Tax_Handout_denmak

2008 tax year

TABLE OF CONTENTS
Page
Introduction 2
The Income Tax Act
Chapter 1: Gross Income 4
Source of Income 19
Exemptions 23

Chapter 2: Allowable Deductions 30

Prohibited Deductions 56

Chapter 3: The Finance Act 58

Chapter 4: Computation of Tax Liability 62

Chapter 5: Double Taxation Relief 81

Chapter 6: Suspensive sale 86

Chapter 7: Partnership 89

Chapter 8: Farming 97

Chapter 9: Mining 110

Chapter 10: Tax Administration 119

Chapter 11: Deceased Estate 122
Chapter 10 : Estate Duty 126

Chapter 13: Capital Gains Act 157

Chapter 14:Value Added Tax Act 175

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I0ntroduction
Taxation has existed since time immemorial. Taxation is a systematic way of collecting revenue in
cash or kind from the subjects of the authority of the land. Taxation is necessary in order for the
Government to meet its national obligations. Taxation systems have changed with time, but its
primary purpose has remained the same. Taxation is even recorded in The Bible:

THE BIBLE 2 Chronicles 2 vs 22-24

And King Solomon passed all the kings of the earth in riches and wisdom. And all the kings of the earth sought the presence of
Solomon, to hear his wisdom that God had put in his heart. And they brought every man his present, vessels of silver, and
vessels of gold and raiment and spices, horses and mules, a rate year by year.

Traditional Taxation
In Zimbabwe, the traditionally authorities of the land are chiefs/kings. People in an area under the
chief’s jurisdiction are required to bring part of their farm produce livestock or to provide labour to
the chief’s fields; it is a form of taxation and still exists in Zimbabwe.

Modern Taxation
Taxation in Zimbabwe in these modern times is by way of statutes enacted in Parliament, which is
the supreme law making body in Zimbabwe. The various Acts, which are passed in Parliament
specifically for taxation, bind the people of the land and have to be complied with. The Acts have
to be passed given the diverse and complex nature of trade.

The Budget
When the Minister of Finance presents his proposed National Budget to Parliament, usually in
October /November each year, he proposes ways of raising revenue through (through taxes, levies,
duties) in order to meet Government expenditure. The same budget outlines the expenditure to be
incurred. The supplementary budget is proposed each year to revise the enacted tax rates and
budget proposals between June and August. Since it will be a proposal it is not binding on people
of Zimbabwe until it has been debated and passed as an Act by Parliament. When legislation has
been passed whether you like it or not it becomes binding and enforceable on you.

Really, “Nothing is certain but death and taxes.”

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The Zimbabwe Revenue Authority(ZIMRA)

The former Department of Taxes and Department of Customs and Excise merged to form what is
now called the Zimbabwe Revenue Authority. ZIMRA started operations in September 2001.It is
headed by a Commissioner General together with several administrative staff.

The organization is decentralised and located in three regional offices. Its responsibility is on the
administration and collection of taxes and customs duty. It collects revenue for the benefit of the
Consolidated Revenue Fund, which is the Government fund so that the Government may be able to
meet its expenditure.

The main Statutes relating to tax in Zimbabwe are:

Income tax Act (Chapter 23.06)

Finance Act (Chapter 23.04)
Capital Gains Act (Chapter 23.01)

Value Added Tax (Chapter 11:04)

The focus of this book is to enable a student studying TAXATION for examination purposes.
Only those provisions relevant according to the taxation syllabi are covered.

The book is relevant for students studying Taxation under the following Examination Boards:
HEXCO, ZAAT, IAC, CIS, ACCA and CIMA.

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Chapter 1

GROSS INCOME
Section 6: Authority to collect tax
The Commissioner General is authorised to charge and collect Income Tax from persons
throughout Zimbabwe for the benefit of the Consolidated Revenue Fund.

Section 7: Method of calculating tax

The calculation and collection of tax is done in a systematic and transparent way according
to the provisions of the Act.

The method of calculating tax is :Gross Income less Exemptions= Income less Allowable
Deductions = Taxable Income

Actual tax chargeable on taxable income is found by using the tax rates for the year
contained in the Amended Finance Act.
Taxable Income xxxxx
Tax chargeable on taxable income xxx
less credits xx
Add 3% Aids Levy x
less PAYE or Relief on foreign income xxx
Tax Payable/Refundable xxx

Section 8.1: gross income

This section is one of the major cornerstones of the Zimbabwean tax legislation. It
embraces all income of whatever nature and specifically deals with various types of income.

Gross income means the total amount received by or accrued to or in favour of a person or
deemed to have been received by or accrued to or in favour of a person in any year of
assessment from a source within or deemed to be within Zimbabwe excluding any amount
proved by the taxpayers to be of a capital nature.

Examples of gross income are salary, allowances, benefits, cash in lieu of leave, sales of
goods or services, rent received, interest received, commission received etc.

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Interpretation of words
Amount means money or any property corporeal (tangible) or incorporeal(intangible)
having an ascertainable money value.

John and Jane are employed as sales persons by the same employer. During the year John
received a cell-phone Nokia 3310 worth $11million for services rendered and Jane received
$10,5million cash. Who has received an amount and who is taxable?

Both are taxable, as they have received taxable income. John is taxable on the value of the
cellphone (being property having an ascertainable money value) and Jane on the cash
received.

Received by means the amount is received by the person for his own benefit. The
amount must be one to which the taxpayer has a legal claim. A person does not receive an
amount if he has stolen it or if the amount is lent to him.

Accrued to means the amount is due and payable to the taxpayer or the taxpayer is
entitled to the amount or the taxpayer acquired a legal right to claim payment.

The following legal precedent is relevant for examination purposes.

Maguire vs C.O.T.
It was held that the amount accrued when it became due and payable that is when they
reached an out of court settlement and could not be spread to previous years. The
Commissioner was entitled to tax the amount on a receipt basis.

Lategan vs C.I.R.
It was held that the words accrued to or in favour of any person merely meant,“to which he
has become entitled.” The taxpayer acquired in the year of assessment a right to claim
payment of the debt in the future.

C.I.R. vs Delfos
It was held that the salary accrued when it became due and payable because it had been
allowed as a bad debt and the accumulated amount fell within the gross income of the year
in which it was received as recoupment.

Accrual Basis
Where gross income accrues to a taxpayer in one year of assessment but is received by him
in a later year, the Commissioner usually adopts the accrual basis but, may tax on a receipt
basis depending on the circumstances and on whichever happens first i.e. receipt or accrual.

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A person (taxpayer) includes an individual, a company, a trust a local or like

authority, a body of persons corporate or unincorporate, a deceased or insolvent estate, but
not a partnership.

The deemed accrual of income is covered under section 10 and source of income is covered
under section 12.

Year of assessment
Year of assessment means a period of 12 months commencing 1 January ending 31
December or any period within the year.

Capital nature ‘Excluding any amount proved by the taxpayer to be of a capital

nature’. There is no definition of what an amount of a capital nature is. Each transaction
depends on its own merits. There is need of an analysis of the nature of the transaction as
well as the intention of the taxpayer at the time of making the transaction. The taxpayer can
have an original intention or mixed intention or change of intention. If it can be concluded
from the above that the intention of the taxpayer was to make a gain then the income
derived can be included as gross income.

Section 8.1.a: Income an annuity

The income is usually received on retirement after one has been in employment
An annuity is almost similar to a pension .Whereas a pension is from a pension fund, an
annuity is from a Retirement Annuity Fund(RAF) operated by an Insurance company.
During the time of contribution both pension and retirement annuity contributions are
allowed as a deduction under section 15.2.h., that is why they are taxed at the time of
receipt.

Characteristics of an annuity
▪ It must be a fixed annual payment [which can be divided into instalments]
▪ It must be claimable from another person or body (ex-gratia payments determined
annually are not annuities)
▪ It must be repetitive and payable from year to year for some period.
▪ An annuity is taxable in full whether made up partly of capital or partly of exempt
income.

An annuity may arise as follows:

▪ Purchased from an insurance company

The individual uses a lump sum amount to purchase a retirement annuity policy under a
Retirement Annual Fund([RAF) operated by an insurance company. The lump sum is not
allowed as a deduction under section 15.2.h.

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Upon retirement, only the interest content of the annuity will be taxable and it is determined
using the following formula:

Interest= (PxN)-A
N
I: Interest
P: Annual receipt [this can be divided into months]
N: Number of years of life expectancy
A: Purchase price/capital amount

Example:
Wachembera [50 years old] purchased a retirement annuity policy with First Mutual many
years ago for $1 250 000. They agreed on life expectancy of 6 years after retirement.
During the year he became entitled to $2 100 000 per annum as an annuity.

Wachembera’s taxable income is as follows:

Interest ($2.1million x 6 years) - $1 250 000

6 years

$11 350 0000/6 years $1 891 667

Though the taxpayer is in receipt of $2.1 million, only $1 891 667 is taxable, the difference
is an amount of a capital nature which is not taxable.

▪ If the annuitant survives beyond the life expectancy the whole amount of an annuity
of $1 250 000 per month is taxable as the capital portion would have been allowed
as a deduction in full.

▪ Where the life expectancy exceeds 10 years the Commissioner adopts 10 years as
the maximum life expectancy. (Life expectancy is the period within which a person
is expected to live after retirement).

▪ As a gift of legacy
The annuity is acquired through inheritance. Suppose your late auntie’s Will states that you
shall receive $40million per annum until you die. The amount is an annuity and is taxable
in full, because beneficiary would not have incurred any expenditure to acquire it.

▪ As an annuity or pension for services rendered

During employment a person may contribute monthly or annually to retirement annuity
fund [RAF]. The contributions are allowed as a deduction under section 15.2.h. subject to
the maximum amounts s. Upon retirement the person will be entitled to an annuity as
income. The annuity is taxable in full if the contributions were allowed as a deduction in
full. If the contributions were not allowed in full then the disallowed contributions are
spread over the life expectancy of the person and are allowed as a deduction against the
annuity received.
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Example
Mudhara retired at the age of 60 years on 31 December and is entitled to an annuity of
$3 200 000 per annum. During his working life he was contributing to the employer’s
Pension Fund and his contributions exceeded the maximum for those years. The aggregate
of the disallowed contributions amounted to $560 000.His life expectancy is 8 years from
date of retirement.

Taxable income is as follows:

$
Annuity 3 200 000
Less Disallowed contributions 560 000/8 years 70 000
Taxable income 3 130 000

▪ An annuity from sale of assets

Only the interest content of the annuity is taxable and the calculations are as in a purchased
annuity.

Example:
Mrs Dube aged 55 years sold her business assets to her cousin for $52 million. They agreed
that the amount is payable over 10 years and that interest at 10% per annum is payable on
the outstantding balance.

The annual interest is an annuity which is taxable. The sale price of business assets is an
amount of a capital nature, which may be charged Capital Gains Tax.

Section 8.1.b: amounts for services rendered

Any amount received for services rendered or to be rendered is taxable income.

▪ The taxpayer receives income as commutation of amounts due under a contract of

service he may elect that it be taxed over 3 years in equal instalments.
▪ An amount paid to an employee while proceeding on leave shall be deemed to
accrue on the last day of each month during the continuance of the leave.
▪ An amount received for services to be rendered is gross income in the year of
receipt not when the services are actually rendered.
▪ The value of assets like shares, motor vehicle awarded for services rendered are
gross income.
▪ The value of wedding presents and other gifts to employees are gross income, but if
the employer does not claim it as a deduction then they are not taxable to the
employee.
▪ An ex-gratia receipt in the hands of a deceased employee’s widow is an amount of a
capital nature since the services were not rendered by her.

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Example:
Isaiah received the following amounts during the year:
$
Salary 21 780 000
Bonus 1 600 000
Cash in lieu of leave 1 240 000
Gratuity on termination of service 1 450 000
Commutation of amount due under a contract of service 4 530 000

An election under section 8.1.b.was made.

Solution
Taxable income for Isaiah
$
Salary 21 780 000
Bonus exempt -
Cash in lieu of leave 1 240 000
Gratuity 1 450 000
Commutation 4 530 000/3 years 1 510 000
Taxable income 25 980 000

The other two instalments are taxed in the following two tax years in equal instalments:
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Section 8.1.c.: as read with The 1st Schedule
A section is read with a schedule because a schedule gives more details about the section.

A lump sum payment received by a person when he resigns or withdraws from a Benefit
Fund or Pension Fund is taxable. However if he uses part or the whole lump sum to
purchase an annuity on retirement or transfers the lump sum to another Pension Fund then
that part used to purchase or to transfer is not taxable.

Pension Fund or a Benefit Funds should be approved by the Commissioner in terms of

section 13 of the Income Tax Act.

First schedule
On 1 July 1960 the rules of benefit and pension funds changed to increase member’s
contributions so that they would receive an increased benefit on withdrawal or retirement.
Benefit Funds
If a taxpayer withdraws from a benefit fund the lump sum received is taxable income as
follows:

 Fund with Unchanged [F.U.R.]

Member joined before 1 July 1960: The lump sum received is not taxable income.

 Fund with Changed Rules [F.C.R.]

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Member joined before 1July1960:Reduce the lump sum with what he would have
got had rules remained unchanged.

 New fund, Fund with Unchanged Rules, Fund with Changed

Member joined on or after 1July1960:
-If lump sum received is less than $8 400 then it is not taxable. The lump sum
received is reduced by $8 400 or by amount he would have received had rules
remained unchanged whichever is the greater or
-Reduce by the amount used to purchase an annuity on retirement. policy ort
transferred to another benefit or pension fund (the above would not qualify as
deduction under section 1.5.2.h. )

Example
Mushandi received a lump sum of $32 000 000 from his employer’s benefit fund. He had
joined the fund on 30.4.1958 and the rules of the fund changed after that date. Had rules
remained unchanged he would have got $7 000 000. He used $2 000 000 to purchase an
annuity with First Mutual Life and transferred $3 500 000 to another benefit fund.

His taxable income is as follows:

$
Lump sum received 32 000 000
Less Amount he would have received had rules remained unchanged 7 000 000
Less amount used to purchase annuity on retirement 2 000 000
Less transfer to benefit fund 3 500 000
Taxable income 19 500 000

Pension Funds

 Fund with Unchanged Rules (F.U.R.):Lump-sum received is not taxable.

 Fund with Changed Rules (F.C.R.)or New Fund

The lump sum amount is reduced by the amount he would have received had rules
remained unchanged or
- amount used to purchase an annuity on retirement or transferred to another pension
fund [these do not qualify as a deduction under section 1.5.2.h. or I]
-Transfer of an amount from Pension Fund to a Benefit Fund is prohibited under
section 16.
-The lump-sum amount is taxed at a special rate of tax (refer to the Finance Act)

Section 8.1.d: Income – Lease premium

A premium is an amount paid by a lessee to a lessor for the right of use or occupation of
land and buildings the right of use of plant or machinery, the right of use of any patent,
design, trademark, copyright, model, plan, secret process, motion picture film, television

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film, sound recording or advertising. The premium can be paid in cash or it can be an
exchange of other property. A premium is taxable in full in the year of receipt or accrual.

In the case of C.O.T. vs Butcher Bros

A premium is described as: Premium or like consideration means consideration having an
ascertainable money value, passing from a lessee to lessor, whether in cash or other wise
distinct from or in addition to or in lieu of rent.

In the case of C.I.R. vs Myerson

A premium does not extend to an amount paid by a lessee to a predecessor lessee for the
acquisition by cession of his right, title and interest in the lease.

In the case of I.T.C. 1231 Oscar Pvt Ltd vs C.O.T.

A premium between sub-lessee and sub-lessor is gross income to sub-lessor.

Example:
Daniel is a landlord who owns two business properties, one in Ruwa and another in Harare.
During the year he entered into lease agreements with two tenants Munyaradzi and Tariro.

Daniel agreed with the tenant Munyaradzi that he should pay $2 500 000 down payment
plus rent of $11 000 000 per month as from 1 August of the current tax year. He also agreed
with tenant Tariro that she should pay $4 000 000 cash and use the property rent free for the
next 3 years.

Calculate taxable income for Daniel

Solution
Taxable income for Daniel is as follows:
$
Premium 2 500 000
Rent $11 000 000 x 5 months 55 000 000
Premium 4 000 000
Taxable income 61 000 000

Munyaradzi sublets part of the property to Kudzai at a rental of $500 000 per month as from
November. The income from subleasing of $500 000 is taxable in the hands of Munyaradzi.

Tariro ceded her rights in the lease to Farai and was paid $2 500 000 for the cession. The
amount of $2 500 000 is not taxable in the hands of Tariro. It is of a capital nature.

Section 8.1.e: Income – Value of lease improvements

The value of lease improvements effected by lessee on lessor’s property under a lease
agreement is gross income to lessor. The value of improvements is the amount stipulated in
the lease agreement. If no amount is stipulated then it is the fair and reasonable value of the
improvements. If a lease requires the construction of specified improvements to a stated

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minimum value the amount on which the lessor is taxable is the fair and reasonable cost but
not necessarily the minimum stated.

▪ The value of improvements accrue as income to the lessor from the date such
improvements were effected in equal monthly instalments over the unexpired
[remaining] period of the lease agreement or 10 years whichever is the lesser period.
▪ Any untaxed balances shall immediately be taxable upon cancellation, death,
cession or assignment or insolvency of the lessor.
▪ If the initial lease period is extended or renewed, only the initial period shall be
considered for the calculation of gross income. If it is silent or indefinite the lease
period shall be deemed to be 10 years.

In the case of Rex Tea Room Cinema Pvt Ltd vs C.I.R.

If there are voluntary improvements by the lessee the lessor is not bound no gross income
arises in his.

In the case of C.O.T. vs Ridgeway Hotel Ltd.

If there is an upward revision of the cost of construction before completion of the
improvements, the lessor is taxable on the revised amount.

In the case of Professional Suites Ltd vs C.O.T.

If such revision of the amount takes place after completion of the improvements the lessor
is only bound on the original amount.

Example:
Good company and Better company entered into a 15 year lease agreement on 1 February
200x1.The agreement stipulates that Better should construct improvements to the value of
$25million which are suitable for its business.

Construction work started on 1 April and two months later, due to increases in building
materials the lessee agreed with the lessor on a new value of $72million. It took the
company 5 months to complete, and the improvements were immediately put to use by
Better.

Show taxable income for the lessor

Solution
Taxable income for Good company(lessor):31 December 200x1

Value of improvements [revised] $72 000 000

Lease period 120 months

$600 0000per month x 9 months

Taxable income from trade $5 400 000

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Year 200x2
The taxable income for the following year would be $600 000 x12 months = $7 200 000

The taxable income is calculated annually until the expiry of ten years. The allowable
deduction to lessee is illustrated under section 15.2.e.

Section 8.1.f: Income – Benefits from employment

Remuneration package for employees usually include benefits .A benefit is any advantage ,
which can be connected with an employee’s services. Benefits are taxable to the employee

Advantage or benefit includes the occupation of quarters or residence, the use of furniture
or of a motor vehicle, the use or enjoyment of any other property including a loan, an
allowance and a passage benefit.

Valuation of benefits
The valuation of accommodation or the use of furniture is according to the benefit enjoyed
by the employee and the valuation of other benefits is according to the cost incurred the
employer.
▪ The benefit can be reduced if it is used for both business and private purposes or
▪ If it is used for part of the year(less than 12months) or
▪ If the employee pays the employer for the enjoyment of the benefit

Housing
The valuation of housing benefit is as follows:
▪ In Municipal areas the open market rental is used. If the residence is outside
municipal areas either 12.5% of salary or 7% of cost of construction.
Furniture
If furniture is provided it is valued at 8% of the cost furniture.

Motor vehicle benefit

The valuation of motoring benefit is :

▪ Engine capacity per annum $

up to 1500cc 2 280 000
1500 - 2000cc 4 200 000
2000cc – 3000cc 6 480 000
3000cc or more 7 200 000

▪ Cost of maintenance
Expenses incurred by the employer in maintaining the vehicle (such as repairs,
insurance, licence, wear and tear, carbon tax.).
▪ Distance covered using Automobile Association Rates [AA rates like $200.00 per
kilometre].

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Loan
Interest free loan made by an employer to an employee, his spouse or near relative or to a
company controlled by the employee have the following deemed cost to the employer on
which the employee is taxable.

Loans below $35 000 12.5% per annum

Loans above $35 000 16% per annum
Loans for the purposes of education, technical training or medical treatment for the
employee his spouse or children are exempt from tax under the 3rd schedule.

Passage benefit
The cost incurred by an employer for any journey under taken by an employee his spouse,
or child, to take up employment or on termination of employment or any journey made by
the employee, his spouse and children which is not for the business of the employer is
taxable in the hands of the employee. The first passage benefit to take up employment and
on termination of employment granted by the employer to the employee it is not taxable.
Journeys for business purposes are not taxable. Dual purpose trips whereby an employee
travels on business and uses the opportunity to take leave, the cost is apportioned and the
private element is taxable.

Allowance
An allowance is income in the employee’s hands to the extent that it is not used business
purposes. Such allowances as electricity, water ,school fees ,groceries, clothing,
entertainment, maid/gardener’s wages are taxable.

Example
Ben and Ken are employees of Fruit company. During the year they received the following
remuneration.
Ben Ken
$miliion million
Salary 95 66
Loan 12 20
Entertainment allowance 1 per month -
Motor vehicle 3 200cc 1 800cc
Housing (market rental) 3 per month 2 per month
School fees 3 -

Ben received the loan on 1 June, and the allowance was from 1 October. He had use of the
vehicle from 1 March of the year. Benefits for Ken were from the beginning of the year.

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Solution
Taxable income
Ben Ken
$ $
Salary 95 000 000 66 000 000
Loan benefit 16%x 12millionx7/12months 1 120 000
16% x 20million 3 200 000
Allowance 1million x3months 3 000 000 -
Motor car 6 480 000x10/12months 5 400 000 4 200 000
Housing 3x12months 36 000 000
2x12months 24 000 000
School fees 3 000 000
Taxable income 143 520 000 97 400 000

Section 8.1.g.: income from growing crops

The sales of reaped crops is taxable income. If timber or crops were grown with the
intention of sale and the land is sold together with the growing crops the market value of
such timber or crops at the time of sale is gross income.

If the land was acquired by way of donation or inheritance and the timber did not become
part of the business assets of the beneficiary no taxable income arises if the land is sold
together with the growing crops. It is an amount of a capital nature.

Section 8.1.h.:as read with the 2nd schedule: Valuation of trading

stock

The value of the following types of stock is taxable income:

Type Method of Valuation

▪ Closing stock cost price, replacement or market value

▪ Stock consumed or donated cost price, or market value
▪ Stock on hand on in solvency, death, cost price, replacement value of market
value
▪ Stock attached by court order cost price, replacement value, or
market value
▪ Stock sold together with business selling price

Section 8.1.i.Recoupment from sale of mining assets

Recoupment arises when an asset used for mining operations is sold. Recoupment is the
sale price of the asset. Details are under the MINING TOPIC.

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Section 8.1.j.Recoupment general

Recoupment arises on sale of an asset on which capital allowances were granted under the
4th schedule. Recoupment is the recovery of capital allowances previously granted and it is
taxable income .Recoupment is restricted to previous capital allowances. Details are under
CAPITAL ALLOWANCES.

▪ Amounts listed under paragraph 2 of the 7th schedule allowances are not recouped.

▪ If an amount is received or recouped as a result of damage or destruction of an asset

on which a deduction has been allowed no recoupment arises, if the taxpayer
purchases or constructs another asset within 18 months from date of damage and is
brought into use within a period of 3 years.

An amount received by an employer on the winding up of a benefit or pension fund when

he ceases to be an employer because of insolvency or liquidation shall be included in gross
income.
Section 8.1.k.:creditor’s concession(oskido vs jjb $5)
If a deduction was allowed under section 1.5.2. in respect of expenditure incurred by a
taxpayer (debtor) and later the creditor and debtor agree that a lesser amount than what is
owed be paid to the creditor, the benefit derived is taxable income of the debtor in the same
way as recoupment. The recoupment cannot exceed the deduction previously granted.

Year 200x1
John sold goods to Dennis for $81 million on credit.

The sales of $81 million are taxable to John. The purchases of $81 million are allowed as a
deduction to Dennis under section 15.2.a. even if he has not paid.

Year 200x2
John agreed with Dennis that he should settle the debt by paying $80 000 000. The benefit
of $1million is taxable to Dennis as recoupment.

Section 8.1.i.:reduction in sale price

Where a lessee who had paid rent for use of property and the rent was allowed as a
deduction under section 15.2, subsequently purchases the property for a price which is less
than the market value the amount that is applied in the reduction of sale price forms part of
taxable income of the lessee. The same principles apply if the purchase price is reduced by
a lease premium or the value of lease improvements. The taxpayer may elect that the
taxable amount be taxed over 6 years.

Example:
Janet leases computers to Molly who has so far paid rentals of $3 000 000. Molly bought
the computers from Janet for $2 000 000 during the year when the market price was
$6 million.

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Taxable income for Molly is :

Recoupment $3 000 000 being the allowable deduction previously granted.

Section 8.1.m.subsidies
If expenditure was incurred and allowed as a deduction and later the taxpayer recovers it
by way of subsidy or grant, the amount recovered is taxable income.

Section 8.1.n.:Commutation of an annuity from RAF

If a taxpayer makes a commutation from Retirement Annuity Fund, 1/3 of the total value
of the annuity is not taxable. If the taxpayer commutes more than 1/3, then the excess is
taxable. A commutation means giving up the right to receive income in future, and opting
for a lump sum.

Example:
Bvuma became entitled to an annuity of $12 000 000 per annum during the year. His life
expectancy is 5 years. He received a lump sum commutation of $9 300 000 .

The taxable income for Bvuma is :

$
Lump sum payment 12 000 000
Less 1/3x$9 300 000 3 100 000
Taxable income 8 900 000

If he had received a lump sum of exactly $3 100 000 then it would not be taxable.

Section 8.1.r.:Commutation from a Pension fund

The commutation of a pension is not taxable if the pension itself would not be taxable.

Section 8.2.:Fluctuations in exchange rates

If there is a variation in the exchange rate of currency between Zimbabwe and any other
country the amount to be included in taxable income is the amount actually expressed in
Zimbabwean currency. If receipt and accrual occur in different years any increase or
decrease is effected in the year of receipt.

Example:
Harvesters pvt ltd exported maize worth $104 billion to Malawi in the previous tax year.
Payments by the Malawian company were made in March this tax year when the maize was
worth $195 billion due to an increase in exchange rates.

The above transactions are treated as follows:

Income Sales previous year $104billion

Current year
Income increase in exchange rate( $195billion- $104 billion) $91billion

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Section 10 :Deemed accrual of income

Income is deemed to have accrued to a taxpayer under the following circumstances:
▪ If income has been invested, accumulated or capitalized by him.
▪ If an amount has not been actually aid over to him but remains due and payable to
him.
▪ If an amount has been credited to an account, re-invested, accumulated or
capitalised on his behalf.
▪ If a parent makes a donation to his minor child, the income, which accrues as a
result of the donation, is deemed to have accrued to the parent who made the
donation.

Example
Mai Shoroma made a donation of $50million to her minor child, on the child’s second
birthday , the money is loaned to a local microfinance company. Interest of $11million was
paid to the minor child. The interest is taxable income to the parent as it is deemed to have
accrued to her.

▪ Reciprocal donation
If, in the pursuance of or by reason of a donation or settlement made by a person , income
accrues to a minor child of another person and , in reciprocate the other person donates to
the first donor’s minor child, the income which accrues is taxable in the hands of the
parents.

Example:
Suwo donates $9 million to Sasa’s baby on the minor child’s first birthday. The amount is
invested by Sasa and income of $1 200 000 accrues to the baby. Sasa also donated $11, 5
million to Suwo’s minor child aged ten years and Suwo invested the amount on which
interest of $3 300 000 was paid to the minor child.

The income of $1 200 000 is deemed to have accrued to Sasa and it is taxable in his hands.
The income of $3 300 000 is deemed to have accrued to Suwo and it is taxable in his hands.

• Donation to a Trust
If a person makes a donation to a Trust and the donor has power on the distribution of the
income of the Trust it is taxable in the hands of the donor not the Trust.

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Section 12 Source of income

The source of income is important in order to determine whether income is taxable in
Zimbabwe or not. All income derived from a source within Zimbabwe is taxable. However,
the Act extends an arm to tax even foreign income. The reason for taxing foreign income in
Zimbabwe might be that Zimbabwe was used as ground for deriving the income, or the
recipient of the income might have been resident or ordinarily resident in Zimbabwe at the
time the income accrued or when he acquired the right to the income.If foreign income is
taxable in Zimbabwe it does mean that it is not taxable in the country of origin. It can be
taxed both in Zimbabwe and in the foreign country which means DOUBLE TAXATION
may arise. [Refer to DOUBLE TAXATION Topic].To determine the source of income you
need to know the originating cause of the income and where the originating cause is
situated.

In the case of Lever Bros and Unilever Pvt Ltd.

The learned Judge stated that:

“Source means not a legal concept but something which a practical man would regard as a
real source of income”
“...... the source of receipts, received as income is not the quarter whence they come, but the
originating cause of their being received as income and that this originating cause is the
work which the taxpayer does to earn them, the quid pro quo which he gives in return for
which he receives them.”

Determination of source of income

Income Source
Salary Where services were rendered. C.O.T. vs Shein

Annuity Where the act or document giving rise to the annuity.

M.M. Parker vs C.I.R.

Dividends Where the shares are registered Boyd vs C.I.R.

If a branch register is regarded as part of the principal register, then
the source of dividends is where the principal register is situated.
Lamb vs C.I.R.

Business profits Where operations were conducted

The profits can be apportioned if two or more countries were used in
the operations. Mufulira Copper Mines Ltd and
Rhodesian Milling Company

Director’s fees Where the Head Office of the company is located I.T.C. 235
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Royalties Where the author exercised his wit, labour and intellect. Millin vs
C.I.R.

Interest Where the lender exercised the services of providing a loan not
where
the loan was used or where interest is being paid.
C.I.R. vs Lever Bros and Unilever Ltd

Sale or rent Where the lessor conducts his business of immovable property[lease
period less than five years] C.O.T. vs British United Shoe
Machinery

The following subsections outline income deemed to be from a source within Zimbabwe:

Section 12.1.a.: Contract on sale of goods

Any amount received or accrued under any contract made in Zimbabwe for sale of goods is
deemed to be from a source within Zimbabwe regardless of the country of origin of the
goods or where delivery or payment for the goods is to be made. The income arising from
the sale is taxable in Zimbabwe.

Section 12.1.b: Income from services rendered

Any amount which is received or accrues for services rendered by a person in the carrying
on of a trade in Zimbabwe is taxable in Zimbabwe no matter where the person making the
payment is resident or where the amount is paid.

Example:
Ms Abba, a Nigerian, carried out research work on the Aids epidemic in Zimbabwe for a
period of ten months during the year. She was paid an equivalent of Z$23 million by her
employer in Nigeria. The amount of $23 million is taxable in Zimbabwe.

Section 12.1.c: Period of temporary absence

If any person renders services outside Zimbabwe for a period of less than 6 months [183
days] during the period as an employee [including a director of a company], the income is
deemed to be from a source within Zimbabwe.

Example:
Mandigona quitted her job in Zimbabwe and went to the United Kingdom in search of
better employment. She was formally employed for a period of five months in that country
before she was deported. She had received an equivalent of $20 million Zimbabwean
dollars The amount of $20 million received during the period of temporary absence is
taxable in Zimbabwe.

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Section 12.1.d: Services rendered to the Zimbabwean Government

If a Zimbabwean resident renders services to the Zimbabwean embassy or mission in a
foreign country, the income is deemed to be from a source within Zimbabwe. However a
foreigner who renders services to the embassy is not taxable in Zimbabwe because he was
not ordinarily outside Zimbabwe for the purpose of rendering such service.

Example:
Mandipa is employed by the government of Zimbabwe in the Ministry of Foreign Affairs.
During the year she worked in the Democratic Republic of Congo [DRC] and earned $19.9
million in salaries and allowances. The amount of $19.9 million is taxable in Zimbabwe.
However, if a Congolese was employed at the same Embassy his income would not be
taxable in Zimbabwe. It will be taxed in the DRC.

Section 12.1.e: Pensions and Annuities

If a pension or annuity is paid to any person by any person wherever resident or by the State
for services rendered in Zimbabwe, the amount is deemed to be from a source within
Zimbabwe. A Government pension is taxable in full and a non-government pension is
apportioned according to the period of service in Zimbabwe [this applies only to the person
who rendered the services].

Period of service in Zimbabwe x pension received

Total service to the company

Example
Mudyandigere retired on 30 May this year. He is entitled to a monthly pension of
$300 000. The pensioner had worked for National Railways of Zimbabwe [NRZ] for a
period of 28 years 3 months, being 12 years 4 months in Mozambique, 5 years 1 months in
Zambia and the rest for the period was in Zimbabwe.

Taxable income: 130 months x $300 000

339 months

$115 044 x 7 months $805 308

A widow in receipt of a widow’s pension is only taxable in Zimbabwe if the Pension Fund
is situated in Zimbabwe.

Section 12.2.: Interest And Dividends

If interest or dividends on foreign securities are received by or accrues to a person
ordinarily resident in Zimbabwe, they are deemed to be from a source within Zimbabwe
and are taxable .

Section 12.3.:Annuity
If an amount is received from a foreign source and the right to the annuity was acquired by
the person whilst ordinarily in Zimbabwe, it is taxable in Zimbabwe.
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Section 12.4.:Royalties
If royalties are received or accrue from the use in Zimbabwe of a patent, or design, or
trademark, or copyright, or plan, or secret process or formula, or motion picture film, or
television film, the income is deemed to be from a source within Zimbabwe.

Example:
Zimbabwe Broadcasting Holdings [ZBH] hires a television film from Ghana for use in
Zimbabwe. It pays $12 million during the year to the lessor company. The amount of $12
million is taxable in Zimbabwe.

Section 12.5:Recoupment
If an asset on which capital allowances had been granted under section 15.2.c. is sold
outside the country, then any recoupment/recovery of capital allowances is taxable in
Zimbabwe.

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EXEMPTIONS
Section 14: as read with the 3rd schedule
Exempt income is income received by or which accrues to a taxpayer which is specifically
immune from tax. Remember GROSS INCOME less EXEMPTIONS = INCOME

Paragraph 1 & 2:
The receipts and accruals of the following are exempt from tax:
Local Authorities, The Reserve Bank of Zimbabwe, POSB ,Building Societies
The Zambezi River Authority, Benefit Funds, Trade Unions, Trusts of a public character,
Charitable organizations

Paragraph 3:
The receipts and accruals of any organisation specifically mentioned as exempt.

Paragraph 4:
The following income is exempt from tax:

▪ The salary and emoluments paid in respect of the office of the President of
Zimbabwe.
▪ The value of accommodation, furniture, motor vehicle or an allowance granted to a
Minister, Deputy Minister, Governor, Member of Parliament Leader of the
Opposition.
▪ An allowance paid to a chief or headman including the use of a motor vehicle.

▪ An allowance paid by the State to the President’s or Vice President’s spouse or the
spouse of a former head of State.

▪ A monthly allowance payable to a councillor.

▪ A scholarship, bursary or payment in respect of tuition fees or other educational

allowance to a student receiving instructions at a school, college or university, but
does not include remuneration income for services rendered.

▪ A bonus or performance related awards. The exemption is $700

▪ Severance pay/retrenchment package.

The exemption is $5000 or 1/3of the first $15000 whichever is the greater
[excluding pension refund and cash in lieu of leave].

▪ Benefits accruing to an employee of company operating on an Export Processing

Zone. The maximum exemption shall be 50% of taxable income from the EPZ
excluding the benefits.
▪ A reward paid to a person by the Commissioner General for ‘blowing a whistle’.

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▪ The value of an allowance in respect of accommodation and transport or the value of

any residence to any member of staff at a district or rural clinic owned or operated
by a rural district council or religious body.

Paragraph 6: Pensions
Any pension accruing to a person being:
• A war widow’s pension
• A war disability pension
• An old age pension
• Compensation or a pension paid to an employee, the dependants of heirs in respect
of disease, injury, disablement or death suffered in employment.
• Compensation or a pension paid from the Wankie Disaster Relief Fund
• Pensions or gratuities paid to war veterans.

Paragraph 7: Compensation
An amount accruing to a person by way of a benefit in respect of injury, sickness or death
of a person which is paid to the person or a deceased estate or his dependants by a trade
union, from a benefit fund or in terms of a policy of insurance covering accident, sickness
or death or from a medical aid society

Paragraph 8: medical expenses

The value of medical treatment or travelling to obtain such treatment which is provided by
an employer for an employee or the dependants of an employee, whether provided in kind,
by direct payment or by refund or in any other manner whatsoever.

Paragraph 9: Dividends
Dividends from a company incorporated in Zimbabwe & that company is chargeable to tax.

Paragraph 10: Interest

Interest paid:
• On savings certificates issued under any law
• The Zimbabwe Post Office Savings Bank [POSB]
• Loans raised by the State subject and specifically stated as exempt
• Tax reserve certificates [TRCs]
• On 4% and 6year Government of Zimbabwe Bonds
• On interest from the Reserve Bank of South Africa
• On Paid Up Permanent Shares [PUPS] Class “C” shares
• Any foreign currency denominated account held by an individual
• by Commercial Banks or Building Societies on which withholding tax has been
withheld
• On any bond issued by the Reserve Bank of Zimbabwe on behalf of National Fuel
Investments Company of Zimbabwe Pvt Ltd

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Paragraph 11
Interest, which accrues to a non-resident not carrying business in Zimbabwe on a loan, used
for mining operations to the State, Local authority or Statutory Corporation.

Paragraph 12: Alimony

Alimony or maintenance received in a divorce settlement .

Paragraph 13: Traditional Beer

Sale of traditional beer in terms of the Traditional Beer Act.

Paragraph 14: Exports

An amount paid by the State to an exporter of goods in terms of a scheme for the
development of export trade.

Paragraph 15: Entertainment Allowance

Any entertainment allowance to the extent that it is expended on the business of the
employer.

Paragraph 16: Export Processing Zone or Industrial Park Developer

The receipts and accruals of a licensed investor who operates on an Export Processing Zone
are exempt for the first five years of operation.

Paragraph 18: Duty on Imports

An amount received or accrued by way of sale, disposal or transfer of any duty free
certificate issued by the Reserve Bank of Zimbabwe to exporters qualifying for a rebate of
duty on imports.

Paragraph 19: Employee Share Ownership Scheme

An amount received or accrued to or in favour of an employee participating in an approved
employee share ownership scheme or trust from the sale to or redemption by the scheme or
trust of any shares, debentures, units or other interest of the employee in the scheme or
trust.

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Exercises

[C.I.S.: November 1999 20 marks]

Mrs Jean Ndu who is 65 years approaches you with regard to completing her 1998 tax return.
She outlines the following facts to you:

1 In 1995 she drafted in Zimbabwe a manuscript on her late husband’s life as a doctor.
She had taken the manuscript to Sydney, Australia where she was able to conclude a
publishing contract with an Australian publisher. The book was published in January
1997.

The book sold well in Australia and New Zealand but had not yet been sold in
Zimbabwe. By June 1997 royalties amounting to $300 000 had accrued to Mrs Ndu. As
she was of the opinion that she was not taxable in Zimbabwe on this income, she
invested $100 000 in a holiday cottage in Sydney, while $200 000 was invested in the
Australian Post Office Bank.

2. By 31 December 1998 further royalties of $200 000 and $10 000 net rent had accrued
to her in Australia. She also received $20 000 interest from the Australian Post Office
Bank. Jean Ndu paid Australian tax of $200 000 on her royalties in the 1998 tax year.

3. Jean Ndu is also in receipt of a monthly pension of $3 000 from a Zimbabwean source.

4. Mrs Ndu is a beneficiary of income from a trust set up under the terms of her late
husband’s will. The pertinent part of the Trust Deed indicates that Mrs Ndu is entitled
to an annuity of $12 000 per year from the Trust, in addition to which she is entitled to
half of the remaining income which is distributed by the Trust annually. In the tax year
ended 31 December 1998 $10 000 was distributed. The Trust income is made up of
Zimbabwean Post Office Bank interest and Building Society Class “C” share dividend.

Required:

a] Explain the taxability of the incomes mentioned in (1) and (2) above, supporting your
answer with legal precedent where possible.
b] Compute Mrs Ndu’s prospective minimum taxable income for the year ended 31
December 1997 and 31 December 1998 from the above information.

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[C.I.S. : November 1999 : 10 marks]

Ben Open is a senior insurance adviser with a leading company in Zimbabwe.

His earning per year are as follows :

Salary $24 480 000

Entertainment Allowances $11 200 000

Free use of a company vehicle, a Nissan sedan with an engine capacity of 3100cc. The
average cost of maintaining the car per year all borne by the insurance company are
$13 000 000.The depreciation charge in the company’s books for the car is $1 500 000.

Mr Open is a member of his employer’s non-contributory medical aid fund which covers
him, his spouse who is a full time housewife, and their minor children. The annual benefit to
the household per year from this membership is $2 000 000.

He lives in a company house for which he pays rent of $650 000 although the market rental
of such a house is $2 960 000. Mr Open currently contributes $3 000 000 per year to an
approved Retirement Annuity Fund.

Required:
Compute Ben Open’s minimum taxable income for the tax year ended 31 December 200x1.

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[C.I.S. : May 1997 : 10 marks]

The definition of “gross income” brings into the tax net amounts from a source within
Zimbabwe. A general test of sources was laid down by Wartermeyr, C.J. in C.I.R. vs Lever Bros
and Unilever Limited [1946], SATC1 as follows:

“... the source of receipts, received as income is not the quarter whence they come, but the
originating cause of their being received as income and that this originating cause is the work
which the taxpayer does to earn them, the quid pro quo which he gives in return for which he
receives them”

You are required to state in one sentence the rules for determining the source of each of the
following specific types of income:

a) Annuities
b) Author’s fees
c) Director’s fees
d) Dividends
e) Interest
f) Rental from immovable property
g) Rental from movable property such as car hire
h) Remuneration of employees
I) Fees for professional services
j) Share sales

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Chapter 2

Allowable Deductions
Introduction
This section is one of the cornerstones of Taxation legislation in Zimbabwe. It is the broad
deduction formula of expenses incurred by the taxpayer. However not all expenses incurred
are allowable, some are prohibited under section 16.

Remember: GROSS INCOME less EXEMPTIONS = INCOME less ALLOWABLE

DEDUCTIONS = TAXABLE INCOME.

Exchange Rates Section 15.1.

When owing to a variation in the rate of exchange of currency between Zimbabwe and any
other country, the amount actually paid in Zimbabwe currency differs from the amount of
the liability that had been incurred prior to the variation date;

▪ the amount to be deducted shall be the amount actually paid in Zimbabwean

currency.
▪ if the incurring of the liability and the payment occur in different years of
assessment effect shall be given to the increase or reduction in the amount in the
year of assessment in which the amount was paid.

If a person earn income from trade and investment and income from employment, any
allowable deductions shall be claimed in respect of the income to which they relate.
If a person earns income from mining operations and income from other trade or
investment, any allowable deductions shall only be claimed of the income to which they
relate.

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The General Deduction Formula: Section

15.2.a
The deductions to be allowed shall be expenditure or losses to the extent to which they are
incurred for the purposes of trade or in the production of income except to the extent to
which it is of a capital nature.

To the extent to which means the expenses can be apportioned between private and
business and only the business portion is allowed as a deduction.

Incurred the expenditure is allowed as a deduction when incurred not necessarily when
paid but as long as the taxpayer has acquired a legal liability to pay.

For the purposes of trade means for the purpose of enabling a person to carry on
business and earn profits.

Capital expenditure
Income is revenue derived from capital productively employed. Capital is wealth used for
the purpose of producing fresh wealth or invested to produce income. It is necessary to
inquire into the nature of each transaction to determine whether the expenditure is capital or
not. Capital expenditure is the cost of acquiring, expanding or improving the income
earning structure. Floating capital disappears in the very act of producing income. The
most common example of floating capital is trading stock.

Revenue expenditure:
It is the cost of performing the income earning operations and cost of maintaining the
income-earning machine. Revenue expenses for the purposes of trade or in the producing of
income are expenses, which are necessary for the performance of the business operations.
Expenses, which are bona fide incurred for the more efficient performance of such business
operation are all deductible provided they are closely connected to the operations of the
business operation that it would be proper, natural or reasonable to regard them as part of
cost of performing the operations.

Capital expenditure include:

• Money spent on acquiring fixed assets for use in business including costs connected
with or attached to the acquisition of capital assets like transfer fees, transport or
installation costs, travelling expenses to purchase the assets.
• Money spent in order to create a source of income e.g. the purchase price of the
goodwill of a business, the purchase price of an annuity.
• The cost of obtaining share capital e.g. underwriting commission, advertising legal
costs in connection with an offer of shares to the public.
• Cost of erection of partitions in leased premises the cost of erecting a model house
on rented site for exhibition of goods. It is advertising of a permanent nature.

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• Outlay incurred in devising permanent method of disposing of waste effluent of a

chemical manufacturing company.
• Acquisition by a farmer of the right to a supply of water in perpetuity.
• Cost of silk gown incurred by an advocate and the cost of legal books.
• Architect’s fees in connection with the erection of new factory premises by
manufacturers.

• Cost of removal and re-erection of business premises or other capital assets like
plant, machinery.
• Installation of drainage works in the case of a property acquired for the purpose of
letting, even when installation is compelled by Municipality by-laws.
• Finance charges included in total purchase price of a capital asset acquired under a
hire-purchase agreement.
• Sum of money paid for the exclusive right to become a sole agent of a certain
commodity.
• Expenditure incurred with the aim of improving a taxpayer’s knowledge resulting in
a change in the income-producing machine as opposed to the mere maintenance of
professional or trade efficiency.
• Bursaries and grants made by an oil company as part of public relations advertising.
Case of Shell Rhodesia Pvt Ltd vs C.O.T.
• Farm security
Steel security screens attached to windows qualify for an allowance for which the
building qualifies. Lighting plant, floodlights qualify for capital allowances.
Fencing around farm improvements and compounds qualify as fencing under the 7th
schedule.

Allowable deductions include the following:

• Eradication expenses on bilharzias.
• Expenditure on replacement of tilita clips. The first purchase can be granted SIA or
Wear & Tear.
• Expenditure on construction of temporary roads realigning temporary or permanent
roads if for the prevention of soil erosion.
• Cost of valuation of assets such as business premises, stock, plant and machinery for
insurance purposes.
• Entertainment expenses incurred by professional persons for the purposes of
producing income.
• Travelling and entertainment expenses incurred by insurance agents.
• Cost of preparation of income tax returns but not cost of professional advice on
income tax matters.
• Expenses incurred on the connection of municipal services such as water. Electricity
and sewerage to business premises (but not installation costs).
• Contributions made towards the cost of a private railway siding in which ownership
remains with NRZ.
• Telephone connection fee paid to PTC.
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• Irrecoverable contribution to the Electricity Supply Commission towards the cost of

a power line.
• Entertainment expenses incurred by bookmakers and the cost of their apparatus at
racecourses.

• The protection of trading rights and the elimination of competition are in general
allowed as a deduction unless the payment is of a capital nature that is if an asset or
advantage of an enduring nature is acquired as a result of the payment.
• Cost incurred in distributing dividends but not interest on any borrowed amount
from which to pay the dividends.
• Expenses incurred by pilots:
Cost of replacing navigation computers, navigation dividers, protractors and straight
edges. Cost of twice yearly medical examinations, annual flying tests and licence
renewals and passport renewals.
• Loan raising fee and finance charges:
These are apportioned on a pro rata basis to the items on which the loan was used..
If a loan is used to purchase assets, the charges be capitalized when calculating
capital allowances. The loan-raising fee in respect of working capital is allowed as a
deduction under section 15.2.a. If a loan is used for capital expenditure, which does
qualify for capital allowances, then the loan-raising fee applicable is not allowable

If a portion of a loan to a farmer is used for items under paragraph 2 of the 7th
schedule a proportionate amount of the raising fee will also be allowed in terms of
that paragraph .
• Expenses incurred in the removal of stock or minor removal of plant within the
same premises.
• Expenditure by farmers on protection work in respect of abandoned mines or
prospects including the refilling or blocking of shafts and the erection of fencing
even though the element of capital may be present.
• Insurance premiums on accident insurance or term assurance policies taken by an
employer for an employee whether the proceeds are for the benefit of the employee
or the employer. Any payment to an employer under either policy is taxable in his
hands.
Any benefit payable to an employee’s estate under a term assurance is of a capital
nature whether the policy covers one individual or a group of employees. Premiums
paid on an individual term assurance policy is gross income to the employee..
• The cost of replacement of tradesman tools.
The cost to the employer or employee of protective clothing such as overalls, boots,
helmets, specially required for the employment and which cannot be used for
ordinary purposes.
• Irrecoverable salary advances to employees where it is the custom of the employer’s
trade to make salary advances in order to ensure the retention of a satisfactory
labour force.
• Donations and similar contributions made from purely business motive not
charitable motive.

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• Losses of cash by petty pilferage and losses through embezzlement or theft by an

employee who is not in the position of proprietor.
• Expenditure incurred by freelance radio or television artists on:
Special clothes for television appearance. Dry cleaning and laundering of clothes.
Entertainment expenses for business purposes. Travelling expenses between the
town office and the studio and subsistence expenses incurred through working
during normal meal hours or away from home.

Expenditure not allowed as a deduction

• Customs fines and legal expenses incurred as a result of Customs Act.

• Entrance fees, but not annual subscriptions to business associations or societies or
clubs.
• Excessive director’s fees or other remuneration, which cannot be linked to
production of income.
• Cost of license policy insuring a pilot in case of illness or injury.
• Losses by embezzlement occasioned by the act of a proprietor.
• Fines incurred by the taxpayer or by any other person and reimbursed by the
taxpayer.
• Removal expenses whether incurred voluntarily or compulsorily are capital
expenditure except removal expenses for stock,. Removal expenses may be
apportioned between capital assets and stock. Removal expenses on assets are
capitalized and wear & tear may be granted but not S.I.A.
• Insurance policies on :
Joint life policy: It is a policy taken on the lives of the partners for the befit of the
partnership business. The expense is not allowed as a deduction.
Ceded policy: It a policy on the life of a partner for the benefit of the partnership
business. The premium is not allowed as a deduction..
Individual life policies: It is a policy for each partner for his own benefit. The
expense is allowed as a deduction to the partnership and taxable to the individual
partner.
Balancing charges policy: Balancing charges policies are entered with a view to
mitigate consequential losses by way of tax, which may become payable on
recoupment arising from the receipt of insurance proceeds when an asset is damaged
or destroyed .Premiums paid on such policies are allowable and the proceeds are of
a capital nature.

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Specific allowable deductions

Repairs ;Section 15.b
Expenditure repairs to movable assets used and property occupied for the purposes of trade
or repairs resulting from the letting of property is allowable. A repair is restoration by
renewal or replacement of subsidiary parts of the whole, which have worn out. It is not
necessary that the materials used should be identical with the materials replaced. The
replacement of broken windowpanes on a house is only a repair of the house. Repairs
should be distinguished from improvements. The test for improvements is whether a new
asset has been created resulting in an increase in the income generating capacity, or the
work done merely restores the asset to a state in which it will continue to earn income.
Reconstruction of substantially the whole not necessarily the whole would not constitute a
repair. It is an improvement.

In the case of : Rhodesia Railways vs C.I.R. Bechuanaland

Part of a railway track had become worn out and dangerous. The relaying of 74 miles of a
track out of 588 miles was held to be a repair.

In the case of : Rhodesia Railway Ltd and Others vs C.O.T.

The original construction of a railway line had been faulty and had caused heavy
operational costs. Subsequent expenditure on deviation and improved gradients was held
not to constitute a repair.

Capital Allowances Section 15.2.c. ( Refer to page 42)

Lease Premium Section 15.2.d. .

A premium is an amount or like consideration paid by lessee to lessor for the right of use or
occupation of land and buildings or for the right of use of plant and machinery, patent,
design, trade mark, copyright, model, plan, secret process or formula, any motion picture
film or television film, sound recording or advertising matter connected therewith or for the
imparting of or the understanding to impart any knowledge.

The allowable deduction is determined as follows:

Premium/ lease period or 10 years(whichever is the lesser period)

▪ If the lease period is silent or for an indefinite or exceeds 10 years it shall be taken
as the lease period. If there is an option to renew the lease such option shall not be
considered.
▪ If the property is used both for business and private purposes, the premium is
apportioned and only the business element is allowed as a deduction.
▪ If the lessee subsequently purchases the property any unclaimed balance falls away
from the year following that of purchase. Check on section 8.1.d.

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Example:
Bath entered into a lease agreement with Towel for a period of 14 years. Towel was
required to pay a premium of $1 450 000 in addition to annual rental of $4 120 000.

Taxable income for Bath : Lessor : Section 8.1.d.

$
Rent 4 120 000
Premium 1 450 000
Taxable income 5 570 000

Allowable deduction Towel: Lessee : 15.2.d.

Rent 4 120 000

Premium $1 450 000/10 years 145 000
Allowable deduction 4 265 000

The allowable deduction is granted every year until the expiry of the lease period.

Lease Improvements Section 15.2.e

The deduction is granted to a lessee where he has effected lease improvements under a lease
agreement. The deduction is based on the value of lease improvements in the lease
agreement or the amount expended on the improvements.

The deduction is calculated as follows:

value of improvements
lease period or 10 years (whichever is the lesser period)

The deduction is granted from date when improvements were first used or occupied for the
purposes of trade.

▪ If the lease period is indefinite or exceeds 10 years it shall be deemed to be 10

years. If the agreement is for an initial period, which is subject to renewal, only the
initial period is considered.
▪ The deduction is apportioned if the property is used both for business and private.
Where the taxpayer acquires ownership of the improvements then the deduction
shall cease from the year following that of purchase. Check section 8.1.e

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Example:
Mr Huni owns a vacant piece of land measuring 2 000 square metres. He entered into a 20
year lease agreement with Mr Moto from 1 February 200x1. They agreed that Moto should
construct lease improvements [warehouse] to the value of $11,5 million. Construction
started on 1 April and it took Moto 4 months to complete the construction. The
improvements were used by Moto for business purposes as from 1 September 200x.

Taxable income for Huni [lessor] : section 8.1.e.

Unexpired lease period (240months less expired lease period lease 2months=238 months)
or 120 months whichever is the lesser
$11 500 000
120 months

$95 833 x 9 months [from date of construction to end of year]

Taxable income from trade $862 497

Allowable deduction to Moto [lessee] : Section 15.2.e.

Unexpired lease period (240 months less 7 months expired=233months) or 120months
$11 500 000
120 months

$95 833 x 4 months [from date of use to end of year]

Allowable deduction $ $383 332

Capital Redemption Allowance Section 15.2.f. [Refer To Mining Topic]

Bad And Doubtful Debts Section 15.2.g.

The deduction may be claimed in respect of debts, which are irrecoverable, the deduction is
granted if it meets the following criteria:

▪ The debt should be due and payable to the taxpayer. If the debts were sold together
with the business, they cannot be claimed.
▪ The debts should have been included in the income of the taxpayer, either in the
current or previous year of assessment. An incoming partner or a person who
acquires or inherits the business cannot claim a deduction for a bad debt.
▪ It must be proved by the taxpayer that the debt is irrecoverable. Provision for bad or
doubtful debts are not be allowed as a deduction.
▪ In all cases, the bad or doubtful debt should be in respect of trading stock.

A claim for bad or doubtful debts should show

- Name of debtor -Chava Chimurenga
- Date on which debt was incurred -22 June 200x1
- Amount of the debt -$7 700 000
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- The nature of the debt -loan for farming operations.

- Reasons why it is irrecoverable or doubtful -taxpayer was declared insolvent

Current /Arrear contributions to pension fund ,Retirement annuity

fund and NSSA Section 15.2. h &i

The contributions to a pension fund by an employer or an employee are restricted to the

following maximum amounts. The maximum allowable deductions :
Year Pension RAF NSSA l
2003 90 000 90 000 1 440
2004 720 000 720 000 15 000
2005 1 440 000 1 440 000 500 000

Contributions to an unapproved fund are not allowed as a deduction. Receipts from such a
fund are not taxable income except for the interest content. These contributions, which are
allowed as a deduction, are taxable income under section 8.1.c. when the employee
resigns/withdraws from the pension fund or when he receives a pension on retirement.

Medical Aid Contribution Section 15.2.i.

Medical aid contributions paid by the employer on behalf of his employees or their
dependants are allowed as a deduction to the employer. The amount is a benefit to the
employee under section 8.1.f. but is exempt from tax under paragraph 8 of the 3rd schedule.

Sale of crops acquired with land Section 15.2.k

Where income id derived from the sale of crops or timber or the sale of the right to reap
crops or to fell timber which were growing on land at the time of acquisition the allowable
deduction is as follows:
▪ Where the land was bought by the taxpayer a fair and reasonable amount
representing the cost of the crops or timber
▪ Where it was acquired by way of inheritance or donation an amount representing
the fair value of the of the crops and timber
▪ The allowable deduction shall be proportionate to the crops or timber sold during
the year.

Sale of crops not acquired with land Section 15.2.l

Income derived from the sale of crops or timber the right to reap or fell or dispose of was
not acquired with the land the allowable deduction is an amount proportionate to the crops
or timber sold during the year.

Research and experiments Section 15.2.m

Any expenditure incurred by the taxpayer in carrying out experiments and research relating
to his trade is allowed as a deduction. The expenditure excludes capital expenditure on
acquisition of assets.

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Example:
Windmill a company which manufactures fertilizer carried out research and experiments on
a new compound of fertilizer during the year and incurred administration costs of $55
million. The amount is allowed as a deduction as the research and experiments are related to
its trade.

Contribution for Experiments and Research Section 15.2.n

A deduction is granted for any sum contributed by the taxpayer during the tax year in
respect of expenditure incurred by another person in carrying out research and experiments
related to their trade. A proportionate amount is allowed if the amount contributed is not
wholly used for the experiments and research.

Example:
Zimbabwe Fertilizer Company (ZFC)contributed $5 million to Windmill to enable it to
carry out research and experiments on a fertilizer component. The amount is allowed as a
deduction to ZFC for its contribution for the research and experiments made.

Contribution to a scientific body Section 15.2.o

A deduction equal to double the sum contributed by the taxpayer to a scientific or
educational society or institution to enable it to carry industrial research or scientific
experimental work related to the trade of the taxpayer.

Example:
Windmill or ZFC or both contributed say $15 million to University of Zimbabwe
agronomists students to carry out research and experiments on the fertilizer component. The
amount is allowed as a deduction to each contributor.

Educational Grants Section 15.2.p

A deduction is allowed of any amount contributed by the taxpayer during the year of
assessment in the form of a grant, bursary, or scholarship to enable any person not
connected with the taxpayer to take a course of technical education related to the trade of
the taxpayer at any educational institution.

The beneficiary should not be related to the taxpayer. The following persons are regarded as
connected/related to the taxpayer and if the educational grant is given to them it is not
allowed as a deduction:
The taxpayer himself, his spouse or near relative or near relative of the spouse of the
taxpayer.

▪ If the taxpayer is a company, an individual controlling the company or the spouse or

near relative or nominee of the individual controlling the company or director of the
company or the spouse or near relative or nominee of a director of the company or
near relative or nominee of the spouse of a director of the company.

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Example:
Glamour a company that manufactures cosmetics awarded two bursaries during the year to
enable two persons to take out a technical course on cosmotology. The first bursary of
$12 million was awarded to a brother of the spouse of the director of Glamour company.
The second bursary for $5million was awarded to an employee in the production section of
the company [not a nominee].

The bursary of $12million is not allowed as deduction to the company as it was granted to a
near relative of the spouse of the director of the company.

The bursary of $5million to the production employee is allowed as a deduction as it was

awarded to a person not connected to the taxpayer.

Ex-Gratia Payments Section 15.2.q

A deduction is allowed for any amount paid by way of an annuity, allowance or pension by
the taxpayer to a former employee or former partner who has retired from the taxpayer’s
employment on the grounds of ill-health, infirmity or old age or to any person who is a
dependant of the former employee or partner.

The maximum allowable deduction shall be $3 000 per annum in respect of each former
employee or former partner and $2 000 per annum in respect of all dependants of the former
partner or employee. The former employer does not have any obligation to pay the ex-
gratia. It is just a ‘thank you payment’ because the former employee will not have
contributed for it.

Donations Section 15.2.r.

A deduction shall be allowed for any amount paid by the taxpayer during the year of
assessment without any consideration whatsoever to:

▪ National Scholarship Fund or The National Bursary Fund or a charitable Trust

administered by the Minister of Health or Minister of Social Welfare.
▪ Donations towards the construction, maintenance or operation of hospitals run by
the State or Local Authorities if the donation is approved by the Minister of Health.
The allowable deduction is up to a maximum of $100 million.
▪ Any amount paid by the taxpayer during the year of assessment without any
consideration whatsoever, to a research institution approved by the Minister for
Higher or Tertiary education. The allowable deduction is up to a maximum of $100
million.
▪ Any amount paid by the taxpayer without any consideration whatsoever to the
Public Private Partnership Fund

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Subscriptions Section 15.2.s.

A deduction is allowed for any subscriptions paid by an individual during the tax year for
his continued membership to any business, trade, technical or professional association.
Entrance fees and subscriptions as a student are not allowed as a deduction. The
subscriptions may need not be necessarily related to the trade of the taxpayer .

Expenditure prior to commencement of business Section 15.2.t.

A deduction shall be allowed for any expenditure incurred by the taxpayer not more than 18
months before commencement of business in the course of establishing it. These are
expenses which are allowable even after commencement of trade, and are claimed in the
year in which business is commenced.

Capital expenditure is not allowed. Interest on loans used to construct a building is capital
in nature and is not allowable, but if the interest accrues after commencement of trade it is
allowed as a deduction.

Trading stock on hand Section 15.2.u

A deduction is allowed in respect of the value of trading stock, which was on hand at the
end of the preceding year that is the value of closing stock, which is opening stock in the
current year.

Stock inherited or Donated Section 15.2.v

A deduction for stock which was acquired by way of inheritance and mixed with the
taxpayer’s own trading stock. The deduction shall be the value as in the decease estate or as
in the donor’s hands.

Example:
Sales (own stock inherited or
received as donation) xxx
Add Closing Stock xxx
xxxx
Less ;Opening stock (xxx)
Less; Purchases (xxx)
Less Valued stock inherited or donated (xxx)
Income xx
Conventions and trade missions Section 15.2.w
A deduction not exceeding $10million per annum is allowed in respect of expenditure
incurred by the taxpayer in attending during that year not more than one convention or trade
mission which is in connection with his trade.
▪ If the trade mission or convention commences in one year and ends in another, the
allowable deduction is granted in the year in which it ends.
▪ If the person attending is a member of a partnership and the partnership incurs the
expense, each partner is allowed to deduct an amount in proportion to his share of
profits. The maximum amount of $10million is applicable to one attendance by each
partner.
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Co-operatives Section 15.2.v

A deduction is granted from income derived by a cooperative or agricultural company
registered under the Co-operatives Societies Act chapter 24:05, for each dollar, by which
the taxable income is less than $15 000. If the taxable income exceeds $15 000 the special
deduction is not granted. The deduction is restricted to taxable income and cannot create a
loss.

Section 15.2.z as read with the 7th Schedule

Allowable deduction granted on FARMING operations. Refer to the FARMING topic.
Section 15.2.aa and bb Appeals to the High Court or Special Court
or the Supreme court
An allowable deduction is granted in respect of costs incurred by the taxpayer in a
successful or substantially successful appeal case on tax matters to the High Court or
Special Court.
Section 15.2.dd As read with the 14th Schedule
Allowable deduction granted on growth point business. Refer to the GROWTH POINT
BUSINESS topic)

Section 15.3. Assessed Losses From Previous Years

From the income remaining after granting allowable deductions under Section 15.2., there
shall be allowed any assessed loss carried forward from previous years. The loss cannot be
granted to
• Any taxpayer who has become insolvent or has assigned his property or estate for
the benefit of creditors shall not be entitled to carry forward an assessed loss
incurred before the date he became insolvent or made the assignment.
• If there is a change in the shareholding of a company with an assessed loss or a
change in the share holding of any company which directly or indirectly controls the
company with an assessed loss, and such change has been effected solely or mainly
in connection with any scheme for taking advantage of the assessed loss, no
assessed loss incurred prior to that change shall be allowed as a deduction.
• No assessed loss shall be carried forward for more than six years except for
MINING operations.
• In the case of a taxpayer engaged in mining operations in more than one mining
location who has an assessed loss in respect of the year of assessment ending on 31
December 2000 and at the end of any subsequent years, no such assessed loss shall
be allowed as a deduction unless the person concerned submits for the approval of
the Commissioner a breakdown showing the extent to which the assessed loss is
attributable to each of the locations.
• No assessed loss shall be allowed as a deduction from income consisting of interest
payable by any bank, discount house or financial institution or any Building Society.

• A loss from other business operations cannot be allowed as a deduction against

income from special mining lease operations.
• Income from employment cannot be offset against losses from business operations.

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Election for a deduction section 15.4

Where a deduction would be allowed under more than one provision of the INCOME TAX
ACT the taxpayer shall elect under which one of the provisions he wishes to claim such an
allowable deduction.

CAPITAL ALLOWANCES
Section 15.2.c as read with the 4th schedule
Capital allowances as outlined in the 4th schedule are allowed as a deduction. The cost of
an asset is an amount of a capital nature which is not allowable. From an Accounting point
of view depreciation is an expense charged in the Profit & Loss account, for Taxation
purposes depreciation is not allowed as a deduction. Instead capital allowances are granted
on assets [movable or immovable] constructed or purchased and used for the purposes of
trade or in the production of income. Capital allowances are calculated on the cost of the
asset capitalising such expenses as importation, installation, removal expenses, finance
charges, loan-raising fees.

Definition of assets
Commercial building means
Any building, which was erected on or after April 1, 1975 [if a building was constructed
before that date no capital allowances are granted even if it is used for business operation]
and which is used to the extent of 90% of the floor area for business operations.

Commercial buildings include a block of flats, apartments or similar units of residential

accommodation and a hotel registered under the Development of Tourism Act. It excludes a
building, which is used to the extent of 10% or more of the floor area for residential
purposes.

Farm Improvement means:

Any permanent building or structure or works on a farm including a water furrow, cattle
dip, permanent roads, dairy, a school, hospital, nursing home or clinic which is used for
carrying on farming operations. It excludes works under paragraph 2 of the 7th schedule, or
staff housing used by the taxpayer as his homestead of himself and his family.

Staff housing means:

Any permanent building used by the taxpayer for the housing of his employees.

Industrial building means:

▪ Any building used for manufacturing purposes.
▪ Any building which is on the same premises as the one mentioned above which
suffers depreciation as a result of operation of such machinery.
▪ Any building which suffers depreciation by reason of chemicals, corrosives used in
the particular trade or industry of which the building forms an integral part.
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▪ Any building erected for the purpose of carrying industrial research or scientific
experiments into improved methods of manufacture.
▪ Any building used mainly for a hotel business which has a permanent liquor or
casino licence has been issued.
▪ Any building in use mainly for the storage of goods or materials to be used in
manufacturing or for the storage of finished goods.
▪ Any building in use for the purpose of trade, which consists in, the distribution of
hydrocarbon oils by pipeline.
▪ Any Toll road bridge declared in terms of the Toll Roads Act like Limpopo River
Bridge.
▪ Any building in use mainly for the purpose of trade which consists in the
manufacturing of goods including canteens for workers but excluding a dwelling
house, retail shop or show room.
▪ Any work for the prevention of pollution.
▪ Any building constructed and used mainly for the purposes of international data
capture operations and additionally or alternatively for the assembly of computers.
▪ Any fencing or permanent sealing of the ground area surrounding such building.

Deduction of Special Initial Allowance [S.I.A.]

Paragraph 2 of the 4th schedule

Special Initial Allowance is granted to a taxpayer if he makes an election.

It is granted on:
▪ Construction of immovable assets (new farm improvements, industrial buildings,
railway lines, staff housing, tobacco barns )or
▪ Additions or alterations to existing farm improvements, industrial buildings, railway
line, staff housing or tobacco barns or
▪ The purchase of movable assets (equipment) used by the taxpayer for the purposes
of trade.

SIA shall be granted in the year in which the asset is first put to use and that it is used
wholly or almost wholly [about 90%] for the purposes of trade.
▪ If the asset is used both for private and business purposes SIA is not granted since it
cannot be apportioned.
▪ SIA shall not be granted where the movable assets were purchased by the taxpayer
and leased to another person unless the taxpayer is entitled to the return of the assets
at the end of the lease period.
▪ Assets acquired without any cost being incurred [by way of donation or inheritance]
do not qualify for SIA since no expenditure would have been incurred by the
taxpayer.
▪ A commercial building does not qualify for SIA, unless it is constructed and used at
a Growth Point area.

The rate of SIA are

▪ 50% in first year
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▪ 25% on cost in second year and

▪ 25% on cost in the third year.
The allowance granted in the second and third year it is called accelerated wear & tear, but
it is calculated using the rates above.

Example:
Rain [Pvt] Limited has been carrying on business in Kadoma for the past 3 years. During
the year it submitted an Income Tax return showing a profit of $33 300 000 before capital
allowances. It incurred the following capital expenditure during the year:
$
Industrial building constructed 3 000 000
Delivery van purchased 6 000 000
Office furniture purchased 2 000 000

Taxpayer elects for SIA.

Taxable income for Rain Pvt Ltd

$
Net profit 33 300 000
Less capital allowances
SIA 5 500 000
Taxable income 27 800 000

Schedule of capital allowances:

Asset Industrial Delivery Furniture

Building van
$ $ $
Cost 3 000 000 6 000 000 2 000 000
SIA 50% 1 500 000 3 000 000 1 000 000
I.T.V. 31/12 1 500 000 3 000 000 1 000 000

Note:
I.T.V. means Income Tax Value. It is the balance of the cost of the asset after allowing the
capital allowance. Once SIA has been granted in the first year it shall be applied until the
cost of the asset is fully written off.

In the following years the allowance will be as follows:

Year 200x2
Industrial
Building Delivery van Furniture
I.T.V.1/1 1 500 000 3 000 000 1 000 000
Wear & Tear 750 000 1 500 000 500 000
I.T.V. 31/12 750 000 1 500 000 500 000
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Year 200x3
Industrial Delivery
Building van Furniture
I.T.V. 1/1 750 000 1 500 000 500 000
Wear & Tear 750 000 1 500 000 500 000
I.T.V. 31/12 Nil Nil Nil

Deduction of Wear and Tear : Paragraph 3 of the 4th schedule

Wear & Tear is granted on:

▪ immovable assets: commercial buildings, farm improvements, industrial buildings,
railway lines, staff housing and tobacco barns acquired or constructed and in both
cases used by the taxpayer for the purposes of trade.
▪ movable assets: equipment belonging to and used by the taxpayer for the purposes
of his trade.

There is no election for wear & tear. If the taxpayer does not elect for SIA, then wear &
tear is granted. The taxpayer can not be granted both SIA and wear & tear on the same
asset.

Wear & Tear on immovable assets is not apportioned but on movable assets it can be
apportioned according to use.

▪ If the asset is used for both business and private use like a motor vehicle is used
80% for business and 20% for private purpose, only the business wear & tear is
allowed as a deduction.
▪ If the taxpayer has been conducting business operations and he acquires movables
assets at any time during the year, a full year’s allowance is granted like a taxpayer
has been operating for the past 4 years and he purchases machinery in October
during the year, there is no apportionment of the allowance. It is granted in full.

The rates for Wear & Tear vary according to the nature and use of the asset and are as
follows.

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Rates for Wear & Tear

▪ Commercial building 2.5% on cost

▪ Farm improvements 5% on cost
▪ Industrial building 5% on cost
▪ Railway lines 5% on cost
▪ Staff housing 5% on cost
▪ Tobacco barns 5% on cost
▪ Equipment 10% on reducing balance
▪ Aircraft, Passenger motor vehicle 20% on reducing balance
▪ Helicopters, Television sets, Tents 20% on reducing balance
▪ Tractors on farms, X-ray plant, Fans 20% on reducing balance
▪ Bicycles, Graders, Concrete Mixers 25% on reducing balance
▪ Legal and Professional Libraries 25% on reducing balance
▪ Mechanical elevators, Tree dozers 25% on reducing balance
▪ Motor cars used on rough country roads 25% on reducing balance
▪ Motor lorries used for heavy work 25% on reducing balance
▪ Dental equipment 20% on cost
▪ Television sets on hire 20% on cost
▪ Medical instruments Renewal or replacement basis
▪ Linen, cutlery, crockery,
all utensils used by hotels or restaurants Renewal or replacement basis
▪ Machinery and plant working 2 shifts per day 17.5% on reducing balance
▪ Machinery and plant working24 hours a day 25% on reducing balance

Example:
Sun [Pvt] Ltd started business operations in Ruwa 2 years ago. During the year it earned net
profits of $32,5 million before capital allowances. The following assets were
constructed/purchased and used for business operations during the year:
$
Commercial building 9 000 000
Equipment 4 200 000
5 ton lorry 8 500 000

Taxable income for Sun

$
Net profit 32 500 000
Less capital allowances
Wear & Tear 2 345 000
Taxable income 30 155 000

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Schedule of capital allowances

asset Commercial Equipment Lorry
Building
Rate 2.5% 10% 20%
Cost 9 000 000 4 200 000 8 500 000
Wear &tear 225 000 420 000 1 700 000
ITV 31/12 8 775 000 3 780 000 6 800 000

Deduction of Scrapping allowance :paragraph 4

Scrapping allowance is not an outright deduction. It is granted when an asset on which
capital allowances had been granted before is no longer useful for the business of the
taxpayer. The asset is either sold for a price which is less than the ITV or it is just thrown
away . If the asset is sold at a price more than the ITV it is recoupment.

SCRAPPING ALLOWANCE is the opposite of RECOUPMENT. Whereas scrapping

allowance is an allowable deduction whereas Recoupment is taxable income. Generally if
assets are disposed of on ceasing g business , scrapping allowance is not granted however.
in practice the Commissioner will consider off setting recoupment and scrapping.Net
recoupment is included in gross income, but net scrapping is not allowed as a deduction.

Example:
$
ITV of asset 320 000 (cost $450 000)
Sold for 70 000
Scrapping allowance 250 000

If it was not sold scrapping allowance would be the ITV of $320 000.

Suppose in the asset was used 80% for business and 20% private.Scrapping allowance
would be apportioned as:

Wear & Tear [business] x Potential scrapping

Total Wear & Tear

$104 000 x $250 000

$130 000

$200 000 being business scrapping allowance allowed as a deduction. The private scrapping
allowance of $50 000 is a prohibited deduction.

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RECOUPMENT (Taxable income)

Recoupment arises when an asset on which capital allowances had been granted is sold at
a price higher than the Income Tax Value .A comparison is made between potential
recoupment and capital allowances granted and whichever is the lesser is recoupment.

Example
Moon company has been trading for the past 3 years. The company had purchased furniture
for $1 450 000 in the first year on which wear & tear had been granted. It sold the furniture
for $1 670 000 during the year.

Schedule of capital allowances

$
Cost 200x1 1 450 000
Wear & Tear 10% 145 000
ITV 31/12 1 305 000

ITV 1/1/200x2 1 305 000

Wear & Tear 10% 130 500
ITV 31/12 1 174 500

ITV 1/1/200x3 1 174 500

Wear & Tear 10% 117 450
ITV 31/12 1 057 050

Sale of asset :recoupment

Selling price 1 670 000
ITV 1/1/200x4 1 057 050
Potential recoupment 612 950
Capital allowances granted 392 950

Therefore recoupment is the lesser $392 950 taxable income.

Renewal or Replacement Allowance

The initial purchase of such small assets like linen, cutlery, tools, surgical equipment can be
granted either SIA or Wear and Tear. However, subsequent purchases are granted on a
renewal or replacement basis that is the whole cost is allowed as a deduction in the year of
purchase/replacement.

Additions or alterations to movable property not Owned But used for trade :
Capital allowance [SIA or Wear & Tear] shall be granted on expenditure incurred on
additions or alterations on movable assets not owned by the taxpayer but used for business
purposes as if the movable assets belong to the taxpayer.

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Example:
A building contractor hires a concrete mixer at an annual rental of $3 400 000 per annum.
The contractor finds that the mixer requires some alterations in order to meet his operation
requirements. Alterations of $660 000 are made to the concrete mixer.

The allowance deductions granted are:

$
Rent 3 400 000
Alterations 330 000
Total 3 730 000

Cost 660 000

SIA 50% 330 000
ITV 31/12 330 000

The rent is deductible under the section 15.2.a. The alteration do not qualify as a repair
under section 15.2.b., but can be allowed as a deduction under the 4th schedule.

Movable assets used for private purposes and brought into business.

Notional Wear and Tear

If movable assets had been used for private purposes or used out of the country and are
transferred to Zimbabwe for business use or were acquired by way of donation or
inheritance and brought into business notional wear and tear (not SIA) is granted for the
period it was in private use. The notional wear and tear is not allowed as a deduction, but
gives the value of the asset at the time of introducing it in business.

Example:
A taxpayer purchased a 5 tonne lorry in Botswana at a cost of $11 million dollars in
January. He started business operations in August this year in Zimbabwe and used the lorry
for business.
$
Cost 11 000 000
Notional wear & tear 20% x 7/12 months 1 283 333
ITV 31 July 9 716 667

ITV 1/8 introduction in business 9 716 667

Wear and Tear will be calculated on the value of $9 716 667 for the years when the asset
will be used for business.

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Assets with restricted/deemed costs

Capital allowances are calculated on the cost incurred by the taxpayer. However assets such
as a passenger motor vehicle, staff housing and a school, hospital, or clinic and staff
housing for teachers, nurses or doctors have maximum/restricted costs for the purposes of
calculating capital allowances according to the Act.

Asset Staff School, Educational, Passenger

Housing Hospital Medical Motor
Clinic saff housing Vehicle
Year
2005 270m/100 100m 100m 50m
2004 50m/15m 50m 15m 10m
2003 3m/1m 10m 1m 1m
2002 1m/250 000 3.5m 250 000 500 000

▪ 50% or more of the children attending at the school should be children of the farm-
workers in order for it to be granted capital allowances and in the case of hospital,
clinic, 50% or more of the patients should be farm-workers and their families.

Example
Abel a local business man constructed staff houses during the tax year and used them for
housing his lowly paid employees He claims maximum capital allowances.

Asset cost $(millions)

3 units of staff: Unit A 465
B 230
C 120

Schedule of capital allowances:

Staff housing A B C
Cost 465 230 120
Deemed cost - 100 -
SIA 50% - 50 60
ITV 31/12 - 50 60

Unit A does no qualify for capital allowances as the cost exceeds the maximum of
$270million

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Example
Mandipa a well known farmer in Nyamapanda constructed the following assets and used
them for her business. She does not elect for SIA
millions
Hospital 675
Clinic 280
School 90
Passenger motor vehicle 400
Medical staff housing 340

Hospital Clinic School

Cost 675 280 90
Deemed cost 100 100 90
Wear &Tear 5% 5 5% 5 5% 4.5
ITV 31/12 85 85 85.5

Passenger Medical/
Motor Vehicle Staff housing
Cost 400 340
Deemed cost 100 5% 100
Wear &tear 20% 20 5
ITV 31/12 80 85

The excess cost is disregarded.

Sale of asset with restricted cost

The passenger motor vehicle mentioned above was sold for $430million.

Recoupment is as follows:
Deemed selling price 100x430
400

107 500 000

less ITV 80 000 000
Potential recoupment 27 500 000
Capital allowances 20 000 000

Recoupment is $20million

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Example
Taxpayer purchased a Toyota Twin Cab for $21,9 million and used it for two years, 90%
business and 10% private.

Capital Allowances granted

Toyota Twin Cab $
Cost 21 900 000
Wear and Tear 20% 4 380 000 (3 942 000 business)
ITV 31/12 17 520 000

ITV 1/1/200x1 17 520 000

Wear and Tear 20% 3 504 000 (3 153 600 business)
ITV 31/12/200x 14 016 000

The motor vehicle is sold during the year for $28 million.
$
Sale Price 28 000 000
Less ITV 14 016 000
Potential Recoupment 13 984 000

Business potential recoupment 90% 12 585 600

Capital allowances 90% 7 095 600

Actual Recoupment 7 095 600

Transfer of Assets Paragraph 8.3.: (Check section 15 of the Capital Gains Act)

If assets are transferred between companies under the same control in a scheme of
reconstruction or merger, the transferor [seller] and transferee [buyer] may elect that the
assets be deemed to have been sold at Income Tax Value. Effectively no recoupment arises
in the hands of the seller even if an amount has been paid to him. If the transferee company
sells the assets to a third party, then recoupment will be calculated in the hands of the
transferee company as if it had always owned the assets.The election also applies to transfer
of assets between spouses .

Example:
Yesterday private limited transferred its assets to Today company under a scheme of
reconstruction. They made an election under paragraph 8.3.

The assets transferred were:

Cost ITV Transfer cost
Industrial building 1.2m 300 000 5.6m
Equipment 900 000 225 000 1.7m

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Today traded for two years and sold the assets in the third year to Tomorrow (a third party)
for:
Industrial building 7,3m
Equipment 2.2m
Show the taxable income for each of the parties

Solution
Yesterday private ltd
The assets are deemed to have been sold as follows
$
Industrial building 300 000
Equipment 225 000
Total 525 000

The assets are deemed to have been sold for $525 000 disregarding the actual sale prices,
and no recoupment arises in the hands of Yesterday as sale price is equal to ITV.

Capital allowances granted to Today private ltd

Year 1
Industrial Building Equipment
Rate 5% 10%
ITV 1/1 300 000 225 000
Wear & Tear 15 000 22 500
ITV 31/12 285 000 203 000

Year 2
ITV 1/1 285 000 203 000
Wear & Tear 28 500 20 300
ITV 31/12 256 500 182 700

Sale of assets to Tomorrow a third party

Industrial Building Equipment
Sale price 7 300 000 2 200 000
Less ITV 256 500 182 700
Potential Recoupment 7 043 500 2 017 300

Capital allowances
Cost 1 200 000 900 000
Less ITV 256 500 182 700
943 500 717 300

Recoupment 943 500 717 300

Recoupment is restricted to previous capital allowances and taxable in the hands of Today
as if it had always owned the assets.

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Growth Point Business - Allowances

Sections 15.2.dd As read with the 14th schedule
Growth Point Area is any area gazetted as such. Growth Point Business means any
commercial or industrial operations at a growth point including the letting of movable or
immovable property to a company which carries on such operations at a growth point where
the lessor owns directly at least 25% of the shares of the lessee company.

Tax rates
• The taxable income of a person engaged in new manufacturing project at a growth
point are is 10%.
• The taxable income of a person engaged in a new project providing infrastructure at
a growth point area is 15%.

Deduction of SIA in respect of Growth Point Business

A taxpayer who carries business at a growth point area is granted growth point allowances
further allowances in addition to special initial allowance and wear and tear. A commercial
building constructed at a Growth Point Area and used for growth point business is regarded
as an industrial building can be granted SIA if the taxpayer so elects. If the building has
been purchased, it does not qualify for SIA, instead Wear & Tear at 2.5% is granted.

Deduction of Investment Allowance for Growth Point Business

An investment allowance deductible in the year of assessment equal to 15% of the cost to
the taxpayer carrying on Growth Point Business on:
• New Commercial or Industrial buildings or Staff Housing erected by him.
• Additions or alterations to existing Commercial or Industrial buildings or staff
Housing.
• New or unused equipment (excluding a motor vehicles, intended or adapted for use
on roads), used at a growth point area for the purpose of growth point.

The allowance is granted only once in the year in which the asset is brought to use. Growth
Point Allowance is not subject to recoupment in the event that the asset is sold.

Example:
Chamukainyama [Pvt] Ltd carries on trade on manufacturing on a new project at Kotwa
Growth Point. During the year it had income before capital allowances of $515,5 million.

The following assts were constructed by the company during the year
-An office for $3.6million,
-Two units of staff housing for $3.4million
-Purchase machinery for $720 000, ($450 000 of it being second hand. The assets were used
for business purposes during the year.

Taxpayer claims maximum allowances.

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Solution
$
Income 515 500 000
Less capital allowances
SIA 3 860 000
Growth Point Allowance 1 090 500
Taxable income 510 549 500

Taxed @ 10% 51 054 950.00

Add 3% aids levy 1 531 648.50
Tax payable 52 586 598.50

Schedule of Capital Allowances

Asset Commercial building Staff housing Machinery

Cost 3 600 000 3 400 000 720 000

SIA 50% 1 800 000 1 700 000 360 000
ITV 31/12 1 800 000 1 700 000 360 000

Growth point allowance

Office 15% on 3 600 000
Staff housing 15% on 3 400 000
Machinery 15% on 270 000
15% on 7 270 000 1 090 500

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PROHIBITED DEDUCTIONS SECTION 16

The provisions of this section is on expenditure incurred by the taxpayer, which is not
allowed as a deduction [prohibited] against income

The expenses, which are not allowable are:

• The cost incurred by the taxpayer in maintaining himself and his family (like purchase of
food, clothing, accommodation and any daily living expenses).

• Domestic and private expenses of the taxpayer including expenses incurred in travelling
between his home and place of trade. In the case of a taxpayer who carries on two or more
trades which are distinct in nature between the places at which such trades are carried.

Example:
i Tito works in Msasa industrial area and incurs $3 000 per month bus fare from
Highfield to his workplace. The amount is not allowed as a deduction against his
income.

ii Mrs Ushehwangu lives in Zimre Park. She operates a hairdressing salon at

Machipisa business centre, and a butchery in Glen Norah suburb. She incurs
$100 000 per month travelling from Zimre Park to Machipisa and $20 000 per week
from Machipisa to Glen Norah. Travelling expenses from Zimre Park to Machipisa
are not allowable and from Machipisa to Glen Norah. The expenses are not allowed
as a deduction because the types of businesses are different.

• Any loss or expense which is recoverable under any insurance contract or indemnity.

• Tax upon the income of the taxpayer or interest payable thereon whether charged in terms
of the Act or any law of any country whatsoever. Tax is not allowed as a deduction. The
income is taxed gross inclusive of tax..

• Income carried to a reserve fund or capitalized in any way. Provisions for anticipated or
contingent losses cannot be allowed as a deduction as the expenditure is not incurred.
However, specific reserves or provisions for director’s fees, cash in lieu of leave, bonuses
are allowed as a deduction as the expense is certainly going to be incurred. Adjustments can
then be made on over or under provision in the following year.

• Expenditure or loss [including the whole or any part of an assessed loss from a previous
year of assessment] incurred in the production of exempt income or of income not from a
source or deemed to be from a source in Zimbabwe. Like if a taxpayer incurs bank
commission on dividends, the expense is not allowed as a deduction, since dividends from
Zimbabwe are exempt from Income Tax or if a taxpayer pays rates for a property outside
Zimbabwe on which he derives income, the rates are not allowable and the income is not
taxable.
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Contributions made by the taxpayer to an Unapproved Fund (like contributions to a burial

society) are not allowable. In terms of section 13 of the Income Tax Act, Pension or,
Medical or Benefit Fund should be approved by the Commissioner for the contributions to
be allowable.

• Interest, which might have been earned on any capital, employed in trade, say, if a person
invests $1 million in a bank and earns interest of $300 000, and another person invests $1
million in business. The one in business cannot claim a losses of $300 0000 which would
have been earned had he invested in a bank.

• The rent of, or repairs, of any dwelling, house or domestic premises except such part which
is used for the purposes of trade.

• Any expenditure incurred by the taxpayer in pursuing an obligation imposed on him under
an agreement, which restrains another person from selling goods other than those supplied,
by the taxpayer.

• The cost of shares awarded by any company to an employee including director.

• Any expenditure incurred by any taxpayer on entertainment, whether directly or by

provision of any allowances to any employee being entertainment of clients on behalf of the
taxpayer.

• Any expenditure incurred in the production of dividends from foreign companies excluding
building societies. Dividends are taxed gross.

• Expenditure incurred in the production of interest payable by any bank, discount house or
financial institution register in terms of the Banking Act [chapter 24:01], or any Building
Society registered in terms of the Building Societies Act.
Since the interest is exempt, no expenditure is allowed.

• An amount paid or payable as tobacco levy in terms of section 36A.Since the levy is some
form of tax it cannot be allowed as a deduction.

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Chapter 3

THE FINANCE ACT

Introduction
The Finance Act is also known as the Charging Act. The Act provides the rates of tax
applied on taxable income. It also provides credits to be applied on individual taxpayer’s
tax chargeable.

Rates of Income Tax :Income from employment

1 January to 31 August 2005
Income Band Amount in Rate% Tax in Cumulative
Band Band tax
$million $million $million $million
1- 8 8 0 0 0
8-12 4 10 400 000 400 000
12-24 12 20 2,4 2 800 000
24-40 16 25 4,0 6 800 000
40-56 16 30 4,8 11 600 000
56-72 16 35 5,6 17 200 000
72and above 40

Add 3% Aids levy after credits

1 September to 31 December 2005

Income Band Amount in Rate % Tax in Cumulative
Band Band tax
$million $million $million $millon
1-6 6 0 0 0
6-12 6 20 1,2 1,2
12-20 8 25 2,0 3,2
20-28 8 30 2,4 5,6
28-36 8 35 2,8 8,4
36 and above 40

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NB; Tax bands were adjusted following the 2005 supplementary budget enacted in
August Of 2005

Rates of Tax: Income from Business and Investments

Nature of income Rate %

• Taxable income of a company, Trust or an individual in business 30

• Taxable income of Company or Trust from mining operations 15

• Taxable income from manufacturing or processing of a company

which exports 60% or more of its output 20

• Taxable income of a licensed investor (first 5years exempt) thereafter 15

• Taxable income of approved manufacturing company at a Growth Point Area

engaged in New Project 10

• Taxable income of persons engaged in new project providing

infrastructure at a Growth Point Area 15

• Interest from person registered in terms of the Banking Act or in terms

of the Building Society Act 20

• Dividends from a company incorporated inside or outside Zimbabwe 20

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• Banking Institution Levy on net profit before tax 5

• Taxable Institution of industrial park developer after the 5th year of operation 10

• Taxable income of operator of a Tourist facility in approved tourist zone:

First 5 years exempt, Second 5 years, 15

• Aids Levy 3

CREDITS

Credits are granted to an individual taxpayer’s tax chargeable on income from employment or
from business.

• Elderly Person’s Credit

A credit of US$900 per annum shall be deducted from the tax chargeable of a taxpayer
who turns 55 years prior the year of assessment. If the period of assessment is less than 12
months (like in the event of death) the credit is apportioned.

• Blind Person’s Credit

The credit is US$900 per annum and is deductible from tax chargeable of a taxpayer who is
blind .Blind person means a person whose eye-sight is so defective during more than half
the period of assessment that he is unable to perform any work for which eye-sight is
essential. (If only one eye is blind and the other is functional, the credit is not granted and it
is not apportioned either).

Any portion of the credit, which is not used by the taxpayer, is transferred to the spouse.
That portion is used to reduce the spouse’s tax liability. If a spouse is blind but does not
have taxable income, the credit is granted to the spouse with taxable income.

• Medical Credit

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The credit is 50% of medical aid contributions made or medical expenses incurred or on
cots of appliances purchased.

Invalid appliance or fitting includes:

 A wheelchair, or any mechanically propelled vehicle which is specifically designed
and constructed for the carriage of one person being a person suffering from
physical defect or disability.
 Any artificial limb, leg callipers or crutch spectacles or contact lenses.
 Any special fitting for the modification or adaptation of a motor vehicle, bed,
bathroom or toilet to enable its use by a person suffering from a physical defect or
disability.

Medical expenses means

 Payments made for the purchase, hire, repair or maintenance of any invalid
appliance or fitting which is necessary for use by a taxpayer or his spouse or any
child of the taxpayer as a result of any mental or physical defect or disability, and
 Payments made for services rendered by a medical or dental practitioner to the
taxpayer or his spouse or children; and
 Payment for all drugs and medicines supplied to a taxpayer, his spouse, minor
children on the prescription of a medical or dental practitioner. (purchase of Anadin
tablets at local store is not as a medical expense, it is not on prescription); and
 The accommodation, maintenance, nursing and treatment including x-rays, blood
transfusion laboratory tests and the like of a taxpayer, his spouse or minor children
at a hospital, maternity home, nursing home, sanatorium, surgery clinic or similar
institution; and
 The conveyance by ambulance including an air ambulance of the taxpayer, his
spouse and minor children. Carrying a patient by a taxi or private car from home to,
say, Parirenyatwa Hospital or Harare Central Hospital is not a medical expense. It
has to be an ambulance.

Medical Aid Contribution

 Contributions made by the taxpayer to an approved medical aid society in respect of
himself, his spouse and minor children. The medical aid society should be approved
by the Commissioner in terms of section 13. If it is not approved (unapproved) the
credit is not granted.

• Mentally or Physically Disabled Person’s Credit

A credit of US$900 per annum is deductible from tax chargeable of a taxpayer who is
mentally or physically disabled to a substantial degree, but not blind. A taxpayer shall not
be regarded as being mentally or physically disabled if his disablement is of a temporary or
transitional nature. The credit applies to the taxpayer, his spouse or child who is mentally
physically disabled. Any portion of the credit not applied against tax chargeable of the
taxpayer can be transferred and deductible from tax chargeable of the spouse. The credit is
not granted to a taxpayer who at any time was not ordinarily resident in Zimbabwe.

Non-Resident Taxpayer
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If the taxpayer is not at any time during the period of assessment ordinarily resident in
Zimbabwe, he shall not be granted the medical expenses credit and the mentally or
physically disabled persons credit.

Transfer of Credits
Credits which can be transferred in full or in part if not fully utilised by one spouse are
blind person, medical and disabled person.

Chapter 4

COMPUTATION OF TAX LIABILITY

Calculation of tax liability

Example
Taxpayer earned taxable income of $54million during the year. PAYE of $7.5million was
deducted and he contributed $1,5million to a medical aid society .
What is the tax liability?

Steps to follow:
1 Taxable income $54 million

2 Tax chargeable
The tax bracket of $54 000 000, is 25%
Cumulative tax of the previous tax bracket (36million), is 4 200 000
Difference between $54million and $36million is $18million @25% 4 500 000
8 700 000
less credits
Medical 50%x1,5million 750 000
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7 950 000
Add 3% Aids levy 238 500
8 188 500
less; PAYE 7 500 000
Tax payable 688 500

INCOME FROM EMPLOYMENT

Example 1
James an accountant with a local Agricultural company was retrenched at the end of
October 200x1. He earned the following income.
$
Salary 12 000 000
Bonus 9 500 000
Cash in lieu of leave 2 700 000
Lump sum payments:Refund of pension contributions 15 000 000
Severance pay 1.4billion

Other Information
1 James had used a company car with engine capacity of 2 700cc.
2 He had occupied a company house. The market rentals for the house was $7million
per month. The company allowed him to pay only $1.5million per month.
3 He bought a pair of spectacles for $1.8million and the medical aid company
reimbursed him $1.2million. He contributed $7.2million for his medical aid scheme.
4 PAYE deductions amounted to $400million. He made ordinary pension
contributions $2 160 000 and NSSA $200 000.
5 Ordinary pension contributions disallowed over the years amounted to $1 600 000.
6 The retrenchment scheme was approved by the Minister of Labour and Social
Welfare.
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Required
Calculate James minimum tax liability for the year ended 31 December 200x1.

Solution
Computation of tax liability for James for the year ended 31 December 200x1.

$
Salary 12 000 000

Bonus 9 500 000 exempt -

Cash in lieu of leave 2 700 000
Pension refund 15 000 000
Less disallowed contributions 1 600 000 13 400 000
Severance pay 1 400 000 000
Less exemption 13/x$1.2billion 400 000 000 1 000 000 000
Motor vehicle 10/12 monthsx $4,2million 3 500 000 000
Accommodation $7m-1.5m)x10months 55 000 000
1 086 600 000
Less allowable deductions
Pension contributions 2 160 000
NSSA 200 000
2 360 000 maximum 1 440 000
Taxable income 1 085 160 000

Tax chargeable
pension refund $13.4m @40 % 5 360 000
other income $1 071 760 000 tax bands
upto $108m 25 800 000
$963 760 000 @40% 385 504 000
416 664 000
less credits
Medical appliance
spectacles (1.8-1.2) 600 000
contributions 7 200 000
50%x 7 800 000 3 900 000
412 764 000
Aids levy 3% 12 382 920
425 146 920
less PAYE 400 000 000
Tax payable 25 146 920

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Example 2
Mr Josefa retired from employment with a firm of lawyers on the 30th December 200x1 at
the age of 50. He is married to a blind wife. His son David was injured in a car accident in
1996 and is now disabled. David is now 27 years old and lives with his parents. During the
year ended December 200x1, Mr Josefa received the following income:

$
Salary 44 800 000
Bonus 11 400 000
Annuity from Old Mutual 3 800 000
Lump sum payment pension commutation 7 000 000
Gratuity 24 000 000
Retirement gift from employer 1 000 000
from former workmates 1 500 000
Cash in lieu of leave 1 240 000

The following deductions were made:

PAYE 12.3m
Pension contributions 1,4m
Medical contributions 1.6m
Purchase of a wheelchair for David 13,5m

Notes:
1 In January 1991, Mr Josefa purchased an annuity from Old Mutual paying a lump
sum of $500 000 [not allowed as a deduction] for a 10 year annuity of $3,8m per
year.
2 On retirement he received a commutation of his pension and this amount is equal to
one-third of his pension.
3 Mr Josefa had an interest free loan from his employer. The loan amounted to
$45m and was received on the 1st of January 200x1. Mr Josefa had the use of a
motor vehicle with an engine capacity of 3100cc.

Required:
Calculate the taxable income of Mr Josefa and tax payable for the year ended 31st December
200x1 assuming he made the necessary elections to minimise his tax.

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Solution
Computation of taxable income for Mr Josefa for the year ended 31 December 200x1
$
Salary 44 800 000
Bonus 11 400 000 exempt -
Annuity from Old Mutual
Interest (3.8mx10years)- 3.5m 3 450 000
10years
Lump sum pension commutation 7 000 000 not taxable -
Gratuity 400 000
Retirement gift from employer 1 000 000
from former workmates not taxable -
Cash in lieu of leave 1 240 000
Fringe benefits use of a company car 7 200 000
Interest free loan 16%x 45m 7 200 000
88 890 000
less allowable deductions
Pension contributions 1 400 000
Taxable income 87 490 000

Tax chargeable 18 621 500

Less credits
Medical contributions 1 600 000
Medical expenses:
purchase of a wheelchair 13 500 000
50%x 15 100 000 7 550 000
11 071 500
add 3% Aids levy 332 145
11 403 645
less PAYE 12 300 000
Tax refundable 896 355

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INCOME FROM BUSINESS

Example CIS Nov 2001 25marks

Mr Mlauzi bought a grocery and butchery business as a going concern from Bubi pvt ltd at
the end of February 2000.The price of the business was allocated to the different assets as
follows:
$
Land 1 500 000
Commercial building 900 000
Plant and Machinery 400 000
Furniture and fittings 300 000
Butchery equipment 450 000
Delivery van 210 000
Mazda B2200 pick up truck 170 000
Toyota corolla 300 000
Debtors 220 000
Stock 845 150

Mr Mlauzi submitted his first profit and loss account to 31 December 2000 showing the
following:
$ $
Advertising 70 000 Gross profit 2 150 336
Bad debts 82 300 Bad debts recovered 63 454
Depreciation 72 235
General expenses 48 000
Insurance 37 570
Legal expenses 16 250
Repairs 546 800
Rates 12 700
Provision for Bad debts 30 000
Salaries 465 000
Travelling expenses 73 780
Net profit 759 155
2 213 790 2 213 790

The following information was also supplied with the return:

1 The stocks purchased with the business were correctly applied in the calculation of
gross profit.
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2 Mr Mlauzi bought the following assets for the business during the year:
$
Toyata Camry sedan bought 1/10/2000 600 000
Furniture 168 100
Land 200 000
Butchery equipment 120 000

The land was a quarter acre stand adjacent to the business premises on which Mr
Mlauzi intended to build a manager’s house and some workers quarters

3 Bad debts included the following

Meat and groceries sold to P Maruta by the previous owner in September 1999. The
customer died insolvent in June 2000 before paying the debt of $6 000.

4 Mr Mlotshwa ordered meat for hid daughter’s wedding in August 2000. It was
alleged that the meat was bad and caused the guests at the wedding to fall sick. Mr
Mlotshwas refused to pay the $30 000 for the meat and the case went through the
magistrate’s court where M Mlauzi lost the case. The debt was written off in
December. The balance of the debts are allowable.

5 General expenses included licencing fines of $5 250,speeding fines $1 000 charged

to Mr Mlauzi when he was driving from Bulawayo to collect orders and $2 000 for
groceries donated to a local burial society.

6 Insurance comprised the following:

$
Business assets 29 200
Householder’s policy on Mr Mlauzi’s Bulawayo house contents 8 370

7 Legal expenses
Bad debts recovered 14 250
Drafting Mr Mlauzi’s Will 2 000

8 Repairs included an amount of $531 200 incurred in renovating the store and
butchery building which was in a bad state. Mr Mlauzi pulled down one wall and
extended the butchery side to include a cold room. This was done after the building
was bought but before Mr Mlauzi commenced business. The other $5 000 was paid
to clear brick rubble on the adjacent stand. The rest was for minor repairs to the
business furniture and equipment after trade had commenced.

9 The provision for doubtful debts was a percentage of outstanding debts at the end of
the trading period to cater for any unrecoverable debts purchased from the previous
owner.

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10 The Corrolla was sold in October 2000 when Mr Mlauzi bought the Camry. He
decided to claim were and tear on the cars and elected to claim special initial
allowance on all the other assets. Both vehicles were used 20% for private purposes.

Required
To calculate the tax payable by Mr Mlauzi for the year ended 31 December 200x.

Solution
Taxable income for Mr M Mlauzi for the year ended 31 December 200x.
$
Net profit 759 155
Add back
Bad debts:
P Maruta allowable -
Mr Mlotshwa allowable -
Depreciation 72 235
General expenses:
Fines-licencing prohibited 5 250
-speeding fines prohibited 1 000
-donation charitable 2 000
Insurance:
Business assets allowable -
Household policy private 8 370
Legal expenses:
Bad debts recovery allowable -
Drafting WILL private/prohibited 2 000
Repairs:
Store renovation capital nature 531 200
Brick rubble capital nature 5 000
Rates allowable -
Provision for doubtful debts prohibited 30 000
Salaries allowable -
Travelling expenses allowable -
1 416 210
add recoupment 36 000
1 452 210
less capital allowances
SIA 719 050
Wear & tear 157 780
Taxable income 575 380

Tax chargeable @ 30% 172 614.00

Aids levy 5 178.42
Tax payable 177 792.42

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Schedule of capital allowances

Land ,debtors and stock not defined assets -no capital allowances.

Commercial Plant & Furniture

Building machinery &fittings
Cost 900 000 400 000 300 000
SIA 50% - 200 000 150 000
Wear &tear 22 500 - -
ITV 31/12 877 500 200 000 150 000

Butchery Delivery Mazda -

equipment van truck
Cost 450 000 210 000 170 000
SIA 50% 225 000 105 000 85 000
ITV 31/12 225 000 105 000 85 000

Renovations Furniture Butchery

equipment
Cost 531 200 168 100 120 000
SIA 50% - 84 050 60 000
Wear &Tear 13 280 - -
ITV 31/12 517 920 84 050 60 000

Toyota Corrola Toyota Camry

Cost 300 000 600 000
Wear &tear
20%x 8/12 months 45 000 20% 120 000
ITV 255 000 480 000

Wear &tear: private 20% 9 000 24 000

:business 36 000 86 000

Sale price 320 000

ITV 255 000
Potential recoupment 65 000
Actual recoupment 36 000

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Questions to attempt

Question 1 20marks
Taurai Masimba, aged 59 is the managing director of Sadza Ltd and earns $52 720 000 per
annum. For the year ended 31 December 200x1, he enjoyed the following benefits from the
employer:

i The company pays school fees for his three children and the cost of that is
$22million per annum.
ii He uses a company car, a Mazda 626 for both business and private purposes. The
car has an engine capacity of 3100cc .
iii The company which, which manufactures children’s toys allows its employers to
purchase toys for personal use at reduced staff price of 60% of market value. In the
tax year just ending, he bought toys for his children and grandchildren for
$1.6million. The market value of the toys was $4.2million
iv He stays in a fully furnished house in one of Harare’s low-density suburbs for which
he pays no rent. The value of the furniture in the house is $65million and the open
market rental is $12.5million per month.
v He was paid $14million as cash in lieu of leave.
vi He was granted and exercised an option to purchase 4 000 shares in Sadza Ltd at
$1.00 when the market value of the shares was $2.50.
vii Taurai who is an accountant by profession , delivered a paper in June 200x1 at the
Chartered Accountants winter school for which he was paid $18million by the
organisers.

Required:
Calculate, with explanations, his taxable income for the year ending 31 December 200x1.

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Question 2
J.Jona who is sixty years old, has been working for a large conglomerate in the soft drinks
industry for many years. During the year, the conglomerate decided to relocate to Malawi
and as a result a number of employees had to be retrenched. J.Jona was one of those
retrenched.

i The retrenchment package was approved by the Minister of Labour on 30 June

200x1 after a protracted battle between the company and the retrenched employees
who were seeking a better deal especially with regard to a restrictive employees
clause, which prohibited them from being employed by the conglomerate’s former
competitors.
ii The retrenchment package entitlement for Jona was structured as follows:
$
Severance pay equivalent to two years salary 1.5billion
Gratuity 99million
Medical aid cover for one year paid by the employer 8million
School fee benefit for two children paid by the employer 25million
Restraint of trade benefit 101million

iv Takeover at book value of a company vehicle previously driven by him $1.9million

v The condition of the receipt of the restraint of trade benefit was that he was not
allowed to work for any competitor of the conglomerate for a period of at least one
year.
v The vehicle taken over was a BMW sedan with an engine capacity of 3000cc which
had been bought several years previously for $800 000 and had a current market
value of $12million.
vi In view of his age, Jona was allowed to commute his pension entitlement, which
enabled him to receive a lump sum of $12million on 30 September 200x1 and a
reduced monthly pension of $1million paid in arrears with affect from October
200x1. The total pension entitlement of Jona prior to commutations was
$5 100 000.
vii Jona had earned the following in the 200x1 tax year prior to retrenchment:
Salary 52 000 000
Medical contribution paid by employer 6 000 000
Free use of BMW 3100cc
vii Jona had been awarded a share option to purchase 6 000 shares in the foreign based
company at 50 percent of the market price of the shares which stood at US $6 a
share at the time of the offer. Jona sold his option without exercising it for US
$15 000 which was credited to his offshore secrete bank account. You can assume
the official average rate of exchange for the 200x1 tax year to be US$1 to Z$4 800.

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Required
i Briefly comment on the taxability of: -the takeover of t he BMW vehicle,
the restraint of trade amount and the share option.

ii Compute the minimum tax payable by Jonas in respect of the 200x1 tax year
15 marks

Question 3
Maria resigned from her job of trade attaché in Brussels for the Zimbabwe Government
with effect from 31 March 200x1. She left in order to take up the post of marketing director
for an export processing zone company in Zimbabwe with effect from 1 April 200x1.

1 For the period from 1 January to 31 March 200x1 Maria’s remuneration from the
Zimbabwe Government was as follows:
$m
Gross salary 26
Pension contributions for the three months. 1 .45
Representation allowances 3.6
Housing and transport allowances 5.9
Her terminal benefits were 3.6
Gratuity 2.0
Cash in lieu of leave 2.0
Pro-rata bonus 4.5
Refund of pension contributions 3.2
Employee tax deducted 7.5

Maria elected to transfer the whole pension refund from the Government service
into a fully paid retirement fund with First Mutual.

2 Maria worked in the export processing zone area until 31 October when her
company posted her to Miami USA with effect from 1 December. She was given
the month of November 2001 to wind up her affairs in Zimbabwe to enable her to
take up the Miami post with effect from 1 December 200x1. Maria’s earnings from
the export processing zone company, which specialised in the marketing of stone
products were as follows in respect of the period 1 April to 30 November

Gross salary 21 000 000

Pension contribution 1 500 000
Representation allowances 2 400 000
Cost of living allowances 5 600 000
Employee’s tax deducted 4 500 000

In addition school fees for her children at school in Belgium, paid directly to the
school by the export processing zone company amounted to $26million. Maria was
also entitled to free medical cover of which her new employers paid $7 200 000 to
the medical aid society.

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Maria also had free use of a company vehicle a Toyota land cruiser with a engine
capacity of 3300cc, and free use of a company house being leased by the company
for $5million per month. The car and the house were availed to Maria with effect
from 1 April to 30 November when Celia left for the United States to take up her
new Miami post.

In June 200x1 Maria has accessed an interest free loan of $88 000 000 from the
company which she used to acquire a residential property in Glen Lorne, Harare. A
condition of the loan was that she would repay the loan after one year.

3 She leased the Glen Lorne house with effect from 1 August 200x1 to the embassy of
an Asian country, receiving rentals in United States dollars equivalent to $42 million
per month. Maria was also entitled to rentals equivalent to $14million per month
from the leasing of a residential property she had bought in Belgium during her stay
overseas. A withholding tax of $8 000 was withheld in Belgium every month.

4 She also received interest from her bank account maintained in Belgium and this
interest for the year ended 31 December 200x1 amounted to $30 000 net of
Belgium tax of $10 000.

Required:
1 Evaluate the taxable remuneration accruing to Maria from her employer in the
export processing zone area and compute the non taxable portion if any. 10marks

2 Compute Maria’s minimum tax liability in respect of the 200x1 tax year
20marks

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CIS May 1997 20marks

Super Cycles private limited manufactures bicycles in its factory in a designated growth
point area. Since incorporation the company had established assessed losses amounting t o
$200 000 exactly for each year. During the year ended 31 March 1996 the company earned
taxable profits of $29 323 640 before any deductions or inclusions relating to the
following capital assets.

A Manufacturing machinery had been purchased on 1 May 200x for $2.5 million on which
special initial allowance a was claimed.

B The income tax value at 1 April 200x of other manufacturing machinery on which special
initial allowance had not been claimed amounted to $1 320 000.

C Manufacturing machinery that had been fully written off for tax purposes was destroyed in
a fire that swept through a portion of the factory. The insurance claim for the machinery
amounted to $4 350 000 and was settled on 30 November 200x.The original cost of the
machinery was $$1 330 000.

D Brand new machinery, having a cash cost of $1 950 000 was purchased under a suspensive
sale agreement and brought into use on 1 February 200x to replace the machinery that had
been destroyed in the fire. Finance charges amounted to $2 471 600 and the total amount
was repayable over 36 months, the first payment falling due on 1 February 200x.

E A machine that had been brought into use many years ago, and which had a tax value of
$90 000 on 1 January was sold as scrap on 30 September 200x for $29 000.

F Repairs to the part of the factory that was damaged by fire were completed during October
200x at total cost of $ 5 100 000.Included in this amount wan an amount of $160 00 which
represented the cost of new loading platforms which and concrete slabs in the dispatch area
which greatly improved the queuing problem experienced in the past.

G On 1 June 200x Super Cycles private limited entered onto a 25 year lease agreement for the
lease of a retail outlet outside the growth point area and paid a premium of $1 650 000 on
that date. It commenced using the shop on that date. In terms of the lease agreement. Super
Cycles private limited was obliged to effect improvements to this property at a cost of $4
360 000.These improvements commenced on 15 June 2oox and were completed and
brought into use on 1 December 200x.the actual cost amounted to $5 420 000.

H During the year the company erected a block of 20 flats at a cost of $30million each to be
occupied by 20 factory employees. The flats were all completed on 1 January 200x and on 1
February 200x the employees moved into their flats. The flats were erected on a plot of land
in the growth point area which Super Cycles had purchased in 1999 at a cost of
$400 000.

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Required
Calculate the assessed loss for income tax purposes of Super Cycles for the year ended 31
December assuming it claims the greatest possible capital allowances.

CIS May 1998 20 marks

On I January 200x1 Mr Chando purchased a block of 14 flats. The purchase price was
allocated as follows:
$
Land 5 000 000
Buildings 2 000 000
Furniture & fittings 2 500 000
Fridges 2 395 000
Lawn mower 105 000
Total 12 000 000

The buildings were constructed on 15 December 1977.Mr Chando occupies one flat. During
the current tax year Mr Chando constructed a cottage for the caretaker at a cost of
$268 000.

The Income and Expenditure account for the year ended 31 December is as follows:

$ $
Advertising 200 000 Rent receivable 22 800 000
Rates 890 000 Local dividends 250 000
Insurance 240 000 Interest Barclays Bank 380 000
Electricity &water 266 000 Profit on sale of personal effects 6 000 000
Wages 180 000
Repairs 332 000
Legal expenses 960 000
Bond interest(after completion 2 095 000
(after completion) 1 380 000
General expenses 380 000
Depreciation 1 340 000
Telephone 600 000
Bond raising fee 1 200 000
Architect’s fee 1 900 000
Net profit 17 467 000
29 430 000 29 430 000

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i Advertising
Advertising costs were incurred in January and May for purposes of sourcing
tenants.
ii Insurance
Householders insurance 15 000
Fire insurance 25 000
Personal life insurance-Mr Chando 200 000
iii Repairs
Erection of durawall new 150 000
Burglar bars attached to windows 120 000
Installation of wrought iron gate 62 000
iv Legal expenses
Cost of drawing lease agreements 150 000
Fine for breach of Municipal laws 230 000
Collection of rents from defaulting tenants 580 000
v Bond repayment and interest
A loan for $68 800 was obtained from Beverly for financing the construction of the
cottage.
vi General expenses
Bank charges 150 000
Donation to St Giles 230 000
vii Telephone
Mr Chando confirmed that 40% of the telephone bill is private or personal.
viii Architect’s fees
The cost was incurred during the construction of the cottage.
ix Depreciation
Buildings 500 000
Furniture &fittings 250 000
Fridges 239 500
Lawn mower 10 500
Cottage 340 000

Mr Chando is a divorcee who lives on his own. He does not claim special initial
allowance.

Required
Determine Mr Chando’s taxable income for the year ended 31 December 200x and tax
payable if any.

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CIS May 1996 26 marks

Ladies Magic 9pvt) limited ,a subsidiary of a Bulawayo company involved in the

manufacture of ladies wear opened its business on in the Esodini Growth point. In June
200x the manufacturing business commenced and the company. Ladies Magic (pvt) ltd,
submitted the following accounts with its income tax return for the year ended 31 December
200x.

Manufacturing Account
$ $
Purchases-raw materials 850 000 Cost of Production 999 500
less closing stock raw materials 92 300
757 700
add factory overheads 102 000
railage 4 500
manufacturing costs 864 200
add Durawall 65 000
electricity & water 45 000
Interest on loan 26 000
Factory manager’s salary 60 000
Depreciation-factory plant 12 000
1 072 000
less work in progress 72 700
cost of production 999 500 999 500

Trading Account
Cost of production 999 500 Sales 2 160 550
less closing stock 101 250
Cost of goods sold 898 250
Gross profit 1 262 300
2 160 550 2 160 550

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Profit & Loss Account

$ $
Accountancy fees 6 000 Gross profit 1 262 300
Depreciation 15 000
Salaries & wages 416 500
Insurance 26 000
Interest 48 500
Motor vehicle expenses 58 300
General expenses 83 700
Advertising 4 800
Provision for director’s fees 50 000
Net profit 553 500
1 262 300 1 262 300
Notes
i The construction of the factory complex was completed in February in 200x at a
cost of $300 000. The actual manufacturing operations however only started on 30
June 200x.
ii The durawall was erected around the factory in February. 200x after the company
experienced a series of burglaries.
iii The interest was charged on a loan to finance part of the factory
iv The wholesale business was being carried out from a building purchased at the
beginning of the previous tax year for $120 000 but had been constructed by the
previous owner in December 1974.
v A staff canteen was constructed and was ready for use in October 200x.It cost
$175 000.
vi The following assets were purchased in the previous year and their income tax value
were as indicated:
$
Equipment 540 000
Motor vehicles 600 000
Furniture & fittings 425 000
vii The following additional assets were purchased during the year:
Furniture & fittings -new 560 400
-second hand 74 200
Plant &equipment second hand 217 300
Mazda 626 sedan for factory manager 1 195 000
viii Equipment bought with ITV of $75 000 was found unusable and sold for $12 000
during the current year. SIA had not been claimed) this equipment was not included
in the in the 540 000 above.
ix General expenses included the following:
Installation expenses for plant 23 500
School fees for director’s son at University 122 700
Lease expenses rentals 100 000

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x Due to an increase in business activity the company entered into a lease agreement
with Esgodini Rural Council to lease a piece of land adjacent to the factory.
xi The lease agreement is for a period of 20 years and stipulates that a building to the
value of $750 000 be constructed and used for retail purposes. However due to
high costs of building materials the building was completed at a cost of $1million
and was immediately put to use as a clothing retail shop. The company claimed
$10 000 in respect of the building constructed. The amount was clamed under
general expenses.
xii The provision for directors fees was voted for on 30 June the following year.

Required
You are required to calculate the minimum tax liability for the company to the year ended
31 December. Esgodini has been declared as a growth point area and the company’
operations accepted as a new project as defined.

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Chapter 5
DOUBLE TAXATION RELIEF
Section 91
Double taxation agreements are entered into between Zimbabwe and any foreign country
.It provides for the avoidance of double taxation on income and for the smooth
administration and collection of taxes charged under the Income Taxes Act and taxes under
the laws of foreign countries. Double taxation arises when a person who is ordinarily
resident in Zimbabwe earns income from a foreign source (refer to section 12 deemed
source).The taxpayer has to pay in that foreign country because it is the source of the
income and again he has to pay tax in Zimbabwe because of his residence.Relief (being a
comparison between the tax charged in Zimbabwe and foreign tax whichever is the lesser
)is granted where foreign income has suffered tax at source.

Note Rate of tax for foreign dividends is 20% and foreign interest is 30%.

Foreign Dividends
Foreign dividends are granted relief only when there was foreign tax was suffered. If no
foreign tax was deducted then no relief is granted. Dividends are taxed gross, no expenses
are allowable. If dividends accrue to a person from different countries the formula below can
be used in apportioning the Zimbabwe tax on dividends.

ExF E: Zimbabwe tax on foreign dividends

F+G F: Dividends from one country
G: Dividends from other countries

Example:
An elderly 75 year old pensioner had the following income during the year:
$
Pension 24 000 000
Dividends from
Botswana 7 800 000 (NRTI 1 400 000)
Malawi 1 000 000 (NRTI nil)
Zambia gross 2 200 000
bank charges 200 000
NRTI 300 000 1 700 000
Dividends from local companies 1 000 000 (RST 200 0000

Medical aid contributions made were $900 000 and PAYE of $2 100 000 was deducted.

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Solution
$
Pension 24 000 000
Local dividends exempt -
Dividends: Botswana 7 800 000
Malawi 1 000 000
Zambia gross 2 200 000 11 000 000
Taxable income 35 000 000

Tax chargeable
tax on dividends $11million @ 20% 2 200 000
tax on $24million 1 800 000
Less credits :Elderly person 500 000
Medical 50%x900 000 450 000
850 000
3% Aids levy 25 500 875 500
3 075 500
Less PAYE 2 100 000
Relief 1 900 000
Tax refundable 924 000

Double taxation relief workings

Dividends:
Zimbabwe Foreign Relief
tax tax
Botswana 7 800 000 @ 20% 1 560 000 1 400 000 1 400 000

Zambia 2 200 000 @ 20% 440 000 500 000 500 000
1 900 000

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Foreign Interest
Foreign interest is subject to relief on any foreign tax suffered. If foreign tax was not
deducted then relief is not granted. Expenses such as bank commission, agent’s fees may
be allowed as deduction on foreign interest. Foreign interest is taxed at 30%, being income
from investments.

The formula below is used in apportioning Zimbabwe tax on interest from different
countries.
(A-B) x C
C +D
A: Zimbabwe tax on all income including foreign interest
B: Zimbabwe tax on income excluding foreign interest
C: Interest from one country
D: Interest from other countries

Example:
Margiee a 60 year old Golden girl who lives at Dandaro lodge received the following
income during the year $
Interest-POSB Zimbabwe 21 000 000
POSB Malawi 3 800 000(NRTI nil)
Class C PUPS 590 000
Mozambique 1 400 000(NRTI 130 000)
UK 2 300 000(NRTI 720 000)
South Africa 6 900 000 (NRTI 1 500 000)

Solution
$
POSB interest exempt -
POSB Malawi 3 800 000
Class C PUPS exempt -
Mozambique 1 400 000
UK 2 300 000
South Africa 6 900 000
Taxable income 14 400 000

Tax chargeable 14 400 000 @30% 4 320 000

less Elderly person credit 500 000
3 820 000
Add 3% aids levy 114 600
Tax chargeable 3 934 600
less Relief 2 320 000
Tax payable 1 614 600

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Double taxation workings

Zimbabwe Foreign tax Relief
Tax
Mozambique 1 400 000@30% 420 000 130 000 130 000
UK 2 300 000 @30% 690 000 720 000 690 000
South Africa 6 300 000@30% 1 890 000 1 500 000 1 500 000
2 320 000

Section 93: Where there is no Double Taxation Agreement

If a person pays foreign tax on income from a country, which has no double taxation
agreement with Zimbabwe and also pays tax in Zimbabwe on the same income such person
will be entitled to claim relief as if section 91 and 92 were applicable.

Withholding Taxes: Residents Non Residents

Withholding Tax is deducted at source by a payer of income. The payee receives the net
income after tax. The payer will remit such tax to ZIMRA. Income, which has suffered
withholding tax, is not subject to further taxation.

• Resident Shareholders’ tax (RST)

Dividends from Zimbabwean resident companies which are distributed ti local individuals,
trusts, and partnerships are taxed 20%
If they are distributed by a company quoted on the Zimbabwe Stock Exchange the rate is
15%.
No tax is withheld on dividends distributed by one Zimbabwean resident company to
another.

• Resident tax on Interest (RTI)

Financial institutions are required to withhold tax from interest paid to a Zimbabwean
resident.

• Non Residents’ Tax on Interest (NRTI)

Interest paid from Zimbabwe to a non resident is charged withholding tax at 10%
Exemptions to this tax are POSB ,Tax Reserve certificates, 4% Government six years
bonds, Building Society Class C shares and interest earned on foreign currency
denominated account.

• Non Resident Shareholder’s tax (NRST)

Withholding tax at the rate of 20% is deducted from dividends distributed by a Zimbabwean
company. If the dividends are distributed by a company quoted on the Zimbabwe Stock
Exchange the rate is 15%.

• Non Residents’ Tax on Fees (NRTF)

Withholding tax at the rate of 20% is charged on fees paid to non residents in respect of
technical, managerial, administrative or consultative services including director’s fees.
The withholding tax does not apply to fees paid by a licenced investors are exempt.
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• Non Residents’ Tax on Royalties (NRTRY)

Withholding tax at the rate of 20% is charged on royalties paid to non-residents for the use
of patent ,trademark, formulae, equipment, motion picture film.
licenced investors are exempt.

• Non –Resident Tax on Remittances

Withholding tax at the rate of 20 % is chargeable on amounts remitted outside Zimbabwe
in respect of allocable expenditure being expenditure of a technical ,managerial,
administrative or consultative nature.

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Chapter 6
SUSPENSIVE and HIRE PURCHASES SALES
The income of a taxpayer who sales goods or services on credit or on hire purchase accrues
on date of sale. However the gross profit arising from the sale can not be taxed at once since
the taxpayer receives the sale price in instalments. The taxpayer is granted a suspensive sale
allowance in respect of amounts not yet received.

▪ The allowance granted in one year becomes income in the following year.
▪ Bad and doubtful debts which have proved to be irrecoverable or doubtful can be
granted as a deduction from the income.

The allowance is calculated as follows:

Trading account
Sales xxx
Less cost of sales xx
xxx
Less suspensive sale
Gross profit %(gross profit/sales) xx
Income xxxx
less other
allowable deductions xx
Taxable income xxxx

Land developers
Land developers who develop stands for resale derives income from carrying on business .
The taxable income is determined as follows:

Sale of stands xxx

Less development costs
Cost of land xx
Surveying xx
Roads and water reticulation xx
Sewer system xx
Taxable income xxx

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Example
Daylight land developers acquired 10 acres of land from Mutare City council for
$15 000 000.It subdivided the land into 1 hectare plots and offered them for sale at $4 500
000 each. All the plots were sold.
The payment terms were as follows:

Deposit 50% and the balance over two years in two equal instalments
The company spent $300 000 on water reticulation, $400 000 on legal fees and $150 000
on surveying and levelling

Required
Calculate the company’s taxable income for each of the years.

Solution
Taxable income for Daylight for the year ended 31 December
$
Sales 45 000 000
Less allowable deductions
Water reticulation 300 000
Legal fees 400 000
Surveying, levelling 150 000
44 150 000
less suspensive sale allowances
22 500 000x44 150 000 22 075 000
45 000 000
Taxable income 22 075 000

200x1
Income 22 075 000
less suspensive allowance
11 250 000x44 150 000 11 037 500
45 000 000

Taxable income 11 037 500

200x2
Income 11 037 500
less allowance -
Taxable income 11 037 500

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Payment schedule
200x 200x1 200x2
Sales 45 000 000 - -
Deposit 22 500 000 - -
Instalment - 11 250 000 11 250 000
Outstanding
Balance 22 500 000 11 250 000 -

Questions to attempt

CIS Nov 2001 25 marks

Munhwevhu pvt ltd purchased a 10 acre plot in the Darwendale area at a cost of million. In
January 1999 the company subdivided the plot into 10 by one acre residential stands at a
cost of $100 000.These were offered for the sale separately to prospective residential home
developers each stand was sold for $400 000 and the following conditions of payment
applied.

i 25% deposit payable on signing of the agreement

ii The balance payable over a period of 3 years at the rate of $100 000 per year

iii Ownership would pass on payment of the last instalment.

iv In event of default at any time the payments made would be forfeited

The company sold the stands as follows

1999 5 stands
2000 3 stands
2001 2 stands

In 2000 ,the person who had bought one of the 5 stands in 1999 could not raise the annual
instalment. He had, with the sellers permission constructed a cottage on the stand. He
negotiated that he finds a buyer for both the stand and the cottage. The property was sold
for $1million and the purchaser was paid $600 000 for the cottage. The second purchaser
negotiated to pay for the stand under the terms of the original agreement which the
company accepted

Required
You are required to calculate thee taxable income in the hands of Munhuwevhu pvt ltd from
the above transactions for each of the years.

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Chapter 7
PARTNERSHIP
Introduction
A partnership is not a legal persona therefore it is not a taxpayer. The individual taxpayers
are liable for taxation. The profits and losses of a partnership are determined in the same
way as any business entity but as a business it is not taxable but such profits or losses are
shared among the partners.

Benefits to partners
Benefits like salaries, medical aid, school fees, housing, motor vehicle expenses paid by the
partnership on behalf of partners are allowable to the partnership business and are taxable to
the individual partners.

▪ A medical benefit to a partner is taxable income to him. It is not exempt as a

partner is no an employee of the partnership business. The partner can be granted a
credit.
▪ Subscriptions to sports clubs or contributions to Retirement Annuity Fund
If the subscriptions or contributions are paid by the partnership they are allowable
and included as taxable income to the partner who then can be granted an allowable
deduction.
▪ Passage benefit
If the partnership pays for the partner’s business trip and the partner uses the
opportunity to take a holiday after the business no taxable benefit arises. However,
if the partnership incurs the cost of a holiday for a partner it is a taxable benefit.
▪ Conventions
The cost incurred by a partnership for the attendance of a convention by a partner is
allowable to the partnership. The maximum allowable for each partner is $5 million
per partner.
▪ Insurance policies
Insurance policies are taken by a partnership for various purposes.
• Public liability policy
It is taken for the purposes for the purposes of trade and is allowable
• Joint Life or Partnership survivorship policy
It is taken for the benefit of the partnership business. The expense not
allowable it is of a capital nature.
• Ceded policy
It is taken by a partner for the benefit of the partnership. It is not an
allowable deduction it is capital nature.
• Insurance benefit
It is taken by a partner for his own benefit. The expense is allowable and
taxable to the partner.

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Transfer of assets
When a new partner is admitted, or a partner dies or retires or a partnership is converted to a
company the old partnership is deemed to have ceased operations and is dissolved on such
an event. A new partnership comes into existence after that date. The assets of the old
partnership are deemed to have been sold to the new partnership recoupment or scrapping
allowance may arise. If there is both recoupment and scrapping allowance usually they are
netted off and a net scrapping is not allowable but a net recoupment is taxable. The assets
transferred or purchased by the new partnership are granted capital allowances. Wear and
tear on movable assets can be apportioned if the period of use is less than 12 months.

Example 1
Emma and Cynthia practice as legal practitioner in Mutare under the style EMCY
partnership. They share profits and losses as 60% for Emma and 40% for Cynthia.

For the year ended 31 December 200x they presented the following accounts

Income
$
Fees 50 000 000
Interest from POSB 11 770 000
Dividends from Zimbabwe 4 130 900

Deductions
Depreciation 1 700 000
Insurance premiums
-Joint life policy 1 200 000
-life policy for Emma 560 000
-life policy for Cynthia 890 000
Interest on capital
-Emma 3 190 000
-Cynthia 4 200 000
Contributions to Retirement Annuity Fund 1 900 000
Medical Aid society contributions
-Emma 850 000
-Cynthia 650 000
Salaries
-Emma 12 000 000
-Cynthia 12 000 000
Staff 6 000 000

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1 Emma borrowed $10 000 000 from Stanbic bank to finance her share in the
partnership practice. Interest payable by her during the year is $780 000.
2. During the previous year the partnership purchased a photocopier and computer
worth $550 000.The partnership elected for S.I.A.

3. Drawings were Emma $1 500 000 Cynthia $ 1 800 000.

Required
Calculate taxable income of the partners for the year ended 31 December 200x

Solution
Income of the Partnership for year ended 31 December 200x
$
Fees 50 000 000
Interest from POSB exempt -
Dividends from Zimbabwe exempt -
50 000 000
less allowable deductions
Depreciation not allowable -
Joint life policy capital nature -
life policy for Emma capital nature 560 000
Cynthia capital nature 890 000
Interest on capital
-Emma allowable 3 190 000
-Cynthia allowable 4 200 000
Contributions to RAF allowable 1 900 000
Medical Aid society contributions
-Emma allowable 850 000
-Cynthia allowable 650 000
Salaries :-Emma allowable 12 000 000
-Cynthia allowable 12 000 000
Staff allowable 6 000 000
(42 240 000)
Income 7 760 000
Less drawings 3 300 000
Capital allowances SIA 137 500
4 322 500
less share of profits
Emma 60% (2 593 500)
Cynthia 40% (1 729 000)
nil

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Taxable income of the partners for the year ended 31 December 200x

Emma Cynthia

Contributions to Retirement Annuity Fund 1 140 000 760 000

Medical Aid society contributions 850 000 650 000
Salaries 12 000 000 12 000 000
Share of profits 2 593 500 1 729 000
Interest on capital 3 190 000 4 200 000
48 483 500 19 339 000
less allowable deduction
RAF contributions maximum 1 140 000 760 000
Less interest paid - 780 000
Taxable income 47 343 500 17 799 000

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Questions to attempt
Question 1 20 marks
Themba and Tulani have been operating a brick moulding business in equal partnership
since 2000 and submit their accounts on 31 December each year. They admitted a new
partner Jabulani in 1 September of the tax year.

The accounts of the old partnership for the period 1 January to 31 August reflected a net
profit of $524 000 000 after charging the following
$
Depreciation 2 800 000
Insurance
Joint life policy 3 000 000
Themba-public liability 1 350 000
Tulani-public liability 1 550 000
Tulani’s life policy for
the benefit of the partnership 1 800 000
Themba’s life policy for the
benefit of the partnership 1 700 000
Assets 2 000 000
Clients 3 000 000
Interest on capital
Themba 1 350 000
Tulani 1 430 000
Motor vehicle expenses
-mazda 5 100 000
-peugeot 3 450 000
Salaries
Themba 15 000 000 per month
Tulani 15 000 000 per month
General expenses
Newspapers &magazines 1 000 000
Legal fees lawsuit with Mr Dube over shortage of bricks 2 000 000
Debt collection 1 550 000
Fine-not displaying car licence 2 650 000
Rent 1 400 000

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The income included the following

1 Tips from customers $850 000 shred equally between the partners and the two
assistants. The assistants share was however not included in their salaries.
2 Bad debts recovered $220 000.The debts were incurred and written off in the
previous year.
3 Interest on savings account at CABS $1 550 000
4 Beverly Building society class C Paid Up Permanent Shares dividends $4 500 000.

The partnership assets at the beginning of the year were

ITV
Furniture and equipment 400 000 (cost $500 000)
Vehicles Mazda B2200 154 000 (cost $220 000)
Shovels, wheel-burrows nil (cost 125 000)
Shovels worth $200 000 were bought in June.

The following further information is provided

1 Themba owns a Pegeuot which she offered to use on partnership business provided
the partnership paid all the expenses. He used the vehicle for private purposes.
2 Jabulani was admitted to the new partnership on the following grounds:
That the profits and losses would be shared equally among the partners.
3 The business onto a building owned by Jabulani for which he charged rent at
$650 000 per month. He would not receive a salary.
4 He ceded his endowment policy to the partnership which paid $120 000 during the
year which was claimed by the partnership.
5 The partnership took over payment of school fees for his child from a previous
marriage. The amount paid was $450 000 .
6 The assets were transferred at the following values:
$
Furniture and equipment 1 200 000
Motor vehicles 2 400 000
Shovels and wheel-burrows 900 000

The new partnership returned Net Profit of $731million after charging the following:
$
Depreciation 2 000 000
Donations-Christmas cheer fund 11 000 000
Rent to Jabulani 12 600 000
Motor vehicle expenses:Mazda 1 600 000
:Peugot 2 800 000

Themba and Tulani received bonuses equivalent to their monthly salaries. Jabulani received
$10 000 000.

Required
Calculate taxable income for the partners and tax payable for the year.

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Question 2
Duri and Mutswi carry on business in partnership as millers .The profit sharing ratio is
Duri 70% and Mutswi 30%.

The following income statement was prepared for the year ended 31 December 200x1

Income
$
Gross profit 334 475 000
Bad debts recovered 14 000 000
Dividends 24 500 000
Interest
-current account 254 000
-POSB 436 000
Trade discount received 777 000
3744 442 000

Expenditure
Annuities 986 000
Bad Debts 362 000
Bookkeeping fees 500 000
Second hand delivery van purchase 914 000
Donations 480 000
Depreciation
-shop fittings at 10% cost 500 000
-on cash register at 10% cost 220 000
Goodwill 17 600 000
Insurance 12 000 000
Legal expenses-debt collection 5 500 000
Licence trade and delivery van 2 600 000
Rent 2 200 000
Retirement Annuity Fund contributions: Duri 2 500 000
:Mutswi 2 900 000
Staff salaries and wages 31 000 000
Shares purchased 27 000 000
Stationery and printing 23 000 000
Sundry deductible expenses 5 000 000
Taxation on previous year’s assessments: Duri 7 600 000
:Mutswi 8 500 000
Net Profit 36 855 390

Notes

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1 The bad debts of was recovered from a former debtor of Duri when he was trading o
three years previously. Of the bad debts of $362 000 an amount of $55 000 relates to
the debts that the two partners took over they purchased the business. The balance
of the bad debts are all in respect customers who have failed to pay their accounts
despite attempted legal action which cost.

2 During the above year the partners decided to invest their surplus cash funds and
they purchased 25 000 shares in a local company Demo Pvt Ltd at per share. The
company paid a dividend on 31 December and an amount of $7 million accrued to
the partners after tax at 20% was deducted .

3 The following annuities were paid during the year

a former employee 186 000
a former partner 294 000
a former employee 506 000
The partnership has not made provision for pensions through pension funds.

4 The shop fittings and the cash register were purchased in the previous year when
special initial allowance was claimed. No such allowance is claimed on the delivery
for which no depreciation has been provided in the income statement

5 An amount of $230 000 was donated to the Society for the Prevention of Cruelty to
Animals and an amount of $250 000 was provided as a bursary to a promising
young student to take a course at an overseas technical college in retail
management.

6 Goodwill paid was in respect of the final instalment due in respect of the purchased
consideration paid to take over the business.

7 Insurance policies were paid on the following policies

Loss of profits 2 000 000
Fire 3 600 000
Partnership survivorship 6 400 000

8 By agreement each partner is entitled to an annual salary This has no been taken
into account in arriving at the net profit. The retirement annuity contributions are
paid on behalf of each partner as part of their remuneration.

Required
To calculate taxable income of the partners. 28 marks

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Chapter 6
FARMING
Introduction
Farming is an active business in Zimbabwe and is carried on a wide and diverse scale.
Farming includes livestock breeding ostrich ,poultry breeding ,horse, crocodile breeding,
beekeeping, horticulture, growing of crops, timber, sugar, tea coffee plantations.

Income of a farmer
The income of a farmer is covered under section 8.1 being(sale of farm produce),
Section 8.1.g.(sale of growing crops) and section 8.1.h.(valuation of farm trading stock)

Allowable deductions
Allowable deductions to a farmer are covered under section 15.2. (expenses incurred on
farming operations) including capital allowances and special allowances under the 7th
schedule.

Valuation of farm trading stock

The purpose of valuing trading stock is to include it as income of the farmer for the year.

The livestock of a farmer can be categorised as Ordinary livestock (not for breeding
purposes) and Stud livestock (for breeding purposes).

Methods of valuation

Ordinary livestock
▪ Cost and maintenance value means the cost of breeding and upkeep of the animal.
▪ Fixed standard value (FSV) is the amount fixed by the farmer and approved by the
Commissioner General for each class of livestock.
Stud livestock
▪ Fixed standard value(FSV)
If the cost of the animal less than $15 000 then the fixed standard value is used.
If the cost of the animal is more than $15 000 then the farmer may elect for the fixed
standard value or $15 000.

▪ Purchase Price Value (PPV)

It is the actual cost of the animal.
If the cost of the animal is less than $15 000 then purchase price value is used.
If the cost of the animal is more than $15 000 then the farmer may elect for either
$15 000 or purchase price value.

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Valuation of farm trading stock

Type Method
▪ Closing stock: livestock-ordinary FSV or cost& maintenance
-stud PPV or FSV
-other crops Fair & reasonable
▪ Private consumption Fair &reasonable
▪ Donation: livestock -ordinary FSV or cost& maintenance
-stud PPV or FSV
-other crops Fair & reasonable
▪ Attached by court order: livestock -ordinary FSV or cost& maintenance
-stud PPV or FSV
-other crops Fair & reasonable
▪ Sold together with business Selling price

Example
Livestock movements on Ndizvo farm were as follows:
Purchases
No. Class Cost $ FSV $
3 stud bull 2 500 000 -
120 cows 7 800 000 100 000
160 heifers 6 000 000 75 000
70 tollies 3 200 000 75 000
90 oxen 4 700 000 110 000
60 calves 2 300 000 50 000
26 500 000

There were 75 births, 15 deaths(being 5 tollies, 3 heifers and 7 oxen).

Sales ($12 980 000 )were 90 made up of 20 tollies,22 heifers,40 oxen and 8 calves.

The following movements in growth took place during the period:

30 calves became tollies
20 calves became heifers
15 heifers became cows
20 tollies became oxen

Livestock expenses incurred were for $1 300 000.The fixed standard values shown have
been approved by the Commissioner and the farmer elects for minimum purchase price
valuation on the valuation of stud livestock.

Required
i Prepare the livestock reconciliation statement

ii The trading account

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Solution

Livestock reconciliation statement for Ndizvo farm

Bulls Cows Heifers Tollies Oxen Calves

Opening stock - - - - -
Purchases 3 120 160 70 90 60
Births - - - - 75
Promotion in - 15 20 30 20 -
3 135 180 100 110 135
Promotion out - - 15 20 - 30+20
Deaths - - 3 5 7 -
Sales - - 22 20 40 8
Closing stock 3 135 140 55 63 77
Valuation
FSV - 100 000 75 000 75 000 110 000 50 000
PPV minimum 15 000 - - - - -
Total 45 000 1.35m 10.5m 4 .125m 6.930m 3 .850m
26 800 000

Trading account for the year ended 31 December

$
Sales 12 980 000
Closing stock 26 800 000
Income 39 780 000
Less
Opening stock -
Purchases 26 500 000
Livestock expenses 1 300 000
Interest 800 000
Taxable income 11 180 000

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Special Allowances for farming:7TH schedule allowances

Paragraph 2
A farmer shall be entitled to deduct any expenditure incurred by him during the year of
assessment on:
▪ The stumping and clearing of land
▪ Works for the prevention of soil erosion
▪ The sinking of boreholes and wells
▪ Aerial and geophysical surveys
▪ Any water conservation works and amounts paid by him towards the cost of any
water conservation work done by another person for which the farmer has become
liable in terms of the Natural Resources Act.
▪ Fencing

If the above are purchased together with the farm there are no capital allowances granted. If
the farm is sold with the above works the allowances are not recouped.

Paragraph 5 Election on Forced sales

If a farmer is forced by drought conditions or an epidemic disease to dispose of his
livestock he may elect that the taxable on forced sales be taxed over three year in equal
instalments. If there are normal sales no election can be made.

Paragraph 5A
If a farmer is forced to dispose of livestock due to the compulsory acquisition of the farm
by the Government he may elect that the taxable income be taxed over three years in equal
instalments.

Example
$
Forced sales 150head 10 900 000
Opening stock 300 head FSV 50 000
Closing stock 50 head FSV100 000
Cost of stock feeds 500 000

Taxable income on forced sales

Forced sales 10 900 000
Less cost of forced sales
150 @$50 000 7 500 000
less stock feeds
apportion 150x500 000 428 571
average head
1/2(opening stock 300+closing stock 50)
Taxable income 2 971 429
Election $2 971 429/3years $990 476

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Restocking allowance paragraph 6

A restocking allowance is granted to a farmer who has restocked his herd which was
depleted by an epidemic diseases or drought conditions. The allowance shall be 50% of the
cost of restocking. However if the farmer restocks and exceeds the assessed carrying
capacity of land(ACCL) determined by the department of AREX, the allowance is reduced
by using the formula
AxB
2 C

A: Cost of the herd

B: The difference between the carrying capacity of land and stock on
hand before purchasing.( closing stock less purchases.)
C: The number of livestock purchased.

Example
Farmer Bindu purchased 200 herd for $1 400 000 to restock the herd which was depleted by
an epidemic disease. The CCL was 450 herd .Stock on hand was
i 210 and
ii 300.

Restocking allowance is
ii 50%x$1.4million $700 000

ii CCL 450herd
less stock on hand before purchasing 300herd
herd to be purchased 150herd
less actual purchase 200herd
Excess purchase 50herd
CCL was exceeded

1 .4million x 150 $525 000

2 200

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Example
Zvemahara pvt ltd is a farming company in Mutoko. It submits the following set of
accounts for the year.
Livestock trading account
Opening stock $ $
2bulls @1 000 000 2 000 000 80 Sales 12 000 000
100cows @90 000 9 000 000 10 Deaths -
70 oxen @100 000 7 000 000 5 Donations -
50tollies @50 000 2 500 000 closing stock
40heifers @50 000 2 000 000 3 bulls @ 3 500 000 10 500 000
40calves @40 000 1 600 000 120 cows @ 100 000 12 000 000
40births - 65 oxen @ 100 000 6 500 000
Purchases 20 tollies @ 60 000 1 200 000
1 bull @1 500 000 1 500 000 25 heifers@ 60 000 1 500 000
55 cows @ 6 000 000 6 000 000 30 calves @ 50 000 1 500 000
Profit 14 100 000
45 200 000 45 200 000

Profit and Loss account

Accountancy fees 1 200 000 Livestock profit 14 100 000
Depreciation 450 000 Crop sales 23 900 000
Donations 250 000
Insurance 900 000
Replacement of tilita clips 470 000
Legal fees: water rights application 680 000
Dipping &Veterinary fees 230 000
Fertilizer &seed 4 100 000
Interest 300 000
Petrol and oil 500 000
Repairs 890 000
Salaries &wages 2 500 000
Net profit 25 530 000
38 000 000 38 000 000
Notes
1 The FSV were approved by the Commissioner and bulls are valued at cost.
2 The company donated 3 heifers toward celebrations for the winning member of
Parliament. The cost of the fixed standard value was claimed and no other
adjustment was made. Another 2 heifers were slaughtered at the wedding of the
director’s son. No amount was paid.
3 Interest was paid of on a loan of $1 000 000 taken to finance farming
operations.$400 000 was lent to the director’s son to finance his wedding interest
free.
4 At the peak of drought in October the company sold 40 cows for $1 300 000.The
other sales are in the normal course e of trade. The farm was gazetted a drought
stricken area.

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5 During the year 45 calves were born and 3 heifers and 10 calves died.15 tollies
became oxen 7 heifers became cows. Of the 16 calves promoted 10 became heifers
and the rest tollies.
6 After the rains in December the pastures improved and the company purchased 56
cattle to restock his farm. The carrying capacity of land is 400 head.
7 During the year the company purchased/constructed the following
assets
$
Mazda B22 truck 4 200 000
Toyota Corrola Sedan 3 000 000
Water reserviour 1 800 000
Fencing 2 000 000
Boreholes sunk 5 000 000
Farm school for workers children 7 200 000
School teacher’s house 2 400 000

8 The following are the income tax values of the assets at the end of the previous
year:
$
Farm improvements cost 60 000 48 000
Manager’s house cost 100 000 75 000
Motor vehicle 55 000

9 The Commissioner considered that the fair market price of the of the donated stock
was $190 000 each. Salaries and wages include $500 000 for herdman’s wages.
10 The Toyota Corrolla was bought for the director and is used 50% for business and
50% for private.

Required
Calculate minimum tax liability for the company 25 marks

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Solution
Taxable income for Zvemahara pvt ltd for the year ended 31 December 200x
$
Net profit 25 530 000
Add back
Donation 5 heifers @190 000 950 000
Accountancy fees allowable -
Depreciation not allowable 450 000
Donations not allowable 250 000
Insurance not allowable -
Replacement of tilita clips allowable -
legal fees: water rights application capital nature -
Dipping &Veterinary fees allowable -
Fertilizer &seed allowable -
Interest 400 000 x 300 000 120 000
1 000 000
Petrol and oil allowable -
Repairs allowable -
Salaries &wages allowable -
27 300 000
less election on forced sales
Forced sales 40cows 5 300 000
Less cost of forced sales
$90 000 x40 cows 3 600 000
Dipping &Vet fees 230 000
Herdman’s wages 500 000
apportion 730 000
40x730 000
average herd ½(342+263) 97 370
Taxable income on forced sales 1 602 630

Election $1 602 630 /3years= 534 210x2years 1 068 420

Income 26 231 580
Less restocking allowance 50%x7 500 000 3 500 000
CCL 400
Less Stock on hand before purchasing
(Closing stock-purchases)263-56 207
what he was suppose to purchase 193
Actual purchase 56
therefore CCL was not exceeded.

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22 731 580
less paragraph 2 allowances
Water reserviour 1 800 000
Fencing 2 000 000
Boreholes sunk 5 000 000 8 800 000
13 931 580
less capital allowances
SIA 8 400 000
Wear &tear 19 000
Taxable income 5 512 580

schedule of capital allowances

Mazda B22 truck Corrola Sedan
Cost 4 200 000 3 000 000
SIA 50% 2 100 000 1 500 000
ITV 31/12 2 100 000 1 500 000

Farm school Teacher’s house

Cost 7 200 000 2 400 000
SIA 50% 3 600 000 1 200 000
ITV 31/12 3 600 000 1 200 000

Farm Manager’s Motor

improvements house vehicle
ITV 48 000 75 000 55 000
Wear &Tear 3 000 5 000 11 000
ITV 31/12 42 000 70 000 44 000

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Questions to attempt

Question 1
Brighton purchased a smallholding for retirement purposes. He grows fruits and raises
cattle. Brighton submitted the following accounts:
Livestock on hand on 1 January was
60 cows FSV 100 000
1 bull at cost 2 500 000
During the year 30 calves were born FSV 30 000

There were no promotions .Donation from brother;3 cows market value $150 000 FSV
100 000 donations to his church1 cow market value $90 000.

Purchase of livestock were:

22 cows at $100 000 each
2 bulls at $ 400 000
Sale of fruit 4 290 000
Sale of 10 cows 3 600 000
Value of fruit not sold at the end of the year 950 000
Sale of used farm tractor 60 000

Expense incurred during the year were:

Interest on bond over farm 180 000
Construction of 10 equi-sized units of staff housing 5 000 000
Prevention of soil erosion 1 700 000
Farming expenses all allowable 3 860 000
Assets purchased/constructed: Fruit harvester 11 200 000
New tractor 10 500 000
Mecerdes Benz 190D(used 50% for private purposes) 2 500 000
Manager’s house 5 500 000
Fencing 2 300 000

Required
Calculate Mr Brighton’s taxable income and tax liability for the year. He claims all tax
advantages which would minimise his tax.

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Question 2
Ivhu Kuvanhu pvt ltd was incorporated in January 2000.The company conducts farming
operations in Shamva and draws its accounts on 31 October each year. The farm was
purchased from Mr Brand for a total sum of $27 950 000.The allocation of the sale price to
the various assets was as follows:
$
Land 2 000 000
Growing crops 1 600 000
Farm dwelling 2 800 000
Fencing 1 900 000
Dams 3 100 000
Boreholes 4 300 000
Farm improvements 2 350 000
Staff housing 4 000 000
Tobacco barn 2 800 000
Plant and equipment 3 100 000
27 950 000

Additions during the year were

Staff housing constructed 5 000 000
Permanent road 1 200 000
Farm manager’s house 6 000 000
Additions to tobacco barns 790 000
Tobacco bulk curer 1 100 000
Combine harvester 3 200 000
Tractor 2 500 000
Fencing 1 650 000
Dam 1 530 000
Mazda B1600 for manager 5 000 000
Mazda 323 3 100 000
Farm school 420 000 000
Farm clinic 618 000 000
Teacher’s house 375 500 000
Nurse’s house 125 000 000
Work in progress:-Uncompleted staff housing 2 750 000
-Borehole 1 250 000

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Question 3
Madison aged 55 years is a livestock and ostrich farmer in the Mutoko area. For the year
ended 31 December the area was severely affected by foot and mouth and Newcastle
diseases and was gazetted as an epidemic area. During this epidemic proclaimed period
Madison sold 300 cattle for $126 000 000 and 100 ostriches for $323 000 000. The Fixed
standard value for cattle was $120 000 per beast and $200 000 for ostrich. Direct herd
expenses were $33 500 000 for cattle and $74 000 000 for ostriches. The opening stock for
cattle was 1 900 and closing stock 700.The opening stock for ostriches was 1 500 and
closing stock 600.

Required
Calculate Madison’s taxable income for the year ended 31 December 200x.

Question 5 CIS Nov 1998 30marks

Steers pvt ltd submits the following accounts in support of its return of income for the year
ended 31December 200x

Livestock trading account for the period 31 December 200x

Herd $ Herd $
2 bulls 3 500 150sales 225 000
200cows@600 120 000 4 deaths -
50oxen@550 27 500 2 donation -
20heifers@350 7 000
15tollies@350 5 250 closing stock
25calves @250 6 250 2 bulls at cost 3 500
152cows purchased 52 000 222cows @ 600 133 200
76 births - 63 oxen @550 34 650
Profit 201 200 5 heifers @ $350 5 250
6 tollies @ 350 2 100
76 calves @ 250 19 000
422 700 422 700

Profit and Loss account $ $

Accountancy fees 2 500 Livestock profit 201 200
Depreciation 17 500 Insurance refund tractor MF 165
destroyed by fire 7 500
Bad debts 600 Crop sales 110 300
Donations 1 500 Dipping@ veterinary fees 3 000
Insurance 6 001
Dipping @ veterinary fees 3 000
Fertiliser @ seeds 2 550
Interest 1 500
Petrol 7 600
Repairs motor vehicles 5 000

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General repairs& maintenance 8 000

Salaries 1 400
Herdman’s wages &rations 7 250

The following further information is supplied

1 Fixed standard values approved by the Commissioner were:
Cows 750
Oxen 650
Heifers 400
Tollies 400
Calves 250
Bulls are valued at cost
2 Donations are in respect of two oxen donated for the heroes Day celebration. The
taxpayer estimates the value at $1 500 and charges it to the profit and loss account.
3 Interest is in respect of a loan used working capital. Cattle sales $225 000 is in
respect of 150 cows sold in May due to stress of drought. The company makes an
election in terms of paragraph 5(1) of the 7th schedule.
4 4 calves died in September and 76 were born between November and December ,20
heifers were promoted to cows ,15 tollies to oxen and of the 21 calves remaining,6
became tollies and the rest heifers.
5 During November the company purchased 152 cows to restock the herd depleted by
drought. The company claims restocking allowance in terms of the Act. The
Department of AREX gives the assessed carrying capacity of land as 284.
Steers pvt ltd meets all the statutory requirements to qualify for the restocking
allowance.
6 During the year the company purchased/constructed the following assets
A second hand tractor MF 265 to replace the one destroyed by fire 65 000
Datsun 1500 pick up 75 000
Small reserviour 50 000
Fencing erected 5 000
Borehole sunk 5 700
Contour ridges to prevent soil erosion 2 000
Staff housing (one unit) 55 000
Clinic for farm workers and families 27 000
7 Income Tax values for existing assets on which SIA was not claimed as at the end of
the previous year of assessment were:
Farm improvements(cost35 000) 22 500
Motor vehicles 16 500
Tractor MF 165(destroyed by fire) 5 000

Required
1 Draw up a livestock reconciliation account and
2 Compute the minimum taxable income or maximum loss for the company for the
year ended 31 December.

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Chapter 9
MINING
Introduction
Mining is a business venture which requires heavy capital expenditure .A person cannot
think of mining and start producing following day . First the person has to carry out
prospecting of the land to find minerals. If the location has minerals it is pegged and
registered in his name as his property then it will be called a mining claim. The mining
claim can be held as an asset and sold as it is without conducting mining operations or the
tax payer may conduct mining operations and produce minerals.

Income of a miner
It is covered under section 8.1 being sales of minerals; section 9 sale of mining claims;
section 8.1.h valuation of stock and section 8.1.k recoupment

Allowable deductions are covered under

Section 15.2 a general mining expenses; section 15.2 f prospecting expenses and section
15.2 f as read wit the 5th schedule.

Sale of mining claims

The miner may elect that taxable income from mining operations be taxed over 4years in
equal instalments.

Recoupment
Generally recoupment under mining is not included in taxable income. It is used to reduce
Unredeemed Balance of Capital Expenditure (UBCE)or to reduce Current Capital
Expenditure (CCE).If both UBCE or CCE are not available the recoupment is included as
taxable income. Recoupment is the sale price of the asset. Recoupment arising from damage
or destruction of an asset or on an assets which was granted replacement allowance is
restricted to the original cost.

Allowable deductions: Section 15.2.f as read with the 5th schedule

An allowance called CAPIAL REDEMPTION ALLOWANCE is granted on capital
expenditure incurred( movable or immovable assets )purchased or constructed and used for
mining operations. No capital allowances like SIA or Wear and tear is granted under
mining.

Pre-production period
Capital expenditure incurred in the pre-production period include administration expenses,
interest on loans, lease premiums, lease improvements, movable and immovable assets.

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Assets with restricted costs

Staff housing for shareholder
If the mine is owned by a company with four shareholders or less any housing for one of
the shareholders can be considered to be staff housing. If the shareholders exceed four then
it shall not be considered as staff housing.

Asset Maximum cost $

Staff housing for nurses, teachers 100million
Mine school clinic or hospital 270million
Passenger motor vehicle 50million
Shareholder’s house 100million

Estimate of the life of mine

A mine producing
-Zinc or lead 10 years
-Iron 5 years
-Any other mineral 20 years

Methods of calculating capital redemption allowance(CRA)

Paragraph 2 Life of mine basis
Paragraph 4(2) Mixed basis (election made)
Paragraph 4(4) New mine/current basis(election made)

Life of mine basis

Unredeemed balance of capital expenditure for the year (UBCE) xxx
less recoupment on sale of assets xx
add current capital expenditure(CCE) xx
xxx
Divide by life of mine (number of years) x
Capital redemption allowance(allowable deduction) xxxx

Mixed basis
Unredeemed balance of capital expenditure at the beginning of the year (UBCE) xxx
less recoupment on sale of assets xx
xx
Divide by life of mine (number of years) x
xx
add current capital expenditure(CCE) xx
Capital redemption allowance(allowable deduction) xxxx

New mine /current basis

Unredeemed balance of capital expenditure at the beginning of the year (UBCE) xxx
less recoupment on sale of assets xx
xxx
add current capital expenditure(CCE) xxx
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Capital redemption allowance(allowable deduction) xxxx

In each of the above methods the unredeemed balance to be carried forward is as follows:

Total capital expenditure for the year xxx

less capital redemption allowance for the year xx
UBCE carried forward xxxx

The above methods are used whether the miner owns ,leases or tributes the mine.

Paragraph 6 Replacement allowance

The method is used when the taxpayer elects for replacement on an assets damaged or
destroyed. The allowance is subject to a maximum of $40 000 per asset and the excess cost
is included as current capital expenditure for the calculation of capital redemption
allowance. Replacement allowance is only used together with the life of mine.

Example
Neutral venue a mining company incurred the following expenditure in the previous year a
period of non production.
$
Mine buildings 2 500 000
Mine equipment 1 350 000
Shaft sinking 4 100 000
Interest on loans
borrowed to finance operations 900 000
Premium paid for use of
special mining machinery 2 200 000
Administration and management costs 1 340 000
Salaries for 3 shareholders 4 200 000
16 950 000

In the current year the company had Net profit after allowable expenses of $18 000 000

It constructed/purchase the following

House for one of the shareholders 23 000 000
Railway lines 5 600 000
5mules 3 500 000
Mine clinic 21 000 000
Mine school 17 500 000
Teacher’s house 6 700 000
Nurse’s house 3 300 000

Excess equipment was sold for $2 000 000 and the life of the mine is estimated as 4 years
from the end of the year of assessment

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Required
Calculate taxable income for the year using
i Life of mine basis
ii Mixed basis
iii Current basis

Solution
Taxable income for Neutral Venue for the year ended 31 December 200x
$
Net profit 18 000 000
Less Capital redemption allowance(CRA) 17 510 000
UBCE 1 January 200x 16 950 000
Less recoupment sale of equipment 2 000 000
14 950 000
add current capital expenditure(CCE)
Shareholder’s house maximum 15 000 000
Railway lines 5 600 000
5mules 3 500 000
Mine clinic 21 000 000
Mine school 17 500 000
Teacher’s house 6 700 000
Nurse’s house 3 300 000
87 550 000
Divide by LOM 87 550 000/5years=17 510 000
Taxable income 490 000

Taxed at 25 %

Taxable income for Neutral Venue for the year ended 31 December 200x
$
Net profit 18 000 000
Less capital redemption allowance(CRA)
Mixed basis
UBCE 1 January 16 950 000
Less recoupment sale of equipment 2 000 000
14 950 000
divide by LOM 14 950 000/5years 2 990 000
add current capital expenditure(CCE)
House for one of the shareholders maximum 15 000 000
Railway lines 5 600 000
5 mules 3 500 000
Mine clinic 21 000 000
Mine school 17 500 000
Teacher’s house 6 700 000
Nurse’s house 3 300 000 75 590 000

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Assessed loss carried forward 57 590 000

Taxable income for New miner for the year ended 31 December 200x
$
Net profit 18 000 000
Less Capital redemption allowance(CRA) Current basis
UBCE 1 January 16 950 000
Less recoupment sale of equipment 2 000 000
14 950 000
add CCE
House for one of the shareholders maximum 15 000 000
Railway lines 5 600 000
5mules 3 500 000
Mine clinic 21 000 000
Mine school 17 500 000
Teacher’s house 6 700 000
Nurse’s house 3 300 000
87 550 000
Assessed loss carried forward 69 550 000

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Questions to attempt

Question 1 CIS Nov 2001 25 marks

Deep Mines pvt ltd is a chrome producing mine in the Midlands area. The company sold
chrome worth $5million during he year 2000.The following capital expenditure
was incurred during the year
$
Steam generator 300 000
Mining buildings 450 000
Earthmoving plant 1 850 000
Staff clinic 1 160 000
Mine doctor’s house 120 000
Shaft sinking 400 000
Renewal of boiler 100 000
Replacement of boiler 250 000

The company also incurred the following expenses

Administration 240 000
Interest 150 000
Salaries 1 350 000
Insurance 150 000
Duty on imported generator 20 000
Notes
i The company had $1 650 000 balance of unredeemed capital expenditure on 31
December 1999.
ii The company sold mining claims (originally purchased for resale for $1 820 000
and excess equipment for $360 000 during the year.
iii The replaced generator had blown up when there was a minor explosion. $300 000
was recovered from the insurance company. The generator had been installed
originally at a cost of $100 000.
iv Administration expenses included $28 000 being penalty for late payment of Taxes.
Another $45 000 was a donation to a local soccer team.
v The company paid the interest of $150 000 for a bank loan of $1million which was
used to finance working capital. However the new doctor requested a short advance
when he moved to the mine. He was lent $150 000 at no interest.
vi The agreed life of the mine is 19 years from the end of 2000 and the company
claimed allowances under paragraph 2 of the 5th schedule to the Income Tax Act
and any other allowances that are available

Required
Calculate the company’s taxable income or assessed loss for the year ended 31 December
2000.

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Question 2
Black Granite pvt limited a company owned by four shareholders incurs the following
expenditure during the year ended 31 December 200x1.
$
Cost of mining claims 7 500 000
Administration expenses 3 400 000
Shaft sinking 4 500 000
Mine shed 2 100 000
Forklift lorry 6 700 000
Mercedes sedan 7 800 000
Goodwill 13 000 000
Residence of shareholder who is employed as manager 6 600 000
Plant 5 000 000
Pre-production expenditure on boreholes 4 600 000
Interest on loan used for mine development 3 750 000
Mine house for employees (not shareholders) 20 000 000

There was no production during the year.

Required
Calculated capital expenditure as defined (12marks)

Queston 3 CIS Nov 1998 30marks

Blue Mines is a mine owning company controlled by two individuals who are the Directors.
The company carries on mining operations in its own mine and produces gold. The
company also owns the L.K. Gold mine ten miles away from which it had no production
during the year.
The following accounts and schedules of information are submitted with the company
return for the year ended 31 December 200x

Balance sheet As at 31 December 200x

Capital/Liabilities $
Issued share capital 300 000$1 shares 300 000
Appropriation account 130 000
Capital Reserve 102 000
Sundry creditors 11 000
Bank overdraft 40 000
583 000
Assets
Mine buildings 100 000
Additions during the year 338 000
438 000
less depreciation 16 000 422 000

Mining claims 45 000

Less written off during 5 000 40 000

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Mining plant 40 000

Additions during the year 22 000
62 000
less sales (at cost) 8 000
depreciation 2 000 52 000

Motor vehicles 25 000

Additions during the year 40 000
65 000
less depreciation 1 000 64 000
Cash 2 000
Stores 3 000
Goodwill 2 000
Less written off 2 000 -
583 000

Profit and Loss account for the year ended 31 December 200x

Depreciation 19 000 Sales 1 000 000

Shaft sinking 20 000 Stock of gold on hand
at realizable value 10 000
Crushing and milling 100 000
Prospecting expenses 20 000
Wages and rations 110 000
Administration 100 000
Mining claims written off 50 000
Goodwill written off 20 000
Profit 571 000
1 010 000 1 010 000

Balance Sheet schedules notes

1. Additions to mine buildings
School 90 000
Clinic 180 000
Staff housing (school staff) 18 000
(clinic staff) 12 000 30 000
Residence for Director 16 000
Residence for Mine Manager 16 000
Staff housing 2 000
Replacement for boiler house 4 000
338 000
All buildings are used in connection with taxpayer’ operations

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2 Mining claims written off

Cost of five claims abandoned 5 000

3 Mining plant and additions

Replacement of steam generator 12 000
New earth moving plant 10 000
22 000
4 Mining Plant sales
Old generator at cost 4 000
Old compressor at cost 4 000
8 000

The generator and compressor each realized $5 000 and the excess of selling price
over cost of $2 000 has been credited to Capital Reserve. The compressor when
originally purchased was a replacement and the cost was claimed under paragraph 6
of the 5th schedule.

5 Motor vehicles additions

Leyland Truck (second hand) 40 000

Other notes
a The company has elected that capital expenditure incurred be allowed over the life
of the mine and that the expenditure on renewal and replacements of the mining
plant and buildings be allowed in terms of paragraph 6 of the 5th schedule
b The Commissioner accepts the life of mine is 4 years from 1 January
commencement of the subsequent year 200x
c The Unredeemed balance of capital expenditure at the end of the previous year of
assessment was $440 000.
d Prospecting expenditure of $20 000 was incurred on claims abandoned and written
off.
e Administration $ 100 000 includes
i $2 000 in respect of general expenditure during a period when the mine was
out of production due to temporary flooding
ii legal expenses:
Regarding drawing up new lease of Harare 35 000
Regarding employees’ service contracts 5 000
f Wages and rations $110 000 includes $20 000 in respect of shaft sinking at LK gold
mine.

Required
Prepare a computation of the taxable income and a schedule of the capital
allowances for the year ended 31 December 200x

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Chapter 8
TAX ADMINISTRATION
Introduction
It covers miscellaneous provisions of the Act on tax administration.

Miscellaneaous taxes Section 36

• Automated teller machines (ATM)
The rate for ATM Charge is $50 000

• Informal trader’s tax

The tax payable by an informal trader is 10% of the rent which he pays.

• Final Deduction System (FDS)

It is a system where the employer deducts employee tax (PAYE) as nearly
as possible to the tax chargeable. No tax refund or tax payable arises.

• Carbon tax
Carbon tax is payable by a person who owns a motor vehicle when he
renews or contracts for a motor vehicle insurance. The insurer shall remit
carbon tax to ZIMRA by the 15th of every month after collection. If he fails
to charge or remit the carbon tax the insurer shall be liable to pay in addition
to the tax 100% of the tax unpaid.

Carbon tax payable is calculated as follows:

Engine capacity amount $
Up to 1500cc 100 000
1500cc-2000cc 175 000
2000cc-3000cc 250 000
3000cc 500 000

Section 45 Estimated assessments

A taxpayer who defaults in furnishing a tax return or information results in the
Commissioner making assessment in which the tax payer’s taxable income or assessed loss
is estimated.

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Section 46 Additional tax in the event of default or omission

• If a taxpayer defaults in submission of an income tax return.
An amount of tax equal to the tax chargeable on his taxable income.
• If he omits from his return any amount which should have been included:
An amount of tax equal to the difference between tax calculated according to
the return and tax calculated including the omitted income.
• If fails to disclose relevant facts which result in less tax being charged:
an amount of tax equal to the difference between tax chargeable including
the incorrect statement and tax properly chargeable excluding the incorrect
statement.
• If a credit is incorrectly granted:
An amount equal to the difference between the tax chargeable considering
the statement and the tax section chargeable.

Section 47 Additional assessment

An additional assessment arises when the Commissioner General had made an error on an
original notice of the assessment which results in less tax being charged.
The error may be:
• not taxing income which should have been taxed or
• incorrect granting of an allowable deduction or
• granting a credit which the tax payer is no entitled to

An amended assessment is issued correcting the error which results in additional tax being
charges. The assessment can not be amended after 6 years from the end of the relevant year
of assessment unless it is due to fraud, misrepresentation or wilful non disclosure of facts.

Section 48 Reduced assessment and refunds

A reduced assessment arises when an error has been made on an original notice of
assessment which results in excess tax being charged. The error may be taxing exempt
income or not granting an allowable deduction or not granting a credit
An amended assessment correcting the error which result in a refund is issued. No claim for
an ammendment is shall be made after 6 years from date of notice of the assessment.

Section 53 Representative taxpayers

Representative taxpayer for the payment of tax in Zimbabwe are as follows:

• Income of a company the public officer

• Income of a trust the trustee
• Income managed by an agent the agent
• Income remitted or paid from Zimbabwe to a
person outside Zimbabwe the payer
• Income paid under a decree or court order the receiver or beneficiary
• Income under trust due to death or legal disability the trustee

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Section 62 Objections and Appeals

If any person is not satisfied with a notice raised by the ZIMRA he may lodge an objection
to the Commissioner. The objection should be in writing, stating the grounds for objection
and should be lodged within 30 days from date of issue of the notice of assessment.

An appeal to the High court or Special Income Tax court by either the Commissioner or the
taxpayer can be made if he is not satisfied with the decision made in reply to the letter of
objection. Any appeal to the Supreme court should on a point of law only.

Section 81 Tax avoidance and tax evasion

Tax avoidance is a legal way of minimising tax liability by using the provisions of the Act
such as elections whereas tax evasion is wilful non disclosure of facts, misrepresentation
and any other acts to evade payment of tax. Tax evasion is illegal and attracts penalties.

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Chapter 11
DECEASED ESTATES

Introduction
When a person dies it is not the end of the road as far as taxation is concerned. He she is
taxed right into the grave as long as there is receipt of income.

Period to date of death/Lifetime of the taxpayer

When a natural person dies his taxable income and tax liability is determined for the period
I January 200… to date of death. All the income which accrue to the person or which is
deemed to have accrued to the person is taxable. Income is not taxable if the person had no
right to the income during his lifetime. It will be an amount of a capital nature like the
pension refund or cash in lieu of leave of civil servants. Note that income may accrue
during the period but may be received by an executor.

Post death period (from day after date of death)

After the death of a natural person another person is created at law called “The Estate of the
late……………………”.An executor is appointed by the court to administer the estate of
the deceased person. The executor collects all income due to the estate and pay all expenses
of the estate. Not all income collected by the executor is taxable income and not all
expenses are allowable for tax purposes. The taxable income and tax liability is determined
in the usual manner and tax rates are applied depending on whether its taxable income from
employment or from trade. No credits are granted to an estate. The executor pay any tax due
and collects any tax refundable on behalf of the estate.

Existence of the Deceased Estate and Distribution

The estate exists as a taxpayer from day after date of death up to date of final Liquidation
and Distribution. Any estate has to be distributed whether it exists for a longer or shorter
period. Distribution of the estate may be at the discretion of the executor or according to
the WILL written by the late. Any distribution received by an heir cash or property is no
not taxable income it is an amount of a capital nature. However if the heir invests the cash
or sells the immovable property inherited he is taxable on the income from the investment
and capital gains tax is chargeable on the sale of immovable property. The deceased may
have wished for a TRUST to be created after his death therefore the distribution will be to
a TRUST. Once created the TRUST becomes a taxpayer in its own right and it can carry out
trade for the benefit of the beneficiaries stated in the WILL .

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Beneficiaries /Heirs
Ascertained beneficiary is a person named in a WILL who acquires an immediate certain
right to claim the present and future enjoyment accruing from an asset in the estate. The
ascertained beneficiary is taxable on the immediately after the death of the deceased.

Beneficiary with a vested right means a person identified as the beneficiary to present or
future enjoyment of income. He is taxable on income distributed to him from the TRUST.

Beneficiary with a contigent right means a person who will have a right to receive income
upon the happening of a certain event. The beneficiary is taxable on income distributed to
him.

Example 1
Senior bachelor aged 60 years died on 3 April 200x after a short illness. He was a manager
with a retail shop in Harare. His earnings to date of death were:
$
Salary 2 350 000
Cash in liue of leave 470 000
Pension from former employer 1 000 000
Medical aid paid by employer 900 000

The executor received insurance proceeds of $12 000 000 from his life policy.

Required
Calculate the taxable income.

Solution
Taxable income of Senior Bachelor for the period 1 January 200x to 3 April 200x ( date of
death)
$
Salary 2 350 000
Cash in liue of leave 470 000
Pension 1 000 000
Medical aid benefit exempt -
Taxable income 3 820 000

Post death period

insurance proceeds $12 000 000 capital nature -
Taxable income nil

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Example 2
Chaka a civil servant married to a non working spouse died on 31 August after a long
illness. His return of income for the year reflected
From 1 January to date of death
Gross salary 14 800 000(PAYE 1 500 900)
Pension contributions 3 000 000
Medical aid 450 000
Medical expenses 200 000
Life insurance premiums 300 000
NSSA 150 000

On 15 November ,the executor received the following amounts

Cash in lieu of leave from Government 6 700 000
Proceeds from insurance 15 000 000

The executor’s final and liquidation account was confirmed by the Master of High court on
15 January the following year. Mrs Chaka qualified for a widow’s pension of $250 000 per
month. She received a death benefit of $4 230 000 on 1 December being the equivalent of
her late husband’s three months salary.

Required
Calculate the tax liability of each taxpayer.

Solution
Taxable income of the late Chaka for the period 1 January 200x to date of death 31 August
200x
$
Salary 14 800 000
Cash in liue of leave capital nature$6,7 million -
14 800 000

less allowable deduction

Pension &NSSA contributions maximum 1 440 0000
Life insurance premiums prohibited -
Taxable income 13 360 000

Taxable income for the Estate of the late Chaka period 1September 200x to 31 December
200x
Proceeds from insurance capital nature -
Death benefit capital nature -
Taxable income nil

Taxable income Mrs Chaka

Pension 1 000 000

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Questions to attempt
Question1
Mr Zuva died on 14 May 2000x .His WLL bequeathed the sum of $100million to his long
time friend Margaret and to his only brother , a commercial building at Mutoko business
centre. The rest of the residue of the estate was left to the testator’ son and daughter in
equal shares.

Among the assets forming the residue of the estate were a fixed account in the Post Office
Savings Bank (POSB) and an investment with Kingdom commercial bank. Interest
amounting to $1million accrued on 30 June 200x from the POSB investment while a cheque
for $4million was received from Kingdom bank being interest accrued to 30 July 200x.The
investments (in POSB and Kingdom)were awarded to the children of the testor on 1 August
200x in equal shares.

The Final Liquidation and Distribution Account was confirmed by the Master on 1 January
200x1 in terms of the Administration of Estates Act. Shown in this account was an amount
of $500 000 being commission which accrued on 10 May 200x but was only paid to the
estate in August 200x.

Required
Outline with full reasons the parties taxable in respect of the income accruing.

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Chapter 12
ESTATE DUTY
Introduction
The estate duty Act is administered by the Master of High Court or The Assistant Master in
Bulawayo. Estate Duty is charged in respect of the estate of a person who dies on or after 1
February 1968.Estate duty is not charged on an estate of a person who dies n or after 18
April 1980 who is designated as a Hero in terms of the National Heroes Act chapter 10:26.

Estate duty is charged on Dutiable amount at the rate of 20%.

What constitutes and estate

The estate of a person shall consist of all the property of the deceased. Property means any
right in property or any right to property movable or immovable, corporeal or incorporeal.

Property shall consist of:

▪ All property of the person as at the time of death which was acquired by that
person on or after 1 January 1967.
▪ All property which is deemed to be property of that person at the time of his death.
▪ All property of that person as at the time of his death which was acquired by that
person before 1 January 1967.
▪ Any fiduciary, usufructuary or like interest in property( including any right to an
annuity charged upon property) held by the deceased immediately prior to his death.
▪ Any right to an annuity enjoyed by the deceased immediately prior to his death,
which accrue another person on the death of the deceased.

If the deceased was ordinarily resident in Zimbabwe property includes:

▪ Any immovable property situated in Zimbabwe
▪ Any property physically situated in Zimbabwe
▪ Any limited interest in the movable or immovable property
▪ Any debt which is secured upon immovable property by bond registered in
Zimbabwe.
▪ any debt recoverable or right of action which is enforceable in Zimbabwe.
▪ any stocks or shares in any company and any corporation or local authority within
Zimbabwe if transfer of change of registration is effected by registration.

If the deceased was not ordinarily resident in Zimbabwe property does not includes:

▪ Any right in immovable property situated outside Zimbabwe

▪ Any right in movable property situated outside Zimbabwe
▪ any debt not recoverable or enforceable in courts in the court Zimbabwe.
▪ any goodwill licence, patent, design, trademark, service-mark ,copyright, no
registered or enforceable in Zimbabwe or attaching to any trade in Zimbabwe

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Deemed property
The property which is deemed to be property of the deceased includes:
▪ Any amount due and recoverable under any policy of insurance which is a local
policy.
-A policy payable to a surviving spouse is not deemed to be property.
-A policy used for the payment of estate duty to the extent of estate duty payable is
not deemed to be property.
▪ A policy which was ceded by the deceased for the payment or fulfilment of any
obligation
▪ Any donation made by the deceased with the intention of avoiding estate duty
▪ Any donation of property exceeding $200 in value under a donation inter vivos
made before 1 January 1967 un less the donation was made 2 years before date of
death of the deceased.
▪ A donation pf property exceeding $1000 in value (not to a spouse) made on or after
1 January 1967.
▪ Any donation made by the deceased under a do nation mortis cause.

Dutiable amount of an estate

Dutiable amount is arrived at after deducting the following:
▪ Funeral and death bed expenses which are considered to be fair and reasonable but
excluding the cost of a tomb stone
▪ All debts due by the deceased to persons ordinarily resident in Zimbabwe which has
been discharged from property included in the estate.
▪ all administration costs related to he estate except for
- the administration of property which is not included in the estate
-expenses incurred in the management and control of any income accruing to the
estate at the date of death.
▪ all expenditure incurred in carrying out the requirement of the Master of High Court
▪ Amount included in the total value of the property of the deceased in respect of
property situated in Zimbabwe acquired by the deceased
▪ before he became ordinarily resident in Zimbabwe
▪ after he became ordinarily resident by inheritance or by donation if the donor was
not ordinarily resident
▪ Any due by the deceased to person ordinarily resident outside Zimbabwe which
have been discharged from property in the estate.
▪ where the deceased is survived by a spouse or by one or more minor children or by
both the value of the family home(principal private residence).
▪ Any amount included in the estate which is payable on the death of the deceased
from a pension fund or from the Consolidated Revenue Fund.
▪ Insurance proceeds up to a maximum of $20 000 where the deceased is survived by
a spouse.
▪ The value of any interest included as property where such property was held by the
deceased because of a donation to him.
▪ Any mount which in terms of the WILL of the deceased is donated to

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-a public institution, charitable organization,

-The State or local authority or Rural district council
-educational or for ecclesiastical purposes of a public nature
-any public institution for the advancement of science art
▪ Any amount included in the estate in respect of the value of pictures, books, or other
objects of art
Administration
Valuation of property included in the estate shall be the price realised on the sale of the
property or near market value. The executor is required to submit a return disclosing the
dutiable amount including
-The property of the deceased at the date of death
-The deemed property
-The allowable deductions

If the executor fails to submit the returns the dutiable amount is estimated and he will be
liable to pay the duty.

Rates for Estate Duty

Estate Duty is chargeable at the rate of 20% on dutiable amount.

Credits
▪ Estate of a person who died leaving a spouse
The credit is $80million and the credit is reduced by $400 for every $1 000 by which it
exceeds $400million
▪ Estate of a person who died leaving no spouse or minor children
The credit is a rebate of$50 000 reduced by $100 for every$1 000 by which it exceeds
$150 000.

Example1
Dutiable amount $500million. The deceased is survived by a spouse.

Duty payable is
Duty chargeable 20% 100 000 000
Less credit 80 000 000
Reduced by 400x100million 40 000 000 40 000 000
1 000
Duty payable 60 000 000

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Chapter 13
CAPITAL GAINS ACT

Gross Capital Amount Section 8.1

Goss capital amount(Sale price) means the total amount received by or accrued to or in
favour of a person or deemed to have been received by or accrued to or in favour of a
person in any year of assessment from a source within Zimbabwe from the sale of specified
assets on or after 1 August 1981,excluding any amount which constitute gross income.

Specified asset means

• immovable property like land ,buildings but excluding movable assets
• any marketable securities including any bond capable of being sold in a share
market or exchange, any debenture, share or stock
• the right possessed by reason of a person’s participation in any unit trust whether or
not capable of being sold in a share market or exchange.

Capital gain or capital loss is the amount remaining after granting exemptions and after
deducting allowable deductions. Gross Capital amount less exemptions=capital amount less
allowable deductions=capital gain or capital loss.

Section 8.2 .a Exchange rates

If there is a variation in the rate of exchange of currency between Zimbabwe and any other
country, the amount expressed in Zimbabwean currency is the gross capital amount. If the
receipt and accrual of the amount occur in different years effect shall be given to the
increase or decrease in the gross capital amount in the year in which the amount accrues.

Deemed sales
Section 8.2.b Disposal other than by way of sale
Where a person disposes any asset other than by way of sale like by donation such disposal
is deemed to be a sale and the gross capital amount is the fair market value of such asset.
Section 8.2.c Expropriation of assets
Where a specified asset is expropriated it is deemed to have been sold for an amount equal
to the compensation received.
Section 8.1.d Assets sold in execution of court order
Where an asset is sold in execution of court order the sale price shall be deemed to be have
accrued to the person on whose behalf it was sold.
Section 8.1. e Maturity or Redemption of stock
Where an amount accrues to a person by reason of maturity or redemption of a specified
asset, the asset is deemed to have been sold by that person on that date.

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Section 8.f. Transfer of rights

Where a person transfers to another person his rights under a deed of sale in respect of the
passing of ownership of the specified asset , he shall be deemed to have sold the specified
asset to that other person for an amount equal to that received upon transfer.

Section 10 Exemptions from capital gains

The following sales are exempt from capital gains tax:
• Sale of specified assets by charitable organization or building societies
• Sale of specified assets by the executor of a deceased state forming part of the
estate
• The sale of a specified asset by a person carrying out insurance business.
• The sale of immovable assets by a petroleum operator
• The sale of a specified asset by licensed investor operating on an export processing
zone.
• The sale of a specified asset by a licensed investor operating at any industrial park.
• The sale of a marketable securities quoted on the Zimbabwe stock exchange.

Capital gains tax rates

• Sale of a specified asset 20 %
• Sale of principal private residence by an individual who is over 60 years 10 %
No credits are granted against capital gains chargeable. No aids levy is chargeable.

Allowable Deduction section 11.2

The deductions to be allowed against the sale price (Gross Capital Amount) are:
• Cost of acquisition
The cost incurred in the acquisition or construction of the specified asset, excluding
expenditure which was allowed in determining taxable income such SIA or Wear &
Tear or allowances under paragraph 2 of the 7th schedule.

Expenses such as interest on mortgage bond, architect’s fees, bond raising fees
forming part of acquiring the asset. If an asset is acquired by way of inheritance the
cost of acquisition is the value as in the deceased estate or by way of donation the
value is as in the donor’s hands.

• Cost of improvements
The cost incurred on additions, alterations or improvements to a specified asset
excluding any expenditure allowed in determining taxable income.

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• Inflationary allowance
An allowance at the rate of 100% of the Annual Average Consumer Index on cost of
asset or cost of improvements, calculated from date of acquisition to date of sale ,
each part of the year is regarded as a full year. (The years are counted as:
The calendar year of January to December was adopted as from 1998.Before that it
used to be from 1 April of the previous year to 31 March of the following year. The
year April 1997 to 31 December 1997 (even if it is less than 12 months) there after
the years a counted on a calendar year basis.

• Selling expenses
Expenses incurred directly with the sale of the asset such as painting ,agent’s
commission or advertising.

• Bad debts
Any irrecoverable amount arising from the sale.

• Expenses on court case

The costs taxed by the Registrar of the High court or Supreme court in a court case
appeal on Capital gains tax matters.

• Overall deduction of $5 000 or less

If after granting all the deductions above the capital gain derived is $5 000 or less it
allowed as a deduction.

Section 11.3
An assessed capital loss brought forward from previous years shall be allowed a deduction
against current capital gain or loss.
Section 11.5
Where the owner of lease improvements have been taxed on them he shall be deemed to
have incurred expenditure equal to the value of the improvements.
Section 6 Deed of sale
If a person transfers to another person his rights under a deed of sale in respect of the
passing of ownership of a specified asset he shall be deemed to acquired the asset from that
other person for an amount equal to the amount payable by him under the deed of sale.

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Example
Computation of Capital Gains Tax
Mashumba sold his house in Budiriro suburb of Harare for $2 850 000 in April 200x. He
had purchased the house in August 2000 for $240 000.He constructed improvements being
a two bed roomed cottage in the following year for $160 000 in June 2001.He incurred
selling expenses of $ 235 000.

Required
Calculate Capital gains tax payable.

Solution
Capital gains tax for Daniel for the year ended 31 December 200x
$
Sale price 2 850 000
Less allowable deductions
Cost 240 000
Inflationary 100%x240 000x5yars 1 200 000 1 440 000
Improvements
Cottage 160 000
Inflationary 100%x160 000x4years 640 000 800 000
Capital gain 610 000

Capital gains tax @ 20 % $122 000

Example 2
Madzibaba acquired and sold shares as follows:
Date Acquired Purchase price Selling price

$ $ $
2000 shares January 2001 10 000 1 500 000
1400 shares quoted on
Zimbabwe Stock Exchange March 2004 2 300 000 4 800 000
3000shares quoted on the
Zambian Stock Exchange December 2003 4 100 000 10 000 000

Madzibaba incurred selling expenses of $900 000 on sale of all the shares

Required
Calculate capital gains tax.

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Solution
Capital gains tax payable by Madzibaba for the year ended 31 December 200x
$
Gross capital amount
Unquoted 1 500 000
quoted on Zimbabwe Stock Exchange exempt -
quoted on the Zambian Stock Exchange not Zimbabwe source -
1 500 000
less cost 10 000
Inflationary allowance 100%x10 000x5years 50 000 60 000

less selling expenses 2 000 sharesx900 000

6 400shares 281 250
Capital gains 1 168 750

Taxed at @20% $233 750

Example 3
Nokutenda donated her a house in Marondera valued at $5 100 000 to her youngest
daughter Ruvimbo during the year. She had purchased the house in October 2000 for $230
000.A swimming pool was constructed in June 2002 for $200 000 and a double lock up
garage a year latter at a cost of $160 000.

Required
Calculate Capital Gains tax

Solution
$
Gross capital amount 5 100 000
Less allowable deductions
Cost 230 000
Inflationary 100 %230 000x 6years 1 380 000 1 610 000
Improvements
Swimming pool Cost 200 000
Inflationary 100%x200 000x3year 600 000 800 000

Double garage Cost 160 000

Inflationary 100%x160 00x2years 320 000 480 000
Capital gain 2 210 000

Capital gains tax @ 20 % $442 000

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Section 12 Damage or destruction of specified asset

• No expenditure is allowed as a deduction on the sale of a specified asset which is
exempt from tax.
• Where a specified asset is damaged or destroyed it shall be deemed to have been
sold at an amount equal to any receipt or accrual if compensated.
• If the amount received is less than the allowable deductions (cost of asset and cost
of improvements ) the asset shall not be deemed to have been sold and the cost of
the asset shall be reduced accordingly. Inflationary allowance shall be calculated on
the reduced cost.
• If the receipt or accrual is used to purchase or construct another specified asset of
like nature as replacement of the damaged one the amount used shall not be deemed
to be a sale and the unexpended amount shall be taxable.
• Where the replaced asset is subsequently sold no deduction is allowed in respect of
the above expenditure.

Example
New Era private limited constructed a commercial building in Chitungwiza town for
$2 600 000 in November 200x. A wall around the property was constructed in February
200x3 for $805 000. The property was destroyed by fire due to an electrical fault. The
building had comprehensive insurance cover and New Era received $12million as
compensation from the insurers.

Solution
The receipt of $12million is deemed to be a sale and capital gains/loss would be calculated
accordingly. If the company had received $2.2million as compensation then it shall not be
deemed to be a sale as the cost ($2.6million+$805 000)exceed the receipt.

The cost shall be reduced as follows:

$
Cost 2 600 000
Cost of improvements 805 000
Total 3 405 000
Less compensation 2 200 000
Reduced cost 1 205 000

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Capital gains tax reliefs

Sections 15,16,17,18, 21,and 22 can be used by the taxpayer in reducing tax liability or
postponing payment of capital gains tax.

Section 15 Transfer of specified assets between companies under

the same control
If the ownership of a specified asset is transferred from one company to another under the
same control in a scheme of merger or reconstruction of a group of companies or
conversion of a private company into a public company.

• The transferor and the transferee may elect that the selling price of the asset shall be
deemed to be the sum of allowable deductions being cost of asset ,cost of
improvements, inflationary allowance and selling expenses
(section 11 a, b, c and d).

The actual selling price shall be disregarded and the effect is that no capital gains arise in
the hands of the transferor. However capital gains or capital loss shall be calculated in the
hands of the transferor as if he had always owned the asset.

Section 16 Transfer of assets between spouses

If the ownership of a specified asset (including a principal private residence) is transferred
between spouses, the transferor and the transferee may elect that the selling price of the
asset shall be deemed to be the sum of allowable deductions being cost of asset cost of
improvements, inflationary allowance and selling expenses (section 11 a, b, c and d).

The actual selling price shall be disregarded and the effect is that no capital gains arise in
the hands of the transferor. However capital gains or capital loss shall be calculated in the
hands of the transferor as if he had always owned the asset.

Section 17 transfer of business property by individual to a company

under his control

If the ownership of immovable property is transferred from an individual to a company

under his control and the company continues to use the asset for the purposes of its trade,
The transferor and the transferee may elect that the selling price of the asset shall be
deemed to be the sum of allowable deductions being cost of asset cost of improvements,
inflationary allowance and selling expenses (section 11 a, b, c and d).

The actual selling price shall be disregarded and the effect is that no capital gains arise in
the hands of the transferor. However capital gains or capital loss shall be calculated in the
hands of the transferor as if he had always owned the asset. Refer to Income Tax Act 4th
schedule paragraph 8(3) for similar provisions.

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Example
Farai has been operating a manufacturing business for the past three years as a sole trader.
He had purchased the property for $790 000.He formed a company called Ngoni
Enterprises during the year in which he holds 90% of the share holding, the other 10% was
held equally by his sisters Ruvimbo and Tariro. The business was sold lock stock and
barrel as follows:
$
Land 3 400 000
Buildings 5 900 000
Equipment 1 500 000
Stock 2 300 000
13 100 000

The transferor and the transferee made an election in terms of the relevant section of the
Act. Ngoni Enterprises constructed additional buildings two years later at a cost of
$430 000 and sold the business to S&S private limited a 3rd party for $20million.It incurred
$900 000 as selling expenses.

Required
Calculate the capital gains tax in the hands of each tax payer

Solution
Transfer election
The asset is deemed to sold at cost
Cost 790 000
Inflationary 100x790 000x3years 2 370 000
Deemed sale price 3 160 000

Deemed sale price $3 160 000

less total cost $3 160 000
Capital gain nil

Sale to S&S pvt ltd

$
Gross capital amount 20 000 000
less allowable deductions: Cost 790 000
Inflationary allowance
100%x790 000x5years 3 950 000 4 740 000
Improvements
Cost 430 000
100%x430 000x2years 860 000 1 290 000
Selling expenses 900 000
(6 930 000)
Capital gain 13 070 000
Capital gains tax @ 20% $2 614 000

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Section 18&19 Suspensive sale allowance

Hire Purchase sales and credit sales
If an agreement on sale of a specified asset states that ownership shall pass from the seller
to the purchaser upon payment of the full sale price ,a suspensive sale allowance shall be
granted as a de duction against the capital gain arising from the sale.

The suspensive sale allowance is calculated as follows:

A x (B-C)
D

A: the outstanding amount at the end of the year

B: the Capital amount deemed to have accrued
C: aggregate of allowable deductions(cost of asset, cost of
improvements, inflationary allowance and selling expenses)
D: the gross capital amount

The suspensive sale allowance granted shall form part of capital amount in the following
year. The deduction of $5 000 or less shall not apply under suspensive sale. However bad
debts arising from the sale can be granted. Refer to Income Tax Act section 17 for similar
provisions.

Example
Tustirayi aged 33 years sold her house under a suspensive sale agreement during the year
for $15million. The terms of payment were
$
Deposit paid on date of agreement 10million
First instalment 4million
Second instalment 1million
The house was bought in May 1999 for $450 000.A garage was constructed for $320 000 in
the following year. She incurred selling expenses of $120 000.

Solution
$
Gross capital amount 15 000 000
Less allowable deductions
Cost of asset 450 000
Inflationary 100%x450 000x7 years 3 150 000 3 600 000
Improvements
Garage 320 000
Inflationary 100%x320 000x6years 1 920 000 2 240 000
Selling expenses 120 000
Capital gains 8 240 000

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Less suspensive sale allowance

5millionx8 240 000 2 746 667
15million
Capital gain 5 493 333

Capital gains tax @20% $1 098 666.60

Year 2
Capital amount 2 746 667
Less suspensive allowance
1millionx 8 240 000 549 333
15million
Capital gains 2 197 334

Capital gains tax @ 20% $ 439 466.80

Year 3
Capital amount 549 333
Less suspensive allowance nil
Capital gain 549 333

Capital gains tax @20% $109 866.60

Section 20 Reduction in cost

Where an amount accrues whether by way of recovery or recoupment relating to the cost or
deemed cost of a specified asset, which has not been sold, and if the amount of recovery
exceeds the total of cost of asset ad cost of improvements such an asset shall be deemed to
have been sold for an amount equal to the amount so received to the amount or accrued.

Section 21 Sale of Principal Private Residence

Principal private residence of an a individual means the individual’s sole or main residence
including any land surrounding the PPR (not exceeding 2 hectares)

Roll over Relief

If an individual seels a PPR and uses the whole or part of the proceeds received to purchase
or construct e new PPR in Zimbabwe he may elect that the capital gain derived on sale of
old PPR be rolled over. The election is made in the year in which he submits a Capital
Gains Tax return for assessment.

Capital gains tax shall be calculated on any unexpended amount using the formula
AxC
B

A: The unexpended amount

B: Selling price
C: Capital Gain on sale of property

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Section 22 Roll over on sale of property used for business

If a taxpayer sells immovable property used for business and uses the proceeds to purchase
or construct another immovable property to be used for business he may elect for roll over
relief as above. The new and old business need not be similar.

Example
Munyaradzi inherited a principal private residence from his late father’s estate where it was
valued at $340 000 in 1999. In December 2000 he made improvements of $30 000. He sold
the house in January 200x for $5 800 000 and incurred selling expenses of $230 000.Two
months later he purchased a new bigger residence for $8 million and incurred transfer fees
of $1 700 000.

Solution
$
Gross capital amount 5 800 000
Less cost 340 000
Inflationary 100%x340 000x6years 2 040 000 2 380 000
Improvements 30 000
Inflationary 100%x30 000x5years 150 000 180 000
Selling expenses 230 000
(2 790 000)
Capital gain 3 010 000

Cost of new PPR 8 000 000

Add transfer fees 1 700 000
Total cost 9 700 000

Therefore the proceeds of $5.8million were fully used to purchase the new PPR and the
capital gain of $3 010 000 is not taxable it is rolled over in full.

Partial roll over relief

Suppose the cost of the new PPR was $4million
$
Gross capital amount 5 800 000
Less cost 340 000
Inflationary 100%x340 000x6years 2 040 000 2 380 000
Improvements 30 000
Inflationary 100%x30 000x5years 150 000 180 000
Selling expenses 230 000
(2 790 000)
Capital gain 3 010 000

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Taxable capital gain

AxC 1 800 000x3 010 000 934 138
B 5 800 000

Capital Gains Tax @20% 186 827.60

Capital gains rolled over $3 010 000 less $934 138 = $2 075 862

Section 21.3 Treatment of rollover relief

If roll over relief was previously granted on an asset and the PPR is later on sold it shall
reduce the cost of the asset but inflationary allowance is calculated original cost.

In the above example Munyaradzi sold the new PPR for $29million two years later
without replacing it. Show the capital gains tax payable

Solution
$
Gross capital amount 29 000 000
Less allowable deductions
Cost 8 000 000
Transfer cost 1 700 000
9 700 000
Less roll over relief 3 010 000
6 690 000
Inflationary 100% $9 700 000x2year 19 400 000 26 090 000

Capital gains 2 910 000

Capital gains tax @ 20 % $582 000

Section 22 Withholding tax on Capital Gains

Withholding tax at the rate of 10% of the sale price of the specified asset and is payable to
ZIMRA. The tax deducted is credited against capital gains tax payable.

Depositary in relation to the sale of the asset means a conveyancer, a legal practitioner
,estate agent a building society, the Sheriff or Master of High Court ,stock broker or
financial institution

No registration on acquisition of a specified asset shall be made with the Registrar of

Deeds or the person responsible for the registration of transfer of shares shall be made
unless the seller has paid capital gains tax.

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Questions to attempt
Question 1 CIS May 1997 10 marks
As he was nearing retirement age Mr Jones born 24 March 1924 sold his house in
November 200x1 for 80million and immediately purchased and moved into a flat which
cost him $55 570 000 plus stamp duty and conveyancing fees totalling $3 000 000.He had
lived in the house since purchasing it in January 1977 for $40 000.In September 1986 he
had outbuildings constructed at a cost of $60 000.He seeks your advice so as to pay
minimum possible tax on the sale.

Now due to deteriorating health Mr Jones is not confident about remaining in the flat. He
has received an offer of $97million and asks what the tax position would be if he were to
sell the flat for that amount in June 200x1.

Required
Prepare a computation of the capital gains tax payable by Mr Jones on
a The sale of the house
b The contemplated sale of his flat

Question 2 CIS Nov 2001 25marks

John Maraire who works for a company in the central business district of Harare owns a
house in New Houston Park. In December 1999 he bought a 2000m3 stand in Ruwa for
$150 000.He approaches you for advice as he IS contemplating improving his residence by
selling either the two properties and buying a bigger house in Avondale West or building a
house on the Ruwa stand. The Avondale house will cost $53 500 000.

John is told by an estate agent that his Houston Park house could fetch him a maximum of
$49million.The stand in Ruwa are selling for approximately $20 500 000.John bought the
Houston house in May 1989 for $ 39 000. It is estimated that building a house of John’s
choice in Ruwa would cost him around $25 800 000 if he builds the house within six
months.

Required
With the aid of brief tax computation outline your advice to John (in note form on which
choice he should make considering the implications of the two option on his capital gain tax
obligations. Also consider other financial implications John may need to consider.

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Question 3 CIS May 1999 15marks

Midas pvt ltd submitted its capital gains tax return for the year ended 31 December 200x
with the following information
Details of property sold
Cost Income tax value
Land purchased 130 000 nil
Industrial building
purchased August 1993 500 000 375 000
Commercial building
constructed October 1994 300 000 270 000

Date of sale was 31 October 200x

Selling of $22 000 000 is payable in instalments as follows:
31 October 200x 12 000 000
31 October 200x1 8 000 000
31 October 200x2 2 000 000

The agreed allocation of the sale price is as follows:

Land 10 000 000
Industrial building 7 000 000
Commercial building 5 000 000

As security for the seller, transfer to the purchaser will only be effected on payment of the
final instalment. Agent’s commission of $68 000 was paid.

Required
Calculate the capital gains tax if any applicable for the three years in question.

Question 4
Dadirai bought a house in January 2000 for $265 000 and sold it under suspensive
agreement in March 200x for $25 000 000. The house was painted immediately before sale
for $750 000.
The purchaser made a deposit of $5million and undertook to make further payments of
$5million on each anniversary. The purchaser defaulted on his fourth instalment and as a
result the sale was cancelled.

Required
Calculate the capital gain to be assessed in her hands for each tax year involved.

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Question 5
Binga which is a farm owning company had one of its under utilised farms acquired by the
Government in July 200x. The compensation paid was $27 900 000 ( $12 300 000 for land,
$6 600 000 for tobacco barns, $5million for fencing and $4million for boreholes.

The company had purchased the farm in March 1998 for $120 000 (being $900 000 for land
$300 000 for tobacco barns). Fencing was erected in October of the following year for
$160000 and boreholes were sunk in the same year $420 000. The ITV for tobacco barns on
date of sale was $180 000.

Required
i Calculate the capital gains tax or assed loss due to the company

ii If Binga uses in the same year the $27.9 compensation to purchase land and
construct and industrial building which it uses for manufacturing purposes what
effect will it have on the capital gains position

Question 6 CIS May 2000 25 marks

Ban International, a company incorporated in the United Kingdom has been operating
branches in a number of countries in Africa. The company in a scheme of reconstruction of
its operations in Zimbabwe has formed a new company incorporated in Zimbabwe in which
it owns 92 % of the issued share capital. The new company Ban pvt ltd takes over the
operations of Ban International ltd’s branch with effect from 1 January 200x.The business
assets taken over were as follows:

Original cost Income Tax value

Land 100 000 nil
Industrial building
(acquired April 1994) 950 000 475 000
Furniture &fittings 300 000 150 000
Machinery &Plant 900 000 249 000
Land 200 000 -
Commercial building
(acquired 1988) 800 000 560 000

Given that the income tax values were as at 31 December 200x and the sale prices were as
follows
$
Land 200 000
Industrial building 300 000
Furniture and fittings 300 000
Machinery and plant 500 000
Land 500 000
Commercial building 1 700 000

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Required
i Calculate the capital gains tax position as to December 200x assuming that no
reconstruction elections were made. 18marks

ii Outline the income tax and capital gains tax implications of the reconstructions in
relation to the business assets taken over given that all elections to minimize any tax
liability are made (calculations are not required) 7marks

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Chapter 14
VALUE ADDED TAX (VAT)
Introduction
Value Added Tax (VAT) is an indirect tax levied on the supply of goods or services.
Indirect tax is levied on transactions rather than persons and VAT being a consumption tax
is one of them.

Registration
A person is required to register if his taxable supplies exceed $250million. After registration
the person is allowed to charge and collect VAT on behalf of ZIMRA .Registration is made
within 30 days of becoming liable for registration on the prescribed form (VAT1) together
with other documents like company registration and bank details. .

Registration is cancelled if :
i. The value of taxable supplies falls below the prescribed limit of $250 million
ii If he ceases to carry on any trade and will not carry on any trade within 12 months
after that date.
iii. Where he had applied for registration in anticipation of commencement of trade but
failed to commence trade.

Advantages of VAT
▪ The tax burden is more evenly distributed as more goods and services are taxed
▪ The tax is recovered in stages throughout the distribution line which benefits the
Commissioner general on timeous collections of tax.
▪ The VAT registration certificate may not be used to obtain goods or services
without paying VAT.
▪ There are fewer exceptions to the payment of VAT which broadens the revenue base
for ZIMRA
▪ VAT does not have a double taxation effect as any tax paid by a registered operator
can be claimed as in put tax
▪ Fraudlent activities and abuse of the system which were prevalent under the Sales
Tax system are eliminated.
▪ More compliance on payments and submission of returns is expected.

Disadvantages of VAT
▪ Registered operators may have to install new accounting systems which are
compliant with the VAT system.
▪ Registered operators are required to keep detailed records of tax invoices which is
and additional administrative cost.
▪ The refund of input tax will increase the workload of ZIMRA.

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The rates for VAT are as follows:

▪ Zero rate 0%
▪ Standard rate 15%
▪ High rate 25%

Submission of VAT returns and Payment of VAT

All registered operators are required to submit returns and account for VAT to ZIMRA at
regular intervals called tax periods. The following tax periods apply to registered operators
as follows:
▪ Two month tax period-Category A & B
Category A : The tax period is every 2 months being the last day of January, March,
May ,July ,September and November.
Category B-The last day of February, April, June, August, October &December.
▪ One month tax period-Category C
The tax period is 1 month and applies to larger businesses with high turnover and
organizations with who expect regular refunds of VAT.
▪ Any other Tax Period-Category D
A registered operator will qualify for any other tax period if the operations are
made up mainly of farming activities .This category is not available to those in
category C.

The 10 day rule

The tax period normally ends on the last day of each month, however the registered
operator may choose a day other than the last day if his accounting cut –off date is 10 days
before or after the month end. The return must still be submitted within the prescribed
dates.

Deemed supplies
VAT is chargeable on the supply of goods and services. The following are deemed to be
supplies on which VAT is chargeable :
▪ Sale of a going concern is deemed to be a supply of goods
▪ Sale of goods by auction
▪ Any goods or rights forming part of the assets when are registered operator ceases
trade are deemed to be supplied by the registered operator on the day before he
ceases trade
▪ Lay by agreements where goods are sold at less than the prescribed amount and if
the agreement is cancelled and a deposit retained by the seller. It is deemed to be a
supply on that date.
▪ Payments made to registered operators by local and public authorities in respect of
taxable supplies
▪ The supply of a right of use of property under a lease agreement is deemed to be a
supply.
▪ Goods reposesed under an instalment credit agreement is deemed to be a supply
unless the goods did not form part of the debtor’s trading stock.
▪ A person receiving money on a bet is deemed to supply a service to the partner.

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▪ The transfer of a loan account or shares in a share block company which is a

registered operator to shareholder is a deemed supply

Exempt supplies
Exempt supplies are not charged VAT at all. These are:

▪ The supply of any educational services for pre-school, primary, secondary tertiary
and technical education and the education or training of physically or mentally
handicapped persons at any institution which meets the requirements of the Ministry
of Education.
▪ Medical services supplied by any person
▪ The supply of residential accommodation under a lease or hire agreement or
as a benefit to an employee
▪ The supply of public road and railway transport to fare paying passengers and their
luggage. Note that the transport of passengers to an export country is zero rated and
overrides the exemption
▪ The supply of certain financial services
▪ The supply of leasehold land used to erect buildings.
▪ The supply by an organization not for gain of any donated goods or services where
the association manufactures goods and at least 80% of the value of the chemicals
used consist of donated goods.
▪ The supply of goods and services by an employee organization to any of its
members to the extent that the consideration for the supply consists of membership
contributions.

Zero rated supplies

These are taxable supplies taxed at the rate of zero %

▪ Goods exported to an address in an export country.

▪ Supply of goods as a going concern
▪ Regular inputs supplied to farmers for farming operations like herbicides, fodder
insecticides milk, raw meat and bread
▪ Goods for disabled persons
▪ Supply of gold coins issued by the Reserve bank.
▪ The supply of drugs as defined in the Medicines & Allied Substances Control Act.
▪ The supply of goods under rental agreement if exclusively used in an export
country.
▪ The supply of transport service to passengers or goods to or from outside Zimbabwe
▪ Transportation of passengers from one place to another in Zimbabwe by aircraft to
the extent that the travel constitutes international trade.
▪ Transportation services for the movement of goods through Zimbabwe from one
export country to another.
▪ Services rendered in connection with land or improvements outside Zimbabwe.
▪ The supply of services by a registered operator to his branch situated in an export
country
▪ Patents and other interllectual property for use outside Zimbabwe .

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Accounting basis
The invoice or accrual basis of accounting is that a registered operator must account for
VAT on both cash and credit sales and on cash and credit purchases. A registered operator
may use cash basis upon permission from the Commissioner.The general rule is that a
registered operator accounts for VAT at the time an invoice is issued or the time any
payment is received by the supplier (whichever is earlier).

Example
Tawanda is a registered operator in category B and accounts for VAT on the invoice basis.
In February he purchases a 4 plate stove for resale and receives a tax invoice for
$1 000 000 (inclusive of VAT @15%). He pays the supplier $900 000 in March. He may
claim the full VAT of $150 000 in the period ending February even if he has not paid for
the goods in full.

Tawanda sales the stove for $1 500 000 inclusive of VAT .He issues an invoice in April and
payment is made in May .The registered operator accounts for VAT in April even if
payment has not been made.

Advantages of the invoice basis

-A claim for VAT is made on purchases before payment.
-It is easy to calculate as it is based on invoiced sales and purchases

Disadvantages
-VAT is accounted for on sales before receipt of payment from debtors
-Debtors and credits are must be retained at the end of each tax period
-It can lead to cash flow problems

Importation of goods or services

VAT is levied and paid on the importation of any goods into Zimbabwe by any person on or
after the fixed date .The importer of goods is liable to pay the VAT on importation. Goods
are deemed to be imported on the date the goods entered for home consumption that is
cleared through customs and VAT on importation must be paid at the same time as customs
duty.

The supply of service should be made by supplier who is not resident in Zimbabwe or who
carries on business outside Zimbabwe to a recepient who is resident in Zimbabwe and used
or consumed in Zimbabwe otherwise than for making taxable supplies. VAT is not payable
if the supply is exempt, zero rated or at the standard rate of 15%.

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INPUT TAX
Input tax is the tax paid by a registered operator when he acquires goods or services for the
purpose of making taxable supplies. Input tax applies to acquisition of trading stock, raw
materials fixed assets, manufacturing or administrative overheads, marketing expenditure,
accounting, security, consultation and cleaning services. A deduction of input tax can be
made if the registered operator is in possession of proof of payment of VAT when he
acquired the goods or services that is a valid tax invoice which has been issued to him by
the supplier. If goods or services are acquired for a purpose other than making taxable
supplies the VAT will not qualify as input tax.

Input tax may be denied on

▪ Goods or services acquired for purposes of entertainment such as staff refreshments,
food or equipment for staff canteens
▪ Membership fees or subscription fees of clubs associations or societies of sporting
,social or recreational nature.
▪ Medical services provided to persons under medical aid that is the medical scheme
may can not claim input tax on the medical services provided to its members.
▪ A deduction for input tax may not be claimed by a registered operator on acquisition
of a non commercial motor vehicle.

OUTPUT TAX
It is tax charged by a registered operator on a supply of goods and services

Tax invoices
Invoice is a document notifying an obligation to make payment. A tax invoice is a
document which enables the registered operator to claim the input tax.
It contains some details about the taxable supply and is issued if the consideration exceeds
$100. An operator is required to issue the tax invoice within 30 days from date of supply.

Credit note and Debit note

A credit note is issued when the consideration for the supply is reduced. A debit note is
issued when the consideration is increased.

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Calculation of VAT

Zero rate 0% Standard rate 15% High rate 25%

Supply of goods or services - xx -

Add deemed supplies xx -
xxx -
Less input tax - xx -
Amount of tax payable xxxx

VAT is charged on cost plus mark up of the goods and services. The tax element of goods
and services supplied will be determined by applying the tax fraction

Tax fraction: r
100+r
r = rate of tax

Example
Nyasha is a registered operator. For the month of May she made purchases of $1million
inclusive of VAT .VAT paid as input tax $150 000.She submits a VAT return showing
sales of $1.5million.
Show the VAT payable by Nyasha.

VAT payable by Nyasha

Sales $1.5million
VAT @15% 225 000
Less tax fraction 15x$225 000
115
29 348
195 652
less Input tax 150 000
VAT payable 45 652

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Penalties
There are two ways of penalizing a registered operator
▪ Penalty and interest for failure to pay tax when due and
▪ Additional tax in the case of evasion or causing a refund in excess of that properly
refundable.

Ordinary penalty
If payment is not made within the prescribed period the tax penalty is equal to the unpaid
tax that is a 100% penalty.
Additional tax
Additional tax is an amount not exceeding 100% of the tax evaded or refunded in excess or
chargeable. It arises when the registered operator intentionally fails to pat VAT payable or
causes a refund in excess of amount properly refundable. It is not subject to 100% penalty
but is subject to interest.
Offences
Any person found guilty of VAT evasion is liable on conviction to a fine of up to
$100 000 or imprisonment of up-to 24 months.
Objection
If a person is dissatisfied with a VAT assessment he may lodge a letter of objection in
writing within a period of 30 days after the date of assessment, specify the grounds of
objections.
14stc22

end 2007 tax year

14stc22

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