar of soap for $1.50 it would charge VAT of 22.5cents($1.50 x 15%).This 22.5cents VAT is the supermarket’s output tax. VAT payable by the supermarket will be 22.5-15 =7.5cents.04/18/2023 By Mabhungu I 314

HOW TO REGISTER FOR VAT

Who must register?Any person who carries on a taxable activity and whose annual turnover exceeds or is likelyto exceed the prescribed amount(US$60 000 per year) must apply to register for VAT purposes on form VAT 1.

04/18/2023 By Mabhungu I 315

A person includes any of the following:-• Company• Partnership or joint venture.• Local and public authorities.• Trust.• Deceased or insolvent estates.

04/18/2023 By Mabhungu I 316

VAT Voluntary Registration

• A person whose turnover is below the prescribed amount(threshold) can voluntarily register for VAT

• Voluntary registration can be denied where a person:

i. Has no fixed residential address or business address

ii. Does not keep proper accounting records for the business.

04/18/2023 By Mabhungu I 317

• Does not operate a bank account for the business• Has failed to perform the duties under the repealed Sales Tax Act or the VAT Act if onewas registered under such Acts.

04/18/2023 By Mabhungu I 318

Separate registration of Branches

Branches can be registered separately when each branch is carrying on a separate trade by reference to the nature of the business activities or geographical location of each branch and such branch maintains independent accounting system.

04/18/2023 By Mabhungu I 319

Cancellation of registration

VAT registration can be cancelled if:• The annual taxable turnover falls below the prescribed turnover for clients that wereregistered compulsorily• One ceases trading• One was registered voluntarily but no longer meets the voluntary registration conditions.

04/18/2023 By Mabhungu I 320

Responsibilities upon registration?

One will be obliged to comply with the following requirements of the VAT Act:• Keep accounting records for a period of at least six (6) years after the tax period to which the records relate.• Complete and submit VAT returns as required.• Calculate and pay the VAT due to the Commissioner on or before the due date.

04/18/2023 By Mabhungu I 321

• Issue tax invoices for any taxable supplies where the value is more than the prescribedamount.• Advise the Commissioner of any changes in business details such as change of address, addition of new partner, cessation of trade, etc.• Allow the Commissioner to enter the business premises and examine goods and all business records.04/18/2023 By Mabhungu I 322

04/18/2023 By Mabhungu I 323

TAX PERIODS

A registered operator is required to submit returns and account for VAT to the Commissioner according to the allocated tax period.• At registration, one will be allocated one of

these tax periods:1. Category A: A two-month period ending on the last day of January, March, May, July, September, and November04/18/2023 By Mabhungu I 324

2. Category B: : A two-month period ending on the last day of February, April, June, August, October, and December.3. Category C(one month tax period)4. Category D

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category C

Under category C, VAT returns are submitted on a monthly basis.One will be registered according to Category C when:• The turnover of taxable supplies exceeds the

prescribed amount per annum. Where theregistered operator has more than one business, or operates a business with branches, thesupplies for all businesses or branches must be added together to determine the total turnover.04/18/2023 By Mabhungu I 326

• One has applied to be in this category.• One has repeatedly failed to perform any of

the obligations as a registered operator.

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Category D

A registered operator will be allowed this category upon written application to theCommissioner. In order for one to be in this category, one’s trade should consist solely offarming, agricultural or pastoral activities and one’s turnover should not exceed or is notlikely to exceed the prescribed amount per annum.

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ACCOUNTING FOR VAT

VAT is accounted for on either the invoice or the cash basis.INVOICE BASISThe invoice basis is where the registered operator must account for output tax on both credit and cash sales. The operator must also claim input tax on both credit and cash purchases and expenses incurred for making taxable supplies.

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Where payment is received before the issuance of a tax invoice, the general time of supplyrule applies, that is the earlier of an invoice being issued or payment being received.CASH OR PAYMENT BASISThe cash or payment basis is where the registered operator claims input tax or accountsfor output tax on the actual payments made or received.04/18/2023 By Mabhungu I 330

TAXABLE AND EXEMPT SUPPLIES

Taxable supplies are supplies that are taxable at the following rates:• Zero rate 0%• Standard rate 15%

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Zero rated Supplies

These are supplies on which VAT is chargeable at rate at 0% Some of the examples of zero rated supplies are:-• Exports of goods from Zimbabwe to an address in an export country.• Basic foodstuffs such as mealie-meal, sugar,

milk, meat, salt, bread, etc.• Agricultural inputs such as fertilizer, seeds, and

pesticides, animal feed, animal remedy, plants, tractors, etc.04/18/2023 By Mabhungu I 332

• Exported goods with the exception of un-beneficiated chrome which is taxed at 15%.

• The supply of day old chicks weighing not more than 185g is now zero-rated with effect from 1st September 2010.

• International transport services provided by a registered person.

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• Services physically rendered outside Zimbabwe.Note: VAT incurred in making zero-rated supplies may be claimed as input tax.

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Standard-rated Supplies

• These are supplies of goods on which VAT is chargeable at 15%.

• Generally all goods and services are standard rated unless specifically exempted, zero-rated

or subject to VAT at a special rate.

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Exempt Supplies

• Exempt supplies are supplies of goods and services on which no VAT is chargeable at all. VAT incurred on goods and services acquired to make exempt supplies shall not be claimed as input tax credit.

• Traders who exclusively provide exempt supplies are not required to register for VAT purposes.

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Exempt supplies include the following services and products:• medical services• educational services• rentals from residential properties• transport of fare-paying passengers• water for domestic use• electricity for domestic use• fuel04/18/2023 By Mabhungu I 337

Deemed Supplies

These are transactions, which do not generally appear as actual supplies but regarded by lawto be supplies. The following are examples of deemed supplies:-• Goods or services taken for own use.• Motoring benefit.• Closing stock and assets on hand at the time of de- registration.• Subsidies or grants received from the state or local authority.04/18/2023 By Mabhungu I 338

• Goods acquired under an instalment credit agreement that have been re-possessed bythe seller.• Transfer of goods between independent branches.

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INPUT TAX CREDIT

• Any VAT paid on local purchases or on the importation of goods for making taxable supplies may be claimed as input tax.

• If goods or services are acquired for the purpose of making both taxable and non-taxable supplies, only the VAT attributable to taxable supplies can be claimed as input tax.

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• Where goods or services are acquired by a registered operator to make both taxable and

exempt supplies, full VAT incurred may be claimed as Input Tax if the ratio of the valueof taxable supplies to total supplies exceeds 90%.

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Amounts which may not be claimed as input tax?

• Entertainment which includes staff meals, Christmas parties and customer entertainment of all kinds (this includes equipment purchased to provide staff refreshments, e.g. canteen utensils.)

• Goods or services acquired exclusively for making exempt supplies.

• Club subscriptions fees or subscriptions

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incurred by a registered operator for membership of a club or association of a sporting, social or recreational nature.• Acquisition of passenger motor vehicles as

specified.

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PRICING

Registered operators are required to include VAT in advertisements or quotations. It must beexplicitly stated that VAT is included in the prices advertised or quoted. If both the priceincluding VAT and the price excluding VAT are shown, then each amount must be shownwith equal prominence.

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• It is a requirement for price tickets to indicate that VAT is included in the selling price.

• However, where notices at all entrances to the premises and at all pay points display that

prices include VAT, the above requirement can be dispensed with on the tickets.

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Determination of price of goods and services

• In determining the price of goods and services to charge customers, input tax incurred should

not be considered as a cost since it will be claimed as a credit.

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Example

A Retailer bought a bicycle valued at $115 for resale. His mark up is 50%. His selling price will thus be:Purchase price - $115Less VAT paid (115 x 15/115) $15Actual Cost $100Add 50% mark-up $50Selling price before VAT $150.00Add VAT at 15% $22.5004/18/2023 By Mabhungu I 347

Selling price including VAT $172.50

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Taxation (Bs211)

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Transcript of Taxation (Bs211)