Tax Credits And Calculation Of Tax

What is Income Tax?

• It is Tax on Taxable income (Tax

chargeable)
 ‘Taxable Income’ Formula

GROSS INCOME XXXXX

Less
EXEMPTIONS XXXXX
=
INCOME XXXXX
Less
ALLOWABLE DEDUCTIONS XXXXX
=
TAXABLE INCOME / ASSESSED XXXXX
LOSS
 Tax Credits And Calculation Of Tax

How is Income Tax calculated?

• In terms of section 7 of the Income Tax Act income tax

is calculated as follows:
a) determine the ‘taxable income’ of the taxpayer for the
year of assessment,
b)apply the appropriate rates of tax as per the charging
Act and,
c) grant the taxpayer the credits to which he is entitled
to.
 Employment Income

means any part of the taxable income of

a person other than a company, trust or
a pension fund, which consists of
remuneration as defined in the 13th
Schedule of the Income Tax Act.
 PAYE and FDS
• Final deduction system is a system of
deducting PAYE by the employer. It frees
employees from submitting tax returns.
Employees need only submit details of their
entitlements i.e credits& deductions to
employers with 7 days of being employed
or change of any particulars.
• Employers with a directive from a ZIMRA
administer PAYE through the FDS.
 Remuneration Includes
• Salary, wage, bonus, cash in lieu of leave
• Leave pay, allowance, overtime pay
• Gratuity, commission, fee, pension
• Commutation of a pension or annuity
• Retiring allowance, commission to an insurance
agent and estate agent
• Other incomes for services rendered to an
employer by an employee
• Advantage or benefit from employment
Payment may be in cash or otherwise
 Remuneration Excludes
• Business income
• Directors fees if not paid over and above other
remuneration
• Fees paid by a statutory corporation to a board
member if not paid over and above other
remuneration
• Exempt income and expenditure reimbursed
• Partner’s receipts from a partnership
• Domestic wages
• Commutation of a pension not forming part of gross
income
• Income earned for services rendered by non-
employees
 Deductions allowable-
employment income
• Subscriptions by the employee for his
membership of professional association, NB,
entrance fees & annual student subscriptions
are not deductible.
• Contributions made by an employee to
industrial councils and trade unions
• Cost of tools incurred by tradesman
• Contributions to a P F, RAF or NSSA up to a
maximum of $5 400.
 Contributions to PF, NSSA
&RAF
Order of deduction Limitation
1. Pension fund contributions:current Limited to the LESSER of $5400per
annum or 7.5% of member’s annual
emoluments or contributions made.
Arrear contributions are limited to
$1800 per annum.
2. NSSA Limited to the LESSER of $5400per
annum or 7.5% of member’s annual
emoluments or contributions made.
(NSSA rules limit contributions to
$2400 per annum)
3.R.A.F Limited to the LESSER of $5400per
Membership of one R.A.F annum or 7.5% of member’s annual
emoluments or contributions made.

Membership of more than one R.A.F Limited to $2700 p.a

 NSSA contr & receipts
• The employer and employee are required to
each contribute 3.5% of the employee’s
insurable earnings to NSSA, upto a
maximum of the employee’s pensionable
earnings of $8 400p.a($700 per month).
• NB The pensionable earnings are the
employee’s basic salary exclusive of any
fringe benefits or any other form of
remuneration
 Exercise
• Ian has a gross annual salary of $ 6000.
• Compute Ian’s contributions to NSSA
 NSSA Receipts
• Pension receipts from NSSA are treated in
the same manner as those from a pension
fund
• NB A compensation for employee’s injury
or death at work or work related injury or
death paid by NSSA i.e envisaged by
workers’ compensation is exempted from
tax
 Contributions to PF, NSSA
&RAF
• Pension contributions- limited to an
amount equal to 7.5% of the TP’s annual
emoluments or $5400’ whichever is lesser.
• 1st determine the amount contributed
• 2ndly determine 7.5% of member’s annual
emoluments
• 3rdly compare amounts in step 1&2 which
ever is lesser is the deduction permissible.
 RAF-contributions
• Contributions made by a member are
allowed, limited to an amount equal to
7,5% of a member’s annual emoluments
or$5400 p.a which ever is lesser.
 Example
• Mr Njere’s has a gross salary of $4 500
p.m. He contributes 12% of his salary to a
pension fund.
• Calculate Njere’s taxable income
 ANSWER
• Step 1(54000* 12%) 6 480
• Step 2(54000* 7.5%) 4 050
• Step3(deduction is the lower of $6 480,
$4 050 and$5 400.
 Exercise
• Mr Nikita has the following annual income
and expenses for the year ended 31 Dec
2014
• Salary 24000
• RAF contr 1400
• P F contr 4000
• Arrear P F contr 2000
 Answer
• Salary 24 000
• Lesser of 7.5%* 24000 or 1400 1 400
 Key areas
• Maximum contribution to be deducted in
respect of one and all funds ( NSSA, PF,
arrear PF contributions and RAF) is
$5 400 p.a
• NB. Where the limit is exceeded, the
commissioner prefers to deduct
ordinary P F contributions 1st, followed
by NSSA, then arrear contributions &
finally RAF contributions.
 Example
• Susan who has a salary of $ 36 000 p.a
made the following contributions during
the year ended 31 Dec 2015. She also
contributes to NSSA.
• RAF 2 400
• PF 5 000
• Arrear P F 2000
• Calculate Susan’s deductions in 2015
 Business Income
means any part of the taxable income of
a person other than a company, trust or
pension fund, which is received by or
accrues to him from any trade,
investment or other activity, but does
not include taxable income from
employment.
 Business income
• Rent, royalties and fees are taxed in the
same way as trading income at 25.75%.
Foreign dividends at a special rate of
20%. Bank interest and dividends from a
local source are subject to final
withholding tax. Interest receivable from
sources other than financial institutions is
also taxed at 25.75%.
 Exemptions
• 1st $3000 of rental income accruing to an
elderly TP in the year of assessment
concerned.
• 1st $3000 of interest earned from BA or
other discounted instruments by elderly TP
• 1st $3000 earned from a deposit in a fin
institution by an elderly TP
• Interest from POSB
 EXEMPTIONS
• Interest on class C permanent shares issued
by a BS
• Dividends from a Zimbabwean co
• NB, in taxing business income the same
principles of gross income and allowable
deductions apply.
• Individuals in receipt of trade and investment
activities will claim tax credits as appropriate
against tax liability.
 Summary On Tax Credits

Elderly Blind Medical Mentally /

Person Person Expenses Physically
Disabled
Person

Credit 900 900 50% 900

Apportionment Yes

Transfer between spouses Allowed Allowed

Blind child Grant credit

 Summary On Tax Credits

Elderly Blind Medical Mentally /

Person Person Expenses Physically
Disabled
Person

Not ordinarily resident Grant credit Grant credit Grant i.r.o. No credit
Medical aid
conts only

Blind taxpayer Grant credit No credit

Medical expenses – Child Grant credit

above 18 yrs i.r.o. Invalid
appliances /
fittings
 Computation of tax payable
• Tax payable is arrived at by applying the
tax rates to the taxable income. After
computing the tax, applicable tax credits
will be deducted.
• Employee’s tax is computed using
progressive rates.
• Calculating employment tax requires the
following steps.
 Steps
• Identify the bracket in which the taxable
income falls into.
• Take the cumulative tax of the prior
bracket, ie the bracket before the one in
which your total taxable income falls into.
• Compute tax on excess amount by
applying the given tax rate for the bracket
in which your total amount falls into.
 Steps continued
• Aggregate step 2 and 3 figures to obtain
aggregate tax.
• Deduct from the aggregate tax the tax
credits an individual is entitled to.
• From the answer in the 5th step, add AIDS
levy 3% to obtain the person’s tax liability.
• To obtain tax payable or refundable.
Deduct PAYE paid by an employee.
 Progressive tax rates/
employment tax brackets
Range Rate Tax Cum Tax Month
0- 3600 0% - - -
3601- 18000 20% 2880 2880 240
18001- 36000 25% 4500 7380 375
36001- 60000 30% 7200 14580 600
60001- 120000 35% 21000 35580 1750
120001- 180000 40% 24000 59580 2000

180 001- 240 000 45 % 27000 8650 2250

240 001 and

above
 Exercise
• Assume your taxable income is $150 000
and you are blind . You also have a
disabled child.
• Compute your tax liability