Lease Premiums as defined in CIR

vs Butcher bros(Pty)

Definition – A “Premium or like

consideration” means a
consideration, having an
ascertainable money value, which
passes from lessee to lessor,
whether in cash or otherwise.
 Lease Premiums Cont’d
Characteristics of a Premium:
 be distinct in nature

 have an ascertainable money value

 pass from lessee to lessor or sub-lessee

to sub-lessor but not to predecessor
lessee.
 be paid in addition to or in lieu of
rent.
 Lease Premiums Cont’d
Is a price for the ‘right of use’ of:
a) Land or buildings
b) Plant or machinery
c) Patent, design, trade mark, copyright,
model, plan, secret process or formula
d) Motion picture film or television,
sound recording or advertising matter
e) Imparting of or undertaking to impart
knowledge for the use of movable or
intangible assets mentioned above
Section 12(4)
This section deems lease premiums received
for the right of use of:
 patents, design, trademark, copyright,
model, plan,
 sound recording or advertising matter
 secret process or formula
 motion picture film or television etc.
in Zimbabwe, to be from a source within
Zimbabwe.
 Lease Premiums Cont’d
Gross Income – Section 8(1)(d)
Tax in full in year of accrual

Deduction Section 15(2)(d)

Must be used / occupied for the purposes
of trade or in the production of income
(apportion between business and private
use)
Yearly allowance is the Lease Premium
divided by the period of lease or 10 years
whichever is the lesser.
 Lease Premiums Cont’d
Deduction Section 15(2)(d)

LEASE PREMIUM
The Lesser of
‘Lease Period’ & 10 Yrs

Note: This must be expressed in

months
 Lease Premiums Deds

If the lease period is not stated use 10

years
Where the lease period may be
extended only the initial period is
used in the calculations
In the year in which the lease
commences, terminates or on
cessation of use for business apportion
the allowance
Example
Bie entered into a 15 year lease agreement with Sisco
Ltd , the owner of industrial buildings. The lease
agreement provided for the payment by Bie of a lease
premium amounting to $ 60 000 on 1 march 2015 and
monthly rentals of $700 from that date.
COMPUTE Sisco’ s taxable income and amounts
claimable by Bie for the year ended 31 Dec 2015
 Lease Premiums Deds

Knowledge - Commissioner `s
discretion applied but not less than
1/10th of the Lease premium
On acquisition of ownership the
lessee will cease to qualify for any
allowance in the year of assessment
next following
Consider recoupment to the lessee in
terms of Section 8(1)(l)
 Lease Improvements
Generally if a property is let out it’s
normally the lessor who effects
improvements.
This section looks at a situation where, in
terms of an obligation in the lease
agreement, the lessee effects
improvements on the lessor’s property
The cost of the improvements is not
reimbursed by the lessor
 Lease Improvements Cont’d
Lease improvements refer to, in the case of
the :
a) lessor, to the value of improvements
on and
b) lessee to the cost of improvements
incurred on

land or buildings, effected by the lessee,

where there is an obligation in terms of the
lease agreement, to effect those
improvements.
 Lease Improvements Cont’d
Section 8(1)(e) brings into the lessor’s
Gross Income, the value of improvements
effected by the lessee in terms of an
obligation in the lease agreement
granting the right of use of land or
buildings.
The section is complementary to section
15(2)(e) which allows expenditure
incurred by the lessee as a deduction.
 Lease Improvements Cont’d

a) The date of accrual of the lease

improvements is the date such
improvements were effected or
completed.
b) The amount is taxable in equal
monthly instalments over the
unexpired period of the lease
 Lease Improvements Cont’d

Unexpired lease period =

Actual lease period xxxxxx

Less: Up to end of construction period xxxxxx
xxxxxx

Note: This must be expressed in

months
 Lease Improvements Cont’d

c) If the period of the lease is indefinite

or silent then it is deemed to be 10
years which is further reduced to
determine the unexpired lease
period
d) Where the lease is renewable only
the initial period of the lease is taken
into account
 Lease Improvements Cont’d
e) It is also important to note that an upward
variation in the building clause prior to
completion of the improvements would
result in the revised amount being captured
by Section 8(1)(e) in full

f) If the variation of the building clause takes

place after the completion of the
improvements the additional amount cannot
be included in the gross income of the lessor
 Lease Improvements Cont’d
CIRCUMSTANCES WHERE ALL FUTURE INSTALMENTS
ARE BROUGHT INTO GROSS INCOME

a) On cancellation of the agreement

b) On cession of the agreement
c) On assignment of the agreement
d) On sale or any other form of disposal of the land or
buildings on which the improvements were effected
e) On death or insolvency of the lessor
 Lease Improvements Summary

a) Where the lease period is given the allowance shall be

equal to:
LEASE IMPROVEMENTS
The lesser of the
UNEXPIRED LEASE PERIOD & 10 Yrs
b) Where the lease period is not given the allowance
shall be equal to:
LEASE IMPROVEMENTS
10 Yrs – period up
to end of construction
Lease Improvements
- Deductions
Section 15(2)(e) allows a
deduction in the hands of the
lessee the cost of the
improvements effected by him in
terms of an obligation in the lease
agreement granting the right of
use of land or buildings.
 Lease Improvements Deds

a) The date on which capital expenditure

shall be assumed to have been
incurred on the lease improvements is
the date such improvements are used
by the lessee for the purposes of trade.
b) The amount deductible shall be in
equal monthly instalments over the
unexpired period of the lease
 Lease Improvements Deds

Unexpired lease period =

Actual lease period xxxxxx

Less: Period to date of business use xxxxxx
xxxxxx

Note: This must be expressed in

months
 Lease Improvements Deds

c) If the period of the lease is indefinite

or silent then it is deemed to be 10
years which is further reduced to
determine the unexpired lease
period
d) Where the lease period is renewable
only the initial period of the lease is
taken into account
 Lease Improvements Deds
e) It is also important to note that an upward
variation in the building clause prior to
completion of the improvements would
result in the revised amount being captured
by Section 15(2)(e) in full

f) If the variation of the building clause takes

place after the completion of the
improvements the additional amount cannot
be included for the purposes of calculating
the deductible amount in the lessee’s hands
 Lease Improvements Deds

g) In the year in which the lease

commences, terminates or on
cessation of use for business
apportion the allowance
h) On acquisition of ownership the
lessee will cease to qualify for any
allowance in the year of assessment
next following
 Lease Improvements Deds

i) Consider recoupment to the

lessee in terms of Section 8(1)(l)

j) Where there is dual usage

apportion between business and
private
 Lease Improvements Summary

a) Where the lease period is given the allowance shall be

equal to:
LEASE IMPROVEMENTS
The lesser of the
UNEXPIRED LEASE PERIOD & 12 Yrs
b) Where the lease period is not given the allowance
shall be equal to:
LEASE IMPROVEMENTS
10 Yrs – Period up
to date of business use
Example
Mrs Chikore leases her property to Mr Jongwe. The
lease was entered into in 1 March 2015 and the lease is
for 8 years. Mr Jongwe was asked to pay monthly
rentals of $10 000 and in addition effect improvements
to the value of at most $260 000. The buildings were
completed on 31st July 2015.
Compute Mrs Chikore’s taxable income for 2015
Elections
 In terms of Section 15(4) of the Income
Tax Act, if a deduction is allowed
under two or more sections, the
taxpayer shall elect under which
section he wants the deduction
allowed.
 The taxpayer has the right to choose
between capital allowances and a
deduction under Section 15(2)(e).
Elections Cont’d
Where the erection is not in terms of an
obligation in the lease
a) Lessee - Allow special initial and
wear and tear allowances
b) Lessor - No special initial and wear
and tear allowances until property is
rented out to another tenant and rent
is thus receivable for the building
Elections Cont’d
Where the erection is in terms of an
obligation in the lease
a) Lessee - Special initial and wear
and tear allowances allowable if
elected as an alternative to section
15(2)(e).
b) Lessor - Wear and tear allowances
only.
Elections Cont’d
Where the erection is in terms of an obligation in
the lease and the cost exceeds the stipulated
amount
a) Lessee - Special initial and wear and tear
allowances on the whole or the stipulated
part as an alternative to section 15(2)(e) or on
the excess if section 15(2)(e) allowance is
taken.
b) Lessor - wear and tear allowance on the
stipulated amount but not on the excess until
the property is re-let to another tenant.
Example
Wisdom Ltd entered into a 30yr operating lease with
Mpofu Ltd for the leasing of an industrial site. This
lease agreement stipulated that Wisdom Ltd would
pay a premium of $20 000 on 1 July 2015 and would
then erect a factory on the site at a cost of $265000.
From July 2015, the company would pay a monthly
rental of $2000 subject to a 10% increase the following
year. The erection of the factory commenced on
August 2015 and was completed on 31 October 2015 at
a cost of $325 000
CONTD
Show the lessor and lessee’s positions in 2015 and in
2016 if the lessee claims lease allowances as an
alternative of capital allowances.
Compute Wisdom’s allowances if he claims capital
allowances as an alternative to lease allowances.