Business Income Group Assignment...

FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING
CAC 4102 TAXATION I

GROUP ASSIGNMENT 1: BUSINESS INCOME
(Due 29 January 2021)
GROUP MEMBERS
NAME STUDENT NUMBER CLASS
1 Tonderayi Gwarazimba N0172285L Conventional
2 Brighton Moyo N0171327T Conventional
3 Chrispen Ncube N0173596V Conventional
4 Felicity Nsingo N0174109W Conventional
5 Tashinga Raura N0171491J Conventional
6 Courage Rwizi N0171945D Conventional
7 Mashal Marowa N0171766M Block Release
8 Vimbai Mupingo N0174670N Block Release
9 Kylie Nyamandi N0174439M Block Release
10 Tinotenda Nyamundanda N0174138E Block Release
QUESTION 1
a) Tirivakundi Private Limited

Computation of total deductions for the year ended 31 December 2020.
Description Workin Amount

g (ZWD)
Number
Accelerated Wear and Tear: Warehouse 1 30 000
Special Initial Allowance: Foundation Underpinning Costs 2 3 000
Replacement of broken windows 3 400
Lease improvements S 15 (2) (e) 4 -
Wear and Tear on excess improvements 4 1 565
Wear and Tear: Commercial Building 5 3 750
Wear and Tear: Office Buildings 6 2 000
Special Initial Allowance: Machinery 7 29 000
Exchange Gains S 8 (2) 7 -
Special Initial Allowance: Lawn Mower 8 625
Accelerated Wear and Tear: Canteen and Restrooms 9 9 000
Living Quarters: Factory 10 22 500
Living Quarters: Administration 10 30 000
Accelerated Wear and Tear: Delivery van 11 -
Accelerated Wear and Tear: Commercial vehicles 11 45 000
Accelerated Wear and Tear: Passenger Motor Vehicle 11 5 000
Wear and Tear: Storage Buildings 12 1 350
Allowable deduction from joint research 13 105 000
Cost of drilling a borehole 14 -
Staff Christmas Party 15 -
Depreciation 16 -
Suspensive Sale Allowance 17 24 083
Expenditure not yet incurred 19 162 400
Thin capitalisation: Allowable interest portion 22 72 000
Total deductions before technical fees 546 673
Add allowable deduction on technical fees 23 3 767
Total Deductions 550 440
b) Provisional Tax Payments in 2020
- Tirivakundi Pvt Ltd should pay tax on a quarterly basis in advance of year end on 25 March,
25 June, 25 September and 20 December at 10%, 25%, 30% and 35% respectively of
estimated annual tax liability.
Adjustments to Tirivakundi’s Operating Profit as at 31 December 2020
Description Working Amount

Number ZWD
Operating Profit before adjustments 3 500 000
Add back amount initially deducted by Tirivakundi on research 240 000
Less deduction from joint research 13 (105 000)
Add back Cost of drilling a borehole 14 195 000
Add back Staff Christmas party 15 40 000
Depreciation 16 -
Less Suspensive Sales Allowance 17 (24 083)
Add Exchange gain 18 38 000
Add Income received in advance 19 203 000
Less Allowance on income received for expenditure not yet incurred 19 (162 400)
Discount received 20 75 000
Subsidy 21 120 000
Thin Capitalisation: Allowable interest portion 22 (72 000)
Allowable deduction on Technical fees 23 (3 757)
Taxable Income 4 043 760
Corporate tax (24.72%) 999 617
Provisional Tax Payments
Date Rate Annual Provision Quarterly Payment

(Multiply by Rate) $
25 March 2020 10% $999 617 99 962
25 June 2020 25% $999 617 249 904
25 September 2020 30% $999 617 299 885
20 December 2020 35% $999 617 349 866
WORKINGS
Working 1: Warehouse
Industrial Building Definition
- An industrial building is a building used mainly as a factory or for industrial purposes, to the
extent of least 50% of its floor area. It includes a building owned by a manufacturer and used
by him for storing his goods, that is, raw material, processed goods or work in progress or
finished goods.
Application to the case of Tirivakundi Pvt Ltd

- The warehouse is an industrial building since it is used for manufacturing and storing
refrigerators.
- Tirivakundi Pvt Ltd endeavours to minimise its tax liability, hence the company elected to
claim the Special Initial Allowance on the warehouse in 2017.
- The warehouse was constructed in 2016 and Tirivakundi started using it in 2017. This means
Tirivakundi Pvt Ltd claimed the Special Initial Allowance in the first year of use, that is in
2017, and claimed accelerated wear and tear in the subsequent years.
Accelerated Wear and Tear for 2020
Year Description $
2016 Cost 120 000
2017 Less: Special Wear & Tear 25% (30 000)
ITV at the end of 2017 90 000
2018 Less: Accelerated Wear & Tear 25% (30 000)
2020 Accelerated Wear & Tear 25% (30 000)
ITV at the end of 2020 -
Working 2: Underpinning Costs
- Section 15 (2) (a) of the Income Tax Act states that the deductions allowed to the taxpayer
shall be expenditure and losses to the extent to which they are incurred for the purposes of
trade or in the production of the income except to the extent to which they are expenditure or
losses of a capital nature.
Case Law
- As per Raltio and Variale v COT, two tax payers were in the letting business and the property
subject to letting developed cracks on the walls and were in a condition crying out for a
repair. The following expenses were incurred for which the tax payer claimed:
- Architectural fees
- Foundation underpinning
- Cutting down of a tree which proved a lightning threat to the property.
- Cutting down of tree roots which threatened the foundation
- Crack filling
It was held that all the expenses except crack filling were of a capital nature and hence were
disallowed for deductions, being a form of improvements. Where expenditure has been re-classified
as improvement it should be added back to net profit and instead be ranked for capital allowances.
Application of the case to Tirivakundi Pvt Ltd

- The warehouse foundation underpinning costs of $12 000 are of a capital nature and
constitute an improvement to property.
- Since the costs incurred in foundation underpinning are of a capital nature it means they form
part of the warehouse and therefore qualify for capital allowances in terms of Section 15 (2)
(c) of the Income Tax Act.
- The Special Initial Allowance can be claimed on these costs since they relate to
improvements on the warehouse which happens to be an industrial building.
Special Initial Allowance 2020

Year Description $
2020 Cost (foundation underpinning) 12 000
2020 Special Initial Allowance 25% (3 000)
- The special initial allowance is never apportioned.
Working 3: Replacement of broken windows
- Section 15 (2) (b) of the Income Tax Act states that repairs to business assets used for the
production of income are deductible in full in the year incurred, in the hands of the taxpayer.
- As per Lurcott v Wakely & Wheeler, it was stated that, ‘Repair is restoration by renewal or
replacement of the subsidiary parts of a whole. Renewal as distinguished from repair, is
reconstruction of the entirety.’
Application of the case to Tirivakundi Pvt Ltd

- The replacement of broken windows is therefore of a revenue nature and constitutes repairs to
the property.
- As such, the repairs of $400 are allowed as a deduction in full in the hands of Tirivakundi
Pvt Ltd as per Section 15 (2) (b) of the Income Tax Act.
Working 4: Lease Improvements
Key requirements
- For a lease improvement to exist there has to be a legally enforceable obligation to improve
the premises in terms of the lease agreement.
- A lease agreement exists between Tirivakundi Pvt Ltd and the lessor. However, Tirivakundi
Pvt Ltd incurred costs in excess of what had been agreed in the lease agreement with the
lessor.
- The excess costs were not agreed upon thus they are deemed to be voluntary improvements
and they do not qualify for a deduction in terms of Section 15 (2) (e).
- However, capital allowances should be computed on improvements which did not rank for
lease improvements allowance (excess improvements) in the hands of Tirivakundi Pvt Ltd, as
the company is seeking to maximise tax advantages.
Application of the Income Tax Act

- According to Section 15 (2) (c) as read with the Third Schedule, the retail shop qualifies as a
commercial building since it is used for the purposes of trade.
- The retail shop (commercial building) cannot be granted the Special Initial Allowance since it
is located in Westgate and Westgate is not a growth point.
- As such, Wear and Tear can be claimed as follows:
Wear and Tear 2020
Date Description $
2016 Cost 62 600
2020 Wear and Tear (2.5% x 62 600) 1 565
- The wear and tear is never apportioned.
Working 5: Commercial Buildings

Commercial Building Definition
- A commercial building is a building constructed on or after 1 April 1975 and is used to the
extent of at least 90% of its floor area for purposes of trade.
- Commercial buildings do not qualify for Special Initial Allowance unless if constructed at a
growth point.
- No information confirms that the commercial building is located at a growth point, therefore
Tirivakundi can claim Wear and Tear.
Wear and Tear 2020
Date Description $
2017 Cost 150 000
2020 Wear and Tear (2.5% x 150 000) 3 750
Working 6: Office building
- The office building is being used for purposes of trade. As such, it qualifies as a commercial
building.
- Commercial buildings do not qualify for the Special Initial Allowance, hence Tirivakundi Pvt
Ltd will claim Wear and Tear as follows:
Wear and Tear 2020
Date Description $
2016 Cost 80 000
2020 Wear and Tear (2.5% x 80 000) 2 000
Working 7: Machinery
Travelling Costs
- The travelling costs incurred by the procurement manager were expenditure necessary to
bring the machinery into a usable condition and location. As such, they are of a capital nature
and should be added to the cost of the machinery.
Cutting and Levelling Costs

- The costs of cutting and levelling the land form part of the expenditure necessary to bring the
machinery to a usable condition. As such, they are of a capital nature and should be added to
the cost of the machinery.
Foreign Exchange Gains

- A capital nature foreign exchange gain arises on acquisition or disposal of fixed assets, on
long term loans or on capital account. As such the gain of $1 000 from the purchase of
machinery is a capital nature foreign exchange gain in the hands of Tirivakundi Pvt Ltd.
- Capital nature foreign exchange gains are non-taxable and can only be off set against cost of
the asset when realized.
- Unrealized foreign exchange gains are not recognized for tax purposes. However, Tirivakundi
Pvt Ltd realised the gain of $1 000 upon settlement of the amount on 02 December 2020. As
such, the gain can be offset against the cost of the asset.
Calculation of the Cost of Machinery
Description $
Purchase price 110 000
Add Travelling costs (capitalised) 2 000
Add Costs of Cutting and Levelling land 5 000
Less Capital nature foreign exchange gain (1 000)
Cost of Machinery 116 000

Year Description $
2020 Cost 116 000
- Special Initial Allowance is never apportioned.
Working 8: Lawn Mower
- It does not matter that the lawn mower is second hand, Tirivakundi Pvt Ltd can elect to claim
the Special Initial Allowance in the year of purchase.

Year Description $
2020 Cost 2 500
2020 Special Initial Allowance 25% (625)
- The special initial allowance is never apportioned.
Working 9: Canteen and Restrooms
- The canteen and restrooms qualify as industrial buildings since they are used in connection
with the manufacturing industry and therefore Tirivakundi Pvt Ltd can elect to claim the
Special Initial Allowance in the first year and the Accelerated Wear and Tear in the
subsequent years.
Year Description $
2018 Cost 36 000
2020 Accelerated Wear & Tear 25% (9 000)
Working 10: Living Quarters
- Living quarters are staff housing.

- Staff housing qualify for capital allowances in terms of Section 15 (2) (c) of the Income Tax
Act.
Factory Workers Living Quarters
Description $
Cost of 3 Units 90 000
Cost of 1 Unit ($90 000/3) 30 000
2020 threshold/limit per unit of staff housing 250 000
- $30 000< $250 000, therefore, the three living quarters for factory workers qualify for capital
allowances.

Year Description $
2020 Cost 90 000
- The Special Initial Allowance is never apportioned.

Administration Workers Living Quarters
Description $
Cost of 5 Units 120 000
Cost of 1 Unit ($120 000/5) 24 000
2020 threshold/limit per unit of staff housing 25 000
- $24 000< $25 000, therefore, the five living quarters for administration workers qualify for
capital allowances.
- Whether or not staff housing is for administration or factory workers does not matter. Both
classes of living quarters still qualify for Special Initial Allowance.
Accelerated Wear and Tear 2020
Date Description $
2019 Cost 120 000
2019 Less: Special Initial Allowance 25% (30 000)
2020 Accelerated Wear and Tear 25% (30 000)
Working 11: Motor Vehicles

Delivery Van
Year Description $
2016 Cost 20 000
2020 Accelerated Wear & Tear 25% -
- No capital allowances will be claimed on the delivery van since it has a nil Income Tax Value
(ITV) at the end of 2019. (All allowances were claimed in respect of the delivery van since
Tirivakundi always endeavours to minimise his tax liability).
Commercial Vehicles
- The commercial motor vehicles qualified for Special Initial Allowance since Tirivakundi Pvt
Ltd endeavours to minimise his tax liability.
Date Description $
2017 Cost 180 000
2017 Less: Special Initial Allowance 25% (45 000)
2020 Accelerated Wear and Tear 25% (45 000)
Passenger Motor Vehicles
Description $
Cost of 2 Passenger Motor Vehicles 60 000
Cost of 1 Passenger Motor Vehicle ($60 000/2) 30 000
2017 threshold/limit per Passenger Motor Vehicle 10 000
- $30 000> $10 000, therefore, in 2017 the deemed cost for each passenger motor vehicle was
$10 000.
Date Description PMV 1 PMV 2

$ $
2017 Cost 10 000 10 000
2017 Less: Special Initial Allowance 25% (2 500) (2 500)
ITV at the end of 2017 7 500 7 500
2018 Less: Accelerated Wear & Tear 25% (2 500) (2 500)
ITV at the end of 2018 5 000 5 000
2019 Less: Accelerated Wear & Tear 25% (2 500) (2 500)
ITV at the end of 2019 2 500 2 500
2020 Accelerated Wear and Tear 25% (2 500) (2 500)
ITV at the end of 2020 - -
- Therefore the total accelerated Wear and Tear for the two Passenger Motor Vehicles is
$5 000.
Working 12: Storage Buildings
- The storage does not qualify as an industrial building since the goods stored in it are not
manufactured by Tirivakundi Pvt Ltd.
- Tirivakundi Pvt Ltd is receiving a fee for the storage of the sister company’s goods, hence the
storage building is being used for trade, and thus qualifies as a commercial building.
Therefore, Tirivakundi Pvt Ltd may only claim wear and tear.
Wear and Tear 2020
Date Description $
2018 Cost 54 000
2020 Wear and Tear (2.5% x 54 000) 1 350
Working 13: Joint Project
- This is a joint project to carry out research with Capri Pvt Ltd.
- Capri Pvt Ltd was undertaking the research and incurred $1.6m on research costs. This
implies that the $240 000 contributed by Tirivakundi Pvt Ltd towards the research is included
in the $1.6m.
- With reference to Section 15 (2) (n), it was incorrect for Tirivakundi Pvt Ltd to deduct the
whole contribution of $240 000 since part of it was used to purchase capital nature items by
Capri Pvt Ltd.
Allowable deduction = A x B
C
Where: A – Tirivakundi Pvt Ltd’s contribution

B – Capri Pvt Ltd’s expenditure had Tirivakundi Pvt Ltd not contributed anything
C – The total research expenditure
Allowable deduction = $240 000 x ($1 600 000 - $900 000)

$1 600 000
= $105 000
Effect on Operating Profit
- Add back the $240 000 which had been initially deducted by Tirivakundi Pvt Ltd and deduct
the correct amount of $105 000.
Working 14: Cost of drilling borehole
- The corporate social responsibility by Tirivakundi Pvt Ltd is a form of a

donation/sponsorship.
- A sponsorship/donation is of a capital nature if its main object is to create an image or
goodwill, whereas it is of a revenue nature if it provides an opportunity for the taxpayer to
advertise and also to conduct market research.
- Tirivakundi Pvt Ltd enhanced its image/goodwill in the society by drilling a borehole. This
implies that the expenditure incurred was of a capital nature and therefore does not qualify as
a deduction according to the general deduction formula.

- Add back the cost of drilling a borehole ($195 000) as it does not qualify for a deduction in
terms of Section 15 (2) (a).
Working 15: Staff Christmas Party
- Staff Christmas party used to be deductible until the introduction of the Revenue Authority
Act. However, since the introduction, the commissioner now considers the staff Christmas
party expenses as part of entertainment expenses which are not deductible.

- Add back the staff Christmas party costs as they are no longer deductible in the hands of
Tirivakundi Pvt Ltd.
Working 16: Depreciation
- Depreciation is not allowable by tax authorities as a deduction.

- Capital allowances are claimable in lieu of depreciation.

- There is no effect on operating profit as the depreciation had not been deducted by
Working 17: Suspensive Sales Allowance

Calculation of Outstanding Debtors & Suspensive Sales Allowance
$ $
Selling Price 220 000
Less Payments:
Deposit 50 000
Instalments [7 x $220 000 - $50 000]
24 49 583 (99 583)
Outstanding balance 120 417
Suspensive Sales Allowance

Sales 220 000
Cost of sales (176 000)
Gross profit 44 000
Suspensive Sales Allowance [ 44 000 x $120 417]
220 000 (24 083)
Taxable Income 19 917
- Tirivakundi Pvt Ltd should be allowed a suspensive sales allowance according to Section 17
of the Income Tax Act.
Working 18: Foreign Exchange Gains
- Gains from foreign exchange form part of gross income. Thus, they should be added to the
operating profit.
1 May 2020
USD 1 900 = ZWD (1 900 x 100)
= ZWD 190 000
30 November 2020
USD 1 900 = ZWD (1 900 x 80)
= ZWD 152 000
Exchange Gain = ZWD 190 000 – ZWD 152 000

= ZWD 38 000
Working 19: Expenditure not yet incurred
- A taxpayer who has received income in advance of expenditure to be incurred after end of
year of assessment when goods are delivered or services rendered, may be granted an
allowance by which the taxpayer has to deduct from the income, provided the taxpayer makes
an election in terms of Section 15 (2) (cc) of the Income Tax Act.
- In practice, the allowance is computed using the taxpayer’s general gross margin.
- Tirivakundi Pvt Ltd will elect Section 15 (2) (cc) in order to minimise its tax liability.
- From ‘Working 17: Suspensive Sales Allowance’ above, Tirivakundi Pvt Ltd’s gross profit
margin is as follows:
Gross profit margin = $44 000 x 100%

$220 000
= 20%
Therefore Allowance = (100%-20%) x $203 000
= 80% x $203 000
= $162 400

- The allowance will be deducted from operating profit.
- Tirivakundi Pvt Ltd will also include the gross income earned in respect of the special type of
refrigerator since it is ‘claiming a deduction’ in respect of the same. Thus add the income
received to the operating profit.
Working 20: Discount Received
- As per Section 8 (1) (k) of the Income Tax Act, discounts received are gross income in the in
the hands of the tax payer if they are received in the normal course of business, that is, not a
discount on the acquisition of non‐current assets.
- Therefore the discount received from the supplier is gross income in the hands of Tirivakundi
Pvt Ltd.
- The fact that the discount relates to a 2019 invoice does not matter because the cause of the
discount arose in 2020.

- Add to Operating profit since the discount received is gross income in the hands of
Working 21: Subsidy
- As per Section 8 (1) (m) of the Income Tax Act, a subsidy is gross income in the hands of the
tax payer. Therefore the subsidy received from government is taxable in full in the hands of
the tax payer.
- Add to operating profit since the subsidy receives is gross income in the hands of Tirivakundi
Pvt Ltd.
Working 22: Thin Capitalisation
- Section 16 (1) (q) discourages thin capitalisation by limiting interest deductible for income
tax purposes.
- It disallows any expenditure incurred by a local branch or subsidiary of a foreign company in
servicing any debt or debts contracted in connection with the production of income to the
extent that such debt or debts cause the person to exceed a debt to equity ratio of three to one.
Computation of Total Equity
Details $
Issued Share Capital 60 000
Share Premium 200 000
Accumulated Loss (100 000)
6% Preference Shares 80 000
Total Equity 240 000
Disallowable Expenditure = A x (B-C)

B
Where: A = total interest or expenditure incurred during the year on debt
B = total financial assistance
C = Equity Capital Multiplied by 3
Disallowable Expenditure = (10% x $900 000) x ($900 000 - $240 000 x 3)

$900 000
= $18 000
Allowable portion = Total Interest – Disallowed Portion
= $90 000 - $18 000
= $72 000
- The excess expenditure which is disallowed is treated as a dividend for purpose of
withholding tax.
- Preference dividends are prohibited deductions in line with Section 16 (1) (e).
Working 23: Technical Fees
- Deduction of general administration or management expenditure paid by a local holding

company, branch or subsidiary of a foreign company or local company is restricted by
Section 16(1) (r) of the Act.
The limit is calculated as follows after commencement of production of income:

1% x [A-(B+C)]
Where: A = total expenditure qualifying for deduction in terms of s15 of the Income Tax Act.
B = expenditure on general administration and management paid outside Zimbabwe
by the taxpayer
C = expenditure qualifying for deduction
Allowable expenditure = 1% x [$546 673 – ($170 000+ $0)

= $3 767
- The excess expenditure which is disallowed is treated as a dividend for purpose of

withholding tax.
QUESTION 2a
i. DEPOSITS ON RETURNABLE CONTAINER
Brief explanation of the situation

- Companies which sell goods in returnable containers such as in beverage drink bottles often
require taxpayers to pay a deposit for the container in addition to the price of the goods sold.
- The deposit paid by the taxpayer passes from (is received by) the taxpayer to the seller.
- A question arises as to whether such a deposit must be taxed in the hands of the recipient of
the deposit.
Case Laws
- Per Brookes Lemos Ltd v CIR (1945) 14 SATC 295, it was held that deposits charged by the
company on glass containers of products supplied to customers, formed part of the
company’s gross income.
- Per Geldenhuys v C.I.R., 14 S.A.T.A. 419, the court held that an amount physically received
is only received for the purposes of the gross income definition if it is “received by the
taxpayer on his own behalf for his own benefit”.
Application of Case Law

- The taxpayer is taxed on the deposit received by him/her for his/her own benefit.
- Tax payers who receive deposits are typically required to repay the deposit under certain
circumstances (for example when the customer brings the container) and one would
reasonably think that this is sufficient to show that a deposit is not received by the taxpayer
for its own benefit.
- However, the taxpayer bears the onus of proving that an amount has not been received by
him/her for his/her own benefit.
Conclusion
- In relation to deposits on returnable containers, the term ‘received by’ implies that the
taxpayer has gained possession of the money which compensates the taxpayer in case the
depositor does not bring back the container. The deposit thus constitutes gross income,
subject to the following exceptions:
 A deposit received by a person who sells commodities in returnable containers
constitutes gross income unless the deposit is received only in trust and cannot be
mixed with the taxpayer’s own funds, or there is an obligation on the customer to
return the container and the deposit is merely security to ensure performance of the
obligation.
 Where the taxpayer is able to prove that the deposits where not received for his/her
own benefit.
ii. LOAN FROM BORROWINGS

- Individuals and corporates normally seek financial support from financial institutions such as
banks. In most cases, the support that they get will be in the form of a loan which is usually
accompanied by an interest.
- The loan obtained is also termed a borrowing.
- A question arises as to whether the loan ‘received by’ the corporate/individual is taxable in
his/her own hands.
- Case Law plays a significant role in clarifying this matter.
Case Law
- Per CIR v Genn & Co (Pvt) Ltd (1955), it was held that an agent does not receive, but keeps
in custody for a principal, and is so the borrower. The borrower is given possession and falls
under an obligation to repay. What is borrowed does not become his, except in the
sense...that what is borrowed is consumable ...” The courts further stated that borrowed
money is not a receipt since at the same moment that the borrower is given possession of the
amount, he falls under the obligation to repay. It is therefore not received for his own behalf.
Application of the case

- The lesson learnt from this case is that loans or security deposits are non-taxable. Trade or
security deposits are only taxable when the customer is under no obligation to claim it back or
if the deposit is forfeitable.
- The fact that the borrower is required to pay back the borrowed funds in full means that those
funds are not his. Therefore they do not constitute gross income in the hands of the borrower
and are not taxable.
Conclusion
- The term ‘received by’ in this instance, dwells merely around the fact that the borrower is in
custody of the borrowed funds which he/she is eventually obligated to repay to the lender. As
such, the term does not apply for the purposes of the definition of gross income.
iii. INCOME RECEIVED THROUGH ILLEGAL MEANS

- Individuals and corporates may engage in a trade or an activity that is not acceptable by the
laws and regulations of Zimbabwe. These may include engaging in a retail business without
an authorising license.
- Such trade or illegal activities may yield positive returns on the individual or corporate.
- This raises a question as to whether the returns on such illegal activities should be brought
into the tax net. This situation often poses challenges because taxing such returns may
indirectly imply that the illegal activity is in fact ‘acceptable’.
- Case law also helps demystify this issue.
Case Law
- Per ITC 1789 (67 SATC 205), where the taxpayer in question had solicited millions of rand
from a multitude of investors in a fraudulent and unlawful scheme, the court held that those
moneys had been “received” as contemplated in the definition of gross income.
- However, Per Cot v G [1981] (43 SATC 159), the Appellate Division of Zimbabwe held that
a person who steals money does not ‘receive’ it in the sense contemplated in the definition of
“gross income” in the Act, because he does not acquire the money on his own behalf and for
his own benefit.
- In the case of MP Finance Group CC (In Liquidation) v CSARS the High Court of Appeal
ruled that income “received by” a taxpayer from illegal gains will be taxable in the hands of
the taxpayer.
Application of case law

- For the purposes of gross income, income is said to have been received by the tax payer if it is
obtained on his behalf and for his benefit.
- Therefore, the intention of the taxpayer is of paramount importance when determining
whether to include in gross income the income that has been obtained illegally.
Conclusion
- In Zimbabwe, in spite of the case of Cot v G [1981] (43 SATC 159) income is still taxable
even if it is obtained from illegal activities.
- Therefore, the term ‘received by’ is relevant for use when referring to income that has been
obtained by the taxpayer illegally.
iv. INCOME RECEIVED BY AN AGENT

- An agency relationship exists when a person (the principal) employs another person (the
agent) to safeguard his interests when he is unable to himself act to protect those interests. For
example, a house-owner (the principal) might appoint an estate agent (the agent) to find
prospective purchasers of his house if he wishes to sell it.
- The question here is whether the income obtained by the agent on behalf of the principal
should be taxed in the hands of the agent.
Case Law
- Per Geldenhuys v CIR 14 SATC 419, the court held that an amount physically received is
only received for the purposes of the gross income definition if it is “received by the taxpayer
on his own behalf for his own benefit”.
- Also, in CIR v Genn & Co (Pvt) Ltd (1955), it was held that an agent does not receive, but
keeps in custody for a principal.
- As held in ITC 11282 “......,the expression ‟received by him‟ means that the money must be
received by him in such circumstances that he becomes entitled to it.....In order for there to
be a “receipt”, the money must be “received “ by the taxpayer for his own benefit.”
Application of Case law

- An agent who receives money on behalf of a principal does not receive the money for his own
benefit, but on behalf of the principal.
- This implies that money received by the agent is not for the benefit of the agent and cannot be
gross income in the hands of the agent.
- However, the agent benefits from the commission he receives in exchange for his services.
The commission thus constitutes gross income and is taxable in the hands of the agent.
Conclusion
- In relation to the agency principle, the term “received by”, for the purposes of the gross
income definition means that the income is received by the principal although the agent
would be the custodian of the same income.
- Therefore it can be concluded that the agent does not receive but keeps in custody.
v. DEPOSITS FOR DAY OLD CHICKS

- It is a common business practice that customers pay deposits or make advance payments to a
supplier of poultry products.
- This raises a question as to whether the amount paid in advance constitute gross income in the
hands of the recipient of the deposits/advance payments.
- Case law provides guidance on this aspect of taxation.
Case Law
- Per ITC 675 (1945) 16 SATC 238, the appellant company’s business of poultry farming
included the supply of day-old chicks to customers in terms of a contract embodied in a
printed form. The contract provided for payment of the purchase price in advance. It was
refundable if the company failed to deliver all, or part, of the order. The delivery date and the
condition of the goods on arrival were not guaranteed. Orders were not subject to
cancellation by customers. The amounts received in advance were accounted for as liabilities
in the books of account. These amounts were treated as deposits received for containers and
against poultry to be supplied. The Commissioner included these amounts received in
advance in the gross income of the company, and subjected them to tax.
Held: since deposits received from prospective purchasers of day-old chicks to be delivered
in the future were not refundable at the instance of the depositor, such deposits represented
income in the hands of the seller.
Application of Case Law

- In common business practice, the suppliers of poultry products generally make refunds for
deposits received only when they have failed to perform their obligations in terms of the
contract with the customer.
- In most cases, the customer is unable to request for a refund if the supplier is still able to
deliver the promised product.
- As such, it follows that the supplier/recipient of the deposit would have received and would
be in control of the income received. That income is thus gross income in the hands of the
recipient of the deposit.
- It also follows that the supplier would have received the deposit for his own benefit.
Conclusion
- In relation to deposits for day-old chicks, the term received by implies that the deposit has
passed to the recipient and since the recipient cannot refund that deposit at the instance of the
customer, it means the deposit is his own income (all the risks and rewards with regards to
that deposit are in the hands of the recipient).
- As such, the deposit constitutes gross income and is taxable in accordance with Section 8 of
the Income Tax Act.
QUESTION 2b
i. Licensed Investor
- Licensed investor means a person under the Export Processing Zones Act [Chapter 14:07]
before its repeal by the Zimbabwe Investment Authority Act [Chapter 14:30] (No. 4 of 2006)
on the 1st January 2007.
Tax Incentives for a Licensed Investor
Special Initial Allowance 50% in first year & 25% in subsequent

years
Licensed Investor in Special Economic Tax Rate
Zone 0%
First 5 years of the arrangement 15%
Second 5 years of the arrangement
- Also exempted are, royalties payable by a licensed investor out of his operations in the special
economic zone.
ii. Export Processing Zone (EPZ) Operator

- In order to qualify for the export processing zone status, an operator has to be licensed by the
Zimbabwe Investment Authority (ZIA). The requirement is that more than 80% of production
output is being exported.
- The sales should be for manufactured goods by the taxpayer rather than buying and selling.
Tax Incentives for the Export Processing Zone Operator

- Exempt from income tax in the first five years.
- Full Value Added Tax refund on purchase of equipment, raw materials and any other inputs.
- No customs duty on the importation of the above.
- Exempt from capital gains tax on selling the business premises.
- Exempt from withholding taxes on dividends, interest, royalties and fees.
iii. Special Economic Zone (SEZ Operator)

- This operator is provided for in terms of the Special Economic Zones Act (Chapter 14:34)
(No. 7 of 2016).
- A special economic zone is any part of Zimbabwe declared in the Act as a special economic
zone.
- An investment licence is also defined in the same Act as an investment licence to a licensed
investor with a qualifying degree of export-orientation.
- It also defines a qualifying degree of export-orientation characterizing a licensed investor to
mean that the licensed investor exports all of its goods and services. This is with effect from
the 1st of January, 2017.
Tax Incentives for a licensed investor within SEZ
Effective 1 January 2017 Special Initial Allowance Claimable On

Capital Expenditure
First Year of Assessment 50%
Second Year of Assessment 25%
Third Year of Assessment 25%
iv. Industrial Park Developer

- An industrial park developer is a person who owns and maintains industrial parks, that is,
approved premises or an area in which any person other than the industrial park developer
carries on the business of manufacturing or processing goods or components of goods for
export from Zimbabwe.
Tax incentives for and Industrial Park Developer
Time Period Tax Rate

First 5 years of the arrangement 0%
Second 5 years of the arrangement 24%
- Not liable to tax from dividends paid to residents or non‐residents.

- Exempt from withholding tax on interest and fees payable to non‐residents.
- Exempt from capital gains tax on disposal of specified assets forming part, or connected to.
v. Export Manufacturing Company

- This company is provided for in terms of Section 14 (3) of the Finance Act.
- An export manufacturing company conducts manufacturing operations and exports at least
30% in any year of assessment.
Threshold for the quantity of Exports

Time Period Minimum Required Exports as a
percentage of Manufactured Output
Before 1 January 2015 50%
From 1 January 2015 going onwards 30%
- The export manufacturing company must prove to the Commissioner that its taxable income
is derived from the manufacturing operations conducted in Zimbabwe during the year of
assessment.
- The output is measured in terms of the physical units or quantities and assessed separately for
each year of assessment.
Tax Incentives for an Export Manufacturing Company
Exports as a Percentage of Manufactured Corporate Tax

Output
Between 30% to 40% of output 20%
Between 41% to 50% of output 17.5%
Above 50% of output 15%
vi. BOT/BOOT Operator

- This arrangement is defined in the statutes on Section 14 (1) of the Finance Act.
BOOT stands for:
B – BUILD
O – OWN
O - OPERATE
T - TRANSFER
- A BOOT Operator arrangement occurs when a contractor enters into a contract/contracts with
the State or a statutory corporation under which the contractor undertakes to construct
infrastructure for the State or statutory corporation.
- The consideration of the contractor will be in the form of a right to operate or control the
infrastructure for a specified period after which the contractor will transfer ownership or
control of the item to the State or statutory corporation.
Tax Incentives for a BOOT Operator

- A BOOT or BOT operator is taxed on its profits in terms of Section 14(2) (h) of the Finance
Act, as follows:
Time Period Tax

Rate
First 5 years 0%
Second 5 years (6th to 10th year) 15%
Thereafter (After the first 10 years) 24%
vii. Power Generation Project

- In an effort to promote the construction of power equipment such as hydro and solar plants,
and to promote the generation of power in the country, the government introduced power
generation projects.
- Actors involved in these projects enjoy fiscal concessions inclusive of rebates on duty
incurred on the purchase of capital equipment and an exemption is also enjoyed on the excise
duty on diesel.
- These concessions enable the actors in the projects to reduce costs.
- Effective 1 January 2018, provisions have been made by the Ministry of Finance and
Economic Development to exempt receipts and accruals of power generation from income tax
as follows:
Time Period Corporate Tax Rate

First 5 years of Operation nil
After 5 years 15%
viii. Youth Employment Credit

- In a bid to create employment for the ‘youths’, the government introduced an initiative
whereby a tax incentive of ZWL$500 per month per employee is granted for corporates that
employ additional youth employees in a year of assessment with effect from 1 January 2020.
Conditions for the Credit to Apply

- The maximum rebate for the company or trust shall be limited to ZWL$ 60 000 per annum.
- The company or trust should be registered for income tax and compliant in previous tax
periods.
- The incentive is claimable when the additional employee has served for 12 consecutive
months;
- The employees should be aged 30 years and below at the time of employment;
- The term additional employee does not include trainee, apprentice, intern or manager, that is,
the tax credit is not applicable to supervisory grades.
- The minimum wage payable to the additional employee should be ZWL$ 2000 per month.
- The incentive is not applicable to companies or trusts with turnover exceeding US$1 million
per annum.
- The rebate is deducted from the income tax payable by the company or trust.
REFERENCES
- Income Tax Act [Chapter 23:06]

- Tax Principles in Zimbabwe by Marvellous Tapera 2020 Edition
- Tax Law and Practice in Zimbabwe by Sabelo Nare 2011 Edition
- ZIMRA Website
- University of Pretoria: Leasehold Improvements: Developing a framework for the tax
deductions applicable to lesses. (Case Laws).
- Finance Act [Chapter 23:04]
- Wikipedia

Business Income Group Assignment...

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business Income Group Assignment...

Uploaded by

Copyright:

Available Formats

FACULTY OF COMMERCE

CAC 4102 TAXATION I

a) Tirivakundi Private Limited

Description Workin Amount

Adjustments to Tirivakundi’s Operating Profit as at 31 December 2020

Description Working Amount

Provisional Tax Payments

Date Rate Annual Provision Quarterly Payment

Application to the case of Tirivakundi Pvt Ltd

Accelerated Wear and Tear for 2020

Working 2: Underpinning Costs

Application of the case to Tirivakundi Pvt Ltd

Special Initial Allowance 2020

- The special initial allowance is never apportioned.

Working 3: Replacement of broken windows

Application of the case to Tirivakundi Pvt Ltd

Application of the Income Tax Act

Wear and Tear 2020

- The wear and tear is never apportioned.

Working 5: Commercial Buildings

Wear and Tear 2020

- The wear and tear is never apportioned.

Working 6: Office building

Wear and Tear 2020

- The wear and tear is never apportioned.

Cutting and Levelling Costs

Foreign Exchange Gains

Calculation of the Cost of Machinery

Special Initial Allowance 2020

- Special Initial Allowance is never apportioned.

Working 8: Lawn Mower

Special Initial Allowance 2020

Working 9: Canteen and Restrooms

Accelerated Wear and Tear for 2020

Working 10: Living Quarters

- Living quarters are staff housing.

Special Initial Allowance 2020

- The Special Initial Allowance is never apportioned.

Accelerated Wear and Tear 2020

Working 11: Motor Vehicles

Accelerated Wear and Tear 2020

Passenger Motor Vehicles

Accelerated Wear and Tear 2020

Date Description PMV 1 PMV 2

Wear and Tear 2020

Where: A – Tirivakundi Pvt Ltd’s contribution

Allowable deduction = $240 000 x ($1 600 000 - $900 000)

- The corporate social responsibility by Tirivakundi Pvt Ltd is a form of a

Effect on Operating Profit

Effect on Operating Profit

- Depreciation is not allowable by tax authorities as a deduction.

Effect on Operating Profit

Working 17: Suspensive Sales Allowance

Suspensive Sales Allowance

Effect on Operating Profit

Working 18: Foreign Exchange Gains

Exchange Gain = ZWD 190 000 – ZWD 152 000

Working 19: Expenditure not yet incurred

Gross profit margin = $44 000 x 100%

Effect on Operating Profit

Working 20: Discount Received

Effect on Operating Profit

Working 21: Subsidy

Working 22: Thin Capitalisation