The Framework for Taxation in Zambia – Interaction of Taxes /Employment income

Taxation of individuals and Aggregation of Income for individuals

➢ An individual has the following main sources of income:

1. Business Profits

This is generated from running a business in form of either a

(i) Sole trader

(ii) Partners

2. Employment Income

3. Investment Income

➢ A taxpayer's income is divided into earned income and investment income.

➢ Earned income consists of income earned by a taxpayer from employment and from
businesses. The business income is the tax adjusted income after capital allowances and any
allowable trading losses. Business income arising from businesses with a turnover that is not
more than K800,000 is subjected to turnover tax and is not included in the computation of an
individual's aggregate income.

➢ Employment income consists of the emoluments from employment.

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Taxation of Employment Income

Employment Office
OFFICE : a position that exists independently of the person presently occupying it. It must be
capable of being declared vacant.
The existence of a position that can be filled by any eligible person is strong grounds for concluding
that the operation of the PAYE system will be required.

Employment

EMPLOYMENT exists where there is a legal relationship of master and servant. The master will
be the employer while the servant will be the employee.
The legal relationship of master and servant may be evidenced by a contract or it may be implied by
conduct.
There is no specific form that the contract, where there is one, is expected to take. As such, the
contract may be an oral contract or it may be a written contract.
A contract may be implied from conduct if two parties conduct themselves towards one another in
such a manner that it would be clear to any third party that there exists a legal relationship of
master and servant. An example could be where a person agrees to carry out some work in return
for a payment and that payment is actually made as agreed.

Employment compared with self-employment

The Zambia Revenue Authority (ZRA) would consider several factors in establishing whether
someone is employed or self-employed.
(a) Type of contract
➢ If there is a contract of service, it will indicate the existence of a legal relationship of
master and servant.
➢ A contract for services will indicate the existence of self-employment.
The contract may be written or it may be oral. Where the contract is a written one, a copy
should be obtained and the contents of that particular contract should be studied. In the case
of oral contracts, the parties to the contract should be interviewed to establish what has been
agreed upon.
Care should still be taken when examining written contracts, as they are not likely to
contain all the relevant points. It is always important to use several other methods of
gathering the relevant information.

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(b) Work performance

Employees must perform the duties assigned to them themselves, while the self-employed
may hire other people to perform the work for them.
If a person does not have a right to hire helpers, that is likely to lead to the conclusion that
there is employment. The self-employed persons will normally have a right to hire their own
helpers.
In contracts of service, personal performance is always required, while in the case of contracts
for services there may be personal performance or there may not be one. In other words,
personal performance is not normally a must in contracts for services.

(c) Control
The work of an employee is controlled by the employer who will normally stipulate working
hours, the place at which the duties are to be performed, how the work is to be performed
and other conditions.
A self-employed person will decide when to perform the duties and how to perform them.
Where there is an absence of the right of control, employment may still be present.
In certain employments, it is not usually possible for the employer to tell the employee what
to do, when to do it and the place at which that is to be done.
(d) Payment and financial risk
Employees are paid an agreed salary on a monthly or weekly basis and incur no form of
financial risk.
In order to earn an extra sum, employees will have to work overtime. Also, employees are
going to get any other additional pay or variation in pay if they meet a set target in which
case they will receive a bonus or a commission.
Employees do not assume any form of financial risk and they cannot profit from sound
financial management.
➢ Self-employed persons are normally paid a proportion of the contract price based
on the amount of work performed.
➢ They will also bear the full financial risk of their business. If they manage their
affairs well, they are going to profit from them.
Care is required in handling certain types of employment as the absence of financial risk will
not always indicate that there is employment.
The fact that a casual worker runs the risk of being unable to find work when a particular
engagement ceases is not relevant to the determination of whether employment exists or
not.

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(e) Place of work

➢ Employees will normally be told where the duties are to be performed. This is
normally at the employer's premises or at the premises of the client.
In most employment, the premises from which the duties are to be performed are those of
the employer.
Self-employed persons will perform the duties at a place of their choice.
If the person performing duties can only do so at the employer's chosen premises, then that
person is an employee. If the person can choose a place from where to perform the duties,
that person is self-employed.
(f) Tools and equipment
➢ An employer will provide the tools and equipment which the employees are to use.
However, the fact that the employer does not provide the tools and equipment will not
be conclusive. In certain types of employment, the employees will normally be required
to provide their own tools and equipment.
➢ Self-employed individuals will provide their own tools and equipment.
(g) Correction of work
➢ Employees will normally during the normal working hours and they will still be paid
for those hours.
➢ Self-employed persons will rectify any faulty work outside the contract time and
they will not be paid for that extra work.
If the person performing duties is not paid for the time spent on correcting work, then that
person is self-employed. On the other hand, if the person is paid for the time spent on
correcting work, then that person is an employee.
(h) Engagement and dismissal
➢ The employer will take on and dismiss employees. The employer will have a right or
power to terminate the contracts of employment by giving the employees
appropriate notice.

➢ A self-employed person will normally enter into a contract with a client specifying
the beginning and end. The contract normally ends when the work has been
performed completely and accurately.

(i) Insurance
➢ Employers will normally provide insurance cover for the actions of their employees.
This is because they are vicariously liable for the offences committed by their
employees.

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➢ Self-employed persons will have to provide for their own insurance needs. The hirer
is not vicariously liable for the offences committed by the hired self-employed
contractors.
If the person who is performing the duties takes insurance cover personally, then that person
is self-employed. But, if insurance cover is not taken by the person performing the duties
personally, then that person is an employee. The employer will have taken insurance cover on
behalf of that employee.
(j) Exclusivity
➢ Employees normally work for only one employer.
➢ A self-employed person will normally work for a number of clients.

(i) Integration Test

The courts will also consider whether an individual's activity is fully integrated within the
organisation. This were the case, it would be difficult for an individual to prove that they are
self-employed.

Importance of the distinction between employees and self- employed

➢ The main reason why it is important to distinguish between employees and the self-employed
contractor is to enable a smooth classification of how the earnings would be classified and
also how any taxes arising would be payable.
➢ Where an individual is held to be an employee, then the earnings will be classified as
emoluments for income tax purposes.
➢ The employee will be required to pay NAPSA contributions.

➢ The emoluments would be subjected to income tax under the Pay As You earn system.
Under this system the employer will be responsible for calculating and deducting income tax
from the emoluments.

➢ On the other hand, if an individual is held to be self-employed, then the earnings will be
classified as turnover. This turnover would be subjected to turnover tax if it were not more than
K800,000 per annum.

➢ In the event that the turnover was to exceed K800,000 per annum, the self-employed individual
would be subjected to income tax.

➢ Payment of NAPSA contributions for the self-employed is not mandatory. The self-employed
individual’s would be assessed to income tax under the self-assessment system.

➢ The self- employed individual will be personally responsible for making the calculations of
income tax and for making the payments.

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Exercise
John Likando was employed as an Electrical Engineer on a three-year renewable fixed term contract
at PMC Limited, a construction and property management company, engaged in the development,
restructuring and management of commercial and non-commercial property for letting. His
contract of employment which commenced on 1 June 2017 and expired on 31 May 2020, provided
for an annual salary of K180,000, transport allowance of K500 per month and housing allowance of
K3,500 per month. He was paid monthly on the last day of each month and Pay As You Earn
amounting to K18,080 was deducted from his employment income in the tax year 2020.

On 31 May 2020, the company paid his accrued leave pay of K5,000, repatriation pay of K45,000 and
gratuity of 35% of his cumulative basic salary up the date of expiry of the contract. He had always
contributed 5% of his basic salary as NAPSA contribution. The earnings ceiling for the purposes of
NAPSA contributions should be taken to be K275,904 per annum.

Likando decided not to renew his contract with PMC Limited and on 1 June 2020, commenced in
business as a Self-employed Electrical Engineer, undertaking electrical wiring and installations for
newly built residential houses for a wide range of clients. He expects his annual revenue from this
business to exceed K800,000.

He purchased equipment costing K55,000, office buildings at a cost of K220,000 and a motor car at
a cost of K45,000 on 1 June 2020. It has been agreed with the commissioner General that he will
have private use in the motor car of 25%. Likando will prepare the first accounts for the period
ending 31 December 2020 and annually thereafter. He has estimated the tax adjusted business
profit from the business for the period to 31 December 2020 to be K350,000, before capital
allowances.
PMC Limited has not engaged someone to replace Likando from the time his employment contract
with the company expired. However, on 1 July 2020, the company entered into an agreement with
Likando, to use his services as a self-employed contractor on its construction projects. Under this
agreement, PMC Ltd assigns Likando on which construction projects he should work on. The
company provides him with transport to the construction sites and also provides all the equipment
and material he needs for the performance of his duties in relation to the contract. Likando is
assisted by his own employees when performing his tasks and spends five hours from 08:00 to 13:00
every day from Monday to Friday (except for Saturdays and Sundays) working on construction
projects assigned to him by PMC Limited, after which he is free to attend to his other clients.
Likando provides his own insurance cover, as well as, that of his assistants in case of any accidents
occurring, whilst performing their duties on these projects. Likando is required to cover the cost of
any faulty electrical installations and compensate PMC Limited for any damage the company may
suffer as a result of defective electrical installations. Likando invoices the company an agreed
amount of K35,000 at the end of each month for the work performed.
Required:
(a) Explain why it is important to distinguish between employees and self-employed contractors
for taxation and pension contribution purposes. (5 marks)

(b) Discuss the criteria the Zambia Revenue Authority will use to establish whether Likando is an
employee or an independent self-employed contractor in relation to the agreement he entered
into with PMC Limited, on 1 July 2020, specifically describing:

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(i) Those factors indicating that he is an employee of PMC Limited. (5 marks)

(ii) Those factors indicating that he is an independent self-employed contractor.
(5 marks)
(c) Assuming that Likando is held to be self-employed in relation to the contract he entered into
with PMC Limited on 1 July 2020:
(i) Compute his final taxable business profit from his business in the tax year 2020.
(4 marks)
(ii) Calculate his total final income tax payable for the tax year 2020. (11 marks)
[Total: 30 Marks]

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EMOLUMENTS FROM EMPLOYMENT

Meaning of emoluments
➢ Emoluments include all payments made to an employee or office holder, whether before the
commencement of employment or upon the cessation of employment.

➢ It refers to all the payments that an individual receives by reason of being an employee. Such
payments include wages and salaries, allowances, bonuses, tips and service charges, overtime
pay and payments on termination of employment.

➢ Emoluments therefore include all salaries, wages, fees, bonuses, commissions, overtime pay,
leave pay, gratuities, benefits and advantages, allowances and all payments which an individual
receives as a result of being employed or being a holder of an office. The term emolument is
quite wide and it will therefore be defined in a broader sense under the discussion of which
types of emoluments are taxable and which are exempt from income tax.

Basis of Assessment of emoluments from employment

➢ The basis of assessment for emoluments from employment is the actual receipts basis.

➢ This means that emoluments are chargeable to income tax in the tax year when they are
received by the employee.

➢ However, due to differences between the time when payments are actually made and when
payments become due,

➢ Emoluments are deemed to have been received on the earlier of:

(a) The time when payment is actually made.

(b) The time when the employee becomes entitled to the emoluments.

In case the case of directors, emoluments are deemed to be received

by a director on the earliest of:

(a) The time when payment is actually made and

(b) The time when the director becomes entitled to the emoluments
(c) The time when the amount payable is decided
(d) The time when the amount payable is credited in the company’s accounting records
(e) The end of the company’s accounting period.

It is therefore important to interpret the actual receipts basis correctly when dealing with payments
made shortly after the commencement of a tax year on 1 January.

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Example

John is employed by ABC Ltd as a Sales assistant. He is entitled to a monthly salary of K14,000
payable to him on the last day of each month. For the month of December 2021, he was not paid
his salary on 31 December 2021 due to the financial difficulties the company
faced that month arising from the effect of COVID 19. He was actually his December 2021 salary on
15 January 2022.

Required:

Explain giving reasons when John will be deemed to have received his pay for tax purposes.

Taxable and Exempt emoluments

➢ As a general rule, all benefits or payments received by an individual who is in employment are
taxable provided they are in form of cash or capable of being converted into cash or
money’s worth unless they are specifically exempt under the provisions of the Income Tax Act.

➢ Similarly, as a general rule, all benefits which are received by an individual who is in
employment are exempt if they in kind i.e. non-cash benefits, or not capable of being
converted into cash or money’s worth unless they are specifically taxable under the provisions
of the Income Tax Act.
Taxable emoluments

Taxable emoluments include the following

(1) Salaries, wages, overtime pay, bonuses

(2) Leave pay, accrued leave pay, commuted leave pay, holiday pay etc

(3) All allowances qualify as emoluments and as such, they are fully taxable. Examples include:

➢ Settling in allowance
➢ Housing allowance/accommodation allowance
➢ Medical allowance but not medical expenses
➢ Travel or transport allowance
➢ Educational allowance
➢ Entertainment allowance
➢ Domestic/Utility allowance
➢ Commuted car allowance;
➢ Allowances paid in recognition of an employee's professional qualifications etc.

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(4) Reimbursement of employment expenses

If an employee is reimbursed any expenditure incurred while performing the duties of
employment, then only the excess of the reimbursed amount over the actual expenditure
incurred by the employee shall be taxable.

This normally occurs in cases where an employee is required to spend personal money when
performing duties and then submits receipts to the employer for reimbursement.

(5) Long service awards but not Labour Day awards

(6) Payments in relation to restrictive undertakings

(7) Payments for personal expenses of employee

where an employer discharges the liability of an employee by paying his/her personal expenses
such expenses relating to the Maintenance of employee’s residence or payment of expenses in
connection with living accommodation, he employer is required to add such payments to the
employee’s emoluments and deduct tax under PAYE:

Examples of such expenses include:

➢ rent,
➢ electricity,
➢ telephone bills,
➢ water bills,
➢ Insurance
➢ Security
➢ school fees or professional association fees,
➢ club membership fees
➢ Taxes and
➢ Other similar payments,

(8) Cash vouchers

A cash voucher is any document or stamp capable of being exchanged, either immediately
or after a time, for a sum of money equivalent to the stipulated value.
Where a cash voucher is provided to an employee by reason of employment, the employee
is treated as having received a taxable emolument.

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(9) Non-cash vouchers

A non-cash voucher is usually a document capable of being exchanged for goods or
services. It may be exchanged immediately or after some time. Examples are Christmas
vouchers, shopping vouchers and fuel vouchers.
Where an employee receives a non-cash voucher, there will be no taxable benefit unless
they are cable of being converted into cash or money’s worth in which the case the
employee will be taxed on the value of that voucher.
(10) Compulsory payments for board
Where arrangements exist to pay wages to employees gross, out of which a certain amount
must go towards the payment for board, then the gross amount payable to the employee is
a taxable emolument.

(11) Tips and service charges

If an employer operates a scheme under which they pay employees tips from customers or
service charges, the amounts paid to employees are taxable emoluments on those
employees
12. Board, lodging and meals
➢ Where an employee is provided with meals or board and lodging by the employer, there
is no taxable emolument on the employee concerned.
➢ If, however, an employee receives an allowance in lieu thereof, the allowance received
would be a taxable emolument.
➢ If an employee is required to work late at night such that it would be unreasonable to
expect him to use public transport for his journey home, then the cost to the employer
of providing such an employee with private transport home is not a taxable emolument
of the employee

13. Income from share option schemes that are not approved for tax purposes

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Exempt Benefits

1. Medical Expenses

Expenses incurred by the employer on behalf of an employee, their family or household for the
cost of medical treatment are not chargeable emoluments.

Reimbursement of such medical expenses incurred by the employee by the employer is not
taxable.

2. Funeral benefits

Payments made in respect of assisting an employee where there is bereavement in the family
are not taxable emoluments, whether in cash or in kind.

3. Labour Day awards, whether in cash or in kind

4. Ex-Gratia Payments:
A voluntary, non-contractual, non-obligatory payment made by an employer to the spouse,
child or dependant of a deceased employee is exempt.
However, ex-gratia payments which are made to a former employee are NOT exempt.
5. Sitting Allowances for Councillors:
Payments by Local Authorities to Councillors as Sitting Allowances are exempt.
6. Benefits that cannot be converted into Cash/Benefits in kind
Benefits which cannot be converted into money or money's worth are not taxable on
Employees. They are instead taxed on the employer and no deduction in respect of the cost of
providing the benefit may be claimed by the employer [section 44(l) of the Income Tax Act].

Non-money fringe benefits are those benefits or advantages that cannot be converted into
money or money’s worth where any three or more of the following factors apply:

• Not capable of being converted into actual money by the employee

• Not capable of being converted into a pecuniary benefit by the employee
• Not capable of disposal or transfer by the employee
• Not owned by the employee
• Received with restrictive terms and conditions
• One can use it or forfeit.

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These benefits include:

(i) Free Residential Accommodation (Free housing)

Provision of free residential accommodation provided to an employee by the employer

in a house owned by the employer.

Where an employer provides free housing to an employee, an employee can only live in
the house and is not allowed to lease out.

The employee cannot therefore convert the free housing benefit into cash or
any other pecuniary benefit nor can they transfer or dispose of the benefit or advantage
of free housing

In the case of housing leased by the employer and provided to an

employee:
(1) Where housing is occupied by a single employee, the amount of rentals will be
added to the employee's emoluments and taxed under PAYE.
(2) Where the housing is occupied by more than one employee, the total amount of
the rentals will be disallowed in the employer's tax computation.

(ii) Provision of Personal to holder motor car

A personal-to-holder motor car means a vehicle provided to an employee for both

business and personal use and usually involves payment by the employer of all the
expenses associated with running and maintenance of the vehicle.

(iii) Provision of free meals from staff canteen

(iv) Airtime:

Where an employer buys airtime for an employee with a condition that the airtime so
credited to the employee, is for the sole use of the employee, the benefit or advantage
is not convertible into money or money’s worth as the employee cannot convert the
airtime into cash, or any other pecuniary benefit nor can the employee transfer or
dispose of the airtime.

(v) Free Fuel:

Where an employer provides fuel to an employee which may be bought through credit
in a fuel card and the condition is that the amount can only be used on a specific fuel
type and in some cases also on a specific car, the benefit or advantage in this case is not
convertible into money or money’s worth because the employee cannot exchange the
fuel for anything nor can the fuel be transferred or disposed of.

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(v) Provision of Goods below market price

Where the employer provides goods to their employees below the open market value,
the benefit is convertible to money or money’s worth.

The employee is taxable under PAYE on the difference between the open market value
and the value at which the goods are provided to the employee. The employer may thus
gross up and account for the tax accordingly.

(vi) Provision of Services below market price.

Where the employer provides services to their employees below the open market value,
the benefit or advantage that the employee enjoys is taxed on the employer.

The difference between the open market value and the value at which the services are
provided to the employee will be disallowed in the hands of the employer.

Tax Treatment of Income from Share Options

The tax treatment of income from share options depends on whether the share option scheme is
approved for tax purposes or not.
➢ A share option scheme is a scheme under which the employer grants options to employees to
buy shares in that employer's company at a price determined now in the future. The price
agreed now at which the shares would be bought in the future is known as the exercise price or
striking/strike price.
➢ On the expiry date of the option, an employee may exercise the option. This means the
employee would buy the shares at that agreed share price. The employee may also not exercise
the option at all. This means the option would lapse.
➢ Employees exercise the options when the market price per share at the expiry date is more than
the exercise price, thereby making a gain. If the actual market price per share is less than the
exercise price, employees would not exercise the options.

➢ The objective of the share option scheme is to encourage employers to set up schemes for
employees to own shares in the companies in which they are employed.

➢ Employees join the scheme in the hope of making a profit as they expect the value of shares,
when they finally acquire them, to be substantially more than the price they will pay.

➢ Management hopes that as employees have a stake in the company that employs them, their
productivity and therefore profits for the company, will increase.

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Tax Treatment of Unapproved Share Option Schemes

Tax treatment for the employee

For the employee there are three events that have tax consequences, the grant of the options, the
exercise of the options and sale of the shares.
(1) Grant

On the grant of shares to an employee in a share option scheme that is not approved, the
exercise price is compared with the open market value of the shares on the date the options are
granted.
If options over shares are granted with an exercise price that is less than the market value, an
income tax charge can arise on the difference between the market price per share and the
exercise price.
(2) Exercise
On the exercise of the options, the individual pays the agreed amount in return for the specified
number of shares in the company. The exercise price paid is compared with the open market
value at that time, and if less, the difference is charged to income tax.

(3) Sale

On the sale of shares acquired by an employee through a share option scheme which is not
approved, in an unlisted company, Property Transfer Tax is payable on the realised value of the
shares sold.
Tax treatment for the employer
The tax benefits associated with an approved share option scheme are not available.

This means that’s

(1) Costs incurred on setting up and administering such a scheme will not be allowable for
taxation purposes

(2) Any income generated by the company from such a scheme will be taxable
(3) PTT will arise on the transfer of shares under the scheme provided the company is not listed
on the LuSE

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Example
On 1 January 2022 ABC Ltd (a company that is not listed on the LuSE) granted
Kaluba who is employed as a Marketing Manager 300,000 share options in a
scheme which is not approved for tax purposes, that is ran by the company.
The share options are exercisable in three years’ time at an exercise price of
K10 per share. The market value of each of ABC Ltd’s K1 shares on the date of
grant of the options was K12 per share. Kaluba’s annual salary in the tax year
2022 was K220,000, after his annual salary increment (see below)
On 1 January 2025, Kaluba exercised the options when the market value of
each share was K15.

On 1 July 2025, Kaluba sold 50,000 shares at K20 per share being the market
value of each share on that date. Kaluba is awarded an annual salary increment
of 10% at the start of each year in January.
Required:
Advise Kaluba of the income tax implications of the above transactions and
compute his income tax payable for each of the relevant tax years. You should
assume that the tax rates and regulations for the tax year 2022, will apply
throughout.

Solution

The share option scheme being operated is not approved for tax purposes, therefore, the taxation
implications will be as follows:
(1) Tax implications for the tax year 2022
Grant
On the grant of shares to an employee in a share option scheme that is not approved, the
exercise price is compared with the open market value of the shares on the date the options are
granted and an income tax charge will arise on the difference if the market price of the shares is
higher than the exercise price.
In the case of Kaluba, the market value of the shares on the date the options were granted to
him was K12, which was higher than the exercise price of K10 and therefore an income tax
charge will arise on the difference.
The amount which will be assessed as income on Kaluba will be
(K12 – K10) x 300,000 = K600,000.
Kaluba’s income tax payable in the tax year 2022 will be computed as follows:

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KALUBA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2022
K K
Salary 220,000
Income from share options
(K12 – K10) x 300,000 600,000
820,000
Income Tax
On first K82,800 8,460
On excess (K820,000 – K82,800) x 37.5% 276,450
Income tax payable 284,910

(2) Tax implications for the tax year 2023

There are no tax implications from the share option scheme in the tax year 2023. Kaluba’s
income tax payable in the tax year 2023 will be computed as follows:
KALUBA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2023
K K
Salary (K220,000 x 110%) 242,000
Income Tax
On first K82,800 8,460
On excess (K242,000 – K82,800) x 37.5% 59,700
Income tax payable 68,160

(3) Tax implications for the tax year 2024

There are no tax implications from the share option scheme in the tax year 2024. Kaluba’s
income tax payable in the tax year 2024 will be computed as follows:
KALUBA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2024
K K
Salary (K242,000 x 110%) 266,200
Income Tax
On first K82,800 8,460
On excess (K266,200 – K82,200) x 37.5% 68,775
Income tax payable 77,235

(4) Tax implications in the Tax Year 2025

Exercise

On the exercise of shares by an employee in a share option scheme that is not approved for tax
purposes, the exercise price is compared with the open market value of the shares on that date

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and an income tax charge will arise on the difference if the market price of the shares is higher
than the exercise price.

In the case of Kaluba, the market value of the shares on the date the options were excercised
was K15, which was higher than the exercise price of K10 and therefore an income tax charge
will arise on the difference.

The amount which will be assessed as income on Kaluba will be:

(K15 – K10) x 300,000 = K1,500,000.

Kaluba’s income tax payable in the tax year 2025 will be computed as follows:

KALUBA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2025
K K
Salary (K266,200 x K110%) 292,820
Income from share options
(K15 – K10) x 300,000 1,500,000
1,792,000
Income Tax
On first K82,200 8,460
On excess (K1,792,800 – K82,800) x 37.5% 641,250
Income tax payable 649,710

(5) Tax implications of the sale of the shares on 1 July 2025

On the sale of shares acquired by an employee through a share option scheme which is not
approved, in an unlisted company, Property Transfer Tax is payable on the realised value of the
shares sold.

Since ABC Ltd is not listed on the LuSE, PTT will arise on the sale of the shares.

The realised value of the shares will be determined as the higher of the following:

The nominal value of the shares sold being:

50,000 shares x K1 = K50,000; and

The open market value being:

50,000 shares x K20 = K1,000,000

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The realised value is therefore K1,000,000 being the higher amount.

The amount of PTT arising will therefore be:

K1,000,000 x 5% = K50,000

Tax Treatment of Approved Share Option Schemes

Tax treatment for employees /Tax benefits for employees

The benefit for the individual employee is that any benefit/gain which arises to that individual on
allotment or acquisition of shares under an approved share option scheme is exempt from income
tax.
Specifically,
(1) There is no Income Tax charge when the share options are granted at an exercise price that
is less than the market value at the time of grant.
(2) There is no income tax charge when the share options are exercised.
(3) No PTT will arise on any subsequent sale of the shares

Tax treatment for employer’s /Tax benefits for employers

The tax treatment and benefits for the employer are as follows:
(a) Costs incurred by the employer to set up and administer the scheme will be allowed as a
deduction in computing the company’s profits for tax purposes.
(b) The income of an approved share option scheme will be exempt from tax.
(c) The employer will be exempt from paying property transfer tax on shares transferred under
the terms of an approved share option scheme.

Procedure for approval of share option scheme

(1) The procedure for the approval of a share option scheme starts with the company preparing the
constitution and scheme rules, whilst referring to the conditions for approval.
(2) Once these have been prepared, the company must make an application for approval to the
Commissioner General. The application must be in writing and must be accompanied by copies
of the constitution and scheme rules.
(3) Upon receiving the application, the Commissioner General reviews the constitution and
scheme rules to determine whether all the conditions for approval have been satisfied.
(4) The Commissioner General would then grant the approval and communicate in writing that
the scheme has been approved, stating the tax year from which the approval applies for the

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first time. Where the Commissioner General does not grant the approval, he still communicates
to the applicant in writing and the company may later re-apply.

Conditions for approval of share option scheme

For the Commissioner General to approve a share option scheme, the following requirements must
be met:
(1) The scheme must be established in Zambia and the employer must be carrying on business
wholly or partly in Zambia.
(2) The scheme should provide for the participation of all eligible employees (including
directors).
(3) An employee participating in the scheme should not acquire more than one fifth (20%) of
the shares to be issued under the scheme.
(4) Only ordinary shares of the company may participate in the scheme.
(5) The scheme entitles an employee to acquire a set number of shares at a fixed price.
(6) The employee must be restricted to a set period of time to use an option to buy shares.
(7) The employees must be citizens or permanent residents of Zambia regardless of where
they perform their duties.

Allowable Deductions against employment Income

Allowable Deductions against employment Income
Under the provisions of the income there are very limited deductions that can be made from the
Gross emoluments to arrive at the taxable employment income. The allowable deductions include
(1) Qualifying travel expenses
(2) Capital allowances on implements plant and machinery acquired by the employee to be used
wholly and exclusively for employment purposes
(3) Professional subscriptions relevant to the duties of employment
(4) Donations to approved PBOs
These are now further explained below:

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(a) Travelling expenses incurred in the course of employment. These are expenses an employee
incurs while performing the duties of employment. They include the following:
(i) Costs incurred in travelling between two places at which the duties are to be
performed.
(ii) Costs incurred in travelling between home and work if the duties commence at home,
as in the case of medical doctors who are on call. For doctors, duties commence when
they get a phone call that they are required at the hospital.
The following travelling expenses are not deductible:
(i) Costs incurred in travelling between two employments, as in the case of employees
working on a full-time contract with one company and on a part-time contract with
another. The costs incurred in travelling between the premises of the full-time
employment and the premises of the part-time employment are not deductible.
(ii) Costs incurred in travelling between home and work, unless duties commence at home
as explained above.
(b) Capital allowances on implements, plant and machinery used wholly and exclusively in the
performance of the duties of employment. This is in cases where employees are required to
provide their own tools and equipment as in the case of tradespeople. Employees who opt to
use their own tools when the employer has already provided suitable tools cannot claim
capital allowances on those tools.
(c) Subscriptions to professional bodies which are relevant to the employment. Subscriptions to
professional bodies whose membership is not relevant to the employment are not deductible.
(d) Donations to approved public benefit organisations

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TAX TREATMENT OF STATUTORY DEDUCTIONS

(1) NAPSA Contributions

➢ Employee’s pension contributions to the National Pension Scheme Authority (NAPSA) and any
other pension fund are not deductible when computing taxable employment earnings.

➢ Employee’s NAPSA contributions are calculated as 5% of the employee’s gross earnings

subject to the social security ceiling or Earnings threshold for NAPSA contributions purposes
or NAPSA ceiling.

➢ Employer’s NAPSA contribution are also calculated as 5% of employee’s gross earnings, again
subject to the social security ceiling.

➢ Gross earnings for NAPSA contributions purposes comprises the basic salary plus all
allowances, bonuses, commission, overtime pay, leave pay, commuted leave days,
severance, gratuity pay etc.

➢ Employees’ NAPSA contributions are not deductible from the gross emoluments when
computing the taxable emoluments, whilst the employer’s NAPSA contribution made on
behalf of the employee do not give rise to any taxable benefit on the employee.

➢ The Social Security Ceiling (the earnings threshold for NAPSA contribution purposes) in any
year is the maximum level of earnings on which contributions to the scheme are computed.
Contributions are calculated on all earnings less than the ceiling, while earnings above the
ceiling are not considered.

➢ For the tax year 2022, the earnings ceiling for the purposes of NAPSA contributions is K293,232
per annum (i.e. K24,436 per month). This means that the maximum employee's NAPSA
contribution for the tax year 2022 is K14,661.60 per annum (i.e. 5%x K293,232) or K1,221.80 per
month (i.e. 5% x K24,436). The maximum employer's NAPSA contribution is also K14,661.60
per annum or K1,221.80 per month.

➢ The employer has a statutory obligation under law to remit both the employee’s NAPSA
contributions deducted from the employee’s earnings and the employer’s NAPSA contribution
by the 10th day following the end of the month to which the employee’s earnings relate.

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(2) National Health Insurance Management Authority (NHIMA) Contributions.

➢ Employee’s contributions to the National Health Insurance Scheme which is managed by the
National Health Insurance Management Authority (NHIMA) or to any other medical or health
scheme are not deductible when computing taxable employment earnings.

➢ The statutory employee’s NHIMA are calculated at the rate of 1% of the employee’s monthly
basic salary. The statutory employer’s NHIMAs are also calculated as 1% of the employee’s
monthly basic salary.

➢ Employee’s NHIMAs are not deductible from the gross emoluments when computing the
taxable emoluments, whilst the employer’s NHIMAs made by an employer on behalf of the
employee does not give rise to any taxable benefit on the employee.
➢ The employer is mandated under the law to remit both the employee’s NHIMAs deducted from
employee’s salaries and the employer’s NHIMAs to the NHIMA by the 10th day following the
end of the month to which the salaries relate.

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Example
The following information relates to three tax payers Jack, John and Mary for the tax year 2022:
Jack John Mary
K K K
Annual basic salary 180,000 200,000 300,000
Housing allowance 20,000 30,000 50,000
Bonus 10,000 5,000 20,000
Leave pay 5,000 - -
Other benefits
Personal to holder car costing K200,000 K250,000 K350,000
Free meals from staff canteen
Costing K2,000 K2,500 4,000
Funeral benefits Nil 10,000 Nil
The NAPSA Ceiling for the tax year 2022, K293,232 per annum.
Required:
(a) Calculate the following:

(i) Employee’s NAPSA contributions

(ii) Employer’s NAPSA contribution

(b) Calculate the following:

(i) Employee’s NHIMA contributions

(ii) Employer’s NHIMA contributions
(c) Compute the income tax payable by each individual in the tax year 2022

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SOLUTION

(a) (i) Employee’s NAPSA contributions

Jack
K215,000(W) x 5% = K10,750
John
K235,000(W) x 5% = K11,750
Mary
K293,232(W) x 5% = K14,662

WORKINGS
COMPUTATION OF GROSS EARNINGS FOR NAPSA PURPOSES FOR:
Jack John Mary
K K K
Annual basic salary 180,000 200,000 300,000
Housing allowance 20,000 30,000 50,000
Bonus 10,000 5,000 20,000
Leave pay 5,000 ___ _______
Annual gross earnings 215,000 235,000 370,000

(ii) Employer’s NAPSA contribution

Jack
K215,000(W) x 5% = K10,750
John
K235,000(W) x 5% = K11,750
Mary
K293,232 (W) x 5% = K14,662

(b) (i) Employee’s NAPSA contributions

Jack
K215,000 x 5% = K10,750
John
K235,000 x 5% = K11,750
Mary
K293,232 (W) x 5% = K14,662

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(ii) Employer’s NAPSA contribution

Jack
K215,000 x 5% = K10,750
John
K235,000 x 5% = K11,750
Mary
K293,232 (W) x 5% = K14,662

(c) (i) Employee’s NHIMA contributions

Jack
K180,000 x 1% = K1,800
John
K200,000 x 1% = K2,000
Mary
K300,000 x 1% = K3,000
(ii) Employer’s NHIMA contributions
Jack
K180,000 x 1% = K1,800
John
K200,000 x 1% = K2,000
Mary
K300,000 x 1% = K3,000

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(d) Income tax payable by each individual in the tax year 2022
PERSONAL INCOME TAX COMPUTATIONS FOR THE TAX YEAR 2022
Jack John Mary
K K K
Annual basic salary 180,000 200,000 300,000
Housing allowance 20,000 30,000 50,000
Bonus 10,000 5,000 20,000
Leave pay 5,000 _________ ________
Taxable income 215,000 235,000 370,000

Income Tax
First K54,000 x 0% 0 0 0
Next K3,600 x 25% 900 900 900
Next K25,200 x 30% 7,560 7,560 7,560
Excess
K132,200/K152,200/
K87,200 x 37.5% 49,575 57,075 32,700
58,035 65,535 41,160

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Exercise
Chulu has been employed as a Sales Representative at a Zambian resident company for many
years. In the tax year 2022, he was entitled to the following benefits:
Annual basic salary K180,000
Lunch allowance per month K1,200
Housing allowance per month K3,500

Throughout the tax year 2022, he was provided with a company owned Toyota Camry Motor car
(with a cylinder capacity of 1,800cc) on a personal to holder basis. The company paid all the motor
car running expenses relating to the car which amounted to K4,000 per month.
On 1 May 2022, he was given a labour day award comprising K3,000 cash and a television set worth
K5,000, for being the most hard-working Sales Representative in the company.
In December 2022, Chulu received a bonus of 2% of his annual basic salary for meeting his sales
targets for the year.
During the year to 31 December 2022, the company deducted employee’s NHICs from his earnings
at the rate of 1% of his basic salary and paid employer’s NHICs at the rate of 1% of his basic salary
on his behalf. The company additionally deducted employee’s NAPSA contributions at the rate of
5% of his employment earnings and paid employer’s NAPSA contributions at the rate of 5% of his
earnings on his behalf.
Chulu Made the following payments from his employment earnings in the tax year 2022:
Donations to political party K2,500
Professional subscriptions relevant to the duties of his employment K2,000

Required:
(a) Calculate Chulu’s employee’s NHISCs and employer’s NHISCs paid in the tax year 2022.
(b) Calculate Chulu’s employees NAPSA contributions and employer’s NAPSA contributions paid
in the tax year 2022.
(c) Compute the income tax payable by Chulu for the tax year 2022. (You should clearly indicate in
your computation by the use of zero (0) any items of income or expense which are not taxable
or not allowable)

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SOLUTION

(a) Employee’s NHISCs

These are calculated at the rate of 1% of the employee’s basic salary. The total amount
contributed by Chulu in the tax year 2022 is therefore:
K180,000 x1% = K1,800
Employer’s NHISCs
These are also calculated at the rate of 1% of the employee’s basic salary. The total amount
contributed for Chulu in the tax year 2022 is therefore:
K180,000 x1% = K1,800
(b) Employee’s NAPSA Contributions
These are calculated at the rate of 5% of the gross employee’s earnings. The total amount
contributed by Chulu in the tax year 2021 is therefore:
K240,000 (W) x 5% = K12,000
Employer’s NAPSA Contributions
These are also calculated at the rate of 5% of the gross employee’s earnings. The total amount
contributed for Chulu in the tax year 2022 is therefore:
K240,000 (W) x 5% = K12,000
WORKING – COMPUTATION OF GROSS ERANINGS
Gross earnings for NAPSA contributions purposes comprises the basic salary plus all
allowances, bonuses, commission, overtime pay, leave pay, commuted leave days, severance
pay etc.
Chulu’s gross earnings for the tax year 2022 will therefore be computed as follows:
K
Annual basic salary 180,000
Lunch allowance (K1,200 x K12) 14,400
Housing allowance (K3,500 x12) 42,000
Bonus (K180,000 x 2%) 3,600
Gross earnings 240,000

(c) CHULU
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2022
K K
Salary 180,000
Lunch allowance (K1,200 x 12) 14,400
Housing allowance (K3,500 x12) 42,000
Bonus (K180,000 x 2%) 3,600
Personal to holder motor car benefit 0

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Payment of motor car running expenses for personal

to holder motor car 0
Labour day award (cash & TV set) 0
Employer’s NHISCs 0
Employer’s NAPSA contributions 0
Gross earnings 240,000
Less allowable deductions:
Professional subscriptions 2,000
Donation to political party 0
Employee’s NHISC’s 0
Employee’s NAPSA Contributions 0
(2,000)
Taxable earnings 238,000
Income Tax
K54,000 x 0% 0
K3,600 x25% 900
K25,200 x 30% 7,560
K155,200 x37.5% 58,200
66,660

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PAYMENTS ON CESSATION OF EMPLOYMENT

Various payments may be made to an employee on cessation of employment by way of dismissal,

resignation, end of contract term, redundancy/retrenchment, retirement or death:

➢ Any payment made on cessation of employment is exempt from income tax provided it meets
the definition of a pension benefit under the Constitutional Amendment Act (2016).
➢ Any payment made to an employee on cessation of employment, that does not meet the
definition of a pension benefit under the Act, is taxable normally under PAYE.
➢ A Pension benefit includes a pension, compensation, gratuity or similar allowance in respect
of a person's service.
The tax treatment of the various payments that may be made to an employee on cessation of
employment is summarised below:

Payment Tax Treatment

1 Pension Exempt being pension benefit
2 Refund of employee's pension contributions Exempt being pension benefit
3 Withdrawal of employer's pension contributions Exempt being pension benefit
4 Gratuity Exempt being pension benefit
5 Redundancy pay Exempt being pension benefit
6 Severance pay or compensation for loss of office Exempt being pension benefit
7 Salary in lieu of notice Exempt being pension benefit
8 Repatriation allowance Exempt being pension benefit
9 Service bonuses eligible for payment only at the end Exempt being pension benefit
of employment
10 Monthly salary Taxable normally under PAYE
11 Commutation of accrued leave days Taxable normally under PAYE
13 Accrued service bonuses Taxable normally under PAYE

➢ The monthly salary, commutation of accrued leave days and accrued service bonuses are
taxable because they are emoluments that have been earned during the course of one's
employment. Note that accrued service bonus is one which is linked to performance and is
taxable in the period in which it accrues.

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SUMMARY OF THE TAX TREATMENT OF BENEFITS PROVIDED/PAYMENTS MADE TO EMPLOYEES FOR BOTH
EMPLOYEES AND EMPLOYERS

Tax Treatment For

Payment
Employee Employer
1 Salaries/Wages Taxable Allowable
2 Bonuses/Commissions/Overtime pay Taxable Allowable
3 Leave pay/Accrued leave Pay Taxable Allowable
4 Allowances Taxable Allowable
5 Long service awards Taxable Allowable
6 Payments for personal expenses such Allowable
maintenance of living
accommodation/Expenses in connection with Taxable
living accommodation
7 Cash vouchers Taxable Allowable
8 Non-cash vouchers Taxable Allowable
9 Tips and service charges Taxable Allowable
10 Allowable
Meals, boarding and lodging
Only taxable if paid in form of
allowance otherwise exempt if
paid directly by employer on
behalf of employee
11 Labour day awards Exempt Allowable
11 Medical expenses Exempt Allowable
12 Funeral benefits Exempt Allowable
13 Ex-gratia payments Allowable

Exempt
14
Exempt Disallowed
Provision of free meals from staff canteen

30% of
15 Free residential accommodation/ Exempt employee’s
accommodation benefit taxable
emoluments
disallowed
Exempt Taxable
Personal to holder motor car benefit
16 depending on
the cylinder
capacity of the
car

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SUMMARY OF THE TAX TREATMENT PAYMENTS MADE ON CESSATION OF EMPLOYMENT FOR BOTH
EMPLOYEES AND EMPLOYERS
Tax Treatment For
Payment
Employee Employer
1 Pension Exempt Allowable
2 Refund of employee's pension contributions Exempt Allowable
3 Withdrawal of employer's pension contributions Exempt Allowable
4 Gratuity Exempt Allowable
5 Redundancy pay Exempt Allowable
6 Severance pay or compensation for loss of office Exempt Allowable
7 Salary in lieu of notice Exempt Allowable
8 Repatriation allowance Exempt Allowable
9 Service bonuses eligible for payment only at the end of Exempt Allowable
employment
10 Monthly salary Taxable Allowable
11 Commutation of accrued leave days Taxable Allowable
12 Accrued service bonuses Taxable Allowable

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Exam Practice Questions

QUESTION 1

John Likando was employed as an Electrical Engineer on a three year renewable fixed term contract
at PMC Limited, a construction and property management company, engaged in the development,
restructuring and management of commercial and non-commercial property for letting. His
contract of employment which commenced on 1 June 2017 and expired on 31 May 2020, provided
for an annual salary of K180,000, transport allowance of K500 per month and housing allowance of
K3,500 per month. He was paid monthly on the last day of each month and Pay As You Earn
amounting to K18,080 was deducted from his employment income in the tax year 2020.

On 31 May 2020, the company paid his accrued leave pay of K5,000, repatriation pay of K45,000 and
gratuity of 35% of his cumulative basic salary up the date of expiry of the contract. He had always
contributed 5% of his basic salary as NAPSA contribution. The earnings ceiling for the purposes of
NAPSA contributions should be taken to be K275,904 per annum.

Likando decided not to renew his contract with PMC Limited and on 1 June 2020, commenced in
business as a Self-employed Electrical Engineer, undertaking electrical wiring and installations for
newly built residential houses for a wide range of clients. He expects his annual revenue from this
business to exceed K800,000.

He purchased equipment costing K55,000, office buildings at a cost of K220,000 and a motor car at
a cost of K45,000 on 1 June 2020. It has been agreed with the commissioner General that he will
have private use in the motor car of 25%. Likando will prepare the first accounts for the period
ending 31 December 2020 and annually thereafter. He has estimated the tax adjusted business
profit from the business for the period to 31 December 2020 to be K350,000, before capital
allowances.

PMC Limited has not engaged someone to replace Likando from the time his employment contract
with the company expired. However, on 1 July 2020, the company entered into an agreement with
Likando, to use his services as a self-employed contractor on its construction projects. Under this
agreement, PMC Ltd assigns Likando on which construction projects he should work on. The
company provides him with transport to the construction sites and also provides all the equipment
and material he needs for the performance of his duties in relation to the contract. Likando is
assisted by his own employees when performing his tasks and spends five hours from 08:00 to 13:00
every day from Monday to Friday (except for Saturdays and Sundays) working on construction
projects assigned to him by PMC Limited, after which he is free to attend to his other clients.
Likando provides his own insurance cover, as well as, that of his assistants in case of any accidents
occurring, whilst performing their duties on these projects. Likando is required to cover the cost of
any faulty electrical installations and compensate PMC Limited for any damage the company may
suffer as a result of defective electrical installations. Likando invoices the company an agreed
amount of K35,000 at the end of each month for the work performed.
Required:

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(d) Explain why it is important to distinguish between employees and self-employed contractors
for taxation and pension contribution purposes. (5 marks)
(e) Discuss the criteria the Zambia Revenue Authority will use to establish whether Likando is an
employee or an independent self-employed contractor in relation to the agreement he entered
into with PMC Limited, on 1 July 2020, specifically describing:
(iii) Those factors indicating that he is an employee of PMC Limited. (5 marks)
(iv) Those factors indicating that he is an independent self-employed contractor. (5
marks)
(f) Assuming that Likando is held to be self-employed in relation to the contract he entered into
with PMC Limited on 1 July 2020:
(ii) Compute his final taxable business profit from his business in the tax year 2020. (4
marks)
(ii) Calculate his total final income tax payable for the tax year 2020. (11 marks)
[Total: 30 Marks]
QUESTION 3 (ZiCADec2016))

(a) Zambian companies may set up share option schemes in which employees may participate
under the applicable conditions.
Required

(i) Explain what you understand by 'share option scheme' and briefly distinguish between
an exercise and a lapse of an option. (4 marks)
(ii) Discuss the reasons why employers set up share option schemes for employees and
why employees actually participate in such schemes.
(3 marks)
(iii) Describe the procedure that must be followed to have a share option scheme operated
by an employer approved for tax purposes. (3 marks)
(iv) Explain the conditions which must be met for a share option scheme to be approved for
taxation purposes. (7 marks)
(v) Explain the tax benefits for both employees and employers of approved share option
schemes. (6 marks)

(b) For the purpose of this part of this question, you should assume that today's date is 15 May
2018.
Imwiko, aged 42, is the managing director of Mwiza Enterprises Ltd, a private Zambian
company specialising in house interior design and cleaning. He is wealthy in his own right and is
married to Helen, who is 45 years old. They have two children – Namakau, who is 13, and
Lubona who is 9.
As part of his salary, Imwiko was given 300,000 shares in Mwiza Enterprises Ltd with an option
to acquire a further 1,000,000 shares. The options were granted on 15 July 2010, shortly after
the company started trading, and were not part of an approved share option scheme. The free
shares were given to Imwiko on the same day.

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The exercise price of the share options was set at the then market value of K2.00 per share. The
options are not capable of being exercised after 10 years from the date of grant. The company
has been successful, and the current value of the shares is now K6.00 per share. Another
shareholder has offered to buy the shares at their market value, so Imwiko exercised his share
options on 14 May 2018 and will sell the shares next week, on 22 May 2018.

With the company growing in size, Imwiko wishes to recruit high quality staff, but the company
lacks the funds to pay them in cash. Imwiko believes that giving new employees the chance to
buy shares in the company would help recruit staff, as they could share in the growth in value of
Mwiza Enterprises Ltd. Imwiko therefore wishes to obtain approval of the company's share
option scheme to make the scheme more attractive.

Imwiko has accumulated substantial assets over the years. The family house is owned jointly
with Helen, and is worth K500,000. Imwiko has a K250,000 mortgage on the house. In addition,
Imwiko has liquid assets worth K90,000 and Helen has shares in quoted companies currently
worth K100,000. Imwiko has no forms of insurance, and believes he should make sure that his
wealth and family are protected. He is keen to find out what options he should be considering.

Required

(i) State how the gift of the 300,000 shares in Mwiza Enterprises Ltd was taxed.
(2 marks)
(ii) Explain the taxation implications arising on the grant to, and exercise by, an employee of an
option to buy shares in an unapproved share option scheme and on the subsequent sale of
these shares. State clearly how these would apply in Imwiko's case. (7 marks)

(iii) Explain the procedure that Imwiko would go through in order to obtain approval of the
company's share option scheme. (3 marks)

QUESTION 4 (ZD12))

For the purpose of this part of the question, you should assume that today's date is 15
September 2018.

Mathews Mwiinde has been employed as the Marketing Director of Special Boots Plc since 2001. He
earns an annual salary of K360,000 and is provided with a petrol propelled 2,500cc-company car on
a personal to holder basis. The motor car had cost K60,000 when it was bought by the company.
Special Boots Plc meets all the motor car expenses including the cost of petrol for private use.
On 1 October 2018 Special Boots Plc notified Mathews that he would be made redundant on
30 November 2018. On that day the company will pay him his final month's salary together with a
payment of K45,000 in lieu of the remaining three months of his six-month notice period, in

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accordance with his employment contract. In addition the company will pay him K105,000 in return
for his agreeing not to work for any of its competitors for the six-month period ending 31 May 2019,
as well as compensation for loss of office amounting to K110,000. Throughout his period of
employment, he always paid 5% of his salary as contributions into the National Pension Scheme
Authority.

On receiving notification of his redundancy, Mathews immediately contacted Luke Imakando, the
Managing Director of Up and Down Plc, who offered him a senior management position.
Up and Down Plc is one of Special Boots Plc's competitors and one of the most innovative
companies in the industry, although not all of its strategies have been successful.
Mathews has agreed to join Up and Down Plc on 1 June 2019 for an annual salary of K390,000. On
the day he joins the company, Up and Down Plc will grant him an option to purchase 300,000
ordinary shares in the company for an exercise price of K5.20 per share under an unapproved share
option scheme. Mathews can exercise the option once he has been employed for six months, but he
must hold the shares for at least a year before he sells them.
The new job will require Mathews to spend a considerable amount of time away from his family in
Kitwe, where the company is based. Up and Down Plc has offered Mathews free accommodation in
a flat that the company purchased on 1 June 2016 for K1,250,000. The flat is currently rented out at
a monthly gross rent of K3,500. The flat will be made available from 1 June 2019. The company will
pay all of the utility bills relating to the flat as well as furnishing and maintaining it. Up and Down Plc
has also suggested that if Mathews would rather live in a more central part of the city, the company
could sell the existing flat and buy a more centrally located one, of the same value, with the
proceeds. On 15 December 2018 Mathew intends to sell 500,000 shares in Mukupo Wethu Plc, a
company that is listed on the Lusaka Stock exchange, for K240,000. His transactions in the
company's shares have been as follows:
K
June 2003 Purchased 284,000 shares 67,450
February 2010 Sale of rights nil paid 6,900
January 2011 Purchased 300,000 shares 52,850
The sale of rights, nil paid, arose as a result of a rights issue made by the company that Mathews
renounced and therefore sold out.
In addition to his emoluments, Mathews receives annual net rental income of K34,000 before
deduction of expenses. The only expense that he incurs is the payment for insurance. He paid
insurance of K4,500 in respect of the year ended 28 February 2018. In respect of the year ended 28
February 2019, he had paid insurance of K6,000.
Required

(a) Calculate the amount of income tax payable by Mathews for the tax year 2018. (7 marks)
(b) Advise Mathews of the income tax implications of the grant and exercise of the share options in
Up and Down Plc on the assumption that the share price on the day he exercises the options is
K9.80 per share, given that on 1 June 2019 it was K5.20 per share. Explain why the share option

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 The Framework for Taxation in Zambia – Interaction of Taxes /Employment income

scheme is not free from risk by reference to the rules of the scheme and the circumstances
surrounding the company. (7 marks)

(c) Describe two of the conditions which should be met in order for a share option scheme to be
approved. (2 marks)

(d) Describe the additional information required in order to calculate the taxable benefits in kind to
be assessed on Mathews in respect of the provision of the furnished flat for 2017 and advise
Mathews of the potential income tax implications of requesting a housing allowance instead.
(2 marks)
(e) Advise Mathews of the taxation implications of his transactions in Mukupo Wethu Plc. Your
answer should include a specific comment on the sale of rights nil paid
(2 marks)

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