a)Coopers & Lybrand, an accounting firm has 2 partners who are both chartered accountants.

One
is based in Zimbabwe and the other in South Africa. Discuss how ZIMRA would determine the
residence status of the partnership, supporting your answer with relevant statutes and/or Case
Law

According to the Section 2 of the Income tax act a person is

A partnership is not a legal persona and is not liable for income tax liabilities. Its profits or losses are
allocated to the partners according to their rights to share in the partnership profits. The tax liability
of the partnership therefore falls on the partners

A partnership is simply a group of individuals trading together. Its income and losses is shared
between the partners as agreed in the partnership deed and then assessed to tax in the hands of the
individual partners. The partnership itself has no separate legal entity compared to its members and
not a person for income tax purposes. Its residence status is determined by the residency status of
partners. A partnership is a resident of Zimbabwe if at any time during a tax year a partner is a
resident of Zimbabwe. Its income is derived from the services of a partner. This is the place where a
partner renders his services to earn the partnership income. The sources of partnership income
therefore depends on the services of partner, not the partnership.Tge source of partnership income
is the place where the partner renders his services to earn income as held in the Epstein vs CIR case.

Application

In our case the partner that is based in Zimbabwe is rendering his services in Zimbabwe as his profits
are realised in such a country whilst the partner in South Africa is rendering his services in such a
country therefore taxable in South Africa.Thus the residency status of this partnership is both in
Zimbabwe and South Africa.
b)If a vehicle belonging to a partnership is used by a partner mainly for private purposes, what will
be the tax implication? Would this constitute a Motoring benefit? Either way, how would you
measure the “benefit’? Do we grant capital allowances to the partnership on such an asset? If so,
how? Justify your answer with relevant statutes and/or Case law

A partnership cannot own property in its own capacity, property held in it is held by partners jointly,
as co-owners. Any capital allowances and balancing charges on such property are apportioned
between the partners according to their sharing ratio. When a vehicle ownwed by the partnership is
mainly used by the partner for private purposes it means the private usage will be more than 10%
therefore the expenses incurred will be allowable to the partnership as a deduction then it is taxable
to the individual partner concerned as a benefit .The partnership will be incurring an expense and
on the other hand the partner will be incurring a benefit as a result of such.It will be as if the
partnership is paying for the private expenses of the partner.

This will be a motoring benefit to the partner concerned.In the case the partner is allowed to use an
asset owned by the partnership and the usage exceeds 10% on private business,then such an asset is
not granted SIA even if there is an election.The asset will be granted Wear and Tear with only the
with only the business part of Wear and Tear being charged to the income statement.The private
element of the Wear and Tear will be credited to the partner concerned.

As the vehicle is used mainly for private purposes it means the private element exceeds 10%
therefore no SIA will be allowed for ,business element of wear and tear charged will be allowed to
the partnership whilst the private element credited tpo the specific partner.
C)Adjusted income statement for the partnership for the two periods before and after admission
of a new partner.

TOTAL FOR THE YEAR JAN-JUNE2020 JULY-DEC2020

Gross profit 2 350 000 1 175 000 1 175 000

Unrealised Exchange gain (62 000 ) (31 000 ) ( 31 000)

Salaries :Staff (w1) (58 000) (29 000) (29000)

:Partners (410 000) (330 000) (80 000)

Insurance policies

Pee is the beneficiary (w2E) (9 000) (9 000) -

On Eee’s life, firm is beneficiary(w3) - - -

Motor vehicles (w4) (25 000) (12500) (12 500)

Survivorship (w5) - - -

Interest on Drawings (w6) 1300 1300 -

Depreciation (w7) - - -

Gym subscriptions (w8) (8500) (8500) -

Medical aid(w9) (11600) (4800) (6800)

Interest on Capital accts (8200) (6600) (1600)

Pension Contributions (w10)

partners (54000) (27000) (27000)

staff (36000) (18000) (18000)

RAF Contributions (w11)

Partners (30 000) (10000) (10000)

Staff (54000) (27000) (27000)

Subscriptions to IEZ (w12 (8000) (6300) (17000)

Bad Debt (w13) (10000) (10000) -

Capital allowances

Toyota corolla (w14) (11000) (1000) (10000)

Machinery (w15) (17500) (8750) (8750)

Motoring benefit (w16) (135000) (54000) (81 000)

Medical contributions

Eee (w14) (91000) (91000) -

School fees-Perfects son (w17) (69000) - (69000)

Realised profit on furniture disposal (w18) - -

Drawings (w19) - -

Trade mission (w20) (50000) (50000) -

Convention (w20) (50000) (50000) -

Passage benefit-holiday(w21) (23000) - (23000)

Capital allowances

Industrial building (w22) W&T (35600) (35600) -

Office block(w23) W&T (15000) - (15000)

$1 069 000 $356 250 $789 350

- -
(w1)Salaries

Salaries are allowable deduction to the partnership and then taxable to the individual concerned
who will be receiving the salary as held in the COT VS Newfield.Where a [artnership paid a partner a
salary as compensation for services rendered,this is not a capital receipt in the form of a loanon
capital account but a receipt representing gross income in the hands of a partner.

(W2)insurance policies

Where a partnership pays premiums for separate policies covering the partners, such an expense is
allowed as a deduction in the hands of the partnership provided that the partners are the
beneficiaries of those policies. The benefiting partner is taxable on the premiums paid on his behalf.

An insurance policy where Pee is the beneficiary is an allowable deduction to the partnership and
then taxable to Pee as an individual.

(W3)Eee’s life, firm is the beneficiary.

Where partners take separate life policies for their lives and the partnership is the beneficiary, such
premiums are not allowable to the partnership even though the partnership pays for the premiums.
Eee had taken the policy for his life and thhe firm is the beneficiary therefore such an expense wont
be allowed even though the firm is paying for it.

(w4)motor vehicles

Insurance premiums paid by a partnership for insuring of its assets is a business expense and
allowable.

(w5)survivorship policy

If a partnership takes out a joint survivorship policy to cover the joint lives of the partners, and
where the partnership is the beneficiary, premiums paid in respect of that policy is not an allowable
deduction in the hands of the partnership.

(w6)Interest on draiwings

This is allowable to the partnership but non deductible to the individual partners.

(w7)depreciation

Depreciation is not an allowable deduction in the eyes of a tax man but capital allowances.

(w8)Gym subscriptions

(w9)medical aid.

Where a partnership bears the cost of contribution to a medical aid society in respect of the
partners, such contribution is allowable deduction in the hands of the partnership. The partners‘ are
taxed on the contribution paid by the partnership on their behalf. The partners can also claim a
credit in respect of those amounts, but the amounts do not qualify for exemption as specified in the
3rd Schedule.
(w10)pension contributions

Allowable to the partnership and taxable to the individual partner.

(w11)RAF contribution.

Allowable to the partnership and taxable to the individual partner.

(w12)Subpcriptions to IEZ

Allowable to the partnership

(w13)Bad debts

Allowable to the partnership and taxable to the individual partners Pee and Eee who were there
when they arose in 2019.

Capital allowances(w14)

Toyota corolla for perfect.From the definition of a passenger motor vehicle a toyoyta corolla is a
passenger motor vehicle therefore if its cost is more than $100 000 as it is $170 000 we deem the
cost to be $100 000.The deemed cost is then used to calculate wear and tear on the vehicle.

$100 000*20%*0.5=$10000

For Pee and Eee we calculate the capital allowances on their corollas on the income tax value.They
(corollas) are passenger motor vehicles but since the income tax value is less than $100 000 we use
the itv for capital allowances purposes.

$5000*20%=$1000

(W15)

Capital allowances on machinery are computed using the reducing balance method assuming that
the machiney is used one shift .This therefore means wear and tear will be calculated using 10%.

10%*$175 000=$17 500

Since this is for the whole year we devide this figure by 2 for the two periods before and after
admission.

17500/2=$8750

(W16)

Motoring benefit

Since the vehicles have a cylinder capacity of 1500 they attract a benefit of $54 000 per year.

For the first part before admission the partners will enjoy a benefit of $54 000 and then on the
second half they will enjoy a benefit of $27000*3=$81000.This will be allowable as a deduction to
the partnership as the individual partners are consuming the motoring benefit at the expense of the
partnership.

(W17)

Medical expenses contributed by the partnership for Eee.

Air lifting fee $29000

Surgeon fees $43000

Prescribed drugs $19000

Total expenses $91000

Medical contributions by the partnership are allowable as a deduction to the partnership and
taxable to the individual partner concerned.They also attract a medical aid credit of 50% of the total
expenses expenses.

50%*91000=$45500 is the medical credit to Eee

(w18)

The school fees allowance for Perfects son is allowable as a deduction to the partnership and then
taxable as a benefit to Perfect himself.

(w19)

The realised profit from the sale of furniture which is a capital asset is also a capital gain.As gross
income does not include incomes of a capital nature therefore we exclude it from gross income.

(w19drawings

Drawings are not allowed as a deduction to the partnership and are not taxable to the partners as
they are transactions of capital nature which are excluded from gross income definition as per
Section 8.

(w20)trade mission and conventions

Attendance at trade conventions Expenditure incurred by a partnership in respect of not more than
one convention attended by a member of such partnership shall be allowed to the partnership up to
a maximum of $25000 per partner for not more than one such convention attended.The partnership
paid $62000 for both Pee and Eee for trade convention.The whole amount expended on this trade
convention will not be allowed in full limited to $25000 per partner which will add upto $50000.For a
trade mission we will limit it also to $25000 per partner which will add up to $50000.

(w21)Passage benefit-paid for holiday

Passage benefits – partnership bears the cost of a holiday for a partner.This is allowable as a
deduction to the partnership and taxable to Perfect as an individual.

(w22) capital allowances on industrial building

In the case the partner is allowed to use an asset owned by the partnership and the usage exceeds
10% on private business,then such an asset is not granted SIA even if there is an election.The asset
will be granted Wear and Tear with only the with only the business part of Wear and Tear being
charged to the income statement.The private element of the Wear and Tear will be credited to the
partner concerned.

Total capital allowances is 5%*800000=$40000

Of the $40 000 the business element is 89% whilst the private element is 11%

89%*40000=$35600

11%*40000=$4400

(w23 wear and tear on office block

Office block is a commercial building and therefore attracts wear and tear at 2.5%.

2.5%*600000=$15000

Recoupment on disposal of soletrader to join partnership

2.5%*$450000*2years=$22500.When a soletrader joins a partnership we treat it as if the soletrader

sold his sold trade business to the partnership so therefore he/she has to recover all the capital
allowances that he had claimed prior to disposal of the business to the partnership.
c) Calculate the tax liability (refund) of each of the partners above (namely Pee, Eee and Perfect)
for the 2020 tax year.

total PEE EEE PERFECT

Joint taxable income-(jan-jun) 356 250(2:1) 237500 118750
Joint taxable income(july-dec) 789 350(4:2:3) 350822 175411 263117
Salaries 410000 190000 140000 80000
Insurance policies-pee 9000 - -
beneficiary
Medical aid-partnership 5120 2560 1600
contributions (a)
Interest on capital accounts(b) 4200 2400 1600
Private element of use of an 4400
asset-wear and tear (c)
Recoupment(d) 22500
Motoring benefit –toyota 54000 54000 27000
corolla(e)
Subscriptions-gym(f) 8500
Medical expenses(g) 91000
Drawings-capital in nature - - - -
Passage benefit-holiday(h) 23000
School fees (i) 69000
Less deductions
Bad debt(j) - - - -
Subscriptions to IEZ(k) (3500) (2800) (1700)
Medical aid –own (1280) (640) (400)
contributions(l)
Bank interest (37500)
Total taxable income 448217
Assessed loss-even if the (28000)
soletrader ceases trade the
assessed loss will follow him
for a period not exceeding 6
years.
Total taxable income 858762 580681 420217
Tax there on @25% 214690.5 145170.25 105054.25
Less credits
Medical credit(n) (3100) (47100) (29000)
Elderly credit-over the age of (9000) - -
55years.
Disability credit-perfect is (18000)
disabled and sio is his son
who is a minor.Disability
credit is transferable
(9000+9000)
Tax liability 202590.5 98070.25 58054.25
Notes

Share of joint taxable income

For the first 6months (January-june2020)

Pee:Eee=2:1

Pee 2/3*$356250=$237500 Eee 1/3*$356250=$118750

For the second 6months (july-december2020)

Pee:Eee:Perfect=4:2:3

Pee 4/9*$789350=$350822 Eee 2/9*$789350=$17 5411 Perfect

4/9*$789350=$263117

a)The medical aid contributions by the partner are taxable to the partner as they are a benefit that
the specific partner will be enjoying.

The medical contributions by the partner were 80% of the total contributions.

Pee 80%* $6400 =$5120 Eee 80%*$3200 =$2560 Perfect 80%*

$2000=$1600

Own contributions

20%*$6400= $1280 20%*$3200=$640

20%*$2000=$400

b)The interest on capital is taxable to the partners who would have invested their finances into the
partnership therefore a benefit that is taxable to them.

(c) The private element of the wear and tear from the use of Industrial building is treated as income
in the hands of the partner enjoying the use of the asset industial building for private purposes.

11%*$40000=$4400

(d)Recoupment when Perfect joined the partnership

When a soletrader joins a partnership we treat it as if the sole trader has sols his sold trade business
to the partnership.In our situation we treat it as if Perfect sold it to the partnership and for that he
has to recoup all the capital allowances that he had claimed prior to disposal of his soletrade
business .Recoupment is limited to the capital allowances claimed.

Since its an office block, it therefore falls under a commercial building setting and the wear and tear
is at2.5%

2.5%*$450000*2years=$22500

(e)the motoring benefit for use of their Toyota corollas provided by the partnership and they have a
cylinder capacity of 1500.Motor vehicles with 1500cc attract a benefit of $54000.For Pee and Eee
they will enjoy a full benefit of $54000 each whilst Perfect will enjoy a benefit of$54000/2=$27000
since he joined halfway through the year.

(f) The gym subscriptions are private expenses of the partner which are paid for by the
partnership .As a result of these paid for by the partnership a benefit accrues to Pee as his private
expenditure is being catered for by the partnership therefore income accrues to him that is taxable.

(g)The medical expenses incurred by the partnership on behalf of Eee are taxable to Eee as a benefit
accrues to him.

The aggregate of all those expenses is the benefit and 50% of that can be claimed as a credit in the
hands of Eee.

Air expenses $29000

Surgeon costs $43000 50%*91000=$45500 which will then be added to the other
contributions paid for by the partnership

Prescribed drugs $ 19000

Total expenses $91000

(h)A passage benefit interms of a holiday paid for by the partnership is a benefit in the hands of a
partner .Perfect is to enjoy a benefit of $23000 for the Durban trip.

(i)The school fees benefit of $69000 will accrue to Perfect as his sons’s fees for the third term are
being catered for by the partnership and therefore taxable to him .

(j)As per Section 15(2)g a bad debt is allowable as a deduction if it fulfils certain conditions that
include:

1)the debt exists that is for the current year or previous year.

2)the debt is now due and payable.

3)it has been proven to the satisfaction of the Commisioner that the debt is no longer recoverable.

In our case the debt of $10000 ,from the previos year 2019,now due and payable but there is no
information that indicates that it was proved that the debt is now irrecoverable therefore the debt
wont be allowed as a deduction to the partners that were there when it arose therefore disallowed.
(k)subscriptions to IEZ-subscriptions paid by the employee to a registered professional or technical
body to which he is a qualified member are tax deductible in terms of s 15(2) (s) of the Act. Since all
the partners are professional rngineers it therefore means that the subcriptions by all the partners
will be allowable as a deduction.

(l)medical aid-own contributions-

(m)bank interest-this is interest on money borrowed to purchase interest in a partnership. This

interest is a deductible expense to the partner concerned.It is treated as if it was incurred in the
production of a partner’s income. In our situation Perfect borrowed mony from Stanbic and used
part of the proceeds to contribute part of his capital into the partnership.This bank interest
therefore qualifies to be interst borrowed to purchase interest in the partnership.

Amount borrowed is $250000

Bank interest is 30%

Interest incurred/annum

Since Perfect joined half way through the deductible expense would be equal to the 6monhs out of
the possible 12months

$250000*30%*6/12=$37500

(n)medical credit

Pee 6200*50%=$3100 Eee(3200*50%)

+45500[note(g)] = $47100 Perfect(2000*50%)+
($56000*50%)=$1000+$28000

=$29000