Table of Contents

Chapter

1 Taxation overview---------------------------------------------------------------- 1
2 General principles ---------------------------------------------------------------- 8
3 Specific principles on gross income------------------------------------------- 12
4 Pension receipts and payments------------------------------------------------- 22
5 Double Taxation------------------------------------------------------------------ 29
6 General deductions----------------------------------------------------------------34
7 Expenditure-------------------------------------------------------------------------38
8 Capital allowances-----------------------------------------------------------------48
9 Leasing------------------------------------------------------------------------------ 60
10 Exemptions------------------------------------------------------------------------- 66
11 Partnership-------------------------------------------------------------------------- 71
12 Farmers------------------------------------------------------------------------------ 76
13 Miners------------------------------------------------------------------------------- 85
14 Exports------------------------------------------------------------------------------ 98
15 Capital gains------------------------------------------------------------------------ 101
16 Hire purchase----------------------------------------------------------------------- 109
17 Deceased Estates-------------------------------------------------------------------- 117
18 Estate duty--------------------------------------------------------------------------- 122
19 Administration---------------------------------------------------------------------- 125
20 Value added tax--------------------------------------------------------------------- 129
21 Tax planning------------------------------------------------------------------------- 133
22 Answers-------------------------------------------------------------------------------143
 Chapter 1
TAXATION OVERVIEW

1.0 INTRODUCTION

Taxation is a government policy targeted at collecting revenue for the financing of public
expenditure.

Tax is also levied as means of discouraging demand of demerit goods i.e. tobacco, alcohol etc,
and promoting or protecting local industries.

The main collecting agent of tax for the state is the Zimbabwe Revenue Authority – ZIMRA.

1.1 TYPES OF TAXES

There are two broad categories of taxes namely, direct and 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 i.e.

Corporate tax –tax on business income (profits)

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.

The first 3 tax aspects are dealt with in the Income Tax Act -chapter 23.06, capital gains in the Capital Gains
Tax Act –chapter 23.01,and estate duty in The Estate Duty Act-chapter 23.04.

Indirect taxes
Are levied on one set of individuals or organisations, but may be partly or wholly passed onto others and are
largely related to consumption. For example, sales tax, value added tax, custom & excise duty etc.
Indirect taxes tend to be regressive. In other words they have a relatively greater impact on the poor. Yet
direct taxes are progressive in nature. The more you earn the more tax you pay.

1.2 CORPORATE TAX –ON BUSINESS INCOME

All companies and individuals i.e. sole traders, public or private companies, including consultants earning
income from business operations are liable to pay corporate tax –provisional tax s72.

The general rate of tax in respect of business operations is 30%. The following are some of the exceptions:

Mining operations 25%

Licensed investor 20%

Manufacturing company operating a new project at growth point 10%

Company operating a growth point business 15 %
Aids levy of 3% is chargeable in all cases.

Example
Azure Investments earned a total profit of $1.5 million for the year ended 31 December 2003
What is its tax liability?
Solution
Tax thereon [.30 x 1,500,000x 1.03] $463,500.00

Please note normal company rate plus 3% aids levy will result in flat rate of 30.9%.
Remittance of corporate tax
Corporate tax is remitted to ZIMRA on certain specified dates known as Annual payment dates (APDs)
in terms of section 72 Income Tax Act notably:.

1st APD 28 February 50% of estimated tax liability

2nd APD 30 June 25% of estimated tax liability
3rd APD 30 November 25% of estimated tax liability

These dates are subsequent to the tax year in which the income accrues. The implication for non-
payment of tax on stated dates is a 100% penalty and 35% interest per year.

EXAMPLE
Topaz (Pvt.) Limited estimated its annual tax liability for the year ended 31 December 2003 to be $500
000.

Required to:
(a) State how the liability should be settled.
(b) Assuming the liability was settled as follows;

$300,000 on 1 March 2004

$100, 000 on 17 July 2004
$100,000 on 31 December 2004

What are the tax implications?

Solution
(a) 1st APD 28 February 2004 (50% x 500 000) = $250 000

(b) 2nd APD 30 June 2004 (25% x 500 000) = $125 000

(c) 3rd APD 30 November 2004 (25% x 500 000) = $125 000

1st APD of $250 000 should have been paid by 28 February 2004, but was paid on 1 March 2004.
There was a delay of 1 day.

This appear reasonable to the commissioner. Usually he allows a grace period of 15 days to good
taxpayers.

2nd APD was paid on 17 July 2004 yet it was suppose to be settled on 30 June 2004. There is a delay
period of 17 days.

Tax due on the second APD is $125 000 of this, however, $50 000 was paid in advance on payment of
1st APD. Thus liability due on the 2nd APD (250,000 + 125,000 – 300,000) = $75,000

Tax due;
Initial tax 75,000
Add 100% Penalty (75 000 x125 000) 75,000
150,000
Add 35% interest (0.35 x 75 000 x 17/365) 1,223

Total tax liability 151,223

Less paid 17/7/04 75,000
 Additional tax 76,223

3rd APD: Date due 30/11/04

Date paid 31/12/04
Delay period 31 days
Tax due (500 000 – 400 000) $100 000

Tax due;
Initial tax 100,000
Add 100% penalty (100 000 x 100%) 100,000
200,000
Add 35% interest (0.35 x 100 000 x 31/365) 2,973
202,973
Less paid 31/12/04 100,000
Additional tax 102,973

1.3 PAY AS YOU EARN-EMPLOYMENT INCOME

Every employee irrespective of race, residence is taxable on income earned on services rendered in
Zimbabwe. The following is the general framework used in assessing an individual’s tax liability.

DETERMINATION OF TAX LIABILITY FOR THE YEAR ENDED 31 DECEMBER 2003

Tax there on xxx
Less Credits xxx
Tax liability xxx
Add 3% Aids levy [3%of tax liability] xxx
Less PAYE xxx
Tax payable (refund) xxx

EXPANATION OF COMPONETS IN THE FRAMEWORK

TAX THEREON
Tax thereon is arrived at after applying the following tax rates on the individual’s taxable income

2003 Tax Year

Segment Rate Tax Cumulative Tax

$ % $ $
Up to 180 000 Nil Nil Nil
180 001-260 000 20 16 000 16 000
260 001-340 000 25 20 000 36 000
340 001-420 000 30 24 000 60 000
420 001-500 000 35 28 000 88 000
500 001-1 500 000 40 400 000 488 000
1 500 000 and above 45

TAX CREDITS
These are concessions granted to taxpayers due to certain life disadvantages, notably: physical and
mental disability, illness, old age, and blindness. Credits are dealt with in the Finance Act.

Special points about credits

 (a) Physical and mental disability

Applicable to a disability of a taxpayer, spouse or child only. Each case is therefore granted
$20,000.

The credit is transferable between spouses where the disabled 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.

The credit is not granted to a taxpayer who is not ordinarily resident in Zimbabwe at any time
during the tax year.

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

(b) Blind person’s credit

Applicable to a blindness of a taxpayer and spouse only. Each case is therefore granted
$20,000.

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.

The credit is granted to a taxpayer whose blindness is essential in carrying out his or her
tasks, and must have been blind for a period exceeding 6 months in the year of assessment.
Example
The income of Mr Banda who is a blind person is $260,000 and that of his wife is $260,000.
Calculate tax payable for each individual for 2003 tax year. Solution

Husband Wife
Income 260,000 260 000
Tax (see table below) 16,000 16 000
Less Blind person credit (20,000) nil
Transfer excess credit 4,000 (4 000)
Tax liability nil 12 000
Add 3% Aids levy nil 360
Tax payable (refund) nil 12 360

(c) Elderly person’s credit

Applicable to an elderly working taxpayer only, and is over the age of 59 years.

The credit is apportioned where the period of assessment is less than a year i.e. 12 months.

**NB The commissioner’s practice is to apportion the credit normally when:

• A taxpayer dies during the year.
• A taxpayer has been declared insolvent during the year

(d) Medical expenses credit

Applicable to medical expenditure of a taxpayer, spouse and child only. Each case is therefore granted
50% of expenditure incurred.

A medical doctor should prescribe the medical expenditure.

The credit is not granted to a taxpayer who is not ordinarily resident in Zimbabwe at any time during the
tax year.

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.
**NB medical expenditure includes among others,
 Drugs, medical treatment operation etc
 Invalid appliances i.e. crutches, leg callipers, wheelchairs, including any modification of equipment,
motor vehicle, bathroom etc to suit the requirements of a disabled person.
 Bedding or accommodation at a nursing home, hospital, clinic etc
 Any ambulances cost etc.

e) 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 Amount Section Apportion Transferable Non-residents

Blind 20 000 10 No Yes Yes

Elderly people 20 000 11 Yes No Yes
Mentally or physically disabled 20 000 12 No Yes No
Medical expenses 50% 12 No No No
Medical contribution 50% 12 No No Yes

AIDS LEVY 3%
Aids levy is applied on tax liability after deducting tax credits. Please note that other items as envisaged
in the later chapters are not charged aids levy. In those circumstances such items must be taxed after
aids levy has been applied.

Example
Mr Portman who is 62 years old received a salary of $1,800,000.00 during the current year of
assessment. He is married to Lisa who is blind. During the year they paid $22,000, medical contribution
to CIMAS.PAYE paid during the year amounted to $550,800.00.
Required: To compute his tax refund or payable.

Solution
DETERMINATION OF TAX LIABILITY FOR THE YEAR ENDED 31 DECEMBER 2003
Tax there on $ $
On 1,500,000.00 488,000
On [1,800,000-1,500,000] x45% 135,000 623,000
Less Credit
Elderly credit 20,000
Blind wife 20,000
CIMAS [22,000 x ½] 11,000 51,000
Tax liability 572,000
Add 3% Aids levy [3%of 572,000] 17,160
589,160
Less PAYE 550,800
Tax payable (refund) 38 360

Remittance of PAYE
The employer is the agent of ZIMRA for the collection of pay as you earn. He must pay over the PAYE
collected to ZIMRA on the 15th of the month following the month of deduction. Thus PAYE for the month
 of July 2003 is due on 15 August 2003. The tax implication for any default of this requirement is a 100%
penalty and 35% interest p.a.

Example
Tattoos fashions deducted PAYE for its employees for the month of June 2003, amounting to $415,000.
The obligation was settled on 1 December 2003.
What is the total tax due on 1December 2003?

Solution
Computation of tax due on 1 December 2003
Initial tax obligation 415,000
Add 100% penalty 415,000
830,000
Add interest [415,000x 35%x138/365] 54,916
Total tax obligation 884,916

Note: Delay period is expressed in days that is 138 days counted from 15 July 2003 to 1 December
2003.

1.4 INVESTMENT INCOME

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

Rental Income
Rental income is treated in the same way as profits from business operations. It is taxable at the
rate of 30% plus 3% aids levy. However, only rental income from an immovable property
situated in Zimbabwe is taxable. For details see the next chapter –sources of income. The tax is
due on the annual payments dates as specified above.

Interest Income
Generally, interest from trade and investments is taxable at the rate of 30% plus 3% aids levy i.e.
30.9% inclusive of aids levy. Accordingly interest on debentures, loan stock or other form of
indebt ness accruing to non-residents and residents alike from a source within Zimbabwe is taxed
at 30.9%. Also taxable at that rate is income from a foreign source accruing to Zimbabwean
residents-s12 (2).
All of the above categories of interest are taxable in the hands of the recipient.

In terms of s 26, however interest from financial institution –refer to twenty first schedule for
definition of financial institution, is taxed at the rate of 20% at source. Accordingly no further tax
is charged in the hands of the recipient once the financial institution has deducted the tax. Such
tax is referred to as withholding tax.

Withholding tax on interest must be paid over to Zimra by the financial institution on or before the last date
of the month following that of paying the interest. Where the financial institution fails to withhold the tax the
agent on behalf of the payee must do so on or before the last day of the month following the month of
receiving interest. Otherwise the obligation to pay the tax will shift to the payee on or before the last day of
the month following the month of receiving interest.
Dividend Income
Resident and non-resident shareholders receiving income from a source within Zimbabwe are subjected to
withholding tax on.

Dividends of 20% unlisted shares

Dividends on listed shares 15%
These are dividends exempted in terms of paragraph 9, 3rd schedule in the hands of the shareholder
generally. The reason for exemption in the shareholder’s hands is because tax is withheld by the distributor
(payer) at the time of distribution.
Dividends from a foreign source accruing to Zimbabwe residents –s12 (2) are also taxable at the rate of
20% in the hands of the recipient.

Withholding tax on dividends must be paid over to Zimra by the company on or before the last date of the
month following that of paying the dividend. Where the company fails to withhold the tax the agent on behalf
of the payee must do so on or before the last day of the month following the month of receiving dividend.
Otherwise the obligation to pay the tax will shift to the payee on or before the last day of the month following
the month of receiving dividend.

Other income items-withholding tax

Management fees 20%

Technical fees 20%

Royalties 20%

1.4 OTHER TAX HEADS

Capital gains tax, sales tax and estate duty tax are best dealt with in the respective chapter, and will only be
covered after chapter 14.Up to that chapter a full attention will be on the Income Tax Act, which constitute
about 80% of most taxation papers.

CHAPTER SUMMARY
The chapter deals with common tax heads administered by Zimra-i.e. payee, APDs etc, with a focus on general
computations and dates for payment of such taxes.
Key Points
• Pay as you earn is due on the 15th of the month following month of deduction.
• Withholding taxes on dividends is 20% while that for interest from financial institution is 20%.
• Provisional tax is due on:
1st APD 28 February 50% of estimated tax liability
2nd APD 30 June 25% of estimated tax liability
3rd APD 30 November 25% of estimated tax liability
 Chapter 2

GENERAL PRINCIPLES

2.0 INTRODUCTION
Taxation theories draw heavily upon the subject of law. However, much of its practical framework is purely
an accounting discipline, though accounting is historic in nature and focuses on profit arrived at based on
accrual concept. Taxation on the other hand does use that historic information, but focuses on profit arrived
at based on cash basis.

2.1 TAXABLE INCOME

Taxable income is net profit adjusted for cash items and other taxman items. Accounting terms such as
gross sales, gross receipts, and expenses apply as well in taxation.
When presented with information prepared in accounting form you adopt the information, and make few
adjustments for tax purposes as follows:

(A) DETERMINATION OF TAXABLE INCOME FOR THE YEAR

Net profit as per statement xxx
Add back
Depreciation xxx
Fines and penalties xxx
Charitable donations xxx
Company formation expenses xxx
Alterations and improvements to fixed assets xxx
Interest on loan used to purchase shares xxx
Provision for bad debts as is expressed in % form xxx xxx
xxx
Less
Dividends xxx
*Capital allowances xxx
Profit on sale of assets xxx
Interest on local banks, etc xxx xxx
Taxable income xxx

* Capital allowances refer to the taxman’s depreciation and usually calculated by him.
Where the financial statements have not been prepared for you, the following framework may be used:

(B) FRAMEWORK FOR DETERMINATION OF TAXABLE INCOME

Gross income [s 8, s10 &s12] xxx

Less Exemption [s14] xxx
Income xxx
Less Allowable deduction [s15, s17 & s18] xxx
Taxable Income xxx

NB: Items contained in the brackets are sections of the Income Tax Act chapter 23.06.

There is not much difference between terminology used in taxation and that used in accounting. Gross
income is synonymous to gross sale, allowable deduction to business expenses. An exemption is income
which is received free of tax.
2.2 DIFFERENCES BETWEEN NET PROFIT AND TAXABLE INCOME
Before we discuss the numerous principles developed out of case law, a clear understanding of the reason
for difference between net profit and taxable income is required.
There are two classes of difference, namely;

Temporary differences

Permanent differences
a. Temporary differences items are those that affect accounting profit and taxable income in different
periods. Both the accountant and the taxman account for the items but in different periods, i.e.
interest collected in advance may be taxable in the period in which it is received but for accounting
purposes credit may be taken only in later days when it is earned

b. Permanent differences, these are differences that either affect net profit or taxable income
indefinite. In other words either the taxman or the accountant will never account for certain items
forever, i.e. income is exempted from tax i.e. dividends and interest, but accounted for in financial
statements.

2.3 GENERAL PRINCIPLES

(a) Definition of gross income s 8(1)

Means the total amount received by or accrued to a person from a source within or deemed source within
Zimbabwe in any year of assessment excluding any amount of a capital nature.

(b).Key elements in the definition of gross income

The following are principles of law applicable to the definition of gross income:
a. Amount – Means corporeal or incorporeal property having an ascertainable money value. The
deduction from this definition is that gross income includes both money and property capable of
being expressed in monetary terms.
b. Received by – Means received by the taxpayer for his benefit or by someone on his behalf. The
taxpayer must have a legal right to claim the amount in order for an item to constitute a receipt.
Stolen items or those held by him in custody for another person or collected by him for the benefit
of someone would never constitute gross income in his hands.
c. A person – refers to a natural person and artificial persons notably
• Individuals
• Companies and trust
• Private business corporations
• Deceased estates etc
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. A
trust though not a person in certain cases it is regarded to be a person when it has income the
subject of which no beneficiary is entitled to.
As envisaged from the above discussion every person natural or artificial is liable to pay tax
except The President.
d. Accrued – Accrued means due and payable –Delfos’s case. Whereas according to Lategan’s case it
means entitled to. The difference between these schools of thought is that an item becomes due
and payable when date of settlement (payment or receiving) has been reached. On the other
hand 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. The application of either
view will however result in the same conclusion.

d. Source of income- Source means the originating cause of income. In other words it is what gave
rise to the income [M.M Parker case]. Only amounts with their origin in Zimbabwe are taxable under
our tax system. The question of residence is not that critical to our tax system. In certain isolated
 cases as shall be seen later a person’s residence is sometimes used as means of taxing certain
individuals. This is in respect of those individuals who receive income from foreign countries while
residents of Zimbabwe.
e. Capital nature. - These are proceeds received by a taxpayer on sale of a fixed asset or his income
generating machinery i.e. proceed on disposal of motor vehicles, machinery, computers, buildings
etc. A disposal of such items will not attract any income tax, unless they constitute trading stock to
the taxpayer. Accordingly, a taxpayer who buys and sells property for profit is taxable on it since he
is engaged in a profit-making scheme. The intention of the taxpayer is also material in deciding
whether an item is a receipt of a capital nature or not. If the taxpayer purchase an asset with an
intention to hold it as an investment its subsequent disposal will not attract income tax. Should
there be a change of intention and he resolve to merge the asset with his stock-in-trade he will be
taxable despite initial intention- C.I.S vs. Lydenberg Platinum Ltd. Where the taxpayer has no clear
intention or has mixed intentions on purchase of the asset the dominant intention will be
considered. 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. A damage or
compensation for loss of profits is taxable, but not when received as result of damages, surrender,
or sterilisation of fixed assets or of taxpayer’s income producing machine –Glenboig Union Fire Clay
Co. Ltd vs. CIR.

(c). Source of incomes

a) Dividend income: The source is the place where the shares are located. As matter of fact
shares are situated at or registered at the registered office of the company or the country
in which the company is incorporated. Thus dividends from a company incorporated in
South Africa are not taxable in Zimbabwe [Boyd vs. CIR]. A question often arises
concerning dividends from shares registered in a branch register. The source remains the
country of incorporation where the branch register is assumed to be part of the main
register.
b) Profits from business operations: There is no clear-cut principle regarding the source of
profits from business operations. In a majority of cases, however, the source is the place
where the operations are being carried out or conducted. A problem arises in cases where
operations extend beyond national border. In those cases one must ascertain whether the
extended business is similar in nature to that carried out in Zimbabwe. Where the
operations are distinct in nature only operations undertaken in Zimbabwe are taxable, and
the extended business in the country in which they are carried out-Estate Late DJ Rooney vs.
COT “………the hotel and catering business carried on in Malawi was quite separate from the hire business in
Zimbabwe………” Mufulira Copper Mines Ltd vs. COT- “………..”cause causans” of the carrying of the
profits must be located in London where the activities were conducted …….received or accrued from a source
outside the Federation.”
c) Partnership income-The source of profit from a partnership is the place where the
services to earn partnership income are rendered.
d) Sale or rental of immovable property-The source of income from the sale or rental of an
immovable property is the country where the property is situated.
e) Rent from movable property- Generally rent received on the letting or hiring of a movable
asset has its source at the place where the lessee uses the asset. However a lot depends
on the type of the machinery and the period of the lease. In the case of heavy machinery
leased for a long-term lease, the source is where the lessee is situated. And in short term
leases such as the lease of computers, the source is the place where the owner of the
asset is living or residing. A long-term lease is a lease with a period of more than 5 years.
f) Service rendered- the source of income from employment is the place where the services
were rendered-Shein vs. COT.
 g) Directors’ remuneration-The source of income for the directors’ remuneration or fees is
where the head office is situated. That is where the director makes his voice heard as a
director.
h) Royalties. The source of royalties from authorship is the authors’ wits, labour and
intellect. These attributes constitute the capital employed in the authorship business, and
where these are exercised is the source of royalties- Millin vs. CIR. The place where the
book is published is immaterial in deciding the source of royalties. The case is also an
authority for the taxation of royalties from patents, trade marks, secret formula, musical
dramatic and some other similar work, the source is regarded to be the place where these
items were created or perfected.
i) Interest-. The source of interest is the services which lender performs for the borrower i.e.
supply of credit. The source therefore is place where the credit or loan was provided -CIR
vs. Lever Brothers and Unilever Pvt, Ltd. Another view is held in the case of COT vs. William Dun
& Co, which deals with Mora (interest for the delay). The source is where the capital is
employed or invested.
j) Annuity: The source of an annuity is the act, instrument or document under which it is
created. Thus an annuity arising out of trust deed has its source in the trust regardless of
the origin of the trust income. “…the source of the annuity was the place where the trust was created or
located” -MM Parker vs. COT. Similarly the source of a contractual annuity is the situs of the
contract-Boyd vs. CIR. Where the annuity is from a pension or a benefit fund, the source is
considered to be situated in the country in which the fund is resident. Thus an annuity
from Old Mutual Zimbabwe is taxable here no mater where the income used to pay the
annuity is derived from a source outside Zimbabwe.

Chapter Summary

This chapter marks the foundation of the Income Tax Act. Principles outlined in this chapter form the base of your tax.
Make sure you understand them before you proceed to the next chapter.

Key points:
• Taxable income is the equivalency of net profit before tax, however, adjusted for items which the taxman does not
regard as income or expenses i.e. donations, profit/ (loss) on sale of assets etc.
• The term gross income is the corner stone of the Income Tax Act. It refers to any amount received from a source
within or deemed source within Zimbabwe.
• Source is a fundamental concept in Zimbabwe tax system. Only items from a source or deemed source within
Zimbabwe are taxable, residence of the taxpayer plays a passive role to the source concept.
 Chapter 3

SPECIFIC PRINCIPLES ON GROSS INCOME

3.0 INTRODUCTION

This chapter deals with specific amounts included in gross income, i.e. sections 8, and sect 10.

3.1 LOCAL SOURCE

3.1.1 Annuities [sect 8 (1) (a)]

An annuity is income received regularly for life or in perpetuity. In order to constitute an annuity there must
be a constant amount received or paid each period i.e. $20,000 every year.

Characteristics of an annuity:
• Provides for an annual payment even if it is divided into instalments
• It is repetitive, payable from year to year for, at any rate, some period
• It is chargeable against some person and not transferable

An annuity can arise in various ways as follows;

An annuity purchased from an insurance company i.e. retirement annuity

An annuity granted by way of gift or legacy

An annuity granted as a consideration for the sale of business, of an asset or surrender of a
right.

An annuity (pension) for services rendered.

It must be noted that if a receipt is an annuity it should be taxed in full whether made partly out of capital or
income of an exempt nature, unless it represent a return of the taxpayer’s capital.

(a) Purchased Annuity

A purchased annuity is taxable only on the interest or profit component, as follows

I = (P x N) – A Where:
N I is the Interest
P is the annual payment
N is the expected life of the annuity
A is the purchase price of the annuity
Example
Mr. Amos purchased a retirement annuity fund (RAF), from Old Mutual. Over the years he contributed $240
000 to purchase it, the contributions were not allowed as deduction .The policy matured beginning of current
tax year and is entitled to $30 000 p. a. His life expectancy is said to be 10years.

Solution
I = (P x N) – A
N
I= [30,000x10 -240,000] i.e. $6,000
10

Please note the whole annual payment is taxable in full after the expiry of life expectancy.
Example
Assuming the same facts as above. However, Mr. Amos received an annual payment of $30,000 after life
expectancy.

Solution
Gross income = $30 000, the whole annual payment is taxable.

(b) Gift or Legacy Annuity

The whole amount is taxable, irrespective of whether the annuity is made or paid out of capital or out of the
exempt income s 14 (3). [Reference case is that of M. M. Parker]

(c) Annuity for Services Rendered (Pension)

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 dealt with in chapter 4.

(d) Annuity from sale of assets

This type of an annuity may arise where an asset or business is sold on credit. Only the interest component
is taxable using the same formula as above.

I = (P x N) – A
N
Example
Sidle Mayo sells a farm to Yolanda Dub for $5 million. Yolanda is to pay for it in installments over a period of
10 years, at $510,000 p.a.

Compute Mayo’s gross income p.a.

I= [510,000x10 -5,000,000] i.e. $10,000

10

3.1.2 Employment Income [sect 8 (1) (b)]

This section is the authority for taxing amounts received from employment, whether during employment or
on termination of employment.

Examples include 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

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.

Special points to note sect 8 (1) (b)

• Commutation of amount due under contract of employment or services is (taxable) spread over 3 years upon
election.
• Where a retrenchment has been approved by Minister of labour & social affair, an exemption is available in
terms of paragragh 4(p), 3rd schedule.
• An exemption is also available in respect of bonus including performance related bonus in terms of
paragragh 4(o), 3rd schedule
• Effective 1 January 2003 gratuity on cessation of employment is no longer spread.
• Retrenchment package include among others any benefit so received on termination of employment as a
result of retrenchment, i.e. severance pay, gratuity on cessation of employment, commutation, company car
granted to a taxpayer etc. But excluding pension or cash in lieu, refer paragraph 4 (p), 3rd schedule
 • Leave pay received in advance (pay for next month(s)) by a person when proceeding on leave is taxable in
the month in which the salary was due.

Exemptions the figures

a. Bonus exemption is the 1st $5, 000,000 of a bonus or 10% of total remuneration whichever is the
lesser with effect from 1November 2003.
b. Retrenchment exemption is 1/3 of retrenchment up to a maximum of a 1/3 of $1,500,000or
$300,000 whichever is greater. Thus providing for maximum exemption of a 1/3 of $1,500,000 i.e.
$500,000 and a minimum exemption of $300,000. Where a 1/3 of the retrenchment falls between
these two maximum and minimum figures the exemption is the figure found.

Suppose the retrenchment figure is $1,8 million, (1/3 x 1,800,000 is$600,000), but the maximum exemption
is $500,000, hence the exemption is $500,000.On the other hand a retrenchment package of $600,000 will
give rise to $200,000 being a 3rd of $600,000, however minimum exemption is $300,000,so $300,000 is the
exemption. Yet a retrenchment package of $1.2 million will give rise to $400,000 a 1/3 of $1.2 million, and
so is the exemption.

Example
Mr. Sam was retrenched on 30 June 2003 and was paid the following items as retrenchment package

Cash in lieu 150,000

Gratuity 200,000

Severance pay 2,000,000

School fees for years 90,000

Commutation of amounts due contract of employment 300,000
The Minister approves the scheme.

Calculate his minimum taxable income

Solution
All above amounts qualify as a retrenchment except cash in lieu of leave in terms of 4 p, 3rd schedule.

TAXABLE INCOME
Severance pays 2,000,000
Gratuity 200,000
School fees 90,000
Commutation 300,000
2,590,000
Less 1/3 of 1500,000 or 300,000 whichever is greater (exemption) 500,000
2,090,000
Cash in lieu 150,000
Taxable income 2,240,000

3.1.3Employment Benefits [sect 8 (1) (f)]

A benefit or an advantage is an allowance granted by an employer to the employee or to a director, which is
paid over and above the person’s salary i.e.

Occupation of quarters or a residence

The use of furniture or a motor vehicle

The use or enjoyment of any property whatsoever, including free interest loan
An important point about benefits is that, all benefits granted to civil servants or persons employed by the
state are exempted in terms of paragraph 4(d), 3rd schedule. In the same way licensed investor employees
(In an EPZ) are also exempted but up to a maximum of 50% of total remuneration paragraph 4(q), 3rd
schedule.

Basic rules in valuation of benefits

The benefit to the employee is the cost to the employer on all others items excluding those stated below.

The value to the employee in respect of residence and furniture granted free of charge to the employee.

However, the question of value to employee is frequently open to dispute. The commissioner has, therefore
set certain yardsticks as stated below:

(a) Housing Benefit

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

The open market rentals for a house located in municipal area such as Harare, Gweru etc.

12.5% of salary of the employee for a house located outside municipal areas.

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

Points to note
o No benefit will arise if the employee is required by his duties or conditions of services to live in a company
house.
o The benefit is reduced by any rentals paid by employee to the employer.
o There is no benefit where the taxpayer pays rentals above the stated rates.

(b) Furniture Benefit

Where the employer free of charge provides the furniture, the commissioner‘s yardstick is 8% of cost of
furniture, where the value to the employee is not available.

(c) Loan Benefit

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

On loan up to $35 000 the interest is 12.5% p.a.

On loan over $35 000 the interest is 16% p.a.

Points to note
 The benefit is reduced by the interest payable by the employee.
 No benefit will arise if the employee is paying interest above prescribed rates.
 The benefit is reduced where period of the loan is less than a year.
 There is no benefit in respect of loans granted for:

Education of taxpayer, spouse or child

Technical education of taxpayer, spouse or child

Medical treatment of taxpayer, spouse or child

Activity 3.1
Nomalanga Zulu is employed by Tees Construction Company a division of Blues Holding Company. She
was granted loan amounting to $600,000 on 1 April 2003,utilized as follows:

20% for the purchase of medical drugs for Sithandile a sister to Nomalanga

30% for the son Kabana ,who is at Harare polytechnic

10% for her uncle Nomuzana who is doing form six at Umuzingwane High school

The rest was used to complete her house in Thokozani Bulawayo

The loan was repaid on 1 November 2003

Compute the amount to be included in Nomalanga’s gross income.
Answer at the end of the chapter

(d) Motoring Benefit

The benefit to an employee on use of a company car is(Dec 2005):
Engine capacity Benefit ($) p.a)
Up to 1500 cc 2 280 000
1 501-2 000 4 200 000
2 001-3 000 6 480 000
3 001 and above 7 200 000

The above figures represent a full year’s benefit, and are reduced proportionately where the period of use is
less than a year, or on dual usage of the motor vehicle i.e. for both business and private.

Example
Tonga Muda was provided with a motor vehicle with an engine capacity of 2 700cc by his employer Deli we
(Pvt.) ltd. He ascertained that 80% of the usage is private. He joined Deli we (Pvt.) on 1 February 2003 and
was employed up to the end of the year.
Compute applicable motoring benefit taxable in Tonga’s hands

Solution

Deemed annual benefit on 2 700 cc 6, 480, 000

Less Business usage {6480000 x 20%} 1, 296, 000
5, 184, 000
Less Period not used [1/12 x5 184 000] 432, 000
Taxable benefit 4, 752, 000

(e) Entertainment Allowances

It is an expenditure of hospitality of some nature incurred by the taxpayer or 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. The cost of a normal daily meal, office
teas whether there is a canteen or not, are exempted benefits.

(f )Passage Benefit
This is the cost of any journey undertaken by an employee, his/her spouse or child as is paid by an
employer. There are three types of journeys that can be undertaken by a taxpayer notably:

A journey for taking up employment

A journey on termination of employment

A journey made during employment, i.e. business trips, holiday trips.

Exempted passage benefits (nontaxable)

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.

A benefit will only arise where the journey does not benefit the employer, but the employee, his/her spouse
or child. The advantage so provided will form party of the employee’s gross income.

Where the journey made during employment is both private and business, the commissioner’s practice is as
follows:

Where the period spent on the business exceeds 10% of the total period of the journey:
 a) The amount paid for the employee’s spouse and children will be taxed in full
b) 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

AxB
C
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

Example
Mr. H was sent on a business trip to South Africa for 10 days, he however decided to pass through
Botswana, where he spent 5 days seeing his uncle Tama. The total amount for the trip paid by the employer
was $500 000.

Compute amount to be included in Mr. H’s gross income

Solution
Total passage benefit 500,000
Less A x B [10 x500 000]
C 15 333,333
Taxable income 166,667

If the time spent on business does not exceed 10% of the total period of absence from Zimbabwe
the whole of the passage benefit is taxed, whether paid for the employee, his/her spouse or child.

(g) 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, but not club
subscriptions i.e. sports club. Business contention is difficult to ascertain in respect of sports club
subscription, in most cases the benefit is for personal enjoyment of the employee and is taxable.
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.

3.1.4 s8- (1) (j) RECOUPMENT

Recoupment is a term used by the commissioner 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 taxman depreciation i.e. capital
allowances.
The recoupment detail under this section applies to all types of businesses except mining.
This type of recoupment is restricted to allowances previously granted thus, it represents a recovery of
capital allowances. The following table shows how the recoupment is calculated. The same table may be
used to calculate scraping allowance. Scrapping allowance is the taxman’s loss on the sale of assets.
Scrapping allowance will be shown in brackets in the table.

RECOUPMENT/SCRAPPING ALLOWANCE

Asset Selling price ITV P/Recoup Allowances A/Recoup

A xx xx xx xx xx
B xx xx xx xx xx
 C xx xx xx xx xx
xx xx
KEY
P/Recoup (potential recoupment) = Selling price – ITV
A/Recoup (actual recoupment) = is the lesser of allowances and potential recoupment.
Allowances = tax depreciation (capital allowances) .I .e Cost – ITV.

Example
ABC Ltd sold the following assets during the year ended 31 December 2003.

Asset Selling price Original cost ITV

Lorry 1,000,000 1 200 000 800 000
Building 500 000 350 000 250 000
Computer 700 000 1 400 000 750 000
2 200 000 2 950 000 1 800 000

Required to calculate recoupment/scrapping allowance

Solution
Asset selling price ITV P/Recoup Allowance A/Recoup
A 1,000,000 800 000 200 000 400 000 200 000
B 500,000 250 000 250 000 100 000 100 000
C 700,000 750 000 (50 000) 650,000 (50 000)
250 000
For more details on recoupment see Chapter 8 Capital allowances.

3.1.5 Closing stock [sect 8 (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.

Type of stock Valuation method

1.Ordinary closing stock Cost, market value or replacement value
2 Donated Cost, market value or replacement value
3. Consumed by taxpayer (drawings) Cost or market value
4.Attached by court order Cost, market value or replacement value
5. Sold together with business Selling price (market value)
6. Work in progress Fair and reasonable price

Valuation of such stock is determined or ascertained in accordance with 2nd schedule. There are three
methods used in the valuation of stocks namely, market value, replacement value and cost.

It is important to note that 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.

3.1.6 Concessions grant from creditors [sect 8 (1) (k)]

Where a taxpayer having incurred a liability in respect of expenditure, which has ranked as a deduction in
terms of s 15 (2), which is subsequently released by the creditor, the benefit there from is included in gross
income.
3.1.7 Subsidy and grants [sect 8 (1) (m)]
Any subsidies or grant paid in respect of expenditure allowed or allowable as a deduction is gross income
on terms of s8 (1) (m).

3.1.8 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.

3.1.9 Exchange gains [sect 8 (2)]

Any profit resulting from changes in exchange rate is gross in terms of this section. The gain shall be
taxable in the year of assessment in which they are realised, expressed in Zimbabwean dollars. Paper or
unrealised exchange gains may only be taxable upon realisation, provided they are of a revenue nature.
Gains of capital nature i.e. on fixed asset or income generating unit of the company are deducted from the
cost of the asset, for purposes of s 15 (2) (c) and 15 (2) (dd). Foreign currency is converted in Zimbabwean
currency using the official rate not the parallel market rate.

3.2 DEEMED ACCRUALS [S 10]

In this segment we look at income, which the taxpayer, has not received, but which remains taxable in his
hands. Deemed means assumed or considered to be.

3.2.1 Income not paid over [sect.10 (1) (a)]

Income shall be assumed to have accrued to a person notwithstanding that it has been invested,
accumulated, or otherwise capitalized by him. If a taxpayer for example instructs his employer to deposit his
salary into a fixed salary account, the taxpayer will still be taxed on the salary irrespective of the fact that he
has not received it. Interest earned but not withdrawn is added to capital and is also taxable.

3.2.2 Income not credited [sect.10 (1) (b)]

Income is deemed to be that of a taxpayer, if it has not been credited to him but remains due and payable to
him. For example December salary erroneously not paid until February of the following year. The salary will
be taxed in the hands of the taxpayer in the previous tax year.

3.2.3 Income accumulated or capitalized [sect.10 (1) (c)]

Income is deemed to be that of a taxpayer if it has been credited to an account or reinvested, accumulated
or capitalized otherwise dealt with in his name. A complete statement of all such income shall be included in
the returns rendered by him under the Act.

3.2.4 Partnership income [sect.10 (2)]

Partnership income is deemed to have accrued on the date of accounts in the ratio in which partners share
profits or losses.

3.2.5 Donations [sect.10 (3)]

A donation made by the parent to his or child is taxable in the hands of the parent. A donation includes an
ordinary gift, includes also abnormal transaction made between the parent and the child. However, if the
child gets income in his or her own right the child is taxable in his or her own right. This includes salary for
services rendered. Additionally, income that flows from the donation will remain taxable unless the link
between the donation and the income is assumed to be remote. Thus if a parent makes a donation to his
minor child, who uses the donation to set up a business, any profits accruing from the business are taxable
in the hands of the minor child.

3.2.6 Cross donations [sect.10 (4)]

Where a parent donates to a minor child of another parent or a near relative who in turn donates to the first
parent’s child, the income is taxable in the hands of the parents.

3.2.7 Donations withheld [sect.10 (5)]

If the donor stipulates in a donation agreement that income shall not be paid over to the beneficiary until the
happening of some future uncertain event the income is taxable in the hands of the donor. The same
principle applies where the donor has ultimate right to control the donation, or to withdraw donation.

Chapter Summary
The chapter dealt with specific items to be included in gross income, both from the true source and assumed source.
Key points
• Any amount received by way of an annuity is taxable in full, excluding the proportion, which represents the cost of
the annuity.
• Gratuity on cessation of employment is no longer spread effective 1 January 2003.
• Any benefits accruing from employment are taxable.

Answers to Activity
Activity 3.1
Nomalanga
Loan borrowed 600,000
Less Drugs for sister not exempt -
Kabana son technical education (180,000)
Uncle not exempted -
Construction of a house -
------------
Interest free loan 420,000

Gross income therefore [420,000 x16% x7/12] = $39,200

Exam-type question
Question one
Andrew Ncube 60 years old has been employed by NACOS a non-governmental organization, as a field officer ever
since 1990.His base station is Dowa growth point. The company has its head office in Harare, and as part of its
rationalization program NACOS closed two of its Manicaland branches. All the affected employees were transferred to
Gweru branch, except Andrew Ncube, who on account of his age, opted for a retrenchment. He was, therefore
retrenched on 30June 2003;
The retrenchment package was structured as follows:
• Severance pay 2,000,000
• School fees children for two years 190,000
• Gratuity on cessation of employment 75,000
• Compensation for loss of office 150,000
• Twin Cab [see note] 300,000
He earned the following to 30 June 2003
• Salary 2,500,000
• Bonus 125,000
• Cash in lieu of leave 180,000

Other information
1) Mr. Ncube had used the Twin Cab engine capacity 3300cc, granted to him on retrenchment since beginning of the
tax year. The market value of the car at the time of takeover was $450 000, and was granted it for $300,000 only.
2) On 1March 2003 he was granted an interest free loan amounting to $60 000, the loan was repaid fully on 30 June
2003.
3) He had occupied a company house. The company allowed him to pay only $10 000
4) Andrew purchased an annuity from insurance company for $250 000. The annuity matured at the beginning of the
current year and will be receiving $40 000 p.a. for the next 10years.
5) Before he was retrenched on 1March 2003, went to South Africa on business seminar together with his wife and
child Nyasha. The seminar was to last for 10 days .On conclusion of the seminar he took some time off to Nairobi
Kenya, spending 5 days on personal business. The total passage benefit paid by his employer amounted to
$1500 000, of which 50% was for the wife and child.
6) Nyasha is blind and the wife is disabled.
7) He contributed $80 000 for his medical aid scheme.

Required: Compute Andrew Ncube’s minimum tax liability.

Question Two
Dr M Tivapasi, a veterinary doctor, is not conversant with tax matters. He has enlisted your services regarding his 2003
assessment year. A preliminary discussion with him indicated that, he is unwilling to be taxed more than the legislation
provides. He therefore requires you to use all legal avenues available in order for him to pay less tax.

The following is a list of his income and payments for the year ended 31 December 2003
Incomes

Salary 2,950,000

Bonus 158,000

Rent from a house in Zambia 200,000

Company car engine capacity 2700cc (note 1) -

Company house (cost of property $1,200,000) -

Royalties (note2) 1,200,000

Gift from a pleased client 12,000

Entertainment allowance (note 3 60,000

Salary for services Germany (June- October) 700,000

Gratuity 20,000
Expenses
Contribution to NSSA 7,000
Pension contributions 47,000
PSMAS medical aid society 90,100
Notes
1. He was granted a company car on 1 March 2003, which he gave up on 1 June 2003 when he went to Germany. He
was further granted the use of the same car upon his return on 1 November 2003. Private use of the car is 40%.
2. He wrote a book about “special dogs in Africa’’: this was a result of the experience gained while working in
Zimbabwe. He took an opportunity to publish it in Germany during the period he was in that country.
3. He was granted $60,000 to entertain business clients. 40% of this amount was used on the business of the
employer.

Required-Tax liability.
 Chapter 4

PENSION RECEIPTS AND PAYMENTS

4.0 Introduction

Income from a pension fund or retirement fund is taxable in full subject to certain adjustments as
stated below.

Pension is usually received on one’s retirement at the age of 55 years and above. This type of
pension is referred to as pension on retirement. - S 8(1)(a), (n) and (r).

Pension may also accrue to taxpayer as result of a taxpayer’s early withdrawal from a pension
fund- s 8(1) (c).

Pension and retirement annuity fund contributions are treated as an allowable deduction in terms of
s15 (2) (h)- is an expense deductible in arriving at taxable income.

4.1 Pension on retirement –s8 (1) (a)

This is a pension that accrues to a person on attaining the minimum retirement age of 55 years. 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

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

Example
Alice Medusa who is 62 years, old retired on 1 September 2003. She was employed by Tendon Accounting
Services (Pvt.) Limited, since 1985. Her employer contributes 50% to Old Mutual pension fund for its
employees. Over the years Alice’s contribution exceeded the limit by $35,000. She will be receiving $10,000
p.m. in arrears with effect from 25 September 2003. Her life expectancy is 10 years. Compute her taxable
income for 2003-tax year.

Solution
Determination of taxable income for the year ended…………………….
Gross pension accrual/receipt [10 000.00x4 months] 40 000.00
Less Disallowable portion [35 000/ 120 months x 4 months] 1 166.68
Taxable income 38 833.32

4.2 Pension on retirement –s8 (1) (n)

The section is the authority for commutation of pension from a retirement annuity fund. This where a
taxpayer elect to receive a lump sum amount in the year of retirement and a reduced stream of equal
pension until the person 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.

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.

To be availed a commutation it is necessary that a taxpayer should elect

Pension entitlement is what the taxpayer is expected to receive over the life expectancy.

Example
Steven retired on 30 July 2003, and will be receiving a lump sum payment $2,500,000 from a retirement
annuity fund as pension. His pension entitlement is $5,700,000.
How much is taxable in his hands?

Solution
Lump sum payment 2,500,000
Less 1/3 of pension entitlement [5,700,000 x/1/3] 1,900,000
Taxable income 600,000

4.3 Pension on retirement –s8 (1) (r)

The section is similar in nature with section 8(1) (n), with a slight variance in the amount to be commuted,
and the source of pension which is pension fund.

The commutation is the greater of $250,000 and 1/3 of the member’s pension entitlement

The other facts remain the same.

Example
Wallace Casey was employed by Stimuli (Pvt.) Limited ever since 1941, which was a contributor to pension
fund. He retired on 1 July 2003 and elected to commute his pension. He received $2 000 000.00 on 31 July
2003, and a reduced monthly pension of $16 000.00 in arrears with effect from 27 August 2003. His total
pension entitlement is $4 200 000.00. Compute his taxable income.

Solution
Determination of taxable income for the year ended…………………….
Lump sum payment 2 000 000.00
Less 1/3 of pension entitlement or $250,000 [1/3x 4 200 000.00] 1 400 000.00
600 000.00
Add reduced monthly pension [16 000.00 x 5 months] 80 000.00
Taxable Income 680 000.00

4.3 Pension on withdrawal –s8 (1) (c)

A withdrawal from a fund occurs when an employee resign from the fund before reaching the retirement
age as a result of:
• Employee being retrenched before the age of retirement
• An employee changing employers, which results in a change of pension fund. Suppose the next
employer is contributing its pension to a different pension fund.
• Liquidation or winding up of pension fund may also result in members being paid back their
contributions.
Such a pension is taxable subject to limitations contained in the 1st schedule. The essential elements
guiding the taxability of the amount are the type of fund, and the date the member (employee) joined the
fund.
There are three types of funds namely:

Benefit fund

Pension fund

Unapproved fund, pension or benefit
The date 1 July 1960 is a very crucial date in terms of the pension laws. On that date pension laws were
amended to allow for increase in contributions made by members to funds.
Due to the changes in pension’s law the above funds were further broken into:

Old benefit / pension fund

Semi-old benefit/pension fund

New benefit/pension
• An old fund is a fund to which the member joined before 1 July 1960, whose rules did not change
after 1 July 1960. A semi- old fund is a fund to which a member joined before 1 July 1960, but
 whose rules were changed on 1 July 1960. While, a new fund is a fund, which was created after 1
July 1960, or to which the member joined after that date.

Beneficiaries of benefit fund

Beneficiaries of a benefit fund are called part one beneficiaries.
1. Where the lump sum is from an old fund (fund with unchanged rules) the whole amount is not taxable.
2. Where the lump sum is from a fund with changed rules (semi-old fund), the amount to be taxable is
arrived at as follows:
Lump sum amount (payment) xxx
Less
Amount he would have received
Had rules not changed, or $8,400 whichever is greater. xxx
Amount used to purchase an annuity on retirement xxx
Amount transferred to a benefit fund xxx
Amount transferred to a pension fund xxx xxx
Taxable income xxx

3. Where the member joined on or after 1 July 1960(New Fund), the amount to be taxable is arrived
at as follows:
Lump sum payment xxx
Less
Prescribed amount 8,400.
Amount used to purchase an annuity on retirement xxx
Amount transferred to a benefit fund xxx
Amount transferred to a pension fund xxx xxx
Taxable income xxx

Beneficiaries of pension fund

Beneficiaries of a pension fund are referred to as part two beneficiaries
1. Where the lump sum is from an old fund (fund with unchanged rules) the whole amount is not
taxable.
2. Where the lump sum is from a fund with changes rules (semi-old fund), the amount to be taxable is
arrived at as follows:
Lump sum amount (payment) xxx
Less
Amount he would have received had rules not changed xxx
Amount used to purchase an annuity on retirement xxx
Amount transferred to a pension fund xxx xxx
Taxable income xxx
3. Where the member joined on or after 1 July 1960(New Fund), the amount to be taxable is arrived
at as follows:
Lump sum payment xxx
Less
Amount used to purchase an annuity on retirement xxx
Amount transferred to a pension fund xxx xxx
Taxable income xxx

Notes
a). Transfer to a benefit fund is not accepted in respect of a lump sum accruing from a pension
fund.
b).Where the lump sum payment is less than $2,000 the whole amount is not
 taxable.

Beneficiaries of unapproved fund

The whole amount is not taxable in respect of lump sum payment received from an unapproved fund.
Usually the amount received constitutes a refund of a member’s contribution. Only the interest is taxable.

Note
Please note that all amounts transferred to other funds will be taxable when received from the fund to which
they were transferred to, unless they would not have been taxable had they been received under the first
fund.

Activity 4.1
a) Mr. Aaron joined X benefit fund in 1954. The rules of the fund have never been changed. He
withdrew from the fund in July 1973, and received a terminal benefit of $80,000, in terms of the
rules
b) Mr. Sibanda joined a benefit fund in August 1956. The rules of the fund were changed in
December 1960 to provide for an increase in the ordinary contributions by the members. He
withdrew from the fund in May of the current year, and was paid a terminal benefit of
$18,000.00. Had the rules not changed he would have received $5 000.00 only.
c) Mrs. Fungati joined a pension fund on 1 September 1973, from which she resigned on 31
August 2001. In terms of the rules of the fund she received $48 000.00, and utilized it as
follows: Purchased an annuity on retirement for $30,000.00, transferred $2 500.00 to another
benefit fund and $2,000 to a pension fund.
Required: To compute taxable under each of above items.
Answer at the end of chapter

4.4 Pension contributions s15 (2) (h), and (i).

Pension contributions are regarded as expenses in assessment of income of both the employer and
employee. Such refers to 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.

Employer contributions per each employee (member):

• Full amount contributed to a benefit fund where the employee joined such fund before 1 April 1958.
• Benefit fund deduction is amount contributed or $600 per year; whichever is the lesser where the
employee joined such fund after 1 April 1958.
• Full amount contributed to a pension fund where the employee joined such fund before 1 July
1960.
• Pension fund deduction is amount contributed or $90,000 per year;(2002: $45,000) whichever is
the lesser where the employee joined such fund after 1 July 1960.

Employee (member) contributions:

• Full amount contributed to a pension fund where the employee joined such fund before 1 July
1960.
• Pension fund deduction is amount contributed or $90,000 per year (2002: $45,000); whichever is
the lesser where the employee joined such fund after 1 July 1960.
• Retirement annuity fund deduction is amount contributed or $90,000 per year (2002: $45,000);
whichever is the lesser where the employee joined such fund after 1 July 1960.

Points to note

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.

Contributions by non-residents to a retirement annuity are not deductible unless:

The person was ordinarily resident in Zimbabwe at the time of joining the fund.

He became a member of the fund before 1 April 1967

The same contributions are not allowable as a deduction in another country other
than Zimbabwe

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

Lump sum pension fund contributions by employers are deductible provided such deduction may
be spread over such years as the commissioner determines

Arrears pension contributions by employees to pension fund are allowable as deduction in the year
of assessment subject to a maximum of 8% of annual emoluments.

A combination of contributions by employer for each employee must not exceed $90,000 for 2003
tax year.

A combination of contributions by employee for each employee must not exceed $90,000 for 2003
tax year.

For purposes of applicable of the above restriction the practice of the commissioner is to allow
ordinary pension first, arrear pension, NSSA then retirement annuity fund.

Chapter summary
The chapter covered aspects of pension accruals and contributions to approved funds by employers and employees
for the benefit of the employees.
Key points

Pension on retirement is taxable in full in terms of sect: 8 (1) (a).

Where the taxpayer so elects a pension on retirement may be commuted in terms of sect: 8 (1) (n) or 8 (1) (r). The
effect is to regard 1/3 of pension entitlement as an amount of a capital nature.

Where an amount is a result of a member’s withdrawal from the fund it is taxable at a special rate. The rate is the
taxpayer’s highest marginal rate of tax, which his last dollar attracted. Any contribution made by employer or
employee to an approved fund is allowable as a deduction in terms of sect: 15 (2) (h)

Answers
Activity 4.1

(a) The terminal benefit of $80 000 will be received tax-free since it is from an old fund with unchanged
rules.
(b) The amount to be taxable in Sibanda’s assessment is determined as follows
Lump sum payment 18 000
Less Amount he would have received
Had the rules not changed or
$8 400 whichever is greater (8 400)
Taxable income 9 600

(c) Mrs. Fungati’s lump sum payment is taxable as follows

Lump sum payment 48 000
Less
Purchase of an annuity 30 000
Transfer to a pension fund 2 000 32 000
Taxable income 16,000

Special points

Lump sum payments are taxable at special rate. Usually the taxpayer’s highest marginal tax rate.
No Aids levy is chargeable on lump sum payments.

Only pension for services rendered in Zimbabwe is taxable .The following formula is used where
the services are rendered partly in Zimbabwe and partly outside

Local service period x pension

Total service period

Exam type question

Question 1
Mr. E Mutate, 50 years old resigned from Old Mutual for marketing post with First Dance Investments in
Bulawayo, on 29 January 2003. He was due to start his new job on 1 March 2003 and his new employer
paid him $60 000 as air fares for moving his family from Harare to Bulawayo on relocation.

Resignation
On his resignation, Mutate was paid 2,090,000 lump sum payment from the Old Mutual pension fund to
which he was a contributor. Of this amount $10,000 was transferred to First Dance Pension Fund, $80 000
was used to purchase an annuity from First Mutual, and $20,000 was transferred to a benefit fund.
He joined the fund when he was working in Zambia on the 1st of June 1959, and was transferred to
Zimbabwe on 1 April 1981. Had the rules not changed he would have received $300,000 only.

In addition, he was paid $200,000 as restraint of trade. This ensures that Mutate would not form a broking
company until the expiry of two years.

Employment contract
His contract provides for a monthly salary of $250,000, 7.5% employee pension contribution and NSSA 3%
up to a maximum of $360 per month. He was granted free use of company car engine capacity 1800ccs.

Payments by him
Contribution to NAMAS Medical Aid 80,000 p.m.
RAF Contribution 2,000 p.m.
Rentals on company house 10,000 p.m.
92,000

Further notes
-Due to a disagreement with the new employer, Mr. Mutate was paid the amount he had transferred to the
employer pension fund plus an interest of $100,000 on the 30th of June 2003.
-Received $200,000 from the sale of his second hand clothing
-Played and won lotto on 1 August 2003, amounting to $1,115,170.

You are required to compute his tax liability for 2003 tax year.

Question 2
Mrs. Martini has been working for the Ministry of Finance ever since she was 22 years in 1964. She
however retired during the current year on 31 May 2003 and is now a permanent resident of Britain effective
1 September 2003. She has telephoned you as a consultant on her Zimbabwean tax matters.
The following are the details that have been forwarded to you for your attention for the year ended 31
December 2003.
Period 1/1/03 to 31/05/03
Salary 225 000
Housing allowance 9 500
Transport allowance 18 000
NSSA Contribution 1 800
Pension contribution 20 000
Retirement annuity contribution 5 000
PSMAS 14 000
Period 01/06/03 – 31/12/03
Salary (see note) 200 000 per month
Dividends (see note) 150 000
Gratuity from the Ministry of Finance 50 000
Annuity (see note) 50 000
Notes
1) Her pension matured on 1 June, 2003 and she received a lump sum payment amounting to $2,700,000
and a reduced monthly of $20 000 per month payable in arrears on the 20th of every month commencing the
20th of June, 2003 for the next 10 years. Her pension entitlement is $6 million, and over the years $80 000
has been disallowed.
2) Her salary for the period 1/06/03 to 31/12/03 was in respect of the services rendered to the Zimbabwean
embassy in Britain.
3) On 30 July she purchased shares in Zambia out of the proceeds from her lump sum. The dividend shown
above is in respect of the dividend declared on the 1st of October 2003.
4) She is also in receipt of an annuity purchased from Old Mutual a few years ago for $300 000. The amount
stated is the first of several annual payments to be received by her.

Required: Her minimum taxable income, and the applicable tax liability.

Chapter 5

DOUBLE TAXATION

5.0 INTRODUCTION

An understanding of double taxation requires first an understanding of provisions of a section s12.

The section deals with foreign income accruing to Zimbabwean residents generally.

Such amounts are subjected to Zimbabwean tax, although the real source may be elsewhere.

Subjecting them to tax in this country may result in the person being taxed twice assuming the
same amount was taxed in the country of origin, accordingly bringing the effect of double taxation
5.1 DEEMED SOURCES s 12
5.1(a) Contracts for sale of goods [sect. 12 (1) (a)]
Any profits made on any contract made within Zimbabwe for the sale of goods, whether such goods have
been delivered or are to be delivered in or out of Zimbabwe, are taxable here. Suppose a Malawian
business tycoon wants to sell some fish to a Zambian resident, and the two makes the agreement in
Zimbabwe, the sale is assumed to have been made in Zimbabwe irrespective of the fact such goods may
not have passed through Zimbabwe.

5.1(b) Amounts for services rendered [sect. 12 (1) (b)]

Any amount received or accrued for services rendered by a person in carrying out a trade in Zimbabwe is
taxable here. This is irrespective of the fact that payment for the services rendered may be received from
another country.

5.1(c) Temporary absence [sect. 12 (1) (c)]

Any amount received or accrued for services rendered as an employee outside Zimbabwe by a resident
during a period of temporary absence, is taxable in Zimbabwe. It is immaterial whether the person making
the payment is a resident or not. A period of temporary absence is a period or periods in the year of
assessment not exceeding half a year i.e. 183 days.

5.1(d) Services rendered for the state [sect. 12 (1) (d)]

Services rendered for the state (government services) by a resident wherever rendered are taxable in
Zimbabwe. This only applies to services rendered outside Zimbabwe by a Zimbabwean resident. Thus
services rendered by a South African resident to a Zimbabwean embassy in South Africa are not taxable
here.

5.1(e) Pension [sect. 12(1) (e)]

This paragraph provides for the taxation of pensions granted by-
i. Any person wherever resident, or
ii. The government of the former Federation, or
iii. The state,

For services rendered, provided that:

If the services were performed wholly outside Zimbabwe the source shall not be Zimbabwe unless
the services were provided in terms of s12 (1) (d).

The person was not ordinarily resident in Zimbabwe at the time of dissolution of the Federation no
amount shall be taxable from a Zimbabwean source.

5.1. (f) Interest and dividends [sect. 12(2)]

Interest and dividends from foreign investments are taxable in Zimbabwe when accruing to ordinary
residents of Zimbabwe. The person should be ordinarily resident in Zimbabwe at the time of receiving the
dividend or interest. Foreign company dividends are taxable at the rate of 20% and no Aids levy is
charged, while interest is taxable at 30% plus 3% Aids levy.

5.1(g) Annuity from a foreign source [sect. 12(3)]

All annuities purchased from a country outside Zimbabwe are taxable. The perquisite for taxability is that the
annuitant should acquire the right to the annuity while ordinarily resident in Zimbabwe.

5.1(h) Trademarks, patents etc [sect. 12(4)]

Income accruing from the use of trademarks, copyrights, patents etc in Zimbabwe, is taxable here no matter
where the trademarks, film etc were produced or perfected.

5.1(i) Recoupment [sect. 12(5)]

Recoupment is the taxman profit on sale of an asset. Where an amount is recovered from other country
(recoupment on sale of asset) for the sale of asset outside Zimbabwe, the source will remain Zimbabwe,
provided capital allowances were granted in Zimbabwe.

5.2 DOUBLE TAXATION (SECTION 91-96)

The President may enter into agreements with governments of other countries with a view to the prevention
or discontinuation of levying taxes in respect of the same income. It is the President who also revokes such
agreements.
Points to note:

Section 12 items may happen to have been taxed in another country other than Zimbabwe.

The practice of the commissioner is to grant a tax relief where the amount was taxed elsewhere. Otherwise it
would appear unfair to tax the person twice on the same amount.

The tax relief is the lower of Zimbabwe tax on the said income and its foreign tax.

The relief is treated in the same way as pay as you earn in arriving at tax refund/(payable).

Steps in computation of relief

Step 1
Ascertain the taxable income in the same way as before, with distinct headings for income from local
source, interest and dividends.

Step 2
Compute tax liability as follows;

DETERMINATION OF TAX LIABILTY FOR THE YEAR ENDED 31 DEC-------------

Local income
Tax on stated income (as before) xxx
Less credits (xxx)
xxx
Add tax on total local interest –gross interest x 30% xxx
Add tax on total foreign interest – gross interest x30% xxx
xxx
Add 3% Aids levy xxx
Add Tax on total foreign dividends –gross dividends x 20% xxx
Tax on total local dividends –gross dividends x 20% xxx
Tax on lump sum payment –s8(1)(c ) x highest rate xxx
xxx
Less PAYE xxx
Relief(step3-4) xxx xxx
Tax payable/(refund) xxx

Step 3-Relief
Computation of Zimbabwe tax on each specific source item i.e.:
Zambia gross dividend x20% = xxx
Malawi gross dividend x20% = xxx
Zambia gross interest x30.9% = xxx
South Africa gross interest x30.9% = xxx

Step 4-Relief
Draw a table to compute the lower of the Zim Tax and foreign:
.
SOURCE ZIM TAX FOREIGN TAX RELIEF
 SA-Dividend XXX XXX XXX
Malawi-interest XXX XXX XXX
Total relief XXX
Relief is the lower of Zimbabwean tax and foreign tax per each source.

Points to note:

Dividends from a local source are exempt income in terms of 3rd schedule, paragraph 9.

Both interest and dividends from a foreign source should only be taxable in Zimbabwe when
received at the time a person is ordinarily resident in Zimbabwe. The date of purchase of shares or
of the investment is immaterial.

In terms of s 16(1) (n) no expenses are deductible in creating income from a foreign source. Thus
dividends and interest from a foreign source are included gross in tax computation, without
deducting agent fees, withholding tax, bank charges etc. Add these items back if they were
deducted (i.e. net of tax or net of expenses would indicate such items were deducted).

Example

Tommy is a resident of Zimbabwe and the following in terms in his return of 31 December 2003.
Local Source
Salary 960 000(396 000)
Interest from Building Society 12 000
Dividend from CBZ 5 000(250)
Interest on Tax Reserve Certificate 700
P O S B interest 1 2000
Pension refund 7 000
Gratuity 10 000
Foreign interest from
Botswana net of tax 7 200(4 800)
South Africa net of tax 5 400(1 100)
Foreign dividends from
Botswana 2 500(200)
South Africa 3 300(300)
Payments to
RAF 12 000
CIMAS 15 000
PENSION FUND 15 000

You are required to calculate Tommy’s tax refund or payable.

Example

DETERMINATION OF TAX LIABILITY 31/12/03

Salary 960 000

Interest building society exempt Para 10, 3rd schedule
Dividends CBZ exempt Para 9, 3rd schedule
Tax Res. Cert. Para 10, 3rd schedule
POSB interest Para. 10, 3rd schedule
Pension fund refund 7 000
Gratuity 10 000
977 000
Less RAF contribution 12 000
Pension fund contribution 15 000 27 000
950 000
Foreign Interest
Botswana 12 000
South Africa 6 500 18 500
968 500
Foreign Dividends
Botswana 2 500
South Africa 3 300 5 800
Taxable income 974,300
Tax thereon
On 500,000 88,000
On (950 000 – 7000 – 500,000) 40% 177,200
265,200

Less Credit CIMAS (15 000 x ½) (7 500)

Add Tax all interest 18 500 x 0,03 5 550
263,250
Add 3% Aids Levy (263 250 x 0,03) 7,898
271,148
Add Tax on Dividends 5800 x 0,20 1 160
On Pension refund 7000 x 0,40 2,800 3,960
275,108
Less relief (W1) 5 308
PAYE 396 000 401 308
Tax refund 126,200

Workings Relief

SOURCE FOREIGN TAX ZIM TAX RELIEF

SA Interest 1100 2009 1100
SA dividends 300 660 300
Botswana interest 4800 3708 3708
Botswana dividends 200 500 200
5308
South Africa interest 6500 x 30% x 1, 03 2009
Botswana interest 12 000 x 30% x 1.03 3708
South Africa dividends 3300 x 0, 20 660
Botswana dividends 2500 x 20 500
Notes

Pension refund is taxable at a special rate i.e. highest marginal tax rate of the taxpayer i.e. 40%

No Aids levy is chargeable on dividends.

CHAPTER SUMMARY
The chapter deals with certain income accruing from a source outside Zimbabwe, and the effects of double taxation.

Question 1
Hamilton Botha a Chartered Accountant born on 13 June 1922 was ordinarily resident in Zimbabwe until 30 September
2003 when he retired from his employment. He emigrated to leave in South America indefinitely whilst in South
America he appointed you as a representative taxpayer in relation to his Zimbabwean tax issues. The following are his
details of income and payments for the year ended 31 December 2003.

Period 1/01/03 – 30/09/03

Gross salary 2,500 000(450,000paye)
Commutation of pension 1 100 000
Gratuity 200 000
Rent from a commercial building in
Zambia net of tax 220 000(150 000 tax withheld)
Dividends from UK net of tax 5 000 (UK tax 600)
Tax reserve certificate interest 22 000
Founders class c shares 14 000 (1400 tax withheld)
Dividends from Zimbabwean company 8 000(800 tax withheld)
Mozambique interest 27 000 (1 700 tax withheld)
Malawi interest 7 000 (350 tax withheld)
Annuity (see note) 40 000
Pension contributions 55 000
Motoring benefit Mazda 626
Engine capacity of 2600cc -
Medical aid contributions 120 000
Alimony for X-wife 20 000
Building society dividends 25000
Period 1/10/03 – 31/12/03
Interest on City of Harare loan stock 141 800
Dividends from UK net of tax 7 500 (500 tax withheld)
Medical expenses 40 000
Gross pension accruals 6 000(16 00 tax withheld)
Medical aid contributions 120 000
Subscriptions to CIS 12 000
Lump sum payment (see note) 150 000

Notes
(a) His total gross pension entitlement prior to commutation was $2 700 000.
(b) He purchased an annuity from an insurance company for $250 000, the annuity matured at the beginning of
the current year and will be receiving $40 000 annually for the next 10 years.
(c) The lump sum payment is received from a pension fund, he joined in 1943 whilst employed in Zambia; his
employer transferred him to his country in December 1973. The rules of the fund were change in January
1963 to provide for increased contributions. He withdrew from the fund in December 2003 and in terms of the
rules received a payment of $150 000 had the rules remained unchanged he would have received 90 000.
He purchased an annuity for $2 000 and transferred $1 000 and $2 000 to pension and benefit fund
respectively. His only son Enoch was permanently injured in car accident on 23 September 2003.

Required: To computes his tax liability for the year ended minimizing the liability where possible.
 Chapter 6

GENERAL DEDUCTIONS

6.0 INTRODUCTION
It is not possible for a person to earn income without incurring expenses. The expenditure pattern though
varying between persons is just but a natural phenomenon. Part of the expenditure sometimes has no
bearing on the profit objective of the organization. As such the commissioner has a right to question the
deductibility of such expenditure. Further more some expenses deducted by the Accountant, though for
purposes of earning income, are generally not deductible to the commissioner. The commissioner’s guiding
principle for the deductibility of an expense is set out in section 15 (2) (a). The section defines the general
deduction formula, as stated below:

6.1 DEDUCTION FORMULA

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.

6.2 KEY ELEMENTS IN THE DEFINATION OF DEDUCTION FORMULA

(a) To the extent to which
The commissioner in practice does apportion the expenditure where it is incurred for both private and
business purposes. The effect is to allow only business expenditure in the determination of the taxpayer’s
taxable income. Thus private expenditure is disregarded. This applies to most small businesses, where the
owner will use his motor vehicle to transport goods for the business and taking his children to school. Only
the expenditure to the extent to which it is incurred on his business is allowable by the commissioner.
(b) Incurred
Expenditure is assumed to have been suffered the moment one enters into an agreement which will require
him to pay. The commissioner deems the expenditure to have been suffered at the time of making the
agreement, irrespective of when actual payment will be exchanged.
The expenditure is thus capable of being allowable as deduction in the year in which the agreement or
contract is made. Assuming I have a horse which I would like to sell to you, and have entered into an
agreement with you to sell the horse to you on 12 March 2003. The terms of the payment are that you
should pay in installment. You are generally assumed to have incurred the expenditure on 12 March 2003.
The total expenditure will be allowable to you in full on that date.

(c) For purpose of trade

As stated earlier on only expenditure for a purpose of enabling a person to carry on and earn profits or
income is allowable as deduction by the taxman. There are three types of such expenditure notably;
designed expenditure, undersigned expenditure and expenditure incurred for the efficient performance of
the business.
i. 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. The commissioner as a
matter of fact has no say what so ever on what particular expense or particular amount should a
taxpayer spend. The commissioner therefore has no right to refuse a deduction in respect of such
type of expenditure.
ii. Undesigned/ fortuitous expenditure: This type of expenditure is usually not expected by the
taxpayer .It occurs as result of some misfortunes or mischance that has overtaken the taxpayer,
e.g. crops destroyed by army worms, or cyclones. The taxman has a lot to say about the
deductibility of such type of expenditure. He does not grant a deduction where the occurrence of
the expenditure is rare or impossible of occurring .A deduction of such expenditure is accepted
 where the risk of the event causing the expenditure to be incurred is inseparable from or a
necessary incident of the carrying of the particular business- COT vs. Rendle. Generally the
commissioner does not accept a misappropriation by the owner of the company or occasioned
through the acts of a managing director, manager of the company who is in the position of a
proprietor to be allowable as deduction. The chance for the owner to steal from his business is rare
indeed, unless one is not normal. On the other hand thefts by employees are generally allowable
as deduction.
iii. Expenditure for the efficient running of the business: Such expenditure is allowable as a deduction
as long as it is capable of increasing future taxable income.

For all the expenses, deductibility does not however extent to expenditure which arising out of the manner in
which taxpayer conducts his trade falls upon him in his capacity as a lawbreaker rather than a businessman.
It follows therefore that any expenditure incurred on breach of a regulation is not allowable as a deduction,
i.e. traffic fines, fines for trading outside trading hours, penalties for late payment of taxes etc.

(d) Capital nature

This is an expenditure incurred on acquisition of fixed assets or income generating units of an organization.
All such type of expenditure is not allowable as deduction, including any expenditure necessary to bring the
asset to its working condition. These are traveling cost to purchase the asset, installation cost , freight
charge on the asset sales tax or import tax on chargeable on the asset etc.

6.3 DEDUCTION CHECK LIST

The following represent expenses that have been ruled by the taxman as allowable. Also included are those
that he would not allow.
Please note the column with x represents action, yes means the expenditure is allowable and no means the
expenditure is not allowable.

EXPENDITURE TYPE Yes NO

Machinery purchased X
Sales tax on items being sold X
Construction of temporary farm roads X
Constriction of permanent roads for prevention of soil erosion X
Goodwill X
Purchase price of an annuity X
Cost of obtaining share capital X
Transfer duty on fixed assets X
Advertising for share offer X
Installation costs X
Tilita clips X
Valuation of assets for fire insurance X
Installation of window lighting X
Permanent signs (neon ) on trade premises X
Acquisition of supply water in perpetuity (water rights) X
Fines and penalties X
Architect’s fee X
Installation of drainage works X
Finance charges on hire purchase transaction X
Restraint to trade X
Cost incurred in distributing dividends X
Interest on money borrowed to pay dividends X
Cost of preparation of tax returns X
Professional advice on tax matters X
Water , electricity or sewerage connection fee X
Telephone connection fee X
Irrecoverable contribution to ZESA for power line X
Raising fees and finance charge on working capital X
Business donations i.e. for purposes of trade X
Irrecoverable advances to employees where it is the custom
of the taxpayer X
Benevolent or charitable donations X
Losses of cash by petty pilfering X
Theft by owners or directors of company X
Customs fines and legal expenses X
Entrance fees as opposed to subscriptions X
Excessive directors’ fees or other remuneration X
Joint life policy for partnership X
Cede partners’ policies X
Separate partners’ lives not ceded X
Company formation expenses X
Preliminary expenses X
Improvements or alterations to fixed assets X
Removal expenses within same premises X
Removal expenses off site X
Traveling expenses to purchase fixed assets X
Exchange loss on acquisition of fixed assets X
New business license X
Renewal of license X
Subscriptions to professional institutes by members i.e. X
ACCA , ZAAT etc(but not by students)
Trade subscriptions X
Removal expense –stock X
Railage paid on plant or other fixed assets X

Draft of Lease agreement (lesser) X

Draft of lease agreement (lessee) X

Further notes
Following the case of C.I.R vs. Genn Company raising fees and finance charges are allocated on a pro-rata
basis to the items on which the loan was utilized.
If the loan was used to finance working capital the proportionate portion of the raising fee will be allowed as
a deduction. If the loan was used to finance a fixed asset the raising fee or finance charge applicable will be
capitalized and qualify for capital allowances – s 15 (2) (c).

Chapter summary
In this chapter we defined the general deduction formula, which is the guiding principle on the deductibility of an
expense.
Key points
• Only expenditure for purposes of trade are allowable
• In the same way as capital expenditure are not allowable in the determination net profit by the accountant, so is
capital expenditure not allowable as an expenditure by the taxman.
• Undersigned expenditure is claimed only when the risk for it to occur is apparent and inseparable from the running
of the business.
• Deduction checklist will obviously assist in understanding the general deduction formula.
 Chapter 7
EXPENDITURE
7.0 INTRODUCTION
In this chapter we look at some of the specific tax expenses and prohibited deductions. This is a
continuation of the previous chapter, and you should be guided always by the general deduction formula.

7.1 ALLOWABLE EXPENSES

1.1 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 allowing that in respect of business usage. An
exception, however for allowing private repairs is when the repairs are a result of the letting of
property .It is immaterial that the property is subsequently taken into private hands.

The word repair should be taken to mean the restoration of a property to its original state. Unlike an
improvement there is no creation of a new asset or increase in the working capacity of the asset.
An improvement increases the form, performance, character or durability of an asset or item. A
repair depletes profit and an improvement increase capital expenditure.

Special points to note

Use of different materials than previously used would not take the work out of repair, as long the
purpose of the work is to restore the asset to its original state. For example one might decide to
use zinc on a roof previous roofed by thatch due to the unavailability of thatch.

A repair may also be a renewal of a part of the whole. For example installation of a new engine in a
motorcar, or relaying of 74 miles of railway track 588 miles in length, according to the case of-
Rhodesia Railways Vs COT Bechuanaland.

Correction of cracks in building though caused by original structural or architectural defect is a
repair, but not the underpinning of the foundation and removal of a tree threatening the property in
terms of -Rialto &Varriali Vs COT.

All replacements and repositions constitute repairs i.e. reposition of neon sign etc

On the other hand a repair cannot be undertaken on a new asset or before an asset is brought into
or used in the business.

1.2 Bad debts & Provision for bad debts [sect15 (2) (g)]
Both bad debts and provisions for bad debts are allowable deductions provided certain
conditions are satisfied notably:
a. The debts in respect of which bad or doubtful debts are claimed must be due and
payable to the taxpayer
b. The debts (debtors) on which the claim is made must have been included in the
taxable income of the taxpayer either in the current year or in any previous year of
assessments
c. The debts (debtors) must be proved to the satisfaction of the commissioner to be
irrecoverable-i.e. Debtor should be untraceable, insolvent or no longer in existent
etc.

Special points to note:

a. A claim in respect of debts sold together with business will not succeed since it is violating
condition (a) above-debts are no longer due and payable to the taxpayer- case RE Cooper
b. 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-SIR vs. Kempton Furnishers.
c. A claim by the purchaser of debts purchased together with business will not succeed. It is
affected by condition (b) above.
d. A claim for provision of bad debts made in one year is gross income in the following year of
assessment when a new provision is determined in the current year.
e. No bad debts can be claimed where the taxpayer has waived his right to it.
f. Bad debts can continue to be claimed even though the trade had ceased
g. No claim may be made for bad debts or provision for bad debts expressed as a percentage of
debtors.

A statement showing the following must support a claim for bad debts or provision for bad debts:

Name of the debtor e.g. Mr. Maporige

Date on which the debt was incurred

Amount of the debt

Nature of the debt i.e. sale of bricks or peanuts

Reasons of regarding the debts as irrecoverable or doubtful.

2.3 Medical aid contribution or expenses [sect15 (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.

2.4 Research and experiments [sect 15 (2) (m)]

To be allowable as a deduction is any expenditure incurred by the taxpayer in carrying out experiments and
research related to his trade excluding any expenditure of a capital nature, such as expenditure on plant,
machinery etc. The taxpayer should personally carry out the research.

2.5 Experiments and Research [sect 15 (2) (n)]

This is where a third party to whom a contribution is made incurs the research expenditure. A deduction of
a proportion of a contribution shall be made.
Provided the expenditure shall not exceed:

AxB
C
A = the amount of contribution made by the taxpayer.
B = the amount of contribution made by the other person
C = the total expenditure incurred on the research.

2.6 Contribution to Scientific and Educational Bodies [sect15 (2) (o)]

A double deduction is allowed on sums contributed to an approved scientific or educational bodies (UZ,
NUST etc). On conditions that such sums are used for industrial research or scientific experiments
connected to the taxpayer’s trade.
**NB: This section was amended effective 1 January 2003 to allow for a double deduction i.e. for every $1incurred the
taxpayer is allowed a deduction of $2.

2.7 Grants and Bursaries [sect .15(2) (p)]

A deduction is allowable in respect of grants; bursaries or scholarships granted to any person under going
technical education provided the course is related to the taxpayer’s trade. However no deduction shall be
granted to the taxpayer in the following circumstances:

1) Where the person is receiving the benefit or grant is a near relative of the taxpayer. See the definition of
a near relative in paragraph 2 of the Income Tax Act, which excludes a cousin.
2) Where the person receiving the grant is related to a director, or nominee of the company. Note that a
director is not a director if he holds less than 5% of the voting shares. A working director, i.e. managing
director, is also not a director for purposes of this section.

2.8 Ex-Gratia Payments [sect.15 (2) (q)]

These are pension’s allowances or annuities paid voluntarily by the taxpayer to a former employee or his
dependants. An employer is allowed to claim a deduction in full on amounts paid as pension, annuities
where there is a contractual obligation between him and employee. However under this section an
employer has no contractual obligation. Thus a deduction is granted to him subject to the following
conditions:

The employee must have retired on grounds of ill health, old age or infirmity.

Amount to be allowable as a deduction is restricted to 3 000 p.a. for a payment to each former
employee.

An allowance is restricted to $2,000 p.a. in respect of payment to one and all dependants of such
employee.
In all cases the amount allowable is reduced by annuity or pension received during the tax year by the
former employee or dependant from any fund of the employer.

The same conditions do apply to a partnership on former partners who would have retired on grounds of ill
health, infirmity or old age. The deduction is not permissible in respect of any amount paid to persons
whose employment was of a domestic nature (private nature).

Please note that a director is not an employee for purposes of this section following the case of Ruwongore
(Pvt.) Ltd vs. COT. However, a working director is an employee – Framptons (Pvt.) Ltd vs. Cot.

2.9 Donations [sect.15 (2) (r)]

The following donations are allowable as a deduction, i.e. donation to:

National scholarship fund.

National bursary fund

Trusts administered by the Minister of Health or the Minister responsible for social welfare.

2.10 Donations [sect.15 (2) (r1)]

The following donations are allowable as a deduction, i.e. donation for:

The purchase of medical equipment for a hospital operated by the state (government), or local
authority or a religious organization.

The construction, extension or maintenance of a hospital operated by the state, local authority or a
religious organization.

The procurement of drugs to be used in a hospital operated by the state, local authority or
Religious organization.
The maximum deduction is $10 million. Please not that no deduction shall be allowable for any donation
made to a private owned hospital. In addition, the Minister of Heath & Child Welfare must approve the
donation.

2.11(a) Donations [sect. 15 (2) (r 2)]

A donation to a research institution approved by the minister responsible for higher or tertiary education is
an allowable deduction. The maximum deduction is $20 million.

2.11(b) Donations [sect.15 (2) (r3)]

The following donations are allowable as a deduction, i.e. donation for:

The purchase of education equipment for a school operated by the state (government), or local
 authority or a religious organization.

The construction, extension or maintenance of a school operated by the state, local authority or a
religious organization.

The procurement of books or other educational materials to be used in a school operated by the
state, local authority or Religious organization.
The maximum deduction is $10 million.

The guiding principle in all donation cases is that the donation must be made with a business motive, rather
benevolent motive. This generally rules out the deductibility of all donations made to political parties, to
churches or social activities, etc unless approved by the commissioner. Furthermore where the donation is
made with a view to create goodwill or company image, such a donation must not be allowable as a
deduction – Shell Rhodesia (Pvt.) Ltd vs. COT. A donation to secure an advantage over competitors or removing
competition is allowable as a deduction – Rothmans of Pall Mull Ltd vs. COT.

2.12 Subscriptions [sect.15 (2) (s)]

Any subscription in respect of membership of business, trade, technical or professional associations i.e.
(subscriptions to ACCA, CIS, ZAAT, IAC etc by members) is an acceptable deduction. Entrance fees
usually paid by students or by a business organization before attaining membership status are not allowable
as a deduction. It is immaterial whether the membership is relevant to the taxpayer’s trade or not. Thus it
may be possible for an Accountant to contribute to a medical doctors’ association. What matters is his
continued membership of the association.
Contributions by both employers and employees to trade unions or industrial associations are also allowable
as a deduction.

2.13 Pre-production expenses [sect.15 (2) (t)]

These are expenses incurred prior to commencement of a business. The expenditure is allowable subject to
the following terms:
It must have been incurred within 18 months prior to commencement of business.
It was incurred by the taxpayer in the course of establishing the business.
It must not be any expenditure of a capital nature- Parkwell House (Pvt.) Ltd’s case.
The expenditure is claimed in the year of assessment in which the business commenced. Thus the
expenditure can only be deducted once the actual producing operations have started – Apps v COT.

Please note any expenditure incurred prior to incorporation of the company is generally not allowable.
Commencement of business is when the business is opened to the public and when the business starts
making sales.

2.14 Opening Stock [sect. 15(2) (u)]

A deduction is granted of opening stock held at the beginning of each tax year.

2.15 Donated and inherited stock [sect.15 (2) (v)]

Any stock acquired through a donation is an allowable deduction at fair and reasonable value. In the case of
inherited stock the deduction shall not exceed value in the estate of the deceased. There is, however, no
deduction where the stock is sold immediately upon receipt.

2.16 Trade convention and trade missions [sect .15(2) (w)]

A deduction is allowed on any expenditure not exceeding $100 000 p.a. Incurred by the taxpayer during the
year of assessment in attending:

Not more than one convention which is connected to the taxpayer’s trade

Not more than one trade mission approved by the minister.

Where the convention or trade mission commences in one year of assessment and ends in another
 the expenditure is allowable in the year of assessment in which it ends.

Where the person attending a trade mission or convention is a member of a partnership, and the partnership
bears the cost, each partner is allowed a deduction in proportion to his or her share of profits.

2.17 High Court expense [sect 15(2) (a a)]

The paragraph permits the deduction of cost incurred by the taxpayer in a successful or substantially
successful appeal case to the High court or special court. The appeal should be made in respect of any
matter related to taxes.

2.18 Supreme Court expenses [sect. 15 (2) (bb)]

The section allows for a deduction of legal cost incurred on a successfully or substantially successful appeal
to the Supreme Court on any tax matter.

2.19 Anticipated Expenditure [sect15 (2) (cc)]

Expenditure not yet incurred but income has been received e.g. subscription received in advance by a
newspaper company is allowable as a deduction where the taxpayer makes an election subject to the
following conditions;

The amount of the allowance will be at discretion of the commissioner and is not subject to
objection or appeal.

The expenditure of a capital nature is not allowable as a deduction.

Current expenditure, which relates directly to future years income, which would have been
claimable in the current year, is set off against the allowances.

Any allowance granted must be brought back into gross income in the following year of
assessment when a new allowance is determined.

2.20. Expenditure ranking for deductions more than once [sect. 15(4)]
No amount can ever be claimed as a deduction more than once. The taxpayer must therefore choose under
which section he wants to claim the deduction.

2.21 Employment and business income [sect. 15 (8)]

No set off is allowable of assessed loss from business against employment income or vice-versa. Thus a
taxpayer is not allowed to claim business expenses against employment income or vice-versa.

3.0 NON ALLOWABLE EXPENSES

No deduction shall be permissible in this section if it is not for the purpose of trade. Sect 16 outlines specific
cases were deduction is prohibited as follows:

3.1 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.

3.2 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 and vice versa 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. Reference cases Hartley, & Crawford. Thus traveling
expenses incurred between a surgery and another surgery is allowable, but surgery to farm is disallowed.
According to the case of Hartley, home may constitute a place of work or business provided there is
evidence to the effect that business is also being carried out there. Thus any traveling expenses between
home and another place of business is allowable should the business carried out there is identical to the
business carried out at home.

3.3 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. Thus you may not claim a deduction of your stock destroyed when a compensation
for the loss is receivable from an insurance company.

3.4 Tax and interest thereon [sect. 16 (I) (d)]

Tax payable or interest chargeable on late payment of tax is not an allowable deduction.

3.5 Transfers to reserves [sect. 16(1) (e)]

No deduction shall be allowed in respect of profits transferred to, a general reserve/revenue reserve or any
other forms of reserves whatsoever, including any profits that have been capitalized in any way. Including
any provisions for anticipated or contingent losses.

However, such transfers will be allowable if:

The amounts are voted on or before the date of the relevant accounts or the annual general
meeting at which they were considered; and

The income is taxable in the year of assessment following that in which it is allowed as a
deduction.

3.6 Expenditure for exempt or of non-taxable income [sect.16 (1) (f)]

No deduction is allowable in respect of exempted income or from a source outside Zimbabwe.

3.7 Contributions to unapproved funds [sect. 16(1) (g)]

No deduction shall be allowed for any contribution made to unapproved fund whether pension, benefit or
medical aid society fund. Funds are approved by the commissioner in terms of section 13 of the main Act.

3.8 Private rent or repairs etc [sect. 16 (1) (I)]

Private rent or repairs to any premises shall not be allowable as a deduction unless the rent/repairs are
incurred for the purpose of trade. However, an allowance is granted of repairs resulting from the letting of
property no matter whether the property is subsequently taken into private hands or is used for private
purposes.

3.9 Restraint of trade [sect. 16(1) (j)]

To be prohibited, as a deduction is the cost of securing sole trading or trading rights (restrained to trade).
For example the cost which might be incurred by the petrol company in payment of a service station so as to
enable the sale of the company’s brand or petrol only or by a company in agreement with an employee not
to compete with the company.

3.10 Lease payments for passenger motor vehicle [sect. 16(1) k]

No deduction shall be permissible on any amounts in excess of $1 000 000 paid for the leasing of a
passenger motor vehicle (PMV) as defined in the 4th schedule.

3.11 Cost of shares [sect.16 (1) (l)

No deduction shall be permissible in respect of cost of shares awarded to an employee including a director
in determination of taxable income of the employer. However, where the shares are issued as remuneration
or for the purpose of paying bonus, the cost of shares remains deductible. Also allowable as a deduction is
the cost of shares awarded in terms of a registered employee share scheme.

3.12 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.

3.13 Expenditure on foreign dividends [sect. 16 (I) (n)]

No deduction shall be permissible in respect of expenditure incurred in the production of dividends from
shares in foreign companies. It follows therefore that foreign dividends are included gross in taxable income
without such deductions as bank charges and agent fees being made.

3.14 Expenditure on interest payable [sect. 16(1) (o)]

To be prohibited as a deduction is expenditure incurred in the production of interest payable by any bank,
discount house or financial institution including a building society.

Generally no deduction shall be permissible if the commissioner is satisfied that the expenditure is not
directly related to the trade carried on by the taxpayer in Zimbabwe.

Chapter summary

Aspects contained in the chapter affect both taxation of individuals and companies.
Key points

Allowable deductions are those expenses which are deducted by the commissioner in determination the
taxpayer’s taxable

Only expenditure for purposes of trade or incurred in the process of creating income are allowable.

Not all expenses are allowable as a deduction, private expenses are disregarded.

Exam type
Questions

Question one
The profit and Loss Account of Kent (Private) Limited, a retail and investment company, for current year is as follows: -
Gross profit 1 650 000
Profit on sale of shares 5 000
Interest from Standard Chartered Bank 11 000
Interest from Oak Limbo (Private) Limited 21 000
Company dividends 3 520
1 700 400
Less: Administration expenses
Depreciation 180 000
General expenses 36 800
Rent 60 000
Bad debts 9 700
Donations 2 900
Advertising 14 600
Interest paid 6 000
Salaries and wages 340 000
Provision for Director’s fees 200 000
Motor vehicle and traveling expenses 450 000
Telephone, electricity & stationary 240 000 1 540 000
Trading Profit $1 60 400
You are provided with the following additional information: -
1. Profit on sale of shares – the company, which deals in shares, bought and sold the shares in question within
two months.
2. Interest received ($21 000) - interest on a loan the company advanced Oak Limbo (Private) Limited.
3. Included in general expenses of $36 800 are: -
(a) $3 500 finance charges on purchase of furniture
(b) $6 000 life insurance premiums on the life of the Managing Director. The policy is ceded to the
company.
(c) $9 000 to Open way Enterprises (Private) Limited under an agreement whereby only goods
supplied by Kent (Private) Limited are to be sold by Open way Enterprises (Private) Limited.
(d) $500 fine imposed by the Department of Customs; One of the company’s employees use the
wrong tariff code when filing out a bill of entry for the importation of trading stock.
(e) $980 being the balance of company formation costs written off.
(f) $220 pilferage of cash by an ex-employee.
(g) $900 valuation fees for fire insurance.
4. Included in rent of $60 000 is: -
(a) $10 000 being a premium paid for the right use of a trading store for fifteen years.
(b) $2 000 rent for an empty shop
5. Included in bad debts of $9 700 is
(a) $1 200 loans to a deceased employee.
(b) $5 000 general provision for doubtful debts
6. Donations comprise: -
(a) $1 900 to an Aids orphanage
(b) $1 000 to a charitable trust administered by the Minister of Labor
7. Interest paid comprises: -
(a) 4 000 on a loan secured to buy shares in a listed company
(b) $2 000 on a loan secured to finance working capital.

8. Director’s fees were fixed at an AGM in January 2002. [ZAAT]

Required: To compute minimum tax payable.

Question two
As a Tax Auditor you are required to advise the following taxpayers of the correct treatment of their items for tax
purposes.

(a) Varaidzo Mukorera is a lecturer at Face-to-Face Academy. In June 2003 she converted a garage at her house into
an office in which she prepared her lectures and papers for presentation at various international forums. She bought a
computer and printer for a total amount of $300 000 and placed them in the home office. During the tax year ending 31
December 2003 she estimates that she has incurred the following expenses in maintaining the home office:

Electricity 12 000
Cleaning costs 18 000
Bond paper 6 000
Traveling costs to and from home office to university 30 000

Varaidzo is now compiling information for her tax return for the year ended 31 December 2003 and she believes that
she is entitled to claim the above expenditure from her employment income as well as fees earned from the paper
presentations made at various forums. She also would like to claim capital allowances with regard to the computer and
the printer.

(b) Dr Chiti is an eye surgeon who in July 2003 underwent an eye operation, which was necessary to enable him to
continue working as an eye surgeon. The operation cost him $200 000 and he was able to obtain a refund of $120 000
from his medical aid society.
He is of the opinion that the cost of this operation was incurred for the purposes of trade as envisaged in s.15 (2) (a) of
the Income Tax Act (Capital 23:06), and that the shortfall of $80 000 should be allowed as a deduction, rather than just
obtaining a medical credit of only 50%.

(c) Oscar Danny is a pharmacist who works in a pharmacy owned by Dr. Desai. Dr. Desai provided a Peugeot 306
sedan. With an engine capacity of 1306cc, for the free use of Oscar. Oscar lives in a flat, which is two kilometers from
his work place and is against being taxed on the deemed motoring benefit, which he believes to be excessive. He
believes that he should not be equated to other employees who on average live 15 kilometers or more from the work
place. [ACCA]

Question 3
Advise how the following should be treated for tax purposes:
a) Your client has informed you that he has incurred removal expenses in connection with the transfer of his place of
business from the light industrial sites to the heavy industrial areas He requires to know whether the expenses are
deductible for income tax purposes.
b) If a retailing company pays bribes to buyers who are employed by the potential customers, is this expense an
allowable deduction from taxable income?
c) Under what circumstances are provisions for doubtful debts deductible from taxable income?
d) Are payments to employees for loss of office deductible from taxable income?
e) When is an irrecoverable loan deductible? [CIS]
Question 4
Marko Chemicals commenced production in the manufacture of pharmaceutical products on 1 January 2003. Its return
for the year ended 2003 is as follows:

Net profit 188,000

Fine for dumping toxic chemicals in Mukuvisi 78,000
Valuation of warehouse for insurance 33,000
License to manufacture antibiotic chemicals 59,000
Caps holdings (note 1) 120,000
Advertising (note2) 200,000
Greenwood pharmacy(note3) 400,000
Life policy on managing director (MD beneficiary) 30,000
Repairs (note2) 250,000
Bad debts (note 3) 74,500
Medical expenses employees 133,800
Educational grants (note 4) 500,000
Pension payment (note 5) 1,000,000
Donations (note 6) 400,000
Pre-production expenses (note 7) 320,000
Attendance at a trade convention (note 8) 850,000

Notes
1. The amount to Caps Holdings was a contribution on a research carried out by Caps on the effect of the
antiviral drugs .Caps incurred $800,000 on this research and only $350,000 of this amount was connected to
Marko’s trade
2. Advertising comprise
(a) Advertisements in the Herald to obtain share capital $70,000
(b) Pens & calendars bearing the company’s name $30,000
(c) Advertisements in the daily news for the sale of drugs $100,000
1. The amount to Greenwood Pharmacy was for the pharmacy to sell mosquito repellants produced by Marko
only
2. Repairs comprise:
a) Cost of replacing durawall damaged by rain $70,000
b) Cost of replacing engine of a delivery truck which had ceased operation $80,000
c) Painting of factory premises $100,000
3. Included in the bad debt is an of $20,000 debts acquired from G. Ltd in a lock , stock and barrel sale. Also
included is an amount to Mayhem Debt collectors of $25,000, who is responsible for collecting its debts.. The rest
is a 5% provision on doubtful debts.
4. Marko paid $300,000 to Samson the MD’s cousin , to take up a course , in Tourism in SA . The MD , holds a 4 %
voting right in the company. The other $200,000 was for a bursary to Haphette a nephew of one of the employees
, to take up a pharmacy course at the UZ.
5. The pension payments were to the following people:
a) A contractual obligation to Mr. Simango , who retired of ill health of $700,000. This arises from the contract of
employment
b) Pension to Mr. Chikari’s wife -$100,000. Mr. Chikari died on 1 October 2003 and was a director . The amount
is of an ex-gratia nature.
c) Annuities of $200,000 to the dependants of Mr. Bere , a working managing director , who was involved in a
fatal accident.
6. Donations comprises of :
a) Donation to Buy Zimbabwe campaign $250,000
b) $100,000 to the Independence Day celebrations
c) $30,000 to the Pharmaceutical Society of Zimbabwe
d) $20,000 to the Chivaka Bus Disaster , which is administered by the Minister of Labour
7. Pre-production expenses include
a) Installation of machinery ( 2002) $20,000
b) Cost of formula to manufacture pain relief pills (2001) $80,000
c) Headgears purchases on 30 September 2001 $120,000
8. The MD attended a 3-week trade convention in Pretoria , beginning 28 December 2002,the cost was $500,000.
The other $350,000 was for a second convention he attended in Durban for another 3 weeks beginning 24
December 2003 . All conventions were for purposes of trade.

Required Taxpayer ‘s tax liability.

Chapter 8

CAPITAL ALLOWANCES

8.0 Introduction

The relevant provisions of the Act are section 15(2) (c) and 15 (2) (dd) as read with, 4th schedule and 14th
schedule respectively.
The cost of acquiring assets used in trading is an expenditure of a capital nature, which is not allowable as a
deduction. Depreciation also is 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
 d) Growth point Allowances
A scrapping allowance is a loss on sale of an asset. The difference between the cost of an asset and capital
allowances is the income tax value of the asset (net book value equivalency)

Some of the assets qualifying for allowances are stated and defined below. 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.

8.1 Definition of assets

It is very crucial to understand what the asset is purported to be, otherwise you risk claiming a wrong
allowance on a wrong asset. .
A: Commercial Building

IS

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 license
IS NOT

A farm improvement, industrial building,
staff housing etc

A building used 10% or more of its floor
area for residential purposes

A building owned under condominium
principle

Following the case of J Heyes (Pvt.) Ltd vs. COT. an addition to a commercial building constructed before 1
April 1975 will never qualify for capital allowances , unless built on a separate foundation. Note as well that
shops, offices with living accommodation in the same building where the living accommodation floor area
exceed 10% will never qualify for allowances.

B: 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 him

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
etc

Tennis courts(permanent), golf courses and bowling greens
*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.

C: 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 $3million. Thus for a staff housing to qualify as a staff
housing its cost must not exceed $3million, but allowances are calculated on a deemed cost of $1miilion, if
the cost exceeds $1million but below $3miilion.
Please see the qualifying and deemed amounts over the years. .
 Deemed cost and qualifying cost trend

Year 2000 2001 2002 2003

Qualifying cost 200,000 300,000 500,000 3,000,000
Deemed cost 100 000 150,000 250 000 1,000,000

The existence of a unit or units in a residential block, which cost more than $3million, will result in the whole
block being disqualified i.e.:

$3,000,000 $1,000,000 $4,000,000

Disqualify the whole block though the total is less than $3,000,000 x 3 =$9,000,000

D: 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.
o Estate car, Pajero, Twin cabs
o Station wagon, Mercedes Benz
Excluding:

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 purposes

Please note for purposes of calculating capital allowances on passenger motor vehicle (PMV) the deemed
cost is $1,000 000.Thus a taxpayer cannot calculate allowances on a cost exceeding, $1,000,000 in respect
of 2003 tax year. There is no limit in the qualifying amount.

Deemed cost trend

Year 2000 2001 2002 2003

Deemed Cost 200,000 300,000 500,000 1,000,000

E: 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 million,
(2002: 3,5million and $2,250,000: 2001).
The qualifying requirements are as follows:

For a school more than 50% of the pupils attending must be of the parents working on the farm or
mine.

For a hospital/ clinic more than 50% of the patients must be people working on the farm or mine.

8.2 Capital allowances

Special Initial Allowance (S.I.A)

S.I.A is granted to a taxpayer upon election, is granted on capital expenditure incurred by the taxpayer
during the year on:
a. Cost of construction of a new immovable asset or
 b. Cost of improvements, i.e. additions or alteration to existing immovable asset or
c. Purchased movable assets and used by the taxpayer for purposes of trade [purchased whether
new or second hand]

Special points about S.I.A

Is calculated based on cost i.e. straight line method

Is never apportioned either on time or usage basis

Is never granted on assets acquired through donation or inheritance

Is never granted on a commercial building unless it is constructed at a growth point

Cannot be awarded on purchased buildings

S.I.A. is granted in the year in which asset is first put into use

Is granted upon election [in an exam key words are ‘’compute maximum allowances, or minimum
taxable /tax liability ‘’ when required to elect.]

No S.I A is granted to a lessor on a financial lease.

The rate for S.I.A. is 50 % on cost in the first year. Once S.I.A is granted an asset will qualify for
accelerated wear & tear in the second & third years at the rate of 25 % on cost p.a.

No SIA is granted where the asset is used less than 90% for purposes of trade.

Wear and Tear

An allowance called wear & tear shall be granted on:
a. Immovable assets acquired or constructed
b. Movable assets belonging to and used by the taxpayer for purposes of trade or in the production of
income
Special points about wear & tear

Granted where no S.I .A. has been elected

Calculated based on cost on immovable assets i.e. straight line method

Based on reducing balance method on movable assets i.e. on income tax value (I.T.V).

Wear & tear is never apportioned on immovable assets.

Apportioned on movable assets on:
• On commencement of business i.e. when business commences during the year
• On ceasing to trade
• When an asset is used for dual purposes i.e. partly private and partly business

Normal rate for wear and tear on immovable assets is 5% on cost. An exception is a commercial
building with 2.5% on cost

Normal rate for wear & tear on movable assets is 10% on reducing balance method. The following
are the exceptions:

• Motor vehicles 20%

• Tractors 20%
• Televisions 20%
• Bicycles 25%
• Machinery running day and night 17.5%
• Machinery working 24 hours a day 25%
• Motor cars used on rough roads 25%
• Graders 25%
Example
A taxpayer constructed a commercial building and staff housing in the first year of her trade, and used these
for purposes of her trade on 1 October 2003. The commercial building cost $9million and staff housing cost
$2,500 000. She also acquired furniture & fittings for $250 000 on 1 July 2003
Required to compute maximum allowances
Solution

WEAR &TEAR SCHEDULE FOR THE YEAR ENDED 31 DECEMBER 2003

Asset Commercial building Staff housing Furniture & fittings
Cost/ITV 9, 000,000 2,500,000 250,000
Deemed cost Nil 1,000,000 Nil
Rate 2.5% 5% 10%
SIA (50%) Nil 500,000 125,000
W&T 225 000 Nil Nil
ITV 8 775 000 500,000 125,000

Notes

Where you are asked to calculate maximum allowances you allow for SIA since it has more allowances than
W&T, subject to conditions stated above.

A commercial building will never qualify for SIA unless constructed on a growth point.

The qualifying cost for a Staff housing is restricted to $3,000,000, allowances are however calculated based
on a restricted cost of $1,000,000.

Example 2-same example as above

Required to compute minimum allowances
Solution

WEAR &TEAR SCHEDULE FOR THE YEAR ENDED 31 DECEMBER 2003

Asset Commercial building Staff housing Furniture & fittings
Cost/ITV 9, 000,000 2,500,000 250,000
Deemed cost Nil 1,000,000 Nil
Rate 2.5% 5% 10%
SIA (50%) Nil Nil Nil
W&T 225 000 50,000 *12,500
ITV 8 775 000 950,000 237,500

Note

Wear & tear is apportioned on movable assets on commencement of trade [6/12 x 250,000x10%]

8.3 MOVABLE ASSETS USED ELSEWHERE BEFORE BROUGHT INTO BUSINESS

Where a movable asset has been used elsewhere by the taxpayer and transferred to Zimbabwe for use by
him in his business or used by the taxpayer for a purpose other than his trade, the value to be introduced in
business is usually arrived at after deducting notional wear &tear from the cost of the asset from the date of
purchase of the asset to the date the asset is introduced into business.

Example
Mr. James purchased a lorry from Zambia at a cost of $4.5 million at the beginning of tax year 1.On 1
January year 3, he started a business in Zimbabwe and introduced the truck in his business and used it
wholly for purposes of his trade,
Compute Wear & Tear for year 3.
Solution

Cost 4,500,000
Year 1 Notional W &T [4 500 000 x20%] 900,000
ITV 3,600,000
Year 2 Notional W &T [3 600 000 x20%] 720,000
ITV 2,880,000
Year 3 W &T [2 880 000 x20%] 576,000
ITV Year 3 2,304,000
Notes

No SIA is claimed in such cases since the asset was used for private business initially.

The notional wear & tear is not allowed as deduction by the commissioner, but only for purposes of
arriving at the estimated cost of the asset at date of introduction into the business.

8.4 Scrapping allowance

A scrapping allowance is a loss on sale of assets for tax purposes. It occurs where the asset has been sold
at less than the income tax value of the asset. Scrapping allowance is deducted in the determination of the
taxpayer’s taxable income.
The word scrap is generally taken to mean used up or discarded and no longer used by the taxpayer for
purposes of trade. In a case were the asset has not been sold, the allowance can only be granted were the
commissioner is satisfied that the asset has become useless for business purposes or has been discarded
with no intention to use it again in the future-Rhodesian Breweries Ltd vs. COT

To constitute a scrap there must be a decision to scrap accompanied or followed by cessation of use -T.M,
Cochrane vs. COT.
The scrapping referred to is scrapping in the course of a taxpayer’s trade and not on closure of business-J.
M Cohler vs. COT. It is clear that a loss on the sale of asset on cessation of trade is not allowable as the asset
has not been scrapped.
As a matter of practice the scrapping allowance calculated on an asset on the closure of business is set off
against amount recouped on any other asset/s. A net recoupment is then taxed, but a net scrapping is
disallowed.

Example
Mr. Fishmonger a farmer sold farming machinery, equipment and other assets “lock stock and barrel” on
disposal of his farm. He realized $5 million allocated as follows:

Land 3,500,000
Machinery 300,000
Equipment 200,000
Tobacco barn 700 000
Lorry 300 000
Total 5, 000,000

His books showed the following balances prior to disposal

Asset Cost Income tax value

Land 2,000,000 N/a
Machinery 500,000 250,000
Equipment 400,000 150,000
Tobacco barn 600,000 550,000
Lorry 500,000 415,000

Required: Compute any income tax effect on disposal of the business.

Solution
RECOUPMENT OR SCRAPPING ALLOWANCE
Asset S/price ITV P/Recoup Allowance A/Recoup
Machinery 300 000 250 000 50 000 250 000 50 000
Equipment 200 000 150 000 50 000 250 000 50 000
Tobacco barn 700 000 550 000 150 000 50 000 50 000
Lorry 300 000 415 000 (115000) 85 000 (115000)
35,000
Notes
1. No capital allowances are claimed on land thus there is no recoupment or scrapping allowance on
disposal of land.
2. The commissioner does not recognize any scrapping allowance on sale of business. Net scrapping
allowance is disallowed , but net recoupment is taxable i.e. 35,000 x.309= $10,815

8.5 Scrapping allowance where an asset is used for dual purposes

Where an asset was used for dual purposes prior to its disposal the commissioner does not grant full
scrapping allowance. His practice is to reduce the allowance by the following formula:
AxB
C
A is potential scrapping
B is private wear & tear
C is the total wear and tear
Example
A taxpayer purchased a lorry in the 2000 tax year for $250,000 .The vehicle was used 20% for private
purposes. Current year it was irreparable and the taxpayer sold it as scrap for $20 000.
Required to calculate scrapping allowance
Solution
DISPOSAL OF A LORRY

TOTAL BUSINESS PRIVATE

Cost 250 000.00 80% 20%
W + T (2000: 250 000 x 20%) 50 000.00 40 000 10 000
200 000.00
Less W + L (2001 : 200 000 x 0.20) 40 000.00 32 000 8000
160 000.00
Less selling price 20 000.00
Potential scrapping 140 000.00
Less A x B 18 000 x 140 000 28 000.00
C 90 000
Actual scrapping 112 000.00

NOTES
1. The actual scrapping of $112 000 is an allowable deduction in the determination of taxable income.
2. The private scrapping i.e. $28 000 is not an allowable deduction.
3. No SIA or wear and tear is grant in the year of sale of an asset.
4. Capital allowances are granted in full where an employee uses an asset privately, but not when used privately by
an employer, owner or someone in a position of a proprietor.

8.6 Recoupment [s 8 (1) (j)]

The word refers to profit on sale of an asset for tax purposes. It is gross income in terms of s 8 (1) (j). It
represents a recovery of capital allowances previously granted. It is the selling price less the income tax
value of the asset, where the selling price is up to a maximum of original cost.

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
Note the same principle is applicable when calculating scrapping allowance

Example
A taxpayer purchased the following assets in the 2001 tax year, a passenger motor vehicle for $385,000,
staff housing 1 unit $195,000. During 2002-tax year he sold them for $405,000 and $430,000 respectively.
Required: To calculate his recoupment in the current. Assume no SIA was claimed.
Solution

Recoupment
Asset S/price ITV P/Recoupment Allowance A/Recoupment
P/motor vehicle *315 584 240 000 75 584 60 000 60 000
Staff housing *330769 142 500 188 269 7 500 7 500
Total Recoupment 67 500

Workings
W1
Deemed cost x Actual selling price
Actual cost
P/motor vehicle 300 000 x 405 000, = $315,584
385,000
S/housing 150 000 x430 000 = $330,769
195000
W2
Allowances
Asset P/ Motor vehicle S/housing
Cost 385 000 195 000
Deemed cost 300 000 150 000
Rate 20% 5%
Wear &Tear (60 000) (7 500)
ITV 240 000 142 500

Notes:

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.

Deemed costs used are in respect of 2001 tax year i.e. the year of purchase of the assets.

8.7 Recoupment on damage of an asset

Where recoupment arises on damage of an asset, and the sale proceeds are receivable through an
insurance policy, the whole amount will not be taxable provided the tax payer satisfies the commissioner
that:
a) Within a period of 18 months from the date of damage or destruction he has purchased or construct a
similar asset thereof and that
b) Such asset has been or will be brought into use within a period of 3 years from the date the original
asset was damaged or destroyed.

Where these conditions are not satisfied or are partially satisfied, the whole or part of the recoupment will be
taxable

Example
Fungai operates a surgery business and on 1 June, 2002 he had his building destroyed by fire. The building
was bought three years ago at $400 000.
Its income tax value at date of destruction was $150,000. A compensation was received from an insurance
company on 1 September 2002 for $450 000.
Required
a) To calculate her recoupment assuming the building was not replaced.
b) To calculate her recoupment assuming the building was replaced and brought into use on 2 February
2007 .
c) Calculate her recoupment assuming the building was replaced at a cost of $350 000 and was brought into
use on 1 December 2004
d) Calculate her recoupment assuming the construction of the building was completed on 2 February, 2005.

Solution
Recoupment
Selling price 450 000
Less: ITV 150 000
Potential recoupment 300 000
Compare with allowances previously granted .i.e. the lower of the two.
Therefore actual recoupment is $250 000
a) The whole amount of $250 00 is taxable since the asset was not replaced.
b) The whole amount is taxable because the asset was brought into use after the prescribed 3 years from
the date of destruction.
c) The conditions were met, however only the recoupment in respect of the unexpended amount is taxable
i.e.

100 000 x 250 000 =$55 556

450 000
d) The conditions were not met , therefore tax the whole recoupment. Construction should have been done
within 18 months from date of destruction of original asset.

The building was brought into use within the prescribed period of three years from the date of destruction.
The construction was also undertaken within 18 months from the date of destruction of the original asset.

8.8 Growth point allowances-s15 (2) (dd), ARW 14th sch

Growth point allowances are further capital allowances provided in respect of an investment made at a
growth point. The intention is to promote development at growth points. Such an allowance is referred to as
an investment allowance.
The allowance is 15% of cost of:
♦ Constructed immovable assets
♦ New and unused movable assets, etc excluding motor vehicles adapted and intended to be used on the
roads
In addition to the above, a commercial building does also qualify for investment allowance and SIA when
constructed at a growth point area. The allowance is only provided once on commencement of use of the
asset. The allowance is not deducted from cost for purposes of arriving at the income tax value of the asset.
In other words it is not recoupable.

8.10 New project at a growth point

In addition to, the growth point allowances there are further allowances provided to a person who provide
any of the following items at a growth point:
• Construction of roads and bridges
• Provision of sanitation or water reticulation.

The person will be taxed at the rate of 15% in the first five years of operation. A manufacturing company
operating a new project at a growth point is taxable at the rate of 10%.

Chapter Summary
The chapter deals with SIA, Wear &Tear, scrapping allowance and growth point allowances.
Key points
• SIA is a special allowance, and is granted in the first year only upon election by the taxpayer.
• SIA is never granted on a commercial building unless constructed at growth area.
• Wear & tear is granted were no SIA has been claimed .
• SIA is never apportioned, but wear & tear is apportioned on movable assets, on commencement of trade, dual
usage of the asset and on cessation of trade.
• Capital allowances are provided in full where an asset is used 90% or more for purposes of trade.

Exam type question

Question one
Mrs. Focus commenced business operation at Chivi growth point area at the beginning of the current tax
year. She submitted the following information in her return.

Net profit for the year $5,400,000, after credit the following items

Profit on sale of equipment $20,000
Bad debts recovered in respect of debts taken over from previous owner 14,250
Exchange profit realized on purchase of machinery 12,750
Dividends from Zest (pvt) LTD 2,100

Total debits amounted to $12,000,000, including among others,

Interest paid to a local bank (see note) 520 000
Underpinning of foundation 120 000
Accounting fee (see note) 952 000
Growth point investment license 100 000
Water connection fee 146 250
Lease improvements (see note) 750 000
Lease rentals (see note) 1,200 000

She incurred the following capital expenditure during the year

• Built a commercial building at a cost of $1500 000
• Staff housing incorporates 6 equal sized residential units $ 1200 000, constructed.
• Purchased PMV new $ 480 000
• Purchased lawn mower new $72 000
• Purchased Wet & Dry Hoover second hand $18000
• Purchased Truck second hand $825 000

Notes
• Accounting fee was paid to Attend & Partners Chartered Accountants in respect of audit work, and tax
advice to the client. The taxpayer claimed that 20% of the fee was in respect of tax advice.
• Interest was in respect of $7 million loan , to assist Mrs. Focus to buy stock , $1million was used to pay
tuition fee for Nicole, a daughter to Mrs. Focus, at Fort Hare University in South Africa
• On 1 January 2003, Mrs. Focus entered into a 13 year lease agreement with a Chivi business tycoon to
effect lease improvements to the value of $625 000. The improvements were completed on 31 May
2003 at an actual cost of $750 000
• In addition, to the above arrangement Mrs. Focus entered into a finance arrangement for the leasing of
a Toyota Venture at monthly rentals of $200 000 p. m.

She claim SIA and all growth point allowances

Compute her tax liability for the year ended 31 December 2003.

Question 2
You are a consultant in Tawana &Partners Chartered Accountants, and you are auditing your client Tivapasi
Wool Manufacturers (Pvt.) LTD, a company operating in the light industries of Harare. The following
accounts were submitted to you for your review.
Notes
1. Donations were to the main political party in the country
2. The Accountant claimed capital allowances on all assets except on factory building which was
constructed in the previous tax year. In addition, to the factory building, computers and delivery lorry
were bought in the previous year. All buildings were constructed .No SIA was claimed in the previous
year.
3. Provision for bad debts comprise of, $75 100 on debts acquired from Zap (Pvt.) LTD, and the rest
represent 5% of debtors.
4. In addition to, expenses deducted in the accounts, the Accountant deducted cost of samples of cotton
wool to Aliment (Pvt.) LTD, a South African company

TIVAPASI WOOL MANUFACTURERS (PVT) LTD

COMPUTATION OF TAXABLE INCOME FOR THE YEAR ENDED 31 DECEMBER 2003
Profit as per statement 81,500,000
Add: Depreciation 617, 750
Water connection fee 12,550
Entertainment allowance 111,100
Donation (see note) 750,000 1,491,400
Less Capital allowances claimed (see note)
Retail building 1 500 000 x 50% 750,000
Lathe Machinery [2nd hand] 50 000 x50% 25,000
Delivery truck 2 500 000 x50% 1,250,000
Pajero for director 4 500 000 x50% 2,250,000
Factory building $2,000,000 x 2.5% 50,000
Staff housing 1 unit 350 000 x50% 175,000
Computers 1 750 000 x 50% 875,000
Twin cab for HR manager 3 500 000 x50% 1,750,000 (7,125,000)
Less Provision for bad debts (see note) 120 100
Provision for directors fees 1 450 000 (1 570 100)
Taxable income 74 296 300

.Required
a) To produce a report to the Finance manager of Tivapasi Wool Manufacturer (Pvt.) LTD, on whether
above accounts were prepared in accordance with the provision of Income Tax Act
b) To compute minimum tax liability for the company.
c) Would the liability be different if the company was located elsewhere

Question 3
Mukwa (Pvt) ltd manufactures furniture. The net profit for the prior accounting year ended 31 December was
$600,000 after debiting:

Exchange loss: payable on machinery imported 16,000

Payment to Mr. Chobe(see note(i) ) 20,000

Lease agreement note (ii) 1,000

Leasehold improvements amortization note (ii) 40,000

Costs re increase of share capital 800

Rent 11,000

Advertising :showroom built at trade fair Zimbabwe 4 years ago

and amortized over 10 years 6,000

Architects fee for new factory 20,000

Interest for late payment for sales tax 400

Valuation fee for insurance purposes 3,000

Taxation fee for preparation of tax return 5,000

Electricity connection ZESA, new factory 2,500

Loan raising fee: cost of construction new factory 4,200

Deprecation 82,000

Donations Trade fair Zimbabwe 800

National Bursary fund donation 750

Society for the Destitute Aged donation 900

Standard Association donation 1,200

Group accident insurance for the benefit of employees 6,300

Customs and excise fine 5,000

Loss on disposal of assets 1,500

Notes
(i) Agreement of purchase of business:
The agreement was signed at the beginning of the year on 1 January whereby Mr. Chobe sold
his business to Mukwa . The allocation of the sale price , which the commissioner accepts is as
follows:
Land 300,000
Factory 400,000
Goodwill 200,000
Equipment 80,000
Office furniture 50,000
Delivery van 170,000

In addition , for a payment of $20,000 p.a. , Mr. Chobe agreed not to produce “ Kiaat” furniture
in Harare for two years
(ii) Lease agreement
The cost of drawing up the agreement was $1,000. The essential terms of the new lease
include:
Date of agreement 1 February
Monthly rent $1,000
Obligation to construct a factory at a cost of $500,000
 Lease period 15 years
The factory , for the manufacture of garden furniture , was completed in the first five months the
lease at a cost of $600,000, whereupon manufacturing commenced
(iii) Further asset details and movements
Asset Cost ITV b/f
: Machinery 100,000 25,000
Computers 40,000 20,000
Mazda 323 90,000 37,500
SIA had been claimed on these assets in the year of purchase.
SIA is claimed on freehold improvements and purchases of movable assets.
(iv) Additional assets:
staff minibus (16 passengers ) 250,000
Lathe 60,000
(v) Scraped
The Mazda 323 bought in the prior year was written off in an accident. The insurance company
paid $45,000. The net book value was, giving a loss of $15,000. [CIS]

Required Taxable income or loss for the year

Chapter 9
LEASING

9.0 Introduction

A lease is a contract made between a lessor and a lessee for the hire of a particular asset. Usually, the
requirement is that the lessee should pay a deposit on inception of the lease; thereafter he should pay
monthly rentals. The deposit is often referred to as lease premium. Generally, lease rentals are business
expenses to the lessee.

9.1 Lease Premiums –s 8 (1) (d) & 15 (2) (d)

A lease premium is a consideration having an ascertainable money value passing from a lessee to a lessor
for the right of use of the lessor’s property i.e. occupation of building, use of secret formula, trade marks,
machine etc. It has the following characteristics:-

It must be expressed in monetary terms.

It must be paid by the lessee to lessor

It should be distinct from rent, and paid over and above the normal rent.

Goodwill vs. Premium

Care must be taken not to confuse goodwill and lease premiums. Goodwill is the good name or reputation of
a person or business. It attaches itself to either the owner of the business i.e. his popular personality,
efficiency etc. However if he leases the premises, the goodwill is then attached to the lease and is regarded
to be a lease premium.

As a general rule all payments made in terms of a lease agreement, constitute a lease premium. However, a
lease premium does not include a consideration paid by a lessee to a predecessor lessee for the acquisition
of the right to the lease. On the other hand, a premium can arise between a sub-lessee and sub-lease and a
sub-lessor -Oscar (Pvt.) Ltd C.O.T.

9.2 Treatment of lease premium

(a) In the hands of the lessor

A lease premium is gross income in the hands of the lessor, in terms of section 8 (1) (d). It is taxed in full in
the year of accrual or receipt, and is never spread.

(b) In the hands of the lessee

A lease premium is a business expense in the hands of the lessee. Where the amount is paid in a particular
year the practice of the commissioner is to allow it as a business expense over the period of the lease or 10
years whichever is shorter.
The commissioner does not, however, grant a deduction where the property is used for private purposes.

Example
Mr. Alec entered into a lease agreement on 1March 2003 for the leasing of his property to Mr. Bin, for a
period of 11 years commencing 1 April 2003. The terms of the lease agreement requires Mr. Bin to pay
monthly rentals of $60,000.00, and $50,000.00 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 each of the person’s books for 2003 &2004 tax years.

Solution

(a) Lessor
Taxable income for the year ended 31December 2003
Lease premium (taxable in full) 50,000.00
Add Rentals [60,000 x9) 540,000.00
Taxable income 590,000.00

Taxable income for the year ended 31December 2004

Lease premium -
Add Rentals [60,000 x12) 720,000.00
Taxable income 720,000.00

(b) Lessee
Allowable deduction for the year ended 31 December 2003
Lease premium (w1)[416.67 x9] 3,750.00 Rentals
[60,000 x9) 540,000.00
Total deductions 543,750.00

Allowable deduction for the year ended 31 December 2004

Lease premium (w1) [416.67 x12] 5,000.00
Rentals [60,000 x12) 720,000.00
Total deductions 725,000.00
Workings
Lease premiums are spread in equal installment over the lease period or 10 years whichever is shorter. In
this case 10years is shorter, since the period of the lease is 11 years. Thus the allowable deduction in
respect premium is arrived at as follows:

Monthly premium=Lease premium/120months

Monthly = $416.67 [50,000.00/120 months]

Further Points:

Where the period of lease is renewable, only the initial lease period is considered in the calculation
of an allowance.

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

9.3 Lease improvements – s 8(1) (e) & 15 (2) (e)

It is a common feature in the commercial sector for a lessee to put up a structure on the premises owned by
someone else. The premises leased may become inadequate for his expanding operations. Such a
structure is referred to as a lease improvement. Obviously, the structure will benefit him, and eventually the
lessor on termination of the lease agreement. However, not all structures will qualify as lease improvements
(obligation under lease).Only those structures with a value agreed between the lessor and the lessee will
qualify.

9.4 Treatment of lease improvements.

(a) In the hands of the lessor

The value of the improvements constitutes gross income in his hands. It is taxable over the period of the
lease or 10 years whichever is the shorter, commencing the date improvements were completed.
Monthly taxable income = Value of improvements .
Lease period/120 months, whichever is shorter
Points to note

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 in
the lessor’s hands.

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.

If the actual cost ends being less than the value per agreement and variation to an agreement is
made 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.

If the lease requires the erection of improvements to stated minimum value, the amount of benefit
is the fair and reasonable value

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

(b) In the hands of the lessee

A lease improvement is a business expense in the hands of the lessee. The deduction is allowed to him in
the same way as is done to lease premium. No deduction is granted on acquisition of ownership of the
building or land under lease by the lessee or by somebody else. The practice is that the lessee will cease to
qualify for any allowance in the following year of assessment. On cessation of use of the property for
purposes of trade the allowance should be given only up to the date of cessation.

Points to note

The lessee is allowed a deduction 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, and period where the property is not used for purposes of trade.

The lessee is allowed a deduction from the date the property is first used for purposes of trade.

Where the value is not stated in the agreement the actual cost of the improvements will be taken
as a business expense in his hands. However, where the value is stated the deduction should not
exceed the value stated.

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.

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 allowable, provided they amend the agreement. If not the value per agreement is used.

If the lease requires the erection of improvements to stated minimum value, the amount allowable
is the fair and reasonable value

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

Example
Tonde and Chamu entered into a ten-year lease agreement on 1 January 2003. Chamu agrees to construct
a building to the value of $1,140,000.Prior to completion of the building the value is amended to $1,200,000.
Buildings are completed in 6 months and put into use on 1 November 2003.
Calculate the allowance and income applicable.

Solution
Income of lessor 2003

The value the improvements are $1,200,000 .This was amended before completion.
The unexpired lease period is 114 months [10 x12 -6] i.e. the construction period is disregarded.

Value to be taxable = 1,200,000 = $ 10,526.32 per month

114

Taxable 2003 = $ 63157.89 [10526.32 x 6]

Taxable 2004 = $ 126,315.79 [10526.32 x12]
Allowance lessee
The value of the improvements is $1,200,000 .This was amended before completion.
The unexpired lease period is 110 months [10 x12 -10] i.e. the construction period is disregarded, including
period of non-use.

Value to be allowed = 1,200,000 = $ 10,909.09 per month

110
Allowable 2003 = $ 21,818.18 [10909.09 x 2]
Allowable 2004 = $ 130,909.09 [10909.09 x12]

Activity 1
Bread (Pvt) ltd entered into a lease agreement with Gweru City Council for the leasing of a stand in Senga area of
Gweru for a period of 11 years. It is a condition of the lease that the lessee erects buildings to the value of $2,250,000
at least. A further condition provided that such buildings were to meet certain specification. The design and structure of
the buildings must be approved and certified by the City Engineer as being suitable for the purpose for which they were
intended.
The 11-year lease commenced on 1 January 2003. Buildings meeting the necessary requirements were completed
and put into use on 30 June 2003,at an actual cost of $3,275,000. The tenant uses the buildings for the purposes of his
trade.

Compute the allowances to be claimed by Bread (Pvt.) ltd, giving reasons for allowing that expenditure.

9.5 Capital allowance on ranking buildings erected by the lessee

Capital allowances are provided as an alternative to s15 (2) (e) upon election by the taxpayer as follows:
I. Where the improvements are not in terms of the obligation (i.e. voluntary improvements) in the
lease, then:

The lessee can claim SIA and Wear and Tear allowance

The lessor will not be granted any of the above allowances until the property is rented out to
another tenant and rent is thus receivable for the improvements.

II. Where the erection is in terms of the obligation in the lease agreement, then:

The lessee can claim S.I.A. or Wear & Tear allowances if elected as an alternative to section 15 2
(e) allowance.

The lessor will be eligible for Wear & Tear allowances only.
III. Where the erection of the building is in terms of the obligation under lease and the cost exceeds
stipulated amount, then the lessee can be granted S.I.A. and Wear & Tear allowance on the
stipulated amounts, but not on the excess until the property is re-let to another tenant.

9.6 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 referred to as recoupment in terms of sect 8(1)(l). Such recoveries are brought into
gross income, and may be taxable over a period of 6 years upon election by the taxpayer. However, all
outstanding installments are brought into gross income if the property is disposed off before the expiry of six
years.

9.7 Lease or buy decision

(a) Leasing option

There are two forms of lease finance and operating lease. An operating lease is a short-term lease,
and the lessor is entitled to the return of the asset at the end of the lease period.
On the other hand, a finance lease is a lease in which the lessor transfers substantially all the risks
and rewards of ownership of an asset to the lessee. Usually there is an option to purchase the asset
on termination of the lease.

Tax on lessee
a) The lessee is allowed a deduction of lease payments or rentals, including any premium paid,
subject to a maximum of $1,000,000 ($500,000:2002) in respect of leasing of a passenger motor
vehicle- s 16(1) (k).
b) No capital allowances are granted since he does not own the asset.
Tax on Lessor
a) The lessor may not claim SIA, but wear & tear only in respect of finance lease.
b) Lease rentals or payments plus any premium receivable are taxable on receipt or accrual basis.
c) Lessor is required to charge sales tax on hired property, excluding on immovable property.

b) Buying option
The buying option includes, hire purchase, purchase of the asset through borrowed funds or with
own resources.

Tax on buyer
a) The buyer may claim capital allowances, but no SIA may be claimed on purchased buildings
b) Finance costs, sales tax chargeable or traveling costs to purchase the asset are capitalized for
purposes s 15 (2) (c) and 15 (2) (dd).

Tax on seller
a) No allowances are granted in respect of assets sold on hire purchase
b) The seller is taxable on the sale in terms of provisions set out in s 17 & 18 Income Tax Act,
hire purchase sale, and s 18 & 19 Capital Gains Tax Act.
c) Seller is required to charge sales tax on assets sold under hire purchase, excluding on
immovable property.

Chapter summary
This topic is very crucial for financial managers, particular when one wants to make a decision to acquire an asset.
Key Points

Lease premiums are taxable in full in the hands of lessor and spread over a period of 120 months or lease
period whichever is less in the hands of lessee.

Lease improvements are taxable in the hands of lessor over a period of 120 months or lease period
whichever is less commencing date of completion.

Lease improvements are allowable deductions to the lessee over a period of 120 months or lease period
whichever is less commencing date of occupation for purposes of trade.

Exam type question

The lease agreement stipulates that Advanced Company (Pvt.) Limited shall erect a building to the value of $
500,000.00 and use it for the purpose of a café. The lease covers a period of 7 years with effect from 1 January. Half
way through construction the building, a clause in the agreement was varied and costs are increased from $
500,000.00 to $ 630,000.00 with the approval of both the lessor J D (Pvt.) LTD and the city council.
Construction of the building is completed in two years and the building is put to use at the commencement of the third
year of lease.

What section of the Act

Allows for the deduction of costs incurred on lease improvements?
Brings to tax improvements under a lease agreement? (2 marks)
b. How much is allowable as a deduction to Advanced company (Pvt.) Limited during the fourth year of lease?
(4 Marks)

c. How much is taxed in the hands of J. D Pvt. LTD and in which year? [CIS]

Answer to Activity 1
The unexpired period of the lease is 10 years 6 month from date of completion, as such use 10 years i.e.
120 months in terms of the Act. Allowance therefore:

Allowance 2003= 3,275,000 x 6mths =$163,750

120 mths
Allowance 2004= 3,275,000 x12mths =$327,500
120 mths

The law states that should a lease require erection of specified improvements to a stated minimum value the
amount on which the lessor will be taxed is the fair and reasonable value, usually cost and not the minimum
stated cost. This is because the lessee has to meet the requirements even if the cost exceeds the stated
minimum.

Chapter 10

EXEMPTIONS [SECT 14 ARW 3RD SCHEDULE]

10.0 INTRODUCTION

Exemptions are accruals and receipts of revenue nature, which are free of income tax. In this chapter we
set out some of those accruals and receipts, which have been gazetted by the government to be non-
taxable.

10.1 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. Also free of tax, are profits of local authorities and such like organizations.

The following have been specifically specified in the act;

(a) POSB
(b) Reserve Bank of Zimbabwe
(c) The Zambezi River Authority
(d) The Natural Resources Board

10.2 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.

Such organizations as are of a public character and are meant to benefit members of the society or a sector
of the society i.e.

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. Cimas

10.3 FOREIGN GOVERNMENTS AND WORLD ORGANISATIONS

Certain governments of some other countries other than Zimbabwe have been selected as free of
Zimbabwean tax. Such organizations have been approved by the minister by a notice in a statutory
instrument.
Also exempted under the same section are certain world organizations. 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
Please note that an exemption in respect of organizations stated above (10.1 to 10.3) does not extend to
individuals employed by those organizations.

10.4 EXEMPTIONS FOR EMPLOYED PERSONS

All individuals providing services for the state are exempted on benefits granted to them by the
state paragraph 4(d), 3rd schedule.

Bonus including performance related bonus-paragragh 4(o), 3rd schedule-the exemption is
$100,000 or 10% of total remuneration whichever is greater.

Also exempted are the salary and benefits paid to the President and his domestic workers paid out
of his salary.

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 university.
Provided that such any amount is not paid as compensation for services rendered by the student or
his/her near relative, 4(m), 3rd schedule.

Benefits granted to persons employed by a licensed investor up to 50% of total remuneration, 4(q),
and 3rd schedule.

Retrenchment package, (excluding pension or cash lieu granted under the same scheme) i.e. 1/3
of retrenchment package up to 1/3 of $1,5 million or $300,000 whichever is greater, 4(p), 3rd
schedule

10.5 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.

10.6 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:

War disability pension

Pioneers or early settlers grant pension

Pension or compensation to any person or his dependants as is paid by Wankie Disaster Relief
Fund.

War Veteran gratuity with effect from 1997.

10.7 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 trade union

Benefit fund or

An insurance company in respect of a policy covering death, accident or sickness

A medical and society

10.8 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.

10.9 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. Please note that a withholding tax of 20%
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.

10.10 INTEREST FOR LOCALS

To be exempted is any interest paid on

Sums deposited with POSB account

Any tax reserve certificate issued by ZIMRA.

Any loan raised by the state i.e. treasury bills, agribonds etc

Class C permanent shares issued by a building society

Interest from a foreign currency account held by an individual other than a company.
10.11 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;

Any person carrying mining operations

The state or a company whose share are fully controlled by the state.

A local authority or such like bodies

A statutory corporation

Building society provided it was made before 16 July 1976
Provided the amount will be taxable where the taxpayer is taxed in his country by reason of its being
exempted from this country.

10.12 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.

10.13 TRADITIONAL BEER

Any receipt or accrual from the sale of traditional beer is free of income

10.14 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 see Sec 16(i) (m).

Activity 10.1
You are a tax consultant in a firm of chartered accountants, and have been approached by the following
taxpayers for advice
1. Tendai is a third year student at Harare Polytechnic she was granted a bursary by the college
amounting to $20 000 as a compensation for holiday work performed by her.
2. William is in receipt of $30 000, this amount is payable to him on an annual basis from the estate of
his late father. The estate derives most of its income from dividends paid by companies
incorporated in Zimbabwe. He is also a beneficiary with a vested right to his father’s house with a
market value of $7 million.
3. Anna is in receipt of $200 000 cash paid out of the will of the late mother.
 4. Dot mark plc is incorporated in UK, and operating branches in Africa including Zimbabwe. During
the current year of assessment the local branch paid it $250,000 as technical fees. The amount
was payable gross without deducting any tax or applicable expenses.
5. Mr. Germ received a dividend from Intermarket Building Societies gross, $20,000.
6. Mr. Zororai died on 20 May 2003 and his estate was paid $60 000 as death benefit, and $450 000
in respect of an endowment policy.

Required

To advice the above taxpayers of their minimum tax obligations, if any.

CHAPTER SUMMARY
Exemptions are receipts and accruals, which are free of income tax.
Key Points
• Government owned companies are not liable to pay tax on their profits.
• Civil servants are not taxable on allowances, housing, transport granted to them by the state.
• Any death, sickness or injury related compensation is received free of tax.
• Dividends from a local company liable to pay tax on profit are not taxable in the hands of the recipient.
• Any entertainment allowance as is expended on the business of the employer is not taxable in the hands of
the employee.

EXAM TYPE QUESTIONS

Question one
While you were carrying out a tax audit for your client Kawaka (Pvt.) Ltd engaged in retailing business, your
audit clerk came across certain items which he is not sure of the correct tax treatment. These items include
among others:
(a) Management fees to a Head Office company in Nigeria $200 000.
(b) Interest payable to Mr. Jones $500 000 on loan provided by him. Mr. Jones is a non-resident of
Zimbabwe and does not carry out any business in Zimbabwe.
(c) An export incentive grant received by the company amount to $370 000.
(d) Dividends from Cimas Medical Aid Society $20 000.
(e) Grant and bursary paid to a director’s child $125 000.

How would you treat above items in your client’s books?

Question 2
Mr. & Mrs. Atkins live together permanently in Bermuda. Although neither carries on business in Zimbabwe,
they derived the following income from Zimbabwe and incurred the following expenses for the year ended
31 December

Mr. Atkins

Rent from flat in Harare ( gross $240,000 after levy $18,000 , repainting $58,000 & installation of
burglar bars $44,000) $120,000

Dividends from a company listed on stock exchange ( gross $8,000 less 15% non-resident ‘s tax
$1,200

Dividends from a company in Zimbabwe not listed (gross $2,000 less 20% non-resident
shareholders’ tax $400) $1,600

Dividends on $60,000 Building society Class C paid up permanent shares $11,700.

Directors’ fees (gross $4,800 less 20% non-resident tax on fees $960) $3,840

Interest on mortgage bonds ( gross $9,000 less 10% non-residents’ tax on interest $900) $8,100

Interest on Government of Zimbabwe 4% six –year local registered bonds $2,400

Pension from former employer $5,700

Life insurance premium on own life $920.

Medical aid society (approved) contributions for self and spouse $1,135

Medical expenses for self and spouse not refundable by the medical aid society $615
Mrs. Atkins

Interest from Bulawayo municipal stock ($6,800 less non-resident tax on interest $680) $6,120

POSB fixed deposit interest $2,015

Mortgage interest (secured on Bulawayo property) $950 less 10% non-resident tax on interest
$95) $855.

Calculate each taxpayer’s tax liability for the year, assuming Mr. Atkins was born in Malawi on 12
September 1935. [CIS]

Answer to activity 1
The bursary to Tendai will be taxable since it was granted in respect of services rendered.
However, the amount is below the tax threshold. Thus it will be received free of tax unless Tendai has
income which can be aggregated together with the bursary to reach minimum threshold of $180 000 per
annum.
The amount received by William on annual basis constitutes an annuity i.e.

Payable on regular basis and

Chargeable against some person and not transferable.
An annuity however received is taxable in full, excluding and amount used to purchase the annuity
not withstanding that it is derived from an exempt income s14 (3)

William is thus taxable in full on the annuity from legacy. The annuitant did not pay anything to
acquire it.
The house itself is not taxable. An asset inherited is not taxable itself but any income derived or
generated by that asset i.e. interest, rent or profits. The house is thus of a capital nature.

Anna is not taxable on the lump sum received from the estate of her late mother. Cash is of capital
nature but any subsequent income generated by that cash.
Interest, dividends, technical fees or management fees payable have certain tax consequences in
terms of section 26. The company paying these items must deduct a withholding tax as follows;
Interest 20%
Dividends 20%
Technical fees 20%
Management fees 20%
Dividend on listed shares 15%
Whether payable to a non-resident or resident of Zimbabwe. The withholding tax so deducted
must be remitted to ZIMRA within 30 days of the date of deduction, credit or declaration thereof.

Tax payable on technical fees therefore 250 000 x 0.20= $50,000

The local branch must deduct this tax and pay it over to ZIMRA within 30 days of withholding.
Germ is taxable on the dividend in terms of paragraph 9, 3rd schedule. Intermarket Building
Society is not liable to pay corporate tax. These dividends are not taxable at source but in the hands of the
recipient, since the building society is not liable to pay income tax on its property.
Mr. Zororai’s estate will not be taxable on the $60 000 death compensation in terms of paragraph
7,3 schedules. Proceeds from an endowment policy are also not taxable- is a receipt of capital nature.
rd

Chapter 11
PARTNERSHIP

1.0 INTRODUCTION
A partnership is not a legal person. It is nothing more than the partners who comprise it.
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.

2.0 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 Sack vs. CIR

3.0 ADJUSTMENTS APPLICABLE TO PARTNERSHIP

If taxpayer has been trading as a sole trader and he admits a partner into his business he
will be considered as having sold his assets to the partnership and hence he is liable on any
recoupment which may arise from the deemed disposal of such assets. The recoupment
would be the difference between ITV of assets on date of deemed sale and the value at
which assets were transferred.

EXAMPLE
Mr. A bought assets for business use in tax year 1 and in tax year 3 he admits Mr. B into his business as a
partner. Assume the original cost was $100 000 and ITV at date of admission was $50 000 and the value at
which the assets were transferred was $75 000. Calculate the recoupment in the hands of Mr. A.

SOLUTION
ITV $50 000
Transfer value $75 000
Recoupment 25 000

Mr. A will be taxed on the $25 000 as recoupment, is restricted to amounts previously allowable.
Partnership to claim allowance on $75 000. The partnership could still claim allowances on transfer value,
even if the asset were transferred at a value higher than the original cost.

1.1.2 Death of a partner and introduction of a new partner into an already existing partner also
causes dissolution of a partnership. When such dissolution occurs, the old partner would be
liable to recoupment if any on disposal of partnership assets.

EXAMPLE
Peter and John are in partnership as equal partners. On 1 January of the current year they admit James
also as equal partner in the new partnership. The position regarding assets for capital allowances and
recoupment is as follows:

Assume original cost of assets $20 000

SIA or W&T granted $15 000
ITV date of dissolution 5 000
Assume these assets were transferred to the new partnership at a value of $10 000

SOLUTION
 Recoupment in hands of Peter and John will be $5 000 (i.e. 10 000 – 5 000)
Taxable as recoupment – Peter $2 500
- John $2 500
$5 000

Deemed cost new partnership Peter, John and James $10 000
Less: S.I.A 5 000
I.T.V and of current year 5 000

Share of S.I.A Peter $1667

John $1666
James $1666
NOTES
The new partnership Peter, John and James can claim W & T as an alternative to S.I.A on the price at which
the assets have been acquired.
1.1.3 If on transfer of assets to the new partnership the price at which the assets have been
transferred is less than the written down balance (I.T.V) a scrapping allowance may be
granted in terms of 4th schedule i.e. if conditions for scrapping are met.
In practice calculation of capital allowances and recoupment is not done for individual partners
but for the whole partnership and the net result would then be allocated to the partners in their
profit sharing ratio.

4.2 PAYMENT OF INSURANCE PREMIUMS – JOINT LIFE POLICY

4.2.1 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.

4.2.2 SEPARATE POLICIES ON PARTNERS LIVES

(Partnership benefit) - If each partner takes out a separate policy on his own life and cede the
policy to the partnership, the premiums will not be allowable as a deduction in the computation of
the taxable income of the partnership (once the partners cede their policies to the partnership then
the partnership becomes the beneficiary).

4.2.3 SEPARATE POLICIES ON PARTNERS (PARTNERS BENEFITING)

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.

4.3 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 benefit 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.
4.4 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. 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.
4.5 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. (Para 8(2) 3rd schedule) does not extent to partners because they are not
employees.

4.6 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.

4.7 ATTENDANCE AT TRADE CONVENTIONS 15(2)(W)

Expenditure incurred by the partnership in respect of not more than convention attended by a member
of such partnership shall be allowed to the partner up to a maximum of $100,000. This being allowed
to partners in their profit sharing ratios.

4.8 AMOUNT PAID BY WAY OF PENSION ANNUITY OR ALLOWANCE TO A FORMER PARTNER

OR DEPEDENT THEREOF s 15(2)(q)
Amounts paid to a former partner who would have retired due to ill-health, old age or infirmity are
allowed to the partnership up to a maximum of $3 000 in respect of each former partner. Also allowed
as a deduction is $2 000 in respect of payments made to dependents of a former partner who has
either retired or is deceased.

4.0 CHAPTER SUMMARY

A partnership is not recognized as a person at tax, but a group of persons forming it. It is not taxable. In
practice income of a partnership is first determined on the basis that it is a separate taxable person, then the
profits (losses) are shared between or among the partners who will be liable to pay tax on their individual share
of profits.
Key points
• Income of partners from a business accrues to them at the end of accounting year or some agreed
accounting date. Tax is due on annual payment dates prescribed by the commissioner see chapter
one.
• Joint life policies, and ceded separate life policies are not allowable as a deduction in the
determination of partner’s income.
• All private expenses incurred on behalf of a partner(s) are allowable as a deduction to the
partnership and taxable in the partner(s)’hands.

Exam type questions

Question 1
Solomon and Wise are in the partnership as architects, sharing profits and losses in the ratio 3:2
respectively. The following is the income statement of the partnership for the year ended 31 December 2003

INCOME $
Fees accrued 7,000,000
Sundry income 120,000
Income from 20-year government bonds 300,000
Interest from building society account 250,000
Profit from sale of land and building 2,000,000
9,670,000

Deductions: $ $ $
 Depreciation: Fixtures & Fittings 120,000
Office equipment 100,000 220,000
Insurance premiums
Loss of profits 60,000
Theft 30,000
Partnership joint survivorship,
Policy 80,000 170,000
Interest on capital accounts:
Solomon 300,000
Wise 200,000 500,000
Salaries:
Solomon 800,000
Wise 500,000
Staff 1,800,000 3,100,000
Donations:
University of Zimbabwe 40,000
National scholarship fund 140,000 180,000
Contribution to Pension fund:
Solomon 200,000
Wise 70,000 270,000
Contribution to Retirement:
Annuity fund:
Wise 120,000
Annuity in favor of widow, of
Deceased employee 320,000
Debt collection 60,000
Drafting lease agreement 30,000 90,000
Purchase of office equipment 600,000
Rent 300 000
Voluntary improvement to lease,
Offices 200 000
Medical contributions:
Solomon 45 000
Wise 55 000 100 000
Medical expenses incurred:
Wise 30 000
Attendance at summer,
Architectural
Solomon 60 000
Wise 60 000 120 000 6 320 000
NET INCOME 3 350 000

The following additional information is available:

(i) During the tax year ended 31 December 2003, Wise borrowed $1 million to finance his share in the
partnership practice. Interest payable by him during the year amounted to $400 000.
(ii) The partnership has elected to have the special initial allowance in respect of the purchase of office
equipment.

Required: Calculate the joint and individual taxable income of Solomon and Wise for the ended 31
December 2003. [ACCA]

Question 2
Fungai and Nomathemba are in partnership of selling scrapping metal to individuals and companies. Profits and
losses are shared in the ratio 5:3 respectively.
The following is the partnership income statement for the year ended 31 December 2003.

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2003

Metal sales 1 900 000
Gross profit 8 560 000
Less operating cost (note 1) 4,000,000
4 560 000
Add other incomes (note 2) 140 000
Net operating profit 4 700 000

NOTES
1. Operating cost is made up of:
Salaries and wages 2 010 000
Salary Fungai 800 000
Rent for use of Nomathemba’s property 280 000
Staff medical contributions 205 000
Partners medical contributions (50:50) 156 000
Fungai’s accident policy 14 000
Public policies 57 000
Pension contribution for Partners (50:50) 18 000
Payment for the right to use trademark 10 000
Depreciation 165 000
Cost of neon sign 114 000
Attendance at Bulawayo Trade Fair 91 000
400 000
2. Other incomes comprises of:
Dividends from a foreign company 270 000
Profit on sale of Van 88 000
Dividend from class C shares 25 000
140 000
Further information
(a) The following assets were purchased on 1st June 2003
New delivery Van 750 000
Furniture and fitting 100 000
Computers 425 000
1 275 000

(b) The new delivery van was bought in replacement of an old van, which was sold for $228,000. Its original
cost was $200 000(book value $140 000) with income tax value of $125,000.
(a) Besides the old delivery van the partnership had the following assets on 1 January 2003

ITV
Factory building (cost $3 100 000) 825 000
Equipment 116 000
Furniture and fitting 145 000
Compute maximum tax for each partner
Chapter 12
FARMERS

12.0 INTRODUCTION
A farmer is any person who derives income from pastoral, agricultural or other farming activities, including
the letting of a farm used for such purposes. A farmer is taxable in terms of provisions stated in the 2nd & 7th
schedules, as stated below. .

12.1 LIVESTOCK VALUATION

At every tax year-end valuation of livestock closing stock is a common feature. The method most commonly
used by the commissioner is the fixed standard 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, and may not change the values unilaterally.

The other methods occasionally used are:

a) Cost and maintenance value method (CMV).
b) Purchase price value method (PPV)

The purchase price value method is commonly used as an alternative to fixed standard value for 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. However, cost and maintenance value method
is rarely used in practice.

12.2 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.
Where the livestock are taxable the cost on acquisition shall be as follows:
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.

12.3 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. 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).

Example
Mr. L Gumbo has just moved into a farm, previously owned by Mr. Taylor who has relocated to
Mozambique.
Mr. Gumbo commenced livestock farming, and his first year return showed the following:
Purchases
Number 1 5 20 10 15 30
Herd Bull Cows Oxen Heifers Tollies Calves
Cost each 1900 1600 1500 800 750 500

It cost him $15 500 to maintain the herd to the end of the year. There was no movement in the herd during
the year, and the same number is still in stock as at 31 December.
For the purposes of valuation of closing stock he adopts PPV for the bulls and FSV’s as follows:

Herd Cows Oxen Heifers Tollies Calves

FSV each 2000 1900 1100 1000 650
Required:
a) To compute his closing stock value
b) To compute his taxable income

Solution

a) Closing stock valuation

Class No in Stock FSV/PPV($) Value($)
Bull 1 1900 1 900
Cows 5 2000 10 000
Oxen 20 1900 38 000
Heifers 10 1100 11 000
Tollies 15 1000 15 000
Calves 30 650 19 500
81 95 400

Note: Bulls are normally valued at purchase price.

b) Taxable income

LIVESTOCK TRADING ACCOUNT FOR THE YEAR ENDED 31 DECEMBER ……

Purchases Sales -
Bull [1x 1900] 1900 Closing stock 95 400
Cows [ 5 x1600] 8000
Oxen [20x 1500] 30 000
Heifers [10 x 800] 8 000
Tollies [15 x750] 11 250
Calves [30 x500] 15 000
74 150
Direct expenses 15 500
Profit 5 750
95 400 95 400

NB Fixed standard values are used for the purposes of closing stock. Purchases are recorded at original purchase
prices or cost, while sales are shown at actual selling price. Deaths are not valued at all.

12.3 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. Where this is
applicable, before a trading account is prepared, livestock reconciliation must be prepared.
Example
Simon Mayo commenced farming operations in the Matopos farming area. He submitted the accounts to 31
December, which includes the following information.
a) Livestock purchases during the year

Number 2 100 90 50 70 40
Herd Bull Cows Oxen Heifers Tollies Calves
Total value 29,000 550,000 600,000 300,000 550,000 155,000

b) The commissioner adopted the following FSV’s.

Herd Cows Oxen Heifers Tollies Calves
FSV each 9500 7000 5000 6500 1500
c) There were 30 births, 4 deaths (2 Tollies and 2 cows), 30 heifers became cows, 15 Tollies became
oxen, and of the 20 calves half became Tollies and half heifers.
d) 100 herd was sold for $1 200 000 , of which 60 were oxen and 40 cows
e) Direct herd expenses amounted to $90 500
Required
(a) To prepare a reconciliation account
(b) Compute the taxpayer’s taxable income.

Solution
LIVESTOCK RECONCILIATION ACCOUNT
Details Bull Cows Oxen Tollies Heifers calves Total
Purchase 2 100 90 70 50 40 352
Births 30 30
Promotion in 30 15 10 10 65
Sub-total 2 130 105 80 60 70 447
Deaths 2 2 4
Promotion out 15 30 20 65
Sales 40 60 100
Closing stock 2 88 45 63 30 50 278
PPV/FSV 14,500 9,500 7,000 6,500 5,000 1,500
Value 29,000 836,000 315,000 409,500 150,000 75,000 1,814,500

(b) TRADING PROFIT ACCOUNT FOR THE YEAR ENDED DECEMBER…..

$
Sales 1,200,000
Less cost of sales
Opening stock -
Purchases 2,184,000
2,184,000
Less Closing stock 1,814,500 369,500
Gross profit 830,500
Less Livestock expenses 90,500
Net profit 740,000

12.5 Special concessions applicable to farmers

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

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.

Fencing
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.

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:

Drought, epidemic or farm acquisition sale xxx

Less : cost of sales
Purchases [number sold x FSV] xxx
Direct expenses* xxx xxx
Taxable income xxx

*Direct expenses are arrived at as follows:

Number sold x livestock expenses
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

EXAMPLE
Mr. Farmer sold 10 cows and 25 oxen in an epidemic area and realized $4 000 000.The F.S.Vs for oxen
and cows which had been on hand at the beginning of the year were $13000 and $15000 respectively.
Opening stock was 260 herds and closing stock 210.The direct livestock expenses were estimated to be
$450 000.Calculate minimum taxable income from epidemic sales.
SOLUTION
Epidemic sales 4,000,000
Less: Cost of herd sold
Cows: 10 at 15000 150 000
Oxen: 25 at 13000 325 000
475 000
Less: Expenses related to herd sold
Cost incurred x herd sold
½{open stock + closing stock}
=35 x450 000 = 67 021 542,021
235 3,457,979

Taxable income: 3 457 979 = 1 152659 p.a.

3
c) 7 schedule paragraph 6: Restocking Allowance.
th

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).In the event of him exceeding the assessed
carrying capacity of the land the maximum restocking allowance granted is:
AxB
2xC
Where:
A is cost of the livestock purchased
B is difference between ACCL and stock on hand immediately before purchase.
C is the number of livestock purchased
The carrying of the land is the number of livestock which must be kept in the farm. The difference as
aforesaid is the assessed carrying capacity of the land less the number held immediately before purchase to
restock.
EXAMPLE
Due to favorable weather conditions, Mr. Farmer restocked his herd which was depleted by drought. He
purchased 300 herd for $930 000.The ACCL as approved was 500 herds. The herd on hand before
purchases was 300.Calculate the restocking allowance.
SOLUTION
Restocking allowance = A x B
2 C

= 930 000 x 200 = 310 000

2 300

Further points about farming

The market value of crops sold together with the farm or land is brought into gross income in terms
of s 8(1) (g)
Temporary farm roads qualify for a deduction in full
Permanent farm roads are regarded as farm improvements on which SIA or wear & tear can be
claimed.
Exam- type
Questions
John Vooster, a farmer in Ziruvi area of Chivi has been operating mixed farming until 31 July 2003 when his
farm was gazetteer for listing by the government for redistribution to landless local small farmers. He was
given up to 31 January 2004 to wind up his affairs, and was paid a compensation of $7.2 million on
November 2003, which was allocated as follows:
• Farm house 1 200 000
• Farm 3,000,000
• Machinery 880 000
• Farm implements 120 000
• Crops growing on the farm 2,000,000
7 200 000
He submitted the following livestock trading account

Opening Stock
FSV $
1Bull - 4 500 Sales 500 000
12 Oxen 2000 24 000 Estimated closing stock 175 000
14 Cows 1500 21 000
30 Calves 700 21 000
20 Tollies 1200 24 000
15 Heifers 1300 19 500
114 000
Livestock expenses 246 000
Gross Profit 315 000

675 000 675 000

Further information provided:

(a) The following movement in the herd took place during the year; 2 oxen were donated to villagers, 3 Tollies died,
and 6 became oxen, 14 calves were born, 10 of them became heifers and 12 Tollies.
(b) 60 herds were sold. Comprising of 15 oxen , 20 heifers, 20tollies ,and 5 cows. The sale was occasioned by the
impending farm acquisition.
(c) The following FSV’s were accepted for valuation of closing stock by the commissioner

Herd Cows Oxen Heifers Tollies Calves

FSV each 2000 2500 1400 1500 800

(d) The following assets were reflected in his books on 1 January 2003
Asset Cost ITV
Machinery 1 200 000 650 000
Farm implements 200 000 25 000
Truck 850 000 525 000
No allowances were claimed on these assets. The truck was gutted by fire on 6 June 2003 following a dispute with
local villagers . He received $675 000 from an insurance company as compensation. The truck was used 80% for the
purposes of trade. The rest of the assets were acquired together with the farm.
(e) The following capital expenditure was incurred by him up to 31 July 2003;

Constructed permanent farm roads $759 000

Tobacco barn constructed $ 1200 000

Dam $ 245 000
A separate arrangement was made for the disposal of the assets with a local villager who was to occupy the
farmhouse. The agreed purchase was $2 500 000, allocated to individual assets as follows:

Constructed permanent farm roads $1,000,000

Tobacco barn $ 1 100 000

Dam $ 400 000
Capital allowances were claimed on the assets before sale.
(f) Operating expenses for the year amounted to $1 900 000including among others:

Installation of window lighting 4,500

Motor vehicle expenses 140,000

Mr. Vooster’s life policy 65,000

Depreciation 240,000

Irrecoverable loans to employees 412,000
Note: Motor vehicle expenses in respect of the truck stated above
(g) Taxable income brought from 31 December 2002 tax in respect of an election for drought sale made in that year
amounted to $700 000.
(h) His net profit after consideration of all the above items was 2,100,000.

Compute his minimum taxable income

QUESTION 3

Farmer Mr Orr submits the following accounts in support of his return for the year ended 31 December
2003.

Livestock Account
Head Head
Opening stock
2 Bulls @ $200 400 100 Sales
60 Cows @ $60 3 600 20 Deaths 140 000
20 Oxen @ $60 1 200 Closing stock
10 Steers @ $30 300 5 Bulls @ $200 1 000
10 Heifers @ $20 200 150 Cow @ $60 9 000
40 Tollies @ $20 800 30 Oxen @ $60 1 800
50 Calves @ $10 500 7 000 60 Steers @ $30 1 800
20 Heifers @ $20 400
30 Tollies @ $20 600
 110 Calves @ $10 1 100 15 700

Purchases
1 Bull 8 000
2 Bulls @ $3 000 6 000
80 Cows 60 000
80 Steers 60 000 134 000
50 Inherited -
120 Births -
___ Profit 14 700 ____ _______
525 $155 700 525 $155 700

b) Profit and loss account

Expenditure Income

Livestock expenses 76 000 Livestock profit 14 700

Crop labour, wages and rations 70 000 Tobacco sales 418 000
Fertiliser 60 000 Maize sales 178 000
Electricity 12 000 Insurance claim 20 000
Motor vehicle expenses 30 000 Sales tax refund 2 000
Repairs to machinery 9 000 Proceeds from sale of truck 51 000
Interest 20 000 Interest 10 500
General expenses 7 600 Free benefits 15 000
Insurance 29 900 Farmers Co-op dividends 500
Sundry expenses 21 500
Fencing 20 000
Hire charge 22 000
Depreciation 80 000
Net profit 251 700 _______
$709 700 $709 700

Notes
1.The taxpayer inherited 50 head of cattle from his late father’s estate and incorporated them into his own herd. The
following is established:
Inheritance FSV of late father Value for estate duty

30 cows $3000 $37 500

20 oxen $2500 $25 000
62 500

2. 50 Steers were sold as a result of the drought for $70,000, and is included in the sales figure.
3. The interest paid was in respect of a loan of $100,000. Of this amount $50,000 was used to build a house,
which was completed during the year, and $25,000 was invested in bank savings. The balance was used to
finance worker’s wages and the payment of fertilizer accounts.
4. The amount of $20,000 claimed in respect of fencing is the net amount after crediting $5,000 grant-in –aid
received during the year
5. The insurance payment of $20,000 was a result of a claim made by the taxpayer when his grading shed was
burnt down. He built a new one for $30,000.
6. The sale tax refund was in respect of irrigation equipment purchased in the previous year
7. General expenses includes:
• Replacement of tilita clips 5,000
• Legal fees in respect of water rights 600
• Packing materials 2,000
8. Insurance includes:
• Valuation of buildings –fire insurance 1,000
• Fire insurance 3,900
 • Hail insurance 20,000
• Life assurance-Mr. Orr 5,000
9. Sundry expenses:
• Aerial survey 5,000
• Contour ridges 7,000
• Temporary roads 2,000
• Donation to Church 500
• Loan raising fee (re loan of $100,000) 6,000
10. Assets – additions during the year:
• Tobacco barns 80,000
• Grading shed 30,000
• Homestead 80,000
• Landover 87,365

The tobacco barns and grading shed were completed in time for the 2003 tobacco season.

Mr. Orr advises that he has commenced work on building a new dam. His expenses totaled $143,838 by
the year-end. He will complete the dam in the following year.
11. Assets – ITVs at beginning of the year:
• Grading shed 12,000
• Plant and equipment 120,000
• Irrigation equipment 20,000
• Truck 30,000

12. The truck was sold in Mozambique for the equivalent of $51,000. The original cost was $50,000.

Compute his minimum tax, assuming no SIA is claimed

Question 3
Mr. Booths sold his farm in Zhombe Midlands to Albright investments, a company incorporated on 29 December
2002.In terms of the sale agreement, the farm was sold to Albright investments at $15,000,000 allocated as follows:
Land 7,500,000
Growing crops 1,800,000
Dam 700,000
Fencing 200,000
Farm School 4,500,000
Staff housing 300,000
15,000,000
Additions
Temporary farm roads 500,000
Permanent roads 800,000
Fencing 50,000
New staff housing 600,000
Mazda 626 (purchased 1/7/02) 620,000
Combine harvester (2/6/02) 230,000
Tractor (1/5/02) 400,000
Plant and machinery (4/9/02) 160,000
Dam 140,000
Farm clinic 4,000,000

Notes
1. The company made a net profit of $2,500,000 for the year ended 31 December 2003 before adjustment of the above
items.
2. Albright investment could not raise enough students for the school accordingly 75% of the students was secured
from local villages.
3.The number of patients visiting the farm clinic was restricted to those working on the farm.
4. The company received $150,000 as dividends on 1 September 2003,from South Africa.

Compute Albright’s maximum tax payable for the year ended 31 December 2003. [CIS]

Chapter 13

MINING
(SECTION 15(2)(f) ARW 5TH SCHEDULE)

13.0 Introduction
A miner is assessed in a manner similar to that applicable to a trader with certain exceptions notably:
Method of claiming capital allowances
Indefinite carrying forward of assessed losses i.e. s15(3)
A more favorable rate of tax on his taxable income of 25%
Houses constructed for employees of the mine are not restricted to $3,000,000 in order to qualify
for capital allowances. However, houses constructed for nurses or teachers’ houses have a restricted cost
of $1,000,000,wherever situated but there is no restriction on the qualifying amount.
A miner’s recoupoment is calculated in accordance with s 8 (I) (i)
 All above aspects are set out in the 5th schedule, and is the authority for taxing miners. Make sure
you are familiar with the words – capital expenditure and Capital Redemption Allowance (CRA).

13.1 Capital expenditure

Means expenditure on mine buildings, works or equipment, lease premiums, shaft sinking, general
administration and management expenditure incurred prior to production, interest on loan, staff
houses (for owners and directors), mining school, mining clinic or hospital etc.

Provided that capital expenditure shall not include:

In the case of a mine, which is owned, tributed or leased by a company, which is under the control
of not more than four individuals, any expenditure in excess of $1,000,000, tax year ($250,000 2002) in
respect of a staff housing.
In respect of any one such school, hospital, nursing home clinic any expenditure in excess of
$10,000 000 ($3.5million 2002).
In case of a passenger motor vehicle, any expenditure in excess of $1,000 000, ($500,000: 2002).

13.2 Capital redemption allowances (CRA)

The allowance is granted on capital expenditure. No capital redemption allowances arise until the
year of assessment in which the mine first commences production.

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).

*NB – Never calculate S1A or wear and tear in mining.

13.3 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. In other words, it refers to 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.

Where an estimated life of mine is used a taxpayer must submit to the commissioner for approval, an
estimate of years for which operations are expected to continue – based on certified estimate of ore
reserves.

A new estimate is required each year of assessment and is counted from the beginning of the year of
assessment.

13.4 Computation of capital redemption allowance (CRA)

There are three methods used in calculating capital redemption allowance namely:
(a) New Mine Basis
(b) Life of Mine Basis
(c) Mixed Basis

(a) NEW MINE BASIS

 A person who conducts mining operations in a new mine may elect to deduct in the year of
assessment 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).

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

CRA= balance b/f + Current expenditure

(b) LIFE OF MINE BASIS

Where this method is adopted a taxpayer must make an estimate of the life span of the mine, and
submit it for approval by the commissioner.

Capital redemption allowance computed thus:-

Capital expenditure ranking for CRA less recoupment is divided by the life of mine i.e.

Capital expenditure OR Balance b/f –recoupment + CE

Life of mine Life of mine

CE is current expenditure

For simplicity the above formula can be expressed as follows:

DETERMINATION OF CRA FOR THE YEAR ENDED……………………..

Unredeemed balance of capital expenditure b/f xxx

Less Recoupment (xxx)
xxx
Add Current year capital expenditure xxx
Total capital expenditure xxx
Less* CRA (xxx)
Unredeemed balance of capital expenditure C/F xxx

*CRA = Balance b/f –recoupment + CE

Life of mine
Note:
(1) The method relate to mine owning individuals and companies
In the case of a tribute mine the position is as follows
(a) 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.
(b) 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 grants an allowance either over the period of tribute or on a
percentage of costs basis such as in the case of wear and tear.
(2) No allowance is calculated until production stage is reached.
(3) Life of mine is computed from the beginning of the year of assessment.
(c) MIXED BASIS
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 spread
over the life of the mine i.e.

DETERMINATION OF CRA FOR THE YEAR ENDED………..

Unredeemed balance of capital expenditure b/f xxx

Less Recoupment (xxx)
Sub total xxx

Add Current year expenditure (CE) xxx

Total capital expenditure xxx
Less *CRA (xxx)
Unredeemed balance of capital expenditure C/F xxx

*CRA = Balance b/f –recoupment + CE

Life of mine

Example
Madhatter 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 the
current year i.e. year 3.

YEAR 1 & 2
$
Plant and Machinery 4,000,000
Shaft Sinking 1,000,000
Mine Building 3,000,000
Salaries and wages 5,000,000
13,000,000
CURRENT YEAR
Salaries and wages 6,000,000
Passenger Motor Vehicle 1, 600,000
Lease premiums 1,000,000
8,600,000
Life of mine is 3 years from the end of year 3.

Required to calculate
CRA based on each of the method stated above:

SOLUTION

NEW MINE BASIS

Balance b/f from previous year
Plant and Machinery 4,000,000
Shaft Sinking 1,000,000
Mine Building 3,000,000
Salaries and wages (pre-production) 5,000,000
13,000,000
 Add Current capital expenditure
Salaries and wages (Post-production) -
Passenger motor vehicle (restricted cost) 1,000,000
Lease premiums 1,000,000
Total 15,000,000

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

LIFE OF MINE BASIS

Balance b/f from previous year
Plant and Machinery 4,000,000
Shaft Sinking 1,000,000
Mine Building 3,000,000
Salaries and wages (pre-production) 5,000,000
13,000,000
Add Current capital expenditure
Salaries and wages (Post-production) -
Passenger motor vehicle (restricted cost) 1,000,000
Lease premiums 1,000,000
15,000,000
Less CRA 3,750,000
Unredeemed balance of capital expenditure C/F 11,250,000

CRA = Balance b/f –recoupment + CE = 15 000 000

Life of mine 4 years

*NB Life of mine is counted from the beginning of the year of assessment concerned i.e. current
year.

MIXED BASIS METHOD

Determination of Capital Redemption Allowances

Unredeemed balance of capital expenditure b/f

- Plant and machinery 4,000,000
- Shaft Sinking 1,000,000
- Mine Building 3,000,000
- Salaries and wages 5,000,000
13,000,000
Add current year capital expenditure (CE) 1,500,000
- Salaries and wages (post production) -
- Passenger motor vehicle (restricted cost) 1,000,000
- Lease premiums 1,000,000
Less CRA 15,000,000
4,750,000
10,250,000

*CRA = Balance b/f –recoupment + CE

Life of mine

= $13,000,000 + 1 500 000 = $4,750,000

4
 NB life of mine is counted from the beginning of current year of assessment. Under this method
current capital expenditure is claimed in full.

13.5 Other provisions about mining

6.1 Recoupment-s 8(1)(i)
Miner’s recoupment is not restricted to allowances previously granted. It is simply sale
proceeds less ITV i.e. (sale proceeds is greater than 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.

Where recoupment comes on the sale of the asset, which has been the subject of replacement
election, and a recovery, usually by way of insurance proceeds. In respect of damage to or
destruction of an asset, the recoupment is restricted to allowances previously granted.

6.2 PROSPECTING EXPENDITURE-S15 (2)(f)(ii)

This is expenditure incurred by taxpayer on operation either in searching for potential
claim or in searching for minerals after the claim has been pegged such expenditure is
allowable in the year of assessment in which it is so incurred. In the absences of
income such expenditure maybe carried forward to be allowed against subsequent
income from the mining operations.

SALE OF MINING CLAIMS-s9

If any part of taxable income is attributed to sale of a mining claim the taxpayer may elect that
such part of his taxable income be spread over four years. Provided that, any outstanding
installments are brought into gross income in the event of death, insolvency or winding up of a
company.
Profit on sale of claim is usually the difference between the selling price of a claim and its cost
incest of claim. However, where the cost of claim is not available profit is the sale proceeds

NB Purchase or expenditure on mining claim is not regarded as capital expenditure.

6.3 REPLACEMENT ELECTION-para 6,5th schedule

Regardless of whichever of the above basis for claiming capital redemption allowance a
taxpayer might have chosen, a taxpayer with a producing mine may elect further to deduct in
full the cost of replacing any capital asset, provided that such cost does not exceed forty
thousand dollars ($40 000).

6.4 TRANSFER OF ASSETS

Where assets are transferred between companies under the same control, or between husband
and wife or in a scheme of localization if the taxpayer so elect, there shall be no recoupment in
the hands of the transferor. .

2. ACTIVITY – 1
N.A Mining Pvt. LTD is a gold mining company located 10km Northwest of Zvishavane. It is
controlled by three individuals. The mine has been in operation since 1 July 1986, but has been
making losses since inception. The total accumulated losses as at 1 January 2003 amounted to
ten million five hundred thousand (10 500 000).
 It submitted the following with its returns for the year ended 31 December 2003.
(a) Net profit as per accounts 140,000,000
After debiting total expenditure 195,000,100
This includes among others:
- Depreciation 15,000,000
- Shaft sinking 9,500,000
- lease premiums on Mazda 626 7,000,000
- Salaries and wage 109,000,000
- Depletion allowances 500,000
- Goodwill 65,000

The following items were credited

- Profit on sale of equipment (see note) 40,000
- Export incentive grant 1,000,000
- Sale mining claim (see note) 400,000

(b) Capital Expenditure

(i) Balance of capital expenditure B/F 624,000
(ii) Current capital expenditure
- Pajero for the General Manager 3,000,000
- Twin cab for the financial controller 2,500,000
- 50 medium density houses for
Supervisory staff 50,000,000
- Renewal of plant 35 000
- director (shareholder)house
Constructed 30km from mine site 450,000
- Shaft sinking 700,000
- Plant and machinery 750,000

NOTES
-During the year equipment with a net book value of $160,000 was sold for $200,000 making a profit of $40
000 on the transaction.
- A mining claim was sold for $400 000 during the year.
- The taxpayer estimated the life of mine to be 22 years from 1 January 2004

Required
Minimum tax liability.

Answer at the end of the Chapter.

13.6 Amendments in mining

(a) Interest
To be prohibited as deduction is an interest paid by a local branch or subsidiary to its holding
company or Head Office, in servicing any debt or debts contracted in connection with production of
mining income to the extent that it exceeds debt to equity ratio 3:1.
The disallowed interest will be treated as dividends for purposes of s 26.

(b) General administration and management fees

To be prohibited as a deduction is general administration and management fees paid by a local
branch or subsidiary of a foreign company engaging in local mining operations.
 In respect of such expenditure as is paid before commencement of production to the extent that is
exceeds 0.75% of:

A – (B + C)
Where,
A – Represents the total expenditure qualifying for deduction in terms of s 15.
B – Represents general administration and management fees paid outside
Zimbabwe.
C – Capital redemption allowance

In the case of such expenditure as is paid after commencement of production to the extent that it
exceeds 1% of the above formula.

(c) Ring fencing

With effect from 1 January 2001 each mine is assessed separately the effect is to repeal paragraph
5 of 5th schedule.

ACTIVITY 2
Tropical Mines (PVT) Ltd is a mining company operating a gold mine in Mvuma in Zimbabwe. 80% of the
company’s issued share capital is owned by Broken Hill Investments plc, an Australian company which has
its head office in Alice Springs, while the balance of 20% is held by Zhunde (Pvt.) Ltd, a Zimbabwean
registered company.

The financial year ended of Tropical mines (Pvt.) ltd is 31 October each year and in respect of the financial
year to 31 October 2001, the net accounting profit per the financial statements was
$8 500 000. The income statement was credited with amounts, which included:

$
Export incentive grant 400 000
Interest on tax reserve certificates 50 000

Total debits were $12,000,000 and these include:

Interest on long term debt (see note) 3 500 000
Management fees (see note) 250 000
Depreciation 1 200 000

The following is an extract from the balance sheet of Tropical Mines (Pvt.) LTD as at 31 October 2001:

Issued share capital 4,000,000

Retained earnings 6,000,000
Shareholders equity 10,000,000

Long term debt 35,000,000

Current liabilities 6,000,000

The capital redemption allowance, which is tax deductible for the current year, is $2,000,000.

NOTES:
(i) The interest expense is payable to an offshore bank (based in Brussels) which had provided
the long-term loan reflected in the balance sheet.
 (ii) The management fees are payable to the Australian parent company but arrangements for its
payment have not yet been made.
(iii) The current liabilities as at 31 October included a proposed dividend of $2,000,000.

The public officer of Tropical Mines (Pvt.) LTD has approached you in your capacity as a tax consultant to
assist with identifying all the tax liabilities associated with the payment of interest, management fee and
dividends. In addition she needs assistance in computing the taxable income of the company for the 2001
tax year, especially in view of the changes in tax legislation governing the taxation of mining companies
promulgated in January 2001.

Required:
(a) Identify the taxes associated with the prospective remittances of interest, management fees and
dividends, qualifying them where possible and indicating when these amounts should be paid to
the Revenue Commissioner
(b) Explain and compute the tax-deductible portions of the interest and management fees in
accordance with the limitation provided for in the Income Tax Act (cap 23:06)
(c) Compute the taxable income and liability for tax year ended December 2001. [ACCA]. Answer at the
end of chapter

CESSATION OF MINING OPERATIONS

(a) If the cessation is due to the life of the mine having come to an end or in the case of a mine
worked under a concession, the concession having expired, the balance of the unredeemed
capital expenditure is allowable as a deduction in the year of cessation of mining operations.
(b) If however the taxpayer has abandoned the mine e.g. by forfeiture of a claim before its life has
come to an end, the unredeemed balance of capital expenditure is not deductible unless he
can show that there has been a material change of circumstance necessitating the revision of
the life of a mine.

CHAPTER SUMMARY
Mining is a common topic with most examiners. Whatever approach or whatever question the examiner might set, the
key aspects likely to be included are:
• Computation of capital redemption allowance
• Treatment of recoupment in the accounts
• Treatment of replacements
Key points

CRA, replaces most allowances contained in 4th schedule of the Income Tax Act, leases premiums and
section 15(2)(t).

CRA is granted on capital expenditure. Capital Expenditure definition is set out in paragraph 1, 5th schedule.

There are tree methods used in calculating namely
• New Mine Basis
• Life of Mine Basis
• Mixed Basis

No CRA is calculated until the mine has reached production stage

Each mine is assessed separately with effect from 1 January 2001

EXAM TYPE
QUESTION

Question 1
Windfall Investments plc, a mining company with Head Office in London, submitted the following information
for assessment, for the year ended 31 December 2003.
The state of Windfall Investments plc at 1 January 2003 was as follows:

Assessed loss brought forward $115 000

The unredeemed balance of capital expenditure was $912 000

Life of mine is 10years from 1 January 2004

In respect of the tax year ended 31 December 2003 Windfall Investments plc’s financial statements
indicated:

i. Net Profit per accounts 199, 000,000

ii After crediting among others:

Interest on tax reserve certificate 200,000

Profit on sale of mining claim 950,000

Sale proceeds of grinder 250,000
iii. After debiting among others:

Depreciation 150,000

Interest paid to Head Office 900,000

Purchase of a mine claim 2,500,000
Iv Current capital expenditure for the year:

Mining buildings 3,000,000

Constructed house for general manager 500,000

House for financial controller 950,000

House for new nurse for mine clinic 550,000

Twin cab for financial controller 300,000

Construction of mine clinic 10,500,000

Shaft sinking 500,000

V Balance sheet extract indicated:

• Shareholders’ equity 14, 000,000
• Long term loan from Head Office 55,000,000

Compute the taxpayer’s minimum tax liability (it’s not a new mine)

Question 2
You are the Audit manager of Towanda and Partners Audit Firm, and you are in the process of finalizing
your client Almond Mining (Pvt.) Limited audit report. The following financial statement, which was prepared
by the Accountant for tax purposes, is brought to your attention. Almond produces iron from a tribute mine.

ALMOND MINING PVT LTD

COMPUTATION OF TAXABLE INCOME FOR THE YEAR ENDED 31DECEMBER 2003
Net profit as per statement 311,000,000
Add: Depreciation 11,000,000
Pilferage by stores man 36,000
Repairs (note 1) 164,000
Motor vehicle expenses (note 2) 120,000
Goodwill 190,000 11,510,000
322,510,000

Less: CRA (note 3) 30,500,000

Renewal expenditure (note 4) 40,000 30,540,000
Taxable income 291 970,000

Tax there on (30% x 291 970 000) 87 591,000

Add: 3% Aids 2,627,730
Tax liability 90 218,730

NOTES
1. Mr. Towers who absconded on 3 January was letting the mine’s property, on which some repairs were
effected on 3 March 2003, the property was unproductive through out the year.
2. Mr. Tomas, the sales manager was granted free use of Mazda 626. He claimed that his free use is only
20% while the rest is for business of the employer. Motoring expenses shown in the accounts represent
20% private motoring expenses by him.
3. CRA was arrived at as follows:
Balance of capital expenditure b/f 2,830,000
Less: Recoupment (30,000)
2,800,000
Current Capital Expenditure
• Plant and machinery 800,000
• Mining school 1 5,000,000
• Mazda 626 for sales manager 10,000,000
• Prospecting expenditure 530,000
• Renewal expenditure (note 4) 20, 000
• Teacher’s house 1750,000
• Purchase of mining claim 2,000,000 30,100,000
Less *CRA (30 500 000)
Balance of capital expenditure C/F 2 400 000

Period of tribute is 7 years from the beginning of the tax year 2003. Mixed basis method was elected
*CRA = 2 800 000 + 30 500 000
7
= $30 500 000
4. During the year the company incurred expenditure on replacement of equipment amounting to $60 000,
the Accountant elected to claim $40 000 in full in terms of the provisions of Income Tax Act.

Required
a. Write a report indication whether items contained in note 1 – 4 were correctly treated
b. Compute Almond Mining Pvt. Limited Tax liability for the year ended 31 December 2003

ANSWER TO ACTIVITIES

Activity 1
NA MINING (Pvt.) LTD

COMPUTATION OF TAX LIABILITY FOR THE YEAR ENDED 31 DECEMBER 2003

Net profit as per statement 140,000,000

Add: Depreciation 15,000,000
Shaft Sinking 9,500,000
Lease premium Mazda 626 7,000,000
Depletion allowances 500,000
 Salaries and wages (correct) -
Goodwill 65,000 32,065,000

Less Profit on sale of equipment 40,000

Export incentive grant (exempt) 1,000,000
Sale of mining claim (taxable over 4 yrs i.e.
400 000 – ¾ X 400 000) 300,000
Renewal of plant 35,000
CRA (w1) 64,421,200
Assessed losses 10,500,000 (76,296,200)
Taxable income 95,768,800

Tax thereon [0, 2575 x 95,768,800, inclusive of Aids Levy] 24,660,466

Working 1
DETERMINATION OF CRA FOR THE YEAR ENDED 31 DECEMBER 2003
Balance of capital expenditure b/f 624 000
Less: Recoupment equipment 200 000
424 000

Add Current capital expenditure :

Shaft sinking 9,500,000
Lease premium (s16 (1)(K) 1,000,000
Pajero for general manager (restricted) 1,000,000
Twin cab restricted 1,000,000
50 houses medium density(not restricted) 50,000,000
Renewal expenditure (paragraph 6 5th schedule) -
Director’s house 450,000
Shaft sinking 700,000
Plant and machinery 750 000 64 400 000
64 824 000
less: *CRA 64 421 200
Capital expenditure c/f 402 800

CRA = 424 000 + 64 400 000 =64,421,200

20 years
NB: Maximum life of mine is 20 year for other minerals.

ACTIVITY 2

1. TAXES ASSOCIATED WITH THE REMITTANCES

INTEREST
Interest will be subject to a 10% Non Resident Tax on Interest (NRTI). The withholding tax (NRTI) (in this
case $350 000) will be due to be paid to the Revenue Commissioner General 30 days from date of payment
or 30 days from the interest has been credited to the recipient’s account and has become entitled to it.
Note 10% withhold was in respect of 2000 tax year. The rate is 20% for 2003-tax year.

MANAGEMENT FEES
A Non Resident Tax on Fees (NRTF) of 20% is deductible from the management fees and this amount ($25
000) becomes due and payable to the Revenue Authority 30 days. After payment of the fees or 30 days
from the time the beneficiary is credited with the amount so that he (it) becomes entitled to it.
DIVIDENDS
Although local dividends paid to Zimbabwean companies are not subject to a withholding tax, if such a
dividend is paid to a non-resident beneficiary, then a withholding tax of 20% is deductible. In this case the
dividend to Brocken plc is subject to a withholding tax of $320 000, which becomes payable 30 days after
payment of the dividend or 30 days after the dividend has been credited to the beneficiary’s account. The
dividend payable to Zhunde (Pvt.) LTD is not subject to any withholding tax.

2. TAX DEDUCTIBLE PORTION OF INTEREST AND MANAGEMENT FEE

INTEREST
The deductible portion of interest is restricted to a maximum of the interest chargeable on the portion of debt
which when compared to the shareholders’ equity ratio does not exceed 3:1. Any portion of interest on the
portion of debt above the debt equity ratio of 3:1 threshold is not deductible in terms of the provisions of the
Income Tax Act (CAP 23:06)

Calculation :
Shareholder’s equity $10,000,000
Current debt $35,000,000
Portion above threshold $5,000,000

Interest attributable to portion of debt

Above threshold:

5,000,000 x 3,500,000 $500 000

35,000,000

MANAGEMENT FEES
The portion of management fees which is deductible for tax purposes is limited to an amount equal to 1% of
an amount calculated per the following formula A – (B + C)

Where
A – Expenditure deductible in terms of S.15(2) of the income Tax Act (cap 23:06); which is essentially the
deductible expenditure.

B – Expenditure on general administration and management paid outside Zimbabwe by a subsidiary mining
company of a foreign mining company.

C – Represents expenditure deductible in terms of s.15 (2)(f)(i) of the Income Tax Act, namely capital
redemption allowance as outline in the 5th schedule.

CALCULATION
A is equal to $12,000,000 + 2,000,000 = 14,000,000
B = 250,000
C = 2,000,000
1% of 14,000,000 – (250,000 + 2,000,000)
1% of 11 750 000
Portion not allowable : $250 000 - $117 500 = 132 500

(ii) COMPUTATION OF TAXABLE INCOME

Profit per accounts 8 500 000
Export incentive – exempt -
Interest on Tax Reserve certificates – exempt -
Non deductible portion of interest 500 000
Non deductible portion of management fees 132 500
Depreciation 1 200 000
9 882 500
Tax at 25% (only for mining companies) 2 470 625
3% Aids levy 74 119
2 544 744

Chapter 14

EXPORTERS

14.0 Introduction
Zimbabwean exports have been declining considerably over the past number of years. Major factors
contributing to the sharp decline are both political and economic factors. Generally, poor publicity, high cost
of production, poor quality of our products among others.

The government has been trying desperately to arrest this problem, however no major in roads have been
made so far. We continue to perform poorly on the export market.

Among the solutions that the government has tried to offer, the following are some of them that are related
to taxation;
(a) Tax holiday for new operators
(b) Favorable rate of tax
(c) Double deduction on export market development expenditure
(d) Special exemptions applicable to licensed investors.

NB – An exporter is a person who has been registered as a licensed investor or operator, for the purpose of
this chapter.

14.1 TAX HOLIDAY

All new companies operating in an export-processing zone are exempted from paying income tax in the first
five (5) years of operations.

14.2 FAVOURABLE RATE OF TAX

All licensed investors operating in an export-processing zone are taxable at the rate of 20% on any profits
made from such operations.
Provided that, new companies are taxable at the rate of 15% in the second five (5) years of arrangement.

14.3 EXPORT MARKET DEVELOPMENT EXPENDITURE

Licensed investors are allowed a double deduction in respect of any expenditure incurred by them on
developing or seeking foreign markets or opportunities. i.e.
a) Research into or obtaining information relating to foreign markets.
b) Research into the packaging or presentation of goods for sale outside Zimbabwe.
c) Advertising or promoting goods outside Zimbabwe.
d) Soliciting business outside Zimbabwe or participating in trade fairs.
e) Bring prospective buyers to Zimbabwe from outside Zimbabwe.
f) Providing samples of goods to people outside Zimbabwe etc.
The above expenditure should exclude any expenditure of a capital nature.

14.4 SPECIAL EXEMPTIONS APPLICABLE TO EXPORTORS

14.4.1 Licensed Investors

To be exempted in respect of a person operating in an export-processing Zone is;
(a) any amount paid by the state to an exporter in terms of a scheme for the development of export
trade, paragraph 14,3rd schedule.
(b) Licensed investors are exempted on imports of raw material and capital goods meant to be used
by them in manufacturing or production of goods to be exported by them.

14.4.2 Licensed Investor Employees

All persons employed by companies operating in an export-processing zone are not taxable on benefits
provided to them by the licensed investor i.e. on benefits arising from employment.
Provided that such benefits or allowances should not exceed 50% of total remuneration granted to the
employee by the investor. Any excess of the 50% is brought into gross income. Total remuneration is
inclusive of such benefits or allowances.

14.5 OTHER POINTS

A licensed investor is not required to withhold any tax in relation to his operations in an export-processing
zone. For further details about with holding taxes see chapter 19.
In order to be registered as an exporter or licensed investor one should export at least 60%(50%: 2003) of
his output. The output is measured in units or physical quantities.

14.6 BOOT ARRANGMENT

This is when a taxpayer builds any infrastructure which he will operate for some time.
Subsequently the infrastructure will be transferred to the State. Where such a situation occurs the
taxpayer will be taxable on the profits accruing there from, before transfer as follows:

1st 5 years of operation zero tax

2nd 5 years of operation taxable at 15%

3rd 5 years of arrangement 20%

CHAPTER SUMMARY
The chapter explores issues that are aimed or targeted at improving our performance on the international market.
Key Points

A double deduction is granted to licensed investors in respect of an expenditure incurred by them in seeking
markets outside Zimbabwe.

Licensed investors are taxable at a special rate of 20% on their profits.

Employees or persons employed by licensed investors in an export-processing zone are not taxable on
benefits or allowances provided to them by the licensed investor.

EXAM TYPE QUESTIONS

Question one
Anita Ncube age 46 is employed by a company operating in an export-processing zone and has the
following information for the year ended 31 December 2003.
Gross salary 2,000,000
Pensions contributions 208,000
School fees for two children 200,000
Company house allowance 95,000 per month
Bonus 350,000
Cost of living allowances 900,000
Cash in lieu 140,000
Motoring benefit ( 2700 cc) -
Required;
(a) Compute maximum exempt benefits applicable.
(b) Her tax liability for the year ended 31 December 2003.

Question two
Akin (Private) Ltd has just been granted a “licensed investor status”. Its chief executive officer has just
informed you that it intends to purchase machinery and plant from UK at $50,000,000. They would like to
know whether they would be required to pay any tax on importation. Suppose the machine has been
bought what capital allowance policy should it adopt and why?

Question three
Plotters (Pvt.) LTD, is a retail company importing and exporting printers. 60% of the company’s issued share
capital is owned by Graphic Printers plc, a Canadian company, while the balance of 40% is held by Divas
(Pvt.) LTD, a Zimbabwean registered company. Plotter (Pvt.) LTD was granted an export license in
December 1995.
The following are the summaries for the year ended 31 December 2003.
$
Net profit for the financial statement: 915,000,000
This was after crediting:
Export incentive grant 405,000
Profit on sale of equipment 95,000
Dividends from ZRC Zimbabwe 20,000
Interest on tax reserve certificate 80,000
Provision for exchange gains on debtors 40,000
Total debits were $ 1,100,000,000.00 and these include among others:
Salaries and wages 500,000,000
Allowances: Employees 400,000,000
Export market development Expenditure:
Advertising for goods outside Zimbabwe 190,000
Participating in South Africa trade fair 70,000
Sample of goods exported to a Canadian firm 1,050,000
Equipment for research outside Zimbabwe 1,500,000
Management Fees (See Note 1) 275,000
Interest on long term debt (See Note 2) 160,000
Depreciation (See Note 3) 200,000
Proposed Dividends 200,000
Notes
1. Management fees are payable to the Canadian Parent Company
2. Interest on long term debt is payable to a British Company which had provided off-Shore loan
 3. In 1999 the company purchased a specialized machine 623 for $ 800,000.00 and has a useful life
of 4 years.
4. The following item has not been taken into account:
On 1 Jan 2003 Plotters (Pvt.) LTD negotiated a loan with a local bank amounting to $
60,000,000.00 at 35% interest rate p.a. This loan was used to purchase six Mercedes
Benz for its six senior managers on 2 Jan 2003.
Required
a) Comment on :
Allowances – Employees, export development market expenditure, purchase of
specialized machine in 1999, and purchase of the six Mercedes Benz, quantifying income
or allowance where possible.
b) Identify taxes associated with remittance of interest, dividends and management
fees quantifying them where possible and indicating when these amounts should
be paid to ZIMRA
c) Compute the minimum taxable income and tax liability of Plotters (Pvt.) LTD for the year
ended 31 December 2003.
Chapter 15

CAPITAL GAINS TAX

15.0 Introduction
The definition of gross income in Sect. 8 (1) of the Income Tax Act excludes any amount of capital nature.
Receipts and accruals of a capital nature are therefore free of Income Tax Act. But the legislation has
singled out certain capital receipts and accruals and subjected them to Capital Gains Tax with effect from 1
August 1981. These proceeds are those derived from sale of a specified asset. A specified asset means an
immovable property or marketable securities. Excluded from the definition of a specified asset are mining
claims taxable under Sect. 9 of the Income Tax Act.
The framework for taxation of specified assets is similar to that of determination of taxable income:

15.1 Determination of Capital Gains (Losses)

Capital gains or losses are determined as follows:

DETERMINATION OF CAPITAL GAINS (LOSS) FOR THE YEAR ENDED……….

Gross Capital Amount (sect 8) xxx
Less: Recoupment (sect 8 Income Tax Act) xxx
xxx
Less Exemptions(sect 10) xxx
Capital Amount xxx

Less: Deductions
Section 11(2)(a) xxx
Section 11 (2) (b) xxx
xxx
Less Capital Allowances(sect 15 (2)(c) & 7th Sch, para 2 *ITA) xxx
xxx
Inflationary Allowance s11(2)(c )
50% x no# years asset held x cost i.e. s11(2)(a ) xxx
50% x no# years asset held x cost i.e. s11(2)(b ) xxx xxx
xxx
Selling expenses s 11(2)(d) xxx (xxx)
Capital gain(loss) xxx
* Refers to Income Tax Act.

After having laid out the above framework the only effort left is to identify those sections or cost items as
detailed below.

15.2 Gross Capital Amount (Sect. 8)

The definition of Gross Capital excludes any amount so received or accrued which is proved by the taxpayer
to constitute gross income. An example of items taxable under Income Tax Act is recoupment or recovery of
capital allowances. Only gains from a source within Zimbabwe are taxable under the Zimbabwe tax system.
Accordingly, any gains from the sale of shares registered in South Africa have its source in South Africa. A
homestead in Warren Park D Harare is from a source within Zimbabwe.

15.3 Deemed Sales

Certain transactions are deemed to be sales not withstanding the fact that no actual consideration has been
exchanged, as follows:

A disposal other than sale e.g. donations. For the purpose of determination of gross capital
amount; the fair market price in the hands of the donor is used.

Expropriation of assets: A specified asset shall be deemed to have been sold for the amount paid
by way of compensation.

Sale in execution of court order: Gross capital amount shall be the amount for which the specified
asset was sold.

Accrual by way of maturity or redemption of a specified asset: Gross capital amount is the
price/amount receivable at maturity.

Deed of Sale: The amount per agreement will be taken as the gross capital amount.
15.4 Exemptions
An exemption is any amount which is so received or accrued by the taxpayer, but which is not taxable in his
hands. Most of the capital gains exemptions are contained in the 3rd Schedule of the Income Tax Act,
paragraphs 1, 2, & 3. However, bodies mentioned in paragraphs 2(a), 2(c) & 2(f) are taxable on disposal of
their specified assets.
In addition to the above the following disposals or sales are also exempted.
 Realization/Distribution by executor of a specified asset forming part of a deceased estate.
 By societies not operating for the private pecuniary profit or gain by members.
 By building Societies.
 Sales of marketable securities being bond or stock in respect of any loan to the state or any
company all the shares of which are owned by the state, local authority or a statutory corporation
etc.
 Disposal of shares registered on the stock exchange with effect from 1 January 2002

15.5 Deductions
Deductions shall be allowable on any expenditure incurred by the taxpayer on acquisition or construction of
a specified asset, as follows:

a) Sect. 11(1) Exchange losses: It provides for the deductibility of any exchange losses
incurred by the taxpayer on the disposal of a specified asset. The amount to be deducted
shall be the amount actually paid in Zimbabwean currency.
b) Sect. 11(2) (a) Cost of Acquisition/Construction: To be deducted in respect of a specified
asset being sold, is the cost of its acquisition or construction (initial cost, transfer duty etc).
Where any part of the cost is recovered or allowed in determination of income tax no
further deduction shall be claimed. Expenses fitting this definition are capital allowances
and special deductions approvable to farmers S.15 (2) (z).
 A special treatment is required in respect of assets acquired through inheritance or
donation. The cost in respect of an item inherited in the hands of the taxpayer is the value
in the estate of the deceased. Yet for items acquired through donation the cost in the
hands of the taxpayer (donee) is:

The market value of the asset at the time of donation, for any donation made
before 1 August 1981.

The amount included in the donor’s gross income or gross capital amount,
whichever is applicable for a disposal after 1 August 1981.
c) Sect. 11 (2) (b) Improvements: This section provides for the deductibility of expenditure on
additions, alterations or improvements to existing specified asset, but not expenditure on
repairs -s 15(2) (b) Income Tax Act.
In the case of a capital amount arising from the sale of shares in a company which owns
immovable property, any expenditure incurred by the seller on alterations, improvements
or additions to the property shall be deemed to be expenditure incurred on addition of
shares.
d) Sect. 11 (2) (c) Inflation Allowance: This section provides for a 30% allowance on:

Section 11 (2) (a)

Section 11 (2) (b)
A 30% allowance is also granted in respect of capital allowances and special deductions
applicable to farmers, paragraph 2, 7th Schedule.
The allowance is granted in full even if the asset is used for a period less than a year. The
inflation allowance, which is an allowable deduction to the taxpayer, was increased from
15% to 30% with effect from 1 Jan 2002 (50%: 2003).
e) Sect. 11 (2) (d) Selling Expenses: To be allowable as a deduction is any expenditure
incurred by the taxpayer in connection with the sale of a specified asset, agents
commission, selling expenses etc.
f) Sect. 11 (2) (e) Bad Debts: A taxpayer shall be allowable as a deduction bad debts
resulting from a disposal of a specified asset. The conditions are the same as to those in
sect. 15 (2) (g) of the Income Tax Act:

The debts must be due and payable to the taxpayer.

The debts must have been included in the taxpayer’s capital amount either in any
previous year of assessment or in the current year.

Must be proved to the satisfaction of the commissioner to be irrecoverable.
g) Sect. 11 (2) (f) High Court expenses: An allowance is granted in respect of payments
made to High court on any case appealed by the taxpayer and successfully or
substantially won by him and which is related to capital gains.
h) Sect. 11 (2) (g) Supreme Court expenses: An allowance is granted for a tax appeal to the
Supreme court in respect of successfully or substantially won case.
i) Sect. 11 (2) (h) Non taxable gains: Where capital gain is $ 5,000.00 or less, the whole
amount shall not be taxable, or be carried forward to any future period.
j) Sect 11 (3) assessed losses: The taxpayer shall be allowed to deducted any capital loss
brought forward .However; no assessed loss may be carried forward for a period
exceeding 6 years. Carrying forward of assessed losses is not permissible where the
taxpayer has been declared insolvent, or has his estate assigned for the benefit of
creditors. A company registered under the Companies Act which converts in into a Private
Business Corporation (PBC) is allowed to carry forward its losses and vice verse.
Example
Nester purchased an industrial building on 1 September 1999 for $ 300,000.00, and transfer duty of $
12,500.00 was incurred when the property was purchased. The property was sold on 1 June 2002 for $
800,000.00. Prior to the sale the taxpayer had incurred $ 30,000.00 on rates to date of sale. Given that
allowances previously granted and now recouped amounted to $ 41,875.00.
Calculate any capital gain applicable.

Solution
Determination of Capital Gains (Losses) for the year ended 31 December 2002
$
Gross Capital amount (sect. 8) 800,000.00
Less: Recoupment 41,875.00
758,125.00
Less: Exemptions (sect. 10) -- - - - - -
758,125.00
Less: Deductions (sect. 11)
11 (2) (a) Cost 312,500.00
Capital allowance 41,875.00
270,625.00
11 (2) (c)Inflation
312,500.00 x 30%x 4 years 375,000.00 645,625.00 Capital
gains (losses) 112,500.00

Tax thereon $ 112,500.00 @ 20% 22,500.00

Notes
• Gains are taxable at the rate of 20%, an exception being any gains accruing to a person over the age of
59 years.
• Inflation allowance is 50% p.a. (30% 2002,and 15% before 2002)-never apportioned even if period is
less than a year.
• Recoupment and capital allowances should be eliminated from capital gains computations. These are
dealt with in the Income Tax Act.
• Rates payable on the property are allowable as a deduction in the determination of taxable income,
thus are not allowable as a deduction in capital gains.
• With effect from 1 January 1998, the tax year is now equivalent to the normal calendar year. The effect
of conversion was that 1997 had two tax years as follows:
1 April 1996 to 31 March 1997
1 April 1997 to 31 December 1997
15.6 Damage or destruction of an asset-s13
Where a specified asset is damaged or destroyed a sale is deemed to have taken place at a price paid by
way of insurance compensation. This is only applicable where the compensation is greater than the cost
plus cost of additions.
Example
Mr. Adrian Mike who is 60 years old purchased a commercial building in July 1997 at a cost of $200,000.00.
In August 1999 he constructed a garage on that property at a cost of $27,000.00. The main building was
gutted by fire on 1 September 2002 and was granted insurance compensation of $2.4 million.

What is the position under the Income Tax Act ?.

Solution
Determination of Capital Gains (losses) for year ended 31 December 2002
$
Gross Capital Amount 2,400,000.00
Less Deduction

S 11 (2) (a) cost 200,000,00

s 11 (2) (b) Additions 27,000.00
 227,000.00
Sect 11 (2) (c) Inflation
200,000.00 x 30% x 6yrs 360,000.00
27,000.00 x 30% x 4yrs 32,400.00 392,400.00
(619,400.00)
Capital gain (loss) 1,780,600.00

Tax thereon @ 10% 178,060.00

Note: The normal rate of tax on gains is 20%; an exception is in respect of disposal by a person over 59
years of age.

It is also important to note that the taxpayer has the potential to minimize tax or avoid it out rightly should he
uses the whole proceeds from insurance company to purchase or construct another asset in replacement,
before the end of the following year next to that of deemed sale.
Where the proceeds are partial utilized the capital gain applicable to the amount not utilized will be taxable.

(b) Sect 13 (2)

Where the compensation is insufficient to cover the cost and cost of additions the asset is assumed not to
have been sold. The compensation is used to off set or reduce the cost and cost of additions of the specified
asset.

Example
Lloyd George purchased land and buildings in April 1989 at a cost of $1.3 million. The building was
destroyed by fire and he was awarded insurance compensation of $1.1 million in February 1999. He uses
the compensation to reconstruct the building at a cost of $1,106,000 in November 1999. In January 2003 he
sells the property for $4.5milliom and incurs $72, 500, worth of selling costs.

What is the position regarding capital gains tax?

Solution
Computation of Capital Gains
Year 31/12/99
No capital gains will arise in the tax year 1999, since the compensation is less than the sum of initial cost.
The initial cost is reduced by the compensation received i.e.

Cost 1,300,000.00
Less Compensation 1,100,000.00
----------------
Reduced cost c/f 200,000.00
==========
Cost of reconstruction c/f 1,106,000.00

Year 31/12/2003

Determination of capital gains (losses) for the year ended 31/12/ 2003
$
Gross capital amount 4,500,000.00
Less Deduction
Sect .11 (2) (a) Reduced cost 200,000.00
Sect. 11 (2) (b) Additions 1,106,000.00
1,306,000.00
 Sect. 11 (2) (c) inflation
200,000.00 x 30% x 15yrs 900,000.00
1,106,000.00 x 30% x5yrs 1,659,000.00
3,865,000.00
Sect.11 (2) (d) selling costs 72,500.00
3,937,500.00
Capital gains (loss) 562,500.00

Tax thereon [562,500,00 x 20%] 112,500.00

15.7 Principal private residence-s21

A sale of one’s residence attracts capital gains tax. A residence is generally taken to mean one’s main
residence (home) as is situated in Zimbabwe, excluding rural homes. Besides the house a residence
includes, garage, storeroom, swimming pool or any other immovable property used together with the house.
It also includes any piece of land that has been registered which does not exceed 2 hectares, and used for
domestic purpose together with the house.

Special points to note:

A sale of one’s principal residence is taxable in full provided that:
The whole capital gain shall not be taxable in the event of the taxpayer expending the full proceeds from
sale in full to purchase another principal private residence before the end of the following year following that
of sale

Where the proceeds from sale of old principal private residence is partially utilized within the
required period, only gains applicable to amount not expended is taxable. . The rest of the gain will
escape tax i.e. rolled over. The amount to be taxable will be arrived at after eliminating (roll over):
AxB
C
A is the amount used to purchase/construct of a new house.
B is the potential capital gain on disposal of old house.
C is proceeds on sale of old house.

The capital gain rolled over will be used in reduction of section 11 (2)(a) of the new principal private
residence for purposes of calculating capital gains on the new property.

That where land, garage, storeroom or some other structures, which were used together with the
dwelling (house) are sold separately provisions of rollover relief are not applicable.

A principal private residence is sold together with some other business assets, the selling price &
applicable cost (initial cost, additions, inflation etc.) must be ascertained and roll over relief
calculated on that private principal residence only.

No rollover is applicable on sale of other specified assets other than a principal private residence.

Example
Mr. Tonde sold his Mbare house for $7million in 1999 tax year, to buy another house in Warren Park D for $6million on
25 December 2001.Following his wedding with Anna, the couple decided to sale their Warren Park D homestead for
$20 million on 6 February 2002, to buy a spacious home in the Mt Pleasant area $16 million on 24 November 2002.
The couple is now permanently residence in Zambia sold their Zimbabwean property for $30million on 30November
2003. Mr. Tonde inherited the Mbare home from the late mother for $200,000 on 6 June 1990,when he was 47 years
old. Each sale incurred 10% selling expenses.

Required: To compute capital gains tax liability on each sale

SOLUTION
DETERMINATION OF CAPITAL GAINS TAX LIABILTY FOR THE YEAR ENDED 31 DECEMBER…
1999 2002 2003
Gross capital Amount 7,000,000 20,000,000 30,000,000
Less Exemption ………… ………….. …………….
7,000,000 20,000,000 30,000,000
Less Deductions 1,200,000 11,600,000 28,280,000
Sect 11(2)(a)-cost 200,000 6,000,000 9,280,000
Inflation Allowance-s11(2)(c ) 300,000 3600,000 16,000,000
S11 (2)(d) selling expenses 10% 700,000 2,000,000 3,000,000
Potential capital gain 5,800,000 8,400,000 1,720.000
Less Roll over ………….. 6,720.000 ……………
Capital gain (loss) 5,800,000 1,680,000 1,720,000

Capital gains tax 1,160,000 336,000 172,000

Notes:
a. Inflation allowance is 15% for a sale before 2002,30% 2002 and 50% 2003 calculated as follows:
1999 sale 15% x10yrs x200, 000 = 300,000
2002 sale 30% x2yrs x6, 000,000 = 3,600,000
2003 sale 50% x2yrs x16, 000,000 = 16,000,000

b. Roller over is not applicable on 1999 sale .The purchase of another principal private residence was effected
after the expiry of the stated period i.e. before the end of the following year following that of sale. The
purchase should have taken place on or before 31 December 2000.No roller over is applicable also on 2003
sale since the principal private residence was not replaced.
c. Roller over is applicable on 2002 sale since the necessary conditions were satisfied. It is calculated thus;
Potential gain x expended amount = 8,400,000x16, 000,000
Sale proceeds (gross capital) 20,000,000
d. Roll over is used in reduction of sect 11(2)(a) of the new principal private residence -i.e. its cost was
$16,000,000 less $6,720,000 = $9,280,000.However, inflation allowance is calculated on the actual cost i.e.
$16,000,000 not $9,280,000.
e. Mr. Tonde is taxed at the rate of 20% for 1999 &2002, however for 2003 the rate is 10% as he is now over
the age of 59years.

15.8 Payment of capital gains –s31

It is an offence to register a specified asset, unless a tax clearance certificate has been obtained
from Zimra stating that any capital gains tax payable on the acquisition of the specified asset has
been paid.

15.9 Capital gains withholding

On sale or disposal of a specified asset a depository must withhold a 10% capital gains tax and
pay it over to Zimra within days of withholding. A depository is an agent, lawyer or someone
selling an asset on behalf of the principal or person. The withholding tax is treated in the same
way as payee .It is deducted from the capital gains tax liability in determination of capital gains
tax.

Chapter summary
The chapter deals with the taxation of specified assets notably immovable assets and marketable securities.
Other matters concerning capital gains are contained in chapter 16 and chapter 21.

Exam Type question

Question one
George & Fanny investments sold its business lock stock and barrel when it relocated to Malawi on 1 July 2002. The
following assets were sold:
Original cost ITV
Showroom (1 July 1994) 600,000.00 250,000.00
Land (1Jan 1970) 20,000.00 -
Furniture & Fittings 450,000.00 100,000.00
Plant & machinery 470,000.00 95,000.00
Com. Building (July 1997) 800,000.00 575,000.00

No allowances were granted claimable in the year of sale. The purchase consideration was $4,000,000.00 allocated as
follows:

Showroom 700,000.00
Land 1,700,000.00
Furniture & Fittings 80,000.00
Plant & machinery 255,000.00
Commercial Building 1,265,000.00
4,000,000.00

Required
a) Calculate any income tax implication on disposal of business.
b) Calculate any capital gains tax implication on disposal of business.

Question 2
Benjamin Butler has been a tobacco farmer in Centenary, Zimbabwe ever since he inherited a farm from his
father’s estate in the 1970 tax year. He was twenty-years-old at the time of inheritance and the inheritance value
of the farm was the equivalent of $20,000.

In the past thirty years or so he had refurbished or replaced farm improvements on the farm a number of times.
The improvements on hand as at 1 October 1999, the commencement of his accounting year were as follows:
Income tax value
At 1 October 1999
a) Staff housing constructed in July 1990$100,000 $20,000
b) Tobacco barns constructed May 1996 for $300,000 nil
c) Fencing which was bought in April 1997 for $40,000 nil
d) Share in a communal dam $200,000 constructed 1995 nil
e) Homestead constructed for $250,000 in June 1994 N/A

Benjamin Butler decided to sell his farm in October in view of the impending invasion of commercial farmland by
landless peasants. He entered into a sale agreement with an indigenous tycoon the selling price being agreed at
$3,000,000, allocated as follows:
Land 500,000
o Staff housing 150,000
o Fencing 20,000
o Tobacco barns 680,000
o Share of dam 800,000
o Homestead 850,000
The selling cost amounted to $24,353.
He used a portion of the proceeds to purchase a $550,000 townhouse in Harare in November 1999. His overall
intention was to immigrate to Australia towards the end of 2000.

Required: To calculate his capital gains tax liability. [ACCA]

 Chapter 16

HIRE PURCHASE SALES

1.0 INTRODUCTION
A hire purchase transaction is a sale on credit .The buyer is not granted ownership of the item until
the full sale price is paid. This is the case no matter whether the item under sale is a movable
property or immovable.
In this chapter we review hire purchase as they pertain to the Income Tax Act and the Capital
Gains Tax Act. The Income Tax Act provisions relates to movable items and immovable items sold
by the taxpayer in the ordinary course of his trade. On the other hand, a sale of immovable assets
(specified assets) held by the taxpayer as an investment is governed by the Capital Gains tax Act.

The commissioner’s practice is to regard a hire purchase sale as a sale on date of agreement i.e.
date of signing the contract. Accordingly, the taxpayer is taxed on the full sale price on this date
irrespective of the fact that the full sale price will be received in installment. Taxpayers are thus
taxable on amounts not yet received. However, the Act recognizes the hardship and makes a
provision for section 17 and 18 allowances.

1.0 PROCEDURE FOR COMPUTATION OF INCOME TAX

The following basic steps should be followed when computing taxable income-Income tax Act
procedure, no matter whether the item sold is movable or immovable:

Step 1

DETERMINATION OF TAXABLE INCOME FOR THE YEAR ENDED 31 DECEMBER…………….

Yr1 Yr2 Yr3
Sales xxx xxx xxx
Less cost of sales xxx xxx xxx

Opening stock - xxx xxx

Purchases xxx xxx xxx
Pre-sale development costs xxx - -
Less closing stock (xxx) (xxx) (xxx)
Gross profit xxx xxx xxx
Add s 17 or 18 Allowance b/f xxx xxx
Less s17 or 18 Allowance (xxx) (xxx) (xxx)
Less other operating costs (xxx) (xxx) (xxx)
Taxable income xxx xxx xxx

Steps 2-4 Computation of Allowance

The allowance is calculated using the following formula:

Gross Profit x Debtors not yet due and payable

 Sales

Step2
Monthly or annual installment computation
= Selling price -deposit
Credit period
Step 3
Gross profit ratio computation
= Selling price – Cost of sales x 100%
Selling price

Step 4
DEBTORS SCHEDULE FOR THE ENDED 31 DECEMBER……………………
Opening debtors - xxx xxx
Sales xxx xxx xxx
Less (xxx) (xxx) (xxx)

Deposit xxx xxx xxx

Installments xxx xxx xxx
Debtors due but not yet paid xxx xxx xxx
Repossessed or Returns xxx xxx xxx
Bad debts xxx xxx
Provision for bad debts xxx xxx xxx
Closing debtors xxx xxx xxx
Allowance: xxx xxx xxx

NB Allowance is gross profit ratio multiplied by each year’s closing debtors.

Special points to note:

The allowance calculated in the current year is taken as gross income in the following year of
assessment.

No allowance is calculated on bad debts, provision for bad debts- s15 (2) (g) items or on
debtors due, but which for some reason have not yet been paid.

No allowance is calculated in the event of death, insolvent of taxpayer, cession or disposal of
item under hire purchase agreement.

Development costs stated above are applicable to computation of taxable income on sale of
immovable items, but post-development costs are treated as operating expenditure.

Pre-sale development should be included in valuation of closing stock.

Development costs refers to expenditure of lying of pipes, streetlights, planting of trees, on
roads etc in the case of a land developer.

Closing is valued thus [(Total purchase price + pre-sale development costs)/no# of items
purchase] multiplied by items in stock.

EXAMPLE- MOVABLE ITEMS S17(1)

Alpha Electronics (Pvt.) LTD is a retail shop, selling Televisions on credit to approved customers.
Each Television cost Alpha Electronics (Pvt.) LTD $120 000. 50 Television sets were bought on 1
February 2003.

You are given the following information for the year ended 31 December

20 sets sold in April 2003 at $250 000 each

16 sets sold in October 2003 at $250 000 each
14 sets sold in March 2004 at $250 000 each
 The terms of agreement requires the customer to pay a deposit of 25%. On date of sale and the
remainder payable over 20 months in equal installments commencing the month following that of
sale.

Compute the taxpayer’s taxable income for each year during the credit period.

SOLUTION
DETERMINATION OF TAXABLE INCOME FOR THE YEAR ENDED 31 DECEMBER…………….
2003 2004 2005
Sales (36 x 250 000) 9,000,000 3 500 000 ----------
Less cost of sales 4,320,000 1,680,000 ---------

Opening stock - 1,680,000 -------

Purchases (120 000 x 50) 6,000,000 - -
Less closing stock (1,680,000) - --------
Gross profit 4 680 000 1,820,000 -
Add s 17(1) Allowance b/f 2,574,000 1218 750
Less s17 (1) Allowance (w1) (2 574 000) (1 218 750) -
Taxable income 2 106 000 3,175,250 1,218,750

WORKINGS
Step 1: - Monthly installments – {250 000 – 25% x 250 000} - $9 375
20 months

Step 2: - Allowance is – Gross profit x Debtors not yet due

Sales

Gross profit sales ratio = 130 000 x 100% = 52%

250 000
i.e. (sales – purchase) = 250 000 – 120000 = 130 000

NB Once this is found it is applied through out the period of credit unless there is a change in price system.

DEBTORS SCHEDULE FOR THE ENDED 31 DECEMBER……………………

Balance b/f - 4,950,000 2,343,750
Sales 9 000 000 3,500,000 -
Less (4,050,000) (6,106,250) (2,343,750)

Deposit 2,250,000 875,000 -

Installments
20 sets 1,500,000 2,250,000 -
16 sets 300,000 1,800,000 900,000
19 stands - 1,181,250 1,443,750
Closing debtors 4,950,000 2,343,750 Nil

S 17 Allowance: 2,574,000 1,218,750 Nil

NB Allowance is 52% of each year’s closing debtors.

3.0 IMMOVABLE PROPERTY SOLD ON HIRE PURCHASE- S17(2)

The land which the owner of the townships holds (i.e. City Councils) is considered as floating
capital and thus trading stock in the hands of the owner. On sale of such land the owner is taxable
on it.
Example
Trojan Masters Limited a land developer buys and sells land. In the current year of
assessment it bought 20 hectares for $10 million, which were subdivided into 120 stands
for sell to residents of Gweru, incurring $5million development costs.

The terms of agreement requires that a deposit of 20% to be paid on signing the
agreement. The balance to be paid over 24 months in equal installment, commencing the
month following the month of sale. Each stand is sold for $2 million.

Sale took place as follows:

50 stands on 29 march 2003

51 stands on 3 January 2004

19 stands on 13 November 2004
Annual developing costs of $300,000 are expected to be incurred at the end of each year.
One of the buyers defaulted in payment of his 7th installment; accordingly the stand was
forfeited in November 2003.
30% of debtors due on 31 December 2003 were settled on 6 January 2004.

Required: Taxable for the 3 years-2003-2005

SOLUTION
DETERMINATION OF TAXABLE INCOME FOR THE YEAR ENDED 31
DECEMBER ……………………..

2003 2004 2005

Sales 100 000 000 140 000 000 -
Less cost of sales 6 125 000 8 750 000 125 000

Opening stock - 8 875 000 125 000

Purchases 10 000 000 - -
Development costs 5 000 000 - -
Closing stock (8 875 000) (125 000) (125 000)
Gross profit 93 875 000 131 250 000 -
Add Interest 300 000 -
S 17(2) Bal forward - 45 937 500 77 937 500
93 875 000 177 487 500 77 937 500
Less Development costs 300 000 300 000 300 000
S 17(2) Bal c/d 45 937 500 77 937 500 16 250 000
Taxable income 47 637 500 99 250 000 61 387 500

DEBTORS SCHEDULE FOR THE ENDED 31 DECEMBER……………………

Balance b/f - 49 000 000 83 133 333
Sales 100 000 000 140 000 000 -
Less (51 000 000) (105 866 667) (65 800 000)

Deposit 20 000 000 28 000 000 -

*Repossessed stand 1 600 000 - -
*Debtors due –not yet paid 980 000 - -
Installments
 *49 stands 28 420 000 39 200 000 9 800 000
51 stands - 37 400 000 40 800 000
19 stands - 1 266 667 15 200 000
Closing debtors 49 000 000 83 133 333 17 333 333

S 17 (2) Allowance: 45 937 500 77 937 500 16 250 000

NB Allowance is 93.75% of each year’s closing debtors.

Notes
1.Gross profit is [2 000 000(selling price)- 15 000 000/120(costs)]=$1 875 000

Ratio therefore 1 875 000/2 000 000 x 100 =93.75%

2. Monthly installment= selling price- deposit

credit period

2 000 000 – [2 000 000 x20%] = $66 666 .67

24 months

3 .Repossessed stand remains in stock since it was not re-sold . Make sure you
remove all its installments whether paid or not in the year in which it is
repossessed i.e. 24 x $66,666.67 = $1 600 000. Deposit has already been
accounted for in the deposit figure.

4. Debtors due but not yet paid are deducted from closing debtors no allowance is
calculated from such debtors. Accordingly amount due on 49 stands for month of
December i.e. 49 x66 666.67=$3 266 667 ,30% of it represent debtors due but not
yet paid

**NB: Students may care to use the following formula for purposes of s 17(2), but many students
find the above procedure very easy according to your author’s experience with them:

Allowance = D X [E – (F +G)]
E
Where
D – represents installments not yet due to payable
E – The whole amount deemed to have accrued to the Taxpayer i.e. selling price
F – Original Purchase price of land
G – Development cost of land

Gross Profit = [E – (F +G)]

GP% = [E – (F + G)]
E

4.0 CREDIT SALES [s 18 Income Tax Act]

This section relates to the taxation of income accruing from sales made on credit with price being paid in
installments. A credit sale is a sale whereby ownership passes to the buyer on delivery of the property.
The whole amount sale price shall be deemed to ;have accrued to the taxpayer on the date on which
agreement is made or concluded.

The commissioner grants an allowance similar to that granted on disposal of movable property sold under
hire purchase i.e. section 17 (1) allowance.

5.0 CAPITAL GAINS HIRE PURCHASE

Where a specified asset is sold on hire purchase the following conditions are applicable

The whole gross capital amount shall be deemed to have been received on the date of agreement
i.e. the date of sale.

Any allowance is made of debtors not yet due and payable.

The allowance is calculated as follows:

Capital gains x Debtors not yet due and payable

Gross capital amount

NB Debtors not yet due and payable must be net of S 11(2)(e) allowances forming part of such debtors.
Alternatively the allowances may be calculated using the following formula

A X (B-C)
D
Where A is debtors not yet due and payable

B is the gross capital amount

C is S 11 (2) (a) to S 11 (2) (d)
D is gross capital amount

The allowance so calculated is gross capital amount in the following year of assessment where a fresh
allowance will be calculated
If any such agreement has been ceded or otherwise disposed of for a valuable consideration by the
taxpayer then no such allowance shall be made by the commissioner in the year of assessment in which
such cessation or disposal took place.

Chapter summary
In this chapter we reviewed hire purchase transactions as it relates to Income Tax Act and capital gains tax act. The
essential difference between the two is that under the income tax act the assets being sold under hire purchase
agreement are regarded as floating capital (trading stock) while under capital gains investment. The computation of
the allowance is the same except that on the other method gross profit is replaced by capital gains while selling/sales
is replaced by gross capital amount.

Key points
A hire purchase agreement is regarded as a sale on the date of agreement or of signing the sale contract.
The whole sale is taxable on date of accrual, which is the year in which the sale agreement is entered into.
The commissioner, however, provides for an allowance in respect of outstanding debtors i.e. debtors i.e. debtors not
yet due and payable as follows;

(a) Income Tax Act

Gross profit x Debtors not yet due and payable

Sales

(b) Capital Gains Tax Act

 Capital gain x Debtors not yet due and payable
Gross capital amount

The allowance so calculated is brought into taxable income/capital gains in the following year of assessment.

No allowance is claimable where the agreement has been ceded or otherwise dispose of by the taxpayer.

Exam type
Questions

Question 1
Mr. Oliver Gomes 61 years, inherited a farm from his late uncle Ogive Mathias in 1965. The valuation of the
farm then in the estate was $30 000. Ever since 1965 he has been operating livestock farm, until 14
January 2003. Due to demand of land for residential purposes he decided to give up farming and sold his
farm to Mutare City Council for $130,000,000 the proceeds were receivable as follows:

$70, 000,000 on 31 December 2003

$45,000,000 on 31 December 2004
$15,000,000 on 31 December 2005

The sale proceeds were allocated as follows:

Land 100,000,000
Homestead 25,000,000
Dam 5,000,000

He had made the following improvements on the land

Small dam (1982) 400,000

Homestead (1995) 1,500,000

No allowances were granted on the dam in respect of paragraph 2, 7th schedule.

Oliver will move to Harare where he intend to establish his new home there, utilizing $20,000,000 of his sale
proceeds to construct a house in the Grange.

On the other hand the Mutare City Council had the farm subdivided into 50 stands of equal size, which were
ready for sale to the public on 1 March 2003 for $3,500,000 each. It incurred development expenditure prior
to sale amounting to $15,000,000.

The sale took place as follows;

20 stand 16 October 2003

15 stand 1 December 2003
15 stand 1 March 2004

the terms of agreement were as follows;

25% deposit on signing of the contract-date of sale. Balance payable over 10 months in equal installments
commencing the month following that of sale.

One of the buyers who had bought the stand on 1 December 2003 failed to pay his March 2004 installment
and his stand was accordingly reposed and resold on the original terms on 1 January 2005. The
installments paid by the defaulting buyer were forfeited.

Required
Mr. Oliver Gomes’ tax liability.
The City of Mutare tax liability.

Question 2

Boetie Nel has been conducting tobacco-farming operation on a farm in Macheke area for the past thirty-five
years. His accounting year has always been to 30 September annually. On the eve of his 63rd birthday on
15 August 2001 he decided to retire from farming. His assets as at 30 September 2000(the commencement
of the account year) were as follows;

Asset Cost ITV Market Value

Land (bought May 1970 30,000 N/A 750,000
T/barns – constructed in March 1990 100,000 45,000 1,000,000
Homestead constructed in March 1995 50,000 N/A 1,000,000
Irrigation equipment 600,000 125,000 850,000
Dam constructed June 1997 250,000 NIL 1,400,000
S/housing-constructed in October 1992 100,000 75,000 500,000
$5,000,000

In September 2001, Boetie signed a suspensive sale agreement with an indigenous tycoon who agreed to
buy the farm lock, stock and barrel for the total price of $5,000,000, the allocation of the sale price being as
listed above. The terms of payment under the agreement were as follows;

On signing the agreement on 30 November 2001 1,000,000

On 30 December 2001 1,500,000
On 30 December 2002 1,200,000
On 30 December 2003 1,300,000

Boetie would like to minimize the tax liabilities where possible. He consults you as a tax expert to assist him
with putting together a plan that helps him to achieve his goals.

Required
Evaluate and quantify any potential income tax that may arise from the disposal and show how this would
be taxed.
Compute the capital gains tax payable giving effect to Boetie’s desire to minimize the tax payable each year.
[ACCA]

Chapter 17
DECEASED ESTATES AND TRUST-Section 11 and Section 2

17.0 INTRODUCTION
As in the case of individuals and companies it is possible for a deceased estate or trust to constitute a
taxpayer and to be liable to tax on his taxable income.

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

1. A deceased estate commences its existence with death of an individual. It consists of the whole of the
deceased’s property. It is administered under the administrator of estates act by the executor and
terminates when any necessary realization of assets has been effected, the master of High Court has
effected final liquidation and distribution account.
2. An insolvent or assigned estate is created by the order of the court on presentation of petition for
surrender sequestration or statutory assignment of the debtor’s estate.
3. A trust on the other hand is not generally a person though it may be person for tax purposes especially
when it has income the subject to which no beneficiary is entitled to. It comes into existence through the
will of a deceased person or can be created by an existing person as shall be seen later.

17.1 DEFINITION OF TERMS

1. Ascertained beneficiaries – means a person named or identified in the will of a deceased person who
by reason of the will acquires on death of the deceased person any immediate certain right to claim the
present or future enjoyment of the income so received or accrued.
2. Asset in deceased estate - does not include a right to claim an amount which becomes due and
payable before the death of the deceased person

17.2 TAXATION OF DECEASED ESTATE

On the death of a taxpayer an assessment is raised on deceased taxable income accruing to the date of
death. A new taxpayer a deceased estate then come into being and there arise the question of determining
in which part’s hands the income accruing in the post death period should be taxed such parties are the
beneficiaries of the deceased. The estate itself or any trust created in terms of the deceased will.

The terms of the will are crucial as they form the basis as to who is taxable on the income subsequently
derived from the asset of the estate as follows;

(a) Specific asset to a specific person

Where a specific asset is left to a specific individual e.g. my house to my son Tatenda; the son is taxable on
the income derived from the asset from the day after the death of the deceased. The son is in this case an
ascertained beneficiary.

(b) Residue
Where the will provides for a residue in the estate, the estate is taxable on the income derived from the
asset or residue from the day after death until the date of distribution by the executor.
The will does neither of the above – where the will does neither of the above, but provides for the whole
estate to go to a specific individual the commissioner tax the estate on the income, in the period prior to
distribution and beneficiaries only thereafter.

(c)Usufruct
Wills are of course not necessarily as straight forward as to live an asset out rightly, a common variation is
that of a usufruct giving the beneficiary the right to income but not to the inheritance of the asset it self that’s
a father may leave an asset to his son but grant the widow a life usufruct.
(d) Assessed loss
An assessed loss incurred by the deceased falls away upon his death . It can not be carried forward against
the income of the estate or any other taxpayer . Similarly any loss incurred by the estate in operation during
the post death period falls away upon the winding up of the estate.

(e) Expenditure against post death income

If the expenditure is allowable under the general deduction formula it will also be allowed be it to the estate
or to the beneficiary but inadmissible, expenditure is disallowed in the determination of taxable income of
part concerned

(f ) Ordinary resident
An estate is regarded to be ordinarily resident in Zimbabwe if the deceased was ordinarily resident in
Zimbabwe at the time of his death.

(g) Income from employment

An individual’s employment may give rise to income which is;

Taxable in either pre-death or post death period

Not taxable

Amounts taxable during the pre-death includes ; salary , bonus already voted and contractual commission
due at that stage. Such amounts should accrue during the pre-death period.

Amounts accruing after death and taxable in the post death period are those to which the taxpayer had a
right to claim had they accrue during his lifetime. They include among others leave pay and contractual
commission falling due after death [Hersov vs. COT].

The following are not taxable in either period:

Non-contractual leave pay for civil servants

Bonus voted after death

Director’s fees as are not fixed in the articles of association

(h)Medical expenses
Medical expenses of the deceased paid after death is claimed as credit in the pre-death period.

17.3 TAXATION OF A TRUST

Generally a trust is not taxable under the Zimbabwe tax system. An exception, however, is when it has
income to which no beneficiary is entitled.

Formation of a trust
There are two ways in which a trust may be formed namely;
a) A trust formed through the will of a deceased person (will trust).
b) A trust formed during one’s life time (inter vivos trust)

(a) Will Trust

The deceased person will nominate certain people in his will who will take charge of his assets upon his
death. Such people will administer the assets of the trust and make distributions to the beneficiaries as
directed by the will. Sometimes the will may state the time or at what age the assets of the trust shall be
distributed or handed over to the beneficiaries. The trust will then be wound up.

(b) Inter vivos Trust

The person will by a written trust deed names certain person(s) as trustees and hand over various assets to
them as initial capital of trust. The trust will then administer this capital and receiving any income accruing
there from in accordance with the conditions set out in the trust instrument.

Who is taxable on trust income?

As stated earlier on, a trust is not taxable unless it has income to which no beneficiary is entitled. In most
cases the commissioner will tax the beneficiaries of the trust.
The question will then turns out to be whether any beneficiary of a trust has a vested right or a contingent
one. Where a beneficiary has vested right he is taxable on the trust income whether distributed or not.

Types of vested right

There are three types of vested rights as follows:

a) A clear vested right

This is where income has to be paid to a beneficiary and the trustees having no decision on the matter. By
its nature the beneficiary is taxable on income for his distribution and income remaining in the trust. The
property in the trust is , in other words deemed to be the property of the beneficiary not withstanding that it
has been capitalized or reinvested by him.

b) Again a vested right

The trustees have discretion over the amount to be distributed nevertheless any amount remaining in the
trust is accumulated for the benefit of the beneficiary.
As such he is again as in (a) above taxable on income for his distribution and any income remaining in the
trust. In other words the income remaining in the trust and that distributed for his benefit is regarded as his
income on which he can nominate any body in his will to be heir on his death.

c) Delay in the vesting right

Under this vesting right the distribution of income and its enjoyment is entirely at the discretion of the
trustees. In other words the trustees have the right to distribute the income of the trust to somebody else
other than the beneficiary. The trust is taxable on all undistributed income. The beneficiary is only taxable on
income for his distribution. Distribution is assumed once the trustees exercise their discretion by making an
award to him such as by crediting an account despite distribution in such being delayed.

17.5 FURTHER POINTS ABOUT A TRUST

(a) Identity of trust income

The general rule is that trust income will retain its identity in the hands of the beneficiary. In other words if
the trust receive a bank interest and distribute it to the beneficiary, the income will still be called bank
interest in the hands of a beneficiary. This is known as the conduit pipe principle. An annuity however forms
an exception to the general rule, thus the exemptions granted in respect of dividends and certain interest in
terms of paragraph 9,10 and 11 of third schedule do not apply to any annuity paid out of such exempt
income. In other words the source of income is the creating instrument, not the asset from which the income
is derived.
As long as an amount is received as an annuity by beneficiary it will be taxable indiscriminately, no matter
whether the trust income is from an exempted source.

(b) Trust expenditure

If the expenditure is allowable under the general deductions formula it will also be allowable against trust
income, and prohibited expenditure is disallowed.
(c)Residence of trust
A trust is assumed to be ordinarily resident of Zimbabwe if
part of its income is from a source in Zimbabwe
the executors or trustees are ordinarily residence in Zimbabwe
the person who created the trust was ordinarily residence in Zimbabwe at the time of creating
the trust

(d)Expenditure on exempt income

It has to be reinforced once again that no expenditure is allowable in respect of exempt income. This
scenario is usually more often in trust cases. The trustees maybe paid commission based on the income
created by them, of which part of the income will be from an exempt source. Where such a circumstance
applies, the allowable part of the commission will be reduced by

A XB
Where:
C

A is the exemption income,

B is direct expenditure applicable on creation of trust income,
C is total gross income created by the trustees.

Example:
Mhere trust was created on 31/07/03 and is administered by Tendai and Tinotenda. During the current year of
assessment the trust earned a total income amounting to $800,000.00, included in this income is dividend
from a company incorporated in Zimbabwe amounting to $40,000.00. the trustees were paid commission
amounting to $120,000.00. How much is allowable against trust income?

Solution
$
Total commission paid 120,000

Less 40,000 x 120,000 6,000

800,000
----------

Allowable commission 114,000

======
Exam type-question
Question 1
Susan Anderson is a beneficiary of a trust created in terms of her husband ‘s will . In terms of the will Susan
is to receive an annuity of $60,000 p.a. until she dies , plus 50% of the remaining income, which is
distributed by the trust annually. The following is a statement of income and expenditure of trust for the year
ended 31 December 2003

Net profit as per statement $160,000, after charging

• dividends from a local company 15,000
• Tax reserve certificate interest 25,000
• Rent from Zambia house 125,000
• South Africa company dividends 35,000
• Farm income 165,000

The following were deducted in arriving at the above net profit:

• Executors’ commission 75,000
• Annuity paid to Susan 60,000
• Depreciation 45,000
• Loss on sale of asset 16,000

The total gross income of trust for the year amounted to $1,200,000.

In whose hands is trust income taxable and what amount will be taxable?

Question 2
Mr. Moo, 70 years, stroked and died on 30 June 2003. He was employed by Ministry of Rural & Water
Development up to time of his death. A wife and child Fungi survive him. His will bequeath his Mutare house
to his child, subject to a life usufruct in favor of the widow. The following are the details for the year ended
31 December 2003

Income & Expenses

• The house is being let at a monthly gross rental of $61,000 payable in advance
• Mr. Moo’s Salary for the period January to July [150,000 x 7] $1,050,000
• Proceeds from insurance received by executors $38,500
• Cash lieu payable after death $115,200.12
• Repairs to Mutare house $15,100 on 1 December 2003
• Medical bills for the deceased paid by the executors $191,750.
• Pension contribution by him $90,000
The master confirmed the executors’ final and first liquidation account on 30 November 2003.

Mrs. Moo is employed as an Accountant for her monthly salary of $250,000 p.m. She drives a company car
engine capacity 3200 cc .She qualified for a widow‘s pension of $50,000 per annual effective 1 July 2003.
Besides the pension she received a death benefit of $450,000 equivalent to husband’s 3 month salary.

Compute the tax liability for each person.

Chapter 18

ESTATE DUTY

18.0 INTRODUCTION
Estate duty is levied on the estate or property of a deceased person. The rate of tax is 20% the dutiable
amount of the estate.
The dutiable amount is arrived at after deduction from the property of the estate certain allowable expenses.
The framework is as follows;
Gross property (assets) xxxx
Less deduction xxxx
Dutiable amount xxxx

18.1 ESTATE GROSS PROPERTY

The following items constitute the property of the deceased person or the estate
(a) all property held at date of death by the deceased which was acquired before 1 January 1967.
(b) Property assumed (deemed) to be that of the deceased at date of death

18.11Property acquired before 1 January 1967

• Any immovable property situated in Zimbabwe i.e. buildings generally including mining claims.
• Movable property situated in Zimbabwe at the time of death i.e. plant and machinery, equipment,
motor vehicles etc.
• Any interest in property whether movable or immovable.
• Any debt secured upon immovable property.
• Any debt capable of being recovered through Zimbabwe courts.
• Shares registered in Zimbabwe.
• Any right to an annuity, excluding an annuity chargeable upon property, held by the deceased at
the time of death and is capable of being transferred to some other person on the death of the
deceased.

18.2 PROPERTY ACQUIRED AFTER 1 JANUARY 1967

• Any right to a movable or movable corporeal or incorporeal
• Any fiduciary usufractuary or other like interest
• Any right to an annuity excluding an annuity changeable upon some property excluding the
following items owned by a person not ordinarily resident in Zimbabwe at the time of his death.
a) Immovable property situated outside Zimbabwe
b) Debt not capable of being recovered from Zimbabwe courts
c) Shares or stock in a body other than a company

18.3 DEEMED PROPERTY

(a) all insurance policies proceeds on the life of the deceased excluding
• policies for purposes of paying estate duty
• policies taken out by a person other than the deceased before 1 January 1967 etc
(b) donations made within 5 years prior to the death of the deceased provided the donee must survive
the donor.
Where the donee dies first the property will be assessable in the estate of the donee.

18.1 DEDUCTIONS
To be allowable as deduction to deceased person’s property or estate is
(a) funeral and death-bed expenses
(b) debts payable out of the deceased persons property to persons ordinarily resident in Zimbabwe
excluding to companies which the deceased held some interest.
(c) Masters administration expenses in respect of the estate property
(d) Donations to charitable organizations or institution of public character
(e) The value of family house as defined by s 21 capital gain Tax Act, where the deceased survived by
spouse or child.
 (f) Payments made by pension and benefit funds.

Exam type question

Question1
Mr. Manama aged 82 stroked whilst on holiday in Victoria Falls on 1 July 2002. He survived by a wife and a
child Tanaka. His estate includes the following items for which Mrs. Manama has enlisted your services for
purposes of compiling information for estate duty.
(1) cash held at Trust bank $11 791
(2) commercial building valued at $3.5 million situated in Zambia
(3) $300 000 being proceeds from insurance taken for the purposes of paying estate duty.
(4) Donations to Chinyaradzo children’s home $200 000
(5) Family house market value $4.2 million
(6) Donation of a car to Morgan his son on his wedding in July 1999 market value $2,100,000
(7) Mr. Manama owed $600 000 on mortgage in respect of a commercial building in Zambia

Required
(a) State how each of the above items will be treated for estate duty purposes
(b) Calculate Mrs. Manama’s tax liability

Question 2
Mrs. June Erasmus was recently appointed executor for the estate of her husband, Jim Erasmus, who died
in November 1999. She is in the process of compiling estate assets for the purposes of estimating estate
duties payable. In particular, she needs some clarification or confirmation of the following matters:

(1) She and her late husband had been living on the family farm, ‘La Vista’ since their marriage fifty years
ago. Although the farm was registered in the name of her late husband, she believes that as they were
using the farm as their principal private residence, the value of the farm, $2,000,000 at the time of her
husband’s death, would not be included in the assets subject to estate duty.

(2) She is uncertain of the tax implications of the following amounts receivable from the guaranteed Life
Assurance Company:

(i) $500,000, being proceeds of a joint life assurance policy they had both subscribed to since 1985.

(ii) $200,000, being proceeds of a policy taken out by the husband five years previously as a provisional
cover for potential estate duty on the death of one of them, earlier than the other.

(3) Her late husband had made some donations prior to his death as follows:

- Lump sum of $300,000 to David, his sister’s son in July1996. David has since committed suicide in
December 1998.

- Vacant stands in highlands, Harare, valued at $100,000 to Janet, his niece, on her passing Á’ Level
examinations in November 1997. Janet had since got married in June 1999.

- Donation of a block of flats valued at $800,000 to the Erasmus family Trust, a discretionary trust formed
by the late Jim Erasmus, in April 1997. The beneficiaries of the Trust were all Erasmus family members. The
trustees were Brian Erasmus, the couple’s eldest son; the family accountant and the family lawyer.

- On 1 January 1998 Jim and June Erasmus had registered a post-nuptial contract whereby Jim had
donated a parcel of stock exchange registered shares valued at $200,000.
(4) Mrs. June Erasmus was also in receipt of a lump sum of $400,000 from the First Mutual, being proceeds
from an approved Retirement Annuity fund registered under the pension and providence funds act of her
late husband.

(5) Mr. and Mrs. Erasmus used to jointly own a town house in the Avenues area of Harare. They had bought
this house in July 1995 for $400,000 as a possible retirement home. However the area in which the house is
situated was rezoned as a business office development area. In October, prior to Jim’s death, they had
signed a sale agreement on the property selling it for $1,000,000. The agreement further stated that the sale
proceeds would be receivable in installments as follows:

- 31December 1999 $500,000

- 30 June 2000 $500,000
Mrs. Erasmus would like to be appraised of her tax obligations in relation to this property and wants to know
whether there is anything she could do to reduce or avoid a portion of the liability.

Required:
(a) Analyze each of the above concerns of Mrs. Erasmus, and give appropriate advice, supporting your
submissions with appropriate calculations where possible.

(b) The formation of a discretionary trust as opposed to a non-discretionary trust has certain tax advantages
attached to it.

(i) Outline at least four advantages; and

(ii) Comment on why the Commissioner should not consider the Erasmus Family Trust as a tax avoidance
scheme. [ACCA]

Question 3

You have been approached by Mr. Benny who does not wish to be taxed on his death and would like to
know whether there is anything he can do in order to pay less tax duty on his death.

Chapter 19

ADMINISTRATION

19.0 INTRODUCTION
In this chapter a review is made of certain administrative issues, which though uncoordinated but are
matters of importance to all taxpayers generally.

19.1 FINAL DEDUCTION SYSTEM

This is a new system of deducting pay as you earn which was introduced on 1 January 2000. The employer
is required to deduct the pay as you earn in such a way that it becomes the final tax.

Under the old system, referred to as pay as you earn system, an employee would submit a P6 form for
assessment to tax department. The department would then ascertain whether the tax pre-paid by the
taxpayer agrees with the assessed value or amount. A refund or payable will then be made as demand in
the event that the pre-paid tax is different from the assessed value.

19.1.1. Major differences between FDS and payee

a) Under pay as you earn system the assessment was carried out by the tax department (ZIMRA).
Yet under FDS obligation for assessment of pay as you earn lies with the employer.

b) In respect of final deduction system credits are taken into consideration by the employer in arriving
at the tax payable. This was not the case with old system; credits were only awarded by the
commissioner.

c) The refund or overpayment is receivable instantly i.e. the following month following that of over
payment or under payment. That is through reducing or increasing the following month’s pay as
you earn. All this is done by the employer. Yet under the old pay as you earn system the refund or
overpayment would be received or paid to the tax department. There was a time lapse for the
refund or overpayment to be processed, which could stretch to more than a year or so.

It must be emphasized from the on set that the final deduction system does not affect any tax legislation.
The only change is that the responsibility for assessment of pay as you earn has been shifted from the tax
department (ZIMRA) to the employer. Otherwise everything remains the same. To check the correctness of
the assessment done by the employers ZIMRA will regularly carry out tax audits.

19.1.2 Assessment under FDS

The employer is required to use daily, weekly and monthly tables in the calculation of PAYE as before. At
the end of each quarter the employer is required to determine the current tax payable and compare with pay
as you earn deductions made during the quarter. In the case of an over deduction, the employer is required
to refund the excess to the employee before remitting to ZIMRA.

Where there is an under payment the employer must make good to ZIMRA, and recover that shortfall from
the employee in the following month.

The obligation that pay as you earn must be made to ZIMRA on the 15th of the month following month of
deduction remains in force under the final deduction system.

FORMULA FOR ASCERTAINING PAYE UNDER FDS

(i) Salary to date (net of deductions).
(ii) Calculate average monthly earnings by dividing the salary to date by number of months.
(iii) Project annual salary by multiplying average monthly earnings by 12.
(iv) Calculate the annual tax based on annual salary (using tax table).
(v) Calculate the average monthly tax by dividing the annual tax by 12.
(vi) Calculate the critically accumulated tax by multiplying the average monthly tax by the number of months
worked.
(vii) Deduct the accumulated credits from the accumulated tax.
(viii) Add 3% Aids levy
(ix) Deduct previous month’s accumulated tax from the result.

The product or result is the tax payable or refund for the month.

EXAMPLE
Mr. Simon has the following information as at 31 October 2003:
Gross accumulated earnings 900 000
Pension contribution (October) 1 000
RAF (Retirement Annuity Fund) (October) 800
Contributions to ZAAT 9 000
Medical Aid expenses 12 000

Required: To calculate tax obligations for the month of October under the final deduction system. You
may assume accumulated pay as you earn for the month of September was $228
000.

Solution→
Step 1 Calculate his taxable in the normal way i.e.

Salary 900,000
Less deductions-Pension 1 000
RAF 800
ZAAT 9 000 10,800
Taxable income 889,200

Step 2 Compute theoretical annual salary → 889 200×12/10

→ $1 067 040

Step 3 Calculate tax on theoretical annual salary

On 500 000 88,000
On (1 067 040−500 000) 40% 226,816
314,816

Step 4 Calculate accumulated tax for the month of October i.e.

314 816× 10 → 262 347
12
Less credits 12 000×50% (6000)
256 347
Add 3% Aids levy 7 690
Accumulated PAYE to October 264 037

Step 5 October pay as you earn

Accumulated PAYE to October 264 037
Less accumulated PAYE to September 228,000
October pay as you earn 36,037

The above method is applicable in a manual system; otherwise software houses have computer packages
to do the computations for you.

19.2 BANKING LEVY

A 5% banking levy was introduced by government with effect from 1 January 2002 .It is calculated based on
banking institution net profit before tax at the end of accounting year. The levy shall be for the benefit of
Small to medium Scale Enterprises. The levy shall be reduced proportionately if the bank makes some
loans to small to medium scale enterprises during the year of assessment, using the following formula:

A x C
B
Where:
A = Total loans made to Small to medium scale enterprises by bank during the accounting year
B = Total loan portfolio made during the accounting year by the bank
C = Net profit before tax at the end of accounting year
Example
Tramp Card Banking Corporation was incorporated on 1 January 2002. The following is an extract from its
31 December 2002 balance sheet
$
Retained profit for the year 650 000
Total loan portfolio to clients made during the year 1 868 000
Notes:

A total dividend amounting to $20 000 was issued on 30 December 2002

No other line item after tax was deducted except the above dividend

30% of the total loan portfolio was made to Small to medium scale enterprises

The rate of corporate tax applicable to this type of business is 30.9% (inclusive of 3% Aids
Levy).

Compute the banking levy applicable to Tramp Card banking corporation.

Solution:
Net profit before tax [w1] 969,609.00
Less
AXC 560400 X 969609 290,883.00
B 1868000

Profit available for banking levy 678,726.00

Levy thereon: [5% x 678,726.00] $ 33,936.00

Working (w1)
Retained profit for the year 650,000.00
Add back dividend 20,000.00
670,000.00
Add back tax {(30.9%/69.1%) x 670,000.00} 299,609.00
Net profit before tax 969,609.00

19.3 INTERMEDIATED MONEY TRANSFER TAX-30th schedule

A customer who makes out a money transfer to another person through an ATM is liable to pay money
transfer tax. The rate of intermediated money transfer is $5 for each transaction on which the tax is payable.
A money transfer transaction on which tax is chargeable is that to which a financial institution
mediates, excluding transfers made by cheque. Such transfer should be:
a. Between two persons or
b. From one person to two or more persons or
c. From two or more persons to one person.
The financial institution should withhold the tax and pay Zimra the required tax on or before 15th
of the following month following that of transaction. Failure to do so will result in an additional
tax of 15% of the unpaid tax.

19.4 ESTIMATED ASSESSMENTS-S 45

This is an assessment done for the purposes of estimating the tax liability in the following circumstances:
a. In the event of default by the taxpayer to submit a tax return
b. Where the taxpayer is about leave Zimbabwe
c. In the event of the commissioner being unsatisfied with the assessment submitted.
An estimated assessment is not subject to appeal or objection. Provided the commissioner may
vary it in the event discovering that material facts were not disclosed causing the taxpayer to pay
more tax, at the time of agreeing the assessment.

19.5 ADDITIONAL ASSESSMENTS-S 47

This is an assessment to increase the taxpayer’s tax liability. It is raised in the event that:
a. Commissioner discovers that income, which should have been brought to tax, was not
brought to tax.
b. The taxpayer claimed expenses or credits, which should not have been claimed.
As such an additional assessment is meant to correct this anomaly by increasing the tax liability
or reducing the assessed loss. An additional assessment should be effected by the commissioner
before the expiry of 6 years from the date of notice of assessment. While those, which are, a
result of fraud has no set time limit.

19.6 REDUCED ASSESSMENTS-S 48

This is an assessment to reduce the taxpayer’s tax liability. It is raised in the event that:
a. The taxpayer discovers that income, which should not have been brought to tax, was
brought to tax.
b. The taxpayer did not claim certains expenses or credits.
As such a reduced assessment is meant to correct the anomaly by reducing the tax liability or
increasing the assessed loss. A reduced assessment should be effected before the expiry of 3 years
from the date of notice of assessment.

19.7 REPRESENTATIVE TAXPAYERS-S 53

These are persons who may stand on behalf of certain persons in respect of tax issues. as follows:
a. Public officer on behalf of the company
b. Agent on behalf of the principal
c. Person handling that person’s tax affairs in Zimbabwe on behalf of person outside Zimbabwe
d. A trustee on behalf of the trust etc.
Chapter 20

VALUE ADDED TAX

20.0 Introduction
Value added tax was introduced on 1 January 2004 to replace the outdated and inefficient sales tax system.
It is the government’s hope that what has been a drain of revenue through non-remittance, and largely
evasion will soon be a thing of the past. The new system, though not error free will encourage compliance
by operators since there is something at stake than before. Notably there are input tax refunds to claim.

20 1. What is Value Added Tax System?

Vat is an indirect tax levied on the supply of goods or services, as well as on the importation of goods or
services.
It is tax collected at every stage of production or distribution. In other words, it is tax on wealth created by
each company in the production and distribution chain. Any person purchasing goods or services in the
production and distribution chain is required to pay input tax (on raw material, assets or overheads or
services) and to charge output tax to customers on the value created by him.

20.2 Input & Output taxes

Input tax is tax payable by a taxpayer on supply of raw materials, capital or overheads .The tax is
recoverable in respect of registered operators. Provided no refund will be issued to the operator if
The input tax was in respect of motors cars unless they are used 100% for business purposes.
 The input tax was on supply of business entertainment.
The input tax was on supply of goods or services to non-registered operator.
The tax was on supply of goods or services consumed by the taxpayer privately.

Output tax on the other hand is tax chargeable to customers on value created by the taxpayer. Exporters
however are exempted from charging output tax on export of goods and services.
Please not that vat is only chargeable on the net amount where a discount is offered for prompt payment.

20.3 Rates of taxes

The general rate of tax for value added tax is 15%(standard rate), and zero-rated for supply of
certain basic foodstuffs, including direct exports of goods from Zimbabwe to other countries.
Other goods and services are exempted i.e. financial services and passenger transport-see below
for details.

20 .4 Vat registration-generally
Any person transacting sales value amounting to $250 million in any year of assessment is required to
register for vat, and will be issued with vat registration number. The effect for registration is that the
registered operator will be exempted on payment of input tax. Thus when a registered operator is supplied
with goods and services by another registered operator vat will be levied –input tax.
When the registered operator in turns supplies goods or a service to other persons vat is charged –
output tax.
In the event of input tax exceeding output tax a refund will be availed to the registered operator
by Zimra. This facility is not availed to non-registered operators. Exporters who are registered
operators are entitled to claim an input tax on supplies of goods or services for the production of
goods for export.

20 .5 VAT vs. Sales Tax

There are no major differences between the two .The only difference is that sales tax is collected
from the final consumer, with all other persons in the chain required to pass it on to the final
consumer, unless they are the final consumer themselves. The major problem under sales tax
system is the level of abuse by both registered and non-registered operators. On many times
operators have declared that they hold a certificate when purchasing goods not meant for resale,
yet they will be the final consumer themselves. Generally, Vat broadens the tax net, as every
body is required to pay.

20.6 Sale tax Weakness-advantages of Vat

Sale tax is difficult to administer than Vat. There are fewer exceptions items

A vat-registered operator is required to pay vat of supplies of goods and services. Under
sales tax registered operators were not required to pay tax on supplies purchased by them,
provided goods were meant for resale. The result was devastating as the operator had to
declare on many times that goods were meant for re-sale when they were not. Resulting
in millions of dollars lost through tax evasion.

The risk of not recovering tax is minimized under Vat, since tax is recovered at every
stage in the value chain, than to wait for the retailer to pay who may abscond.

If a trader fails to register for vat, what is lost is the value created by him only

20.7 Vat weakness- advantages of sale tax

The major weakness under the vat system is the requirement for more paper work. Registered
operators are required to keep detailed records of tax invoices and to install new accounting
system. The commissioner will also require extra manpower for the processing of input tax
refunds, including also installation of computerized system which is value added tax compliance.
20.8 Registration for Vat
A business making taxable supplies exceeding $250 million in the last 12 months must register for vat.
Provided registration is not required if taxable supplies in the following 12 months will not exceed $250
million. Registration is required within 30 days from the date of liability.

Voluntary registration is also permissible in respect of those not meeting required threshold, but with a sales
value of a minimum of $200 million.
Such registration is beneficial to the taxpayer when:

The taxpayer is supplying zero rated supplies. The taxpayer will be able to recover input tax and no
output tax will be chargeable or collected from customers. Bearing in mind that non-registered
taxpayer are not availed a refund of input tax.

The taxpayer is supplying his supplies to other registered operators. Input tax will be reclaimed,
and it should be possible to charge output tax on top of the pre-registration selling price. This is
because the output vat will be recoverable by the customers.

Voluntary registration is not beneficial where selling prices cannot be increased beyond a certain price. The
output tax as a result will be borne by the registered operator, creating an extra cost to him. Registration is
not required for a taxpayer supplying exempt supplies. Input tax is also not recovered.

20.9 Deregistration of Vat

Deregistration is required when the taxpayer ceases to make taxable supplies. Accordingly within 30 days of
such the commissioner must be notified. Deregistration is also required where the taxpayer ceases to carry
out trade or will cease to carry out trade within 12 months after that date. Where the taxpayer registers with
an anticipation of carrying out trade but later abandoned.
For taxpayer registering voluntary deregistration will be made if he fail to comply with the provisions of the
Act.

20.10 Vat returns

Vat returns should be submitted to Zimra not later the last day of the month after the end of a tax
period. There are four tax periods as stipulated by the commissioner as follows:

Two-month tax period- Category A end of tax period last day of Jan, May, March, July
Sept & Nov

Two-month tax period- Category B end of tax period last day of Feb, April, Jun, Aug,
Oct & Dec

One-month tax period- Category C end of tax period last day is the last of every month.

Category D mainly for farmers.
In order to qualify as category A or B the taxpayer must make an election, otherwise the taxpayer
will qualify for category C. Provided no election will allowed to defaulting taxpayers.

20.11 Interests and Penalties

Penalties and interests are raised when:
a. The taxpayer fails to pay tax by the due date
b. The taxpayer evades paying tax or asking for excess input tax refund.
Where the taxpayer fails tax by the due date a 100% penalty fee is chargeable. The penalty is a once off.
Additional tax is an amount not exceeding 100% of the tax evaded or refunded in excess.
The interest is 35% p.a on the amount, which should have been paid.
.
20.12 Vat exemptions
The following services to persons generally are exempted from vat;

Services offered by local authorities

Education provided by a pre-school, primary, secondary, university technical and commercial
education e t c.

Transportation of goods by rails.

Transportation of passengers on a stage carriage or by public transport.

Sale of immovable property.

Construction of buildings, bridges, roads, dams e t c.

Services provided by insurance companies
For detailed information about exemptions refer to the Vat Act.

20.13 Tax invoices

A vat tax invoice should be issued on supply of taxable supplies .No invoices however may be issued on
supply of exempt or zero-rated supplies. Certain information should be on the tax invoice such as vat
registration number, the rate of vat for each supply, amount of vat payable, description of the goods, name
of the supplier i.e. tax payer, the person receiving the goods, date of invoice etc.

20.14 Change of ownership of motor vehicles

On sale of motor vehicles vat must be charged and should be paid over to Zimra, who will issue a
clearance certificate thereof. Such a certificate is required on registering the vehicle in terms of
the Vehicle Registration and Licensing Act. It is an offence to register a motor vehicle without a
tax clearance certificate.

Example
You are a tax adviser and have been approached by Mr. Tapera the chief executive of Vat (pvt) limited. The
business is considering three business opportunities. Insurance business, retail business sells of foodstuff,
and sale of electrical gadgets. Each of the alternatives will yield a sales value of $251 million(exclusive of
tax) per year and expense of $32 million(inclusive of tax) per year.

Required
(a) To advice for each alternative whether registration is required
(b) To calculate output and input tax applicable.
(c) To advise on the best business opputunity
Solution
(a) Registration is required for the sale of electrical goods and foodstuff .These are refered to as standard
rate supplies and zero rate supplies respectively.The required threshold is being met ie a minimum of $250
million in period of 12 months.As for insurance it is an exempt service and registration is not required.

(b)
Input tax
Input tax is chargeable on expenses as follows:
• Insurance business ie 32 000 000 x15/115=$4 173 910
• Electrical gagdets business ie 32 000 000 x15/115=$4 173 910
• Sell of foodsuff business ie 32 000 000 x15/115=$4 173 910

Output tax
Output tax is chargeable on sales as follows:
• Insurance business ie 251 000 000 exempt thus nil
• Electrical gagdets business ie 251 000 000 x15%=$37 650 000
• Sell of foodsuff business ie 251 000 000 x0%=$nil
•
(c ) The best option is one that maximise the wealth of Mr Tapera as follows:

Insurance Foodstuff Electrical business

Sales 251 000 000 251 000 000 251 000 000
Less exepenses 32 000 000 32 000 000 32 000 000
Profit 219 000 000 219 000 000 219 000 000
Add input tax refund nil 4 173 910 4 173 910
Less output tax payable nil nil 37 650 000
Cashflow(profit) 219 000 000 223 173 910 185 523 910

Mr. Tapera should be advised to operate the foodstuff business as envisaged in the above computations.
No output tax is chargeable but input tax is reclaimable. For insurance business input tax cannot be claimed
neither the output tax chargeable.

Chapter 21

TAX PLANNING

21.0 INTRODUCTION

Tax planning means the management of one’s tax affairs in advance of the period to which it relates, with a
view to minimize future tax liability. It involves issues about tax advice, and timely remittance of taxes to
ZIMRA.

Tax planning has the effect of minimizing tax liability, through avoidance of penalties and interest, as well as
being able to take advantage of schemes targeted at postponing tax liability. Unfortunately, however, a
number of taxpayers are ignorant of such schemes. Usually taxpayers have the tendency of seeking expert
knowledge on these matters when things have gone wrong. That is when they been visited by the taxman.

The legislation contains quite a number of schemes concerning tax planning. In order to understand them
better you need to know whether a given scheme is legal or illegal through classifying a scheme either as a
scheme of tax avoidance or tax evasion.

21.1 DIFFERNCE BETWEEN AVOIDANCE AND EVASION

21.1(a) Tax Avoidance

It is the legitimate ordering of one’s affairs so as to minimize tax liability. Tax avoidance is permissible,
unless it falls within the terms of the specific anti-avoidance sections of the Acts – s 98 main Act. The
commissioner has a right to attack any transaction should he assume it to be abnormal, and that it was
entered into with the object of avoiding paying tax. He has powers to determine the fair market price where
such transaction occurs.

21.1 (b) Tax Evasion

Tax evasion is illegal. It is the deliberate submission of false returns, omission of sales from the trading
account, overstating deductions and credits etc – s 46 Income Tax Act. There are penalties and interest
implications on such type of transactions, as well as offences, which are open to prosecution.

21.2 TAX PLANNING SCHEMES

These are schemes targeted at minimization or postponement of tax liability. There are quite a number of
them in the Acts, but shall review the major ones. The schemes are available to both companies and
individual taxpayers.

21.2.1 Paragraph 8 (3) 4th Schedule Income Tax Act

According to this paragraph an election may be made on sale of assets to transfer the assets at income tax
values as established in the hands of the transferor, notwithstanding the actual selling price. The election is
permissible where the asset(s) is sold under any of the following schemes:

A sale between a husband and wife, or vice-versa.

Where the assets are sold between companies under the same control

A sale of assets in a scheme of reconstruction, or some other business combination.

Where a foreign company formally operating in Zimbabwe is being taken over by a new company
formed in Zimbabwe to take over foreign business.

Or in a scheme of conversion of a company to a private business cooperation.

The election would result in the avoidance of income tax on potential recoupment. However, the recoupment
will be taxable if the asset(s) is subsequently sold outside the group or to person who is not the spouse of
the transferor.

Please note that where assets were transferred at ITV the new owner may not claim allowances on the sale
price, but at ITV and no SIA is claimed.

21.2.2 Section 15 Capital Gains Tax Act

The section provides for the transfer of specified assets at values equal to deductions i.e. Sect 11-(2) (a) to
Sect 11 (2) (d), in the hands of the seller or transferor upon election, notwithstanding the actual selling. The
election is permissible where a specified asset(s) is sold under any of the following schemes:

Where the assets are sold between companies under the same control

A sale of assets in a scheme of reconstruction, or some other business combination.

Where a foreign company formally operating in Zimbabwe is being taken over by a new company
formed in Zimbabwe to take over foreign business.

Or in a scheme of conversion of a company to a private business cooperation.

The effect is that any potential capital gain tax on sale or disposal is postponed, until such a time the
asset(s) is sold outside the group.

Activity 1

Troika (Pvt.) LTD, a company incorporated in the United States has several branches throughout
the world. The company has a branch in Zimbabwe, Rom (Pvt.) Ltd. As a result of restructuring
made at its head office in the United States, a new company was formed in Zimbabwe for the taking
over of Rom (Pvt.) LTD ‘s business with effect from 1 March 2002. All the assets belonging to Rom
(Pvt.) LTD were taken over by the new company. Some of the assets taken over were:

Asset Original cost I TV 31/12/01 Selling price

Showroom (7/97) 900,000 350,000 900,000

Plant 415,000 75,000 45,000
Factory (9/94) 750,000 140,000 6,650,000
Com building (2/97) 940,000 195,000 800,000
Required: a) to compute any tax implications on assets taken over.
b) Outline any relevant provisions of the Acts that result in either tax minimization or
postponement

21.2. 3 Section 16 Capital Gains Tax Act

The section provides for the transfer of a specified asset(s) between spouses, whether in the normal course
of trade or by the order of the court. If the taxpayer so elect transfer may be effected at values equal to
deductions i.e. sect 11 (2) (a) to sect 11 (2) (d), notwithstanding the actual selling price. Any potential tax on
capital gain on disposal is postponed until such a time when the asset(s) is sold to any person who is not
the spouse of the seller.

21.2.4 Section 17 Capital Gains Tax Act

It provides for the transfer of asset(s) previously used by an individual for purposes of his trade at values
equal to deductions [i.e. sect 11 (2) (a) to sect 11 (2) (d)], to a company owned by him upon election,
notwithstanding the actual selling price. It is important that the person should hold a majority shareholding in
the company. The effect is to postpone any potential tax on gains resulting from the transfer. Provided that
capital gain shall be calculated on disposal of an asset outside the group.

Example
Mr. Marvelous Mike has been operating a retail business in Chinhoyi since 1 July 1992. On 1 January 2001
Mr. Mike transferred a commercial building previously owned by him in his retail business to a new company
in which he holds 60% of the shares. The building was transferred at a market value of $250,000. Its original
cost was $50,000 when it was constructed in 1992. Income tax value at date of transfer was $13,500.

Comment on any tax implication on disposal assuming the building was later sold outside the group 31 May
2002 for $300,000. Support your comment by relevant computations,

Solution
Since Mr. Mike controls the company, he may elect to post pone capital gains tax on the transfer of the
asset in terms of section 17 of the Capital Gains Tax Act. The tax will be payable when the asset is
subsequently sold to a third party.
The capital gains position is thus nil on the transfer of building on 1January 2001.As at 31 May 2002 capital
gains when the asset is sold to a third party is $85,000 calculated as follows:

DERTERMINATION ON DISPOSAL OUTSIDE THE GROUP

Gross capital amount 300,000
Less Recoupment 37,750
262,250
Less Deduction
Cost 50,000
Less capital allowance 37,750
12,250
Inflation (11yrs x 30% x 50000) 165,000 177,250
Capital gain 85,000

However, there is no equivalent section in the Income tax Act which will enable Marvelous to escape tax on
transfer of the asset to the company. Thus he will be taxable on the recoupment on 1 January 2001 of
$36,500.Arrived at by comparing the lower of potential recoupment and allowances previously granted i.e.
[250,000-13,500] = $236,500 , and [50,000 – 13,500] =$36,500
Please note, remember to calculate capital allowances for the 2001 tax year based on original cost i.e. 50,000 x2.5%
=$1,250, but no allowances in the year of sale outside the group.

21.2.5 Section 22 Capital Gains Tax Act

Subject to an election, a taxpayer may rollover or postpone any potential capital gains on disposal of a
business asset, provided the proceeds from sale of the asset are utilized in construction or purchasing of an
asset of a similar nature before the end of the following year following that of disposal or sale thereof.

The gain to be taxed will be reduced by the following formula (referred to as rollover):

AxC
B
Where:
A is the expended portion or proceeds
B is proceeds on sale of business asset
C is capital gain accruing from the sale of asset

Where an amount has been rolled over it shall be used in reduction of the cost (s 11 (2) (a) of the new
immovable asset.

Activity 2
Mr. Rice, a retail businessman, sold his business lock stock and barrel, when he re-located to Murewa
Growth point on 31 December 2001. Among that assets sold was a commercial building sold for $3.5
million, originally constructed for $850,000 in the 1995 tax year. The income tax value at date of disposal –
31 December 2001 was $550,000. Of the proceeds received from sale of commercial building $2,500,000
was utilized on construction of a similar commercial building at the growth point. Mr. Rice turned a farmer on
25 January 2003;as a result he sold his business to a local businessman, fetching $7million on the
commercial building in the process.

Required. Capital gains implications on disposal of the two buildings.

21.2.6 Assessed losses sect.15 (3) Income Tax Act

An assessed loss is an allowable deduction in terms of s 15 (3). The section allows such a loss to be set-off
against income of any other business activity owned by the same person. Where the assessed loss has not
been set-off against any other income such losses are carried forward and allowable as a deduction against
future year’s income.

The commissioner however, does not accept the carrying forward of assessed loss in the following
circumstances:

By a taxpayer who has been declared insolvent

By a taxpayer whose property or estate has been assigned for the benefit of his creditors.

Where there has been a change of ownership (shareholding), and it is established that the change
was mainly influenced by the existence of an assessed losses. Thus trafficking in shares of
companies with assessed losses is not allowed

No assessed loss may be carried forward to a new company in a scheme of localization of foreign
company unless the sole consideration for the transfer will be the issue to members of the old
company of shares in a new local company in proportion to their previous shareholding in the
foreign company.

Assessed losses may be carried forward for a maximum of six years on a FIFO basis i.e. losses
created first are first set-off against taxable income. An exception to the six-year limit in which is
 mining operation, where losses can be carried forward indefinitely.

In a scheme of a conversion of private company into a private business corporation or vice-versa
unless it can be proved that the intention is not to take advantage of assessed loss

Sometimes it is difficult to justify the taxpayer’s intention, however the commissioner will always accept a
change of ownership influenced by need for change of management, restructuring of business operations or
some other reasons, but not to take advantage of assessed loss. The advantage of utilizing assessed loss
rest in its effect to reduce the amount to be taxable. In that sense it is beneficial for a company anticipating
high profits in the future to takeover a company with huge balances of assessed loss. Thus companies with
losses are usually targets for takeover by prudent financial managers.

Note, however that once an election is made to carry forward assessed loss to the new company, the old
company may not utilize those losses anymore. Therefore, it make sense for the election to be made as well
in terms of paragraph 8 (3), 4th schedule Income Tax Act, otherwise the old company might be taxed heavily
in case there was going to be potential recoupment as result of transfer of assets, with no corresponding
expenses to utilized in the reduction of amount to be taxed.

As a financial manager of a company with huge balances of assessed loss it pays to minimize your
expenses. Such expenses will result in the build up or increase in assessed loss, and if no meaningful
profits are anticipated in the future some of the losses may be written off after the expiry of 6 years, bearing
in mind that losses made in a particular year have 6 years to be off set against taxable income. It therefore
pays to claim wear & tear instead of special initial allowance if the company is making losses, and the trend
is expected to continue for more than 6 years.

21.2.7 Employee vs. Consultancy

Sometimes a question may be raised on whether one should be an employee or an independent
contractor/consultant. In such a case an option with the least tax liability should be chosen.

An employee is taxable using individual rates, and is not allowed to claim any expenses from employment
except for a few prescribed in sect15 (2) (h) and sect.15 (2) (i).

On the other hand a consultant is taxable at 30% i.e. income from trade and investments. He is also
required to register for sales tax where his sales value exceeds the required threshold. For details refer to
chapter on sales tax. Where he has registered for sales tax he must charge 15% on services provided. The
tax so charged must be paid to ZIMRA within 30 days following the month of sale. A consultant is allowed to
claim business expenses in the assessment of his taxable income.

21.2.8 Period of tax holiday

Capital allowances policy: It is prudent for an organization to claim wear & tear in lieu of SIA where it is
enjoying a period of tax holiday or where it has huge balance of assessed loss which is not likely to be set-
off against future taxable income. Additionally, capital expenditure can be deferred to period after the tax
holiday or to periods where huge taxable income is likely to be made. Such an arrangement would result in
postponement or minimization of tax liability.

21.2.9 Sale Tax registration

Being a registered operator exempt the taxpayer from paying tax on purchase of goods and services
intended for re-sale. This will result in better utilization of the cash resources which could have been paid as
tax on purchase, after sale of goods or services the taxpayer has further 30 days credit period to make use
of the collected cash from customers. It is recommended that taxpayer should register for sales tax the
moment one meets the required threshold.
21.2.10 Housing loans or construction of houses for employees:
You may be called upon to assess whether it is tax efficient for a company to provide loans to its employees
for the construction of houses, or whether the company should construct the houses for its employees.
Loans provided free of interest or below prescribed rates would be regarded as a taxable benefit in the
hands of an employee in terms sect 8(1) (f). If the company constructs the houses it will be granted capital
allowances subject to a restricted cost $250,000 ($500,000 for 2003) per each unit of staff housing.

21.2.11 Company cars for employees or loans to employees

Ideally, company cars bought by a company for use by employees whether for private or business purposes
qualifies for capital allowances in terms of section 15 (2) (c), related motor running expenses are also
allowable as a deduction. The employee will however, be taxable on the private benefit in terms of s 8(1) (f)
depending on the engine capacity of the car. The effect to the company is the reduction of taxable income
available as result of the expenses claimed. Should the company provides loans to employees for the
purchase of cars for use by the employee in the business of the employer, no capital allowances may be
claimed since the car is owned by the employee, related running expenses cannot also allowable to the
company. The employee will be taxable on the loan benefit in terms of s 8 (1) (f) depending on the loan
provided or whether the employer charges no interest or below the stipulated rates.

If the employee uses the personal car on the business of the employer in return for compensation, the
transaction may well be taken to be the hiring of the car. The employee will be taxable on the compensation
(deemed rentals), and will be taxable using the business income rate 30.9%. The company may in that case
claim the related hiring expenses, but not capital allowances, subject to a maximum of $500,000 in respect
of a passenger motor vehicle – s 16(1) (k).

21.2.12 Other Individuals schemes

Employees are also capable of taking advantage of schemes outlined in the Acts in order to minimize their
tax liability i.e. spread gratuity on cessation of employment, commute pension in terms of sect 8 (1) (n) or
sect 8 (1) (r) etc, maximum utilization of exempt benefits such as medical aid contributions by employer or
more allowances for civil servants etc. All such cases will result in more disposal income in the hands of a
taxpayer.

We are unable to exhaust all schemes, in your studies we hope you will come across some of them.

Exam type-question
Question 1
Tax Advice questions
a) Mr. Flan aged 60 years would like to sell his private house for $8 million and buying the right to live
in a retirement village for $9 million. He would like to know whether he is required to pay capital
gains.
b) In the current year of assessment Mr. Mateo purchased a house for $5.4milion plus transfer duty
$160 000. He is paying interest on the bond amounting to $60 000, and would like to know
whether such amounts can be claimed as a deduction for capital gains purposes.
c) Mr. Dete sold his private house and then bought shares in a company, which owns his new
replacement house. He wants to know whether he can claim rollover relief.
d) Mr. Weans wants to transfer his Comet shares into his wife’s name without suffering capital gains
tax. What would you advise him?
e) Jacks Ltd sold its land and buildings for $20million and buys another factory with its land by
purchasing the shares of Lombard Ltd for $25million.Will Jacks Ltd be entitled to defer capital gains
tax by rolling over the gain by virtue of the purchase of the new company.
 f) Mr. Ronald is an Accountant with Aniline (Private) Ltd is due to resign 30 June 2002. His company
will pay him and his family air tickets to Germany on termination of employment. He would like to
know whether the benefit is taxable.
g) Mrs. Dick is an employee with Funds & Cash flow (Private) Ltd; she would like to know the effect of
signing a consultancy contract with the company.
h) Dorothy, 27 years old died of malaria. Her husband was paid $200,000, by her employer. The
husband would like to know whether the amount is taxable in his hands. At the same the company
would also want to know whether the expenditure is deductible.
i) Alice a Zambian resident working for Government of Zimbabwe in Zambia has approached you for
advice on whether she is taxable in Zimbabwe on her salary and benefits.
j) Mr. Robertson was injured on 1 April 2002 in a motorcar accident. On 31 July 2002 he received
$30 000 as claim damages from the vehicle owner insurer. He would like to know whether the
amount is taxable.
k) Mr. Wear has just received his 1999 assessment, he is however not happy with it . He would like to
know whether there is anything he can do to correct the error.

Question 2
Ban International Ltd, a company incorporated in the United Kingdom, has been operating branches in a
number of countries in Africa. The company, in a scheme of reconstruction of its operations in Zimbabwe
has formed a new company incorporated in Zimbabwe in which it owns 92% of the issued share capital. The
new company Ban (Pvt) Ltd takes over the operations of Ban International Limited’s branch with effect from
1st January 1999. The business assets taken over were as follows:
Original cost income tax value
Land 100,000 -
Industrial Building (acquired 4/1994) 950,000 475,000
Furniture Fittings 300,000 150,000
Machinery and Plant 900,000 249,000
Land 200,000 -
Commercial Building (acquired 6/1988) 800,000 560,000

Given that the income tax values were as at the 31st December 1998 and the sale prices were as follows:
Land 200,000
Industrial Building 300,000
Furniture and Fittings 300,000
Machinery & plant 500,000
Land 500,000
Commercial Building 1,700,000

Required
a) calculate the capital gains tax position as at 31 December 1999, assuming that no reconstruction
elections are made.

c) Outline the income tax and the capital gains tax implication of the reconstruction in relation to the
assets taken over given that all elections to minimize any tax liability are made (calculations are not
required). [CIS]

Question 3
1. ABC (PVT) ltd owned the following fixed assets as at 31 December

Land which was purchased for $100,000 on 4 July 1983

An industrial building which was purchased for $2,500,000 on 4 July 1983 and has been
depreciated ( market value at 31 December is 4,000,000)

Plant and machinery with a cost of $1,700,000 and accumulated depreciation $800,000 (ITV at 31
December was 250,000)

Furniture and fittings with a cost of $1,200,000 and accumulated depreciation of $500,000(ITV 31
December 150,000)
2. The authorized and issued share capital of ABC (Pvt) ltd as at 31 December comprises 300,000 ordinary
shares of $2 each. Mr. Sibanda purchased these shares on 1 April 1990 for an amount of $20 each.
3. Other information
ABC (Pvt) ltd has no tax loss carried forward as at 31 December
The company has no other significant assets or liabilities at 31 December
The company profit before taxation has been approximately $500,000 for the past 5 years

4. Mr. Sibanda intends selling the business to Mr. Jones with effect from 31 December . he is considering
giving Mr. Jones the choice of purchasing either 100% of the shares or the fixed assets.

You are required to list and briefly discuss the taxation related factor to be considered by both the seller
and the purchaser in determining whether the shares or the fixed assets should be sold. No calculations are
necessary. [CIS]

Question 4

TNT Cigarettes International Company specializing in the manufacture of tobacco products is

contemplating restructuring its operations worldwide. The company has been operating a branch
in Zimbabwe in the name of TBA (Pvt.) Ltd.
The company is being restructured at its head office in London. Although it is winding up its
operations in a number of countries in Southern Africa the decision has been to form a new
company registered with the Zimbabwe Registrar of companies for the purposes of taking over
the business operations of TNT International Ltd. Zimbabwe was chosen as the suitable place for
centralizing operations in Southern Africa on the basis that most of the high quality tobacco leaf
was grown therein

Smoking Pleasure Ltd is the new company, which is formed with its entire issued share capital
being held by TNT International Ltd and its nominees:

The assets of TNT International Ltd Zimbabwe branch on hand as at 1 January 1999 were as
follows:
ITV 1/01/99 Market value Cost
$ $ $
Manufacturing equipment 800,000 1,000,000 1,500,000
Furniture & Fittings 450,000 250,000 600,000
Commercial building 450,000 1,000,000 600,000
Delivery fleet of vehicles nil 500,000 800,000
Computer equipment 125,000 100,000 500,000

Smoking Pleasure took over the operations of the TNT International with effect from 1 January
1999. The commercial building had been constructed in July 1996.

In order to be competitively placed the company relocated operations to the Workington

industrial sites. The company moved in to operate from leased industrial premises, which were
secured by signing a 20-year lease agreement commencing 1 February 1999. The terms of the
agreement were as follows:
Lease premium payable prior to occupation $120,000
 Lease rentals payable every month 5,000
An obligation to construct on the stand a suitable staff canteen for a value of not less than
$200,000.

Although the company commenced operating from the industrial stand with from 1 February
1999 the construction of the canteen was not completed until June 1999 at an actual cost of
$240,000 and was first used with effect from 1 July 1999.

The company replaced some manufacturing equipment, which had an income tax value of
$100,000 as at 1 January 1999 but had cost $500,000 in the hands of TNT International, after
selling the equipment for $300,000. The replacement equipment cost $600,000.

During the year some second equipment was also received from South Africa subsidiary of TNT
International ltd with a value $500,000.

The company sold the commercial building acquired from TNT International Ltd for $1.4 million in June 1999
and used the proceeds to construct a new spacious office building on freehold land in Avondale for $2
million. The new building was brought into use with effect from 1 December 1999.

Required

a. Outline the elections that can be taken to minimize the incidence of tax on the
group for the 1999 tax year

b. Compute the potential tax avoided on the restructuring as a result of making the elections
identified in (a) above.
c. Compute the maximum deductions that can be claimed by Smoking Pleasure Ltd in
respect of the year ended 31 December 1999. [ACCA]

Answer to Activity 1

Tax implications on disposal

There is a potential tax on recoupment as a result of the transfer of assets in terms of the Income Tax Act as follows:
Rom (Pvt.) LTD
Asset S/Price ITV P/Recoup Allowances A/recoup
Showroom 900,000 350,000 550,000 550,000 550,000
Plant 45,000 75,000 (30,000) 340,000 (30,000)
Factory 6,650,000 140,000 6,510,000 610,000 610,000
Com /blg 800,000 195,000 605,000 745,000 605,000
2,245,000 1,735,000

Potential tax on recoupment @ 30.9% of 1,735,000 =$536,115.00

There is a potential tax on capital gains as a result of the transfer of assets in terms of the Capital Gains Tax Act as
follows:

ROM (PVT.) LTD

DETERMINATION OF CAPITAL GAINS (LOSSES) FOR THE YEAR ENDED 31 DECEMBER 2002

Gross capital amount 8,350,000

Less Recoupment 1,765,000
6,585,000
Less Deductions
Showroom 900,000
Factory 750,000
Commercial building 940,000
2,590,000
Less Capital Allowances 1,905,000
685,000
Inflation Allowances
900,000 x30% x 6yrs 1,620,000
750,000 x30% x 9yrs 2,025,000
940,000 x30% x7yrs 1,974,000
------------- 5,619,000 (6,304,000)
Capital gains (losses) 281,000

Potential tax on capital gains @20% of 281,000 =$56,200

Relevant provisions:

If the taxpayers make an election in terms of paragraph 8 (3) 4th schedule Income Tax Act, the transfer can
be effected at income tax values. This will result is the postponement of tax on recoupment of $536,115.00
as stated above.

If an election is made to transfer at allowable deductions the taxpayer i.e. transferor would not pay tax on
capital gains in terms of sect.15 of the Capital Gains Tax Act.

Answer Activity 2

Capital gain 2001

Gross capital Amount 3,500,000
Less Recoupment 300,000
3,200,000
Less Deductions
Cost 850,000
Less Capital allowances (300,000)
Inflation 850,000 x 15 % x 8yrs 1,020,000 1,570,000
Potential gain 1,630,000
Less A x B [2,500,000/3,500,000 x 1,630,000] 1,164,286
C
Capital gain 465,714

Capital gain 2003

Gross capital Amount 7,000,000
Less Recoupment 1,250,000
5,750,000
Less Deductions
Cost [2,500,000 –1,164,286] 1,335,714
Less Capital allowances (1,250,000)
Inflation 2,500,000 x 50 % x 2yrs 2,500,000 2,585,714
Capital gain 3,164,286

Notes
Inflation rate for a sale made in 2001tax year is 15% while that of 2003-tax year is 50%.
Commercial building does qualify for SIA when constructed on a growth point i.e. 2,500,000
x50% (1,250,000) for 2002 tax year no capital allowances are granted in the year of sale.
The rollover i.e. $1,164,286 for 2001 sale is used in reduction of s11 (2) (a) of the new asset,
constructed out of proceeds from sale of old asset.
We assume by now you should be able to calculate recoupment.
Chapter 22 Answers

Chapter 3
Question 2
Dr TIVAPASI
COMPUTATION OF TAXABLE INCOME FOR THE YEAR ENDED 31/12003
Salary 2,950,000
Bonus 158 000
Less exemption 100 000 58,000
Rent Zambia (not from a source in Zim) -
Company car (540,000 x 5/12 x 40%) 90,000
Housing benefit (7%x 1 200 000) 84,000
Royalties (source in Zimbabwe) 1,200,000
Gift 12,000
Entertainment (60 000 x 0.60) 36,000
Salary for period of temporary absence (S12 (1) (c) 700,000
Gratuity 20,000
5,150,000
Less Deduction
NSSA 7 000
Pensions 47 000 54,000
Taxable income 5,096,000
Tax thereon
: On 1,500,000 488,000
: On (5,096,000−1,500,000) 45% 1,618,200 2,106,200
Less credit
PSMAS 90 100 x 0.50 45,050
2,061,150
Add 3% Aids levy (2 ,061,150 x 0.03) 61,835
Tax liability 2,122,985
Notes

Gratuity during employment is never spread, and that on cessation of employment is no longer spread.

Maximum deduction in respect of NSSA, Pension, retirement annuity contribution and arrear pension
contribution is $90,000 for 2003 tax year, s15 (2) (h).

Question 1
ANDREW NCUBE
DETERMINATION OF TAXABLE INCOME FOR THE YEAR ENDED 31 DECEMBER 2003
Severances pay 2,000,000
School fees 190,000
Gratuity on cessation 75,000
Compensation for loss of office 150,000
Twin Cab taken over {450,000-300,000} 150,000
Less Exempt {1/3 x 1,500,000 or $300,000} (500,000) 2,065,000
Salary 2,500,000
Bonus 125,000
Less exemption 100,000 25,000
Cash in lieu of leave 180,000
Motoring benefit [900,000x6/12] 450,000
Loan benefit [16% x 60,000 x4/12] 3,200
Housing benefit [12.5% of 2,500,000(salary)-10,000] 302,500
Annuity (w1) 15,000
Passage benefit 1,000,000
Taxable income 6,540,700

Tax thereon: on 1,500,000 488,000

: On [(6,540,700-1,500,000) x 45%] 2,268,315
2,756,315
Less Credit
Elderly credit period 20,000
Blind child -
Wife disabled 20,000
Medical expenses [80,000 x 50%] 40,000 80,000
2,676.315
Add 3% Aids levy(2,676,315 x3%) 80,289
Tax payable 2,756,604

Workings
1. Annuity: Interest= P X N – A = [40,000 x10 -250,000] = 15,000
N 10
2 Passage benefit
Total benefit 1,500,000
Less 10/15 x 50% x 1,500,000 500,000
Taxable income 1,000,000

Chapter 4

MUTATE E COMPUTATION OF TAX LIABILTY FOR THE YEAR ENDED 31/12/03

$
Lump sum payment (w1) 805,000
Passage benefit [60,000 exempted 1st passage benefit] -
Restraint of trade capital receipt -
Lotto proceeds capital receipt -
Second hand clothing private income -
Salary [10 months x 250,000 p.m.] 2,500,000
Co. House [12.5% x 2,500,000 -10,000 x10] 212,500
Co. car [420,000 x10/12] 350,000
Lump sum payment First Dance pension fund 110,000
3,977,500
Less Pension [2500, 000 x .075] 187,500
NSSA [2500, 000 x .003 up to 3600] 3,600
Retirement annuity contribution 20,000
*211,100 90,000
Taxable income 3,887,500

Tax there on 1,500,000 488,000

On. [3,887,500 –1,500,000 -915,000] 45% 662,625
1,150,625
Less Credit [NAMAS 80,000 x 10 x 50%] 400,000
 750,625
Add 3% Aids levy [750,625 x 3%] 22,519
773,144
Add Tax on lump sum payment [915,000 x 45%] 411,750
Tax liability 1,184,894

Notes

Lump sum payment is taxable at a special rate usually the taxpayer‘s highest marginal tax rate i.e. 45%, and
no Aids levy is chargeable i.e. 805,000 +110,000=915,000

The lump sum payment from First Dance pension fund is taxable in full, only amounts which are transferred
into another fund which would not been taxable had they been received from the fund which they are
transferred from will escape tax.

*The sum of section 15 (2) (h) and 15 (2) (i) are deducted up to a maximum of $90,000 for the 2003 tax year.
Workings
Lump sum payment 2,090,000
Less: Amount he would have received had rules not changed 300,000
1,790,000
Less Pension for services outside Zimbabwe 895,000
Purchase of an annuity 80,000
Transfer to pension fund 10,000
Transfer to benefit fund - 985,000
805,000

Local service period x Pension = 262 months x 1,790,000= $895,000

Total service period 524 months

Answer to Q2 Martini
Salary 225 000
Housing all exempt paragraph 4d, 3rdsch -
Transport all exempt paragraph 4d, 3rdsch -
Lump sum payment (W1) 835 333
Salary- June –Sep s12 (1) c 600 000
Salary- no longer a resident -
Dividends- no longer a resident -
Gratuity (W2) 50,000
Annuity (W3) 20 000
1,730,333
Less Deduction
NSSA 1800
Pension 20,000
Retirement annuity fund 5,000 26,800
Taxable income 1,703,533

Tax thereon on 1,500,000 488,000

On (1,703,533-1,500,000) x45% 91,590
579,590
Less credits PSMSA 14,000 x50% 7,000
Elderly 20,000 (27,000)
552,590
Add 3% Aids Levy 16,578
Tax payable 569,168
Workings
Section 8 (1) (r)
Lump sum payment 2,700,000
Less: 1/3 x 6,000,000 2,000,000
700,000
Add: Reduced pension (20 000 x 7) 140,000
840,000
Less: Disallowed contribution 80,000 x 7/12 4,667
10
Taxable income 835,333

Notes
*She elected to commute her pension by receiving a lump sum payment hence 1/3 of her pension entitlement is an
amount of a capital nature in terms of section 8 (1) (r).

*Reduced pension is taxable in full as and when it accrues. Hence for the current year pension for seven months
accrued.
* Disallowed portion represents an amount, which was not allowed as deduction at the time of contribution. Taxing it
again would be taxing the same amount twice. It should be spread throughout the life of the pension, i.e. 10 years.
.2. Gratuity – is no longer spread.
3. For a purchased annuity only the interest component is taxable as follows:

I = (PX N) – A = [50,000 x10-300, 000]/10= $20,000

N
Note – Where the life expectancy is not mentioned you use 10 years

4 Dividends – s12 (2) is meant to tax persons ordinarily resident in Zimbabwe at the time of receiving the dividend or
interest, yet Martini was no longer a resident then.

Chapter 5
(a) HAMILTON BOTHA
DETERMINATION OF TAX LIABILITY FOR THE YEAR ENDED 31 DECEMBER 2003
Gross salary 2 500 000
Commutation of pension 1 100 000
Less 1/3 pension entitlement (270 000x1/3) 900 000 200 000
Gratuity 200 000
Rent Zambia (not from source in Zim) -
Tax reserve certificate exempted -
Founders’ class C shares exempted -
Dividends from Zimbabwe CO exempted -
Annuity (40 000−250 000/10) 15 000
Motoring benefit (9/12x540 000) 405 000
Gross pension accruals 6 000
3 326 000
Less Deduction
Pensions contributions 55 000
Alimony for x-wife disallowed -
CIS contributions-15(2) (s) 12 000 67 000
Employment income 3 259 000
Lump sum payment s8 (1) (c) (w1) 27 000
3 286 000
Dividends
UK (5 000+600) up to 30/9/03 5 600
Dividends UK up to 31/12/03 -
Building society 25 000 30 600
3 316 600
Interest
Mozambique 27 000
City of Harare paragragh 11,3rd Sch -
Malawi 7 000 34 000
Taxable income 3 350 600
(b)TAX LIABILITY HAMILTON BOTHA

Employment income
On 1 500 000 488 000
0n (3 259 000−1 500 000)45% 791 550 1 279 550
Less credit
Elderly credit 20 000
Medical aid cont 120 000x0, 50 60 000
Medical aid cont 120 000x0, 50 60 000
Disability credit 20 000 160 000
1 119 550
Add 3% Aids levy 33 587
1 153 137
Lump sum payment (27 000x45%) 12 150
1 165 287
Dividends (30 600x0, 20) 6 120
Interest (34 000x0, 30x1-03) 10 506
1 181 913
Less Withheld taxes
PAYE 450 000
DTA (W2) 2 650 452 650
Tax payable (refund) 729 263

Notes

Medical expenses incurred after Hamilton has left Zimbabwe cannot be granted since he is no longer a
resident of Zimbabwe (see Chapter 2).

Interest on city of Harare loan stock is exempted in terms of paragraph 11, 3rd schedule he is no longer a
non-resident and not carrying out business in Zimbabwe.

Dividends from UK received after he has left is not taxable here, is not the type stated in s12 (2). He should
have been ordinarily resident in Zimbabwe at the time of receiving the dividend.

Lump sum payments are taxable at the taxpayer’s highest marginal rate excluding Aids levy

Workings
1. Lump sum payment 150 000
Less amount he would have received had the rules not changed 90 000
60 000
Less: Pensions for source outside Zim
30-yrs/60 yrsx60 000 (30 000)
30 000
Less amount used to purchase
Annuity 2 000
Transfer to pension fund 1 000
Benefit fund - 3 000
27 000
2.
INCOME ZIM TAX FOREIGN TAX RELIEF
Dividend UK 1 120 600 600
Interest Moza 8 343 1 700 1 700
Malawi 2 163 350 350
2 650

1. Dividend UK 5,600 x0, 20=$1 120

2. Interest Moza 27 000x0, 30x1-03→8 343
3. Interest Malawi 7 000x0, 30x1-03→2 163
Chapter 7
Trading profit 160,400
Less: Interest from bank (exempted) 11,000
Company dividends (exempt) 3,520 14,520
145,880
Add: Depreciation 180,000
Finance charges 3,500
Life insurance (co beneficiary) 6,000
Restraint of trade (Open way) 9,000
Fine customs 500
Formation costs 980
Rent for empty shop 2,000
Premium [s15 (2) (d) 10000 *9/10] 9,000
General provision 5,000
Loan to employee 1,200
Donations-Aids Orphanage 1,900
Loan to buy shares 4,000
Director fees-voted after date of accs 200,000 423,080
Taxable income 568,960

Tax there on (568,960*0.309) 175 809

Question 2

(a) Varaidzo cannot claim expenses incurred in the production of employment income- s
15 (8).
However, since she presents papers on a regular basis she may be able to support a
claim of attributable expenditure against the income earned from these presentations.
In her particular case, provided that she can prove that the computer and the printer are
mainly used for the purposes of business, that is the production of paper presentation
income, she would be justified in claiming capital allowances.
(b) The operation was certainly essential for Dr Chiti to safeguard his income earning
structure/capacity and indeed Chiti would not have been able to continue earning income from his
profession as eye surgeon. However, it falls squarely into the class of expenditure defined as
expenditure in maintaining oneself- s 16 (1)(a). The expenditure is medical in nature and it has
been incurred in performing an operation on his person. In that respect, he can only claim a
medical credit of 50% of the shortfall.

(c) Danny would be subject to a motoring benefit on the vehicle provided to him by the employer.
Currently the tax legislation provides for a motoring benefit on the basis of engine capacity of the
motorcar availed. Danny’s deemed annual benefit is $240,000 per year.
In order for Danny to be considered for a lesser benefit, he should be able to submit a detailed
calculation of expenditures and solid reasons to show his actual benefit is definitely less than the
 deemed benefit. From a practical point of view though, it would be very difficult to prove the value
of Danny is less than $240,000. Since Danny has free use of the vehicle over the weekends, and,
bearing the cost of fuel, service and replacement of tires, he would not succeed in convincing the
revenue authority that his benefit is less than the deemed value.

Question 3
a) Expenses incurred in removal of trading stock, or minor removals of assets within same premises are
allowable as a deduction in terms of s 15 (2) (a).
Other removals will therefore constitute capital expenditure and should be capitalize to form part of the cost
of the asset concerned for purposes of capital allowances s15 (2) (c).

b) The expenditure is clearly laid out for the purposes of profits i.e. to secure sales. They are therefore
incurred for the purpose of trade and also in the production of income. It is therefore deductible in terms of s
15 (2) (a). S16 (1) (j) does not appear to prohibit the deduction since the payments are made voluntarily and
it is unlikely that the understanding with the buyers can be described as an agreement, which restrains the
purchaser from selling goods obtained from other suppliers
c) They are deductible if:
• They relate to specific debts
• The debts are due and payable to the taxpayer
• The debts are proved to the commissioner’s satisfaction to be doubtful and
• The debt has been included in the taxpayers’ income of any previous year or current year.

d) Yes, provided the employer’s business is not closing down. There are court decisions where such
payments were made to directors and were held not to be deductible. The reason was that the payments
were part of the package deals also involving the sale of the director’s shareholding. And where the same
amount is paid to get rid of a director, who is considered an obstacle in the efficient running of the
company’s business, was held to be for purposes of earning profits and is deductible.

e) If the money lent is floating, not fixed capital, for example by the moneylender in the ordinary course of
business, is allowable as a deduction. But not when the person is not in the business of giving out loans.

Question 4
Answer
Net profit as per statement 188,000
Add Fine for dumping toxic 78,000
License to manufacture chemicals 59,000
Caps holding research see note 67,500
Advertising to obtain shares 70,000
Greenwood pharmacy – s 16 (1) (j) 400,000
Replacement of durawall 70,000
Painting of factory 100,000
Purchased debts- G Ltd 20,000
5% of doubtful 29,500
MD’s cousin –grant & bursary 300,000
Mr. Chikari’s wife 100,000
Annuities – s 15 (2) (q) 198,000
Donations- Independence Day 100,000
Installation of machinery 20,000
Alteration of memorandum 200,000
Purchase of formula 80,000
MD’s Trade convention (500000 – 100,000) 400,000
 MD’s Trade convention second 350,000 2,642,000
Taxable income 2,830,000

Tax thereon (2,830,000 x .309) 874,470

Notes
The question was basically testing your understanding of s 15, with particular emphasis on:
1. Trade convention s 15 (2) (w) – the allowable deduction is up to $100,000 in the year of
assessment in which it ends. The first trade convention ended in 2003 tax year
accordingly it is allowable in that year subject to maximum of $100,000. The second
convention ended in 2004-tax year not the year of accounts accordingly disallows the
whole amount.
2. Annuities s 15 (2) (q) – the deduction is applicable in respect of former employees and
dependents of former employees, but not amounts paid to former directors and to their
dependents. Note that a working director is regarded to be an employee. Disallow in full
payment to Mr. Chikari’s wife not an employee, but allow up to $2,000 on Mr. Bere’s
dependents – a working director is an employee Frampton case.
3. Grants and bursaries s 15 (2) (p)- the grant or bursary should be connected to taxpayer’s
trade – Tourism course is not connected. The person receiving the grant should not be
related to the taxpayer or director of the company. But director does not include a
working director or a director controlling less than 5 % voting shares.
4. Pre-production expenses s 15 (2) (t) – must be allowable as a deduction in the year in
which business commences, excluding expenditure of a capital nature. All others are
capital nature, but headgears (protective clothing is not). These were incurred within 18
months prior to commencement of business on 1 January 2003.
5. Research expenditure s 15(2) (n) – where the taxpayer is a contributor the expenditure
may not exceed amount arrived at using:
AxB
C
. i.e. 120,000/800,000 x 350,000 = $52,500, but the company had claimed $120,000
therefore add back the difference $67,500.

6. Repairs s 15 (2) (b) – painting of a factory adds value to the factory therefore it is an
improvement, expenditure on durawall is also an improvement unless part of the durawall
was replaced – the question did not say.

Chapter 8
Question 1
Net profit as per statement 5,400,000
Less Profit on sale of equipment 20,000
Bad debts recovered 14,250
Exchange gains machinery 12,750
Dividends from Zest 2,100
Lease improvement (W3) 36,458
S1A (see schedule) 2,047,500
Investment allowance (schedule) 415,800 2,548,858
2,851,142

Add Interest (W1) 74,286

Underpinning of foundation 120,000
Accounting fee (w2) 190,400
 Growth point license (capital) 100,000
Lease improvements (W3) 750,000
Lease rentals (1200 000 – 1 000 000) 200,000 1,434,686
Taxable Income 4,285,828

The tax on (4 285 828 x 0, 15) 642 874

Add 3% Aids levy 19 286
Tax payable 662 160

NB Lease rentals on passenger motor is restricted to $1 000 000[S16 (1) (k)].

WEAR AND WEAR SCHEDULE 31/12/03

Asset COM. Staff PMV lawnmower Hoover Truck Total

Build housing

COST 1 500 000 1 200 000 480 000 72 000 18 000 825 000 4 095 000

RATE 2,5% 5% 20% 10% 10% 20% -

S1A (50%) 750 000 600 000 240 000 36 000 9 000 412 500 2 047 500

INVEST 225 000 180 000 - 10 800 - - 415 800

(15%)

ITV 750 000 600 000 240 000 36 000 9 000 412 500 2 047 500

Notes
(1) S1A is claimed on constructed immovable assets, and movable assets purchased whether new or second hand.
(2) Investment allowance is never claimed on second hand items and motor vehicle intended or adapted for use on
the roads.
(3) Exchange profit on machinery should be added to the cost of machinery and qualify for capital allowances, but the
cost of the machinery is however not given.

Workings
(w1) Interest: $1 million of the loan was used for unproductive activity thus the corresponding interest
should be disallowed.

1,000,000 x 520 000 = $74 286

7,000,000

(w2) Accounting fee: Any expense in respect of tax advice is not allowable as deduction by the
commissioner i.e. 0, 20 x 952 000 = 190 400 to eliminated.

(w3) Lease improvements s15 (2) (e) are to be spread over lease period or 10 years whichever is shorter.
Where no period is stated use 10 years.

Allowable current year i.e.

625 000 x 7 months = $36 458
120months
Only the amount stipulated in the agreement will qualify for lease improvement deduction> Mrs. Focus may
elect to claim capital allowances on the excess i.e. (750 000 – 625 000) $125 000.

Questiion 2
TIVAPASI WOOL MANUFACTURERS (PVT) LTD

REPORT TO THE FINANCE MANAGER

We have audited the financial statements contained on pages 2 to 10 for tax purposes, and would like to
bring the following weaknesses to your attention.

1. Capital Allowances
Capital allowances were incorrectly computed on most assets except, lathe machinery. Pajero and
Twin Cab are both passenger motor vehicles and should have been restricted to a cost of $1,000 000.
Computers, delivery and factory building should qualify for wear and tear as these were brought forward
from previous year where no SIA was calculated. Factory building qualifies for wear and tear at the rate
of 5% on cost. Staff housing too has a restricted cost of $1,000,000 on which to calculate allowances,
but use actual amount since it is below the deemed cost. While retail building (commercial building)
should not have qualified for SIA, but wear and tear unless it is constructed at a growth point.

2. Water Connection Fee

Is a permissible deduction in terms of s15 (2) (a) and should not have been added back.

3. Bad Debts – acquired together with the business are not allowable in terms of s15 (2) (g). Reference
case is that of R E Cooper. Also disallowed is any debt expressed as a percentage of debtors.
4. Provision for Directors Fees – provisions of such a nature are not allowable in terms of s16 (1) (e),
unless voted on or before the date of the relative accounts or the annual general meeting at which they
are considered.
5. Expenditure - in respect of samples to Aliment (Pvt) Ltd, is allowable once. A double deduction
incentive is only applicable to licensed investors in terms of s15 (2) (gg).
We hope the foregoing will clarify the issues.

Yours faithfully
Tawana & Partners Chartered Accountants

COMPUTATION OF TAX LIABILITY FOR THE YEAR ENDED 31 DECEMBR 2003

Taxable income as per accounts 74,296,300
Less Water connection fee 12,550
Wear & tear (schedule) 987,500
SIA (schedule) 1,175,000 2,175,050
72,121,250
Add incorrect capital allowances
Retail building 750,000
Truck 1,250,000
Pajero 2,250,000
Factory 50,000
S/housing 175,000
Computers 875,000
Twin cab 1,750,000
Bad debts 120,100
Provision for directors fees 1,450,000 8,670,100
 Taxable income 80,791,350

Tax liability (30.9%× 80,791,350) 24,964,527

WEAR AND TEAR SCHEDULE 31 DECEMBER 2003

Asset `R/Building Truck Pajero Factory S/house Computers Twin cab Total
A/ cost 4 500 000 350 000 3 500 000
Cost/ITV 1 500 000 2 500 000 1 000 000 2 000,000 350 000 1 750 000 1 000 000
Rate 2.5% 20% 20% 5% 5% 20% 20%
Wear 37 560 500 000 - 100 000 - 350 000 - 987 500
SIA50% - - 500 000 - 175 000 - 500 000 1 175 000
ITV 1 462 500 2,000,000 500 000 1 900 000 175 000 1 400 000 500 000

c) Yes the tax liability would be different, if the company was located at a growth point area. In addition to
the capital allowances granted in terms of 4th schedule the company could qualify for a 15% investment
allowances on the retail building, lathe machinery, and staff house. In order for an immovable asset to
qualify for investment allowance the taxpayer must have constructed it, whereas the taxpayer must have
purchased movable asset new. Excluded are motor vehicles intended and adapted for use on the roads.
Furthermore the retail building (commercial building) will qualify for SIA. .The Company will also be taxable
at favorable 10% tax rate.

Question 3
Net profit per accounts 600,000
Add Exchange loss realized 16,000
Restraint of trade 20,000
Cost of lease 1,000
Lease improvement amortization 40,000
Increase in share capital 800
trade fair showroom 6,000
Architects fees 20,000
Late payment of sales tax 400
Loan raising fee 4,200
Depreciation 82,000
Destitute Aged 900
Fine 5,000
Recoupment Mazda 7,500
Loss on disposal of asset 15,000 218,800
818,800
Less SIA & Accelerated wear and tear 410,100
Wear& tear 21,500
Improvements(obligatory 6/120x 500,000) 25,000 456,600
Taxable income 362,200

Asset Machinery Computer Equip S/room factory furniture van bus lathe Improved
Cost/ITV 116,000 40,000 80,000 60,000 400,000 50,000 170,000 250,000 60,000 124,200

Rate 10% 20% 10% 2.5% 5% 10% 20% 20% 10% 5%

Sia/ accer 33,000 10,000 40,000 25,000 85,000 125,000 30,000 62,100
Wear & tear 1,500 20,000
ITV 8,000 10,000 40,000 54,000 380,000 25,000 85,000 125,000 30,000 62,100
Notes
1 All assets on which SIA was claimed in the previous year would qualify for accelerated wear & tear at the rate of 25
%.
2 Machinery the cost is made up of the cost for previous year and the exchange loss of $16,000, which has been
capitalized. Exchange loss will qualify for 50% SIA while the brought forward from last year 100,000 will qualify for
accelerated wear & tear.
3 Voluntary improvements (last column) do qualify for SIA see paragraph 9.5 chapter, this is after capitalizing architect
fees (20,000) and loan raising fee (4,200). To give a total of $124,200.
4 Mazda 323 recoupment or scrapping 45,000- 37,500= $7,500

Chapter 9
a) i) Sect. 15 2 (e)
ii) Sect 8 1 (e)
b) Period of the lease 7 years
Less Construction period 2 years
Unexpired lease period 5 years

Varied cost $ 630,000.00

Allowance $ 630,000.00 x 1/5
In the 4th year $ 126,000.00

c) Taxable income $ 126,000.00 equally over the unexpired period of the lease.

Chapter 10
a) Management fees payable to Head office in Nigeria must be paid net of withhold tax of 20%
i.e. 40 000 (200 000 x 0.20). This is in terms of section 26 of the income tax act. The tax withheld
must be paid over to ZIMRA within 30 days of deduction.

b) Interest to Mr. Jones of $500 000 is not the type exempted in terms of paragraph 11 in the 3rd
schedule. It should be paid net of withholding tax of 20% in terms of section 26 of the income tax
Act. The tax withheld must be paid over to ZIMRA within 30 days of deduction.
c) The grant should be received free of tax in terms of 3rd schedule paragraph 14.
d) Dividends from CIMAS Medical Aid society of $20 000 should be taxable in the hands of the
recipient at the rate of 20% i.e. $4 000 (20 000 x 0.20).The dividend was not taxable at source
since CIMAS is not liable to pay tax on profits in terms of paragraph 2 of 3rd schedule. See also
paragraph 9, 3rd schedule.
e) The grant and bursary paid to a director’s child of $125 000 would not be allowable to the company
in terms of section 15(2) (p) unless the director holds less than 5% of voting shares of the
company. The child is a relative to the director.

Question 2
Notes

Interest on loans made to the state and other quasi government bodies (local authorities) by people not
ordinarily resident in Zimbabwe and not carrying on any business in Zimbabwe paragraph 11, 3rd schedule

A medical expense paid by a person not ordinarily resident in Zimbabwe does not qualify for a credit in terms
of s12 Finance Act.

Rent is taxable in Zimbabwe, provided the property is situated in Zimbabwe. It is immaterial whether the
person receiving rent is not ordinarily resident in Zimbabwe.

Dividends payable to a person not ordinarily resident is after 15% and 20% withholding tax i.e. for listed and
non-listed shares respectively, in terms of section 26. No further tax will be payable by the non-resident after
deduction of withholding tax, by the company paying out the dividend.

You ought to know that the rate to be used is that applicable to business income since neither is employed in
Zimbabwe.

Note also that no credits are granted on income from a business

Computation of tax liability Mr. Atkins

Rent 120,000
Add back Burglar bars (improvements) 44,000
164,000
Dividends Listed exempt -
Dividends non-listed exempt -
Class C Shares exempt -
Directors’ fees (gross) 4,800
Mortgage interest (gross) 9,000
Government bonds exempt -
Pension (taxable in full service rendered in Zim) 5,700
Taxable income 183,500

Tax thereon 183,500 x 30.9% 56,702

Less Prepaid taxes Director’s fees 960
Mortgage Interest 900 1,860
Tax payable 54,842

The only aspect taxable in the hands of Mrs. Atkins is interest from a mortgage (950 x.309) $294 less
prepaid tax on $95. Tax payable therefore is $199 (294-95). POSB interest and Municipal loan stock are
both exempted by paragraph 10 & 11, 3rd schedule respectively.

Chapter 11
Question 1- Solomon & Wise

DETERMINATION OF JOINT TAXABLE INCOME FOR THE YEAR ENDED 31/12/2003.

Net profit as per statement 3,350,000

Less: Govt bonds income (Para 10, 3rd sch.) 300,000

Interest Building Society (Para 10, 3rd sch.) 250,000
Profit on land and building (capital) 2,000,000
SIA equipment (600 000 x 0.50) 300,000
Wear and tear improvements (200 000 x 0.05) 10,000 2,860,000
490,000
Add: Depreciation Fixtures 120,000
Equipment 100,000
Joint Policies 80,000
Donation UZ [not specified] 40,000
Annuity widow[ s 15 (2 ) (q) 320000-2000] 318,000
Purchase of equipment [capital nature] 600,000
Attendance summer [ s 15 (2) (w) ] 20,000
Drafting lease agreement 30,000
Lease improvements [capital nature] 200,000 1,508,000
Joint Taxable income 1,998,000
Notes

Drafting lease agreement expenditure is not allowable to a lessee, but when incurred by the lessor.

The lessee may elect to claim wear and tear on voluntary improvements see chapter 9 paragraph 9.5.

Each partner will be granted 50% credit in respect of medical contributions or expenses taxable in his hands.
SEPARATE TAXABLE INCOME FOR THE PARTNERS 31 DECEMBER 2003
SOLOMON WISE
Share of profit 1,198,800 799,200
Interest on capital 300,000 200,000
Salaries 800,000 500,000
Private expenses
- Pension 200,000 70,000
- Annuity 120,000
- Medical contribution 45,000 55,000
- Medical expenses 30,000
Pension contribution s 15 (2) (h) (90,000) (90,000)
Taxable income 2 453 800 1 684 200

Question 2

DETERMINATION OF PARTNERSHIP INCOME FOR 31DEC………….

Net profit as per statement 4,700 000

Add right to use trademark 9/10x1000 9,000

Depreciation 165,000
Neon sign capital nature 114,000
Recoupment (200 000−125 000) 75,000 363 000
5,063 000
Less: Dividends from a foreign Co. 270,000
Profit on sale of van 88,000
Dividends from class C shares 25,000
Wear and tear 426,100 809,100
Taxable income 4,253,900

Notes

Trademark-premium s15 (2)(d) is deductible over the lease period or 10 years whichever is shorter

Trade fair s15 (2)(w) deduction is limited to $100,000 effective 1 January 2003.

Recoupment is restricted to the minimum of allowances previously granted and potential recoupment

Partners are taxable using corporate rate of tax of 30%.

WEAR AND TEAR SCHEDULE FOR THE YEAR ENDED 31 DECEMBER 2002

Asset D/van F& F Computers Factory Equipment F&F Total

Cost 750 000 100 000 425 000 825 000 116 000 145 000
Rate 20% 10% 20% 5% 10% 10%
W&T 150 000 10 000 85 000 155 000 11,600 14 500 426 100
SIA - - - - - -
ITV 600 000 90 000 340 000 670 000 104 400 130 500

DETERMINATION OF TAX LIABILTY OF THE PARTNERS FOR 31 DEC……….

Fungi Noma

Share of profits 2 658 688 1,595 212

Salary 800,000
Rent 280,000
Medical Aid 78,000 78 000
Accident policy 14,000
Pension policies 9,000 9 000
Pension policies (s15) (2) (h) (9 000) (9 000)
Taxable income 3 550 688 1 953 212
Tax thereon at 30% 1 065 206 585 967
Less Credit [78,000 x50%] 39,000 39 000
1 026 206 546 967
Add aids levy 3% 30 786 16 409
Foreign Dividends 270 000 @ 20% 33 750 20 250
Tax liability 1 090 742 583 626

Chapter 12-Jack Booster

DETERMINATION OF TAXABLE INCOME (LOSS) 31 DECEMBER 2003

Gross profit 2,100,000
Add: Crop sales 2,000,000
Government recoup (w3) 325,000
Truck (w3) 120,000
Recoupment (villages) (w4) 879,500
Operating Cost (W5) 749,500
Taxable income (w6) 350,000 4,424,000
6,524,000

Less: Overstated stock (W1) 120,900

Drought sale (W2) 127,030
Dam 245,000
SIA Farm road (W4) 379,500
SIA Tobacco barn (W4) 600,000
1,472,430
Taxable income (loss) 5,051,570

Reconciliation account- closing stock(w1)

Bulls Oxen Cows Calves Tollies Heifers

Open stock 1 12 14 30 20 15 92
Promotion in 6 12 10 28
births 14 14
1 18 14 44 32 25 134
Sales 15 5 20 20 60
Donation 2 2
Deaths 3 3
Promotion out 22 6 28
1 1 9 22 3 5 41
FSV(PPV) 4500 2500 2000 800 1500 1400

Closing stock 4500 2500 18000 17 600 4500 7000 54 100

Total closing stock= 54 100

Less claimed in A/Cs 175 000
Overcastted stock 120 900
2.Farm invasion sales

Sales 500 000

Less: Cost of sales
15 Oxen*2000 = 30 000
20 Heifers*1300 = 26 000
20Tollies*1200 = 24 000
5Cows*1500 = 7 500
87 500
Add direct expenses (60*246000) 221 955 309 455
(41+92)1/2 190 545

Less 2/3 taxable in next two 127 030

Taxable current year 63 515

3. Recoupment Government Compensation

Asset S/price ITV Allowances P/Recoup A/Recoup

Machinery 880 000 650 000 550 000 230 000 230,000
Implement 120 000 25 000 175 000 95 000 95,000
325,000
Truck 675 000 525 000 325 000 150 000 150 000

Actual recoupment(Truck) 150 000×0.80→ 120 000

4. Recoupment Acquired by Villager

ITV
Farm roads →759 000− (SIA 50%× 759 000) → 379,500
Tobacco barn→1 200000− (SIA 50%×1 200 000) →600 000
Recoupment
Asset S/Price ITV P/recoup Allowance A/recoup
Farm roads 1,000,000 379,500 620,500 379,500 379,500
Barn 1,100 000 600,000 500 000 600,000 500,000
879 500

W5. DISALLOWED OPERATING EXPENSES

Window lighting capital nature 4 500
Motor expenses (140 000× 0.2 private) 28 000
Life policy (personal) 65 000
Depreciation 240 000
Irrecoverable loan allowance 412 000
749 500
W6. Taxable income b/f from previous year 700,000. This represents 2/3 of taxable income of December
2002, which was spread over 3 years in terms of paragraph 5th schedule.

Only 1/3 is taxable in current year i.e.

700 000 = $350 000
2

Question 2-Allbright Investments

COMPUTATION OF TAX LIABILITY FOR THE YEAR ENDED 31/12/02
$
Net profit as per statement 4,300,000
Add Dividends [s 12 (2) 150,000
4,450,000

Less Temporary farm roads [s 15 (2) (a) 500,000

Fencing in full [Para 2, 7th schedule] 50,000
Dam in full [Para 2, 7th schedule] 140,000
Wear & Tear [see schedule] 369,708 1,059,708
Taxable income 3,390,292

Tax there on [3,390,292-150,000] x30.9% 1,001,250

Add tax on dividends [150,000 x20% 30,000
Tax liability 1,031,250

Workings
WEAR AND TEAR SCHEDULE FOR THE YEAR ENDED 31/12/02

Asset Deemed cost Cost/ITV Rate % W&T ITV

Staff house 250,000.00 300,000 5 12,500 237,500

P/road - 800,000 5 40,000 760,000
Mazda 500,000.00 620,000 20 50,000 450,000
C/harvester - 230,000 25 33,542 196,458
Tractor - 400,000 20 53,333 346,667

Plant - 160,000 10 5,333 154,667

Clinic 3500,000.00 4,000,000 5 175,000 3,325,000

NOTES
1. No SIA has been calculated since the taxpayer is required to pay maximum tax.
2. In order for a school to qualify it should be attended by at least 50% of the children of the farm workers. Accordingly the farm would not qualify
3. Land and dam are not qualifying assets.
4.New staff housing would not qualify it exceeds qualifying limit of $500,000
5. Wear and tear is apportioned on movables in the first year of trade accordingly we have apportioned it on all movables.
6. Dividends are taxable at flat rate of 20%, and no Aids Levy is chargeable.
7 Growing crops will be included as gross income in the returns of Mr. Booths, and is an allowable deduction in the
hands of Albright investments.
8 Fencing generally does not qualify for capital allowances, unless it surrounds an industrial building that is when it will
be treated as a qualifying asset. This is categorically stated in the 4th schedule definition of industrial building.

Question 3
Profit per accounts 251 700
Add legal fees-water rights 600
Life assurance-private expense 5 000
Donation 500
Depreciation 80 000
Interest &bond raising fee [26,000x 75 000]/100,000 19 500
Recoupment –truck ($50 000- ITV $30 000) 20 000 125 600
 377 300
Less Drought sales 37 180
Inherited livestock 62 500
Insurance claim 20 000
Sales tax refund 2 000
Proceeds on sale of truck- capital nature 51 000
Dividend -exempted 500
Wear & Tear 36 773
Dam –para 2 ,7th schedule 143 838
Interest from bank-exempted 10 500 364 291
Taxable income 13 009
Tax thereon 13 009 x .309 4 020

WEAR AND TEAR SCHEDULE FOR THE YEAR ENDED 31 DECEMBER 2003
Asset Plant Barns Grading shed Landover Irrigation equipment Total

Cost/ITV 120 000 80 000 30 000 87 365 18 000

Rate 10% 5% 5% 20% 10%
W&T 12 000 4 000 1 500 17 473 1 800 36 773
SIA - - - - -
ITV 108 000 76 000 28 500 69 892 16 200
Notes

Recoupment in respect of a grading shed burnt down (sale proceeds $20 000- $12 000 ITV) $8 000, shall not
be taxable since the proceeds were utilized in full within a period of 18 months to construction an asset of a
similar nature , which was brought into use before the expiry of 3 years , s 8 (1) (j).On the same note the
proceeds from an insurance claim (sale proceeds) is a receipt of a capital nature.

A refund of sales tax i.e. $2 000 is reduces the cost of the irrigation equipment for purposes of s 15 (2) (c )
$18 000 [20 000- 2 000].

Inherited stock is valued at estate duty value , accordingly the heir should deduct as his cost $62,500.

Drought sales are spread over 3 years in equal installment upon election, paragraph 5 ,7th schedule.

Sale 50 steers 70 000

Less cost of sales
Purchase –FSV $30 x50 1 500
*Expenses 76 000 x 50 12 730 14 230
[192+405]/2
55 770
Less 1/3 x 55 700 taxable in the current year 18 590
Deduct from profit 2/3 taxable in the next 2 years 37 180

Please note livestock expenses are apportioned between normal sales and drought sales using the formula:
Number sold x livestock expenses
Average stock [opening stock + closing stock/2]

Chapter 13

Answer to Q1
WINDFALL MINES
DERTERMINATION OF TAX LIABILTY FOR THE YEAR ENDED 31 DECEMBER 2003
$ $
Net profit as per statement 199,000,000
Less: Interest on Tax res. Cert. 200,000
 Sale of mine claim [3/4 x950, 000] 712,500
Sale of grinder 250,000
Assessed loss b/f 115,000
Capital redemption allowance (w1) 15,860,182 17 137 682
181,862,318
Add: Depreciation 150,000
Purchase of mine claim 2,500,000
Interest (w2) 212,727 2,862,727
Taxable income 184 725 045

Tax thereon [.2575 x 184,725,045 inclusive of Levy] 47,566 699

Workings
1
CAPITAL REDEMPTION ALLOWANCE 31/12/03
Unredeemed balance of capital expenditure b/f 912,000
Less: Recoupment Grinder 250,000
662,000
Divide 11 years [662,000/ 11] 60,182
Add: Current expenditure
Mining buildings 3,000,000
House GM 500,000
House Fin. Controller 950,000
Nurse house [restricted] 550,000
Twin Cab 300,000
Mine clinic [restricted] 10,000,000
Shaft Sinking 500,000 15,800,000
Capital redemption allowance 15,860,182

2 Interest payable in excess of debt: equity ratio of 3:1 is not an allowable deduction. Thus the proportion
should
42,000,000: 14,000,000
The ratio is exceeded by 13,000,000 [55,000,000 – 42,000,000]. Therefore disallowable interest is:
13, 000, 0000 x 900,000 = $212,727
55,000,000

Notes
Mixed basis has been used since it provides for minimum tax.
Life of mine should be counted from beginning of the current year of assessment.
Sale of mine claims are taxable over 4 years in terms of s 9 Income Tax Act, thus proportion
applicable to 3 years have been eliminated.
Purchase of mining claims is not generally regarded as a capital expenditure or an allowable
deduction
Disallowed interest is treated as payment of dividends for purposes of s 26.

Answer to Q2

(A) REPORT TO SHAREHOLDERS OF ALMOND (PVT) (LTD)

We have reviewed your financial statements contained on page 3 to 10.
We would like to point out certain issues, which have not been correctly treated. Otherwise the financial
statements were prepared in accordance with generally accepted accounting standards.
(a) Repairs
These repairs are the type stated in s15 (2) (b) (ii), repairs resulting from the letting of property. Such repairs
are allowable as a deduction no matter whether the property is subsequently taken into private hands or
used for other purposes other than business. The prerequisite for deductibility of such expenditure is that
the repair should be occasioned or caused by the leasing of property. The expense should not have been
added back as it is an allowable deduction.

(b) Motor Vehicle expenses

The motor vehicle expenses should be allowed as a deduction in determination of the company’s taxable
income. Any cost for the maintenance of company’s vehicles is allowable to the company whether an
employee uses the car privately. An exception is when the vehicle is used by the owner of the company or
someone in a position of a proprietor. The employee will however be taxable on the benefit derived from the
use of the car for private purpose in terms of s 8 (1) (f) depending on the car provided.
The accountant should not have added the expense back.

(a) Capital allowances

(i) Capital redemption allowance was grossly miscalculated:
The accountant should have calculated CRA using the shorter of the life of mine and period of the mine.
According to paragraph 1 of the 5th schedule life of mine must not exceed 5 years in the case of a mine
operated for the purpose of producing iron.

(ii) Mining school and Mazda 626 for the sales manager have stated restricted cost of $10 000 000 and $1
000 000 respectively for the 2003 tax year.

(iii) Whereas the teacher’s house is a building classified under staff housing. Unlike the treatment accorded
to it in the 4th schedule, such a building has no qualifying limit in mining .However, for purposes of capital
allowance in mining it has a restricted cost of $1 000,000.

(iv) Prospecting expenditure qualifies for a full deduction under s15 (2) (f) (ii).Thus it is not regarded as an
expenditure of a capital nature. Unless the taxpayer has no sufficient taxable income such expenditure may
be carried forward to be set off against future income upon election. In this case the expenditure should rank
for a deduction in full.

(v) Renewal expenditure was not correctly treated as well, see below.

(d) Renewal expenditure

The accountant misinterpreted the provisions of paragraph 6, 5th schedule. The wording of the paragraph
should generally be taken to mean expenditure not exceeding $40 000, not that expenditure is deducted up
to $40 000.

NB: Mining operations are taxable at the rate of 25% as opposed to 30% used by the accountant. Purchase
of mining claim is not classified as capital expenditure.

We hope the foregoing will clarify the issues.

Towanda and Partners Audit Firm.

(b) COMPUTATION OF LIABILITY FOR THE YEAR ENDED 31 DECEMBER 2003

Taxable income as per statement 302 970 000

less Repairs 164 000
Pilferage stores man 36 000
Motor vehicle expenses 120 000
Prospecting expenditure 530 000
CRA (WI) 13 420 000 14 270 000
288 700 000
ADD Renewable expenditure 40 000
CRA (wrongly calculated) 30 500 000 30 540 000
319 240 000
Tax thereon (25,75% x 319 240 000) 82 204,300

Working 1
Computation of CRA
Balance of capital expenditure b/F 2 830 000
less Recoupment 30 000
2 800 000
Current capital expenditure
Plant and machinery 800 000
Mining school (restricted) 10 000 000
Passenger motor (Mazda 626) 1 000 000
Renewable expenditure 60 000
Prospecting expenditure -
Teacher’s house (restricted to 1 000,000) 1 000,000
Purchase of mining claim - 12 860,000
15 660 000
less CRA 13 420 000
________
Balance of capital expenditure C/F 2 240 000

* CRA = 2 800 000 + 12 860 000

5
= $13 420 000

Chapter 14

Answer to question one- ANITA NCUBE

(a) MAXIMUM BENEFITS

Cash in lieu 140,000
Gross salary 2 000,000
Bonus (350 000−100 000) 250,000
2,390,000
Benefits
School fees 200,000
Cost of living all 900,000
Housing allowance 1,140,000
Motoring benefit 540,000 2,780,000
Total remuneration 5,170,000

Nontaxable allowances are restricted to 50% of remuneration (50%x 5 170 000) $2,585,000.The
excess is taxable i.e. $195 000.
 (b) DETERMINATION OF TAX LIABILITY FOR THE YEAR ENDED 31/12/03
Total remuneration 5,170,000
Less exempted benefits [(a) above] 2,585,000
2,585,000
Less: Pensions contribution (max per yr) 90,000
Taxable income 2,495,000

Tax there on
On 1 500 000 488 000
(2 495 000−1 500 000) 45% 447 750
935,750
Add 3% Aids levy (935 750x0.03) 28,073
Tax liability 963 823

Question 2 solution
Exporters are not required to pay importation tax on all capital goods and raw material to be use by them in
production of goods for export purposes. Usually, exporters are not required to pay tax on their profits in the
first 5 years of operations, and are taxable at the rate of 15% in the 2nd 5 years of arrangement. Thereafter
at a normal rate of 20 %. It is therefore prudent for the company to claim as little capital allowances as
possible in the years in which no tax is payable. Thus no claim should be made of SIA in the initial stages;
otherwise it will be just a wasted deduction.

Answer question 3

PLOTTERS PRIVATE LIMITED

(a) Allowances employees

All allowances granted to employees engaged by a licensed investor are granted tax free to, up to a limit of
a maximum of 50% of total remuneration i.e. 450,000,000 (500,000, 000 + 400,000,000,)x 50%. In this case
the whole amount is granted free of tax to employees.

(ii)Export market development expenditure: A double deduction is granted in respect of any expenditure
incurred by a licensed investor for the purposes of seeking markets outside Zimbabwe. All market
development expenditure stated in the questions fit the definition, except the purchase of equipment for the
purpose of research outside Zimbabwe, which is of a capital nature.

(iii) The specialized machine should be granted wear and tear allowance as follows:

Cost 800 000

Less wear and tear (10% x 800 000) 80 000
ITV 1998 720 000
Less wear and tear (10 % x 720 000) 72 000
ITV 1999 648 000
Less wear and tear (10% x 6 480 000) 64 800
ITV 2000 583 200
Less wear and tear (10% x 583 200) 58 320
ITV 2001 524 880
Wear and tear 52 488
ITV 2002 472 392
(iv) Purchase of six Mercedes Benz:
The company is allowable to claim S.I. A on the Mercedes Benz on a restricted cost of $500 000 i.e. (500
000 x 6 x 50%) $1 500 000 and a deduction is also allowable of interest incurred on the loan i.e. (35% x
60,000,000) $ 21,000,000.

(b) Remittances
There are no taxes associated with remittances since all licensed investors are exempted from withholding
any tax. In respect of other companies the taxes will be withheld and remitted to ZIMRA within 30 days of
deduction.

(c) DETERMINATION OF MINIMUM TAX LIABILITY FOR THE YEAR 31/12/02

Net profit as per statement 915,000,000
Less: Specialized machine wear and tear 52,488
Export incentive grant 405,000
Profit on sale of equipment 95,000
Dividends from ZRC 20,000
Interest on Tax Res. certificate 80,000
Equipment (SIA 1500 000 x0, 5) 750,000
Passenger motor vehicle (SIA) 1,500,000
Advertising of goods outside Zimbabwe 190,000
S.A. Trade fair 70,000
Sample of goods 1,050,000
Interest 21,000,000 25,212,488
889,787,512
Add Equipment-research 1,500,000
Depreciation 200,000
Proposed dividends S16 (1) (e) 200,000 1,900,000
Taxable income 891,687,512

Tax there on [891687 512x0, 20] 178,337,502

Add 3% Aids levy [1 783 375 502x0, 03] 5,350,125
Tax liability 183,687,627

Chapter 15

Question one -GEORGE AND FANNY

(a)INCOME TAX IMPLICATIONS

Asset S/Price ITV P/rec Allowance A/ rec.
S/room 700,000 250,000 450 000 350,000 350,000
Furniture 80,000 100,000 (20 000) 350,000 (20,000)
Plant 255,000 95,000 160 000 375,000 160,000
Com. Building 1,265,000 575,000 690 000 225,000 225,000
1,300,000 715,000

Tax on recoupment [30.9%x715 000] $220,935

(b) DETERMINATION OF CAPITAL GAINS TAX LIABILITY

Gross capital amount 3,665,000
Less Recoupment (see (a)) 575,000
 3,090,000
Less Deduction
Showroom 600,000
Land 20,000
Commercial building 800,000
1,420,000
Capital allowances (see (a)) 575,000
845,000
Inflation
60 000x9yrs.x30% 1,620,000
20 000x34yrsx30% 204,000
800 000x6yrsx30% 1,440,000 3,264,000 4,109,000
Capital gains (loss) (1,019,000)

Notes
Only recoupment and capital allowances applicable to specified asset have been considered in capital
gains (loss) computations so is the gross capital amount applicable to the sale of specified assets.

Question two
BUTLER :DETERMINATION OF CAPITAL GAINS TAX LIABILITY
Gross capital amount 3,000,000
Less Recoupment (w1) 380,000
2,620,000
Less Deduction
Farm 20 000
S/Housing 100 000
T/Barns 300 000
Fencing 40 000
Dam 200 000
Homestead 250 000
910 000
Less Allowances (w1) 620 000
290 000
Inflation
20x31yrsx15% 93 000
100 000x10yrsx15% 150 000
300 000x4yrsx15% 180 000
40 000x3yrsx15% 18 000
200 000x5yrsx15% 150 000
250 000x6yrsx15% 225 000 816 000
1106 000
Add selling expenses 24 353 1 130 353
1 489 647
Less Roll over-Homestead (W2) 242 647
Capital gains (loss) 1 247 000

Tax there on (1 247 000x0, 20) 249 400

(W1)
Recoupment
Asset Selling ITV P/Recoup Allowances A/Recoup
 Price
S/Housing 150 000 20 000 130 000 80 000 80 000
T/Barns 680 000 - 680 000 300 000 300 000
Dam - - - 200 000 -
Fencing 40 000
620 000 380 000

(W2) Rollover principal private residence

Gross capital amount 850 000
Less cost
Original cost 250 000
Inflation All 225 000 475 000
375 000
Less 550 000 x375 000
850 000 242 647
Gains taxable 132 353

Chapter 16
Question one

(a) DETERMINATION OF CAPITAL GAINS TAX LIABILTY FOR THE YEAR ENDED 31 DECEMBER…
2003 2004 2005
Gross capital Amount 130,000,000
Less Exemption ………… ………….. …………….
130 000 000
Less Deductions 14 630 000
Sect 11(2)(a)-cost Farm 30,000
Dam 400,000
Homestead 1,500,000
Sect 11(2)(c )30,000 x40 yrs x50% 600 000
,, 400 000 x23yrs x50% 4 600 000
,, 1 500 000 x10yrs x50% 7 500 000
Potential capital gain 115 370 000
Less Roll over 12 800 000 ……………----------
Potential gain (loss) 102 570 000
Add s 18 Allowance b/d - 47 340 000 11 835 000
Less s 18 Allowance: 47 340 000 11 835 000 - --
Capital gain (loss) 55 230 000 35 505 000 11 835 000

Capital gains tax @ 10% 5 523 000 3 505 500 1 183 500

Notes
o The taxpayer is taxable at the rate of 10% since he is over 59 years of age.
o The taxpayer will not be taxable on proportion of the money used to purchase a new principal
private residence in terms of s 21 i.e. [$20,000,000/25,000,000 x potential gain or disposal of old
principal private residence].

WORKINGS
W1
Roll over – Harare house replacement
OLD HOUSE
Gross Capital 25,000,000
Less cost 1 500 000
 Inflation 7 500 000 9,000,000
16,000,000
Less 5/25 x 16 000 000 3,200,000
Gain rolled over 12,800,000
W2
DEBTORS SCHEDULE FOR THE ENDED 31 DECEMBER……………………
Year 1 Year 2 Year 3
Balance b/f - 60 000 000 15 000 000
Sales 130 000 000 - -
Less Proceeds (70 000 000) (45 000 000) (15 000 000)
Closing debtors 60 000 000 15 000 000 ----------
S 18 Allowance: 47 340 000 11 835 000 -

NB Allowance is 78.9% of each year’s closing debtors .

Capital gains ratio → 102 570 000 / 130,000,000 → 78.9%

(b) DETERMINATION OF TAX LIABILITY MUTARE CITY COUNCIL

SOLUTION
DETERMINATION OF TAXABLE INCOME FOR THE YEAR ENDED 31
DECEMBER ……………………..

2003 2004 2005

Sales 122 500 000 52 500 000 3 500 000
Less cost of sales 101 500 000 43 500 000 2 900 000
Opening stock - 43 500 000 2 900 000
Purchases 130 000 000 - -
Development costs 15 000 000 - -
Repossessed 2 900 000
Closing stock (43 500 000) (2 900 000) ………….
Gross profit 21 000 000 9 000 000 600 000
S 17(2) Bal forward - 13 950 000 675 000
21 000 000 22 950 000 1 275 000
S 17(2) Bal c/d 13 950 000 675 000 -------------Taxable
income 7 050 000 22 275 000 1275 000
Tax thereon @ 30.9% 2 178 450 6 882 975 393 975

DEBTORS SCHEDULE FOR THE ENDED 31 DECEMBER……………………

Balance b/f - 81 375 000 3 937 500
Sales 122 500 000 52 500 000 -
Less (41 125 000) (129 937 500) -------------

Deposit 30 625 000 13 125 000 -

Repossessed stand 2 100 000
Installments
20 stands 10 500 000 42 000 000
14 stands 36 750 000
1 stand-repossessed 525 000
15 stands - 35 437 500 3 937 500
Closing debtors 81 375 000 3 937 500 ------------

S 17 (2) Allowance: 13 950 000 675 000

 NB Allowance is 17,143% of each year’s closing debtors.

Notes
1.Gross profit is [21 000 000/122 500 000 =.17143 or 17,143%

2. Monthly installment= selling price- deposit

credit period
3 500 000 – [3 500 000 x25%] = $262 500
10 months

Answer to Q3

Boetie Nel
a) Potential income tax

Income tax would arise in relation to the following recoupments:

Land nil
Tobacco barn (100 000 – 45 000) $55 000
Homestead nil
Irrigation Equipment (500 000- 125 000) 375 000
Dam nil
Staff housing (100 000- 75 000) 25 000
$455 000

The tax at the rate of 30.9% could be payable in installments in proportion to the suspensive sale installment
as follows:
2001 tax year
2 500 000 x 455 000 = $227 500
5,000,000

2002 tax year

1 200 000 x 455 000 =$109 000
5,000,000

2003 tax year

1 300 000 x 455 000 =$118 000
5,000,000

b) Capital Gains Tax Payable

Proceeds of specified assets (less recoupments)

Land $750 000

Tobacco barns ($1,000,000 – 55,000) 945 000
Homestead 850 000
Dam 1 400 000
Staff housing (500 000 - 25 000) 475 000
4 420 000
Section 15(2) allowances:
Land 30 000 x 15% x 32 (144 000)
Tobacco barns 100 000 x 15% x 12 (195 000)
Homestead 50 000 x 15% x 7 (53 500)
Dam 250 000 x 15% x 5 (187 500)
Staff housing 100 000 x 15% x 10 (150 000)
3 690 000

Capital gain
The capital gain would also be taxable in installments in proportion to the portion of proceeds, which have
become due for the tax year as follows:
2001 tax year
2 500 000 x 3 690 000 = $1 845 000
5,000,000

2002 tax year

1 200 000 x 3 690 000 = $885 600
5,000,000

2003 tax year

1 300 000 x 3 690 000 = $959 400
5,000,000

Chapter 17
Answer to Q1
(a) COMPUTATION OF TRUST TAXABLE INCOME FOR THE YEAR ENDED 31/12/03
Net profit as per statement 160,000
Less Dividends [Para. 9, 3rd schedule] 15,000
Tax Res .cert [Para 10, 3rd schedule] 25,000
Rent from Zambia [not from a source] 125,000 165,000
(5,000)
Add Depreciation 45,000
Loss of sale of asset 16,000
Executor’s commission (w1) 10,313 71,313
66,313
Less 50% payable to Susan 33,157
Taxable income 33,156

(b) TAXABLE FOR SUSAN ANDERSON 31/12/03

Annuity 60,000
Add 50% of Trust Income 33,157
Taxable income 93,157

Working 1
A XB

Where:
A is the exemption income plus income not from a Zimbabwean source
B is direct expenditure applicable on creation of trust income,
C is total gross income created by the trustees.

165,000 x 75,000 = $10,313

1,200,000

Answer to Q 2
MR MOO- PREDEATH
DETERMINATION OF TAX LIABILITY FOR THE PERIOD ENDING 30/06/03

Salary (Jan – June : 150 000 x 6) 900 000

Less Pension contribution 90 000 810 000
Rental income (61 000 x 6) 366 000
Taxable income 1176 000

Tax Liability
On employment income 810 000
On 500 000 88 000
On (810 000 – 500 000) 40% 124 000 212 000
Less credits
Medical bills 191 750 x ½ 95 875
Elderly credit 20 000 x 6/12 10 000 105 875
106 125
Add Aids levy (157 625 x 0,03) 3 184
109 309
Add Tax on business income (366 000 x 0,309) 113 094
Tax liability 222 403

Notes
1. Medical bill paid after death is included in assessment prior to death s12 Finance Act.
2. Elderly credit is apportioned where the period of assessment is less than a year.

MOO POST DEATH PERIOD

DETERMINATION OF TAX LIABILITY FOR THE PERIOD ENDING 30/11/03
Proceeds from insurance company capital nature -
Cash in lieu of leave civil servant not taxable -
Salary July has no right to -

MRS. MOO
DETERMINATION OF TAX LIABILITY FOR THE PERIOD ENDING 30/12/03
Salary [250,000 x12] 3,000,000
Widow’s pension [50,000 x1/2] 25,000
Death benefit Para 7, 3 schedule
rd -
Motoring benefit 900,000
Rental income [5 x150, 000 750,000
Repairs to house 15,100 734,900
Taxable income 4,659,900
Tax thereon on 1 500,000 488,000
On [4,659,900-1 500,000-734,900]45% 1,091,250
1,579,250
Add 3% Aids Levy 47,378
1,626,628
Add Tax on business income rent [734,900 x 30.9%] 227,841
Tax liability 1,854,109

Chapter 18
Answer to Q 1

Determination of Estate Duty

Cash 11 791
Com building 3 500 000
Family house 4 200 000
Car (less than 5 years) Morgan 2 100 000
9 811 791

Less: Deductions
Donation –Chinyaradzo 200 000
Family house 4 200 000
*Debt on Zambian property -
Insurance to pay duty 300 000 4 700 000
5 111 791

Tax thereon 5 111 791 x 20% 1,022,358

Note
Debts are deducted where the assets outside Zimbabwe are insufficient to cover the liability.

Answer to Q2
1) Principal Private residence is deductible in the determination of dutiable assets of a deceased person
who is survived by a spouse or minor child.
-In the case of the late J Erasmus, the value to be excluded from the dutiable amount is:
-The value of the homestead on the farm, together with;
-The land surrounding or adjacent to the homestead up to a maximum of two hectares.

2) Amounts received from the guaranteed life assurance company:

i) $500,000 from joint life assurance policy.
As the late J Erasmus is survived by a spouse, up to a maximum of $20,000 of the proceeds from the
insurance company is deductible in the determination of the dutiable amount.
ii) The proceed of $200,000 would not be subject to duty to the extent to which they are utilized in the
statement of estate duty.
iii ) Donations:
-Donations made within five years before the date of death are generally included in the dutiable estates of
the deceased.
In the case of the $300,000 to David, however the amount is not included as David died prior to the death of
the late J Erasmus. The amount would have been included in the estate assets of the late David.
-The $100,000 vacant land donated to Janet the niece would be included in the assets of the late J Erasmus
as five years have not elapsed since the donation.
-The $800,000 block of flats donation would also form part of the estate asset of the late J Erasmus
because of the five-year limit.
3)Amounts paid by pension or benefit fund are deductible, hence the $400,000 would be subject to estate
duty as it was paid by a retirement annuity fund, registered in terms of the Pension and Provident Funds
Act.

Answer to Q3
There are legal options available, which Mr. Benny can use in order to minimize his Estate duty obligation.
Below are some of such legal schemes:
(a) Donation of assets
He may donate his assets to his beneficiaries. This he must do 5 years prior to his death. Thus in order for
the donation to escape tax, he must survive 5 years after the donation otherwise it will be taxable in his
estate upon his death. Where he donates a specified asset he should be aware of the tax effect in terms of
the Capital Gains Tax act on the date of donation, as well as income tax on recoupment.

(b) Formation of trust

Mr. Benny may form a trust to which he can donate his income generating assets. The trust to be formed
must be the one in which he has an influence otherwise he may not be able to control the trustees. It is not
permissible for him to form a discretionary trust where he is the only trustee.
Once again he must survive five years in order to escape tax on the donated assets.
Thus he should be aware of income tax on the recoupment and capital gains effect on donation.
(c) Take insurance
He may take out an insurance policy in order to cover the estate duty liability.

Chapter 21
Question one
(a) Capital gains tax is payable. Roll over is applicable only where the taxpayer sells his/ her principal
private residence and uses the whole or part of the proceeds to buy another private principal residence
before the end of the next year following the sale of old principal private residence s 21 Capital Gains Tax
Act. The right to live in a retirement home is not a principal private residence.

b) The interest is allowable as deduction in determination of capital gains. The amount also qualifies for 30%
inflation allowance. However, where the amount has been claimed as deduction for income tax purposes no
further deduction will be provided.
c) Mr. Dete should have bought another private principal residence in order to qualify for the roll over.
d) The scheme is acceptable under section 16 of Capital Gains Tax Act, provided an election is made. The
transfer will be effected at values equal to s11 (2) (a) to s 11(2) (d), irrespective of the actual selling price.
There is no capital tax payable on the transfer. Capital gains tax will be payable when the shares are
disposed to a third party.
e) Capital gains tax can only be rolled over if the business property is replaced by another business property
s 22 Capital Gains Tax.
f) The benefit is not taxable if it represents the first passage benefit on termination of employment section 8
(1) (f).
g) Mrs. Dick should be aware of the requirement to charge sales tax on the services provided by her.
Further more she will be treated as an independent contractor and will be taxed at the business rate of 30%
on her profits. She will be required to pay her tax through a system of Annual Payment Dates. No credits
may be claimed by her from the income accruing as a consultant.

h) The amount is not taxable as it is an ex-gratia payment. Dorothy had no right to this income Hersov vs.
C.O.T, the company cannot be allowed a deduction in full since the amount represents a voluntary payment.
The maximum deduction applicable is $3000 s15 (2) q.
i) Alice is not taxable on her salary in Zimbabwe. The provisions of s12 (1) d are meant to tax Zimbabwean
residents working for the state outside Zimbabwe.
k) Any benefit for injury is not taxable Para 7,3rd schedule.
L) Mr. Wear can object to the assessment in terms of s 62 Income Tax Act. The valid essentials of an
objection are:

It must be in writing

It must state the reasons or grounds for objection

Must be lodge with the commissioner within 30 days of receiving a notice of an assessment.

Question 2
a) Calculation of recoupment and capital gains

Asset S/price ITV P/Recoup Allowance Actual Recoup

Land 700,000 - -
Ind.Building 300,000 475,000 (175,000) 475,000 (175,000)
Com. Building 1,700,000 560,000 1,140,000 240,000 240,000
Total 715,000 65,000

COMPUTATION OF CAPITAL GAINS TAX LIABILITY 31 DECEMBER 1999

Gross capital amount 2,700,000
Less Recoupment (working above) 65,000
2,635,000
Less Deduction
S11 (2) (a) Land 100,000
Land 200,000
Industrial building 950,000
Commercial building 800,000
2,050,000
Less Allowances (working above) 715,000
1,335,000
Inflation s11 (2) (c)
100,000 x 6 yrs x15% 90,000
200,000x12 yrs x15% 360,000
950,000 x6 yrs x 15% 855,000
800,000 x12 yrs x 15% 1,440,000 4,080,000
Capital Loss 1,445,000

Please note for all disposals made prior to 1 January 2002 inflation is calculated at the rate of 15%,
thereafter up to 31 December 2002 the rate is 30%, but changed to 50% for a sale made in 2003 and
thereafter.

b) Election for minimization of tax liability

1. Income tax effect
In terms of paragraph 8(3), 4th schedule, where a group under the same control is restructuring, transfer
between spouses, scheme of localization or any other business combination or reconstruction, transfer of
assets may be instituted at income tax value as established in the hands of transferor upon election,
notwithstanding the actual selling price. The effect is that they will be no recoupment in the hands of the
transferor. On disposal of the assets outside the group recoupment shall be calculated as if the disposing
company always owned the assets.

2. Capital tax effect

For capital gains tax purposes the election (same schemes as above applies) in s 15 of the capital gains
should be made by Ban International. The effect is that the transfer will be made at amount equal to the sum
of the deductions allowable to the transferor, irrespective of the actual selling price. On disposal of the
assets outside the group capital gain shall be calculated as if the disposing company always owned the
assets.
This is the preferred way as the loss would be of no use in Ban International Limited’s books

Question 3
FACTORS TO BE CONSIDERED BY THE SELLER
1. If the shares are sold:

Mr. Sibanda will be liable for capital gains tax based on the selling price of the shares and after deduction of
the applicable allowances.

The sale proceeds will accrue directly to Mr. Sibanda who will not be taxed on the capital profit for normal
tax purposes.

2. If the fixed assets are sold

The company will be taxed on recoupment relating to the capital allowances granted when the fixed assets
were purchased.

The company will be liable for capital gain tax on the sale of the land and buildings. This will be based on the
selling price of these assets after deduction of recoupment and allowances.

The sale proceeds will accrue to the company. These can subsequently be distributed to Mr. Sibanda (after
allowing for payment of the taxes mentioned above) by means of dividends on which a withholding tax of
20% will be payable.

FACTORS TO BE CONSIDERED BY THE PURCHASER

1. If the shares are purchased:

Mr. Jones will not be entitled to any immediate tax allowances or advantages. In the event of him selling any
of these shares at a future date, he will be entitled to claim the costs as an allowance for capital gains tax
purposes based on the amount paid, plus inflationary allowance.

The company will continue to claim income tax wear and tear allowances on assets purchased in previous
years.

2. If the fixed assets are purchased:

The purchase of land does not give rise to any normal tax allowances. If this asset is disposed of at a future
date then the cost of the land, together with an annual inflationary allowance for each year that it is held, will
be allowed in determining the capital gains tax payable.

The purchase of the industrial buildings can be claimed by the purchaser, but limited to 5% per annum on
cost, no SIA is claimed on purchased immovable assets.

The cost of the industrial buildings, together with an inflationary allowance will be claimed as a deduction in
determination of capital gains tax if disposed later

SIA can be claimed on both the plant and machinery and furniture and fittings at the rate of 50%, and 25%
annual in the subsequent two years.

Question4
(a) Elections that can be taken to minimize tax
(1) Paragraph 8 (3) of the 4th schedule of the Income Tax Act
The election provides, where a group under the same control is restructuring, for the transfer
of assets at income tax value as established in the hands of transferor, notwithstanding the
actual selling price.

TNT International Ltd and Smoking Pleasure are restructuring, hence the group
should make this election to avoid paying income tax on potential recoupments.
(2) Section 15 of the Capital Gains Tax Act
 For capital gains tax purposes the election in s 15 of the Capital Gains Tax Act should be
made in relation to the Commercial building, which is a specified asset.

This provides for the transfer of the specified asset at values, which are equal to the
deductions available to the seller or transferor.
This has the effect of postponing the payment of capital gains tax, which may
actually arise on the sale.

(3) Section 22 of the Capital Gains Tax Act

This section provides that capital gains tax will not be chargeable on proceeds from the sale
of the specified asset provided those proceeds are utilized in the construction or acquisition
of a similar business asset.

(4) Special initial allowances on ranking assets

The company should also make the election to claim special initial allowances on
assets acquired or constructed or bought during the year.

(b) Tax avoided by making the elections stated above

Income Tax (Recoupment)
Manufacturing equipment (1,000,000 – 800,000) 200,000
Furniture and fittings (250,000 – 450,000) (200,000)
Commercial building (600,000 – 450,000) 150,000
Delivery vehicles (500,000 – 0) 500,000
Computer equipment (100,000 – 125,000) (25,000)
Recoupment 625,000

Tax thereon 30.9 % x 625,000 193,125

Capital Gains Tax-Commercial building

Gross capital amount net of recoupment (1,000,000 – 150,000) 850,000
Less Cost net of capital allowances (600,000 – 150,000) (450,000)
Inflationary allowance 600,000 x 15% x 4 yrs (360,000)
Capital gain 40,000

Capital gains tax at 20% $8,000

(c) Maximum deductions claimable by Smoking Pleasure Ltd for 1999

Wear & tear SIA Total

Assets taken over from Branch
Manufacturing equipment net of sale
(800,000-100,000) x50% 350,000 350,000
Furniture & Fittings 450,000 x 50% 225,000 225,000
Computer equipment 125,000 x50% 62,500 62,500

Assets acquired during the year

Machinery bought 600,000 x 50% 300,000 300,000
Equipment from SA 500,000 x50% 250,000 250,000
New comm. building 2,000,000 x 2.5% 50,000 50,000
Capital allowances 1,237,500
Pease note:
No allowance was claimed on commercial building taken over since the building was
sold during the year.
Special initial allowance has been claimed using the rate applicable in the current
contrary to 25% p.a. for 4 years applicable in the 1999 tax year
The current corporate rate of 30 % plus 3 % Aids levy has also been used.

Deduction related to lease agreement

Lease premium (120,000 / 120) x 11 months $11,000
Rent 11 months x 5,000 per month 55,000
Lease improvement (250,000 / 120) x 6 months 12,000
78,000

QUESTION 1

Mr. Matondo is a beneficiary of land reform program in Zimbabwe. The following is his second
year return as farmer, for the year ended December 2003.

LIVESTOCK TRADING ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2003

Opening
stock
1 Bulls @ 2500 2500 75 Sales 212 500
100 Cows @ $1000 100 000 10 Deaths -
60 Oxen @ $900 54 000 Closing stock 205 600
[estimate]
25 Tollies @ $600 15 000 5 Donations -
40 Heifers @ $600 24 000
30 Calves @ $200 6 000

36 Births -
Purchases

1 Bull 3 500
50 Cows 60 000
16 Donation -
Profit 153 100 ----------
418 100 418 100

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2003

Accountancy fees 4 800 Livestock profit 153 100

Depreciation 22 100 Tobacco sales 113 200
Donations 1 800
Insurance 11 200
Dipping & vet fees 5 700
 Fertiliser & seed 18 400
Interest 4 600
Petrol & oils 12 800
Repairs 26 450
Salaries & wages 78 570
Net profit 79 880
266 300 266 300

Notes
1. 1.Mr Matondo got a donation of 16 oxen from his brother on 1 March 2003 and incorporated them
into his own herd. The following is established:
Donation FSV of brother each Market value each

16 oxen $700 $1 200

2. The following FSVs were approved by the commissioner for valuation of closing stock: cows $1
000 each, oxen $900 each, heifers $600 each, Tollies $600 each and calves $200 each. Bulls are
valued at cost.
3. Mr. Matondo donated 3 heifers towards the celebrations of independence, and another 2 heifers
were slaughtered at wedding of Mr. Matondo, s son. No amount was paid for in respect of these
donations.
4. Interest paid on a loan of $100 000 used to finance the farming operations. $15 000 of it was lent to
the Accountant to build his house.
5. Mr Matondo sold 35 cows as a result of the drought for $42 000, and is included in the sales figure.
6. When the situation improved mid December 2003 the farmer purchased 50 cows and 1 bull to
restock the farm. The carrying capacity of the farm is 400 head.
7. During the year, 36 calves were born, 1 heifer and 9 calves died.10tollies became oxen and 5
heifers became cows. Of the 13 calves that were promoted, 9 became tollies and the rest heifers.
8. During the year Mr. Matondo purchased/constructed the following assets:
• Mazda B1600 (truck) 8 500 000
• Twin cab 12 300 000
• 3 Water reservoirs sunk 700 000
• Farm school for worker’s children 19 500 000
• Farm school teacher’s house (staff house) 4 500 000

9. Assets – ITVs at beginning of the year:

• Farm improvements (cost $1 200 000) 840 000
• Manager’s house (built for $450 000 in 2002 SIA claimed) 125 000
• Motor vehicle 200 000

10. The commissioner considers that the fair market value of the donated stock of heifers to be $900
each.
11. Included in salaries and wages is $11 340 herdmen’s wages.
12. The Twin cab is used by the Accountant 60% business and 40% private.

Required :

Minimum tax liability for Matondo assuming no SIA is claimed unless where otherwise stated.
Question 2

Mr. Hotbeds 61 years old has been operating livestock farming ever since 1 April 1990 when he purchased
a farm land together with existing buildings notably: farm improvements and homestead ,for $3 500 0000
The cost of the land was $1 000 000,with farm improvements and homestead being valued at $1 700 000
and $800 000 respectively.

The following additions were effected;

Dam(constructed) 1/04/92 80 000
Farm improvements-1/04/92 100 000
Plant &machinery-1/04/92 600 000
Land cruiser(see note below)-1/02/2000 800 000
Lorry –1/02/2001(see note below) 1 500 000

The land cruiser was used 80% privately by the Accountant .

The lorry was purchased on 1 February 2001 ,and used 100% privately until introduced into the
business on 1 January 2002,and used 20% privately by Mr. Hotbeds until date of disposal.
In view of the changing political climate in Zimbabwe,Mr Hotbeds sold his farm lock,stock and barrel on 31
October 2003 for $53 million allocated as follows:

Land (farm) 20 000 000

Homestead 14 000 000
Farm improvements(1990) 8 000 000
Farm improvements(1992) 4 000 000
Dam 2 800 000
Debtor & Stock 2 000 000
Plant & machinery 1 200 000
Land cruiser 400 000
Lorry 600 000
Total sale proceeds 53 000 000

Further information:
1. He claimed maximum allowances,and no allowances were granted in the year of sale of business.
2. $10 million of the proceeds were utilized in purchasing Mr. Hotbed’s new home in Gweru on 1
February 2004.
3. The sale price is received in installment as follows:

$14 million on date of agreement 31 October 2003

$13 million on 31 December 2003

$13 million on 31 December 2004

$13 million on 31 December 2005

Required:
(a) Ignoring the effect of hire purchase agreement compute total taxable
income on disposal of business
(b) Compute capital gain (loss) for 2003 and 2004 tax years.

Question 3
Mr. Bushman, an architect, submits the following income tax returns for the year ended 31 December 2003.

Salary 1 350 000

Annuity 160 000
Cash in lieu of leave 90 000
Payment on cessation of employment 330 000
Lump sum payment from a benefit fund (see note) 104 000
Commutation of pension (see note) 160 000
Pension 32 000
Director’s fees (see note) 15 000
Foreign company dividends-RSA (net of tax $300) 30 000
Foreign company dividends-Zambia gross 27 000
Interest -Cabs 20 000
-On treasury bills 50 000
-On a foreign currency denominated 75 000
Total income 2 343 000
He incurred the following expenditure:
(a) Current pension contributions to an approved fund $180 000
(b) Repainting his residence, (let throughout the previous year while he was resident in Mutare) $30
000. He returned to live in the house on 1st April 2003 and incurred the expenses on 5th April 2003
(c) Donation to the National Bursary Fund $10 000.
(d) Entrance fee $2 750 and subscription of $1 250 all paid to Institute of Architects. It was necessary
to incur these expenses because although advanced in age and left employment, he intended to
continue practicing.
(e) Bank charges incurred in deriving foreign company dividends $ 3 270
(f) Fee for preparation of his income tax return - $ 5 000
(g) Cost of attending an approved architectural convention (21 December 2002 to 4th January 2003).
Notes

i. He joined the benefit fund (from which he received the lump sum payment) on 1st August 1960.
ii. The $16 000 pension commutation represents one third of what Mr Goldmoon would have received
over a ten (10) year life expectancy.
iii. Director’s fees were for the service rendered at a Director’s meeting in Mozambique.
iv. His employees’ tax certificate (P6) reflects that the following deduction was also made:
Pay-as-you-earn $469 350-00
Medical aid contributions $ 27 000-00
Life assurance premiums $ 30 000-00
v. Mr Goldmoon was born in 1935 and his wife earned no income in the year

Required

Calculate the minimum tax payable by Mr Goldmoon.

Question 4

(a) What are the essentials of a valid objection?

(b) What do you understand by the term ‘prescribed assessement’?
(c) The Act prescribes time frames within which additional and reduced assessments can be raised.
What are the time frames
(d) In what circumstances may a liability for capital Gains tax be deferred?

Question 5
Beta (Pvt) Ltd bought a hotel business from Mr Wasu Rutenga designated Growth Point area for $12 000
000. The company commenced business on January 1 of the previous year and adopted a 31/12
accounting year. The company’s accounts for 31 December of the current year reflected a net profit of $56
000 500 after charging the following expenses: -

$
Depreciation 11 500 000
Advertising 600 000
Insurance 450 000
Salaries 10 000 000
Bad debts 450 000
General Expenses 1 300 000
Rural rates 300 000
Legal expenses 100 000
Medical expenses 1 000 000
Traveling expenses 2 700 000
Repairs 1 800 000

NOTES
Additions to the main hotel building were completed and used on 28/2 for $8 000 000
A manager’s house was also constructed for $1 550 000
The following other assets were bought:
(a) A new Peugeot station wagon to carry hotel guests for $26 500 000.
(b) A new Mazda B1600 pick-up to carry hotel supplies for $88 100 000.
(c) Furniture for $11 000 000.
(d) Kitchen equipment $8 000 000 ($2 000 000 worth of equipment was second hand)
(e) Fencing around the hotel premises are erected at a cost of $2 700 210.
(f) An old lorry was bought from another businessman in the area for $2 500 000
The purchase of the business was made up as follows
$
Land 20 000 000
Main hotel building 50 000 000
(originally erected 1/4/79 and is registered under the
Development of Tourism Act, 1975 (No 36 of 1975)
Furniture and fittings 27 000 000
Kitchen equipment 16 000 000
Stock 17 600 000
Crockery, linen and curtains 9 400 000
1 40 000 000
The following additional information on the expenses claimed was furnished
(a) Advertising consists of:

Advertising in provincial paper $250 000

Calendars and pens with hotel’s name on $150 000

Donations to local school $ 200 000
$ 600 000
(b) Bad debts comprised of:
30% of purchased debts estimated as irrecoverable 35 000
Amos-accommodation for February- debtor died insolvent in December 180 000
Musa- salary advanced in July- Musa(barmaid) absconded in September 235 000
450 000
(c) General Expenses $
 Stationery 400 000
Bulbs and electrical repairs 300 000
Cleaning materials 350 000
Newspapers & magazine related to the hotel industry 250 000
13 00000

(d) Legal expenses-company formation expenses 100 000

(e) Medical expenses $1 000 000-full amount was paid to take an employee to South Africa for an eye
operation after getting chemical into her eyes.
(f) Traveling expenses
Collecting stocks and making orders Harare, Chegutu and back 1 200 000
Traveling to Botswana to collect the B1600 truck 1 500 000
2 700 000

(g) Repairs- 1 800 000 for repainting the old hotel building before opening for business.

Calculate the company’s minimum taxable income or assessment loss for the year ended 31
December 2003.