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Chapter 2 (Paper 3.4 - Advanced Taxation)

Chapter 2 (Paper 3.4 - Advanced Taxation)

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CHAPTER 2 PERSONAL BUSINESS TAXATION

LEAR ! " #B$E%T!&E'( After studying this chapter you should be able to:  Understand the Badges of trade  Compute Tax Adjusted profits for ole Traders and partnerships  Compute capital allo!ances  Understand Basis "eriods  Understand the operation of Turno#er Tax

2.1 – AN EVALUATION OF THE BADGES OF TRADE
The Definition of Trade Income Tax is charged on the ‘Annual Profits or gains arising or accruing to any person residing in the Republic of Zambia from any trade, profession or vocation. A trade is defined as ‘ very manufacture, adventure or concern in the nature of trade. This is given by the !" Tax legislation at #ection $%& '() I*TA (+$$. A ‘trade, is defined in the legislation as a ‘trade,, -hich is a circular definition and does not ta.e us a great deal further. Therefore, the interpretation of -hat is meant by the term ‘trade, has been left largely to the courts. The courts have developed a number of tests to determine -hether somebody is trading. These tests are .no-n as ‘The Badges of Trade’.

rofit !ee"in# $oti%e&
/hen a person enters into a transaction, -e need to identify -hether there is a profit see.ing motive. it is not the existence of a profit that is important, it is the motive to earn one. 0o-ever, the ZRA -ill really be interested in this issue if a profit has actually been earned, because then they have something to tax. A Taxpayer may argue that they are trading in order to utili1e a loss to reduce their Tax bill. The taxpayer must ho-ever, demonstrate the motive rather than the existence of profit to establish that a trade is being carried on. S'$$ar(& Intention to trade clearly constitutes trading. Intention to make a profit may not necessarily be so.

41
L.3 – Advanced Taxation Amendment Act 2006/07

In IR) V! Reinho*d +1,-./ the Tax2 payer bought four houses admittedly for resale. 0e -as held not to be trading. *onversely, the intention not to ma.e a profit -ill not necessarily mean that a trade is not being carried on. In Gro%e V! 01)A +1,2./ the canteen of 34*A made a surplus. The 5rgani1ation -as a non 6 commercial one. It -as held that the profits -ere trading profits. The !'34e5t $atter of rea*i6ation If the assets are normally held as trading stoc., the presumption that the trade is ta.ing place is higher. If the assets that have been sold are normally not held as trading stoc. it is unli.ely that the transaction may be interpreted as trading. ♦ In R't*ed#e V! IR) +1,2,/ the Tax2 payer, -hilst in 7ermany on business, purchased one and a 8uarter million toilet rolls. #hortly after his return to ngland he sold them ma.ing a profit of sterling Pounds Ten thousand. 0e -as held to be trading. ♦ In 1artin V! Lo7r( +1,28/ an Agricultural machinery merchant purchased from the 7overnment its entire stoc. of aircraft linen amounting to almost 9: million yards. 0e had hoped to sell the linen to manufactures but instead -as forced to sell it through an extensive retail operation direct to the public. 0e made a profit of almost #terling Pound t-o million. 0e -as held to be trading. The *en#th of 9eriod of o7ner!hi9 If a person sells an Asset that he has held for a long period of time it -ill be 8uite difficult to prove that the asset had been held as trading stoc.. This is because assets held for long periods of time are normally investments. In :i!do$ V! )ha$3er*ain +1,;,/ the tax2 payer had, -ith borro-ed money, purchased silver bullion as a hedge against possible devaluation. After about a year he sold it ma.ing a profit, after expenses, of approximately forty eight thousand sterling pounds. 0e -as held to be trading. 0arman ;.; said< <'ote& =This -as a transaction entered into on short term basis for purpose of ma.ing a profit> and if that is not an adventure in the nature of trade, I do not really .no-hat it is?

The fre='en5( of !i$i*ar Tran!a5tion! The more often that a tax2 payer has entered into a particular transaction, the greater the presumption of trading. In the case >. Bo*!on ? Son! Ltd V! Farre** +1,-.), 0arman ; said< =A deal done once is probably not trading. @one three or four times it usually is?

42
L.3 – Advanced Taxation Amendment Act 2006/07

In i5"ford V! <'ir"e +1,28), the Taxpayer had entered into four transactions each resulting in a profit. 0e -as held to be trading. In his Audgment Ro-latt ; remar.ed< )*ote =Bo- of course it is very -ell .no-n that one transaction of buying and selling a thing does not ma.e a man a trader, but if that is repeated and becomes systematic then he becomes a trader and the profits of the transaction, not taxable so long as they remain isolated, become taxable as item in trade as a -hole, setting losses against profits, of course and combining them all into one trade?.

S'99*e$entar( :or" If an asset is ac8uired -hen it is in a poor state and supplementary -or. is carried out to improve it, then such an asset -hen sold -ill give rise to a trading profit. ♦ In )a9e Brand( S(ndi5ate V! IR) +1,21/@ three individuals in the -ine trade bought (C,CCC gallons of #outh African Drandy. This -as blended, bottled and sold to over (CC separate buyers over a period of about ($ months. 0eld to be trading. Per Ro-latt. ;. They had =>bought it -ith a vie- to transport it, -ith a vie- to modify its character by s.illful manipulation, by blending -ith a vie- to alter>.? ♦ In IR) V! Li%in#!tone +1,82/@ a syndicate purchased a cargo vessel -ith a vie- to converting it into a steam drifter and selling it at a profit. They had never previously done this, but they -ere held to be tradingE

)ir5'$!tan5e! #i%in# ri!e to the Rea*i6ation
If a taxpayer sells an asset in order to raise money to help solve some financial problems it -ill be difficult to prove that he is carrying on a trade. Incidentally, there have been fe- cases on this point. In a#e V! o#!on +1,-A/ the taxpayer built a house for himself and sold it six months later after completion. 0e then built another one but had to sell it -hen his employment moved to another part of the *ountry. 0e -as held to be trading by the *ommissioners of Taxes. !pAohn .; felt unable to reverse the finding of the commissioners -hilst doubting -hether he -ould have reached that conclusion himself. In addition to the !iB 3ad#e! of trade there additional factors -hich have to be ta.en into account. These are< • TaB9a(erC! other 5ir5'$!tan5e!<

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L.3 – Advanced Taxation Amendment Act 2006/07

If other circumstances of a taxpayer indicate the existence of a trade then even the current transaction is li.ely to be interpreted as an indication of the existence of a trade. • The :a( in 7hi5h the a!!et 7a! a5='ired< If the asset -as ac8uired by inheritance or by -ay of gift the transaction may not be considered to be a trading transaction. • 1ethod of Finan5e< If the asset sold -as ac8uired by use of borro-ed funds the presumption that the asset -as held as trading stoc. is high. The presumption is even greater if some interest -as paid on the amount borro-ed.

EDA1 FO)US
The $uestion of !hether a trade is being carried on or not% often in the minds of the &e#enue Authority% !ill depend on the results of the substanti#e transactions. In#estments by an Indi#idual !ere not held to be carrying on of a trade% thus denying him loss relief against income.

2.2 – )O1 UTATION OF TADABLE TRADING ROFITS The ZRA -ill normally accept profits -hich are determined in accordance -ith the accounting principles provided that there is no conflict bet-een accounting principles and tax legislation. 0o-ever, there is normally a conflict and the accounting profits re8uire several adAustments to be made to them in order to determine the taxable profits. #ome xpenses that are charged in the Accounts are not recogni1ed as expenses for tax purposes. /e have so far recogni1ed such expenses as +isa,,o-a.,e Ex/endit*re. #imilarly some Income that is usually credited to the profits is not taxed under Tax rules.

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L.3 – Advanced Taxation Amendment Act 2006/07

The taBa3*e rofit i! 5o$9'ted a! fo**o7!& 1S. EAUNDA 1ULENGA
)o$9'tation of TaBa3*e Tradin# rofit for the 5har#e (ear 222;F 2228

Bet profit as per Accounts Add& Di!a**o7ed EB9endit're< @epreciation Tax Penalty Proprietor,s /ages Private Telephones Le!!& EB9endit're not 5har#ed in the ? L B't 7hi5h i! TaB A**o7a3*e in the A5t& *apital Allo-ances In5o$e )redited in the ? L 3't not TaBa3*e< Profit on Asset disposal Dan. Interest 'Taxed #eparately) AdAusted Dusiness Profit

EC222 F F F F F 22222 F

'F) 'F) 'F) 2222222222 D GGGGG

Note& This computation is usually the first to be made. It is then carried for-ard into the Personal Income Tax *omputation as a -or.ing under arned Income. The list under disallo-able expenditure is not exhaustive. 5ther items that might be included are< Hines for illegal acts, @onations to non 6approved charities, loans to employees, bad debts incurred before incorporation, costs of tax appeals, etc. Allo-able expenditure may include< 7ross -ages, Redundancy payments, compensation for loss of office, Bormal business Iosses and BAP#A *ontributions.

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L.3 – Advanced Taxation Amendment Act 2006/07

problems.s and chairs *omputers 4oveable partitions #tationary Plant 2 4etal Tan. Petrol and lectric motor vehicles ♦ 4otor Po-er and ngines 46 L. 4echanical Transport 6 Rail-ay. capital expenditure is not allo-ed as a deduction for tax purposes. 4achinery and Plant. is of course supposed to be the available statutory legislation. etc. The phrase Implements. 0o-ever. relief is given for certain types of capital expenditure by granting *apital Allo-ances.G2.3 – Advanced Taxation Amendment Act 2006/07 .s. implements. the meaning of 01ac2iner3’ seems to cause fe. li. #team. under the fifth and sixth schedules of the same Act. Dut Audging from reported tax cases. Dut going through the Income Tax Act reveals that #ection & of the Income Tax Act gives no precise definition of implements.g. =Asset or Advantage? can be Intangible. – )O1 UTATION OF )A ITAL ALLO:AN)ES !nder #ection &+ of the Income Tax Act. machinery.2. /here a person carrying on a trade incurs capital expenditure on the provision of machinery or plant for the purposes of the trade. *ontainers etc. I1 LE1ENTS@ 1A)HINER0 AND LANT The starting point for any consideration of the meaning of ‘Plant.e 7ood-ill or the exclusive right to use a trade 2 mar. The capital allo-ances system deals separately -ith different types of expenditure. the *apital expenditure on ac8uiring the 4aster2 *ard symbol in :a*"er V! >oint )redit )ard )o$9an( Ltd in 1. -ith different rules both in terms of identifying -hich items 8ualify for capital allo-ances and in terms of the rates of capital allo-ances available. he may be allo-ed to claim capital allo-ances. The -ords must therefore be given their 5rdinary meaning as per the Rules of constructing the Taxing Acts. . or symbol.ant’. )a9ita* EB9endit're #uch expenditure brings into existence an =Asset or Advantage? for the enduring benefit of the trade. plant. 4achinery and Plant could be said to include all moveable and fixed items of e8uipment including< ♦ ♦ ♦ ♦ ♦ ♦ lectrical devices such as F2Ray and Radar 8uipment @es. These include buildings. but considerable difficulty has been experienced in determining -hether or not expenditure has been incurred on the provision of 04..

nglish and understands . shop front 6 <im/3 !nternationa.that is to say% the court of construction must Interpret it as a man !ho speaks . Ducley I.s ♦ Actual running 4achinery etc. said< )5#TE( 'The tatutes ha#e not contained a definition of the meaning of "lant.and &s <ar. . and 4i==a . lift truc. In this case the court held that a horse used by a tradesman in his business -as part of his plant. in the *ase of 0ar$o'th V! Fran5e. there is a great Jolume of *ase la.nglish language in the context in !hich it has been construed.around this issue.+ In many !" Tax cases. the courts have approved an ($$K description of Plant by Iindley I. T). Iord .es it clear that things such as horses may be plant for tax purposes even though they -ould not be so considered by a layman.nglish accurately . 0o-ever..mployers0 liability Act 12234: but% In its ordinary sense% it includes !hate#er apparatus is used by a business man for carr3ing on 2is ..e Bros &s 42i. the follo-ing are examples of items of capital expenditure.i/s6 7892 6 regarded as the setting in -hich the business -as conducted rather than something used in carrying on the trade.imited in 787. it has al-ays been assumed to be e8ually applicable to the tax legislation. -hich the courts have decided do not 8ualify for capital allo-ances< ♦ @isplay or bac. including the one above.3 – Advanced Taxation Amendment Act 2006/07 . The case ma. .ustice Iindley said< )5#TE( 'There is no definition of plant in the Act /the .and6 7898 6 again regarded as setting and part of 47 L. And in so holding.*siness 5 not his stock in trade% !hich he buys or makes for sale% but all goods and chattels% fixed or mo#eable% li#e or dead% !hich he keeps for permanent employment in his business+.♦ Pullies and for. Although there is no general #tatutory @efinition of Plant and 4achinery. Although the 3armouth case -as not a tax case. In a recent case of Ben!on V! 0ard Ar$ )*'3 Ltd@ -. ♦ The canopy of a petrol station -as also regarded as setting and did not 8ualify in the case of +ixon &s :itc2 "arages .ground lighting in a retail store 6 %o. Conse$uently the $uestion is !hat does the !ord mean( And ho! does it apply to the particular circumstances of the case( That is a case of )a! * being one of interpretation% but ne#er* the* less% it is a jury $uestion in the sense that the !ord '"lant+ is not a !ord of Art% it must be interpreted according to its ordinary meaning as a !ord in the . ♦ Hloor and -all tiles and dLcor..

)IR Ver!'! Bar5*a(@ )'r*e? )o Ltd A. for the fast food business. The Revenue. They claimed capital allo-ances on the -hole of the expenditure including the cost of excavating and lining the site.the fabric of the building. pumping machinery.T) 221 )a!e oint – :hether a dr( do5" i! *ant. the lighting -as allo-ed as it -as regarded as necessary to create the re8uired ‘ambience. lining the doc. The revenue conceded that the pumping machinery 8ualified for capital allo-ances but argued that the doc. -e -ill use some of the recent court cases -hich set out to ma. Industrial Duildings allo-ance. you must observe that the courts have used t-o tests to determine -hether an obAect 8ualifies as Plant or not. at most. The di!tin5tion 3et7een *ant and Settin#& In practice most disputes bet-een Tax authorities and the taxpayers seem to arise -here the choice is bet-een the expenditure being on Plant or on a structure -hich is merely a setting -ithin -hich the business is carried on -hich -ould 8ualify for. The company argued that the -hole thing -as a single entity performing the function of a large hydraulic lift2 cum2vice. capital allo-ances are not due. itself -as a structure and thus the setting in -hich the trade -as carried on.e this distinction. 2222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 A shipping company built a dry doc. ♦ The 9re$i!e! te!t – that is to say is the obAect part of the premisesM If so. I must confess that some of these cases are really funny and interesting. no matter -hat the function is 6 unless the premises themselves are plant.s case -as that each item had to be considered separately. -ith concrete and installing gates. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 48 L. In coining this distinction. In the cases -e are going to use belo-. valves etc. Perversely. These are< ♦ The f'n5tion or 3'!ine!! '!e te!t& H that is to say does the obAect fulfill the function of plant in the businessM If so. Iet us no. it can 8ualify for capital allo-ances 6 even if it is a building or structure. This involved excavating the site.3 – Advanced Taxation Amendment Act 2006/07 .have a critical loo.. at some of the decided court cases bordering on the above t-o tests.

22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 49 L. The dry doc.ing on any maAor capital expenditure. -as a structure it performed the function of plant in the company. The topic on leasing is covered in ade8uate detail in a later chapter. It played an essential part in getting a ship into the doc. TaB *annin# oint& Defore embar.. -as not merely the setting in -hich the trade -as carried on. )oo"e %er!'! Bea5h Station )ara%an! Ltd A. There -as no doubt that the dry doc. T) -1A )a!e oint – S7i$$in# 9oo* a! *ant 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 The taxpayer company o-ned a caravan par. An alternative to buying an item of e8uipment on -hich capital allo-ances may not be available -ould be to lease it.3 – Advanced Taxation Amendment Act 2006/07 ..R'*in#< The -hole of the cost 8ualified for capital allo-ances. Although the doc. 5ne Audge said and I 8uote< )5#TE( 6. holding it securely and returning it after-ards to the -ater. Apart from the obvious cash flo. -as a structure but it fulfilled the function of plant and therefore capital allo-ances -ere due and claimable. It provided various amusements including s-imming and paddling pools. The !hole dock is% I think% the means by !hich% or plant !ith !hich% the operation is performed.advantages 6 not having to pay the full amount no. *apital allo-ances -ere claimed on the -hole of the costs of building the pools including excavation and terracing..s trade. *urle N *o case is of course supposed to be the function or business use test. The Revenue accepted that the heating and pumping e8uipment 8ualified but argued that the pools themselves -ere part of the setting in -hich the business -as carried on.+ The test referred to in the Darclay. advice should be sought on -hether capital allo-ances -ill be available.6 the annual leasing charges -ill normally be deducted in full in arriving at the taxable profit. ven a building or structure can 8ualify as Plant if it fulfils the function of plant in the trade.It seems to me that e#ery part of this dry dock plays an essential part in getting large #essels into position !here !ork on the outside of the hull can begin% and that it is !rong to regard either the concrete or any other part of the dock as a mere setting or part of the premises in !hich this operation takes place.

s at.t. 0ere is -hat he said< )5#TE( 'The distinction% I think% is that in the one case the structure is something by means of !hich the business acti#ities are in part carried on.+ The ferry boat -as the setting -ithin -hich the company carried on its business. /ould you have accepted the claimM And -hat reasons -ould you have advanced for your particular decisionM R'*in#& The claim -as thro-n out. They -ere not merely ‘-here it. It played no further part in the operations of the trade. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 A company bought an old ferry boat and converted it into a floating restaurant. It -as no different in principle from restaurant premises on dry land.. Thus the company got its capital allo-ances. The court decided and held that the boat -as the place or settling in -hich the trade -as carried on. In Deach #tation *aravans Iimited the trade -as providing leisure services and the s-imming pool -as part of the plant -ith -hich the trade -as carried on. They claimed capital allo-ances on the grounds that it -as plant. The Audge commented on the difference bet-een a structure -hich could be regarded as plant and one li. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 4ay be before -e analy1e this case thin. of -hat your decision might have been. T) . They fulfilled the function of providing ‘safe and pleasurable buoyancy.. 50 L.8 )a!e 9oint – F*oatin# re!ta'rant /e revisit this case -hich -e used earlier on. o in the case . Ben!on %er!'! 0ard Ar$ )*'3 Ltd -.e this one -hich couldn. of a subject matter !hich is a building or some other kind of structure% regard must be paid to the !ay in !hich it is used to disco#er !hether it can or cannot be properly described as plant.3 – Advanced Taxation Amendment Act 2006/07 .R'*in#& The Audge said that the pools -ere part of the apparatus -ith -hich the company carried on its business.in the other case the structure plays no part in the carrying on of the acti#ities but is merely the place !ithin !hich they are carried on. It all depends on the nature of the trade. This does not mean that any trader can build a s-imming pool and claim capital allo-ances on it.

g.critical the nature of trade is in deciding -hether an obAect is plant or not.I per annum shall be allo-ed in ascertaining the profits of the business for each charge year. 4anufacturing or Tourism is given at the accelerated rate of :C P Per annum6 Para. The pooling basis for computing /ear and Tear allo-ance -as abolished as from (++(O+&. 4achinery or Plant belonging to him for the purposes of his Dusiness a deduction .no-n as a /ear and Tear allo-ance at the rate of 2. or Plant exclusively used in Harming. the /ord Dusiness is as contained in #ection & but including em/. 2 -th S5hed'*e art II – Ba!i5 Detai*!< :ear and Tear A**o7an5e< Para. The /ear and Tear Allo-ance for any Implement.2.TUTORIAL NOTE& 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 This case is undoubtedly a good illustration of ho. (C'&). Implements. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 2. 51 L. The straight2line basis for computing -ear and tear allo-ance -as introduced and is still in force. 0and tools. Hor this reason. the ZRA may find it necessary to verify that extra implements have not been included in the so called Replacements. If the company had been in the business of operating a ferry service it -ould no doubt have got its capital allo-ances. Hor the purposes of the second #chedule.(C '() 6 /here a person has used any Implements. '$) 6 Provides that /ear and Tear Allo-ances are not to be given on Implements re8uiring fre8uent replacement e. 4achinery.(C ':). The cost of any additional implements is capital expenditure and cannot be allo-ed as a deduction in the Tax *omputation.etting of /ro/ert3. -hen a claim is made for the cost of replacing Implements during the year.o3ment and t2e .3 – Advanced Taxation Amendment Act 2006/07 . Para. machinery or plant ac8uired under a 0ire purchase agreement are regarded as the Property of the purchaser for the purposes of /ear and Tear allo-ance2 Para.

Hor assets bought on hire purchase. Re='ired& *ompute Allo-ances to be claimed by @orcas 4utiti Itd.en place -hen the Implements. )a9ita* Re5o%erie! fro$ I$9*e$ent!@ 1a5hiner( and *ant. 4achinery or Plant -ould have reali1ed in the 5pen 4ar. A recovery from *apital expenditure on Implements. fre8uently described 52 L.CCC from @ade Itd on 0ire Purchase. An!7er& Dor5a! 1'titi Li$ited& @orcas 4utiti Iimited has ac8uired a 4achine. 4achinery or Plant for the purposes of computing /ear and Tear allo-ance.(C 'Q).et at the time the event giving rise to the Recovery occurred. :CC. :CC.The /ear and Tear Allo-ance on the *ost of any Be.3 – Advanced Taxation Amendment Act 2006/07 .CCC and 9 Annual Instalment Payments of "(. A :or"ed EBa$9*e& H )a9ita* a**o7an5e! on A!!et! 3o'#ht on hire 9'r5ha!e& DOR)AS 1UTITI LI1ITED @orcas 4utiti Itd.e a deposit of "(.s 4anufacturer in a Rural area is calculated on a #traight line Dasis at 22 I per annum on cost 6 Para. capital allo-ances are claimed on the cash price. a *ompany Incorporated in the Republic bought a 4achine for ":. 4achinery or Plant is deemed to have ta.une each year. -hile the interest or fiancL charges are an allo-able expense against trading profits. CCC.Plant or 4achinery ac8uired and used by any #oft @rin.: million. The 0ire element. The amount of the recovery from *apital expenditure is the amount -hich the Implements. The rate of interest chargeable is (C P p.CCC on %C . 4achinery or Plant< ♦ Permanently cease to be used for the purposes of a businessR or ♦ *ease to belong to the person carrying on a business.a. The *apital *ost of the 4achine on -hich the /ear and Tear Allo-ance can be given is the *ash Price of ":. The terms and conditions of the 0ire Purchase included the follo-ing< @orcas 4utiti Itd -as to ma. This falls -ithin the applied definition of Implements.

Therefore< 53 L.3 – Advanced Taxation Amendment Act 2006/07 .-rongly as Interest is not available for /ear and Tear Allo-ance but falls to be allo-ed as a Revenue *harge in the Profit and Ioss Account.

mini2buses.3 – Advanced Taxation Amendment Act 2006/07 . The /ear and Tear Allo-ance for *ommercial Jehicles is given at the rate of &: P Per Annum.s.(% '%) defines a *ommercial Jehicle as 4eaning< 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 A road Jehicle of a type not commonly used as a private vehicle and unsuitable to be used as such but includes all types of road vehicles used solely for 0ire or *arriage of the public for re-ard.2up Truc.%K:. Iorries. )O11ER)IAL VEHI)LES Para. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 All other vehicles should be regarded as non2commercial. Duses and other Jehicles of similar type.&) /@J E :. This in particular includes< private cars. -hile Bon2*ommercial Jehicles receive a &C P p.*ost Price '*ash Price) / N T &:P on *ost '3r. Pic. motor caravans etc but excludes Jans. station -agons.CCC '(.(&:.a /ear and Tear Allo-ance.CCC) 2222222222222 9.CCC '(.%K:. 54 L.() /ritten @o-n Jalue / N T &: P on cost '3r.CCC) 222222222222222 2@8-2@222 GGGGGGGGG TUTORIAL NOTE& The Interest *hargeable at the Rate of (C P Per Annum is allo-ed as a @eduction for Tax Purposes and does not come in the /ear and Tear Allo-ance computation.:CC.

CCC (.CCC) 2222222222222 %.CCC.the *apital Allo-ances *omputation for the *harge years affected.22@222 . 55 L.C:. E (.CCC 22222222222222 22222222222222 A@.CCC.CCC '(.CCC '(.(&. An!7er& )o$9'tation of )a9ita* a**o7an5e!& S9innin# Lathin# ri%ate Tota* 1a5hine +2-I/ 1a5hine +2-I/ )ar +22I/ *ost / N T &:P %(.K:C.(:C.K:C. QQ&.CCC.CCC GGGGGGGG 2 E E :.CCC (.(:C.CQ Iathing 4achine 9.C%. Note& *hali "alumba -ill use the "%.CCC 2 2 :(&. #he ac8uired the follo-ing items of Plant for business use.CCC) 22222222222222 9.CQ Private *ar :..)HALI EALU1BA EBa$9*e& *hali "alumba #tarted in business on ( April &CCQ and prepares Accounts to %( 4arch each year.CK E Q.CCC to reduce her Taxable trading Profits for the *harge year &CC9 O C: to arrive at AdAusted Profit for Tax purposes.CCC.C:C.CCC '(.:(&.:%$.CCC) (.CCC Re='ired& #ho.C%.2@222 GGGGGGGGG GGGGGGGG S Private *ar is a non2commercial vehicle -ritten do-n at the rate of &CP p.C9.CQ #pinning 4achine Q.CCC GGGGGGGG 2 E 9.CCC 2222222222222 2 2222222222222 :.CK /NT %(.3 – Advanced Taxation Amendment Act 2006/07 .a on *ost as per Part J of the :th #chedule to the Income Tax Act.K:C.C:C.

C%. The Botional -rite off is made of the /ear N Tear allo-ances -hich -ould have been due had it been used in a business. In Practice the #hafting 4achine -ould be -ritten do-n notionally by &: P p.s approach -ould be to value the 4achine at (. 1U1BA )HA1F0A EBa$9*e& 4umba *hamfya bought a #hafting 4achine locally for "K$(. @uring these years the 4achine -as being used in Zimbab-e.s determination.+K. i.3 – Advanced Taxation Amendment Act 2006/07 . ANS:ER 1U1BA )HA1F0A 4umba *hamfya bought the 4achine in (++9 but only engaged it in business in (++K. 4achinery or Plant that has been< ♦ !sed outside the Republic by a person.+K. and is then used for the purposes of his businessR or ♦ Ac8uired by him for no valuable consideration Is according to the *ommissioner 67eneral. +:O+Q.e. 56 L. and he started using the #hafting 4achine from that date.CCC on &C 4ay (++9.Va*'ation in eB5e9tiona* 5ir5'$!tan5e! Para. and brought by him to the Republic for the purposes of his DusinessR ♦ !sed by him for a purpose other than the purpose of his business.C:. ::C. to Zambia. 4ugabe *onstructions in Zimbab-e hired this 4achine until %(.+K.C:. for the years +9O+:.a for the years it -as not in use. In Practice this -ill be done in the year of first business use and the net cost after Botional /ear N Tear -ill ran. off on (. the 5riginal *ost of any Implement. Re='ired& *ompute the *apital Allo-ances. the time of first business use. -hen it -as brought bac.(% provides that in the calculation of any allo-ance.. In 7eneral ZRA. for /ear N Tear Allo-ances on #traight Iine Dasis. and +QO+K. 4umba *hamfya immediately conceived the idea of setting up a construction business and his dream finally too. Dut this is not -hat is usually done in Practice.

+K EC222 K$(.C%. %$$.G.(& of Part II of the Hifth #chedule to the Income Tax Act provides for the Proportionate reduction of -ear and tear allo-ance on Implements.. is the 4otor *ar. %$$.C%.(Q& '(+:. -hich is most often used privately. for non 6business use.C9. 2. The Botional -ritten do-n value as at %(.+Q / N T 'Botional) &:P /@J %(.C%.%$$) 222222222222 1..%$$) 22222222222 %+C. but are not deductible -hen computing taxable profits and any resulting balancing charge is restricted to the actual allo-ances given. 57 L. 4achinery or Plant.CCC) for *apital allo-ances purposes. Therefore< *ost / N T 'Botional) &:P /@J %(.CCC due to rounding off. The type of Asset.3 – Advanced Taxation Amendment Act 2006/07 . – DIVIDED USE Para.+K -ill be the net cost '"(+:. *ompute the *apital Allo-ances.-@.+: / N T 'Botional) &:P /@J %(.C%.C%.Notiona* :ear ? Tear A**o7an5e< Botional -rite off is made of the /ear N Tear allo-ances -hich -ould have been due had the 4achine been used in business. 0e later sold the car on C(.KK9 '(+:.+$ and used it for both business and private purposes. ETER )HOLA EBa$9*e< Peter *hola bought a 4otor *ar for "&: million on (. The proportion for private use is estimated at %CP.%$$) 22222222222 :$Q.::C '(+:.C( for only "(Q million.S GGGGGGG S @oes not add up to "(+:.

CC #ale Proceeds Dalancing *harge • The balancing charge arises -hen the @isposal Proceeds exceeds the /@J of the Asset at the time of @isposal.CCC 222222222222 222222222222 2 2 (. -hich stipulates that< )5#TE( 'Income of a person Includes any amount paid by !hich reco#eries from capital expenditure exceed 5 in the case of Implements% 7achinery or "lant% such residue of the expenditure ranking for Capital allo!ances incurred in respect of the Implement% 7achinery or "lant as remains after deduction of any !ear and tear or other Capital allo!ances or similar deduction !hether allo!ed under the Income Tax Act or under any "ro#isions of the "re#ious )a! for any Charge year+ /here the sales proceeds exceed the original cost. E E 2 2 (.CCC 2222222222222 +1@222@222/ GGGGGGGG ri%ate U!e Net Ad4'!t$entH .CCC.++ / N T &CP %(.CCC) 2222222222222 &C.:CC.++.CCC (Q.C%. The rationale behind this is that an Asset has been sold at a profit and that profit is a taxable Income.C%. /here the @isposal Proceeds are less than the /@J.CCC %. the balancing charge of "KCC.:CC.C( as follo-s< )o!t E &:.CCC 2222222222222 222222222222 2 2 2 2 . CCC should be included in the Tax *omputation.C%.22@222 GGGGGGG 822@222J GGGGGG / N T &CP %(.CCC) 22222222222222 (:.CCC.CCC ':.2I A**o7ed.C%.ANS:ER< ETER )HOLA< Peter *hola -ill claim *apital allo-ances for the *harge years beginning %(.CC and %(.: '()'b) of the Hirst #chedule. This is provided for in Para.CCC %. 58 L.CCC. In this case.:CC. %(. then a balancing allo-ance arises.:CC.CCC.3 – Advanced Taxation Amendment Act 2006/07 . the proceeds are restricted to the original cost for the purpose of calculating the balancing charge.C%.CCC.CCC ':.CCC.

As an alternative to 5utright *ash purchases of e8uipment. The amount of @eduction should not exceed the amount of the premium divided by the number of years for -hich the right of use is granted. :EKI BANDA LI1ITED EBa$9*e& /e1i Danda Iimited has been trading for many years.FIFTH S)HEDULE – ART III – RE1IU1 ALLO:AN)E. The right to use this 4achinery -as to last &C years. aimed at relaxing and maintaining a buoyant cash flo.CQ. Para.(9 provides that a @eduction called =Premium Allo-ance? is allo-ed in arriving at the profits of a business. This allo-ance is e8ual to the amount of any premium or li.e consideration paid for the right to use the 4achinery or Plant. The agreement -as signed and entered into on (. Re='ired& *ompute the Premium Allo-ance. he ceases to be allo-ed that @eduction as from the date of such ac8uisition of interest. 5n (.Asset ac8uisition strategies. the *ompany ac8uired a 4achine by #ubscribing "(% million for the right to use 4achinery.+Q. Its expanding business has led to the adoption and implementation of ne.+$. the *ompany paid additional funds amounting to "(: million for the complete o-nership of the 4achinery.CQ. 59 L.3 – Advanced Taxation Amendment Act 2006/07 . /here a person ac8uires Interest in the o-nership of Property for payment of a premium for the right of use of -hich he has already been allo-ed a deduction.position.

Re='ired& /hat *apital Allo-ances might he claimM 60 L. has been trading as a Dre-er for $ years no-. If part of the expenditure has been covered by a government grant or subsidy.ANS:ER& :EKI BANDA /here a premium has been paid for the use of 4achinery. 0e has. There -ill be no allo-ance after +$O++ because the 4achinery -as bought. -hich he cannot afford. a premium allo-ance is allo-ed in arriving at the profits of the Dusiness.CCC Allo-ance 6 +QO+K (O&Cth 'Q:C.CCC Allo-ance 6 +KO+$ (O&Cth 'Q:C. in the charge year &CC9OC: received a grant of "(: million from the 4inistry of *ommerce for the ac8uisition of additional and more advanced 4achinery *osting ":C million. This allo-ance is computed as follo-s< E *ost of Premium (%. S'3!idie! *apital allo-ances are given only for *apital expenditure incurred or actually suffered by the taxpayer. as from (. etc. ENO)E SIEAK:E EBa$9*e& noc.CCC) 2222222222222222 11@2-2@222 GGGGGGGG Note& Bo apportionment of the allo-ance is made on time basis. 0is business has suffered a slump in recent years follo-ing technological advancement in the industry. This.3 – Advanced Taxation Amendment Act 2006/07 . a Patent.+$ has ac8uired an interest in the o-nership of the 4achinery in respect of -hich the premium -as earlier paid for the right of use. The *ompany.CCC. the amount of capital expenditure is reduced by the amount of subsidy.CCC Allo-ance 6 +$O++ (O&Cth 'Q:C. therefore.CCC) 222222222222222 ((. Plant.%:C.CQ. means that capital allo-ances -ill be calculated on the net amount.CCC) 222222222222222 (&.KCC.

the *ompany ceased trading and the vehicles -ere sold for ":. has in his possession an Asset. Re='ired& #ho. The /@J of his vehicles at %(. 5n (. -hich the *ommissioner 7eneral determines.s business to a Iimited *ompany on (.+Q.CCC Iess< 7rant '(:.CCC. " Total xpenditure :C. if the parties to the sale apply in -riting for this basis. therefore.CCC) 222222222222222 %:.C9. -hich are controlled by the same group of individuals.CCC / N T &:P '$. NKALI EATILUNGU B1ali "atilungu sold her transport *ontractor.C%. i. The trader 'B1ali) and the *ompany made an election in -riting under Para.e.(C.C%.CCC) 222222222222222 /@J %(. be restricted to the expenditure he has actually suffered.+K.(K '%) of the Income Tax Act.3 – Advanced Taxation Amendment Act 2006/07 .C9.. #he o-ned nearly all the shares in the *ompany and thus controlled it.et PriceR or ♦ The /@J. This method is applied only -here the buyer has control of the seller or the seller has control of the buyer or some third party has control of the both.CCC. The 5riginal cost of these vehicles had been "Q million and / N T allo-ance of "& million had been allo-ed before (. &CC. -hich is partly financed by Public funds.ANS:ER& ENO)E SIEAK:E noc. is not at =Arms Iength Price? then *apital allo-ances are calculated as if the assets had been sold for either< ♦ The 5pen mar.K:C.CCC.CCC.C( 2.+Q -as "9 million.@2-2@222 GGGGGGGG )ONTROLLED SALES /here Assets are sold for a sum. 0is claim of *apital allo-ances -ill.+Q.the calculation of / N T Allo-ance and Recoupment for the *ompany. a government 7rant. This type of situation arises -here s sole trader turns his business into a private *ompany or -here sale of assets are made bet-een private *ompanies. 61 L.

*onsists of the 4anufacturing of 7oods *onsists of the #torage of goods to be used in 4anufacturing *onsists of the #torage of goods on Imports or for xport *onsists in the -or. subAection of goods and materials to any process< coupled -ith some -holesale rather than retail selling< +Ei*$arno5" E='ita3*e )oo9 V! )IR – A2 T).e..8-/ .+K %. inland navigation. In general of course the type of activity re8uired is that of manufacturer.ing of a mine or -ell for the extraction of natural deposits.ANS:ER& NKALI EATILUNGU The calculation of / N T allo-ances and Recoupment for the *ompany -ill be as follo-s< E (++Q O +K *ost of 4otor Jehicles to the *ompany 9.CCC. -ater. made it clear that some Retail activity does not debar a claim -here there is also selling -holesale.CCC 22222222222222 *ompany to be taxed on *apital Recovery 2@222@222 GGGGGGGG )A ITAL ALLO:AN)ES ON INDUSTRIAL BUILDINGS AND OTHER ASSETS B'i*din#! An Industrial Duilding means a building or #tructure in use for the purposes of any electricity.CCC. or is in use for the purposes of any trade -hich< ♦ ♦ ♦ ♦ ♦ Is carried on in a 4ill. transport.ing. bridge or tunnel underta.CCC. factory etc.CCC) 22222222222222 /@J %(. or any li.C%.&CC..CCC #ales Proceeds :. 62 L.CCC / N T &:P '(. gas.ing of public utility.3 – Advanced Taxation Amendment Act 2006/07 . i.e underta. The statutory definition of =Industrial building or structure? concentrates on the business Activity rather than the premises as such. hydraulic po-er.

e %oAo/erative 'ociet3 Ltd &s %!R The #ociety erected a building to par. The *ourts have amplified the definitions set out in the #tatute and the follo-ing illustrate the vie-s of the *ourt in setting limits to them. ♦ The #creening and pac.Rooms ♦ 0otels or offices. 63 L.ing -ages into nvelopes 6 because notes and *oins are not goods. /here a retailer or -holesaler stores goods the building does not 8ualify. The *oal -as passed by conveyor belt from -agons in the yard into a hopper near the roof. passed by conveyor belt to the -eighing points. case is subAecting goods to a process. *oal into &$lb paper bags. These are< ♦ @-elling 0ouses ♦ Retail #hops ♦ #ho.ing of *oal into paper bags as -e sa..>i. -hich consists in the subAection of goods or materials to any process. ♦ 5n the other hand a building used for the *remation of human bodies does not 8ualify 6 0uman Dodies are not 7oodsE Beither does a building used for pac. fed do-n a chute through a vibrator screen -here dross -as removed.ed into the bags and deposited at floor level to a-ait disposal. ♦ A building for maintaining and repairing hired out Plant did not 8ualify because the Plant -as not being subAected to a process. ♦ Duildings used for #torage of 4anufactured goods before delivery to a customer. )a!e Ana*(!i!& The success of the appellant.in the "ilmarnoc. He*d& That the #ociety -as entitled to industrial building allo-ance.( '&) of the :th #chedule has specifically excluded certain buildings from being classified as industrial buildings. The material consideration is the purpose of the use of the premises.marnoc? E@*ita. Para. ♦ /here claims are made for a building on the 7rounds that it is used to subAect goods to a process the nature of the =goods? is Important. -hich it sold to retail shops. pac.s contention depends on -hether their building is in use for the purpose of a trade. EB5*'ded B'i*din#!.3 – Advanced Taxation Amendment Act 2006/07 . not the use to -hich the product is put.

*onversions of buildings. -hich on first construction is an 0otel. The cost for each housing unit should not exceed E2 $i**ion.QQ 8ualifies to be classified as an industrial building unless the old 0otel -as made out of a *onverted building. Hor instance.3 – Advanced Taxation Amendment Act 2006/07 . All 0otels in existence at %(. The cost of a housing unit.C%. it ceases to be classified as an office. e.. housing for domestic employees -ould not 8ualify because such employees are not usually employed for the purposes of the mployer.C9. <'a*if(in# Ho'!in# Unit! – ara./ Any building. mind..+K -ill 8ualify for IDA provided the cost does not exceed "& million. A housing unit may be a separate building complete in itself or a part of a larger building. or -hich is an extension made to a building first constructed as an 0otel and is certified by a relevant 7overnment 4inistry as conforming to the #tandards of the 0otel Industry. Any housing unit ac8uired or constructed on or after (. on or after (. -hich exceeds "& million. 64 L.1 +A/ Any building constructed or ac8uired by a person to provide housing for mployees 8ualifies for Industrial building allo-ance. =:irst %onstr*ction? means the building must have been planned and erected as a 0otel.s Dusiness. -hich -ere originally erected -ith some other purposes in.. xtension to any 0otel. a flat or dormitory accommodation. a dra-ing office o-ned by a structural steel engineering company may not be excluded from the definition of an industrial building 6 )IR V! La$3hi** Iron7or"! Ltd – . Dra7in# offi5e If the dra-ing office is an integral part of the industrial premises and is devoted to the industrial operations carried on..g.1 T).cost housing unit. -ill not 8ualify for Industrial building allo-ance. -ill not 8ualify because they are not 0otels on first construction.<'a*if(in# Hote*! – ara.1 +. 0o-ever. A private 0ouse. 8ualifies as an industrial building for the purposes of the Income Tax Act.g.QQ and beyond are excluded from the definition of Industrial buildings. as long as it is a lo.C9. old or ne-. e.

B'i*din# '!ed for the 7e*fare of e$9*o(ee! Any building in use for the -elfare of employees engaged in the underta. /or. but sub2paragraph ':) states that for a building used for the -elfare of the employees to 8ualify as an industrial building. If the non2industrial part of the building exceeds (C P of the -hole. then the -hole building -ould 8ualify as an industrial building. then the -hole building shall be classified as an industrial building -here the non2industrial part of the building does not exceed (C P of the total cost. 65 L.s *anteens. EDA1 ALERT 5nly buildings -ill 8ualify. #ub2paragraph 'K) states that -here part of a building is an industrial building and a part is not. does not specify that the employees shall be employed in any particular type of business for their 0ouses to 8ualify. #ub2paragraph '9) 6 -hich deals -ith 8ualifying 0ousing units for employees. Bo allo-ance is given on structures li. the employees must be engaged in the trades mentioned in sub2paragraph '() -hich includes< /or.ings and trades mentioned in sub2paragraph '() of the : th #chedule.3 – Advanced Taxation Amendment Act 2006/07 .e #-imming PoolsR #taff Tennis courts etc. then only the Industrial part must be treated as an industrial building.s sports pavilions and mine hospitals. Thus if an office or sho-room is housed in a factory building and costs (C P of the entire cost of the building. 8ualifies for industrial buildings allo-ance. If the office or sho-room is housed in a separate building sub2paragraph 'K) cannot apply. because these structures are not DuildingsE :HERE ART OF A BUILDING IS AN INDUSTRIAL BUILDING AND THE OTHER ART IS NOT.

u.+: at a cost of "(CC million.3 – Advanced Taxation Amendment Act 2006/07 .C9. 66 L. -hich are used for business.(C. ban. 8ualify as a commercial building. The *omplex -as finally completed and brought into use on (. Included in the "(CC million -ere Architects fees of "9 million. provided it -as constructed for first use on or after (. a long time serving @irector at Bational 4illing decided to resign and set up her o-n *ompany in (++: at -hich time she -as only 9: years old.ho. It is obvious therefore that a housing unit for employees -hich does not 8ualify as an industrial building only because it costs more than "& million. )o!t of *and An industrial building or commercial building is a separate entity from the Iand on -hich it stands. *apital Allo-ances are to be restricted to the cost of the building or structureR they are not to be given on the cost of the land on -hich the building is erected. office buildings. xamples include retail shops. for the purposes of *apital Allo-ances. "& million -as paid in connection -ith the Iand Purchase. garages.Q+. sho-rooms or houses.the 8ualifying cost for industrial building allo-ance -ill be arrived at. and proceeded -ith the *onstruction of an ultra modern milling facility complex.Q+. -ill. )HRIS IN 1UEUEA )HONTA EBa$9*e& *hrispin 4u.a.sR and is in use for business purposesR and -as completed for first use on or after (. #he proceeded to ac8uire barren Iand in the /oodlands area at a cost of "(K million. #ho.C9.)o$$er5ia* 3'i*din#! A commercial building means a building or structure -hich is not an industrial buildingR and is not a farm improvement or farm -or.s. The definition also includes #tructures and parts of a building.

67 L. and cutting. Professional fees 6 Architects Hees.CCC. The allo-ance is granted in the year in -hich the building. Bo initial allo-ance is given on an Industrial building -hich has been in existence for sometime and -hich the taxpayer has subse8uently bought. incurred as part of a construction proAect do 8ualify for industrial building allo-ances.addition to an existing Industrial building.CCC 22222222222222 '(+. There is no initial allo-ance for commercial buildings.CCC.G@222@222 GGGGGGGGG INITIAL ALLO:AN)E FOR INDUSTRIAL BUILDINGS An initial allo-ance of (C P on an Industrial building is available. The Tualifying cost for industrial building allo-ances -ill therefore be computed as follo-s< Total *ost Iess< Bon 6 Tualifying xpenditure< *ost of Iand Incidental Iand ac8uisition costs E ((K.CCC.buildings. on the Iand that is preliminary to construction do 8ualify. #uch costs include< The preparation of the site in order to lay foundations. for industrial buildings allo-ances.CCC &.ANS:ER& )HRIS IN 1UEUEA )HONTA xpenditure must be incurred in construction. addition or alteration is brought into use. This allo-ance is only available on brand ne. This need not necessarily be for the same year as the year in -hich the building is completed.CCC. 0o-ever.3 – Advanced Taxation Amendment Act 2006/07 . costs of -or.CCC) 2222222222222222 . tunneling and leveling the Iand in connection -ith the construction.CCC (K. Initial allo-ance is granted on a ne. thus the cost of the Iand and the incidental costs associated -ith its ac8uisition do not ran.

no-n as a /ear and Tear allo-ance is granted..:EAR AND TEAR ALLO:AN)E In ascertaining the business profits of any person -ho in any charge year has the use of an Industrial or *ommercial Duilding -hich he ac8uired.+Q /@J +Q O+K/ N T U : P IT/@J %(.+K 68 L.C%.CCC) 2222222222222 (KC. i.+:.C(.3 – Advanced Taxation Amendment Act 2006/07 . on a #traight2line basis or 8ual Instalment basis.CCC) 2222222222222 1-2@222 GGGGGGG %(. constructed.CCC '(C. EBa$9*e& A factory building -as constructed and completed on %C.the allo-ances -ill be granted. Rate! of :ear and Tear a**o7an5e& Io.C%.+9 at a cost of "&CC million and -as brought into first use on (.C%.e.(C.CCC (C.CCC 222222222 '%C. An!7er& *ost +9 O+: 6 Initial Allo-ance U (C P /ear and Tear allo-ance U : P EC222 &CC. #ho.+: /@J +: O+Q/ N T U : P %(.CCC &C. added to or altered. a deduction .cost 0ousing !nits Industrial Duildings '5thers) *ommercial Duildings Implements.CCC) 2222222222222 (QC.CCC '(C. 4achinery and Plant Bon 6*ommercial Jehicles *ommercial Jehicles Rate (C P :P &P &: P &C P &: P The /ear and Tear allo-ance is calculated each year on the 5riginal *ost of the Duilding.ho.

et.a on cost is given.C%.: '%) has the po-er to determine the mar.C$. Ba*an5in# a**o7an5e for 3'i*din#! /here a building. A bloc. The *ommissioner 7eneral.en place in the open mar.CCC +QO+K/ N T U & P '&9. is sold. then a balancing allo-ance is given.en place or if he is not satisfied that the sale has ta.Note& A factory 8ualifies as an Industrial building '5thers) upon -hich relief of : P p.CCC +:O+Q/ N T U & P '&9. The balancing allo-ance is given in the year in -hich the building ceases to belong to the taxpayer or in -hich he permanently ceases to use the building for business purposes.CCC) 22222222222222 IT/@J %(. calculated on the difference bet-een the last /@J and the amount obtained on the sale of the building. -hich has been used for business purposes.et value of a building if no sale has ta.(KQ.(:&.+K 1@12G@222 GGGGGGGG Note& The initial allo!ance is not a#ailable on Commercial buildings.+9.3 – Advanced Taxation Amendment Act 2006/07 . Allo-ances -ill be given as follo-s for the first three years of its use< EC222 *ost (.C%.& billion. It cost "(.&CC.+9 and -as brought into first use on (.CCC +9O+: / N T U & P '&9. 69 L.C%.+Q (. under Par.+: (. A balancing allo-ance is also given -here a building is not sold but permanently ceases to be used for business purposes. of offices -as completed on %(.CCC) 22222222222222 /@J %(. EBa$9*e H )o$$er5ia* 3'i*din#!.CCC) 22222222222222 /@J %(.(&. It is only gi#en on Industrial Buildings.

82@222 GGGGGG The factory bloc.ABRAHA1 1ULOLANI EBa$9*e& Abraham 4ulolani erected a factory bloc.CCC) 22222222222 .en into first use on (.+: and ta.s *anteen (&. In this *ase.CCC *onstruction of Duilding *omprising< Hactory &QK.CCC *utting and tunneling of site &.+$ the factory -as sold for "%CC million 'Including "(CC million for the Iand to *handa 4usonda. The total price of "%KC million -as apportioned as follo-s< EC222 Hreehold Iand 'Including *ost of *onveyancing) QC. ANS:ER& ABRAHA1 1ULOLANI <'a*if(in# EB9endit're< Total *ost Iess< Iand N associated costs *ost of *onstruction EC222 %KC.CCC 'QC.CCC mployee. 5n (.3 – Advanced Taxation Amendment Act 2006/07 .12@222 GGGGGGG #ub2Para. 7eneral offices costing "&+ million needs further investigation as follo-s< 70 L.CCC 22222222222 .C$.C$. Re='ired& *ompute the IDA available to Abraham 4ulolani for each of the years concerned.'K) of the Hifth #chedule provides that -here part of a building is an Industrial building and a part is not.+:. for use in his manufacturing business. -as completed and paid for on (.CCC 7eneral 5ffices &+. Abraham 4ulolani has al-ays prepared his accounts to %( 4arch. then the -hole building shall be classified as an Industrial building -here the Bon2Industrial part of the building does not xceed (C P of the Total *ost.CQ.

CCC %(. rather than a more formal tenancy) incurring expenditure on items.C%. %K:. Therefore< Dalancing Allo-ance for +$O++ G %O9 F " %&. so the Industrial building allo-ance is available on the *ost of the /hole structure.. expenditure and claims for *apital allo-ances must reside in the same person or corporate body.e.:CC) 22222222222 &Q%. %KC million The Bon 6 Industrial part does not exceed (C P of the total cost.CCC) 222222222222 . There are ho-ever numerous exceptions to this.:CC 3ears ended %(. Hor Instance.s fixtures once installed on the premises.1. :ho o7n! the a!!etL As a general rule.CCC.C%.$ '#ay $P). #ubsidies from private sources -ill also reduce the amount on -hich allo-ances are due. "%(C million. *ost Initial allo-ance U (C P /NTU:P %(C. 71 L.. o-nership. EC222 . i...:CC '&CC.&+ million F (CC P 2222222222222222222222222 G K.CCC (:.+K / N T U : P for & yrs /@J Defore #ale Tualifying #ale Proceeds '"%CC 6 "(CC) '%(. A trading tenant 'possibly holding only a licence to occupy the premises. In such circumstances the tenant may be permitted to claim the appropriate *apital allo-ances.CCC G "&9.3 – Advanced Taxation Amendment Act 2006/07 .CCC) 22222222222 &%&. / N T allo-ance given for % yrs.2.+K N %(. -e have seen that subsidies from Public sources normally reduce the amount on -hich *apital allo-ances can be claimed.:CC.2@-22 GGGGGG Total period of o-nership from +:O+Q to +$O++ G 9 yrs. -hich become Iand Iord.:CC 222222222 '9Q. -here the provider of the subsidy can themselves obtain tax relief either as a business deduction or by -ay of capital allo-ances.

-hich prescribes such a practice. it does not ma.e 6 although such changes may not al-ays be effective for Tax purposes. -hich does not coincide -ith the end of the *harge year.A H A))OUNTING DATES There is often an assumption for the ne-ly set up businesses that accounts should be prepared for (& months from the date of commencement. Taxpayers are free to choose -hatever accounting date they -ish. It provides as follo-s< S. In Zambia. The legislation solves this problem by tying the right to allo-ances to o-nership of the relevant interestR meaning the Interest 'Hreehold or Ieasehold) o-ned by the person incurring the expenditure at the time -hen the expenditure -as incurred. There is. or *harge year as it is commonly called runs from (st April to the follo-ing %( 4arch. ho-ever. #tudents are advised to note that the acceptance of a non %( 4arch accounting date is discretionary and as per the provisions of #ection ((9 '()'a) such discretionary acceptance cannot be 8uestioned in any proceedings. This sho-s that even though the Ia.recogni1es %( 4arch as the re8uired end of year date.2 +1/ A person may have an accounting date. the Tax year. They may also change that chosen date as often as they li. 72 L.2 ITA Se5tion . The *ommissioner 7eneral has the discretion to accept or reAect a date.2 ITA deals -ith Dusiness Accounts. 2. -hich is Iess than (& 4onths as though the accounts had been made up for a period of (& 4onths. -hich does not coincide -ith %( 4arch. even though they do not add up to a period of (& 4onths are re8uired to be made up to %( 4arch of each charge year. Income Tax therefore is charged by reference to the Tax payer. as -e shall see later in this *hapter. -hich ends on a date other than %( 4arch. The *ommissioner 7eneral also has the po-er to accept a Period. /e can deduce from the foregoing that for tax purposes business accounts. ROVISIONS OF SE)TION .e it the only accounting date to -hich accounts are supposed to be made. that is.Iand and Duildings cause Particular problems because of the Iegal possibility of a multiplicity of subordinate interests in the property.s Income received from a source -ithin or deemed to be -ithin Zambia in a charge year and the amount of business income assessable is the amount received in the charge year ended %( 4arch. no provision in our Zambian Income Tax Act..3 – Advanced Taxation Amendment Act 2006/07 .

the date %( @ecember (+++ belongs to the charge year ++O&CCC but %( @ecember (+++ falls in the year (+++ -hich -ill be ta.2 +.2 +2/ /hen the *ommissioner 7eneral accepts an accounting date. i.A/ This section -as introduced by the (+++ amendment Act.C+.+$. therefore the *3D rules -ill be applied. It provides that for a Tax payer -hose accounting date straddles %( 4arch the provisional returns should not be based on the charge year. DATE BET:EEN 1 >UL0 AND . Hor a set of accounts ending on %C.. And %C. A current charge year is the charge year in -hich the accounts date falls.B/ #tates that relevant accounts must relate to the accepted accounting date.e. from April to 4arch. BASIS OF ASSESS1ENTS Accounts that have been prepared to a Bon %( 4arch accounting date may be assessed< ♦ Hor the current charge year ' )0/. S. ♦ Hor the previous charge year + 0/.S.uly and %( 4arch.+$ falls bet-een ( . Hor Instance. -hich falls bet-een ( . This is the charge year +$O++. S. it becomes the standing and binding accounting date even in subse8uent years.2 +. -e use the current charge year basis +)0B/.uly and %( 4arch.1 1AR)H Hor any accounting date. A previous charge year is the charge year ending before the accounts date. This po-er to compute adAusted Income is discretionary so the Taxpayer cannot 8uestion or appeal against such adAustment. EBa$9*e< Hor a set of accounts -ith a year2end of %(OCKOC(..3 – Advanced Taxation Amendment Act 2006/07 . but should be based on the accepted financial year..Q& '(). The accounting date can only be changed through an application to the *ommissioner 7eneral.. S.2 +.uly and %( 4arch./ The *ommissioner 7eneral is empo-ered to compute adAusted Income -here the accounting date has been changed. -e -ill use the *3D. ♦ Accounts for less than (& 4oths may be assessed as if they -ere for (& 4onths 6 #.en as the current charge year. This is the charge year &CC(OC&.C+.. #ince %(OCKOC( falls bet-een ( . 73 L.

the P3D rules -ill apply.DATE BET:EEN 1 A RIL AND . FIRST A))OUNTS AFTER )O11EN)E1ENT eriod $ore than 12 1onth! 3't *e!! than 1G 1onth! ♦ /here the first accounts to %( 4arch are for more than (& 4onths but not more than ($ 4onths they may be accepted and apportioned on a time basis. EBa$9*e& A trader commences business on ( Bovember (++: and adopts %( 4arch as the accounting date. -hich is less than ($ months but more than (& 4onths.CCC. %( 4arch (++K. The proportion from the date of commencement to the follo-ing %( 4arch -ill be assessed for the charge year ending on that date and the balance of (& 4onths for the charge year ending on the next %( 4arch.2 >UNE Hor any accounting date.une (++K. ♦ *apital allo-ances are due for the full year in both years. The proportion from (O((O+: to %( 4arch (++Q -ill be assessed for the charge year ending on %(OC%O+Q. year basis 'P3D) is used.((K. CCC. The period -ill be apportioned on a time basis. ie.CCC G " ":. EBa$9*e!& ♦ Hor a set of accounts to (: . 0o.une the Previous.une. 74 L.Q9K This is the charge year (++QO+K '*3D). This is the charge year &CC(OC& but since it falls bet-een April and . -hich falls bet-een April and . 0is trading profits for the (K 4onths to %( 4arch ((+K are "&C.une.-ill these profits be assessedM An!7er& This is a period of (K 4onths. #o this is the charge year +KO+KE ♦ Hor a set of accounts to %( 4ay &CC(.%:%. This is the charge year +KO+$ but since (: . $$&. -hich is +:O+Q< :O(K F "&C.3 – Advanced Taxation Amendment Act 2006/07 .CCC G " (9. the P3D rules -ill apply so this is the charge year &CCCOC(.une (++K falls bet-een April and . as follo-s< (&O(K F "&C. CCC. There is no apportionment. The remaining (& 4onths -ill be assessed on the period ending on the next %( 4arch. CCC.

This provision is to be found in #ection Q& '() of the ITA. it may be easier to ta. this -ill be allo-ed.to submit accounts on a particular date. the action to be ta.en -ill depend on t-o things< ♦ Are the accounts to the ne. ♦ /here the Tax2 payer has provided #ound *ommercial reasons for -anting to change the accounting date.accounting date falls bet-een ( . separate accounts from the date of commencement up to the follo-ing %( 4arch and for (& 4onths to the follo-ing %( 4arch are re8uired. ♦ /here a change of accounting date has been effected. )ondition! to 3e $et& ♦ /here a *ompany is a member of a group.uly and %( 4arch. there may be tax advantagesR hence there are conditions that must be fulfilled before the change is effected.accounting date falls bet-een ( April and %C . the P3D -ill apply. it might change its accounting date to that of other group members.une. ♦ Hor farming businesses a date that falls -hen there is no gro-ing of crops is more appropriate. Hor example. In doing so. ♦ Hor individuals -ho are re8uired by la.a profit or lossM 75 L. they might be allo-ed to change their accounting date to that re8uired by la-. A!!e!!$ent Ba!i!< /here a Bon %( 4arch accounting date has been accepted the accounts -ill be assessed on a =current year basis? or =previous year basis? depending on the ne. at certain times of the year. In Zambia most farming businesses prepare their accounts to %C #eptember.accounting date< ♦ If the ne. a self employed person or legal person is allo-ed to change hisOher accounting date. the *3D -ill apply.eriod 1ore than 1G 1onth! /here the first accounts to %( 4arch are for more than ($ 4onths.accounting date for less than (& 4onthsMR and ♦ @o the results sho. )HANGE OF A))OUNTING DATE Provided certain conditions are met.e stoc. thus if a farmer -ishes to have his accounting date changed to %C #eptember. ♦ If the ne.3 – Advanced Taxation Amendment Act 2006/07 .

♦ /here the change results in a *3*.une. ♦ The profit expansion gives rise to the issue of @ouble Assessment of profits. This profit.A55o'nt! *e!! than 12 1onth! 7ith a rofit EBa$9*e& Agreed Accounting date is %C .une (++: to this date is a total period of Q months.CCC Q ♦ The ne. -hich has been doubly assessed. Accounts to %C.1 De5e$3er 1. ♦ This is the subse8uent *harge year after the *3*..uly and %( 4arch thus the *3D -ill apply. the Taxpayer has an inherent opportunity of ma. . no.date of %( @ecember falls bet-een ( . CCC. CCC.-& ♦ The accounting date has been shifted to this date.s Permanent Botes Hile at ZRA and is given as a relief on cessation of business. The amount doubly assessed is computed as follo-s< (++:O+Q  "(Q. Accounts to %(.ing Tax savings. Thus the profits of the Q 4onths to %( @ecember (++: -ill be expanded as follo-s< Profits G $. In order to minimi1e the levels of abuse.CQ.CCC 6 "$.CCC F (& 2222222222222222222 G "(Q. Hrom %C .CCC. The profit assessable is " (9 million.. The xpanded profits of "(Q million -ill be assessed in this charge year.+: 'Q 4onths) Profits "$ million.2 >'ne 1. . It follo-s therefore that this is the charge year (++:O+Q. 76 L.+: '(& 4onths) Profits "(: million Accounts to %(. This is .no-n as the charge year of change '*3*).(&. A!!e!!$ent!& .-& ♦ As far as this assessment is concerned this is the last Bormal charge year before the change.1 De5e$3er 1.3 – Advanced Taxation Amendment Act 2006/07 . And since .une.(&. ♦ The "(: million -ill be assessed in (++9O+:. CCC.une falls bet-een April and . is recorded in the Taxpayer.. 0ence this is the charge year (++9O+:. the previous charge year basis -ill apply.CCC. -hich is less than (& 4onths.changed to %( @ecember.CCC G "$.+Q '(& 4onths) Profits "(9 million.. the ZRA does expand the profits of this narro-ed *3* since it is a potential source of unfavorable Tax engineering. CCC.

+Q '(& 4onths) Profit "(: million. The profit is expanded to &9 months and then half assessed in the *3*. ♦ The subse8uent charge year after the year of change ending on the next %( @ecember -ill be for (& 4onths.(&.(&. A!!e!!$ent! ♦ The last Bormal charge year ending %C.uly.+: '(& 4onths) Profit "(C million.+Q '(% 4onths) Profit "(% million Accounts to %(.CQ.CQ.+9 -ill be assessed on the P3D.CQ.: million.3 – Advanced Taxation Amendment Act 2006/07 . )o$$ent on the Lo!! There is no need to record it in the Permanent Botes Hile since there is no double assessment or Ioss xpansion. ♦ The loss is not expanded to (& months. EBa$9*e& Agreed Accounts date %Cth .CK. Thus the "( million -ill be assessed in (++%O+9 ♦ The *3* falls in the charge year +:O+Q '*3D). Accounts to %(.A))OUNTS LESS THAN 12 1ONTHS :ITH A LOSS ♦ The loss is to be regarded as a loss for the charge year of change based on the ne.+: 'Q 4onths) Ioss "C.accounting date. Accounts to %(.CK. EBa$9*e& Agreed Accounting date %C .: million.une changed to %( @ecember.+K '(& 4onths) Profit "(9 million.+9 '(& 4onths) Profit "( million. Thus the "(: million -ill be assessed in the charge year (++QO+K under the current charge year rules. Accounts to %C. Accounts to %(. A))OUNTS 1ORE THAN 12 1ONTHS :ITH A ROFIT.une changed to %( . The assessable Ioss is "C. 77 L. Accounts to %C.

CCC 6 "(%. and Income for the remaining period is deemed to be Income of the follo-ing charge year. . 5ne half assessable charge year of change is the +QO+K -ith "(& million. Thus it is not the /hole "&9 million that -ill be assessed in this *3*. CCC. A note in the Permanent Botes Hile of the doubly assessed profits of "&9. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 EBa$9*e< A *ompany prepared its accounts to %(. CCC./ ro%ide! that& 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 /here the period is in excess of (& months.CCC. 0o-ever. the Income is deemed to be for the charge year succeeding that in -hich the Income based on accounts for the immediately preceding charge year -as assessed. 1onth!/& Profits expanded to &9 4onths as follo-s< (%.A!!e!!$ent!< .2 >'ne 1.++ it ceased to trade.+$ and on %(.(&. A!!e!!$ent!<  In every case. 78 L.-& This is the Iast Bormal year assessed under P3D rules. CCC. This is the charge year +9O+:.CCC G "((. %( .CCC. The loss is not expanded to &9 4onths. (% The Amount -ill be half assessed in the *3*.CCC has to be made and adAusted on cessation. 0EAR OF )ESSATION S.. irrespective of the accounting date. A))OUNTS :ITH 1ORE THAN 12 1ONTHS :ITH A LOSS The loss is apportioned (& 4onths to the charge year of change '() and the balance to charge year of change '&).1 >'*( 1. The profit of "(C million -ill be assessed in (++9O+:.2 +. accounts for the last Bormal charge year to the date of cessation are re8uired.CCC F &9 22222222222222222222 G "&9. +1.3 – Advanced Taxation Amendment Act 2006/07 . CCC.C:. this is a (% 4onths period...uly and 4arch -ith current charge year rules applying. "(& million.uly falls bet-een .. -hich straddles t-o charge years as follo-s< *harge year ( G +:O+Q *harge year & G +QO+K "(& million.

S.. The succeeding or follo-ing charge year is the charge year ++OCC.+$..: million G "Q. but this period has already been assessedEEE The Dalance is deemed to be Income of the follo-ing charge year. an overlap relief is given.+$ '(& 4onths) Profit "(: million '+$O++) An!7er< 1. -hich is ++OCC.C(.& Iess< @ouble Assessment relief '&.+$ '+$O++) -ill be deemed to be Income of the succeeding year -hich is the period ending %(.+K is "&C million '+QO+K) Accounting date changed to %( August.+$ to %(. 0ear of )e!!ation EC$ 9.. Accounts for K 4onths to %(.C$.++ ': 4onths) falls in the charge year +$O++ under the previous year basis.: 'Dalance).2 +8/ ro%ide! That& ♦ /here Income has been taxed t-ice and the business ceases.% million 6 "+.: F (& 2222222222 G "(Q.: million '+KO+$) Accounts to %(. EBa$9*e& Accepted Profits for (& 4onths to %(. This is the charge year +$O++..++ to %(.3 – Advanced Taxation Amendment Act 2006/07 .$ million.: million and "Q.% K @oubly assessed profits G "(Q.G Profit G +.C$. -hich -ill be assessed on *3D.(&.    In this case the IB*3 is the period from (.++. This means that the Income of the (& 4onths to %(.(&.8F.:) 2222222 2 GGGG 79 L. the relief -ill be applied as follo-s< 0ear Before )e!!ation + en'*ti$ate 0ear/ EC$ Income 'Profit) Q. The period from (.& million in the year before. GGG S "Q. the profits of the penultimate year.C:.+K Profit "+. If in the year of cessation the *ompany has profits of "9.C(.$ 6 "9.: '9. ♦ The overlap relief only reduces profits of the year of cessation and if the profits are not sufficient.%)S 2222222 .C(.C:.

'b) Any Person -hose Dusiness earnings are subAect to /ithholding Tax and it is not the Hinal Tax. This coupled -ith sound legislative base.H TURNOVER TAD In a bid to broaden the Tax Dase. These Include the follo-ing< 80 L..2. public acceptance and ade8uate financing -ill most li. ♦ Any Individual or Partnership carrying on Dusiness of Public #ervice Jehicle for carriage of Persons. The successful implementation of the Turnover Tax Regime is going to expand the Tax base and indeed provide 7overnment -ith a buoyant Tax instrument for future Revenue collection. xamples include the follo-ing< ♦ Rental Income ♦ *ommissions ♦ Interest arned by *ompanies ♦ Royalties arned by Residents er!on! not Lia3*e to T'rno%er TaB The follo-ing Persons are not liable to Turnover Tax< ♦ Any Person carrying on any Dusiness -ith an Annual Turnover of more than "&CC 4illion. #o far. it seems that this institutional capacity -ithin the ZRA has been created.ings ♦ 3ield. the Income Tax Amendment Act of &CC9 introduced Turnover Tax for the very first time in Zambia. Turnover includes 7ross< ♦ arnings ♦ Income ♦ Revenue ♦ Ta. ♦ Partner.s Income from the Partnership is also excluded from Turnover Tax. The potential to raise revenue in future is further enhanced by improving the institutional capacity -ithin the Zambia Revenue Authority to collect this Tax. 1eanin# of T'rno%er& Hor the purposes of Income Tax. This is because it is the Partnership that carried on Dusiness and not the Partners.3 – Advanced Taxation Amendment Act 2006/07 . and ♦ Proceeds Lia3i*it( to T'rno%er TaB The follo-ing are liable to pay Turnover Tax< 'a) Any Person carrying on any business -ith an Annual Turnover of "&CC 4illion or Iess. ♦ Partnerships carrying on any Dusiness irrespective of -hether the Annual Turnover is "&CC 4illion or Iess. ♦ Any Person -hose Dusiness earnings are subAect to -ithholding Tax and it is the Hinal tax.ely lead to the desired goal.

The Refund -ill be determined through standard assessment issued by the ZRA at the end of the charge year.3 – Advanced Taxation Amendment Act 2006/07 . he should notify the ZRA immediately. 81 L.'a) 'b) 'c) 'd) 'e) 'f) 'g) 'h) Dan. compute the Turnover tax and Remit the Tax due by the (9 th of the Hollo-ing month. 1onth – End ro5ed're!& At the 4onth end a Taxpayer is re8uired to add up his Turnover for the month. Interest for Individuals @ividends Interest on 7overnment bonds Interest earned on Treasury bills for *haritable Institutions and other xempt Persons. They -ill be registered and given a Tax Payer Identification Bumber 'TPIB). 4anagement and consultancy Hees paid to Bon 6 Residents Payments made to Bon 6Resident *ontractors Public ntertainment Hees paid to Bon 6 Residents Royalties Paid to Bon 2 Residents Re#i!tration for T'rno%er TaB Taxpayers -ill be re8uired to notify the ZRA -ithin %C days of commencement of Dusiness. Taxpayers under the Turnover tax threshold -ill not be re8uired to submit Provisional Income Tax Returns. 0ear End 9ro5ed're!& Taxpayers -ho -ould have suffered -ithholding Tax @eductions during the year shall be refunded upon submission of -ithholding Tax certificates at the end of the charge year. Individual or *ompany Account number and a Pay As 3ou arn 'PA3 ) #cheme number -here applicable.e monthly or 8uarterly remittances through the 4onthly Turnover Tax Remittance *ard. Dut -here a Taxpayer discovers during the year that his Turnover is going to exceed "&CC 4illion. as they -ill be expected to ma. /here no declaration is received the ZRA may issue a standard assessment at the maximum rate of %P of "&CC 4illion.

EDA1INATION T0 E <UESTIONS :ITH ANS:ERS 82 L.3 – Advanced Taxation Amendment Act 2006/07 .

. landing.222Bet Doo..Q&& Transfers +(%..1. passenger service fees relating to passenger traffic.222A (. The company.CK& %&.A1 222222222222222 1@1G.:(( '$(. over from the 7overnment of the Republic of Zambia (% years ago.3 – Advanced Taxation Amendment Act 2006/07 .@.9&+) 222222222222222 2@A28@28GGGGGGGGG 2@.::Q Q$C 2 22222222222222 12@2.A.C9.KK$ K:+.%9: Reclassifications 2 2 2 @isposals 2 2 '$&.2.+C: &.222.2A@822@81..s turnover has largely been represented by the invoiced value of navigation.%&& 2 (.ing fees relating to aircraft traffic.2.QQK.9$$ Additions +.+%%.2@.@A. 222222222222222 (.++% $:K.2. Jalue M . GGGGGGGG 22@.1.1.2@28A .s auditors have recommended the use of historic cost convention in the preparation of financial and statutory accounts..K%+) 22222222222222222 22222222222222 22222222222222222 .1.Q$C 2 %(:. 22222222222222 2. over flights.Q%C.$K9 2 222222222222222 2@A.2.-2 GGGGGGGGG 28@G81@A22 2222222222222222 1G@222@2..222Bet Doo. Hor the year ended %( 4arch &CC: the company accountant has prepared the follo-ing Hixed Asset #chedules. GGGGGGGGGG GGGGGGGG GGGGGGGGGG De9re5iation& (. the company. rentals and concessions relating to accommodation facilities provided at airport terminals and -arehouses. #o far. ground handling and par. Jalue M.&CC9 (+.2@.&CC9 *harge for the year @isposals . Air9ort@ ter$ina* Lea!ed 1otor R'n7a( ? A9ron! B'i*din# Vehi5*e! EC222 EC222 EC222 )OST& (..:(:.K%C..A 2222222222222222 +.1.C9.2222222222222222 83 L.@.$&C.<UESTION I IREEN 1A ULANGA Ireen 4apulanga is the proprietor of Zamiga Airports Itd -hich she too.2@.

II $.Q(C.1.K%+) 22222222222222 222222222222222222 22222222222222222 .Q&Q..CCC Bissan Jan Q:&.G@A8A@. -here the company has a facility of up to "(CC million secured by a first legal mortgage of "9:million and a lien for !# V (C.:Q& K&.The follo-ing additional schedules are also available including the overall totals< F'rnit're )a9ita* :or" Tota* ? Fittin#! In ro#re!! EC222 EC222 EC222 )OST& (.QQ(.1.2@.:CC. K%+.CCC 2 $.CCC 2 :.2 HHHHHHHHHHHHHHHHHHH .@A-2 NNNNNNNN -.@.:CC.-@G.1.9(Q -ill be claimable as a balancing allo-ance in the tax computation.CK$ ':9.K%Q +. 84 L.@.2.3 – Advanced Taxation Amendment Act 2006/07 .K$9 Additions %.:CC.K:&.CCC.@A1.$CC :K.2.81@.:9+.222A 82@.+CC.::$....2 GGGGGGGGGG 2 2 2 HHHHHHHHHHHHHHHHHH H NNNNNNNNNNN G@-.CCC.G@2AG HHHHHHHHHHHHHHHHHH Note& The leasehold building is encumbered as security for overdraft facility at a named commercial ban.CCC 2 %.12 HHHHHHHHHHHHHHHHH .@2A.9:+ 2 Q.+CK.C9% 2 HHHHHHHHHHHHH 1.%CQ Transfers :%.C&Q) '%.CCC 222222222222222 22222222222222 222222222222222 G2@8.C9.222M .222Net Boo" Va*'e& M .+&& +.CCC 0yundai #onata Q.+%&.9:9.CCC 2 :..%CC.Q(&..@2.&CC9 (:.+%&.++9.Q$%.&CC9 *harge for the year @isposals .AG HHHHHHHHHHHHHHH 12@.C&Q) @isposals 2 2 '$&.2.$+9..C9.&::.1.8 HHHHHHHHHHHHHHHHHHHH 11.CCC.@-A.CCC.QCK 2 :..9(Q is made of the follo-ing figures< )OST ITV 3Ff RO)EEDS Bissan (+C. H A8@-22@222 222222222222222 22222222222222 2222222222222222 The accountant has estimated that a total of "%:.CCC 0ilux (Q.CCC.+$Q.(C$ '$(@9&+) HHHHHHHHHHHHHHHHHH 1G@1-8@A1NNNNNNNNNN .(CC.CCC *orona (C.2GGGGGGGGGG $.222De9re5iation& (.2.@.CCC Hire tender &Q.CCC 4icro Dus (%.-@G.(C%) 2 Reclassifications 2 '%.s foreign currency accounts.CCC.9C+ K.CCC over the company. HHHHHHHHHHHHHHH G@-.%:C 2 Q.@-1.CCC 4ar. Note 1& 1otor Vehi5*e Di!9o!a*! &+ EC222/ The total figure of "$&.2.&%+.CCC 2 $.22@G22 GGGGGGGG :.%+K 9K.

+QK.C::.(:$ &%.3 – Advanced Taxation Amendment Act 2006/07 .&K(.. This information is being re8uired for the Hinali1ation of the &CC9O&CC: Income Tax Assessment.&$C $. Assume that the company has a policy to claim capital allo-ances as far as possible and at the earliest.99+ (9.GGGGGGGGGG Note A – Air9ort Ter$ina*!@ R'n7a(! ? A9ron! – ind'!tria* 3'i*din#!& )o!t ITV – BFF &CC% (&.9&+.A@.&&&.+:9 ((:.@A2A 1-@-8G@AG.$+K.K(9 ((.@--G@.@8.(KK.CCC 2222222222222222222 .2.+Q9 (++: (.A@.9CC.CCC (++Q 99K.$C+.K(C 9.%:&..K9:.2 222222222222222222222 222222222222222222222 Re='ired& Hrom the foregoing information you are re8uired to compute the capital allo-ances that are claimable by Zamiga Airports Iimited.K$9.CCC.%9C :QQ.9%$. /or.:$Q (++K (&K.K:+.CCC &CC( 9Q+.%$Q &CC( (:.CC&.$:+.99: 222222222222222222 81.CCC (++( K&Q.&9C.@1. to the nearest million "-acha.C:( (++C %&.Q$( %+%.%CK.Q:C %K:. GGGGGGGGGG ITV – BFF &$.Q++.A@11. – Ind'!tria* B'i*din#!& )o!t (++C +Q%.:K% &CC9 9.C9&.@G8GGGGGGGGGG ITV – BFF %%K...$%+.&((.%CQ 22222222222222222 1@A.%:(.@111@2. 85 L.Note 2 – )o$$er5ia* B'i*din#!& The buildings -ere bought as follo-s< )o!t (++C %$.+K(.CCC Bil 222222222222222222222 222222222222222222222 2G@2.C(% (.CCC 222222222222222222 --. ::K &CC: (C.G8 GGGGGGGGGGG Note .(9(.CCC (++9 +.

It is far much better to revise and practice -ith long 8uestions and if you are a bit luc. as (++CE Thus Initial allo-ance -ill be computed as follo-s< "(C. i. 9&+ 4illion F (CP G "(.ANS:ER& IREEN 1A ULANGA This 8uestion loo. In the 8uestion -e have been told that the accountant has anticipated a balancing allo-ance of "%:.s a bit too long.m tempted to admire your mental alertness. All other Industrial buildings -ere bought years ago. an Initial Allo-ance at the rate of (CP shall ariseE @id you see thatM If you did. /e can no.constructions are classified as Industrial Duildings. to say straight line method.Airport Terminals. i. /e can tell for sure that the follo-ing *apital allo-ances are li. I. you. /e need to verify from the available information -hether or not the accountant.ust loo.e.e this literally. &%+ 4illion but -e can not ta. Although the 8uestion is long.ve got to get used to this type of 8uestions. to simply compute the various capital allo-ances that are claimable.AirPort Terminals. its demands and re8uirements are relatively straight for-ard.y encounter a short 8uestion in the actual examinations.get started by tac.s estimate is accurate and above all if it is in agreement -ith the Income Tax Ia-. 86 L. and yes. ♦ *apital allo-ances on 4otor Jehicles ♦ Hrom the information given in Bote ( -e can tell that since there -ere disposals of fixed assets.ing at the Asset schedule alone should be enough to tell you -hat allo-ances are applicable.e. some as far bac. either a balancing charge or allo-ance -ill arise and needs to be computed. . Ind'!tria* B'i*din#! A**o7an5e& The industrial Duildings Allo-ance 'IDA) is computed at the Rate of :P per annum on cost. Run-ays and Aprons -ere constructed in the current charge year. #ince these ne.ely to be computed from the available information< ♦ Industrial Duildings Allo-ances ♦ Hrom the information in Bote 9 -e observe that during the current year the company has constructed ne. C9% 4illion.ling the easier capital allo-ances first< Initia* A**o7an5e on Ne7 Ind'!tria* B'i*din#!& Be. 9&+ 4illion.3 – Advanced Taxation Amendment Act 2006/07 . ♦ *apital allo-ances on *ommercial buildings. Run-ays and Aprons at the cost of "(C.

1i**ion& )OST ITV 3Ff (+C.@A1.KCK %.CCC Q.0ear )FF (++C &CC( &CC% &CC9 &CC: &CC: )o!t ITV 3Ff :?T '9$) '&9) 'Q9:) '&9$) ':&() '(.%:C 2 222222222222222 222222222 G2@8. H 222222222222222 222222222 ro5eed! A**o7an5e Q.&&& (C.CCC 2 (C. GGGGGG ITVH &$+ %:9 (C.CCC.Q(C..:CC.%+% :.CCC 2 (Q.%9K.3 – Advanced Taxation Amendment Act 2006/07 .:CC.CCC 9.CCC.CCC 2 &Q.+QK 9.the accountant computed and arrived at a balancing allo-ance.e is 8uite common in practice and you need to get straight on top of things and never be caught off guard by the Zambia Revenue Authority.%:C) 222222222222222 2222222222222222 A8@-22@222 +.CCC :.Q(C.CCC..%:& 9.CCC) %./ 2222222222222222 2222222222222222 Bissan Bissan Jan 0yundai #onata Hire tender 0ilux *orona 4ar.+K9 $.CCC '(.-@2. This mista.:CC.CCC '$.+$Q. at Para. II 4icro Dus SS /hen the total allo-ance is rounded off to the nearest 4illion "-acha -e get " %: million.(CC.$C+.9:+ 2 Q:&.$+$ ((.CCC) :. -hich states that< 87 L.CCC ':.: '() 'b) of the Hirst #chedule to the Income Tax Act again.CCC.9&+ C Initial Allo-ance Verif(in# the a55o'ntantC! 5o$9'tation of Ba*an5in# A**o7an5e of E.9CC.CCC 2 $.$Q: +Q9 %%K 9KC %K$ &.QCK 2 Q.:9( :. This is ho.s have a loo.:CC.CCC 'K.CCC.CCC.CCC '&&.+$Q..CCC) $.CCC) $. -hat does the lasayM Iet. but this computation is against the re8uirements of the Income Tax Act as -e shall see shortly.CCC 2 (%.+CC.CCC QCC. #o.%CC.C9%) 2222222222 2@-2.@A1.:CC.

it.CCC $.CCC 2222222222222222 A8@-22@222 HHHHHHHHHHHHHHHH /atch outE /hat -as predicted to be a balancing allo-ance has in fact turned out to be a balancing charge.:CC.CCC. Bote that balancing charge is the excess of @isposal Proceeds over the Income Tax Jalue of an asset.CCC %.3 – Advanced Taxation Amendment Act 2006/07 .CCC.CCC.)5#TE( 'Income of a person Includes any amount paid by !hich reco#eries from capital expenditure exceed 5 in the case of Implements% 7achinery or "lant% such residue of the expenditure ranking for Capital allo!ances incurred in respect of the Implement% 7achinery or "lant as remains after ded*ction of any -ear and tear or other Capital allo!ances or similar deduction !hether allo!ed under the Income Tax Act or under any "ro#isions of the "re#ious )a! for any Charge year+ The .: 4illion in the Tax *omputation.s li.CCC 222222222222222 A8@-22@222 HHHHHHHHHHHHHHHH )har#e Q. 88 L. /hen -e match disposal proceeds -ith ITJ the scenario loo.CCC $.s /@J or ITJ 'Income Tax Jalue).CCC.(CC.(CC.CCC.+CC.+CC.CCC $.ey -ords are ‘as remains after the deduction of any !ear and tear0 this effectively means that the figure to compare our disposal proceeds -ith is not the cost of the disposed asset but rather.CCC :.CCC. II 4icro Dus 2 2 2 2 2 2 2 2 222222222222222 H HHHHHHHHHHHHHH ro5eed! Q.CCC :.CCC.CCC $.CCC :.CCC.CCC :.CCC.CCC %.e this< ITV 3Ff Bissan Bissan Jan 0yundai #onata Hire tender 0ilux *orona 4ar.CCC Q.CCC Q. The Zambia Revenue Authority -ould start by first and foremost reversing the earlier claim of a balancing allo-ance and then disallo-ing " 9K.CCC.:CC. As can be seen the accountant -as matching @isposal proceeds -ith 5riginal cost rather than ITJ to arrive at the balancing allo-ance of "%: 4illion.CCC :.CCC :.

22 -AA@111@.C(% (.:&C ITV 5Ff &K.($& &.C9.K$9.G8@.C9&.KK& %$9.CCC +.+:9 ((:..K+K. /e can do a simple estimate as -e did for motor vehicles to Aust sho.::Q. )a9ita* a**o7an5e! on F'rnit're and Fittin#!& Hurniture and fitting are allo-ed a &:P /ear and Tear Allo-ance on cost. /e have not been given the date of ac8uisition of the furniture and fittings so -e can not accurately determine the ITJ of these assets to ascertain the amount remaining for the assets to be completely -ritten do-n. *ost on (.::+ F &:P G "%.$CC (.(9(.CCC 99K.K9:.&CC9< 2 "&.9%+ K.%9C :QQ.@G8. Hor the purposes of this 8uestion.A@. Additions to the asset register.CCC K&Q. 0ear (++( (++& (++% (++$ (+++ &CCC &CC( &CC& )o!t %$.:&C ::(.@8.C::.&$C $.A@.9%$.CCC --.(KK.&9C.9+$.+KK.&CC9< " (:.CCC. -e -ill assume that all vehicles are commercial vehicles in -hich case they -ill be allo-ed a &:P /ear and Tear allo-ance on straight line basis< Additions< &CC:< 2 "(.9CC.+Q9 (.$$( $.(CC.K$$ ((&.C:( %&.8- )a9ita* A**o7an5e! on 1otor Vehi5*e!& /e have not been told -hether or not the motor vehicles ac8uired during the year -ere *ommercial or Bon2 *ommercial Jehicles..3 – Advanced Taxation Amendment Act 2006/07 .(9(.KQC (++. $&C 4illion F &:P G "KC: 4illion per annum for each year from date of ac8uisition -hich is not given in the 8uestion.%+K &%.(:$ &%.12@.+K(.CCC :?T KQ( Q9&. $+C 4illion per annum for each year from date of ac8uisition.%$Q (:..:$Q (&K. QQK 4illion F &:P G "9(K 4illion.e.C9.+9$.Q$( %+%.the annual -ear and tear allo-ance on cost and the -ear and tear relating to the current charge year.$%+.CCC (9. 89 L. i.$&C (9.QQ( %CC.:K9 &9.CCC .G8 ITV – BFF &$. *ost on (.99+ (9. +C$ F &:P G "+KK 4illion.)a9ita* A**o7an5e! on )o$$er5ia* B'i*din#!< *apital allo-ances on commercial buildings are computed at the rate of &P per annum. / N T on Additions for the year &CC:< "%.C(K.

<UESTION II )HIB:E 1ATILDAH BITI :ATA 4atildah is involved in the manufacturing of farming e8uipment for small2 scale farmers.::: &C. Re='ired Advise 4atildah of the tax implications arising from the three options above. CCC.2 GGGGG O9tion 2 Duy an existing factory building from 4umba *hamfya at an estimated cost of "%K:.factory..CCC :. CCC.CCC &. Q%C. :::.CCC O9tion .CCC 2222222222 A.CCC and the lease premium -ill be "%CC. Include appropriate computations to support your ans-er.CCC (:.CCC.CCC..%CC 9C. 90 L.KK: &$. This arrangement -ill entail a monthly rental of "(.CCC %(C.3 – Advanced Taxation Amendment Act 2006/07 .@. This -ill ta. JAT on building materials *ost of land Architects fees Jentilation and heating systems Hire alarm *oncrete floor to support machinery 7eneral offices Hactory EC222 ($. 5btain a medium si1ed factory on an arranged lease for &C years.e $ months and -ill cost her a total of "9%+. 0er business has been expanding steadily follo-ing the numerous tax incentives in agriculture announced by governmentR and no.she needs an additional factory. #he has three alternative options as follo-s< O9tion 1 #he can contract @ana constructions Itd to construct a ne.

CCC G +P.:::) ':.@. #ince this is belo.ANS:ER 1ATILDAH )HIB:E BITI :ATA The 8uestion does in fact concern the tax implications of three alternative for 4atildah -ho at the moment needs extra factory space as she is expanding follo-ing favourable tax incentives given by government to the farming community.(C P the -hole building -ill 8ualify. Thus a total of ":$.22 GGGGG Total cost Iess< *ost of land JAT Jentilation N 0eating system Hire alarm S'3 – ara +8/ of the fifth schedule provides that -here part of a building is an industrial building and a part is not.%CC. then the -hole building shall be classified as an industrial building -here the non industrial part of the building..CCC) G "%+. %%C.CCC as initial allo-ance. as this is a brand ne. does not exceed (C P of the total cost. O9tion 1 – )on!tr'5tion of the fa5tor( thro'#h Dana )on!tr'5tion Li$ited The factory -ill be ne..KK:) 222222222222 .CCC -ill be deducted from the taxable trading profits in the current charge year in respect of industrial buildings alone. An additional industrial building allo-ance -ill be claimed at the rate of : P on cost as follo-s< ': P F %+%. for the Initial allo-ance at the rate of (C P as -ell as the : P industrial building allo-ance on cost. This can be computed as follo-s< "9C.%%C. The a**o7an5e 7i** 3e 5*ai$ed a! fo**o7!< '(CP F %+%.CCC. i. The industrial building allo-ance -ill accordingly be based on the cost of the -hole structure. Q%C '&C.3 – Advanced Taxation Amendment Act 2006/07 . in this case the general offices. QQ:.Q%C. " %+%. This -ill be as follo-s< <'a*if(in# EB9endit're EC222 9%+.CCC) '($.building.CCC.%CC.CCC) G "(+. CCC.and -ill be brought into the business for the first time after construction and -ill accordingly 8ualify and ran. 91 L.CCC O 9%+. ++:.CCC) '&.e.

The Input JAT of "($.CCC) 2222222222222 1G.CCC -ill be reclaimed in full assuming that 4atildah is ma. KK:. for /ear and tear allo-ances at the rate of :C P on cost on a straight line basis. $$K. O9tion . O9tion 2 – B'( an eBi!tin# fa5tor( 3'i*din# If 4atildah opts for this option. The proportion of the premium assessed on the o-ner -ill also be deductible over the period of the lease as follo-s< EC222 Premium paid %CC.K:C.@222 GGGGGGGG "($Q.ing standard rated supplies. – Lea!e of the fa5tor( !nder this option the o-ner of the factory -ill be entitled to claim the capital allo-ances as title of o-nership remains -ith the lessor.CCC) -ill 8ualify as plant and machinery and -ill accordingly ran.CCC F :C P G " %. CCC. :::.CCC F & P F '&C 6 () '((9. KK:. :::. The :C P accelerated rate applies to plant and machinery that is used directly in farming and this is -hat -e have assumed to be the case for 4atildah. SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS 92 L.CCC O &C years G "+. Thus "K.CCC F :P G "($.3 – Advanced Taxation Amendment Act 2006/07 . The cost of the ventilation and heating systems '": million) and the fire alarm '"&. 4atildah can only claim the lease rentals as a deduction in her tax computation. Thus the "( million monthly rentals -ill be an allo-able expense and this -ill total "(& million at the end of the year. %CC. she -ill only be entitled to the industrial buildings allo-ance at the rate of : P. 0er total tax benefit -ill only amount to "%K:.CCC Iess< %CC.CCC per annum. The (C P initial allo-ance is only available on brand ne. :CC. KKK.buildings upon their first construction.

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