tax rev (dec22)

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2012 EXAM YEAR

TAX REV KIT (ZWE)

2011 TAX LAW

Marvellous Tapera

MBA (UZ), ACCA, CIS, ICTA(Z), CPA(TZ)

All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, without the approval of the author or his authorized agents

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RATES OF INCOME TAX ON TAXABLE INCOME

“Section Level of taxable incomeSpecifiedpercentage%

14(2)(a)(i) Up to $2,700 0

14(2)(a)(ii) $2,701 to $6,00 20

14(2)(a)(iii) $6,001 to $12,000 25

14(2)(a)(iv) $12,001 to $18,000 30

14(2)(a)(v) $18,001 and more 35

14(2)(b) Taxable income of individual from trade or investment 25

14(2)(c) Taxable income of company or trust 25

14(2)(d) Taxable income of pension fund from trade or investment 15

14(2)(e) Taxable income of licensed investor (before the end of the fifth year of his or her operations as such) 0

Taxable income of licensed investor (after the fifth year of his or her operations as such) 25

14(2)(f) Taxable income of holder of special mining lease 15

14(2)(g) Taxable income of company or trust derived from mining operations 15

14(2)(h) Taxable income of person engaged in approved BOOT or BOT arrangement : First five years of the arrangement 0

Second five years of the arrangement 15

14(2)(i) Taxable income of industrial park developer (before the fifth year of his or her operations as such) 0

Taxable income of industrial park developer (after the fifth year of his or her operations as such) 25

14(2)(j) Taxable income of operator of a tourist facility in approved tourist development zone (before the fifth year of his or her operation as such)

0

Taxable income of operator of a tourist facility in approved tourist development zone (after the fifth year of his or her operation as such)

25

14(3) Taxable income from manufacturing of a company which exports 50% or more of its output 20

A 3% AIDS levy is chargeable on income tax payable less tax credits.

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Pension Contributions

Maximum permissible deduction $

In relation to employers:Contribution to employer’s pension fund per employee 5,400Contribution to employer’s benefit fund per employee 1,500In relation to employeeContribution to employer’s pension fund 5,400Retirement annuity fund/Self employed pension fund 5,400National Social Security: 4% of gross salaryAggregate maximum contributions to all above per employee per year: 5,400

Deemed annual motoring benefits:

Engine capacity $

Up to 1500cc 1,8001501 – 2000cc 2,4002001 – 3000cc 3,6003001 and above 4,800

Tax credits $

Elderly person (55 years and over) 900Physically disabled person 900Blind person 900Medical aid and expenses 50% of amount paid in each year

Capital Allowances

Special initial allowance 25%Accelerated wear and tear 25%Industrial building 5%Commercial building 2.5%Motor vehicles 20%Movable assets in general 10%

Value Added Tax (VAT) 15%

Capital Gains Tax

Disposal of listed marketable securities acquired after 1 February 2009 1% of gross proceeds

Disposal of specified assets acquired prior to 1 February 2009– sold prior to 1 February 2009 20% of gain– sold after 1 February 2009 5% of gross proceeds

Disposal of specified assets acquired on or after 1 February 2009 (excluding listed securities) 20% of gain

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Inflation adjustment rate per year 2·5%

Capital gains withholding tax on sale proceeds

Immovable property 15%Unlisted securities 10%Listed securities (prior to 1 February 2009) 5%Listed marketable securities (final tax) 1%

Withholding taxes:

Dividend distribution to shareholders other than companies:By a company listed on the Zimbabwe Stock Exchange 10%By any other company 15%Non-residents’ taxNon-resident tax on interest nilNon-resident tax on certain fees and remittances 15%Non-resident tax on royalties 15%Residents’ tax on interest from financial institution 15%Withholding tax on contracts 10%

Elderly taxpayers (55 years and over)

The exemptions from income tax are as follows: $

Rental income 3 000Interest on deposits with a financial institution 3 000Interest on discounted instruments 3 000Pension No limitGain on disposal of Principal Private Residence (no limit)Gain on disposal of marketable securities 1,800On acquisition of motor vehicle from employer No Limit

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ABBREVIATIONS

The following abbreviations are used in the book:

AY Assessment year

FA Finance Act

TP Tax payable

T/P Taxpayer

GI Gross income

CG Commissioner General

CA Capital allowances

CGTA Capital Gains Tax Act (chapter 23.01)

CIR Commissioner of Inland Revenue

COT Commissioner of taxes

Main Act Income Tax Act (chapter 23.06)

ITA Income Tax Act (chapter 23.06)

VAT Act Value Added Tax Act (chapter 23:12)

ZIMRA Zimbabwe Revenue Authority

CAP Chapter

SI Statutory Instrument

S. Section

Para Paragraph

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Contents and topics

1. Gross income

2. Gross income inclusions: Individuals

3. Gross income inclusions: Trade & Investment

4. Deductions

5. Capital allowances

6. Business tax

7. Capital gains

8. VAT

9. Admin and other

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Chapter 1 Gross income

1.1 SOURCE OF INCOME

1.1.1Exempt income

Erika Gava, a resident of Zimbabwe received the following incomes for the year of assessment ended 31 December 2011.

a) $14,250 rental income from a source within Zimbabwe

b) $30,000 in salary while working in Brazil for the period 1 January to 31 July 2011.

c) $2,000 dividend income from Xcel Ltd, a company incorporated in Zimbabwe

d) Dividend income of $1,200 from Cola Company, a Ghanaian based company (15% of withholding tax had been paid)

Calculate the taxable income of Erika Gava for the AY ended 31 December 2011.

Solution

Rental income 14,250

Salary from Brazil -

Dividend from Xcel -

Dividend from Cola (100/85 x $1,200) 1,412

Taxable income 15,662

Notes

Income for services rendered by a person for a period of more than 183 days outside Zimbabwe is not from a Zimbabwean source unless the person is rendering services for the State re Brazilian salary

Dividend received by an individual from a source within Zimbabwe is tax exempted in the person’s hands (para 9, 3rd Sch ITA, because it is taxed at source re Xcel dividend.

Dividend received by a person from outside Zimbabwe, at the time that person is a resident of Zimbabwe is deemed to be from a source within Zimbabwe re Cola dividend.

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1.3 DEEMED ACCRUALS

1.3.1 Delayed distribution

Emma is a market director for Apes Ltd. On December 18, 2010, the board of directors awards her a $20,000 bonus. Emma asks the company’s finance controller to delay processing the bonus check until January 2011. The request was granted and Emma received the $20,000 bonus check on January 10, 2011. Advise Emma whether she has the choice of including the bonus in her 2011 GI, as she contemplates.

Solution

Under s.10 (1) ITA, income shall be deemed to have accrued to a person, even if such income has not been actually paid over to the person, but remains due and payable to him.

The bonus became due and payable to Emma in December 2010, when the Board declared it unconditionally as income entitled to her. If she wanted to use the money, Emma could have used it for her benefit effective 18 December 2010, without any recourse. She has demonstrated an ability to control the bonus by having it paid in January 2011, which was unconditionally made available to her in 2010 and she must include the $20,000 in her 2010 gross income.

1.3.2 Donated income

Manatsa is an inventor who has also written several successful mystery novels. Because he didn't really need the income from the novels, Manatsa wrote them under an assumed name and had the royalties paid to M-R (Pvt) Ltd. When Manatsa incorporated M-R (Pvt) Ltd, he gave all the stock to his three sons. The sons are employed by the corporation, with salaries approximately equal to the royalties earned each year from the novels. In whose name is the royalty income taxed?

Solution

The issue to be resolved is who is taxed on the royalty income. This arrangement is an attempt to transfer taxation of Manatsa's royalties to his sons through M-R (Pvt) Ltd. Because the income was earned by Manatsa, the assignment of income doctrine requires that he be taxed on the royalties. The royalties received by Manatsa would not be income for the corporation. Section 10(3) also provides that any income donated by the parent to his/her minor child remains the income of the parent and the parent remains taxable on that income.

1.3.3 Deemed income: Advance income

Tawanda signs a contract to write a book for Longprint (Pvt) Ltd in the current year. Under its terms, he receives a $5,000 advance against future royalty payments upon signing the contract. The contract provides that if Tawanda does not write a suitable book or if the book's royalties are insufficient to cover the advance, he must repay any portion not earned. When is Tawanda taxed on the $5,000 income received in advance of signing the contract?

Solution

The question is whether Tawanda has realized income from the receipt of the $5,000. Under the claim of right doctrine, income is realized when the taxpayer has complete dominion and control over the income. That is, he can use the money in any manner he chooses and is under no absolute

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obligation to repay the advance. The fact that the income may have to be repaid in a later period does not negate Tawanda's right to control the $5,000 advance payment. If he is required to make a repayment in the future, he would be allowed a deduction at that time. Tawnda has realized income of $5,000 when he receives the advance royalty.

The Income Tax Act imposes tax on receipts that are income in nature and which are chargeable under the ITA. The receipts must properly be determined to be income and not of a capital nature. It is immaterial, irrespective of whether that sum is received in one lump sum or by way of several installments, predetermined or otherwise.

Non-taxability of the receipts

It can be argued that the sum received is a capital payment since it is a one-off event – Mr. Jagger Lee has not written any book or story before and does not plan to do so in the future.He had not retained any copyrights in the publication and therefore not in possession of any rights –whether in the serial publication or in the book that may be published later or the movie that may be produced. The payment is a one-off payment notwithstanding that it was paid in three installments. The payment is not tied to any publication or copies sold and therefore appear to be a capital receipt.

Taxability of the receiptsIt could be argued that the payment was a reward for the provision of personal services (the writing of the story); and such services were rendered for the reasons of receiving the payment.Besides the quantum of the payment is significant - it is not merely a nominal amount to cover Jagger Lee’s costs or inconvenience; he has to provide a service in order to receive the payment – by way of writing a story.Jagger Lee is also motivated to provide the service by the receipt of the payment (as evidenced by the agreement with the newspaper, acceptance of assistance to write the book and the effort put in to write it over a period of time) indicates that the activity (to write the story) was not spontaneous but was planned and organized in a systematic way in accordance with a set time line.

1.4 RESIDENCE STATUS

1.4.1 Foreign working contracts

Simba M, a Zimbabwean domicile and resident, has accepted a five year contract to work in Tanzania. He expects to return to Zimbabwe frequently to see his family and attend business meetings. Describe the main tests to determine whether Simba would be classified as a Zimbabwe resident for Income Tax purposes.

Solution

Simba should be present in Zimbabwe for either six months (183 days) or more during the year of assessment, i.e. 1 January – 31 December. He will be regarded as a non-Zimbabwean resident from the day following his departure as he has a contract for more than one tax year. Any intention to spend short holidays in Zimbabwe will not affect his non-Zimbabwean residency, unless the visits aggregate in total to 183 days in any calendar year. His duties carried out in Zimbabwe must be incidental to those carried out in Tanzania.

1.4.2 Resident working outside

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Skye (Pvt) Ltd is incorporated in Zimbabwe and carries on business in Zimbabwe. In March 2009, the company set up a branch in Angola to promote business there.

Mr Weza who is a Zimbabwean resident is the sales controller of the company and he was seconded to Angola to head the branch there. He is stationed in Luanda and comes back to Zimbabwe twice a month. During his visits in Zimbabwe, he goes to the Head Office and reports to the MD about the progress of business in Angola, as well as visiting his family. During the year ended 31 December 2011, he stayed in Harare for 50 days, and received the following remuneration:

$Salaries 30,000Holiday journey to France with the family 62,000

As he stayed in Angola for over 183 days, he paid Angolan individual income tax of $25,000 on his income of $120,000.

Mr Weza contributes 5% of his salaries for his retirement annuity fund pension in Zimbabwe. None of those contributions are deductible in Angola.

Mr Weza’s wife is a housewife and has no employment income.

a) Explain rules regarding Mr Weza’s residence status for tax purposes in Zimbabwe.b) Comment on Mr Weza’s contribution in Zimbabwe to retirement annuity fund.c) Compute Mr Weza’s taxable income for the AY 2011.

Solution

a) An individual is treated as resident in Zimbabwe for the entire year of assessment if that individual:

o has a normal place of abode in Zimbabwe and is present in Zimbabwe at any time during the AY, or

o is present in Zimbabwe for a period of, or periods amounting in aggregate to, 183 days or more in any 12 months period that commences on 1 January to 31 December, or

o is an official of the government of Zimbabwe posted overseas during the year of assessment

Although Mr. Weza has a home in Zimbabwe, he is not a resident for tax purposes in AY 2011 because he was absent from Zimbabwe for a period, or periods exceeding 183 days in the AY. Mr. Weza is however, liable to pay tax in Zimbabwe on income received for services rendered in Zimbabwe, based on the source rule in Shein v COT.

b) Mr. Weza’s retirement annuity fund contributions are deductible in Zimbabwe. According to s.15(2)(h) no contribution to a retirement annuity fund shall be allowed as a deduction to a member of such fund who was not ordinarily resident in Zimbabwe at the time he made the contribution unless that: person was ordinarily resident in Zimbabwe at the time he became a member of the fund, person became a member of the fund before the 1st April 1967, and

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person’s contributions are not allowed as a deduction in terms of any law imposing a tax on income which is in force in a country other than Zimbabwe.

c) Computation of taxable income

Zimbabwe salary 30,000Holiday allowance 62,000

92,000Less RAF contribution ($120,000 + $30,000) x 5% - restricted 5,400Taxable income 86,600

1.4.3 Non-resident carrying business in Zimbabwe

Mr. Banda is a Zambian national who has been running a hospitality business in Zimbabwe since 2005. His family is also heavily involved in his business. His social activities involve a close relationship with the Zambian community in Zimbabwe and regular social gatherings are held in the private function room of his restaurant in Harare. He plays golf at least once a week at the Harare Golf Club where he is a member. Due to the poor security situation in Harare, he has moved to Musina, in South Africa, where he now lives and commutes across the border to Harare every day to work.

Required:

(a) State the residence and non-residence tests that Mr. Banda satisfies.(b) State whether or not Mr. Banda qualifies for the following:

i) Personal tax creditsii) Deduction for contributions to a superannuation fund.iii) Income tax exemption of interest earned from a local bank.

Solution

a) A person is deemed to be ordinarily resident in Zimbabwe if he/she is:

a national or has a permanent home in Zimbabwe. physically present or exercises an employment in Zimbabwe for a period or periods of 183 days

or more in the year of assessment, i.e. 1 January – 31 December.

Where a person has a permanent home in Zimbabwe and another country, he is a resident of the country with which his personal and economic relations are closer (center of vital interests). If his/her center of vital interests cannot be ascertained, he/she will be a resident of Zimbabwe if he has a habitual abode in Zimbabwe.

Mr. Banda has neither a home in Zimbabwe nor is he employed in Zimbabwe, therefore is not a resident of Zimbabwe. However, the income from a business carried on in Zimbabwe remains taxable in Zimbabwe. The originating cause of such income is the place the business operations are being undertaken, irrespective of the person’s residence.

b) Since Mr Banda is not a resident of Zimbabwe, the following is his income tax position regarding personal tax credits, contribution to superannuation fund and bank interest:

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i) Personal tax credits- Mr Banda qualifies for all tax credits except medical expenses and physical and mental disability credits. No credit for medical expenses or mentally or physically disabled persons is granted if the taxpayer is not at any time during the period of assessment ordinarily resident in Zimbabwe.

ii) Contributions to a superannuation fund- Mr Banda can deduct amounts he pays to a superannuation fund (an annual limit is $5,400), unless the contributions are made to a retirement annuity fund. Contributions made to a RAF are not deductible to non –residents unless:

the person was ordinarily resident in Zimbabwe at the time he became a member of the fund, and

the person became a member of the fund before the 1st April 1967, and the person’s contributions are not allowed as a deduction in terms of any law imposing a

tax on income which is in force in a country other than Zimbabwe.

iii) Bank interest- Mr Banda is exempted from withholding tax on bank interest. Interest paid to a non-resident is exempted from withholding tax.

1.4.4 Non-resident employee

Fungibles Ltd is a U.S. manufacturing company with several subsidiaries. It also has subsidiaries in a number of countries, including Zimbabwe. The Managing Director, Mike, believes that the operation of the Zimbabwean subsidiary would be greatly improved by relocating Andrews, who is currently operations manager in the U.S. parent company. Andrews’ contract will be for 4 years and would require a salary of $100,000 per annum. If he moved here, he would rent a house in Greystone Park for $2,000 per annum. Andrews also has interest from a U.S. bank of $1,000 per annum and interest from a Dutch bank of $1,500 per annum. Andrews moved to the U.S. headquarters 5 years ago from its Dutch subsidiary.

He is planning to work on a new machine which treats waste more efficiently and with limited carbon emissions. He is planning to patent the machine. All the search and development work will be carried out in Zimbabwe. Mike wants to use this machine for Mike Enterprise. Andrews expects to receive royalties of $20,000 per annum from Mike Enterprise but this amount has not yet been agreed.

Andrews’ wife, Laura, would move over with him. She is a composer and has written many songs that have been successful in Europe. In a good year she can earn $150,000.

REQUIRED:

(a) Advise Andrews how his remuneration package should be best structured and explain your reasons. (b) Advise him how the patent income and his wife's songwriting income will be treated for tax purposes.

(c) On the basis that neither she nor her husband has any other income (other than as outlined above) and are entitled to no other deductions, advise them of their tax liability for a typical tax year.

Solution

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Remuneration Package for Andrews

Employment Income

Andrews should remain in the employ of the US parent company. Where an individual is sent by his or her foreign employer to work in the State for that employer (or an associated company) and the individual continues to be paid from abroad, the individual concerned can have the Zimbabwean PAYE tax deducted from so much of the foreign employment income as is related to duties exercised in Zimbabwe, provided a double taxation agreement exist between Zimbabwe and the person’s country of residence. In Zimbabwe, Andrews will be liable to pay PAYE because services will be rendered for periods of more than 183 days in each of the 4 assessment years he will be working in Zimbabwe. If he decides to come for short periods in each of the assessment years (periods less than 183 days), no liability will arise in Zimbabwe as long as the remuneration is paid by a non-resident person and such remuneration is not borne by the PE of the non-resident person situated in Zimbabwe.

Patent Income

Andrews would be taxed on patent royalty since the development work and the patent registration will take place in Zimbabwe. He will be resident in Zimbabwe for tax purposes. Income derived from the patent will be taxable in Zimbabwe based on the place of patent development and registration.

Andrews might consider carrying out the development work and registration of the patent outside Zimbabwe and granting the license to Mike Enterprise as suggested. In such circumstances, income from Mike Enterprise will qualify for exemption from income tax in the hands of Andrews, since the patent was not created in Zimbabwe and is not used in Zimbabwe.

Laura’s profession will be exercised in Zimbabwe and thus liable to Zimbabwean tax

Both Patent Royalty income and the income from composing are exempt. However, both exemptions are considered to be specified reliefs for the purposes of the limitation of reliefs for high income earners.

1.5 CAPITAL NATURE RECEIPTS

1.5.1 Receipts of a capital nature

Makomborero, who is studying taxation with Institute of Chartered Taxation Zimbabwe (CTA), approached you for assistance regarding the following questions.

a) What is the difference between "revenue income" and "capital" nature?

b) State whether the following items are included in Gross Income

(i) Advance payments v. security deposit(ii) Claim of right(iii) Deposits by customers(iv) Loans

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(v) Illegal income(vi) Gifts, bequests and inheritance

Solution

a) Income differs from capital. Income is any wealth which flows to the taxpayer other than a return of capital. Capital constitutes the investment which is the source of income. Capital is a fund while income is the flow. Capital is wealth, while income is the service of wealth. Capital is the tree while income is the fruit

The fundamental relationship of "capital" to "income" has been much discussed by economists, with capital being likened to the tree or the land and the income to the fruit or the crop; the former is depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. "Income may be defined as the gain derived from capital, from labor, or from both combined," provided it is understood to include profit gained through a sale or conversion of capital assets . . . Eisner v. Macomber 252 U.S. 189 (1920

(i) A security deposit does not belong to a recipient until he/she complies with all terms. It is only included in GI when all terms are complied with. Advance payment must be included as income in the year it is received. Income is included in GI when received or when it becomes due and payable to a taxpayer, whichever occurs first.

(ii) A taxpayer who properly reports income under the claim of right doctrine is entitled to a deduction if he/she is subsequently required to refund the money.

(iii) Deposits are included in gross income only when a taxpayer enjoys a complete dominion over such income. The key is whether or not the taxpayer has some guarantee that he will be allowed to keep the money.

.(iv) Loans do not constitute GI. They do not represent an “accession to wealth” or increase in

taxpayer’s net worth because they are accompanied by an equal and offsetting liability. repayment is not a deductible expense a lender has no income when a loan is repaid a lender has no deduction when a loan is made

However, a failure to repay a loan or the forgiven of a taxpayer’s liability by another may generate tax consequences- s. 8(1) (k) ITA.

(v) Gains from illegal business, embezzled funds or extorted funds constitute gross income

(vi) Gifts, bequests, inheritance are not included in GI, unless they are:

gifts from employers to benefit the employee. amounts received as prizes and awards, other than awards made in recognition of

achievement and the recipient was selected without his action. bequests, gifts or inheritance which are in the form of an annuity

1.5.2 Restraint of trade

Anne is the managing director of F Ltd, a company which manufactures cutlery. F Ltd was successfully taken over in September 2011, and an agreement was reached with Anne under which

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she was paid $100,000 in return for her resigning from the office of managing director and entering into a restrictive covenant in which she agrees not to be engaged in any capacity in the business of manufacturing cutlery in Harare for a period of five years.

Solution

By signing an agreement for restraint to trade, Anne has created a contractual or a right giving rise to an enduring advantage which is of a capital nature. She has created a capital asset, although the asset is not chargeable under CGCTA. The income is therefore of a capital nature, and is not included in her gross income. The company cannot claim a deduction of the amount as well, because it is of a capital nature.

1.5.3 Compensation for loss of trade-in stock

Pfupajena has been involved in the property development business since 2002. In 2010, it purchased a piece of land in Ruwa for the purpose of developing it into a residential area. It submitted an application to the City of Harare for approval. It had incurred development costs, such as planning and surveying costs.

However, in 2011, the land was compulsorily acquired by the State for the purpose of constructing a highway. The company was offered a compensation of $500,000 based on the prevailing market price.

Required:

State, with reasons, whether or not the compensation received by the company is taxable under the Income Tax Act.

Solution

The compensation received is taxable because it is a revenue receipt.Points to be considered:

1. Pfupajena is a property developer and such land would be stock-in-trade.2. The company had the intention to develop the land into a residential area and derive income from the sale of houses, i.e. trading.3. Compensation received “fills a hole in the profits” because if the land is developed and houses built, the profit would be subject to income tax.

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Chapter 2 Gross income inclusion: Individuals

2.1 CASH REMUNERATION

2.1.1 Incentives

The Herald of 2 November 2011 carried a story of Zimra applying the Pay-as-You-Earn tax to teachers receiving incentives, arguing that the educators are part of the mainstream workers who earn income that should be taxed. It further argues that incentives constitute double pay and should be declared for taxation. The educators argue that incentives do not constitute a regular income and cannot be taxed. They merely constitute a donation by parents who want their children to be served by a motivated workforce. Is Zimra correct in taxing the amount? Discuss.

Suggested answer

Para 1, 13th Sch ITA defines remuneration as

2.1.2 Bonus and de minimis benefits

Mr Fishy works for a mission hospital in Mrewa. In December 2010, the mission hospital authorized a Christmas bonus of $3,000, a cash gift of $500 and transportation allowance of $6,000.00 for each of its employees. State with reasons the tax treatment of the 13th month pay and de minimis benefits and aggregate Mr. Fishy’s GI.

Solution

According to para 4(o), 3rd Sch ITA, a bonus or performance-related award accruing to an employee or agent in respect of his or her employment or agency, to the extent that the bonus does not exceed or, where the employee or agent receives more than one bonus in the year of assessment concerned, to the extent that the aggregate of the bonuses does not exceed $500, is exempted from tax. Mr. Fishy will be taxable on $2,500 of his Christmas bonus, after exempting the first $500.

The cash gift per employee of $500, being substantial is taxable. All gifts granted in an employment relationship are included in GI, unless they are gifts of "small value" which employers might give to their employees on special occasions like Christmas.

Mr. Fishy’s transport allowance of $6,000 is tax exempted. The value of an allowance in respect of accommodation and transport, or the value of the grant of quarters or a residence to any member of staff of a mission hospital or rural clinic, is exempted from tax in terms of para 4(t), 3rd Sch ITA..A “mission hospital or rural clinic” a is private hospital or rural clinic owned, operated or sponsored by any religious body or a hospital or rural clinic owned or operated by a rural district council.

Mr. Fishy’s aggregate GI

Christmas bonus 3,000Less exemption 500Net bonus 2,500Transport allowance (exempt) -Cash gift 500GI 3,000

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2.1.3 Scholarship

Brighton, a bright and promising employee accepted his employee’s offer to complete his final studies in BCompt with Selous University, as a full time student. Under an arrangement with his employer, Brighton was paid a salary amounting to 60% of his usual salary on the usual pay days, which includes the course days during the current years of assessment. The employer also reimbursed Brighton any compulsory fees and prescribed reference books. There was no express condition that Brighton continues employment with the company upon completion of the course of study. Is the scholarship granted to Brighton taxed in his hands?

Solution

Only a scholarship, bursary, payment in respect of tuition fees or other educational allowance to a student receiving instruction at a school, college or university is tax exempted. It excludes an amount accruing to the student by way of remuneration for services rendered or to be rendered by the student or a near relative of the student. Because Brighton’s scholarship was offered in an employment relationship, he is required to declare the amount in his current year GI.

2.2 TERMINATION PAYMENTS

2.2.1 Retrenchment, pension commutation, restraint to trade, etc

Mrs. Gana, who was employed as an executive manager by ZimGlass, was retrenched on 31 August 2011. She was paid $22,000 in severance pay and $5,000 gratuity.

Mrs. Gana also signed an undertaking with ZimGlass, which would restraint her from competing with ZimGlass within Harare for the next 3 years. She accepted a payment of $35,000 for accepting the restraint to trade.

ZimGlass allowed Mrs. Gana to take for free the Land Cruiser V6 she had been using prior to her retrenchment. The vehicle was valued at $24 000 as at 31 August 2011.

Meanwhile, she received $90,000 after commutation of 2/5 of her pension from Diamond Pension Fund. The pension commutation amounted to $45,000. With effect from 1 Sept 2011, Mrs. Gana became entitled to a monthly pension of $1,600, guaranteed for a period of ten years.

Compute Mrs. Gana’s minimum termination GI. Support your answer.

Solution

Retrenchment packageSeverance 22,000Gratuity 5,000Motor vehicle takeover ($24,000 -$0) 24,000Restraint of trade (capital in nature) -Retrenchment package 51,000Less Exemption 15,00036,000Add Pension receiptsLump sum payment 90,000

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Less capital amount ($45,000 x 5/2 x 1/3) (37,500)Add monthly receipts ($1,600 x 4 months) 6,400 58,900Termination payments 94,900

Para 4(p), 3rd Sch ITA provides for exemption of the first $5,000 or one-third (up to a maximum of one-third of $45,000), whichever is the greater, of the amount of any severance pay, gratuity or similar benefit, other than a pension or cash in lieu of leave, which is paid to an employee on the cessation of his employment, where his employment has ceased due to retrenchment under a scheme approved by the Minister responsible for labour or the Public Service. The package is assumed approved because minimum termination GI is anticipated.

Section 8(1)(r) considers as GI any amount so received or accrued by way of commutation of a pension or annuity which is payable from the Consolidated Revenue Fund or a pension fund, to the extent that it exceeds one third of a person’s entitlement. The one third is called a pension commutation and is a capital nature amount. Mrs. Gana commutated 2/5 of her pension entitlement, therefore her pension entitlement was $112,500 (5/2 x $45,000). By law, she must commutate 1/3 of the pension entitlement, i.e $37,500 ($112,500 x 1/3).

A restraint is a capital nature payment. The parties must ensure that the amount is really a restraint of trade, otherwise the CG might consider it as a termination GI.

2.2.2 Unapproved retrenchment package, dividend, interest, etc

Tanatswa, 59 years old, was retrenched from Eager Ltd on 30th September 2011. His wife Nyaradzai is a housewife. They have 3 children, one of whom is permanently incapacitated. Details of Tanatswa’s retrenchment package are as follows:

Statutory redundancy 10,000Compensation payment 54,500Company car $22,000 market value at date of leaving. Tanatswa paid $13,000 to the employer to obtain title of the vehicle.

Tanatswa’s salary was $32,700 for the period to 30th September 2011. His benefits in kind in the same period amounted to $4,000. PAYE deducted was $10,900.

At the date of termination of employment, the value of Tanatswa’s tax-free pension entitlement was $56,000. She received $90,000 lump sum payment.

Other income:

In June 2011, Tanatswa received a dividend of $720 net (tax withheld $240) from a South African resident company. Nyaradzai received interest of $2,635 (net) from a deposit account held in Safeco Building Society.

This was the amount credited to her account on 30th September 2011.

You are required to:

Calculate the Income Tax payable / (repayable) by Tanatswa and Nyaradzai

Solution

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Computation of Tanatswa’s tax liability

Salary 32,700Benefits in kind 4,000Lump sum payment 90,000Less pension commutation 56,000 34,000

70,700RetrenchmentStatutory redundancy 10,000Compensation payment 54,500Company car ($22,000 – $13,000) 9.000 73,500Employment taxable income 144,200Dividend (720 + 240) 960Taxable income 145,160

Tax thereon on $18,000 3,960On ($144,200 -$18,000) x 35% 44,170

48,130Less Tax creditsElderly credit 900Disabled child 900 1,800

46,3303% AIDS Levy ($46,330 x 3%) 1,390

47,720Add dividend tax ($960 x 20%) 192Tax liability 47,912Les PAYE 10,900Tax credit on dividend 240 11,140 Tax payable 36,772

Computation of Nyaradzai’s tax liability

Interest gross (100/85 x $2,635) 3,100

Tax there on $2,635 x 15% 465Less Withholding tax 465Tax due nil

2.2.3 Employer voluntary terminal payments

Mr. Queen worked as the chief accountant of a hospital for forty-five years. When he retired at 65, he received retirement pay equivalent to two months' salary for every year of service as provided in the hospital approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Mr. Queen more than what was provided for in the hospital's retirement plan in view of his loyalty and invaluable services for forty-five years, hence, the hospital board of directors resolved to pay him a gratuity of $10,000 over and above his retirement pay. The CG taxed the $10,000 as part of the gross compensation income of Queen who protested that it was excluded from income because (a) it was a retirement package, and (b) it was a gift.

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Is Mr. Queen correct in claiming that the additional $10,000 was a retirement package and therefore excluded from income? Explain. How is the paying company treated?

Solution.

No. Whether retirement plan or not, the additional $10,000 is part of Mr. Queen’s gross income. The amount received was in consideration of his loyalty and invaluable services to the company which is clearly a compensation income received on account of employment under s.8 (1) (b) ITA. It would only qualify as a gift if there is nothing but 'goodwill, esteem and kindness' which motivated the employer to give the gratuity. Such is not the case in this problem, because it is paid as a consequence of employment.

The company can only deduct $500 out of the $10,000 in the computation of its tax liability. Under s.15(2)(q), ex-gratia payments in the nature of annuities, allowances or pension granted to ex-employees on grounds of old age are deductible up to a maximum of $500. However, the two months’ salary is fully deductible because it is stipulated in the hospital approved retirement plan (employment contract). It is not of an ex-gratia nature.

2.2.3 Gratuities and allowances for officers

Capt. Chato has been a member of the armed forces since 1992. When he was considering retiring on 2 January 2011, the army offered him an extended service gratuity of $13,500, which he duly accepted. Besides his pay as captain, the government gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the camp. The Capt also got a medal for long service and was also given a gratuity of $300 in conjunction with this award. State whether the benefits are taxable income to Capt. Chato? Explain.

Solution

The long term service gratuity is income that is included in GI by s.8 (1) (b) ITA. Capt Chato must include the income in his GI. The income is taxed at a special rate, which is the officer’s highest marginal rate of tax or 20%, where the officer has income which is below the minimum tax threshold, i.e. below $2,700 p.a. No AIDS levy is chargeable on this income.

The free uniforms, free living quarters and the free meals inside the camp are not income to Capt. Chato because these are facilities or privileges furnished by the employer for the employer's convenience which are necessary incidents to proper performance of the military personnel's duties.

Capt Chato’s $300 gratuity is tax exempted. According to para 4(h), 3rd Sch ITA, any gratuity given in conjunction with the award of the Fire Brigades Long Service Medal or the Medal for Long Service and Good Conduct (Military) is tax exempted.

2.3 COMPENSATION AND DAMAGES

2.3.1 Compensation for injury

Mr. Ini was hit by a car while on his way to work. He survived but had to pay $400 for his hospitalization. He was unable to work for 6 months and for that period he did not receive his usual salary of $2,000 a month. He sued the car driver and was able to obtain a final judgment awarding him $400 as reimbursement for his hospitalization, $12,000 for the salaries he failed to receive

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while hospitalized and $3,000 as moral damages for his pain and suffering. He was able to collect in full from the judgment. Compute his gross income. Explain.

Solution

Paragraph 7, 3rd Sch ITA exempts amounts accruing by way of a benefit in respect of the injury, sickness or death of a person which is paid to the person or his dependants or deceased estate, by a trade union, from a benefit fund, in terms of a policy of insurance covering accident, sickness or death or by a medical aid society.

Therefore, the $400 reimbursement for his hospitalization expenses and the $3,000 for moral damages for his pain and suffering are tax exempted.

However, the $12,000 income realized from the judgment is a recovery for lost salaries. This constitutes taxable income because were it not for the injury, he could have received it from his employer as compensation income. The income substitutes employment income.

2.3.2 Compensation for injury Susan was injured in car accident and lost sight in one eye. She incurred $3,000 medical expenses. She had a personal accident and health policy that paid her $6,000 for medical expenses, $3,000 for lost wages, and $6,000 for loss of sight. Another accident and health policy provided by her employer paid $2,000 for medical expenses, $5,000 for lost wages, and $2,000 for loss of sight. How much should Susan include in her gross income? Explain.

Solution:

Under para 7, 3rd Sch ITA, injury and sickness related benefits are tax exempt when paid by a trade union, a benefit fund, a medical aid society or an insurance company on a policy covering accident, sickness or death.

Therefore, medical expenses, loss of eye are excluded incomes. The only item to be included in gross income is the amount paid for lost wages, because it is substituting employment income.

2.5 FRINGE BENEFITS

2.5.1 Valuation of benefits

Wade is a salesman for a real estate development company. Because she is the “salesperson of the year,” she is permitted to purchase a lot from the developer for $90,000. The fair market value of the lot is $150,000 and the developer’s cost is $100,000. Wade must recognize a benefit of $10,000 ($100,000 developer’s cost – $90,000). Evaluate this arrangement in the hands of Wade for tax purposes.

Solution

True: The benefit is what it cost the real estate development company to provide the benefit, not the opportunity cost of the benefit. Wade’s benefit is computed as follows:

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Cost to employer 100,000Less Amount paid by Wade 90,000Taxable benefit 10,000

2.5.2 School fees and personal use of company property

David is employed by Ace Bank which gave him a laptop, so that David may work at home at night and on weekends from time to time. David and his wife and children are permitted to use the laptop for their personal business.

As part of the incentive offered by Ace Bank to its employees who have performed well, the bank offers to pay part of the private school fees in respect of the children of those employees. In the year ending 30 June 2011, David performed well and Ace Bank paid $2,000 of the school fees of David's son. The payment was made directly by Ace Bank to Ben's school.

Advise David of the tax ramifications of the following transactions:

Solution

2.5.3 Allowances for civil servants

Mr. Whashu is a Magistrate in Masvingo. He is living in a furnished house provided by the Government free of rent. His salary is $1,200 p.m. The rent of unfurnished house as per Govt. rules is $1,000 p.m, but its fair rental value is $7,500 p.m. He is provided furniture of the value of $2,000. Compute his GI.

Any allowance or the value of any benefit which is granted to any person in the full-time employment of the State and which is specified for the purposes of this subparagraph by the President by notice in a statutory instrument with effect from such date, whether before, on or after the date of the notice, as the President may specify therein;

2.5.4 Passage benefit

In April 2011, Bondia Ltd organized a merit trip for its entire staff to Victoria Falls in view of the company’s record profits for the year ended 31 December 2010. A sum of $200,000 was paid to the organizing travel company. The staff was required to attend a half-day brain-storming session during the trip. Advise Bondia Ltd whether it should include the $200,000, shared proportionately, in each of the employees who participated in merit trip.

Solution

A passage benefit is included in gross income under s.8 (1) (f), unless the trip is made for the benefit of the employer. The primary purpose of the merit trip was for holiday as an award to the staff for the company’s encouraging results for the past year. Therefore, the benefit is assessed on the individual employees, even though they were required to attend the half-day brain-storming session. The following are the passage benefits that are tax exempted:

passage benefit expended on employer business first passage benefit for taking up employment first passage on termination of employment,

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890-=]2.5.5 Motoring benefit, use of residential company house etc

Mr. A is an executive of Madaka Ltd, earning $3,500 p.m. Besides his salary, his employer provides him with the free use of a residential company house, free use of a jaguar (2,000 cc) and membership in a country club where he can entertain customers of the corporation. The company paid $2,000 country club membership for Mr. A in 2011. You are required to compute Mr. A’s taxable benefits, if any. Explain your workings.

Solution

Free use of company house ($3,500 x 12 x 12.5%) 5,250Free use of jaguar 2,400Country club membership (exempt) -Taxable benefits 7,650

Free use of the residential company house and the jaguar are deemed benefits under s.8 (1) (f) ITA, they should be included in Mr. A’s GI.

The benefit for a free use of a company house is the open market rental of the house or 12.5% of a taxpayer salary in the absence of the open rental. The benefit for free use of company vehicle depends on the engine capacity and the annual deemed benefit is $2,400, for a 2000 cc vehicle.

The membership fee in the country club needs not to be included in GI. The membership of Mr. Adrian to the country club is primarily for the benefit and convenience of the employer, i.e. to enable him to entertain company guests. It is tax exempted- para.15, 3rd Sch ITA.

2.5.6 Occupation of company houses due to conditions of services

Chiware is a boarding master for Rutedze Private School. In addition to his salary, he gets a school-provided home near the school. The school built the house specifically for the boarding master. In advising Chiware re: tax consequences to him of the rent-free use of home, what kind of information would you want from him and why?

Solution:

House benefit is taxable under s.8 (1) (f). No tax consequence would arise where an employee is forced or required to occupy the house due to his conditions of employment, provided the house is within the employer’s business premises and is for the convenience of the employer.

2.5.7 Purchase of company vehicle

My name is Stephen Chimwayi. My aunt felt she was short changed by ZIMRA. At the end of last year she was retired by her company on the grounds of old age (she is now 62 years old). As a long service gratuity she was offered a Honda CRV previously used by her as company car for $3,500. Similar vehicles were selling at $8,000. Her employer brought into her gross income a benefit of $4,500 ($8,000 -$3,500) on the basis that she got a benefit in terms of s.8 (1) (f), when she purchased the vehicle at below market price. My argument is on the assessable amount and whether the company clearly followed the provisions of s.8 (1) (f) (x) when it brought this amount into my aunt’s GI. Advise my Aunt of her correct status regarding the purchase of the Honda CRV.

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Solution

As stated in s.8 (1) (f) (x), when an employee acquires a motor vehicle from an employer for free or at below market price, a taxable benefit arises to the employee. The benefit is computed as follows:

A - B

A is the market value of the vehicle

B is the cost of the vehicle to the employee

Mr. Chimwayi, the purchase by your aunt of the Honda CRV at below market price gives rise to taxable benefit in terms of.8(1)(f)(x) ITA and this benefit was correctly computed. However, no advantage or benefit shall be deemed to have accrued to an employee who, on the date of the disposal is 55 years or above that age. The company erred in taxing your aunt, because she was 61 years old when she purchased the vehicle.

All is not lost however, you can institute a claim for refund of tax. The statutory limit for claiming a refund is 6 years from the date of notice of assessment in question-s.48 (iii) ITA.

2.5.8 Employee share scheme

My name is Mirainashe, a finance manager for Golden Estates. In 2009, my company offered me 10,000 shares under the company ESO, which I was entitled to claim on completing 2 years in service. I completed my 2 years in service on 12 August 2011, but did not opt to exercise my option because of the bullish stock market. However, an overzealous ZIMRA officer included in my GI the income I would have realised had I exercised the option. I have been to their offices several times without success. I heard that you are doing CIS and that you are one of the bright students in Mr. Muguri’s taxation class. For your service I will give you $200, because there is a lot of money involved. Please be specific in your answer in advising me of the correct tax treatment of my ESO.

2.5.9 Education loan, car allowance and ESO

Mr Kavhu is employed by CMC Motors. On 1 April 2011, CMC gave him a loan of $16,000 to pay for his education. The loan was repayable over 12 months at no interest. In fact, CMC will waive 50% of the loan capital. LIBOR is 5%.

Each senior manager of CMC qualifies for a maximum car allowance of $1,000 per month for petrol, oil, tollgate fees, repairs and maintenance if he/she owns a car. The only way a manager can claim and receive the allowance during the year is through submission of proof of payment for these expenses. However, if by the end of the year, there is still an unclaimed portion of the allowance, such a balance is paid to the manager concerned. During the year, Mr. Kavhu submitted claims totaling $9,200 for which he was accordingly reimbursed. The balance was paid to him on 30 March 2011.

On 1 September 2010, he was granted the right to subscribe for 10,000 shares in CMC Holding Limited, the parent company of CMC, at a price of $0.90 each. On 1 February 2011, he exercised the option. On 15 March 2011, he sold 50,000 shares. The market values of the shares of CMC Holding Limited at the above relevant dates were as follows:

Date Market value per share1 September 2010 $1

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1 February 2011 $1.515 March 2011 $2

.

Compute Mr. A’s taxable fringe benefits, if any. Explain your workings.

Solution

Interest free loan $8,000(tax exempt for education) -Loan waiver $8,000 (tax exempt for education) -Car allowance 12,000Share option (($1.50-$0.9) x 10,000 shares) 6,000Taxable fringe benefits 18,000

Loan waiver, i.e. a cancellation of a liability by employer, gives rise to a taxable event, being a quid pro benefit to Mr. Kavhu in terms of s.8(1)(f) ITA. However, loans for medical, education or technical education of a taxpayer, his/her spouse or child are tax exempted. The same reason applies to the outstanding loan of $8,000.

.A car allowance is a fringe benefit in terms of s.8 (1) (f) ITA, being a reimbursement of Mr. Kavhu’s domestic expenses. The full amount is brought into his GI in 2011, because it has been incurred, despite the fact that he has postponed its recognition- s.10 (1) (b) ITA.

A share option is a taxable benefit to Mr. Kavhu. It is taxed to him the first day he is eligible to exercise the option or the day he exercises the option, i.e. 1 February 2011. In the absence of inflation, Mr. Kavhu’s GI on the share option is computed as follows:

A- BA is the market price on date of share option exercise

B is the share option exercise price

The subsequent disposal of shares acquired under the share option scheme has no further income tax effect. Instead, Mr. Kavhu will be liable to pay capital gains tax, if a capital gain is recognized. His cost basis, for CGTA is the share market value on date of exercising the option, i.e. the $1.5 price per share.

2.5.10 Share option scheme (ESO)

In 2009, Airtec Inc. issues options to Anderson, a company secretary, to purchase 100,000 shares of Airtec stock under an ESO plan. At the date the stock options are issued, the fair market value of the stock is $1 per share and the option price is $1.20. The stock becomes freely transferable in 2010, when the market value per share was $1.30. Anderson exercises the options in November 2009 when the stock is selling for $1.50 per share. He sells the stock in December 2011 for $1.80 per share.

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a) Determine the amount to be included in Anderson’s gross income in 2009

b) Determine the amount to be included in Anderson’s gross income in 2010

c) Determine Anderson’s capital gain in 2011 on the sale of the stock

Solution

a) For income tax purposes, Anderson does not have income upon the exercise of the ESO in November 2006. The option is a restricted instrument. It becomes taxable in the year the stock becomes freely transferable (2011).

b) Anderson’s GI is $10,000 ($130,000 – $120,000) occurs in 2010 when the stock becomes freely transferable.

c) Capital gain is as computed below:Gross capital amount 150,000Less cost of shares ($1.3 x 100,000) 130,000Inflation ($130,000 x 2.5% x 2 yrs) 6,500 136,500Capital gain 13,500

2.5.11 Work place meals

Wasara is an articled clerk with KPMG. He spends some time each week-day evening working at office. The firm gives articled clerks who work late $20 to enable them to break and eat supper at a nearby restaurant. Advise Wasara whether his supper money is taxable income?

Solution

Wasara’s supper allowance is taxable in terms of s.8 (1) (f) ITA. His meal is not provided on the employer’s business premises. Further, Wasara is not given food. Only subsidized meals available to all workers are tax exempted if a reasonable charge is made to cover direct costs, provided they are taken on the employer’s premises.

2.5.12 Rent, loan and other benefits

Mr G, an employee of Spar Ltd receives the following incomes during the year ending 31 December 2011. Basic salary up to 31 August 2011, $1,400 p.m and thereafter at $1.500 p.m, $4,500 leave travel allowance (entire amount spent).Children Education Allowance $250 per month for 1 child. Reimbursement of medical expenses $3,150 (Private Hospital). He has been provided with a rent free flat (rent paid by the company $11,000 p.a), facility of a watchman and a cook ($200 each per month), interest free loan for purchasing home appliances $12,000 (date of loan borrowed 01-04-11 and Libor on 01-04-11 is 5% p.a.).Compute his TP for the AY 2011. Support your workings.

Solution

Salary ($1,400 x 8 + $1,500 x 4) 17,200Leave travel allowance 4,500Children education allowance ($250 x 12) 3,000

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Reimbursement of medical expenses -Rent for the flat 11,000Watchman and cook (fringe benefits s.8 (1) (f) ITA) 4,800Interest free loan ($12,000 x 10% x 8/12) 800Taxable income 41,300

2.5.13 Miscellaneous benefits, etc

Friday is a registered ICAZ accountant employed by Pepe Ltd. He has been employed by the company since January 2004. He received a salary of $7,450 per month (net of 12% pension contributions) and a 2 months bonus of $11,000 for the calendar year 2011. Half of his bonus was paid end of December 2011 and the balance on 1 January 2012.

He was also provided with a fully furnished house in Chisipite by the company. The company paid rental of $2,000 per month (inclusive of the rental for the furniture of $600). Under the term of the service, Friday is to use the house to entertain foreign guests invited by the company. He estimated that 30% of the time the house was used for official functions.

The company also provides the following benefits to Friday:

Paid By CompanyDriver $340 per monthGardener $200 per monthServant $170 per month

Utility bills $1,200 per year (paid by Friday, reimbursed by the company)

Friday bought a retirement pension several years ago, unfortunately the scheme was wound up on 2 June 2011 and Friday thus received $140,000 of which $60,000 represent his cumulative contributions and $15,000 as interest income earned on the scheme. Of his cumulative contributions, $34,000 was allowed as a deduction to him in terms of s.15 (2) (h) ITA.

Friday paid $143 as a member of ICAZ, which is required for him to perform his duties.

Compute the tax liability of Friday for the tax year 2011.

2.6 TAX CREDITS

2.6.1 Disability and invalid appliance credits

Ropafadzo, Agatha’s daughter, has a mental disability. On the recommendation of a doctor, she attends a school for disabled children where Agatha pays $10,000 in tuition and the cost of meals and lodging. Because of her heart condition, a physician advised Agatha to install a swimming pool at her home and it was completed at a cost of $12,000. Agatha treats it as an invalid appliance. In addition, Agatha pays $9,000 to install wheelchair ramps, support bars, and railings for her son, Moses’ personal bedroom. Moses is physically disabled.

Compute Agatha’s tax credits in respect of the above expenditure. Explain your answer.

Solution

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Disability credit for Ropafadzo 3,000Tuition, meals and lodging for Ropafadzo -Cost of swimming pool -Wheelchair ramps ($9,000 x 50%) 4,500Total tax credit claimable 7,500

Medical expenses include provision of accommodation and maintenance for a sick person at a hospital, maternity home, nursing home, clinic, etc. The cost of tuition, meals and lodging for Ropafadzo do not qualify because they paid to a school not a medical institution.

Definition of invalid appliance s.12 FA includes any special fitting for the modification or adaptation of a motor vehicle, bed, bathroom or toilet to suit the use by a disabled person. Agatha is sick not disabled, therefore the cost of swimming is disqualified on the basis that it’s not an invalid appliance.

Wheel ramps, etc qualify as invalid appliances, which are used by a disabled person. Accordingly, they qualify for 50% medical credit under s.12 FA.

2.6.2 Medical expenses and blind credit

Musanhu is employed as an architect. For the calendar year 2011, she had GI of $40,000 and paid the following medical expenses:Medical insurance contributions 7,800Doctor bills for Amos and Junior (Musanhu’s parents) 7,300Doctor and dentist bills for Musanhu 2,500Prescription medicines for Maria (Musanhu’s daughter) 750Nonprescription drugs for Musanhu 950

Maria is blind. Musanhu filed a claim for reimbursement of $1,000 of her own expenses with her employer and received the reimbursement in 2012. What is Musanhu’s total tax credit in 2011 AY? Explain.

Solution

Musanhu’s total tax credit is $6,425, determined as follows:

Medical insurance contributions 7,800Doctor bills for Amos and Junior (Musanhu’s parents) -Doctor and dentist bills for Musanhu 2,500Prescription medicines for Maria (Musanhu’s daughter) 750Nonprescription drugs for Musanhu -Total 11,050

Medical expense credit (50% x $11,050) 5,525Add Maria blind credit 900Total 6,425

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Amos and Junior cannot be claimed as Musanhu’s dependents, only medical expenses applicable to taxpayer, his/her spouse and children are claimable in a taxpayer’s return.

Non prescribed drugs do not qualify as medical expenses. The medical reimbursement was not received until 2012. It can only affect the tax credits of 2012.

2.7 SUPERANNUTION PAYMENTS

2.7.1 Widows’ pension

Mr. X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to X’s salary for one year. Is the amount considered taxable income to the widow? Why?

Solution

No. The amount received by the widow from the decedent's employer may either be a gift or a benefit on account of death. It is excluded from gross income

2.8 EXAM TYPE QUESTIONS

2.8.1 Exam type question

Mrs. Ranga, 60 years old, is an employee of ZimBank. She furnishes the following information for computation of her TP for the AY 2011:

a. Basic Salary $2,500 p.m.b. Cost of living Allowance @ 15% of salary.c. Entertainment Allowance, $250/- p.m.d. Bonus $4,000e. Children Education Allowance for her three children $2,200/- p.tm. per childf. Travelling allowance for tour $15,000 (during the year she only spent $14,000.g. She took medical treatment in a private hospital during the year and paid $2,500.h. The bank has provided her an accommodation by deducting $600/- p.m. from her salary, but the

bank is paying a rent of $900/- p.m. to the owner of this house.i. Furniture costing $7,000 is also provided in this house by the bank.j. Employee and employer contributed 5% each of her salary to PPF. The interest credited to the

PPF is $3,300/- @ 10% during the year.k. During the year the bank has paid her PAYE of $14,000 and Health Insurance Premium of

$1,500.

Solution

Salary ($2,500 x 12) 30,000Cost of living allowance (15% x $30,000) 4,500Entertainment allowance 3,000Bonus 4,000Less Exemption para 4(o), 3rd Sch 500 3,500Children education allowance ($2,200 x 3 x 3) 19,800Travel allowance 14,000Subsidized rent ($900-$600) x 12 3,600

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Furniture benefit (8% x $7,000) 560Employer pension contribution (tax exempt) -Health insurance premium 1,500

80,460Less pension contribution (30,000 x 5%) (1,500)Taxable income 78,960

Tax on 18,000 at graduated rates 3,960Tax on ($78,960- $18,000) x 35% 21,336

25,296Les tax credits:Elderly credit 3,000Medical expense credit ($2,500 x 50%) 1,250 4,250

21,0463% AIDS Levy ($21,046 x 3%) 631Tax payable 21,677Less PAYE 14,000Tax payable 7,677


Mr. Mbeva is working for a mission hospital in Murobedzi. He has a basic salary of $1,500 p.m. and a transport allowance of $200 p.m. He received $2,000 as bonus for the year 2011. He is given a rent-free unfurnished house owned by the company together with the facility of gardener on a monthly salary of $160. His company paid $1,000 during the year towards his membership fee of a club. During the year he got medical bills reimbursement from the company for treatment given in a nursing home to his mother amounting to $20,000. He is contributing 15% of his salary to RAF.

Mr Mbeva also furnishes the following particulars for the AY 2011:

1. Interest on German Bonds $60,0002. Property income from Malawi $18,000 ($12,000 is used in Malawi, the balance was remitted

to Zimbabwe)3. Dividend paid by a Zimbabwe company received while he was in Tanzania $5,6004. Past untaxed profit $10,500, net cash (WHT $500), brought to Zimbabwe5. Profit on sale of building in Mozambique but received in Zimbabwe $148,0006. Pension from a Zimbabwean company received in London $36,0007. Gift in cash from a relative received in Zimbabwe $6,000.

Required:

a) Compute Mr. Mbeva’s taxable income for the tax year 2011 on the basis that he is:i) A residentii) A non- resident.b) Comment on items 1-6 above

Solution

a) Computation of taxable income

Option Resident Non resident

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Salary 18,000 18,000 Transport allowance (exempt) - -Bonus ($2,000 -$700) 1,300 1,300Rent free house (exempt) - -Gardener (exempt) - -Club subscriptions 1,000 1,000Refund Medical bills for his mother (exempt) - -Pension contribution (2,700) (2,700)Interest on German Bonds 60,000 -Property income from Malawi (not from source) - -Dividend from Zimbabwe (taxed at source) - -Past untaxed profit (dividend) 11,000 -Profit on sale of building in Mozambique - -Pension from a Zimbabwean company 36,000 36,000Gift from a relative (private income) - - Taxable income 124,600 53,600

b) Comments on items 1-6

Interest on German Bonds- Interest received from a foreign by a person at the time the person is ordinarily resident in Zimbabwe is deemed to be from a source within Zimbabwe by s.12 (2) ITA. If Mr. Mbeva is not ordinarily resident in Zimbabwe the interest is not taxable in Zimbabwe

Property income from Malawi- The source of property income is the place the property is situated. Therefore, this income is not from a source within Zimbabwe, whether remit to Zimbabwe or not.

Dividend paid by a Zimbabwean company to an individual, whether distributed to a resident of Zimbabwe or a non resident person, attracts a withholding tax at source of 15% (10% for a listed company).

Profits remitted from a source outside Zimbabwe to a person at the time the person is ordinarily resident in Zimbabwe is deemed to be from a source within Zimbabwe in terms of s.12 (2) ITA. If Mr. Mbeva is not ordinarily resident in Zimbabwe the interest is not taxable in Zimbabwe

Profit from sale of a building in Mozambique is an income of a capital nature taxable under CGTA. However, only capital gains derived from sale of specified assets situated in Zimbabwe are taxable in Zimbabwe.

The source of pension for services rendered is the place the services were rendered no matter the pension is paid to a non-resident person or paid out of a fund situated outside Zimbabwe.


David, aged 55, is an employee of Southern Salt Ltd. He joined the company on 6 June 2011, on a basic salary of $5,000 per month. The company deducted $13,600 of PAYE from his pay in the AY 2011. He also received the following benefits from his employer during the tax year 2011:

a. David is given an annual cash benefit of $6,000 per year as an alternative to a company car. b. David has been using an old car which he bought from his previous employer. He received a

mileage allowance of $0.50 per mile when he used his own car on business trips. During 2011,

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David’s business mileage using his car amounted to 18,000km.c. Before taking up his employment with Southern Salt Ltd, David lived in Mutare. In June 2011,

the company reimbursed his relocation expenses of $7,200. All of this sum was spent on legal fees, estate agent's fees and other moving costs and was paid on presentation of David’s bills.

d. The company provides David with a spare PC to use from his home. The cost of the computer was $1,500.

e. On 6 August 2011, the company lent David $20,000 at an interest rate of 3% per annum. David repaid $12,000 of the loan on 6 November 2011. Libor is 2%

f. David was paid $8,000 from his previous employment and also received a bonus of $7,500 which was awarded on 31 March 2011 and paid on 12 April 2011. PAYE of $1,540 was deducted from his salary and $1,000 from the bonus.

g. David has other income for 2011 consisting of Zimbabwe dividend of $378 and bank interest of $128. Both sums represent cash received or credited.

Required:

a. Calculate the amount of income tax payable by David in the tax year 2011b. Briefly outline the main features of the FDS system.

Solution

a) Computation of David’s tax payable

Employment

Salary (7 months x $5,000) 35,000Cash benefit in lieu of company car (7/12 x $6,000) 3,500Own car usage for business (exempt) -Reimbursement of relocation expenses (exempt first passage benefit) -PC for use at home 1,500Interest benefit on $20,000 loan ($20,000 x 4% x 2/12) 133Interest benefit on $8,000 loan ($8,000 x 4% x 2/12) 53Salary from previous employer 8,000Bonus ($7,500 - $500 exemption) 7,000Taxable income 55,186

Tax on $18,000 3,960Tax on excess 13,015

16,975Less Tax credits: Elderly credit ($75 x 7) 525Tax liability 16,450Add 3% AIDS Levy 494Tax liability 16,944PAYE ($13,600 + $1,540 + $1,000) 16,140Tax payable 804

Other incomeNet amount Tax at source Gross amount

Dividend ($378 x 100/85) 378 67 445 Interest ($128 x 100/85) 128 23 151Total 506 90 596

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David is entitled to a refund of 100% of the dividend tax ($67) deducted at source. The CG shall authorise a 100% refund of dividend withholding tax for a resident shareholder who is 55 years old or above as stated below, if his aggregate dividend from a local source and interest from local financial institutions in an assessment year does not exceed $600.

b) The main features of the FDS system are as follows:

Employers deduct PAYE from employees when paying their wages and salaries. The sums deducted in a tax month must be paid over to ZIMRA within 10 days of the end of that tax month.

The PAYE system applies to all payments assessable as employment income, including fringe benefits.

Each employee must submit to the employer his/her entitlement to tax credits or reliefs. The system is cumulative in nature. With the aid of tax tables provided by ZIMRA, the

employer uses the table to determine the amount of tax due for the year to date. The tax already paid for the year (if any) is then subtracted, giving the tax due for the current month.

The aim is that, at any time of year, the tax paid so far during the year should be equal to the amount due so far for that year. At the end of the year, the system should have automatically collected the correct amount of tax and it should not be necessary to issue the employee with a further tax demand or make a tax repayment.

At the end of each tax year, employers are required to submit an end-of-year return to ZIMRA, summarizing all employees' gross pay and tax paid for the year. A certificate of gross pay and tax deducted must also be provided to each employee at the end of the tax year.


Babu was born on 2 June 1935. His wife, Bibi, was born on 14 May 1940. Throughout 2011, Babu was employed as a director of ZSR Ltd at a salary of $50,000 pa. The following information relates to the benefits received by him during 2011:

a) Between 6 April 2010 and 30 June 2011, ZSR Ltd provided Babu with a petrol-engined motor car with an engine capacity 2200 cc.

b) Between 1 July 2011 and 31 December 2011, ZSR Ltd provided Babu with a diesel-engined motor car with an engine capacity 3200 cc.

c) Since 1 September 2009, Babu and his wife have lived in a house provided by ZSR Ltd. ZSR Ltd bought the house for $220,000 in 2009. The company refurnished the house in June 2010 at a cost of $14,350.

d) On 6 June 2011, ZSR Ltd provided Babu with a $24,000 loan at an interest rate of 2% pa. Babu repaid $6,000 of this loan on 6 September 2011. Libor is 1%

e) On 6 April 2011, ZSR Ltd lent Babu a brand-new home entertainment system for personal use costing $2,700. On 6 August 2011, the company sold the system to Babu for $750. Its market value on that date was $1,000.

In addition to his employment income, Babu also derives rental income from a holiday cottage which he lets to tenants. During 2011, this cottage was let for 48 weeks and generated rental income of $9,670. Babu and his wife occupied the cottage themselves for the remaining four weeks of the year. Expenses incurred in relation to the cottage in 2011 were as follows:

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Insurance 450

Painting and decorating 330

Advertising for tenants 750

Drafting of lease agreement 300

Eviction of tenant to seeking more rent 900

Bibi's income for 2011 consisted of:

- A salary from a part-time job of $80 per week for 52 weeks

- Net building society interest of $7,664

- Net Zimbabwe dividends of $4,590

Required:

(a) Calculate Babu's employment tax liability for 2011(b) Calculate Babu’s tax liability from the cottage for 2011.(c) Calculate the amount of income tax borne by Bibi in 2011(d) In an attempt to reduce his tax liability, Babu is considering:

Transferring his holiday cottage to his wife’s name Reducing the amount of his loan from ZSR Ltd Buying a car of his own (which he would use for both business and private motoring)

rather than using a car provided by ZSR Ltd.

Assess the extent to which each of these suggestions would be successful in reducing Babu’s tax liability.

Solution

a) Computation of Babu’s employment tax liability

Salary 50,000Motoring benefit Jan –June ($3,600 x 6/12) 1,800 Motoring benefit Jul –Dec ($4,800 x 6/12) 2,400House benefit $220,000 x 7% 15,400Furniture benefit $14,350 x 8% 1,148 Interest benefit on $24,000 loan (4% x $24,000 x 3/12) 240Interest benefit on $18,000 loan (4% x $18,000 x 3/12) 180Home entertainment system ($1,000 -$750) 250


Charity Nhema, a widow aged 58, is employed as a youth coordinator in the Ministry of Youth and Development. In October 2010 she was involved in an accident while travelling to South Africa for a business meeting. The accident has caused her to be wheelchair bound.

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She approached you for assistance in computing her taxable income for the year ended 31 December 2011.Employment earnings and deductions for the year:

Compensation from NSSA for permanent injuries 21,500Salary (PAYE $4,234) 15,300Representation allowance 2,500Housing allowance 9,800Encashment of leave days 1,456Bonus 900Pension contributions 1,678Retirement annuity fund contributions 5,000Medical aid contributions 7,000Travel allowance 1,605Widow’s pension received 4,200Prescription medicines purchased 860

Charity is granted free use of a Government vehicle, a land cruiser, engine capacity 3200cc.

Other income received:Rental income and deductions in respect of a house being managed by Gabriel Real Estates:

Gross rent received 48,000Estate agent’s management fees 4,800Repairs and maintenance 1,300Rates and security 1,895Construction of a lock up garage and driveway (see note) 5,700Mortgage bond repayment 6,500Interest paid on mortgage bond 2,200Insurance premium for the property 1,700Note:Charity obtained a loan from her employer at an interest rate of 3% in order to effect the improvements to her property. The loan of $16,000 was advanced on 1 January 2011.

Other investment income:Interest received from Bankers’ Acceptances with Metropolitan Bank 15,000Interest received from CABS Building Society 16,000Dividends received from Zimbabwe Sugar Refineries (gross) 35,000Interest received from a local commercial bank 8,250

Required:

a. Identify those items of income in respect of which Charity's tax liability will be satisfied by final withholding and state the rate of withholding tax applicable.

b. Compute Charity’s employment taxable income for the AY ended 31 December 2011c. State and quantify the tax credits that Charity can claim against the tax payable by her on this

income.

d. Compute Charity’s resultant tax liability for AY ended 31 December 2011.

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e. State, giving reasons, whether or not Charity will be required to remit corporate tax and submit a tax return to ZIMRA for the year ended 31 December 2011, and if so by which date must be submitted.


Anna, a Saudi Arabian national, moved to Zimbabwe in January 2011 with her French husband, Nikita and their two children to take up a position as General Manager of Flamingo, a new hotel in Eastlea. For the first two months, Anna was paid from Saudi Arabia, where her salary was taxed at the rate of 10% (she has documentation to prove that this tax was paid to the Saudi Arabian tax authorities). However, from March 2011 onwards, her salary was paid from Zimbabwe. Nikita also got to be employed by FAO. They move into an apartment, and the children are enrolled in a respected international primary school.

In February 2011, Anna’s remuneration comprised the following payments and benefits:

Salary 7,500Bonus for successful opening of business 500Housing Allowance 1,000Medical insurance 800Pension contribution 750Children’s school fees 1,000

Anna was also reimbursed $1,300 in respect of expenses related to a three day business trip to Zimbabwe as follows:Hotel 500Air Travel 600Out of Pocket Expenses 200

Anna also has the exclusive use of a company car and driver, which the hotel rents at a monthly cost of $2,500.

Required:

a) On what basis is Anna’s salary taxable: resident or non-resident? Give your reasons.b) Discuss the legal basis under which Nikita may benefit from tax exemption in Zimbabwe.c) Compute Anna’s tax liability on her February remuneration, taking into account any potential

deductions.

Solution

a) A person of any nationality will be deemed a Zimbabwean resident if (s)he is domiciled in or has a principal place of residence in Zimbabwe, or is present in Zimbabwe for more than 183 days in any period of 12 months ending in the current tax year. Besides, income for services rendered is taxed based on the place the services, irrespective of the person’s residence status. In practice however, tax is activated when a person assumes 183 days in the country.

b) Firstly, Article 27 of the Double Taxation Agreement (Tax Treaty), “remuneration paid to employees of diplomatic or consular missions of foreign governments holding an official or diplomatic passport of that government have received ” are exempt from tax, provided that they are received “within the framework of fulfilling their official function” in Zimbabwe.

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Secondly, SI 417 of 1999 provides an exemption from tax of salaries and emoluments of officials, representatives, officers and employees employed by the Agencies of the United Nations.

The income of a non-resident is also exempted from tax in Zimbabwe provided that the employee’s presence in Zimbabwe does not exceed 183 days and the remuneration for “technical assistance” is paid by a non-resident (and not by a resident of Zimbabwe) and the employer does not have a permanent establishment in Zimbabwe.


Mr. Tanaka is a Japanese citizen working with Bermuda Ltd, a subsidiary of an American company based in Harare. He has been working with this company since 2003. He returned to Kyoto permanently in December 2011, after his retirement on 31 July 2011.

Mr. Tanaka had reached the retirement age of 55 years on 31 March 2011. He received a gratuity payment of $55,000 for his years of service with the company. Mr. Tanaka provided the following information in his return for the year 2011:Salary per month 10,000Leave pay (January, February and March 2011) 30,000Bonus for the year 2010 7,000Entertainment allowance per month 1,000Travelling allowance per month 2,000Air passage to Los Angeles 5,000

Further information provided was as follows:

i. Mrs. Tanaka is a housewife and they have three children. The first child aged 19 years got married in November 2006 while pursuing a degree in Mass Communication at a public university located at Los Angeles, USA. The second child is continuing a degree course in accounting at a University in Pakistani and Mr. Tanaka incurred $6,000 during the year. The third child is 12 years old and she is attending an International school located in Harare. Mr. Tanaka is fully supporting his children's education.

ii. Mr. Tanaka was given the option to buy 4,000 units of the company's shares at the price of $10 per share on 1 January 2011. The market value at that time was $18 per share. He exercised his option on 1 June 2011 when the price was $22 per share.

iii. Mr. Tanaka incurred $12,000 on entertainment expenditure on official purposes. The entertainment and travelling allowances were paid up to the end of December.

iv. Mr. Tanaka was provided a company house till July 2011. The rental of $5,000 (including $1,500 for furnishings) on a monthly basis was paid for by the company. The house was larger than what the family actually required. Mr. Tanaka estimates that 30% of the house was used for official entertainment.

v. Mr. Tanaka is pursuing a post-graduate degree in Law on a part time basis and he incurred fees amounting to $12,000 in 2011.

vi. Mr. Tanaka was provided with a luxury car engine capacity 3,500 cc. The employer did not bear the cost of fuel for Mr. Tanaka.

vii. Mr. Tanaka's wife had medical problems and had to go for a major surgery at Trauma Medical Centre. Since she was suffering renal failure for over a two-year period, she successfully underwent a kidney transplant operation in March 2011. Mr. Tanaka incurred medical expenses of $14,000 during the year. He was reimbursed $9,000 by the company

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viii. Mr. Tanaka made a cash donation of $5,000 to a National Bursary Fund.ix. Mr. Tanaka made the normal contribution to Employees Provident Fund, which was equivalent

to 11% of his salary.x. Mr. Tanaka received dividends amounting to $25,000 from his portfolio of shares in Japan in

2011. He also got rental income of $60,000 from his family home in Kyoto directly credited into his account in Japan.

Required:

a) Compute the tax payable by Mr. Tanaka for the year of assessment 2011

b) Comment on residence status of Mr. Tanaka regarding employment income, dividend and rental income and state where these incomes are taxed.

c) How can a person like Mr. Tanaka avoid tax on employment in Zimbabwe?

Solution

a) Computation of tax payable by Tanaka

Gratuity 55,000

Salary ($10,000 x 7 months) 70,000

Leave pay 30,000

Bonus ($7,000-$500) 6,500

Entertainment (exempt-expended on employer business) -

Travelling allowance 24,000

Air passage to Los Angeles 5,000

Share option ($22-$10) x 4,000 units 48,000

Housing and furniture ($5,000 x 7 x 70%) 24,500

Motoring benefit ($4,800 x 7/12) 2,800

Less Donation to a National Bursary fund (5,000)

Less Pension fund contribution (3,150)


Tax on 18,000 3,960On excess 83,878

87,838Tax creditsElderly credit ($75 x 7) 525Non refundable wife medical expenses ($5,000 x 50%) 2,500 3,025

84,813Add 3% AIDS Levy 2,544Tax payable 87,357

b) Comment on dividend and rental income received by Mr. Tanaka

Dividend from a foreign source is deemed to be from a source within Zimbabwe if it is received by

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a person who is ordinarily resident in Zimbabwe at the time the dividend is received. Regarding Mr. Tanaka we need to determine his resident status (his domicile i.e place of abode) using the following tie breaker rules:

A person is resident of Zimbabwe if he:

- Has a permanent home in Zimbabwe and if he has also a permanent home in another country, residence status in Zimbabwe is determined by centre of vital interests

- If has also centre of vital interests in another country, he shall be deemed to be resident of Zimbabwe if has an habitual abode in Zimbabwe

- If has also a habitual abode in another country, he shall be deemed to be a resident of Zimbabwe if he is a national of Zimbabwe.

Mr. Tanaka has a home in Japan and is only present in Zimbabwe by the reason of employment. He is therefore a resident of Japan and shall not be taxed on dividend received outside Zimbabwe.

The residence tie breaker rules for employment is 183 day and this rule cannot be applied on other incomes. For employment purposes Mr. Tanaka is a resident of Zimbabwe because he has been in Zimbabwe for more than 183 days in the year of assessment.

The residence tie breaker rules for rental income are similar to dividend income. However, Mr. Tanaka shall not be taxed on the rental income Zimbabwe, irrespective of residence status. Rental income is sourced at the place the property is situated. Since Mr. Tanaka’s home is not situated in Zimbabwe, the rental income is not from a Zimbabwean source.

c) Avoiding employment tax in Zimbabwe

A person like Mr. Tanaka can avoid employment tax in Zimbabwe if:

- He is present in Zimbabwe for a period less than 183 days in the year of income and- His remuneration is not paid by or paid on behalf of an employer resident in Zimbabwe and- His remuneration is not paid by or paid on behalf of PE of foreign company situated in

Zimbabwe.


Ms Maidei has been recommended for promotion to the head of Finance of Cotton Wool Ltd. The promotion will result in a salary increase of $3,500 per month. However, Ms Maidei may also choose one of the following remuneration packages:

Package Ai. Provided with a new company car, engine capacity 2,500 cc (fuel included).ii. Housing allowance of $1,800 per month.iii. An increase in the company’s rate of contributions to the Employees Provident Fund from7% to 20%.

Package B

i. A fuel allowance of $300 per month with no stipulation on how she should spend it.ii. A driver on the payroll of the company earning $300 per month.iii. A car loan of $64,000 at an interest rate of 2% per annum.(The company will borrow the money from a bank which will charge interest at the rate of 6% per annum. LIBOR is 1.2%)

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iv. An unfurnished house provided by the company. The company will pay a rental of $2,800 per month but Ms Maidei would be required to reimburse the company $1,000 per month.

Presently, she is paid a monthly salary of $2,000 with no benefits whatsoever. Her contribution rate to the Employees Provident Fund is 8% of her salary.

Required:

(a) Compute the tax payable by Ms Maidei in the case of each of the two remuneration packages (A and B) on a full year basis (b) Which package should Ms Maidei decide on and what other factors should she consider when deciding between the two packages.

Solution

c) Computation of Ms Maidei’s tax payable

Option A B

Salary 3,500 3,500Motoring benefit/allowance 3,600 3,600Housing allowance/accommodation 21,600 21,600Driver 3,600Interest benefit ($64,000 x 5.2%) 3,328Pension contribution by employer exempt - -Her pension contribution (8% x $3,500 x 12) (3,360) (3,360)Taxable income 28,668 28,940

Tax thereon 3,960 3,960On excess 3,734 3,829Tax liability 7,694 7,789Add 3% AIDS Levy 231 234Tax payable 7,925 8,023

d) Which package may Ms Maidei choose and other factors to consider

For tax consideration, Maidei should choose option A. While tax consideration forms the basis of her choice, Ms Maidei must also consider the option which gives her a better after cashflow or wealth. To this end, she must consider the following factors:

- Option B gives him the option to buy a car in the least possible time, whereas this could take longer using her own savings. The cost of money

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Chapter 3 Gross income: Trade & Investment

3.1 Subsidy, refund or grant

3.1.1 Subsidy and reimbursement

Mr. Wasuka, a pig farmer based in Mhondoro received a $10,000 government payment in the current income tax year as a consequence of a plan to aid pig farming. He also received from the neighbouring farm a $500 reimbursement of expenses that he claimed as deductions for fence he erected in the previous income tax year.

Advise Mr. Wasuka how he should treat these amounts in his current year tax return. Support your answer.

Solution

Section 8(1)(m) ITA considers as GI any amount received or accrued by way of refund, grant or subsidy in respect of any expenditure allowed or allowable as a deduction under the ITA or any previous law. Subsidy, refunds or grants reimbursing expenditure of a capital nature is non taxable, but used to reduce the cost base of the fixed asset.

Therefore, Mr. Wasuka must include the $10,000 received from the government to the extent to which this money is used in financing the pig farming working capital. Any of the amounts used to acquire or construct a fixed asset is non taxable, but reduces the cost base of the acquired fixed asset.

Mr. Wasuka must include $500 reimbursement of fencing expenditure in his gross income. Fencing is not a capital nature expenditure to a farmer, but a revenue expense deductible in full in the year in which it is incurred- para 2, 7th Sch ITA.

3.2 LEASE IMPROVEMENTS

3.6.1 Lease improvement substituting rental payments

Quick Properties (Pvt) Ltd concluded a lease agreement with Netbo (Pvt) Ltd in terms of which a factory building is leased to Netbo (Pvt) Ltd for a period of 9 years. The lease agreement provides that Netbo is under an obligation to refurbish and restore the leased building. As agreed in the contract the value of the improvements shall be a minimum of $120,000.

The lease agreement provides for $15,000 monthly rental payments, payable by Netbo to QP. The lease agreement provides that Netbo will be liable for payment of the rental in respect of all the buildings, but that the rental payments will be set off against the improvements costs incurred by Netbo. In terms of the lease agreement, this arrangement will continue until Netbo has recovered all the improvements costs from QP.

Required

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Advise Quick Properties (Pvt) Ltd and Netbo (Pvt) Ltd regarding the tax implications of their agreement. In your answer you must address the following matters: a) State how the concession in rental payments provided for in the lease agreement is treated in

the hands of QP, for income tax purposes?

b) State whether Netbo is entitled to deduct the rental payments?

c) Is Netbo entitled to claim a leasehold improvements allowance in terms of section 15(2) (e), in light of the fact that QP is agreeing to suspend all rental payments until all improvements costs have been reimbursed?

Solution

The Income Tax is not does not clearly deal with this issue, but the answer can be inferred from the existing legislation.

Where the lessor agrees to receive reduced rental payments or no rental payments from the lessee, either as reimbursement of improvements costs incurred by the lessee or as an inducement for the lessee for entering into the lease agreement, a benefit accrues to a lessee.

It is submitted that there is an “amount in cash or otherwise”, as an “amount” includes every form of corporeal or incorporeal property, which has a money value and where a taxpayer has a right to receive an amount, then the value of such right should be included in his gross income. The lessee becomes entitled to this benefit upon incurring the leasehold improvements costs. Naturally, the rental payments must be legally set-off against the improvements costs. The rules of set-off legally requires that one debt is cancelled by another and it can only take place when debts are mutually owed by two persons, i.e. each person is simultaneously the debtor and creditor. There can however be no set-off of the rental payments against the improvements costs, as both obligations will be due by the lessee. (Refer to commercial law regarding rules of set-off).

For this reason the concession granted by the lessor for rental payments will not affect the availability of a leasehold improvements allowance in terms of s. 15(2)(e) ITA. The lessee will therefore actually have incurred expenditure, and provided the expenditure is incurred in pursuance of an obligation in terms of the lease agreement and the property is used for the production of income, the lessee will qualify for an allowance in terms that section.

As stated in s.8 (1) (k) ITA, a waiver by the lessor of his right to the claim for rental payments result in recoupment to the lessee because he has been relieved from the obligation to make rental payments. The lessee will be entitled to a deduction of the rental payments in terms of s.15 (2) (a) and simultaneously his is deemed to have recovered an amount equal to the rentals deducted in terms of s.8 (1) (k).

Adopting this line of argument, QP shall not be relieved of his liability regarding lease improvements. QP shall be taxed on lease improvements in terms of s.8 (1) (e), but shall be relieved of his tax on rental payments because they have been taxed to the lessee.

3.6.2 Disposal of lease agreement

ABC (Pvt) Ltd leases a building to F Printers for $5,000 per month under a 5-year lease, commencing 1 April 2011. The terms of the lease provide that any improvements to the building

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made by F Printers revert to ABC upon termination of the lease. On 2 June 2011, F Printers completed the remodeling of the building at a cost of $40,000. The improvements were first used by F Printers for purposes of its trade on 1 August 2011.

A year later, on 1 August 2011, ABC sells the building to F Printers for $250,000 when the fair value on that date was $275,000.

Required

a) State at points ABC (Pvt) Ltd and F Printers might recognize income from the improvements.

b) Compute the taxable income for ABC (Pvt) Ltd for the year ended 31 December 2011

c) Compute the taxable income for ABC (Pvt) Ltd for the year ended 31 December 2012

d) Compute F Printers’ tax effect when it purchased previously leased property

e) When F Printers would ceases to qualify for lease improvement allowance?

Solution

a) The following are possible income recognition points from the lease improvements:

i. at the time the improvements are completed by F Printers, ABC shall be deemed to have accrued income in equal monthly instalments over the unexpired period of such agreement, cessation or assignment, as the case may be, or over a period of ten years, whichever is the less:

ii. ABC (the lessor) must include the balance of the outstanding (untaxed) lease improvements upon the:

cancellation, cessation or assignment of the lease agreement

sale of the land or buildings on which the improvements were effected

death or insolvency of the lessor

iii. F Printers (the lessee) may recognize lease recoupment when he acquires the land or the buildings under lease, provided that the lease recoupment shall be taxable over 6 years in equal instalments if an election is made.

b) ABC Pvt Ltd taxable income for the year ended 31 December 2011

Rentals $5,000 x 9 45,000

Lease improvements $40,000/ (5 years – 2 months) x 7/12 4,828


c) ABC Pvt Ltd taxable income for the year ended 31 December 2012

Rentals $5,000 x 7 35,000

Lease improvements $40,000-$4,828 35,172


d) On acquisition of the immovable property, F Printers shall be taxed on any amount paid, whether in the form of rent, premium, consideration in the nature of a premium or otherwise, for the right of use or occupation of such property which has been allowed as a deduction and which upon the subsequent acquisition of such property is applied in reduction or towards

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settlement of the purchase price of such property. That recoupment must not exceed the actual gain, i.e. the difference between the fair market value of the property and the amount paid to acquire the property.

F Printers’ recoupment is therefore the lesser of:

(A) Actual gain ($275,000 - $250,000) 25,000And

(B) Deductions:Rent deducted ($5,000 x 16 months) 80,000Lease improvements ($40,000/ (5 years – 4 months) x 12/12 8,571

88,571

F Printers’ recoupment is therefore $25,000. If it makes an election, the amount to be taxable in 2012 is $4,167 ($25,000/6 years).

e) On acquisition of ownership of the leased property, F Printers (the lessee) will cease to qualify for lease improvement allowance in the year of assessment following.

3.6.3 Lease improvements

Durban Investments (Pty) Ltd is a South African registered company wishing to venture into leasing out up-market apartments to South African business travellers to Zimbabwe. The company has been offered a block of flats in Harare under a scheme whereby it will enter into a six year lease to buy agreement, with an annual rental in the sum of $150,000. The scheme also requires that the company effect improvements to the block of flats at a cost of $500,000. At the end of the lease period, Durban Investments will have an option to purchase the property for $1.1 million. The fair market price of the block of flats at the end of the lease period is estimated at $1·5 million.

a) State, giving reasons, whether Durban Investments (Pty) Ltd’s income will be taxable in Zimbabwe.

b) Explain the tax implications of the lease to buy agreement supporting your explanations with relevant calculations.

Solution

a) The basis for taxation of Durban Investments (Pty) Ltd in Zimbabwe is the place of business theory. The income it generates in Zimbabwe is assigned a geographical location by reference to the location of the assets and activities that are used to generate the income or to the place where the operations are carried on. Another basis which can be used in this case is the location of the immovable property. Rent from an immovable property has its source in the country or place where the property is situated.

b) The following are the tax consequences of items related to the lease to buy agreement:

Durban Investments can deduct the rentals of $400,000 on annual basis in its tax return and over six years, the total deducted would be $2,400,000.

The lessee is allowed to deduct the value of improvements of $500,000 effected on the block of flats. This amount is deducted over the shorter of 10 years and the lease period (six years), effective date the improvements are used by Durban Investment (Pvt) Ltd for

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purposes of its trade or in the production of income. The annual deduction to Durban Investment is $83,333 ($500,000/6years).

Durban Investment (Pvt) Ltd may recognize lease recoupment when it acquires the block of flats under lease at the end of the lease period. The tax effect of the lease to buy agreement, at the end of the lease period is a recoupment of $400,000, which is the lesser of :

(A) Potential recoupment (actual gain): Fair market value of block of flats 1,500,000Purchase price to the lessee 1,100,000 400,000

And(B) Previously deductible expenses under the lease:

Rent 900,000Lease improvements 500,000 1,400,000

If Durban Investment Pty Ltd so elects, the amount to be included in gross income in the year in which it acquires the block of flats is $66,667 ($400,000/6years), and thereafter $66,667, in each year, for the next 5 years

3.7 DEBT CANCELLATION

3.7.1 Debt cancellation

Overlanders Ltd has assets of $60,000 and liabilities of $100,000. To assist Overlanders Ltd, its bank agrees to reduce the amount due on a loan from $65,000 to $50,000. Advise Overlanders Ltd on how it should treat the loan written off by the bank for tax purposes.

Solution

In terms of s. 8(1) (k) ITA, GI includes all income from whatever source derived, including (but not limited to) income from discharge of indebtedness. Overlanders Ltd realized income of $15,000 by the payment or purchase of his obligations at less than their face value, provided the debt extinguished a liability which was deductible under s.15 of ITA. Gross income does not include any amount which would be included in gross income by reason of the discharge (in whole or in part) of indebtedness when the discharge occurs when:

(i) the taxpayer is insolvent,

(ii) the company is wound by the court on grounds that it is unable to pay its debts

3.7.2 Debt forgiveness

Edward borrowed $80,000 from a bank to finance the purchase of inventory. A year later, he liquidated his business because of poor downtown economy. As such, the bank accepted $33,000 in settlement of a $49,000 loan balance. What is the tax effect of the debt forgiveness to Edward?

Solution

Under s.8(1)(k), a forgiveness of a debt is GI, as long as the liability forgiven arose from expenditure in respect of which a deduction was granted under s.15(2). In this case what is included

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in GI is the proportion of interest applicable on the forgiven loan. This is the amount which would have been deductible, not the loan or the shoe store.

No amount is included in GI, if the discharge or cancellation of indebtedness arises when the person becomes insolvent or when a company is wound by the court because of its inability to pay debts.

3.8 ROYALTIES

3.8.1 Purchase of patents and licensing

In 2010, GO WAY Ltd became operational in the marketing of computer programs. In that year, it purchased rights to a computer program which has been developed by HP Software, a non-resident company, in consideration of:

a) lump sum payment of $1 million (which was in fact paid to HP in 2010) and b) 10 percent of the annual gross sale proceeds of any computer programs sold by GO WAY Ltd

which are based on the program developed by HP.

In 2011, GO WAY Ltd pays HP $100,000 pursuant to clause (b) of the agreement.

Required:

(a) Explain the income tax concept of royalties.

(b) Advise HP and GO WAY Ltd of the income tax consequences of their agreement.

Solution

If a payment is in the nature of a royalty, it is subjected to income tax, where it is paid to a non-resident, for the use or right of use of intellectual property in Zimbabwe. Royalties are also taxed in Zimbabwe if they arise on an intellectual property created or perfected in Zimbabwe, or respect of works of art or fiction of which labour and wits are exercised in Zimbabwe.

“Royalty” is a compensation for the use of property (lease of copyrighted material), usually copyrighted material or natural resource, expressed as a percentage of receipts from using the property or as an account per unit produced. It represents a share of a product or a profit reserved by the owner for permitting another to use the property. It is given as a compensation for the use of some property and not for assignment or acquisition of the property.

According to s.12 (4) ITA “royalty” means any consideration paid for the use in Zimbabwe of or the grant of permission to use in Zimbabwe, or the imparting of or the undertaking to impart any knowledge directly or indirectly connected with the use in Zimbabwe of:

a. any patent, design, trade mark, copyright, model, plan, secret process or formula or any other property which, in the opinion of the CG, is of a similar nature; or

b. any motion picture film or television film or any sound recording or advertising matter used or intended to be used in connection with such film

In Zimbabwe – UK Tax Treaty royalty is defined as a payment of any kind for the use of, or the right to use of:

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a. a patent, trademark, design or model, plan, secret formula or process;b. industrial, commercial or scientific equipment, or information concerning industrial,

commercial or scientific experience;c. a copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for

radio or television broadcasting.

Not all payments for the acquisition of information constitute a royalty payment. For example, payments to obtain mere data or a calculation sheet cannot be treated as royalty payments. In order to withhold tax on payments for information received, the information should have some special features and should not merely be of a pure commercial nature.

The sale or acquisition of know-how cannot be taxed as royalty, because the seller does not retain any property in the designs. The buyer cannot also get a deduction because the property is an item of a capital nature. As a general rule, payments for alienation/transfer of property would be taxable as royalty only if the payments were contingent on the use or disposition of the property. b) GO WAY Ltd must withhold tax on the royalties paid to HP Ltd as consideration for the use of

or the granting or permission to HP’s computer program. The withholding tax is withheld at the rate of 15%. Where a double taxation agreement exists between Zimbabwe and HP’s country of residence, the withholding rate is reduced to 10% generally. GO WAY Ltd can deduct the royalties paid in the computation of its tax. The withholding tax is computed as follows:

2010 $1,000,000 x 15% = $150,000

2011 $100,000 x 15% = $15,000

3.8.2 Acquisition of patent

Camlink Ltd, a local corporation, owns the copyright in a computer program. It copies the program onto disks. The disks are placed in boxes covered with a wrapper on which is printed what is generally referred to as a shrink-wrap license. The license is stated to be perpetual. Under the license no reverse engineering, decompilation, or disassembly of the computer program is permitted. The transferee receives, first, the right to use the program on two of its own computers provided that only one copy is in use at any one time, and, second, the right to make one copy of the program on each machine as an essential step in the utilization of the program. The transferee is permitted by the shrink-wrap license to sell the copy so long as it destroys any other copies it has made and imposes the same terms and conditions of the license on the purchaser of its copy.

These disks are made available for sale to the general public in the country and within the region. In return for valuable consideration, Dr Theo, was mailed one such disk. The label license is not determinative. How would you classify the income received by Camlink Ltd for tax purposes?

Solution

No copyright rights have been transferred in this transaction. Dr Theo has received a copy of the program, however, and, therefore, Dr Theo has acquired solely a copyrighted article. Taking into account all of the facts and circumstances, Dr Theo is properly treated as the owner of a copyrighted article. Therefore, there has been a sale of a copyrighted article rather than the grant of a lease.

3.10 TAX EXEMPTIONS

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3.10.1 Exemption of educational entity of public character

The Midlands State University, a non-profit entity, operates a canteen, a bookstore inside the campus and two dormitories for its students, one of which is in the campus. Is the University liable to pay income taxes for the operation of the: 1) Canteen? 2) Bookstore? 3) Two dormitories?

Solution

Receipts and accruals of educational institutions of a public character are tax exempt under para 2(e), 3rd Sch ITA. For the operation of the canteen inside the campus, the income thereon being incidental to the operations of the University as a school is exempt. For the same reasons, the University is not liable to pay income tax for the operation of the dormitory located in the campus.

3.10.2 Exempt organisation-religious organisation

YZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. In January this year, it sold a portion of its lot used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Crèche for children of single parents. In order to subsidize the expenses of the Crèche and to support its religious, charitable and social welfare projects, the Foundation leased the 300 square metre area of the second and third floors of the building for use as a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the income from which is used actually, directly, and exclusively for the purposes for which the Foundation was organized. Advise of the tax effect of these transactions.

Solution

Under para.2 (e), 3rd Sch ITA, ecclesiastical organised for religious, charitable or social welfare purposes are exempt from income tax on their receipts and accruals. However, if these religious organizations derive income from their properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income irrespective of their disposition.

The income derived from the sale of lot and rentals from its boarding house are considered as income from properties which are subject to tax, so is the income from the operation of the canteen and gift shop.

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Chapter 4 Deductions4.1 EMPLOYMENT EXPENSES

4.1.1 Pension contributions

Mr Dlamini earns a salary of $120 000 per annum of which 10% is deducted as a pension contribution. Advise Mr. Dlamini the maximum contributions he is allowed to deduct in respect of contributions to a pension fund? Assume he has already deducted $1,000 in respect of retirement annuity fund contributions.

Solution

In terms of s.15 (2)(h) ITA, 1Mr. Dlamini is permitted to deduct so much of the total current contributions to the pension fund made during the AY as does not exceed the lesser of—

(A) Of so much of the contributions as do not exceed 7.5% of the member’s annul emoluments

And

(B) The amount of $5,400.

Mr. Dlamini will thus be permitted to deduct the greater of-

(A) So much of contributions made, i.e. $12,000 ($120,000 x 10%) but must not exceed 7.5% of the member’s annual remuneration, i.e. $9,000 ($120,000 x 7.5%)

And

(B) $5,400

Mr. Dlamini will therefore be permitted to contribute and deduct $5,400 to a pension fund. However, only $4,400 ($5,400- $1,000) is deductible. This is because he has already deducted $1,000 of contributions to a retirement annuity fund. The aggregate of pension, NSSA and retirement fund annuity contributions must not exceed $5,400 for AY 2011.

4.1.2 Employment expenses, etc

(a) State any three criteria that have to be considered under s.15 (2) (a) ITA before remuneration expenses incurred by an employer can be deducted against the gross employment income.

(b) Sandura runs Car Rental Services business in Kadoma. He bought a badly damaged two-year old car for $10,000 from Norah whose son was involved in a bad accident while driving the motor vehicle. The market value of the car would have been $26,000 if it had' not been for the accident. A sum of $5,000 was then spent on repairs and reconditioning to make it road-worthy and to comply with VID requirements before using it in the business. How would the sum spent on repairing the car be treated in the accounts of Sandura?

(c) What is the tax treatment for an employee in respect of an interest-free or subsidised loan given by an employer to the employee?

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(d) What will be the tax treatment on the employee when the employer pays the insurance premiums for the benefit of the employees or their families?

Solution

a) Criteria to be considered before employment expenses can be deducted

The ITA law does not permit the deduction of any expense incurred by an employee in the production of employment income, unless the expenditure specifically permissible in terms of the specific provisions of the Act. For example, the Act specifically allows the deduction of the against employment income if the expenditure:

- represent contribution by an employee to superannuation fund, up to a maximum of $5,400 per year.

- represent a cost incurred by an employee on the business of the employee- is in respect of subscriptions to professional associations by a member- is incurred on trade tools or tool to be used in trade.

In general, expenditure must be incurred for purposes of trade to be deductible.

b) Repairs incurred on the motor vehicle

The expenditure of $5,000 spent on repairs and reconditioning of the car to make it road-worthy and to comply with VID requirements is treated as the cost of acquisition of the vehicle. All initial repairs or those incurred on an asset before it is put into use or used for purpose of trade are treated as capital improvements which qualify for capital allowances in terms of s.15(2)(c ) ITA>

4.2 NON DEDUCTIBLE EXPENSES

4.2.1 Home expenses

David is a college professor who does some consulting work on the side. He uses 25% of his home exclusively for the consulting practice. He is single and 63 years old. His employment income is $45,000. Other information follows:

Income from consulting business 14,000Consulting expenses other than home office 1,500Total costs relating to homeInterest and taxes 6,500Utilities 1,500Maintenance and repairs 450Depreciation (business part only) 1,500

Required:Calculate David’s tax liability for the year ended 31 December 2011.

Solution

Expenses relating to your home office may be claimed as a deduction for tax purposes if:

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“A part of your home is occupied for purposes of your trade and that part is regularly and exclusively used for purposes of your trade; and“The part so used or occupied is specifically equipped for purposes of your trade.

Employment ConsultancyGross income 45,000 24,000Business Expenses (1,500)Interest & Taxes (25% x $6,500) (1,625)Utilities(25% x $1,500) (375)Main. And Repairs (25% x $450) (113)Depreciation -Taxable income 45,000 20,387

Tax thereon 13,410 5,097Less Tax Credit: Elderly 3,000 Tax before AIDS Levy 10,410 5,097Add 3% AIDS Levy 312 153 Tax payable 10,722 5,250

4.2.2 Private expenses

Hopewell Inc., a Zimbabwe private corporation, has been your client for several years. Every year, you prepare the corporation’s financial statements and income tax returns, as well as the tax returns of Miss. Chigubu, who controls Hopewell, and all members of her family.

When preparing the financial statements for Hopewell Inc’s year of assessment ended 31 December 2010, you noted the following facts:

1. On 3 March 2010, Hopewell Inc lent $15,000 to Wendy, Miss. Chigubu’s finance, so that he could pay his UNISA BCompt degree tuition fee. The loan had not been repaid as of 31 December 2010. The loan bears interest at the rate of 10%. Wendy does not work for Hopewell Inc.

2. Hopewell’s advertising account includes an unidentified withdrawal of $17,000, hotel expenses of $6,000 in Dubai, and registration fees of $2,500 for a conference. When you ask Chigubu for explanation, she told you that in April 2010 she attended a 3-day conference in Dubai related to Hopewell’s activities, and that Hopewell paid the conference registration fees plus the hotel expenses for the duration of the conference and for an additional 7-day period following the conference. Ms Chigubu confirmed that she remained in Dubai a few days more to gamble and had to withdraw money to cover her losses.

Required

Explain the tax consequences of each of the facts noted, for Hopewell and for Chigubu and the members of her family, with supporting calculations where applicable.

Solution

Loan to Wendy

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Since the loan was not repaid in the year following the end of the taxation year of Hopewell Inc. during which the loan was made, and since no other exception applies, Wendy must include the amount of $75,000 in his income for 2006 under subsection 15(2).

Advertising expenses

A portion of the hotel expenses (7/10 × $6,000) and the unidentified withdrawal of $17,000 are Chigubu’s personal expenses and cannot be used to claim a deduction in computing Hopewell’s taxable income. Under s. 8(1) (f), Chigubu must include a taxable benefit equal to the amount of the expenses refused to Hopewell in its 2008 income.

4.3 BAD DEBTS

4.3.1 Bad debts

PQR Ltd claimed as a deduction in its tax returns the amount of $30,000 as bad debts and $120,000 as provision for pre-mature termination of employment. The CG added back the bad debts on the grounds that the debts cannot be considered as "worthless," hence they do not qualify as bad debts. Regarding the provision for pre-mature termination of employment, the CG argued that no expenditure had been incurred, therefore no deduction can be granted.

The company asks for your advice on "What factors will be considered in determining whether or not the debts are bad debts?" Answer and explain briefly. Is the CG correct in disallowing the provision for pre-mature termination of employment?

Solution

Bad debts are deductible under s.15 (2) (g) ITA. The following factors are considered:

The debt must be proved to the satisfaction of the CG to be irrecoverable, e.g. debtor is insolvent, has neither property nor visible income, and has been adjudged bankrupt or insolvent.

the debt must be due and payable to a taxpayer, i.e. you have to be the owner of debts to deduct them

The debts must have been included in the taxpayer’s taxable income of the current year or in any previous year of assessment.

A provision or a contingent is disallowed in terms of s.16 (1) (e). The following are further arguments supporting the CG’s decision:

A sum as charged in the profit and loss account should be a sum actually incurred within the meaning of s.15 (2) (a). Given the wording of the words in s.15(2)(a) the charges will only be given a deduction if there is definitive obligation to pay and which arose in the relevant basis period for the year of assessment. A mere provision of a sum that has not been truly ‘incurred’ or for which payments has not been disbursed to the employees may not fall within the provisions of s. 15(2)(a).

Given the facts of the case, it is most probable that the amount charged in the Profit and Loss Account would be disallowed by the CG on the grounds that it is a mere provision and a contingent charge, no matter how accurately the charges had been computed. The weak point for the taxpayer is that the sum payable upon retirement, resignation or even termination is not a guaranteed payment to which the employee is entitled to as a matter of right but is subject to the fulfilment of

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certain terms and conditions which may result in the employee being denied the payment – in other words, the sum as charged in the accounts may not be actually incurred – on which score the claim for deduction fails.

Provisions that are deductible include provision for directors’ fees and bonus, provided they are voted for before the date of accounts or before the AGM.

4.4 LEASE IMPROVEMENTS

4.4.1 Lease improvements

Clay (Pty) Ltd is a manufacturer of stone fireplaces. The company made an operating profit of $450,000 for the year ending 31 December 2011.The expenses that have been deducted in calculating this figure include the following:

Amortisation of lease premium and improvement 5,597Depreciation 78,750

Leasehold property

On 1 March 2011 Clay (Pty) Ltd entered into a 15 year lease agreement to acquire the use of an office building. The company paid $50,000 as a lease premium on 1 March 2011. The monthly lease rental commencing on 1 April 2011 was $7,500 per month.

Clay (Pty) Ltd was required to make an improvement to the property and this was included in the lease agreement. The amount specified in the lease agreement for the improvement was $67,000. The improvements were completed on 1 June 2011 at a cost of $72,500 and were immediately brought into use.

Purchase of manufacturing building

Clay (Pvt) Ltd bought new factory premises on 1 April 2011 and these were immediately brought into use. The cost was made up as follows:

Land 300,000Factory building 475,000

775,000

Plant and machinery

On 1 January 2011, details of the existing machinery used in the manufacturing process were as follows:

New machinery purchased on 1 January 2008 at cost $240,000Second-hand machinery purchased on 1 January 2009 at cost $310,000

Clay Pvt Ltd has policy of claiming minimum capital allowances

Required:

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a) What are the key requirements that must be met before a lessee can deduct lease improvement expenditure?

b) Compute Clay (Pty) Ltd’s taxable income for the tax year ending 31 December 2011.

c) Briefly discuss the income tax effects of the lease agreement for the lessor. Support your answer with appropriate workings. The lessor has 31 December year end.

Solution

(a) The following are key requirements which all need to be complied with in order for the lessee to claim a section 15(2)(e) leasehold improvements allowance:

There must be a lease agreement; There must be an obligation to effect improvements in terms of the lease agreement; There must be expenditure actually incurred in pursuance of such obligation; and The land or building must be used or occupied for the production of income or income

must be derived there from.

(b) Taxable income for the year ending 31 December 2011

Operating profit 450,000Amortisation of lease premium and improvement 5,597Depreciation 78,750

534,347DeductionsLease premium $50,000/10 x 10/12 4,167Lease improvement $67,000/10 x 7/12 3,908Factory building –wear & tear $475,000 x 5% 23,750New plant and machinery 17,496Second hand plant and machinery 25,110 74,431Taxable income 459,916

Comments

The lease improvement may only be deducted from the date the property is first used for purposes over the lesser of the unexpired period of the lease (15 years – 3 months) and 10 years, based on the value specified in the lease agreement.

Wear & tear is computed on plant and machinery using the reduced balancing method, at 10% p.a. The following is the computation of wear & tear over the years:

New Plant & Mach Second Plant & MachCost/ITV 1/1/2008 240,000Less W & T 31/12/2008 24,000Cost/ITV 1/1/2009 216,000 310,000Less W & T 31/12/2008 21,600 31,000ITV 1/1/2010 194,400 279,000Less W & T 31/12/2010 19,440 27,900ITV 1/1/2011 174,960 251,100Less W & T 31/12/2011 17,496 25,110

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ITV 31/12/2011 157,464 225,990

(c) Tax effects for the lessor

The lease premium of $50,000 will be included in gross income in 2011.

The lease rentals of $67,500 ($7,500 x 9) will be included in gross income.

The improvements value as specified in the lease agreement of $67,000, must also be included in gross income effective date improvements are completed, spread over the shorter of the unexpired period of the lease (15 years – 3 months) and 10 years. The income for 2011 is $3,908 ($67,000/10 x 7/12).

4.5 BREACH OF REGULATIONS

4.5.1 Bribes and fines

In order to facilitate the processing of its application for a license from a government office, BEC Ltd found it necessary to pay the amount of $100,000 as a bribe to the approving official. Is the $100,000 deductible to BEC Ltd and taxable to approving official? Explain your answers.

Solution

A bribe is not allowed as a deduction to BEC Ltd. However, to the recipient government official, it constitutes a taxable income. All income from legal or illegal sources is taxable absent of any clear provision of law exempting such income.

4.6 REPAIRS AND IMPROVEMENTS

4.6.1 Repairs

Dombo made the following expenditures with respect to his apartment building. Discuss whether each of the expenditure is deductible or constitutes capital expenditure.

a) $500 for painting one of the apartments and $15,000 to have entire building painted.b) $1,000 for patching roof of his building and $5,000 to have a new roof.c) $500 for some rewiring and plumbing work. Would the answer change if Dombo paid $4,500

to have the rewiring and plumbing done as part of the overall renovation of the building?d) $1500 for wages paid to carpenter who spend three weeks building a large carport for the

apartment building. He failed to have the new carport painted at time it was constructed, but paid $400 in the following year to have it done.

e) $2000 in legal fees to block efforts by the city council to condemn some of Dombo’s land adjacent to his building in order to widen a nearby highway.

Solution

a) The cost of painting one of the apartments or the entire building is deductible. It merely restores the property to its working condition, deductible under s.15 (2) (b) ITA.

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b) The patching of a roof is deductible (same reasoning as above), while $5,000 spent on new roof is not deductible. It is a major improvement and more than keeping the building in operating condition. It will improve the building or extend its working life for a number of years.

c) The rewiring and plumbing work is a repair, which is deductible under s.15 (2) (b) ITA, while the overall renovation constitutes permanent improvement. Note that, expenditure that is alone viewed as repairs can be capital expenditures if done in whole as part of a major renovation.

d) Wages are normally currently deductible under s.15 (2) (a), but wages paid for an asset being created must be capitalized with the cost of the asset. The fact that the carport was not painted at the time of construction does not change the nature of expenditure. It was just a delayed part of the construction and must be capitalized.

e) The cost of defending or perfecting a title to a property is considered as capital expenditure. Therefore, the legal fees incurred to protect property must be capitalized to protect the title.

4.6.2 Repairs

Steel Company Ltd conducts business as a manufacturer and supplier of concrete and concrete products, including block and reinforced support columns. It owns and uses several old buildings which are in need of maintenance and painting. It also operates a railway to transport material and products to and from port facilities. The railway is functional, but 20 years old. Some sleepers need replacement and some rails are rusted. The company's electrical equipment is in good condition. As business is booming, the company decides to expand its production and resolves to do the following:

a) to repair a leaking roof in an old building, replace some old dangerous awnings and paint all existing buildings to prevent further damage to timber;

b) to build a new production plant factory at the rear of the present buildings;

c) either to make necessary repairs to the existing railway and extend it to the new buildings, or to scrap the old one and start again;

d) to buy some additional rundown locomotives and, after repairing them, to use them on its railway to transport materials;

e) to mechanise fully by installing computerised manufacturing equipment.

Advise Steel Company Ltd of the deductibility of money spent in connection with items referred to above.

4.7 INTEREST

4.7.1 General interest

To what extent may Monte deduct the following interest payments made during taxable year?

a. $5000 interest on bank loan used to pay operating expenses in Monte’s cattle businessb. $350 interest on Monte’s MasterCard account to which he charges personal itemsc. $2000 interest on bank loan used to pay employee’s technical college tuitiond. $1000 interest he paid on loan through brokerage house for purchase of stock.

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Solution

a. $5000 interest on bank loan used to pay operating expenses in Monte’s cattle business is deductible under s.15 (2) (a) ITA. It was incurred in connection with trade or business.

b. $350 interest on Monte’s MasterCard account to which he charges personal items is not deductible, being personal interest. A credit card debt is private consumption item.

c. $2000 interest on bank loan used to pay employee’s technical college tuition deductible subject to limits of s.15 (2) (p) ITA. The technical education must be related to the taxpayer’s trade.

d. $1000 interest he paid on loan through brokerage house for purchase of stock.

4.7.2 Interest incurred on exempt income

Leona borrows $10,000 from Trust Bank and used it to purchase agricultural bonds. The interest Leona pays on this loan is deductible in terms of s.15 (2) (a) ITA.

Solution

False. Leona cannot deduct the interest on the bank loan. Section 16(1) (f) (i) prohibit its deduction because it was incurred in the production of interest on agricultural bonds which is exempted from tax- para 10(1) (k) and para 10(1) (m), 3rd Sch ITA.

4.7.3 Interest incurred on constructed buildings

Mrs. Savanhu started construction of her factory building on 07-06-2010 and took a bank loan of $600,000 at 12% per annum on 01-07-2010. The construction was completed on 22-11-2010 at a cost of $620,000 and was put into use on 01-01-2011. The entire amount of loan was outstanding during 2011. The capital together with the accrued interest was repaid on 31 December 2011. Simple interest method of calculating interest should be assumed. She has taxable income in 2011 of $120,000 and assessed loss (before the bank obligation) on 1 January 2011 of $250,500.

a) Explain whether the interest incurred on the bank loan is tax deductible.

b) When Mrs. Savanhu is eligible to claim capital allowances and how much capital allowances must she claim if she intends to keep her assessed loss low?

c) Compute Mrs. Savanhu’s tax liability for 2011 tax year.

Solution

a) To be deductible, interest must incur on debt incurred for purposes of trade or in the production of income. It does not matter whether the loan or debt is used to acquire or purchase fixed assets. However, interest incurred during the construction of a building is capitalised to form part of the cost of the building for purposes of s.15 (2) (c). Therefore, Mrs. Savanhu should capitalise into the cost of the building the interest incurred from 1/7/ 2010 to 30/11/2010, i.e. $30,000 ($600,000 x 12% x 5/12).

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b) In the year in which the building is first put into use i.e. 2011. To keep her assessed loss low, Mr. Savanhu must not increase deductions. She must therefore claim wear & tear i.e. $32,500 ($620,000 + $30,000) x 5%.

c) $0

Taxable income 120,000Less Deduction:Wear & tear 32,500Interest for 2011 ($600,000 x 12%) 72,000 104,500Taxable income 15,500Assessed loss b/f ($250,000 + *$6,000) 256,500Assessed loss C/F 241,000

*the interest incurred after completion of construction is deductible in the tax year in which it is incurred, i.e. interest for December 2010, is deductible in that year to increase assessed loss.

4.8 RELATED PARTIES EXPENSES

4.8.1 Excessive payments

Karen is a sole shareholder of First Chemist, a company that owns 5 chemists in Chegutu. During the current year, First Chemist paid $15,000 salary and $20,000 bonus to Linda, Karen’s daughter, who works as pharmacist at one of the stores. Other pharmacists only received $2,500 as year-end bonuses. Is the bonus payable to Linda deductible to First Chemist?

Solution

The question is whether Linda's bonus is deductible. To be deductible, the expenditure must be incurred for purposes of trade or in the production of income. This means that the primary motive for making the expenditure is profit related. In addition, a business expense must be ordinary, necessary, and reasonable in amount. The problem in this arrangement is that the payment is made to a related party. Payments made to related parties are assumed to not be made at arm's-length and, therefore, are given special scrutiny. Other pharmacists only received $2,500 compared to Linda’s $20,000. In such a case, the substance over form doctrine would characterize the excess payment as a dividend payment (which is not deductible by the corporation) rather than as a deductible salary expense.

In addition, the bonus could be treated as a donation made by a parent to her children under s.10 (3) ITA. If treated this way, then the mother will have to include the excess income in her tax return.

4.8.2 Bursary, grants and scholarship

Which of the parties listed below are related parties? What is the tax implication of such relationship to the deductibility of bursary, grants or scholarship made on behalf of the related party?

a) Heather and her sister Janet?

b) Heather, an executive director and Promise Ltd. Heather owns a 4% interest in Promise Ltd.

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c) Heather and her cousin Maurice?

d) Harvey and Noti Corporation? Harvey owns 40% of Noti Corporation. Three unrelated parties own 20% each.

e) Heather owns 40% of the stock in A Ltd, while her husband owns 30% and her brother-in-law owns the remaining 30%.

Solution

In relation to persons, related parties are defined by s.2 ITA to include members of an individual's family (ancestors, lineal descendants, and brothers and sisters), i.e.:

a. a lineal ascendant of an individual, including a step-father or stepmother; orb. a child or a lineal descendant of an individual other than a child; orc. a brother, half-brother, step-brother, sister, half-sister, step-sister, uncle, aunt, nephew or niece

of an individual; ord. the adopter or adopters of an individual; ore. the spouse of a relative of an individual referred to in paragraphs (a) to (d) above.

4.9 EXPENSES GENRALLY

You have been approached by a client who has set up a business and he/she would like you to explain the following terms to them:

a) Calculation of tax adjusted profitsb) Income tax payments dates and calculation of amounts duec) Basis of assessment for commencement

Solution

a) Computation of Tax Adjusted Profits

In order to arrive at the taxable income, adjustment is made on trading profits as follows:

Net Profit per accounts Add: Disallowable expenses Add: Trading income not taken account of in profit and loss account Less: Expenses not charged in profit and loss accounts which should have been Less: Capital receipts and exempt receipts General Rules as to allowable and disallowable deductions

1) Capital items are disallowed in computing profits for income tax purposes 2) Certain revenue items are specifically disallowed

Examples of commonly deductible expenses o wages paid to taxpayer’s wife where she is a bona fide employee o trade interest o statutory redundancy

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o donations to approved bodieso repairs o lease payments o specific bad debts, provided adequate action has been taken to recover the debtso Goods stolen o Legal fees re debt collection o Contributions to staff pensions paid up to the limit of 7.5% of the employees’ gross salary or

$5,400o Capital allowances at specified rates computed on qualifying assets o Exchange losses are only deductible if they are trade related and realisedo subscriptions to relevant professional bodies and trade associations o Double deduction is allowable for export market development

Examples of disallowed expenditure:o Interest incurred which relates directly or indirectly to non-income producing investments or

non-trade debtors o not wholly and exclusively for the purpose of the trade o rent of houses not used for trade o depreciation,o entrance feeso donations, unless made to approved institutions o loss on sale of fixed assets o improvements to premises o drawings o income tax payments o covenants o private element of certain expenses o interest on late payment of tax o increase in general bad debts o customer entertainment o lease charges in excess of $10,000 on renting a PMV

b) Income tax payment dates and calculations of amounts due.

Tax Returns

Tax Return must be submitted by 31 December of the end of the year of assessment. For example, for the tax year 2010, the tax return must be submitted by 31 December 2010. Those on self-assessment should submit tax returns by 30 April following after the end of the year of assessment. For example for the tax year 2010, the tax return must be submitted by 30 April 2011. Provisional tax

Provisional tax is an advance payment of tax. It is due for payment as follows:

10% of tax liability by 25 March25% of tax liability by 25 June 30% of tax liability by 25 September35% of tax liability by 20 December

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The tax above is paid in the same year as that of income, based on estimate of annual tax liability.

Basis of assessment for commencement

Commencement Year 1: The basis of assessment for year one is the profit from the date the business starts until the following 31 December. Year 2: o If only one account is made up to a date within the year of assessment and that account is for a

period of twelve months, the assessment will be made on the profits for the twelve months ending on that date.

o If an account is made up to a date which is not for twelve month period or where more than one set of accounts are made up to different dates within the same tax year, then the assessment will be based on the full amount of the profits for the twelve months ending on the latest accounting date ending in the second tax tear.

o In any other case, the assessment is based on the full amount of the profits for the actual second tax year, where there is no period of account ending during the second tax year.

Year 3: Normally the profits of an accounting period of twelve months ending on any date during the third tax year. The taxpayer has an option in relation to the assessment for the third year. He may claim to reduce the assessment for the third year by the amount by which the assessment raised for the second tax year exceeds the amount of the actual profits of the second year.

4.10 PREPRODUCTION EXPENDITURE

4.10.1 Preproduction expenses

Tinashe decides to enter the fast-food business. He bought Chicken Inn franchise for $50,000. Tinashe decides to rent commercial space, rather than buy and spends $1,000 in advertising. After finally renting, he spends two months remodelling. Prior to opening, he paid $5,000 in rent, $3,000 on employee training sessions at Chicken Inn HQ and $2000 in wages to employees being trained. Can Tinashe deduct the advertising, rental, employee training and wage expenses he incurred prior to opening the business?

Solution:

Tinashe’s expenses were incurred during the preproduction period. The expenses are deductible under s.15 (2) (t) subject to the following conditions:

a trade is being carried on by a taxpayer The expense is incurred within 18 months prior to the commencement of trade. The expense is incurred in the preparation of a trade. The expense is qualifying as a deduction under s.15 (2) (a) ITA. The expense is deductible when trade commences.

The cost of the franchise is a capitalized expense, and NOT currently deductible because it is an asset that lasts beyond the current year. Advertising, rent and salaries are deductible subject to the above conditions.

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4.10.2 Pre-incorporation expenses

Jolly Juice (Pvt) Ltd, with an authorised share capital of $1 million, incurred $80,000 of incorporation costs on 1 November 2010. It then commenced business on 1 January 2011 and prepared its first set of accounts to 31 December 2011.

Required:

State, with reasons, whether the amount of $80,000 incurred Jolly Juice (Pvt) Ltd is deductible.

Solution

The expenditure is non deductible. An expenditure must be deducted if it is incurred for purposes of trade or in the production of income. The incorporation costs are expenses not incurred in the production of income, but for creating an entity which will produce income. It is an expenditure of a capital nature.

4.11 ASSESSED LOSS

4.11.1 Loss carried forward period

Govans Ltd had sustained losses for years. In 2011, it made a good recovery. The returns for some years showed the following adjusted results:

Year ended 31st December 2004 loss 55,000Year ended 31st December 2005 loss 45,700Year ended 31st December 2006 loss 7,500Year ended 31st December 2007 loss 7,900Year ended 31st December 2008 loss 45,000Year ended 31st December 2009 loss 7,500Year ended 31st December 2010 profit 17,900Year ended 31st December 2011 profit 55,000

Required

a) State the maximum period for the carrying forward of assessed loss.

b) Show the relief of losses against assessable profits allowed.

Solution

a) Assessed loss can be carried for a maximum period of six years in all businesses except mining business. Mining businesses can carry forward assessed loss for an indefinite period.

b) Computation of loss reliefLoss Taxable income

2004 Year of Assessment Loss for the year carried forward (55,000)2005 Year of AssessmentLoss for the year (45,700)

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Add unrelieved loss brought forward (55,000)Total loss carried forward (100,700)2006 Year of Assessment Loss for the year (7,500)Add unrelieved losses brought forward 100,700)Total losses carried forward (108,200)2007 Year of Assessment Loss for the year (7,900)Add unrelieved losses brought forward (108,700)Total losses carried forward (116,600)2008 Year of Assessment Loss for the year (45,000)Unrelieved losses brought forward (116,600)Total losses carried forward (161,600)2009 Year of AssessmentLoss for the year (7,500)Unrelieved losses brought forward (161,600)Total losses carried forward (169,100)2010 Year of AssessmentAssessable profits for the year 17,900Less Loss relief 2004 17,900 (17,900)Unrelieved losses brought forward (169,100)2004 loss lapse (45,000 -17,900) 27,100Total losses carried forward (124,100) -

2011 Year of AssessmentAssessable profits for the year 55,000Less loss relief 2005 45,700Less loss relief 2006 7,500Less Loss relief 2007 1,800

55,000 (55,000)Unrelieved losses brought forward (124,100)Total losses carried forward (69,100)

4.11.2 Assessed loss

Simplex Group Limited has three wholly owned subsidiary companies operating distinct businesses, which are Duplex P/L, Complex P/L and Bullet P/L. All three subsidiary companies have been in business for the past six years and have recorded the following taxable income/losses:

Year Duplex Complex Bullet

2004 50 000 130 000 (645 000)2005 116 000 180 000 (170 000)2006 (243 000) 45 000 88 0002007 (560 000) 205 000 93 0002008 (845 000) 427 000 107 0002009 (919 000) 746 000 132 0002010 (990,000) 820,000 150,000

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Duplex is expected to record a further loss of $800,000 for the year to 31 December 2011 and the group finance director considers that this company has little prospect of making a profit in the foreseeable future. He therefore intends to propose to the board of Simplex Group Ltd that Duplex ceases to trade immediately and that its assets are transferred to Complex and Bullet, both of which will make a profit in excess of $600,000 in 2011. The following are the fixed assets currently owned by Duplex as at 1 January 2011:

Date Cost Income tax valueLand 2002 100 000 100 000Parking lot 2002 45 000 38 250Office block 2002 180 000 148 500Haulage trucks 2002 300 000 NilPassenger motor vehicles 2002 165 000 NilOffice equipment 2003 248 000 NilFurniture and fittings 2003 200 000 Nil

Required:(a) (i) Calculate the loss to be carried forward by Duplex and Bullet respectively as at 31/12/2010. (ii) State the maximum period for which a recorded loss can be carried forward.(b) Explain the tax implications of the group finance director’s proposal to transfer Duplex’s assets to either of the other two companies. (c) Briefly state the tax registration requirements for a newly incorporated company which has commenced trading operations.

Solution

(a) (i) Calculation of the loss to be carried forward as at 31 December 2010

Year Duplex Bullet

2004 - (645 000)2005 - (815,000)2006 (243 000) (727,000)2007 (560 000) (634,000)2008 (803,000) (527,000)2009 (1,722,000) (395,000)2010 (2,712,000) (170,000)

(ii) A recorded loss can be carried forward for a maximum of six years from the year incurred, if it cannot be written off in that period it expires, e.g. $75,000 of the $645,000 could not be written off within the statutory 6 year period.

(b) The following are the tax issues of the transfer of assets to the transferee (Duplex P/L):

The transfer is treated as a deemed sale and hence gives rise to the following taxes: capital gains tax of 20% on the capital gain arising on the specified assets, i.e. the land, parking

lot and office block. capital gains withholding tax calculated as 15% of the selling price or market value applicable

at the date of sale of the immovable asset

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corporate tax of 25% on the recoupment of capital allowances previously granted on the movable assets, if any.

Since Duplex P/L has sufficient losses ($800 million expected for the current year and $2.712 million carried forward), to offset this recoupment in full, there is no tax to pay. (c) A newly incorporated company is required to register for the following:(i) Corporate tax – to be remitted quarterly according to specified quarterly payment dates. (ii) PAYE – to be remitted on the 10th of the month following the month of deduction. (iii) VAT – to be remitted in accordance with the specific registration category.

4.11.3 Assessed loss on change in shareholding

Sam owns 60 percent of the shares of Honest Pty Ltd, while the remaining 40 percent is held by Mary, his wife. During the year, Sam sold all of his shares in Honest to Mary. Honest Pty Ltd has in prior years made a number of losses which it has been carrying forward. Mary hopes to make Honest Pvt Ltd’s business more profitable by involving the company in the manufacture of gearboxes.

Advise Mary whether she is eligible to claim assessed loss brought from the business with Sam.

Solution



Garment Ltd started operating in January 2003. For the year ending 31December 2011, the company reported a net accounting profit of $200,000 before deduction for prepayment of tax on Profit. This profit was arrived at after charging / (crediting) the following items:

Accrual Bonus which will be paid in April 2012 12,000Accounting Depreciation (note 1) 10,000Charitable contribution and donation (note 2) 10,000Re-assessment of tax for the year 2010 20,000Penalty and interest for late payment of taxes 4,000Unclaimed VAT input 3,000Entertainment expense 2,000Unrealized gain on exchange (6,000)Unrealized loss on exchange 7,000Subsidized /granted income (note 3) (50,000)Accrued pension fund (note 4) 10,000Supply of goods free of charge 5,000

Notes:

1. The depreciation of $10,000 is based on the company’s depreciation rate. 2. $3,000 was contributed to the Zimbabwe Red Cross, a charitable organisation. A further $7,000

was donated to a local church.

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3. On 30 June 2011 the company was granted $50,000 by a foreign government agency to support its operations, there being no repayment requirement.

4. For the year ended 31 December 2011 the company accrued a pension liability of $10,000 for its staff which it paid in full into a pension fund.

Additional information:

As of 31 December 2010, the company had made a provision for doubtful debts of $1,000. By 31 December 2011 the provision for doubtful debts had grown to $1,700.

The company paid the prepayment of tax on profit during the year of $8,000.

The company received rental income from its tenants and accordingly withheld $6,000 in withholding tax as per statutory requirements. The income has not been accounted for.

The company brought forward a loss of $10,000 for the year 2010.

Required:

a. Compute ABC’s Profit tax for the year 2011. All working should be shown.

b. State the conditions under which a company’s loss can be carried forward. Explain how loss will be utilized and when a loss must be forfeited.

c. State when the tax deducted on the rental income should be paid to ZIMRA.

Solution

a) Computation of ABC’s profit tax

Net profit 200,000AddProvision for bonus 12,000Depreciation 10,000Zimbabwe red cross 3,000Local church donation 7,000Accrued pension fund 10,000Reassessment of tax for the year 2010 20,000Penalty and interest for late paid taxes 4,000Unclaimed VAT Input tax 3,000 Entertainment expenses 2,000Unrealised loss on exchange 7,000Supply of goods free of charge (donation) 5,000Rental income (90/10 x $6,000) 54,000 137,000

Less unrealised gain on exchange (6,000)Taxable income 331,000Less loss brought forward 8,000Taxable income 324,000

Tax thereon @ 25.75% 83,430

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b) Conditions for claiming losses

Assessed loss can only be claimed by a taxpayer who incurred it and cannot be carried forward where:

- A taxpayer is has been declared insolvent- A company is converted into a PBC or vice versa, unless the CG is satisfied that the change

was not motivated by existence of assessed loss.- A former business is acquired compa Assessed losses are set off against current year income and where there is no available income in the year of assessment they are carried forward and set off against first future available profits. They are claimed on first in first out (FIFO) basis.

Assessed losses can only be carried forward for a maximum of six years and if they are not utilized within that period they are forfeited. An exception is in the case of mining assessed losses. They are carried forward indefinitely.

c) State when tax deducted on rental income should be paid to ZIMRA

A lessor, i.e a local authority or any person, letting premises to an informal trader must withhold 10% presumptive tax on gross rental paid by the informal trader. The tax withheld must be paid over to ZIMRA within 30 days of receiving the rent and must be accompanied by an appropriate tax return.


Agrometrics Ltd is a Zimbabwean company. Its abridged profit and loss account for the year ended 31 December is as follows:

$ $ NotesGross profit 702,000Operating expenses:Bad and doubtful debts 12,940 1Legal and professional fees 30,510 2Entertainment and gifts 24,570 3Royalties payable 50,000 4Motor expenses (MD’s car) 5,200 5Car hire 13,300 6Amortisation of lease premium 5,000 7Depreciation 73,240Loss on disposal of equipment 2,820Profit on disposal of motor car (440)Consultative fee 77,000 8Other expenses 95,380 389,520

339,480Other operating income:Royalties receivable 100,000 9Operating profit 439,480Profit on sale of freehold property 105,000 10

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Profit on sale of shares 12,000 11Investment income:Zimbabwe dividends received 43,110Interest receivable 14,840 57,950

614,430Interest payable 7,440Profit before taxation 606,990

Notes1. Bad and doubtful debts are as follows:

Trade debts written off 7,250Trade debts recovered (100)Increase in specific provision for doubtful debts 6,290Decrease in general provision for doubtful debts (500)

12,9402. Legal and professional expenses are as follows:3. Arranging lease of new business premises 2,500

Fine for breach of environmental legislation 8,000Legal fees re environment prosecution 2,700Debt collection 17,350

30,5504. Entertainment and gifts comprise:

Entertaining local customers 3,270Entertaining overseas customers 4,800Staff entertainment 11,500Donation to National Scholarship fund 1,500Company calendars for customers 3,500

24,570

5. Patent royalties of $40,000 were paid during the year for trade purposes to a non-resident person. A further $10,000 was accrued at the end of the year

6. The MD’s car is used for both business and private journeys. The company pays all of the car’s running costs. Private journeys accounted for 60% of the car’s mileage during year

7. During the year, a car was hired wholly for use by the marketing manager.8. On 1 January 2011, the company paid a $60,000 premium for a 12 year lease on new business

premises. The premium is written off against income statement on straight line basis.9. During the year, the company commissioned SBU Wan networking, supplied by a UK based

company and incurred the following expenses:a. Training of staff 5,000b. Technical and support 56,000c. Payment to its employees involved in the project 7,500d. Commissioning fee 9,000

10. Royalties of $60,000 were received during the year for trade purposes. A further $40,000 was accrued at the end of the year.

11. In October 2011, the company sold a freehold property for $400,000. This property had been acquired for $295,000 in July 2004. Its ITV on date of sale was $32,000.

12. The amount shown for Zimbabwean dividends is the actual amount received during the year with no adjustments for tax credits.

13. A bank deposit account was opened in July 2011 (not for trade purposes). No interest was received during the year, but an interest of $14,840 was received at the end of the year

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14. Interest of $11,440 was paid during the year for trade purposes. No interest was accrued at the end of the year, but $4,000 had accrued at the start of the year.

You are required to compute Agrometrics’s tax liability for the year.

Solution

Profit before taxation 606,990Increase in doubtful debts (disallowed) 6,290Decrease in doubtful debts (non taxable) (500)Arranging lease 2,500Fine for breach of environmental legislation 8,000Legal fees re environment prosecution 2,700Entertaining customers 3,270Entertaining overseas customers 4,800Staff entertainment 11,500MD’s private use of a car ($5,200 x 60%) 3,120Car Hire (restricted to $10,000) s.16 (1) (k) Main Act 3,300Amortisation of lease premium (1,000)Depreciation 73,240Loss on disposal of equipment 2,820Profit on disposal of motor car (440)Profit on sale of freehold property 105,000Recoupment on freehold property ($295,000-$32,000) 263,000Profit on sale of shares (capital nature) (12,000)Zimbabwean dividend (exempt) (43,110)Interest receivable (taxed at source) (14,840)Taxable income

Notesa. Doubtful debts, whether specific or general are disallowable. Because the provision for

doubtful debts is not deductible, a decrease in the provision is non taxable. b. The fine for breach of environmental legislation is disallowable, so are the legal fees re

environmental prosecution. The expenses are not a requirement in carrying out a taxpayer’s trade, but a punishment for the breach of a specific provision of the law.

c. Entertainment expenses whether incurred for purposes of trade or private purposes are disallowed in terms of s.16 (1) (m) of the Main Act.

d. Lease premium is a deductible expense to a lessee equal instalment over the shorter of the lease period or 10 years. The annual allowance is therefore $6,000 ($60,000/10 years).


Toyo Ltd is involved in the manufacturing of toys and games for children. Its profit and loss account for the year ended 31 December 2011 is as follows:

Note $000 $000Sales 42,900Less: Cost of sales 1 (36,753)

6,147Add: Other income 2 40

6,187Less: Expenses:

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Remuneration 3 1,970Professional fees 4 32Entertainment expenses 5 66Bad debts 6 170Lease rental 7 62Repairs and maintenance 8 108Foreign exchange 9 (95)Fines 10 18Donations 11 336Depreciation 110 (2,817)Net profit before tax 3,370

Notes:

1. Cost of sales includes toys costing $38,000 donated to an approved orphanage on 13 September 2011. The normal selling price was $42,000.

2. Other income is in respect of rent derived from a property in Namibia and received in Zimbabwe in July 2011.

3. Remuneration includes:i. Entertainment allowance of $3,500 paid to the managing director and the general manager.

ii. Employees Provident Fund (EPF) contributions of $75,500 made by the company in respect of its 10 employees.

iii. Cost of maintaining a holiday bungalow in Nyanga used by senior executives of the company, $45,000

4. Professional fees comprise:Registration of the company’s new trademark 5,500Legal fees on compensation claim by a dismissed employee 3,600Non-trade debt collection expenses 1,700Accounting and auditing fees 8,200Income tax appeal 9,000Feasibility study for expansion of operations in Japan 4,000 32,0005. Entertainment expenses comprise:

Entertainment of suppliers 40,000Staff lunches and refreshments 8,000Promotional gifts (own product i.e. computer games) 6,000Subsidy for customer purchase* 12,000 66,000

* During the year, Toyo Ltd implemented a promotional campaign whereby customers are allowed to buy an electronic toy at $1 for every computer game purchased. The actual cost of the toy to Toyo Ltd was $5.

6. Provision for doubtful debts (trade)

Balance as at 1 January 2011 220,000Add: Provision for the year 80,000Less: Amount written off (90,000)Balance as at 31 December 2011 210,000

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7. Lease rental comprises the rental paid for three motor vehicles for use by the salesmen. The lease rentals paid were as follows:

Year 2009 2010 2011

ABH 9742 2,000 2,000 8,000ABE 6453 1,000 2,000 6,000ABE 6734 2,000 6,000 8,000Total 5,000 10,000 22,000

8. Repairs and maintenance expenses comprise:

Replacement of office glass doors 26,000Replacement of component parts of machinery 4,000Cleaning and repainting of factory premises 30,000Cost of office computers 48,000 108,0009. Foreign exchange comprises:Realised gain on payments made to non-trade creditors (40,000)Unrealised gain on trade creditors (55,000)

(95,000)10. The fines comprise:Interest to EPF Board for late payment 13,600Fines for late payment submission of VAT returns 4,400

18,00011. During the year, Toy Ltd made the following donations:Provision of a wheel chair to a disabled employee 8,500Sponsoring a local cultural show approved by the Minister of Youth and Sport 28,000Cash donation to the University of Science & Technology for research contribution approved by Higher & Tertiary Education Minister 124,000Donation of a painting to the National Art Gallery (market value) 65,000Cash donation to a Public Private Partnership Fund 110,500

Required:

Compute the income tax liability of Toyo Ltd for the year of assessment 2011.

Solution

Computation of taxable income for 2011 Year of Assessment

Net Profit for the year 3,370,000Deduct:Rent from Namibia (not from source) 40,000FX gain on non-trade creditors 40,000Unrealised gain on trade creditors 55,000Interest Received 7,700 ( 246,400)

100,800Add:

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Donated stock 38,000Entertainment allowances 3,500Pension contributions (75,500 -54,000) 21,500Holiday bungalow- entertainment 45,000Trademark registration 5,500Non-trade debt collection expenses 8,200Feasibility study 5,600Entertainment of suppliers 40,000Bad debts (general provision) 18,200Lease for PMV ($2,000 + $0 +$6,000) 8,000Cost of computers 48,000Interest to EPF board for late payment 13,600Bad debts (general provision) 80,000Provision of a wheel chair 8,500Sponsoring a local cultural show 28,000NUST donation ($124,000 -$100,000) 24,000National Art Gallery donation 65,000Public Private Partnership Fund 60,500Fine for late payment of VAT 4,400 491,960Adjusted Profit 592,760Less SIA Computers ($48,000 x 25%) (12,000)Changeable profit 488,880


Zuvaradoka Ltd, a local company, manufacturers and sales diving equipment. Its profit and loss account for the year ended 31 December 2011 is as follows:

Notes $ $Sales 700,400Less Cost of Sales (280,000) Gross Profit 420,400 Less: Administration wages and salaries 62,000 Directors emoluments 23,000 Pension contributions (1) 32,000 Salaries and wages (2) 84,000 Debt collection expenses 6,165 Travel and subsistence (3) 15,800 Insurance 7,000 Subscriptions and donations (4) 5,000 Advertising 6,560 Legal and professional fees (5) 9,800 Bank interest payable 10,000 General expenses (6) 5,700 Amortisation of goodwill 3,000 Depreciation 35,000 Interest on late payment of tax 2,000 Finance lease interest (7) 4,000 Increase in general provision for bad debts 1,000 (312,025)

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Add: Profit on disposal of fixed assets 5,000 Bank deposit interest (9) 8,000 13,000 Net Profit 121,375

Notes (1) Pension contribution represents $32,000 contributions for the company’s 5 employees. (2) Salaries and wages include employee bonuses of $12,000 for 2010. These were not paid until July 2011.(3) Travel and subsistence is comprised of:Petrol oil and repairs 5,000 Tax and insurance 1,400 Staff Christmas party 2,800 Customer entertainment 6,600 (4) Subscriptions and Donations are comprised of: Trade subscriptions 4,200 Charitable donations 800 (5) Legal and Professional is comprised of: Audit and accountancy fees 1,000 Legal fees re customer injury claim 2,000 Legal fees are defending unfair dismissals claim 3,800 Legal fees re: purchase of an asset 3,000 (6) General expenses are made of: Cleaning 3,000 Canteen expenses 1,200 Parking fines 1,500

(7) Finance lease The finance lease is on a packing machine. The capital repayments for the year are $5,000.

(8) Fixed Assets An item of plant which had cost $10,000 on 1st July 2007 had a net book value of $4,000 on 1 January 2011 and was sold for $9,000 in September 2011. It had a tax written down value of $4,000 at 1 January 2011. Plant and machinery, costing $18,000 purchased in 2009, had a tax written down value of $4,500 on 1 January 2011. During the year the company purchased plant and machinery totalling $30,000 and computer equipment costing $10,000. (9) Bank deposit + interest: Bank deposit interest (gross) receivable.

Required Calculate Zuvaradoka’s tax liability for the year ended 31 December 2011.

Solution

Net profit per accounts 121,375Add backPension ($32,000 - $5,400 x 5) 5,000Customer entertainment 6,600Charitable donations 800 Legal fees re purchase of an asset 3,000 Parking fines 1,500

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Amortisation goodwill 3,000 Depreciation 35,000Interest on late payment of tax 2,000Increase in provision for bad debts 1,000Recoupment on plant ($9,000 -$4,000) 5,000 62,900

184,275Less deduction Profit on disposal of fixed assets 5,000Bank interest deposit 8,000SIA on old plant and machinery ($18,000 x 25%) 4,500New plant and machinery (10% x $30,000) 3,000Computer equipment ($10,000 x 20%) 2,000 22,500Taxable income 161,775

Tax payable @ 25.75% 41,657

Notes

The bank was supposed to withhold tax on deposit interest. Where a payee receives interest on which tax has not been withheld he/she must remit the tax due to ZIMRA within 15 days of receiving it, otherwise he/she faces penalty and interest. The tax due is $1,200 ($8,000 x 15%).

Before 1 January 2010, the rate of SIA was 50% in the first year and 25% in each of the next two years. Note: on old plant and machinery, the company claimed SIA based on the old policy.


Lockhorns (Pvt) Ltd has been in business for many years and makes accounts to 31 December. Its profit and loss account for the year ended 31 December 2011 shows the following:

Gross Profit 1,134,000Dividend Received (Net) 81,900Rent Received (Gross) 98,000Profit on sale of vehicle 58,800Interest Received 7,700

1,380,400Less: Rent Paid 114,800Salaries and Wages 392,000Repairs of cold room 63,000Transport and Travelling 28,000Heating and lighting 14,000Stationery 14,000Depreciation 114,800Cold room Expansion 32,200Cost of Patent 7,000Water Rate 28,000Bad debts 33,600Neon Signboard 5,600General Expenses 91,000

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Income Tax Provision 95,200 (1,033,200)

Net profit for the year 347,200

Additional Information:

(a) Capital allowance for the year was agreed at $103,880 with the tax authority.

(b) The rent paid is in respect of a building occupied partly by the business and partly by the Managing Director. The ratio of usage is agreed at 4:1 between business and private use.

(c) Bad debt includes 10% general provision on old debtors of $182,000.

(d) General expenses include $22,400 legal fee for acquisition of new lease and $4,480 for renewal of a lease for another 10 years.

(e) Salaries and wages include $168,000 paid as salaries to the Managing Director’s houseboy.

(f) Water rate relates to the amount paid on the business premises.

Required:

Compute the adjusted and chargeable profit for Lockhorns Pvt Ltd

Solution

Computation of taxable income for 2011 Year of Assessment

Net Profit for the year 347,200Deduct:Profit on Sale of Vehicle 58,000Dividend Received 81,900Rent 98,000Interest Received 7,700 ( 246,400)

100,800Add:Domestic Rent (114,800 x1/5) 22,960Domestic Water rate (28,000x 5,600House boy’s Salaries 168,000Depreciation 114,800Cost of Patent 7,000Cold room expansion (a) 32,200New Sign Board (a) 5,600Legal expenses (acquisition) 22,400Bud debts (general provision) 18,200Income Tax Provision 95,200 491,960Adjusted Profit 592,760Less Capital Allowance (103,880)

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Blue Water Ltd is a manufacturer and distributor of bottled drinking water. The company's income statement for the period 1 January 2011 to 31 December 2011 is as follows:

Note $ $Sales 980,000Less Cost of salesOpening stock 156,000Purchases 545,000Closing stock 1 (144,000) 557,000Gross profit 423,000Other income Gain on disposal of motor vehicle 2 30,000Gain on disposal of shares 3 121,000Gain on foreign exchange 4 45,780Dividend 5 34,800 231,580 654,580Operating costsRent and rates 6 23,000 Consultancy fees 7 79,300Depreciation 123,000Donation 8 48,300Finance charges 9

- Overdraft 54,000- Loan interest 43,000

Entertainment 10 82,000 Foreign exchange loss 11 16,000Legal fees 12 21,000Profession fees 13 30,500Quality accreditation 14 30,000Repairs and maintenance 15 120,000Travel 16 99,900 770,000Net loss (115,420)

Notes to the accounts

1. Towards the end of the financial period, a batch of bottled drinking water worth $20,000 was found to be contaminated. The Ministry of Health strongly recommended that it be destroyed. In the stock taking exercise, the company had made a provision for the full amount.

2. The motor vehicle used by the company director was involved in an accident. The company made a gain of $30,000 on the insurance recovery.

3. The company had invested in Porto Freight Company Ltd. During the financial year, the shares in Porto Freight Company were disposed off to release cash for working capital. The details of the investment in Porto Freight Company Ltd are as follows:Cost of shares $560,000Date acquired 5 November 2006Date disposed 30 July 2011Profit on disposal $121,000

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4. The company bought two units of hi-speed bottling machines from Malaysia during the year. On settlement of the balance, the company made a foreign exchange gain of $45,780.

5. The dividend was paid by Ateco Ltd, a local corporation from its own exempt account.

6. Rent and rates were paid to the local town council was for the land and building used for the water production. Included in the amount is a sum of $5,000 being penalty for late payment of the assessment and rent.

7. The consultancy fees were incurred for the following services:Payment to an estate agent for the property purchased(currently let out to an ice manufacturer). 13.000Payment to a local Approved Research and Development 28,000Company for technical advice on the prevention of contamination in bottled water 38,300Total 79,300

8. The company claims that it had made the following donations during the financial period:

Supply of bottled water to earthquake victims inMalawi. The company, however, has no receipt 22,400.Cash donation to the Red Cross (a charitable body approved for income tax purposes). 26,400Total 48,800

9. The overdraft interest was paid on the overdraft taken during the year to augment the company's working capital. The overdraft amount was settled in July 2011, while loan interest was payable on the loan taken to purchase the factory now rented out in Norton.10. The company had incurred the following entertainment expenditure:Entertainment of wholesalers and supermarket executivesby the company's sales manager. 45,000Entertainment of senior bank officials by the company's financial director 37,000Total 82,000

11. The foreign exchange loss arose on the purchase of machinery from Germany and the loss has yet to be realized.

12. The legal fees were incurred for the following:Legal cost to sue a local newspaper that wrote an unfavorable report on the company's activities, including allegations of high-level corruption. The case was, however, settled out of court on the advice of the company's lawyer because the company had a weak case.

13. Professional fees include a payment made to the company secretary, auditors and tax agents.ZIMRA audited the company's accounts for the years of assessment 2010 and 2011. Some financial discrepancies were found and ZIMRA took an action for 'fraud and wilful default'. An amount of $17,500 was paid to the company's tax agents as a professional fee. As a result, the company was required to pay only additional taxes for the two years of assessment, including a penalty payment.

Also charged under professional fees is a sum of $13,000 paid to a professional trainer to conduct a training program for the company's staff. The training program was approved by the Minister of Finance.

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14. Quality accreditation expenditure was incurred to obtain the European Economic Community certification of Quality Standard from Brussels. Such a certification will facilitate the exporting and marketing of the company's products to European countries. The certificate is expected to be issued sometime in early 2012.

15. Included in the repair and maintenance expenditure is the cost of replacing the existing wire fence around the factory with a high concrete wall, and installing new security features like special lighting and cameras for improved security, costing altogether $90,000.

16. The company confirmed to the auditors that travelling involved the following:Local travelling by company sales and marketing personnel 42,300Trips by director to Tanzania 39,900Trips by director to Angola 17,700Total 99,900As for the trips to Tanzania and Angola, the company was unable to provide the relevant supporting documents.Other informationThe unabsorbed assessed loss carried forward to the year of assessment 2011 was $78,000.

REQUIRED:

a) Compute the minimum taxable income of Blue Water Ltd for year of assessment 2011.

b) Compute any tax on disposal of holding in Porto Freight Company Ltd.

Solution

a) Computation of Blue Water Ltd’s taxable income

Net loss (115,420)LessProfit on motor vehicle (capital nature) 30,000Profit on sale of shares (capital receipt) 121,000Exchange gain on purchase of hi-speed machine (capital nature) 45,780Dividend (non taxable) 34,800SIA on security fence ($90,000 x 25%) 22,500 (254,080)

AddStock loss (deductible)Penalty for late payment of rent 5,000Estate agent fee on purchase of factory (acquisition of fixed asset) 13,000Approved Research and Development (deductible s.15 (2)(o))Technical fee to prevent contamination (deductible)Approved donation to Red Cross (deductible)Overdraft interest (incurred in the production of income-deductible)Loan interest (incurred in the production of income-deductible)Entertainment of wholesalers and supermarkets 45,000Entertainment of senior bank official 37,000Foreign exchange loss on machinery (capital expenditure related) 16,000Legal fees (related to corrupt activities-non deductible) 21,000Payment to auditors (expenditure on tax advice-non deductible) 17,500

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Training of staff (deductible)Accreditation expenditure (benefit to accrue not only in one tax year,but over a number of years-expenditure is capital nature) 30,000Security fence (an improvement –capital expenditure) 90,000Trips by director to Tanzania (unvouched expenditure-non deductible) 39,900Trips by director to Angola (unvouched expenditure-non deductible) 39,900Depreciation 123,000 455,100Current year taxable income 85,600Less Assessed loss b/f 78,000Taxable income 7,600

b) Computation of capital gains tax on disposal of Porto Freight Company shares

Gross capital amount ($560,000 + $121,000) 681,000Less cost 560,000Inflation ($560,000 x 2.5% x 6 years) 84,000 644,000Capital gain 37,000

Tax there on @ 20% 7,400

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Chapter 5 CAPITAL ALLOWANCES

5.1 Wear & tear on commencement of trade

Mr Tan commenced business as a printer on 1 April 2010. He makes up his accounts to 31 December annually. Upon commencement of his business Mr Tan acquired the following assets:

Printing machine 150,000Office equipment 35,000Delivery truck 85,000Personal computer 15,000Private car 160,000

In the year 2011, he acquired additional assets for the business as follows:

Personal computer 10,000Furniture and fittings 5,000

In 2011, Mr Tan disposed of personal computer for $1,000 as it had become obsolete.

Mr Tan purchased a delivery truck in 2009 and used it privately until he commenced the business. The vehicle is now used 100% in business.

Required:

a) Calculate the minimum capital allowances for all business assets for the year of assessment 2010 and state the residual expenditure of each asset at the end of the year of assessment 2011.

b) Calculate the balancing charge in respect of the personal computer disposed of in 2011.

Solution

Actual Cost 160,000Less: 2009 Notional annual allowance $160,000 x 20% 48,000

112,000Less: 2010 Notional annual allowance $112,000 x 30% 33,600Notional cost of asset 78,400

Note: For the purposes of the 20% wear & tear in the 2011 AY and subsequent years of assessment, the car would be treated as if it had been purchased on 12 August 2011 for $78,400

5.2 Capital allowance on industrial buildings

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Sunroof Plc, a manufacturing company, incurred the following expenses during the year ended 30 September 2011:Cost of land 345,000Stamp duty on the purchase of the land 5,000Legal charges on the Sale and Purchase Agreement 3,000Cost of construction of the buildings:A factory 300,000A storage building* 54,000A canteen and restrooms 36,000Living quarters for factory workers (3 units) 90,000Living quarters for administrative staff (5 units) 120,000

The construction of all the buildings was completed in February 2011 and the buildings were put into use for the business from March 2011.The company also incurred $75,000 on cutting and levelling the land to prepare a site for the installation of heavy machinery, costing $800,000, purchased in January 2011. The machinery was put into use for the business from March 2011.

* The storage building, which is used for the storage of the finished products, is adjacent to the factory.

REQUIRED:

a) Explain the Income Tax rules regarding claiming capital allowances on an industrial building. b) Compute Sunroof Plc's capital allowances in terms of para 2, 4 th Sch ITA for the year of

assessment 2011, together with the residual expenditure carried forward. c) Explain your treatment of the cost of cutting and levelling the land, cost of storage ,canteens

and restroomsd) State, giving reasons, the circumstances in which a warehouse is treated as an industrial

building for the purposes of industrial building allowances.

Solution

e) Rules regarding Industrial building

An industrial building is one which is a factory or similar premises or a building used for the manufacture of goods or materials by subjecting them to process or for the storage of goods of materials used for manufacturing which are to be subject to processed finished goods which have been manufactured.

Industrial buildings include hotels in respect of which a permanent liquor or casino licence is held. Dwelling houses, retail premises and offices are specifically excluded.

The cost of an industrial building allowed for tax deduction includes only the expenditure incurred on construction or acquisition, excluding the cost of land. Where part of a building is used for a non qualifying purpose, it is ignored if the usage is less than 50% and claimed in full if at least 50%.

Wear & tear is allowed on a "straight line" basis (same amount each year) at 5% per year, no matter the period of use is less than 12 months. Industrial buildings have capital allowance life of 20 years.

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SIA is only granted on constructed industrial buildings, while purchased buildings do not qualify for SIA.

Asset Cost/ITV Rate SIA Wear and tear ITVLand N/A N/A N/A N/A N/AFactory 300,000 25% 75,000 - 225,000Storage building 54,000 25% 13,500 - 40,500Canteen 36,000 25% 9,000 - 27,000Living quarters for factory workers N/A N/A N/A N/A N/ALiving quarters for admin Staff 120,000 25% 30,000 - 90,000Machinery 873,000 25% 218,750 - 656,250Total

a) The expenditure on cutting leveling of land is capital in nature because it is incurred on an item of capital nature. It should be capitalized to form part of the cost of machinery.

b) A storage building is an industrial building as defined by para 1 of the 4th schedule ITA, i.e. buildings for storing materials, finished goods etc, are all industrial buildings. Canteens and storerooms when used together with a factory are also classified as industrial buildings.

c) A warehouse is an industrial building provided such building is used to store goods manufactured.

5.3 Passenger motor, hire purchase etc

Pachipamwe ENT. A manufacturing company based in Rugare prepares its accounts to 31 December annually. The following information is related to fixed assets it purchased during the tax year ended 31 December 2011.

Lorry 120,500Accountant’s car 210,000Packaging machine (heavy) 325,000

Both the lorry and the car were bought on a cash basis, whereas the packaging machine was acquired on the following hire purchase terms:

Date of purchase 2 March 2011Deposit paid on 2 March 2011 $80,000Instalment per month commencing 1 April 2011 $4,900Cash price $300,000Number of instalments 50

Required:

Compute the minimum capital allowances that can be claimed by Pachipamwe for the AY 2011.

Solution

Cost Rate Wear & Tear ITVLorry 120,500 20% 24,100 96,400

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Accountant car (PMV) 10,000 20% 2,000 8,000Packaging Machine 300,000 10% 30,000 270,000Total 430,500 56,100 374,400

Capital allowances are computed on the cash price (price ex of finance charges) for item acquired through hire purchase. Accountant’s car is a PMV, allowances are computed on a deemed cost of $10,000.

5.4 Capital allowances and leasing

Art Ltd is leasing equipment under a finance lease for $20,000 p.a over 5 years. The present value of lease payments (cost of asset to the lessee) is $83,533. Art Ltd pays an annual finance charge of $4,150. Its net profit for the year, after depreciation and finance cost is $12,150. It depreciates the asset over the term of the lease on straight line method.

a) Briefly explain how a lease is treated for tax purposes in the hands of the lessee.

b) Briefly explain how a lease is treated for accounting purposes in the hands of the lessee.

c) Compute Art Ltd’s tax liability for AY 2010, based on your answers in (a) and (b) above.

Solution

a) There are two main types of leases, an operating lease and a finance lease. The distinction does not really matter because the leases are treated the same way.

o a lessee is allowed to deduct lease payments (both capital and finance charges), but lease payments for a PMV are restricted to $10,000-s.16 (1) (k).

o a lessee may claim a deduction of lease premium in terms of s.15 (2) (d), but spread equally over the shorter of the period of lease and 10 years.

b) For accounting, finance leases are recognised as an asset in the balance sheet of the lessee in terms of IAS 17. The lessee charges depreciation and finance charges in relation to the asset.

c) $13,007, computed as follows:

Net profit 12,150Add depreciation ($83,533/5years) 16,707Finance charges 4,150

33,007Less Lease payments 20,000Taxable income 13,007

5.5 Finance lease

Cupshark Ltd lets manufacturing machines with effect from 1 March 2011 and submits the following information for the year of assessment ending on 31 December 2011:

Machine A Machine BDate of purchase 31 Dec 2011 31 Dec 2011Cost 600 000 760 000

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Rent received 200 000 150 000Interest payable 72 000 91 200

The buyer has the option to purchase the assets at the end of leasing period.

a) Briefly explain how a lease is treated for tax purposes in the hands of the lessor.

b) Compute Cupshark Ltd’s tax liability for AY 2010, based on your answers in (a) above.

Solution

a) The distinction between a finance lease and operating leases really matters.o Under operating lease a lessor can claim wear &tear or SIA in terms of s.15 (2) (c).o Under finance lease, because the lessee has the option to buy the asset, a lessor is not

allowed to claim SIA- para 2(c) (ii), 4th Sch ITA.o The lessor is allowed to claim capital allowances on vehicles purchased for leasing purposes,

they are excluded from the definition of PMVs in terms of para. 14(2), 4th Sch ITA.o Lease rentals are treated as GI of a lessor based on the income recognition rules, i.e. earlier

of receipt or accrual.o Lease premium is taxable in full when received or when it accrues –s.8 (1) (d).

b) $13,081, i.e. $50,800 x 25.75%

Rental income 350 000Interest payable 163,200Net rental income 186 800Wear & tear allowances 136,000Taxable income 50,800

5.6 Splitting of purchase consideration

J Ltd, which has a successful business decided to sell its business to Noah Ltd on 1 January 2011. In exchange for this, J Ltd was offered $1,000,000 cash. Its assets are as detailed below:

Cost ITV FMVPlant & Machinery 250,000 150,000 470,000Equipment 113,400 42,000 45,370Factory building 962,000 729,000 900,000Stocks of goods 330,000 210,000Debtors 294,000 250,000

a) What should be the basis for allocating the $1m received cash price? Explain.

b) Allocate the cash price based on your argument in (a) above.

c) Compute the income tax resulting from the disposal by J Ltd of its business.

d) Why do you think the CG would treat the sale with suspicion? And what is his defence?

Solution

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a) In terms of para. 8(1) (b), 4th Sch ITA, if assets are sold for a lump sum, the transferor and the transferee must furnish a joint statement in writing to the CG, setting out the details of the allocation of the price to individual assets. If the CG is not happy that the prices allocated do not represent the fair market thereof, he shall determine such prices. Therefore, J Ltd’s selling price of the individual assets must be closely related to the above stated market prices.

b)

FMV Workings (000) AllocatedPlant & Machinery 470,000 470/1,919 x 1000 244,919Equipment 45,000 45/1919 x 1,000 23,450Factory 900,000 900/1,919 x 1,000 468,994Stocks of goods 210,000 210/1,919 x 1,000 109,432Debtors 294,000 - 153,205Total 1,919,000 1,000,000

c) $0. J Ltd made a scrapping allowance of $183,837

Item FMV ITV P/R CA Actual

Plant & Mach. 244,919 150,000 94,919 100,000

94,919

Equipment 23,450 42,000 (18,550) 71,400 (18,550)Factory 468,994 729,000 (260,006) 233,00

0(260,006)

Total (183,837)

c) (i) The CG has enough arguments to counter the sale:

o The price fetched does not represent a business sold as a going concern, yet there is no mention that the going concern is in doubt.

o J Ltd is said to have been running a successful business, meaning the opportunity cost to J Ltd of the business should be higher than the aggregate of fair market values of the individual assets in order to account for goodwill.

(ii) The CG can counter the sale in terms of s.98 ITA, if he suspects there is a scheme of tax avoidance. He will use the fair market values as the deemed selling prices.

5.7 Damaged assets

Derrick owns a farm in Matabeleland North. Heavy winds hit the area and destroyed a farm building, some farm equipment, fence and a barn.

Item ITV FMV Cost Insurance Proceeds

Building 85,000 97,000 140,000 105,000Borehole n/a 16,000 23,000 15,000Fencing n/a 13,000 34,000 14,500

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Barn 25,000 45,000 30,000 35,000

Derrick has an assessed loss of $45,000 from last year. He is planning to replace the building by spending $84,000 of the insurance proceeds received towards its construction.

a) Explain the tax position regarding his intention to replace the building

b) Explain any other concession available to him on some of the assets as a result of the damage.

c) Compute Derrick’s minimum taxable income.

Solution

a. In terms of s.8 (1) (j) ITA, Derrick is not taxable on recoupment applicable to the insurance proceeds utilised towards the replacement building, provided that he satisfies the CG that he will use the proceeds to acquire or construct a similar building within 18 months of the date of destruction of the original building and that the building will be brought into use within 3 years of damage of the original building.

b. Expenditure on fencing and borehole was allowable to Derrick, being a farmer, para 2, 7 th Sch ITA. Any subsequent disposal of such items, whether by reason of sale or otherwise do not give rise to recoupment. Therefore, recoupment of fencing and borehole expenditure is not taxable.

c. $9,000, i.e. $25,000 – ($20,000 x $84,000/$105,000).

Item Sale price ITV P/Recoupment CA ActualBuilding $105,000 $85,000 20,000 55,000 20,000Borehole n/a n/a $0 n/a n/aFencing n/a n/a $0 n/a n/a

Barn $35,000 $25,000 $10,000 5,000 5,000Total 25,000

5.8 Capital allowances, debenture interest and capital dividends

Southern Africa Transporters Inc., SAT, operates a courier and logistics business. Its financial statements for the tax year 31 December 2011 show a net income of $702,830 before taxes.

Income from courier operation $ 531,830Income from logistics operation 70,000Gain on sale of assets 60,000Interest income 22,000Dividend income 19,000

$ 702,830

a. Interest income includes $15,000 from a government bond and $7,000 semi-annual interest from a TB. This TB was acquired on 1 April 2011 and interest was received on 30 Sept 2011.

b. Dividend income consists of $7,000 from a public corporation and $12,000 foreign sourced dividend.

c. A review of SAT’s 2010 corporate tax return shows an assessed loss of $8,000.

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d. The following are the tax written down values of assets held on 1 January 2011:

Equipment 250,000Independent store (original cost $80,000) 32,000Delivery truck 51,000Processing equipment nil

e. On 31August 2010, a new warehouse for storage was constructed and occupied, i.e.:LandPurchase price $ 75,000Paved parking 14,000Landscaping 4,500BuildingCost of construction 250,000Architect fee 6,000

f. On 1 July 2011, SAT sold an independent store for $120,000 (land $60,000; building $60,000). This property’s original cost was $80,000 (land $30,000; building $50,000).

g. On 1 June 2011, SAT purchased a small airplane for $600,000 and a new delivery truck for $80,000. It sold its old delivery truck for $35,000, which had originally cost $80,000.

h. On 2 July 2011, the taxpayer entered into a hire purchase agreement to acquire a photocopier at a hire purchase price of $25,000. A deposit of $3,000 was paid. The hire purchase price included interest of $4,000. The first of 36 monthly instalments was paid in August 2011.

i. On 1 August 1, it purchased three new computers costing $19,500.

j. On 31 December 2011, SAT sold its processing equipment for $12,000. It was purchased on 1 January 2008 at a cost of $52,000.

k. SAT’s income statement for the year ended 31 December 2011 includes the following:Amortization $ 43,000Legal expenses 15,000Other expenses 29,800Reserve for bad debt expense 31,000Legal expenses included $3,000 for the collection of bad debts, and $12,000 for the interim audit fee for the current year.

Other expenses included newspaper advertising for $8,200, a $500 monthly contribution (Jan-Dec) to a charitable organization, $2,800 for the annual membership dues of a golf club used for business purposes, $12,000 for acquiring a permanent mailing list for the business, and $800 for entertainment tickets.

l. On 31 December 2011, SAT declared and paid dividends of $59,850, of which $6,000 was from the capital dividend account

Required

a) Compute SAT’s minimum tax liability for the 2011 AY

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b) Comment interest on government bond and dividend paid out of capital profits.

Solution

a) Computation of SAT’s minimum tax liability

Income 702,830LessTB- Semi-annual investment (taxed at source) 7,000Dividend (exempted) 7,000Foreign dividend (taxed at different rate) 12,000Gain on sale of assets 60,000Loss on sale of delivery truck (35,000-51,000) 16,000SIA 244,125Wear and tear 25,000 (371,125)

Recoupment- processing machine 12,000Amortisation 43,000Monthly contribution to charity 6,000Annual membership dues (entertainment) 2,800Mailing list (intangible asset) 12,000Entertainment tickets 800Reserve for bad debts 31,000Recoupment on store building ($50,000 -$32,000) 18,000 125,600

457,305Less: Assessed loss b/f (8,000)

449,305

Tax thereon @ 25.75% 115,696Add tax on dividend from a foreign source ($12,000 x 20%) 2,400 Tax payable 118,096

Asset Cost/ITV Rate SIA Wear and tear ITVEquipment 250,000 10% 25,000 225,000New Delivery van 80,000 25% 20,000 60,000Photocopier 21,000 25% 5,250 15,750Computers 19,500 25% 4,875 14,625Warehouse 256,000 25% 64,000 192,000Airplane 600,000 25% 150,000 450,000Total 244,125 25,000

b) Comment interest on government bond and dividend declared by SAT.

- Interest from financial institution suffers a withholding tax of 15% which was deducted at source by the paying company. Any other income is treated as trade and investment income.

- SAT must withhold 15% tax on the $59,850 dividend, unless the dividend is paid to another Zimbabwean company. However a dividend does not include an amount which represents a return of shareholder’s capital. Dividends are paid out of profits and if they are paid out of

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capital amount that represents a reduction in shareholders’ capital and no withholding tax is chargeable on such an amount.

5.9 Capital allowances, balancing charge etc

JB Ltd is a Zimbabwe resident trading company with no associated companies. Its results for the 12 months to 31 December 2011 are as follows:

Trading profit (before deduction of capital allowances) 1 864,000Debenture interest receivable 2 40,000Zimbabwe dividends received 3 126,900

Notes:

1. Trading profit has been adjusted for tax purposes but capital allowances have not yet been deducted. Maximum capital allowances are claimed.

2. $400,000 of 10% debentures were acquired (not for trade purposes) on 1 January 2011. Interest is receivable half-yearly on 31 March and 30 September.

3. The figure shown for local dividends is the total amount actually received during the year, with no adjustment for tax credits.

4. On 1 January 2011, the tax written down values of the company's assets were as follows:

Plant (original cost $50,000) 13,000Toyota land cruiser car used by Managing Director 2,000

The Toyota Land cruiser was bought in 2003 for $70,000.

5. The company bought and sold the following plant and machinery during the year:$

2 June 2011 Bought plant 40,5003 June 2011 Sold Toyota Land Cruiser car 32,50023 August 2011 Bought replacement Toyota Land Cruiser 66,80017 September 2011 Sold plant (original cost $50,000 in 2008) 12,20028 September 2011 Bought a salesman a car 19,27019 November 2011 Bought motor van 14,000

There is always a 30% private use of the Toyota Land Cruiser by the Managing Director.

6 On 30 November 2011 the company sold land for $300,000. This land had been bought for Z$50,000 in May 1991.

7 On 29 January 2011, the company bought further land for $225,000.

8 Losses brought forward on 1 October 2011 were as follows:

$Trading losses 438,550

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Capital losses 40,290

Required

a) Prepare a capital allowances computation for each accounting period.b) Compute the chargeable gain arising on the disposal of land in November 2011.c) Compute JB Ltd’s tax liability for the year ended 31 December 2011

Solution

a) Capital allowance computations.

Asset Cost/ITV Rate SIA Wear & tear ITVPlant and machinery 113,330 10% 11,333 109,997Plant 40,500 25% 10,1245 30,375Toyota Land Cruiser 10,000 20% Buss 1,400

Private 600 8,000Salesman car 9,270 25% 2,318 6,952Motor van 10,000 25% 2,000 8,000Total 14,443 12,733

b) Capital gains computation.

Where a specified asset was purchased in Zimbabwe dollars, capital gains tax shall be computed as 5% of the gross proceeds re is made in respect of land sold on November 4 for $300,000.

Capital gain (5%× 300,000) 15,000Less: capital loss b/f (40,290)Capital loss c/f (25,290)

c) Income tax liability computation.

Trading profit 864,000Add:Debenture interest 40,000Zimbabwe dividend (exempted) -Recoupment 1,843 41,843

905,843Less:SIA 14,443Wear and tear 12,733 27,176

878,667Less Assessed loss b/f 438,550

440,117

Tax thereon @ 25,75% 113,330

Notes:Only interest from financial institution are taxed at source, other interest income are treated as investment income which is taxed in the hands of the taxpayer, thus debenture interest is taxed in the hands of JB ltd.

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Recoupment table:Asset Selling price ITV P/Recoupment Allowances Recoupment

Land Cruiser 4,643 2,000 2,643 5,600 2,643Plant 12,200 13,000 (800) 37,800 (800)Total 1,843

Notes:

a) Where an asset is used by the owner or anyone in the position of proprietor, wear and tear shall be apportioned if such an asset is being used partly for business and partly for private, thus wear and tear on Toyota Land Cruiser is apportioned accordingly. SIA is not applicable because the asset is used less than 90% for the purpose of trade.

b) Recoupment on Toyota Land Cruiser – because the asset qualifies on a deemed cost, a deemed selling price is computed:

Deemed selling price =$10,000/ $70,000× 32,500 = $4,643

Note further that capital allowances claimed were in respect of business use. Therefore capital allowances claimed on land Cruiser were: (10,000-2,000) × 70% = 5,600.

c) No capital allowances are computed on land. It is a non qualifying asset.

5.10 Capital allowances and balance charge

Omary (Pvt) Ltd, a manufacturer of plastic products, is owned by Mr. Michael and his wife. The company made the following assets purchase and disposals for the tax year 31 December 2011: 1. Omary (Pvt) Ltd disposed off a machine to its wholly owned subsidiary, Rack Ltd, on 27 May

2011 for $56,000. The machine was purchased by Omary (Pvt) Ltd on 30 April 2000 for $120,000. Both companies used the machine in their business operations and close their accounts on 31 December each year.

2. Omary (Pvt) Ltd constructed a factory at a cost of $500,000 of which $80,000 was the cost of the land. The building was completed on 1 November 2006 and 20% of the building was used as an office. On 1 February 2011, the building was sold to Ricky for $700,000 (including $200,000 for the land). Ricky uses the whole building as a factory. A replacement factory building was purchased for $760,000 on 3 February 2011.

3. Omary (Pvt) Ltd bought a second hand lorry from Ametc Ltd costing $160,000 on 30 April 2009. Due to high maintenance cost, the lorry was sold to a third party on 30 April 2011 for $75,000.

4. The company bought a four wheel drive Honda CRV on hire purchase. Cost of vehicle was $25,500 and paid deposit of $15,000 on August 2011. Installment payment of $2,100 per month for 6 months commenced from 1 September 2011.

5. Omary (Pvt) Ltd bought a generator on 27 December 2011 at a cost of $55,000. Expenditure incurred on the alteration of the new factory building for the purpose of the installing the

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generator was $7,000. The generator was used in business on 5 January 2012 when the installation works was completed.

6. Omary (Pvt) Ltd sold its car to Mr. Gonzo’ sister on 2 April 2011 for $48,000, when its market value was $63,000. The company had bought the car in July 2008, for $140,000. Mr Gonzo had used the car partly for business purposes and partly for private purposes. The private use was agreed as 15% by ZIMRA.

7. On 1 May 2011, the company purchased a machine on hire purchase for the use in its business. The following are information pertaining to the machine:

Cash Price 100,000Hire purchase price 120,000Deposit paid 30,000Number of installment 45 times

Payment for the first installment began on 1 June 2011.

Omary (Pvt) Ltd has a policy of maximizing capital allowance.

Required:

a) State the conditions that a taxpayer requires to met before he/she can claim SIA.

b) Who is entitled to claim capital allowances in respect of a hire-purchase transaction?

c) What rules apply when a fixed asset is sold to a relative or connected party?

d) Compute the capital allowances and balancing allowance/charge for Omary (Pvt) Ltd for year of assessment 2011.

e) What are the tax consequences of ceasing trade or winding up of a business?

Solution

a) Conditions for claiming SIA

Under Para 2, 4th Sch of the Income Tax Act an allowance known as the Special Initial allowance would be given if the following conditions are satisfied:

A person has for the purposes of a business of his incurred qualifying expenditure in relation to

an asset; At the end of the basis period for a year of assessment he was holding and using the asset in his

trade or in the production of income; And it was in use for the purpose of the business.

A person shall not be entitled to an allowance under the schedule for a year of assessment unless he makes a claim or an election for the allowance for that year of assessment.

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In making the claim, he shall make a written statement containing such particulars as may be required to show that the claimant is entitled to the allowance and a certificate signed by the claimant verifying those particulars. The claim must then be furnished with the return of his income for that year.

c) General implications of ceasing to trade/business winding up

The cessation of the company`s trade and/or the commencement of the winding up will trigger the end of an accounting period. The following are some of the tax consequences of cessation of trade:

It accelerates the corporation tax payment date although in this case, with losses being available, it is unlikely that there will be any corporation tax liability.

There will be a deemed disposal of fixed asset for capital allowances purposes resulting in either recoupment which will increase trading profits or scrapping allowance which will decrease the profits.

if the company`s stock is sold to an unconnected `arms length` person any actual sale proceeds will be credited in the final trading account.

Trading losses can only be carried forward against future profits from the same trade by the same taxpayer. A new taxpayer cannot use or carry forward assessed loss of the previous owner unless:o The loss is exchanged between companies under the same control and the CG is satisfied

that the takeover was not motivated by the existence of assessed losso The loss is exchanged as result of conversion of PBC into a company or vice versa and the

CG is satisfied that the conversion was not motivated by the existence of assessed loss

5.11 Capital allowances

Biscuit (Pvt) Ltd incurred the following expenditures during its tax year ended 31 September 2011:

Cost of land in Westgate amounting to $340,000 for the construction of the buildings stated below.

Cost of constructing a building amounting to $650,000. The building comprises a factory and an office. The construction cost of the office was $230,000.

Cost of constructing a building used as a power station to supply electricity to the factory amounting to $30,000.

Cost of constructing an extension to the factory building to be used as a warehouse for the storage of finished goods amounting to $143,000.

Cost of levelling land for the installation of machinery amounting to $54,300. The machinery cost $135,700.

Cost of constructing 2 units of living accommodation for the factory workers amounting to $45,000.

Cost of constructing a warehouse for the storage of finished products for distribution to the retailers in the region amounting to $105,000.

Biscuit (Pvt) purchased another factory in Ruwa on 21 February 2011 for $166,000.

All the above assets were in use for the business of Biscuit (Pvt) Ltd as at 31 December 2011.

Required:

a. In respect of each item of expenditure listed in the scenario 1 to 8, determine whether such building is an industrial building

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b. State the amount of the qualifying expenditure for the purposes of industrial building allowance and calculate maximum possible capital allowance.



Ruswa Techno Ltd (RTL), a local controlled private corporation, operates a technology business. Its financial statements for the tax year end 31 December 2011 reported a net income before taxes of $215,000, summarized as follows:

Income from technology business 250,000Share of DD Ltd.’s loss (40,000)Interest on Tax reserve certificates 2,000Dividend from Zimbabwe Inc., a local company 3,000Net income before taxes 215,000

Notes

(a) For the 2010 taxation year, DD Ltd had a net loss of $100,000. Ruswa owns 40% shares of DD.(b) In March 2011, Ruswa Ltd sold 1,000 shares of a public corporation for $30,000. The shares

were originally purchased for $1,000 in 2008.(c) A review of RTL’s 2010 corporate tax return provides the following information regarding

RTL’s assets written down values as at 31 December 2010.

Truck 13,000Passenger motor vehicle 6,400Factory building 56,000

(d) In January 2011, RTL bought a truck for $20,000 to add to its existing fleet. Unfortunately, on March 15, an old truck had an accident. The insurance company declared a total loss and paid $9,000 to the company. This automobile had a market value of $12,000 and the cost of acquisition was $15,000.

(e) In the first week of August, it sold its only passenger vehicle for $20,000 (original cost $35,000) and replaced it with another costing $36,000. This amount was financed with a loan for which Ruswa Ltd paid $400 interest per month and interest was deducted as an administrative expense.

(f) In February, the company sold its only building for $650,000 (land $200,000, building $450,000) and moved to a rental facility. The acquisition cost of the property was $500,000, including $100,000 for land.

(g) The company began outsourcing its office operations, and therefore was able to sell all of its office equipment and fixtures for $33,000. This equipment was acquired in 2006 at a cost of $50,000.

(h) During the year, the company paid $2,000 interest on a bank loan obtained to purchase common shares of Zimbabwe Inc.

(i) Legal expenses consist of the following items:Fee paid for collection of bad debts 2,000Lawyer’s fee for drafting the license agreement 3,000Commission and accounting fee for issuance of 5-year bond 4,000

(j) Promotional expenses included $3,600 for leasing and maintaining speed boat to entertain suppliers and employees, $1,000 in airfare and accommodation incurred by the sales manager

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for attending a sales convention in Japan and $1,000 reimbursed to the CEO of the company for meals and refreshments bought while entertaining clients.

(k) The income statement also included a $2,000 donation to Save the Children Foundation, $1,000 of interest and penalties on income tax assessments resulting from the late filing of last year’s tax return, a $3,000 premium paid on the term insurance on the life of the CEO with the corporation as beneficiary.

Required

Calculate RTL’s minimum taxable income for the 2010 taxation year.


Mukwa Sawmills (Pvt) is located in Penhalonga. It specializes in high-end furniture for office and home use. The company has been in operation for several years and closes its accounts to 31 December each year. For the year ended 31 December 2011, the company furnished the following financial statement:

Notes $Sales 1,999,456Less: Cost of sales 675,400Gross profit 1,324,056Dividends 1 65,000Interest 2 56,200Rental 3 120,000Gain on disposal of fixed asset 4 34,500

1,569,101Less: Operating ExpensesRates and rent on factory land 34,000Bonus 98,000Depreciation 189,100Donation 5 238,000Entertainment 6 36,400Fines and penalties 7 10,000Foreign exchange gain 8 (25,000)Foreign exchange loss 9 45,000Insurance Charges 10 19,800Lease of motor vehicles 11 33,000Legal fees 12 27,000Loss on disposal of fixed asset 13 13,900Promotion 14 230,000Provision for doubtful debts 15 60,000Repair and maintenance 16 85,056Royalty 17 60,000Salaries and wages 345,678Security services 18 45,000Shipping charges 19 82,000Staff retirement benefits 20 153,000Traveling 21 7,000 1,754,934Net loss (185,833)

The accounts are accompanied by the following additional information:

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1. Dividends received during the year are made up of the following:

Company Gross Tax Net

Solutions Industrial Park Developer 25,000 Exempted 25,000Kadoma paper Mills 40,000 8,000 32,000

2. This is a non-exempt interest earned from fixed bank deposit.

3. The rental was received from a furniture subcontractor who used part of the company's factory space to store his goods temporarily pending construction of his own warehouse.

4. An old machine was disposed of during the year to a furniture subcontractor for a small profit.

5. The company had made the following donations:

Unity Peoples Party (a political party) 12,000Contribution to the State to help set up Maternity Ward unit at Parirenyatwa Hospital 126,000Approved Destitute Homeless Persons Rehabilitation Fund 100,000

6. Entertainment expenses are made up of the following:

Drinks for office and factory staff 5,000Drinks for clients 7,400Annual dinner for staff 24,000

7. The company incurred a sum of $10,000 on fines and penalties during the year. It is made up of the following:

Fines for company Lorries that were caught speeding 8,000 Penalties for late submission of statutory forms to various Government offices 2,000

8. An amount of $25,000 represents gains made in forward purchases of raw materials from Brazil and Argentina. As at 31 December 2011 a sum of $12,000 out of the $25,000 was not realized.

9. Foreign exchange loss of $45,000 represents the loss made on three separate sales to a company in Italy. Of this loss, a sum of $12,000 was not realized as at 31 December 2011.

10. Insurance charges are made up of the following:Transit insurance paid to Export Insurer for cargoes of furniture to Italy 12,000 Insurance on stocks, factory building, plant and machinery 7,800

11. Motor vehicles are leased by the company as part of a strategy to eliminate cash being tied up on unnecessary assets. Lease payments were made to a local motor leasing company as follows:

Model lease/bf Rental for 2011 cumulative4 Tonnes Mitsubishi Truck 2,000 14,000 16,000Land Cruiser for MD 5,000 12,000 17,000Honda CRV 5,000 7,000 12,000

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The Honda CV is used to transport visiting dignitaries and important visiting clients. The 4 Tonne Truck is used occasionally for transportation of very bulky and special order furniture.

12. The company furnished details of the legal fees incurred as follows:Fees paid for arranging a loan for the purchase of a special plant 3,000Fees paid to defend the company in court against a casebrought by the Ministry of Environment in which the company wascharged with polluting a nearby river by discharging toxic wastes. 9,000Fees paid for the recovery of bad debts arising from furnituresales made three years ago but still outstanding. 8,000Fees paid for patenting a new design for a new line of furniture 7,000

13. One of the Lorries owned by the company met with an accident and was written off.14. This consists of general advertisement of the company's various products in the local

newspapers and selected home and women's magazines and $100,000 reserves for future promotion.

15. Provision for doubtful debts of $60,000 relates to provision for general bad debts.

16. The repair and maintenance expenditure provided by the company is as follows:Minor repair and maintenance of factory building, plant and machinery 12,456Extension of the loading and unloading bay 27,600Construction of a new manager's room in the factory area 45,000

17. During the year the company paid a royalty to an Italian design house in consideration of technical advice and technical assistance in respect of the manufacture of furniture of special designs. On 15 July 2011 $40,000 was paid but no withholding tax was deducted. On 15 September 2011 another $20,000 was paid and the withholding tax was remitted to ZIMRA on 10 October 2011.

18. The company engages security guards from a leading private security firm to guard the factory. A trespass occurred in the factory premises. Upon investigation, it was found that the security guard on duty at the time of the incident was found to be careless and negligent in his duties. The security firm agreed to compensate the company a sum of $30,000 for the trespass. This amount has been netted off in the security service charges debited in the account.

19. The following are included under shipping expenses:a) Amount of $7,000 paid to the Immigration as penalty for failing to declare in time a

particular shipment of furniture on to a ship.b) A sum of $75,000 represents freight charges for transport of some furniture from

Penhalonga to Beira Port.

20. To avoid high turnover of staff, the company decided to operate its own insurance-based retirement benefit fund. During the year, the company paid an initial lump sum of $150,000 to an insurance company to setup this fund. The company is then required to pay a sum of $100 per year for each new employee who joins the company during a particular year, to entitle them to participate in the scheme. During the year 2011, the company recruited 30 new employees.

In addition, an annual fixed sum of $1,000 is payable to the insurance company to validate the scheme. This sum is payable only from next year onwards. Manager and staff who retire or leave the company are paid a one-off retirement benefit directly by the insurance company based on an agreed scale, one of the determinants being the employee's length of service with the company. The

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company has written to the CG for approval of the retirement scheme, but as at date of close of accounts, the approval has yet to be received.

21. The company's marketing manager showed exceptional initiative in furthering the sales of the company's products, especially in promoting it overseas. The company therefore awarded $7,000 an all-expense paid trip to Egypt, for him and his family in November 2011.

22. The company has incurred the following capital expenditure for fixed assets in the assessment year ended 31 December 2011:

o purchase of a computer for a director’s use $2000) (this computer is used 65% for business purposes and 35% for private purpose)

o purchase of computers which were leased to customers for rental income $290,000.o Purchase of delivery vehicles $160,000o Purchase of a private car on hire-purchase (cost = $100,000, down payment of $20,000 on 1

January 2011, monthly payments for 10 months from February 2011, $20,000 each month (interest portion = $2,000 each month))

o Purchase of one set of network computer system $500,000o Purchase of office furniture $80,000o Purchase of room air-conditioners $70,000o Built 3 dwelling units for its staff for total cost of $80,000

23. The ITVs of items brought forward from the previous AY are as follows:

Plant and machinery (used 2 shifts) $500,000Warehouse $600,000 (cost $800,000)

Required

a) Compute the tax liability of Mukwa Sawmills (Pvt) Ltd for the year of assessment 2011, together with a schedule of capital allowances.

b) Comment of royalties paid to the Italian designer

c) Compute minimum capital allowances for Mukwa Sawmills (Pvt) Ltd for the AY 2011.

Solution

a) Computation of Mukwa Sawmills (Pvt) Ltd’s tax liabilityNet loss (185,833)Less DeductionDividend (non taxable) 65,000Interest (taxed at source) 56,200Gain on sale of fixed asset (capital profits) 34,500Unrealized foreign exchange gain 12,000Wear & tear 288,530 (456,230)

Add Unity Peoples’ Party donation (not for purpose of trade) 12,000Construction of Maternity Ward (restricted to $100,000) 26,000

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Destitute Homeless Persons (restricted to $50,000) 50,000Drinks for client (non deductible) 7,400Staff drinks (deductible if offered on non-discriminatory basis) -Annual diner (e.g. Christmas are deductible) -Fines for speeding Lorries 8,000Late submission of statutory forms 2,000Unrealised foreign exchange loss 12,000Transit insurance (deductible) -Insurance on stocks, fixed assets etc (deductible) -Lease on 4 Tonne Mitsubishi truck (deductible) -Land Cruiser for MD (restricted on PMV to $10,000) 7,000Honda CRV (deductible –is used for purpose of trade) -Fees for a loan to purchase a special plant (deductible) -Fees for defending a breach of regulation 9,000 Fees for recovery debts (deductible) -Fees for patenting a new design (capital nature) 7,000Depreciation 189,100Loss on disposal of asset 13,900Reserve for future promotion (provisions are not deductible) 100,000Provision for doubtful debts 60,000Minor repairs of factory building (deductible) -Extension of the loading and unloading bay 27,600New Manager’s room 45,000Royalties (deductible) -Fees for trespassing (correctly netted off)Penalty paid to Immigration office 7,000Freight charges (deductible) -Unapproved benefit fund ($150,000 + 30 x $100) 153,000Allowance for marketing manager (deductible) - 736,000 Taxable income 93,937

b)c) Computation of minimum capital allowances

Asset Cost/ITV Rate Wear & Tear ITV

Director’s computer 2,000 20% 400 1,600Lease computers 290,000 20% 58,000 232,000Delivery vehicles 160,000 20% 32,000 128,000Private car 10,000 20% 2,000 8,000Computer network 500,000 10% 50,000 450,000Office furniture 80,000 10% 8,000 72,000Air conditioners 70,000 10% 7,000 63,000Dwelling (non-qualifying) N/A N/A N/A N/APlant & machinery 500,000 17.5% 87,500 412,500Warehouse 600,000 5% 40,000 560,000Loading and Loading bay 27,600 5% 1,380 26,220New Manager’s room 45,000 5% 2,250 42,750 Total 288,530

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Chapter 6 Business Tax6.1 INDIVIDUAL

6.1.1 Trade and investment income

Mr. Gozho, a sole trader, owns, Kuedza Enterprise. In the current assessment year, he made a net profit from the business of $80,000. In addition, Mr. Gozho has the following income and expenses in 2011.

Interest income 11,000Royalty income 28,000Pension contributions 2,500

What is Gozho's current year taxable income and income tax liability?

Solution

Net profit from business 80,000Interest income 11,000Royalty income 28,000

119,000Less Pension contribution –s.15 (2) (h) 2,500Taxable income 116,500

6.1.2 Employment income and other sources

Hartwell Boma, 62 years old, is a resident of Gweru. For tax purposes, the following information is given about him for use in the 2011 tax year: He is married with eight children of which, two have graduated from high school; one is working, while the remaining five are still in school. He has an aged mother for whom he pays $3,500 p.a for medical care at a nursing home. He pays an annual premium of $24,000 on a life policy for himself at a capital sum of $320,000. He is a full time Executive Director at Omar Packaging Ltd and therefore declared the following:

Rent received 160,000Remuneration as a director 56,000Dividends (net) 400Profits from Fish Farming 42,000Other investment incomes (gross) 80,000

Notes:

a) On 1 June of the current tax year, Hartwell bought a wheel chair for his eldest son, John, who became wheel chair bound after being involved in a car accident on his way to work. John is 32 years old and married to Sofia.

b) Dividend is from Real Beits Ltd, a Zimbabwean incorporated company.c) Hartwell together with his family are on Cimas Private Hospital medical cover, paying $3,200

medical contributions per annum.

Required:

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a) Comment on the medical care for aging mother and purchase of wheel chair for John.b) Compute Harwell’s tax liability for the 2011 tax year.

Solution

a) Medical care for aging mother and purchase of wheel chair for John

Medical expenses credit is granted on expenditure incurred by the taxpayer for himself/herself, his/ her spouse and minor children. The expenditure on aging mother does not qualify as medical for medical credit claim by Hartwell.

A wheelchair is treated as invalid appliance provided the expenditure is incurred by the taxpayer on behalf of himself/herself, minor child or spouse, as long as the beneficiary is disabled. Since John is not a minor child Hartwell can only claim the credit if he fully supports John, otherwise if John is an independent taxpayer no credit will be given to Hartwell

b) Computation for tax liability for Hartwell:

Details Dividend income Investment income Employment incomeRent 160,000Less Exemption (3,000)Remuneration 56,000Dividends(taxed at source) -Fish farming 42,000Other investment income 80,000Income - 279,000 56,000Less deductions:Life premium (non deductable) -Taxable income - 279,000 56,000

Tax thereon (Aggregated) 69,750 17,260Less: CreditsElderly credit (900)John’ wheelchair (N/A) -John’s disability(N/A) -Mother’s medical expenses -

CIMAS medical cover (1,600)Tax liability before Aids levy 69,000 14,760Add 3% Aids levy 2,070 443Tax liability 71,070 15,203

6.1.3 Employment, trade & investment

Loral, a pharmacist has been employed as sales rep for many years by Medic Ltd, at a salary of $33,000 in the year ended 31 December 2010 and $37,500 in the year ended 31 December 2011. Her employer provides her with a diesel engine car cost $21,500 with engine capacity 2700 cc. All diesels are purchased on the company’s account at a local garage. Loral contributes $50 per month for the use of the vehicle.

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On 1st May 2011 Loral, whilst she continued her employment, also started up a small business of her own, where she and 2 other people the only employees. Results for the year to 31 December 2011 showed a loss before capital allowance of $41,343, from $75,000 annual turnover. Purchases of assets in the year to fit out the premises included:

Fixtures & fittings $19,200 (purchased from previous owner)Equipment $25,440 26 January 2011 She wishes to claim capital allowances on these as soon as possible.

Other income in the year to 31 December 2011 includes: $

Bank interest received (gross) 3,400Interest on National Savings & Investment A/C (gross) 1,750

Required

(a) What concession (s) is available to person operating a business size as that of Loral?(b) Calculate Loral tax liability in 2011(c) Outline the alternative ways in which the loss sustained can be used.

Solution

a) Concession available to Loral

Based on the number of employees, the annual turnover and the business’s asset value, Loral’s business is an S.M.E. An S.M.E qualifies for S.I.A of 50% on the cost of the asset in the 1st year of use of the asset and 25% p.a accelerated wear and tear in the next two years. b) Computation of Loral’s tax liability

Employment trade & InvestmentSalary 37,500Motoring benefit 3,600Business loss (41,343)Fixture & fittings (SIA 50%) (9,600)Equipment (SIA 50%) (12,720 Total 41,100 (63,663)Tax on $18,000 3,960Tax on excess 8,085

12,045Add 3% AIDS Levy 361Tax liability 12,406

NB: Motoring benefit is computed based on the engine capacity of the car provided, reduced where the period of use is less than a year or where the vehicle is used partly for business of the employer. No consideration is made of the cost incurred by employer e.g. service cost, repairs, insurance, and deprecation. No reduction of the benefit is made is also where the employee is contributing also the cost of running the vehicle.

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Tax on interest from a local financial institution paid to a resident person is deducted at source at the rate of 15% on the gross interest paid. The tax is a final withholding tax. Where the tax is not deducted at source the payee should pay the tax to ZIMRA within 15 days of receiving the interest. Because no tax was deducted at source, Loral has the following obligation:

Bank interest received ($3,400 x 15%) 510Interest on National Savings & Investment A/C (1,750 x 15%) 263Total 773

c) Alternative way of sustaining a loss

If a loss is not claimed in the year of assessment, an option is available for carrying it forward to the next year of assessment or future period and it set off against that period or periods’ trade profits, provided general business loss (other than mining loss) can be carried forward for a maximum of 6 years.

6.1.4 Independent contractor

Hama has a one man business cleaning office building windows as an independent contractor. He has a five year contract to spend one day a week (either by himself or his agent) cleaning the windows of Stella Ltd's four storey building for a fee of $20,000 per year. Hama has similar contracts with four other building owners. When the contract with Stella Ltd has four years to run, Hama falls from the building and suffers injuries which prevent his ever working again as a window cleaner. Stella Ltd immediately terminates Hama's contract and engages another window cleaner.

Hama threatens legal proceedings against Stella Ltd for termination of his contract and for the injuries he has suffered which are due, he alleges, to Stella Ltd's negligence. Stella Ltd offers Hama $10,000 for his injuries, and four annual payments of $18,000 each in respect of his contract. Hama is disposed to accept Stella Ltd's offer.

Required

a) Is Hama an independent contractor? Explain

b) What are the taxation consequences of being an independent contractor?

c) Based on your answer in (a) above advise Hama as to the taxation consequences of accepting an offer for compensation from Stella Ltd.

Solution

a) Is Hama an independent contractor

Whether a person is an independent contractor or not should be implied in the engagement contract and depends on the circumstances of each particular case. The following are some of the factors usually used practice:

Ownership of tools and equipment-the employer generally provides the equipment needed, while an independent contractor brings on tools and equipment (on a major scale rather than a minor scale).

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Method of remuneration- employees are paid on regular intervals e.g. monthly or weekly, while independent contractors are paid based on stage completed.

Normally, independent contractors contract under a business name.

Duration of service- employees usually have an indefinite engagement period, whereas an independent contractor is related to a specific task or contract period.

Employees have regular/fixed working hours and usually take holidays.

Exclusivity of service- usually employees can work exclusively for someone, while an independent contractor has a choice of several engagements.

When a person has the right to delegate work so that there is a duty to see that the work is done but not necessarily to do it oneself, he is normally an independent contract.

When an employer has a power of summary dismissal on the part of the person for whom the work is performed indicates an employment contract. Normally an independent contractor is dismissed when there is a breach of contract.

An employer has the power to control where an employee should do his work. (But this is also consistent with an independent contract.)

The provision of workers’ compensation insurance, medical aid or other benefits by the person for whom the work is performed for the benefit of those performing the work indicates an employment contract.

Integration/Organisation test. Usually when a person carries out their activities as an integral part of the business, it indicates an employment relationship.

Where control is exercised by the party for whom the work is performed over the manner in which the other party performs the work, this indicates an employment contract.

From the above factors, there is compelling evidence to indicate that Hama is an independent contractor. The only information to the contrary is with regard to the power to delegate. Hama did the work either by himself or his agent. In that case, an injury of Hama should not have affected the duration of contract, assuming Stella Ltd was contracting with the business not Hama. However, there is nothing that stops a person from dismissing an independent contractor.

b) the taxation consequences of being an independent contractor

According to para 1, 13th Sch ITA, remuneration does not includes any amount paid or payable to any person in respect of services rendered or to be rendered by that person in the course of any trade conducted by him independently of the person by whom such amount is paid or payable. Therefore, an employer has no obligation to withhold pay as you earn on payments made to an independent contractor.

The independent contractor must personally pay corporate tax. He shall be liable to pay provisional tax on profits on annual quarterly payment dates. Where he has annual sales value exceeding $60,000, he/she must register for VAT and collect 15% output tax on his/her sales.

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A registered operator who contracts with an independent contractor with no tax clearance, for a value of contract exceeding $250, must withhold 10% withholding tax on the contract. Withholding tax on contract is not a final tax; the independent contractor can claim it against tax chargeable on profits, when he submits a tax return for assessment.

c) Taxation consequences of accepting an offer for compensation from Stella Ltd.

The $10,000 compensation for injury of Hama is tax exempted.

Compensation for breach of contract of annual payments of $18,000 should be included in Hama as and they accrue. As held in Burmah Steamship Co v CIR (1930), they substitutes lost profits from running a business and they are treated in the same way as had Hama earned the profit.

6.1.5 Sole trader

Pauline Nyamweda is the sole proprietor of a fast food catering business located in Marondera. Below is the profit and loss account of her business for the year ended 31 December 2011.

Notes $ $Gross sales 305,000Less: Cost of sales 1 95,000Donation and SAZ 2 6,000Leave passage 3 8,500Van running expenses 4 11,900Salaries and wages 5 110,000Cost of computer 6 6,000Entertainment 7 15,000 252,400Net profit 52,600

Notes:1. Cost of sales includes the cost of meals consumed by Pauline and her family amounting to

$1,500. The catering price of these meals is $1,790.2. Pauline made a cash donation to the National Bursary fund on 1 July 2011 amounting to $3,500

and the balance is SAZ payment on her business income.3. The leave passage cost relates to a trip made by Pauline and her family to visit her relatives in

New York.4. The van was bought for cash by Pauline in 2009 at a cost of $84,000.It was agreed by ZIMRA

that 75% of the van running expenses is attributable to business purposes.5. Included in salaries and wages is a sum of $24,000, being salary drawn by Pauline6. The computer was bought for her daughter (20 years old) who is studying full time at the UZ.7. On 31 October 2011, Pauline organised a weekend trip to Nyanga for her staff and their

families. The details of the expenses are as follows:Food 6,000Accommodation 4,000Leave passage 5,000

8. Other information:

i. Pauline Nyamweda has 2 residential properties as follows:• Semi-detached house:Gross rental from 1 July to 31 December 2011 is at $6,000 per month.

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Rates from 1 January to 31 December 2011 were $3,000.

• Condominium:Gross rental per annum 8,400Agent fee 450Interest on loan 4,000Repairs and repainting 4,200

ii. She also received a royalty of $32,000 from a book translation. However, the translation was not approved by the relevant authority and the whole amount was donated to an approved charitable organisation.

iii. She donated a dialysis machine costing $25,000 to a kidney centre (a charitable trust) approved by the Ministry of Health. The value of the gift was certified by the Ministry of Health at $25,000.

iv. She received an alimony amounting to $500 per month from her ex-husband, who divorced her 4 years ago. The alimony is paid in accordance with a court order.

v. She has 4 children aged between 9 to 20 years. The second child who is 17 years old is disabled due to an accident which happened 8 months ago. The other two children are in primary school. Both she and her ex-husband are maintaining the children.

vi. Pauline also made a claim on the following expenses:

A wheelchair for the disabled child costing 2,900 Her yearly medical check-up costing 920 Life insurance premium 1,200 Medical and education insurance premium for the children (50:50) 3,200 .

Required:Compute the income tax payable by Pauline Nyamweda for the year of assessment.

Solution

Net profit 52,600Stock taken for private consumption-s.8 (1) (h) 1,500Donation to National Bursary-deductible-s15 (2) (r)SAZ contributions –deductibleLeave passage (not for purposes of trade) 8,500Van running expenses (25% x 11,900) 2,925Salary for Pauline (deductible unless it’s excessive)Cost of computer for child (private) 6,000Entertainment cost 15,000Wear & tear on Van ($84,000 x 0.8 x 0.8 x 20% x 75%) (8,064)Gross rent on semi-detached house ($6,000 x 6) 36,000Rates ($3,000 x 6/12 –other period property does not production income so expenditure is not deductible) (1,500)Gross rent on condominium property 8,400Agent fee (450)Interest on loan (4,000)

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Repairs and repainting (4,200)Royalty (non taxable)Donation to kidney centre –s.15 (2) (r) (25,000)Alimony from ex-husband (exempt –para 12, 3rd Sch) 35,111 Taxable income 87,711

Tax @ 25% 21,928Less Tax creditsDisabled child ($75 x 8) 600Wheel chair disable child ($2,900 x 50%) 1,450Medical check-up Pauline ($920 x 50%) 460Medical contribution (50% x 50% x $3,200) 800 3,310Tax liability 18,618Add 3% AIDS Levy 559Tax payable 19,177

6.1.6 Sole trader and property income

Ms Thabani owns a two-storey shophouse in Gwabalanda, Bulawayo. She has been occupying the ground floor until April 2011. On 1 May 2011 Thabani commenced to rent the ground floor to a restaurant operator. The whole of the first floor has been rented out to the Ralon Hair Salon since 2004.

The expenses incurred by Ms Thabani on the shophouse for the year ended 31 December 2011, were as follows:

Rates 7,500Fire insurance 8,000Loan interest 9,000

60% of the above expenses were attributable to the ground floor.

Other expenses incurred during the year:Legal expenses for defending the title 7,000Legal expenses for collecting rent from the Ralon Hair Salon 2,000

Ms Thabani received the following payments during the year 2011:Ground floor:Rent at $15,000 per month, payable every three months in advance, commencing on 1 May 2011 and a two months' rent as deposit (refundable).First floor:Rent at $12,000 per month, payable on the first of each month. The rent for December 2011 was not received until February 2008.

REQUIRED:

a) Compute the taxable income for Ms Thabani for the year of assessment 2011.

b) What further taxes must be remitted to ZIMRA by Ms Thabani, if the tenants do not have tax clearances from ZIMRA? Compute such taxes and state the dates they must be paid to ZIMRA.

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6.1.7 Elderly taxpayer and investment income

Mrs. Marie Makunde has been widowed for a number of years. Her husband Jason died on 1 April 1990. Her date of birth is 4th July 1937. She lives alone at no.5 Mukonono Road Mufakose.

Mrs. Makunde has other income for the year ended 31 December 2011 of:

Income:Occupational pension 16,920Retirement pension 4,716Bank deposit interest standard deposit account (net) 300Dividends from Zimbabwe Trading company (net) 200Dividend from Building Society (net) 100Rent from an investment property 15,780

a) The occupational pension arises from her deceased husband’ employment and is paid by the Old Mutual Pension Fund Co. The details were: Gross pension $16,920, PAYE $2,882

b) State retirement pension amount received $4,716c) Deposit interest income arose on an ordinary deposit account with the Kingdom Bank.

Required:

a. Calculate any balance of Income Tax payable by or repayable to Mrs. Malloy

b. Outline the circumstances in which a person like Mrs. Makunde would be entitled to a refund of tax on dividend and what period of time period is allowed for the claiming of such refund.

c. Calculate tax to be refundable to Mrs. Makunde based on your answer in (b) above.

d. Outline other circumstances in which dividend withholding tax may be refundable by the CG.e. Outline tax benefits other than those dealt with in this question, to which an elderly person is

entitled to.

Solution

Where a taxpayer is over 55 years the CG shall authorise a refund of tax withheld on dividends and interest paid as follows:

Aggregate of dividend and interest Refund %

Up to 600 100601 to 720 75721 to 840 50841 to 960 25

Where the taxpayer is below 55 years old the CG shall authorise a refund of tax withheld on dividends and interest paid as follows:

Amount Refund %Up to 480 100481 to 600 75

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601 to 720 50721 to 840 25

6.1.8 Individual and estate, etc

Mr Stan was domiciled in Zimbabwe during the basis year 2011. The following information is in respect of Mr Stan’s income for the year ended 31 December 2011.

Sole proprietorship business (derived from Zimbabwe):Business income 30,000Unabsorbed business loss brought forward 9,000

Partnership business (derived from Zimbabwe):Assessed loss 10,000Capital allowances 12,000Scrapping allowance 20,000

Dividend (net of tax rate 15%) - credited on 1 October 2011 36,500

Interest income:Savings account with FBC Bank –credited on 15 March 2011 10,000

Rental income:Received from apartments in Chegutu 12,000

Mr Stan, a bachelor, died on 1 August 2011 due to a kidney failure. His brother, Mr Riley has been appointed as the executor of his estate upon his death.

Mr Riley is resident in Zimbabwe during the year of assessment 2011. He is being paid $300 p.m for his service as the executor of the estate. Miss Gwen, the niece of Mr Stan, is to receive an annuity of $4,000 per annum, but instead, she was only paid $1,800 during the year of assessment 2011.

Required:

a. Compute the chargeable income of Mr Stan (deceased) and the estate of Mr Stan for the year of assessment 2011. Show all relevant workings.

b. State, with reasons, whether there would be any change to the chargeable income of the estate if the deceased was a non-resident during the year of assessment 2011.

6.2 PARTNERSHIP

6.2.1 Taxation of partners

A partnership of Hoto, Moto and Choto which has been in existence for some years submits accounts for the AY ended 31December 2010, showing a net profit of $96,000 after the following charges:

Hoto Moto Choto$ $ $

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Salaries 10,400 - 20,800Interest on capital - 960 -Passages on leave 3,600 3,600 -

The partners’ shares under the Deed of Partnership are: Hoto 50%, Moto 37.5% and Choto 12.5%.

Required:

a) State how partnership income is treated for tax purposesb) State the tax consequence of partnership in the event of insolvencyc) Compute taxable income of the partners account from the results of the partnership.

Solution

a) A partnership is not a “person” for tax purposes. It does not pay tax on its income. A partnership is a conduit entity of partners. Each partner is allocated his/her share of the partnership income or loss for inclusion in their individual tax return.

b) The tax consequence of partnership in the event of insolvency, is that any tax due from the insolvent partnership in respect of any period prior to the date of insolvent of partnership, whether or not that tax has become due and payable after that date, shall be paid out of free residue of insolvent partnership, by any partner as is referable to the taxable income derived by him from the partnership. Thus, the tax due and payable by a partner is according to the ratio he/she shares in the profit or loss of the partnership. For purposes of the Insolvency Act, “tax” means any tax payable under the ITA, other than any additional amounts of tax payable under s. 46 ITA.

c) partners taxable income:

Hoto Moto ChotoSalaries 10,400 - 20,800Interest on Capital - 960 -Share of passage 3,600 3,600 -Computed income 48,000 36,000 12,000Assessable income 31,000 20,280 16,400

6.2.2 Sole trader forms partnership

Mrs. Esnath Kabanda has been in business of selling cosmetics on her own account for many years taking substantial amounts of profits. In the year ending 31st December 2011, she expects to make a final taxable business profit of $95,000.

Her son, Kuda, has just completed his studies at the University of Zimbabwe. Mrs Kabanda is considering bringing him into the business either as an employee or as a partner with effect from 1 st

January 2011. If Kuda is introduced as a partner, then there will be annual partnership salaries of $20,000 for Evelyn and $18,000 for Kuda. Profits and losses would be shared between Esnath and Kuda in the ratio of 3:2 respectively. Pension fund contributions would not be payable by either party under this option.

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If Kuda is introduced as an employee, his annual salary would still be $18,000. He will then be required to pay NSSA contributions of 5% to NSSA as an employer’s contribution. Evelyn will also get $20,000 as her own salary.

Mrs. Kabanda has approached you for advice her on how best to proceed. Enumerate the options.

6.2.3 Taxes on change of partnership deed

Joseph is in partnership with Amos, sharing profits and losses equally. In 2010, the partnership assets comprise of 3,000 shares in A Ltd, which were acquired for $6,000 in 2006. In 2011, the partners admit Suzan to the partnership in consideration of her paying to each of them an amount of $6,000. It is agreed that each partner will have equal entitlements to assets, profits and losses of the partnership. The partnership now plans to sell the shares in A Ltd for $18,000. Advise as to the consequences (if any) under ITA of this transaction to the partners involved.

Solution

Joseph and Amos are deemed to have sold their partnership to the new partnership when they admitted Suzan in the partnership. The assets or the business is deemed realized at its market value, which becomes the basis for the new partnership. Joseph and Amos would be liable to tax on recoupment arising on the deemed business disposal in proportion to the ratio stipulated in the old partnership agreement, if any. However, there is no recoupment involved because the assets held do not qualify for capital allowances.

In terms of the CGTA, Joseph and Amos are liable to capital gains tax, if any. Partners are to have fractional interest in the partnership and realize capital gains when the partnership deed is varied, e.g., when the new partner is admitted, etc. Capital gains tax is computed as follows:

On date of admission of Susan:Joseph Amos

Gross capital amount 6,000 6,000Cost (3,000) (3,000) Inflation ($3,000 x 2.5% x 6 years) (450) (450)Capital gains 2,550 2,550On sale of partnership business:

Joseph Amos Susan

Gross capital amount 6,000 6,000 6,000Cost (3,000) (3,000) (3,000) Inflation ($3,000 x 2.5% x 1 year) (75) (75) (75)Capital gains 2,925 2,925 2,925 6.2.4 Miscellaneous items

Chido and Chipo carry on a public accountancy practice in partnership. The partnership agreement was entered into on 1 July 2006. During the AY ended the 30 June 2011, the partnership derived assessable income of $500,000 and incurred deductions amounting to $300,000, before adjusting the following items:

(a) During the year, Chido’s spouse John did some bookkeeping and data entry work for the partnership and was paid $25,000. This amount has been included in the deductions above.

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However, the CG has informed the partnership that a payment of $10,000 would be considered appropriate for this work.

(b) Chipo derived assessable income of $80,000 from unrelated employment. In doing so, she incurred allowable deductions of $6,000.

(c) Interest of $5,000 has been paid by the partnership on a loan from Chido. The borrowed amount has been used by the partnership for working capital and the rate charged is a commercial one.

(d) The partnership agreement allows for an annual salary of $60,000 to be paid to Chido. This is to compensate her for the additional time she dedicates to the partnership in comparison with Chipo. The residual profit or loss is to be shared equally.

(e) A net capital gain of $20,000 was realised on the disposal of a CGT asset which had been owned by the partnership. This asset was not a depreciating asset.

(f) The partnership disposed shares in Premium Ltd, an advertising company listed on the Johannesburg Stock Exchange. The partners purchased 200 Premium shares on 1 July 2004 at a cost of $41·50 each, inclusive of all costs. On 1 February 2011, it disposed of 100 shares in Premium for $78 each.

(g) Destruction of the Partnership’s commercial rental property through fire on 31 January 2011. The building was constructed on 1 April 1999 for $250,000. Insurance compensation received amounted to $175,000. Re-construction of a similar building, which takes account of modern fire protection technology, commenced on 31 March 2011. It is estimated that it will cost $350,000. The building is to be completed in six months time.

(h) A Nissan Almeria motor vehicle which the Partnership had purchased for $117,000 on 1 November 2004 and allocated to one of its senior staff members was disposed of for $70,000 on 1 January 2011. The employee used the vehicle partially (70%) for business purposes and partially (30%) for personal purposes.

Required:

Compute the tax payable by Chido and Chipo for the AY ended 30 June.

6.2.5 Admission of new partner

Eaglet Constructions Company is a firm of engineers in which Ishe and Paul are partners. For convenience they employed Gari, a qualified engineer on a salary of $3,000 p.m. The firm makes up its accounts to 31st December, each year.

On 1st July 2011, Gari who had worked for the firm for several years became a partner. The partnership agreement provides among others that the partnership net profit will be shared as follows:(a) Before the admission of Gari into the partnership, Ishe takes 60% and(b) After the admission of Gari, the sharing ratio changed to: Ishe 50%; Paul 30% and Gari 20%.

The total earnings from January to December 2011 amounted to $222,500. According to the partnership agreement, Ishe is entitled to draw $2,000 every month, Paul $3,000 and Gari $3,500 every month from the date he became a partner. The partnership had assets on which $375,000

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capital allowance was claimed and allowed. The following expenses were incurred during the year by the firm:

Staff 45,360Rent 36,000Repairs 11,250Electricity 2,400Generator repairs & Maintenance 5,250Depreciation 15,000Pension fund contribution approved 1,800Industrial training fund levy 1,275Bank charges 1,350General Expenses 2,400

Gari’s salary was not included in the above. Ishe is married with six children, while Paul is married with only 2 children (both mentally disabled). Gari on the other hand is unmarried.

Ishe has a life Assurance Policy for $300, 000 on which the partnership pays $825 p.a as premium.

Compute the Taxable Income of each Partner for the AY 2011

6.2.6 Dissolution of a partnership Amstar firm consisting of partners Pride, Paul and Precious decided to dissolve the partnership. They decided to take over certain assets and liabilities and continue business separately. Their Balance Sheet on the date of partnership dissolution is stated below. They shared profits and losses in the ratio of 3: 1: 1 respectively.

Capital Accounts: Cash 32,000Pride 275,000 Sundry assets 170,000Paul 100,000 Debtors 242,000Precious 70,000 Less: R.D.D. 12,000 230,000Creditors 60,000 Stock 78,000Loans 15,000 Furniture 10,000

520,000 520,000

It was agreed that:

a. Pride is to take all the furniture at $8,000 cost and the debtors amounting to $200,000 at $172,000 and creditors at book value. The furniture was originally purchased for $15,000 and had an ITV of $9,000 on the date of partnership dissolution.

b. Paul is to take over all the stock at $7,000 and certain of the sundry assets at $7,200 (being 10% less than their book value).

c. Precious is to take over remaining sundry assets as stated below and to assume responsibility for discharge of the loan together with an outstanding interest of $300 which had not been recorded in the books.

d. Expenses of dissolution amounted to $2,700.e. The remaining debtors realised 50% of their book value.f. The breakdown of sundry assets taken over by Precious is as follows:

Asset

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Original cost ITV Market PriceComputers 28,000 9,000 13,500Non commercial car 66,000 nil 41,000Office building 160,000 96,500 95, 500 Agreed purchase price 150,000

Required:

Compute taxable income of the partners as a result of the dissolution of the partnership.

6.2.7 Admission of a partner

Freddy and Joshua are partners in partnership as JF Associates. Mr. Staclo, a professional surveyor was employed on an annual salary of $60,000. The accounting year end of the firm is 31 December of every year. On 1 July 2011 Mr Staclo was admitted as a partner in the partnership. The profit sharing ratio agreed was 6:4 (Freddy and Joshua) before the admission of Staclo. After admitting Staclo, the ratio was changed to Freddy 50%; Joshua 30%; and Staclo 20%.

The total earnings of the firm for January to December 2011 were $731,250. According to the partnership agreement, the partners were to make the following withdrawals per month: Freddy $8,000, Joshua $6,000 and Staclo (from date of admission) $4,000. The capital allowance allowed for the partnership was $85,000.

The following expenses were incurred during the year by the firm:

Required:

a) Explain whether there is any requirement to draw accounts on the date of admission of Mr Staclo.

b) Compute the partnership income of each partner for the relevant year.

c) Explain briefly who is responsible for the filing of the partnership return.

Solution

a) Whether accounts should be prepared on admission of a partner

Staff Salaries 350,000Office rentals 27,000Repairs 8,438Electricity 7,425Generator: repairs & servicing 9,563Industrial Training Fund levy 5,456Approved Pension fund 12,656Bank charges 23,513Miscellaneous 24,300

468,351

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Partnership profit generally accrues on the accounting date, but in cases where a new partner is admitted, a new partnership comes into existence and the partnership profit is deemed to accrue on that admission date. Where the partnership operations are continuing after the change in membership, ZIMRA does not normally require the financial statements to be drawn up on that date. What is required is the basis used for determining the share of profit.

Thus, Freddy and Joshua will each be taxed on the profits accruing up to 30 June 2011 and the profits accruing from 1 July 2011 to 31 December 2011 will be shared amongst the three partners, according to the agreed ration.

b) Computation of partners’ taxable income

Professional earnings 731,250DeductSalaries 350,000Rent 27,000Repairs 8,438Electricity 7,425Repairs and servicing 9,563Bank charges 23,513Industrial training & levy 5,456Pension fund 12,656Miscellaneous 24,300Capital allowances 85,000 553,351Joint taxable income 177,899

Total Freddy Joshua Stacloi) 1/1/11-30/6/11

Profit 88,950Share of profit (88,950) 53,370 35,580

ii) 1/1/11-30/6/11

Profit 88,950Share of profit (88,950) 44,475 26,685 17,790Partnership income 97,845 62,265 17,790

Share of profit between periods:

Before admission of Staclo: 1/1/11 - 30/6/11: $177,899 x 6/12 = $88,950

After admission of Staclo: 1/7/11 - 31/12/11: $177,899 x 6/12 = $88,950

c) How should tax be paid and what are the tax rules regarding tax returns Partners are required, in respect of each year of assessment, to make a joint return of partnership income. Such return shall, notwithstanding any provisions to the contrary contained in any agreement of the partnership, be accompanied by such accounts as are necessary to show the result

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of the operations of the partnership for each year of assessment, and each partner shall be separately and individually liable for the rendering of the joint return

However, partners shall be liable to tax only in their separate individual capacities. In the event of death of any partner, accounts are prepared in order to show the results of the operations of the partnership for the period from the last accounting date to the date of the death of the partner. Surviving partners are not required to include their shares of the income as shown by such accounts, unless the death occurs before the accounting date of the partnership’s first anniversary year.

6.2.8 Company taking over partnership business

Tate and Zviko partnership went out of business on 31 October 2010, after a new a company was formed to takeover its business on 1 November 2010.Tate and Zviko formed the partnership in 2003 after borrowing $500,000 loan from a local bank, which they utilized as follows:

Purchase of raw materials 400,000Personal loan to Tate 100,000Total amount utilized 500,000

The balance of the loan outstanding on 31 October 2010 was $100,000. The interest paid to date on the loan is $110,000 inclusive of $25,000 for the period January – October 2010.

In January 2006 the partnership entered into a 9 year lease agreement with Rose. Rose effected improvements to the value of $400,000, completed on 1 September 2006.

The new company has agreed to take over the following partnership assets for $90,000.

Asset

Original cost ITV Market PriceDebtor 10,000Furniture & fittings 15,000 8,000 2,500Computers 18,000 9,000 13,000Office building 26,000 19,500 41,000Wall to wall carpets 11,000 6,600 5,500Goodwill 18,000Agreed purchase price 90,000

The purchase price is to be received as follows, 65% on 30 November 2010 and the remainder on 31 January 2011.On 18 November 2010, the bank agreed to write off $60,000 of the outstanding loan and received the balance on 30 November 2010 together with an interest on loan of $20,000.

The partnership made a net loss of $150,000 from January –October 2010, after charging, $50,000 legal expenses for evicting Rose to allow the smooth takeover by the new company and bad debts of $2,500 on debtors held on 31 October 2010.Nothing has been recorded in the year regarding the lease improvement, salary of $6,100 per month each payable to partners and interest of $12,000 on Tate’s capital.

You are required to compute each partner’s taxable income.

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Solution

Net loss -150,000Recoupment- note 1 2,535Lease improvements -note 3 200,000Eviction costs- note 2 50,000Bad debts- note 5 2,500Concession by the bank -note 4 61,200Interest on drawings -Zviko 11,000Salary for partners -122,000Interest on capital -Tate -12,000Interest paid -November -20,000Joint taxable income 23,235

Separate taxable incomeTate Zviko

Share of profit/loss 11,618 11,618Interest on capital 12,000Interest on bank loan note 6 9,000Salary 61,000 61,000Taxable income 93,618 72,618

a) Recoupment is computed as follows:

Asset Sale Price Tax value P/recoup Allowances A/recoupFurniture 2,500 8,000 -5,500 7,000 -5,500Office Blg 41,000 19,500 21,500 6,500 6,500Computers 13,000 9,000 4,000 9,000 4,000Carpets 5,500 6,600 -1,100 4,400 -1,100

3,900

Recoupment on amount received in instalments is taxable in instalments, i.e. $58,500/$90,000 x $3,900 = $2,535. Scrapping allowance on closure of business is non deductible, but is set off against recoupment.

a) Eviction cost to alter the use of the premises is disallowable.b) Outstanding lease improvements are brought into gross income on disposal of premises or land

on which improvements were effected, computed as follows, i.e. $400,000/100 months = $4,000 per month. Taxable lease improvements to date (1/9/06 to 31/10/10) is $4,000 per month x 50 months = $200m. The outstanding improvements yet to be taxed are $200,000.

c) A waiver of debt by the bank triggers a recoupment of expenses previously claimed as a deduction- s. 8 (1) (k). The partnership claimed a deduction of the interest and the purchased raw materials in its financial statements. The recoupment is therefore, the summation of raw materials deducted ($400,000) and the interest on loan ($110,000), multiplied by the loan written off, divided by the borrowed amount, i.e. $60,000/$500,000 x $510,000

d) Bad debts on debtors sold together with a business are not deductible s. 15 (2) (g). Also non deductible is Zviko’s interest on drawings, which is a private expenditure.

e) The interest on loan for personal use by Tate is a deductible expense to the partnership and taxable in Tate’s hands. In the current year, the amount paid in respect of the loan amounted to

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$45,000 ($20,000 + $25,000).The taxable amount in Tate’s hands is computed as follows: Personal loan/total loan x interest= $100,000/$500,000 x $45,000= $9,000

6.3 MINING

6.3.1 Methods for computing CRA

Goodhope Mines Ltd was incorporated on 1 January 2010, and operates a zinc mining in Chirundu. Goodhope Mines Holdings, a company incorporated in Australia owns 80% of Goodhope Mines Ltd’s equity capital. It also advanced a long term loan of $6,000,000 to Goodhope Zimbabwe for mining development purposes. Mining development commenced in February 2010 and by March 2011 it had started exporting its minerals. The following is Goodhope Mines Ltd’s abridged balance for the year of assessment 31 December 2011:

Ordinary shares 5,000,000Preference shares 1,000,000Accumulated losses (3,500,000)10% mining development loan 6,000,000Creditors 670,000

9,170,000

Fixed Asset 7,101,900Inventory and consumables 2,000,000Receivables 1,200,000Cash at bank (1,131,900)

9,170,000 Notes

1. The accumulated loss was arrived at after adjusting the following items:

Interest on mining development loan for the 2 years $1,200,000 Salaries and wages prior to commencement of production 450,0000 Depreciation 680,000 Mine investment licence 250,000 Head office allocable expenses 542,000

2. Capital expenditure was incurred as follows:

2010 2011

Site preparations buildings 150,000Sumps, pimps chambers 200,000Mineral storage buildings 340,000Elevators 750,000Excavation equipment 340,000Shaft sinking 760,000Mining equipment 188,900 126,000Commercial vehicles 270,000Minerals loading bay 120,000 Standby generators 500,000 178,000Forklifts 133,000

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Non commercial (16) motor vehicles* 700,000 200,000Directors’ house 45km from mine location 175,000Living quarters for factory workers (73 units) 1,971,000 Total 6,137,900 964,000

*12 of the non commercial vehicles were purchased in 2010 and the remainder in April 2011

3. The life of mine is 12 years from 1 January 2011.

4. The mine has chosen to claim allowances in accordance with para 2(1), 5th Sch ITA.

Required:

a) Determine the unabsorbed capital expenditure (if any) that would be carried forward to 2012 year of assessment.

b) Compute Goodhope Mines Ltd’s tax liability for the year ended 31 December 2011c) Explain briefly how mining losses are treated for tax purposes

6.3.3 Windfall tax

Kilombero Mines Plc was given an undertaken by the by government that it would not be liable for payment of tax on windfall profits. However the legislative changes to give effect to the exemption were never promulgated. ZIMRA went ahead and charged additional tax. The revenue authority dismissed the company’s objections and instituted recovery of the amount plus penalties through withholding of VAT refunds due to the company.

Required:

a) What do you understand by the term windfall tax and who is liable to pay it?b) Briefly explain what Kilombero Mines Ltd should have done to avoid action by ZIMRAc) Show how the first positive accumulated net cash position is determined.

Windfall Tax

Windfall tax is the additional profits tax that is charged to Holders of special mining leases when the price of a commodity rises above a certain level. This tax is presently set at 31.176% of the first positive accumulated net cash position plus 27.78% of the second positive accumulated net cash position as defined in the legislation.

Advanced tax ruling

6.3.3 Assessed loss ring fencing etc

Mafunde and Chimera are in partnership, operating MC Mines Ltd. The mine is comprised of two mine locations, one in Chegutu and the other in Sanyati. Q28. Accra Coal Mines was granted a special mining licence on 1 June 2008 and immediately purchased a mineral property for $100,000, with estimated coal reserves amounting to 4 million tonnes of coal. The purchase of the property was financed by a five year loan, obtained on 1 July

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2008 from a South Africa parent company of $75,000, at 10% interest per annum. An alternative loan could be obtained from the local financial market at interest rate of 7% per annum.

Actual production commenced in July 2010. The following further information is also provided:a) The mine processes ore only to the concentrate stage and the annual concentrate production is

40,000 tonnes.b) The realization price is $240 per tonne of coal and a cost of $130 per tonne of coalc) The minerals are marketed through the Mineral Marketing Corporation of Zimbabwe (MMCZ),

which deducts the royalties in terms of the standing legislation.d) Accra’s capital expenditure incurred to bring the mine into production are as follows:

2008 2009 2010Pre-preproduction development cost 25,000 15,000 2,450

Prospecting expenses 10,000 2,700 1,000Post-production development cost 9,000

6.3.4 Mining royalties

6.4 FARMING

6.4.1 Livestock reconciliation, enforced sale etc

Mr. Honda acquired Boran Farm in Bubi, on 2 February 2011 and immediately purchased the following livestock:

$4 bulls 12,00050 cows 38,00020 Heifers 14,50030 Tollies 22,50010 Steers 11,000

Mr. Honda’s livestock movements at the farm for the year ended 31 December 2011 were as follows:

13 calves were born8 calves became tollies2 bulls were stolen by cattle rustlers8 tollies became steers15 heifers became cows4 steers were slaughtered for rations26 cows were sold for $32,000 during the course of the year

On 2 November Mr. Honda was forced to sale 32 cows for $33,000, following an outbreak of foot and mouth disease at the neighboring farms.Mr. Honda incurred the following expenses during the year ended 31 December 2011:

General livestock expenses 7,500

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Sinking boreholes and wells 12,000Dip tanks 15,300Construction of staff housing (3 units) 60,000Tractor 38,500

Additional information

Mr. Honda’s policy on valuation of livestock as approved by ZIMRA is as follows:Bulls are valued at cost while other livestock are based on the following fixed standard values:

Cows 1 000Tollies 800Heifers 800Steers 750Calves 200

On 13 December 2011, when the government lifted the quarantine, Mr. Honda purchased 16 cows for $14,200 for restocking purposes.

Required:

Calculate Mr. Honda’s minimum taxable income from his livestock farming business at Boran farm.

6.4.2 Farmer’s reliefs

Tinashe bought a farm in Shurugwi on 30 September 2010, on which he commenced mixed crop farming on 1 January 2011. The following are the fixed assets acquired/constructed and used on the farm for the year ended 31 December 2011.

Farm implements 200,000Tractor 44,000Combine harvester 300,000Borehole and water tank 19,500Farm workers compounds (10 units) 150,000Farm manager’s house 75,000Fencing 28,000Fowl runs 7,800Tobacco barns 35,000Irrigation equipment 69,000Two passenger motor vehicles 65,000

Tinashe also incurred the following expenses in the assessment year 2011.

Stumping and clearing of the land 5 000Geophysical survey expenses 3,500Contour ridges 6 000

Required:

(a) State the tax reliefs that are available to livestock farmers under drought conditions.

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(b) Compute Tinashe’s assessed loss for the AY ended 31 Dec 2011. Maximize his loss.

Solution

(a) The tax relief available to livestock farmers under drought conditions:

o Carry forward the assessed losses incurred in their business for up to six years.o Can elect to spread the taxable income that is attributable to forced sales as a result of a drought

or epidemic outbreak over a period of three years.o Can claim a restocking allowance of 50% of the cost incurred in restocking their herd after a

drought or disease outbreak.

(b) Computation of assessed loss

Para 2, 7 th Sch ITA allowances Borehole and water tank 19,500Fencing 28,000Stumping and clearing of land 5 000Geophysical survey expenses 3,500Contour ridges 6,000Capital allowances: SIAFarm implements ($200,000 x 25%) 50,000Tractor ($44,000 x 25%) 11,000Combine harvester ($300,000 x 25%) 75,000Farm workers compounds (10 units) 37,500Farm manager’s house (exceeds limit) -Fowl runs ($7,800 x 25%) 1,950Tobacco barns ($35,000 x 25%) 8,750Irrigation equipment ($69,000 x 25%) 17,250Two PMVs ($10,000 x 2 x 25%) 5,000 206,450Assessed loss carried forward 268,450

6.4.3 Farmers’ capital expenditure allowance

Mr. Mrewa started ostrich farming on 1 January 2011. He incurred the following initial expenditure in starting the project:

Cost of 35 hectare site 150,000Clearing of land 25,000Construction of temporary road 10,000Construction of water reservoir 70,000Construction of a drainage system 12,000Construction of Abattoir 113,000His income for the year ended 31 December 2011 is as follows:Adjusted net profit 118,000Dividend income 4,000Rental income 12,000

REQUIRED:

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a) How much of the expenditure would qualify as approved farm expenditure under para 2, 7th Sch ITA?

b) Determine the unabsorbed expenditure (if any) that would be carried forward to the following year

c) What is the different in tax treatment for farmer’s capital expenditure allowance and capital allowance?

d) What would be the taxable income of Mr. Mrewa for the year of assessment 2011?

Solution

a) Expenditure deductible under para 2, 7th Sch

Clearing of land 25,000Construction of temporary road 10,000Construction of water reservoir 70,000Construction of a drainage system 12,000Total 117,000

b) Unabsorbed expenditure carried forward to the following

Asset Cost Wear & tear (%) SIA Unabsorbed exp. (ITV)

Abattoir 113,000 5% 28,250 84,750

The cost of a 35 hectare site (land) is a non qualifying asset. c) Computation of taxable income

Net profit 118,000 Dividend income (exempt income) -Rent income 12,000

130,000Less DeductionSpecial deductions 117,000SIA abattoir 28,250 145,250Assessed loss 15,250

6.4.4 Sale of farm

A land audit by the land inspectorate committee revealed that XYZ Ltd had many farms and the committee`s recommendation that the Marondera farm be acquired was approved by the relevant minister. The farm measured 85 ha. The breakdown of the compensation payable on acquisition of the farm was as follows:

Asset Date acquired cost ITV CompensationLand 1920 18,000 n/a 500,000Farm house 2000 180,000 140,000 220,000Clinic 2002 630,000 570,000 900,000School 2004 490,000 410,000 540,000

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Staff houses 2003 210,000 180,000 240,000Combine harvest 2005 450,000 270,000 390,000Tractors 2006 196,000 166,000 206,000Tobacco shed 2007 394,000 286,000 410,000Dam 2006 450,000 - 510,000Fence 2008 610,000 - 690,000

The company was compensated by a cash payment so that it would quickly leave the farm and pave way for the new farmers to be settled before mid 2011

Required:

(a) Identify circumstances in which specified assets are deemed to have been sold.(b) Calculate the capital gain or income tax payable as a result of the above disposal.

6.5 BANKING

6.5.1 Bank tax liability

FBC Bank Ltd was incorporated many years ago. It prepares its accounts to December 31st of every year. The following information was extracted from the Audited Financial Statements of the bank for the year ended 31 December 2011:

Paid-up Capital 16,000 17,500Statutory Reserve 7,000 8,250General Reserve 2,250 2,750Debenture Stock - 7,000

A summarized Statement of the Bank’s Profit and Loss Account is given below:

Income from banking operations 39,000Profit on sale of Fixed Assets 19

39,019Less operating expenses:Depreciation 1,000Interest paid to other banks 750Stamp Duty on landed property 125Provision for possible and specificLosses in respect of loans 750General provisions for loan losses 50Other operating expenses 12,000 14,675Net Profit 24,344

The following additional information was provided:Capital allowance claimed was $75,000

You are required to compute the tax liability of the bank for the relevant year of assessment.

6.5.2 Interest paid by the bank

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Security Bank, a company incorporated in Zimbabwe closes its accounts on 31 December each year. On 1 January 2010, Security Bank borrowed $3,000,000 from Security Bank Plc, its UK head office. Interest, at the rate of 8% per annum, is payable on this loan at the end of each calendar quarter. The rate between unrelated parties in similar circumstances is 6%.

The bank also borrowed $2,000,000 from the Reserve Bank of Zimbabwe for one year and paid $160,000 interest. Required: For the financial year ended 31 December 2010:

i. Calculate the limitation of deductible interest expense in respect of the above transactions.

ii. State, giving reasons, whether or not Security Bank is obliged to deduct withholding tax from the payment made in (i) above, and if so, at what rate.

ii. Assuming that withholding tax is deductible, state the consequences for Security Bank of not deducting the tax due from the amount of interest paid.

iv. State the due date for payment of any withholding tax and the penalties for not making due payment of the tax deducted to the CG.

Solution

i. Computation of limitation of deductible interest expense Amount

Related party interest (6% x $3,000,000) 180,000Add: Reserve Bank of Zimbabwe interest expense 160,000Maximum interest expense allowed for deduction during the period 340,000

The excess interest expense paid to a related party of 2% (8-6%), i.e $60,000 is to be treated as dividend distribution by Security Bank.

ii. Zimbabwean law on taxation does not require any person paying interest to a non resident to deduct tax. The interest is exempted from withholding tax. While the country does not have rules on transfer pricing, the law requires transactions between related parties to be reflected at arm’s length. The excess interest paid by Security Bank Plc is non deductible to Security Bank Zimbabwe, because it does not reflect a transaction that would be undertaken by independent parties in an arm’s length dealing. It is treated as dividend and Security Bank is thus obliged to deduct withholding tax at the rate of 15% from the excess interest paid to Security Bank Plc and pay this to ZIMRA.

A withholding tax of 15% is chargeable on interest paid to resident persons (individuals or companies) by local financial institutions on a loan, deposit, Treasury bill, Banker Acceptance or discounted instrument. The law does not require the tax to be withheld where the interest is paid to another financial institution. Therefore, Security Bank is not required to withhold tax on interest paid to Reserve Bank of Zimbabwe.

iii. The tax law stipulates that where a person fails to make a deduction of tax which he is required to make, any amount which he fails to deduct shall be debt due from him to the CG and shall be recoverable as such.

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iv. The tax deducted from the interest payment must be paid over to ZIMRA by the 15th of the month following the month in which such interest is paid or deemed to be paid ( the due date). Failure to comply with this requirement shall be subject to the following penalties:o Additional tax of 100% on tax due.o Interest rate at 10% per annum is levied on the underpaid tax.

6.6 INSURANCE COMPANIES

6.6.1 Short term insurance

a) Briefly explain how the taxable income of a short term insurance business is computed.

b) Universal Insurance Ltd is a short term insurance business. The following are its transactions for the year ended 31 December 2011:

Premium received 201,000Dividend received 38,000Profit on sale of fixed assets 550Re-insurance premium 32,900Re-insurance commission 67,200Insurance Association (NIA) 500Unexpired risk on 1 January 2011 31 000Unexpired risk on 31 December 2011 25,550Claims 12,000Amount recovered under re-insurance 7,500Salary and other administrative expenses 14,500Capital allowances 21,000

You are required to compute the tax payable by the company for the AY 2011.

Solution

B. The profits of a short term insurance business on which tax may be imposed are ascertained in accordance with 8th Sch ITA and are computed by:

(a) Aggregating interest and premium and other incomes received in the course of carrying on short term insurance business

(b) Adding thereto recovered or recouped premiums, reinsurance commissions which were previously deducted in the computation of short term insurance business taxable income.

(c) Adding thereto reserves of unexpired risk at the beginning of the year.

(d) Deducting there from:

(i) premium return to the insured or premium paid on re-insurance(ii) reserve for unexpired risk at the end of the year;(iii) the actual losses, less amount to be recovered from any reinsurance(iv) amounts deductible under s.15 to the extent to which expenses are incurred wholly and

necessarily in the pursuance of the short term insurance business

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B: Computation of Universal Insurance tax liability

Premium received 201,000Dividend received (exempt) -Amount recovered under re-insurance 7,500Profit on sale of fixed assets (capital nature) -Provision of unexpired risk (at the beginning) 31,000Reinsurance commission 67,500

307,000Less Deduction:Premium on Re – insurance 32,900Provision for Unexpired Risk (at the end) 25,550Claims paid 12,000Membership of NIA 500Salary and other admin expenses 14,500Capital allowance 14,000 99,450Taxable income 207,550

Tax liability 25.75% x $207,550 53,444

6.6.2 Life insurance

Hope life Assurance Company is a company which writes life business. The following is its Profit and Loss Account for the year of assessment ended 31 December 2011.

Life fund (1/1/2008) 1,750,000Premium 2,650,000Investment Income 360,000

4,760,000Deduct:Claims paid 145,000Reserve for outstanding claims 420,000Surrenders 22,000Bonuses 25,000Expenses 72,000Commissions 876,000Life fund (31/12/2008) 2,500,000 4,070,000

690,000


i. Premium received outside Zimbabwe amounted to $500,000ii. Commissions and expenses attributable to operations outside Zimbabwe were $176, 000 and

$15,000, respectively.iii. Depreciation $65,000

You are required to compute Chargeable Profit or Loss for the year.

6.6.3 Life Assurance business

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First Insurance Company Limited has been in business for several years making accounts to 31 December each year. Below are extracts from the accounts for the year ended 31 December 2011.

Gross premiums received 98,900General administrative expenses 20,108Commissions to agents 9,890Claims settled and paid 34,560Re-insurance recoveries 19,800Re-insurance premiums paid 8,000Premiums returned 3,500Dividends received 18,400Interest on Treasury bills 24,000Capital allowance claimed 18,700

Notes1. Reserve for unexpired risk is at 40%2. Reserve for the previous year is $43,0003. The company undertakes general Insurance business

Required:1. Determine the taxable income of the company.2. What would be the company’s taxable income if it were in Life Insurance?3. Explain briefly whether or not the commission paid to insurance agents is subject to PAYE

withholding tax by an employer4. State the due date for payment of any withholding tax and the penalties for not making due

payment of the tax deducted to the CG

Solution

The law requires every employer to deduct pay as you earn on remuneration paid by him to any person. The term “remuneration” means any amount of income which is paid or payable to any person by way of any salary, leave pay, allowance, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance, stipend, etc, whether in cash or otherwise and whether or not in respect of services rendered.

Remuneration does not include amounts paid or payable to independent contractors in respect of services rendered or to be rendered by that person in the course of any trade conducted by him independently of the person by whom such amount is paid or payable. However, if such payment is paid or payable to an insurance agent in respect of any act done by him on behalf of a person who is a registered insurer in terms of the Insurance Act [Chapter 24:07] in relation to the initiating of insurance business, the receiving of proposals for insurance, the issuing of policies or the collection of premiums, such amounts shall constitute remuneration. An employer is therefore liable to withhold PAYE on remuneration paid or payable to the insurance agent.

6.6.4 Life Assurance

State the allowable deduction with respect to the following classes of Insurance Companies for tax purposes.a) Non-Life Insurance Companiesb) Life Insurance Companiesc) Re-Insurance Companies

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Equity Ltd is a life Assurance company incorporated in Zimbabwe and has its Head Office in Botswana. Its Profit and Loss Account for the year ended 31 December 2011 is shown below:

Life fund at 1/1/11 2,750,000Premium 3,650,000Investment income 860,000

7,260,000Deduct:Claims paid 345,000Reserve for outstanding claims 520,000Surrenders 32,000Bonuses 45,000Commissions 576,000Other expenses 100,000Life fund at 31/12/05 4,500,000 (6,118,000)

1,142,000

You are required to compute the Chargeable Profit or Loss for the year.

6.7 DEFERRED CONTRACTS

6.7.1 Construction contract

Eagle Construction Limited was awarded a tender to construct a secondary school in Bikita at a price of $450,000 on 1 January, 2011. The following data relate to what transpired within the year:

Work Certified 225,000Equipment Purchased 80,000Wages for Casual Workers 25,000Salaries of permanent staff 16,000Payments to subcontractors 20,000Rent and Insurance 13,500Electricity 350Motor Vehicles Maintenance 1,000Depreciation on: Motor Vehicles 1,400Equipment 28,000Equipment running costs 6,500

Note:(i) Capital allowances have been agreed with the tax authority as $36,500(ii) Contract work given to the subcontractors is priced at $40,000 in total, and there is a Certificate of Valuation for $24,000 for the year.

Required:

a) Critically explain how taxable profit of a construction company is computed.b) Compute the tax liabilities for all the relevant years of assessment

6.7.2 Lease

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Roller Ltd carries out leasing and hire purchase activities. In respect of the financial year ended 31 December 2011, the following information is available:Lease rentals receivable from lease A 18,000Lease rentals receivable from lease B 24,000Lease rentals receivable from lease C 30,000Depreciation of leased assets (26,000)Other deductible expenses (5,000)Approved donations (1,000)Profit before taxation 40,000


1. Lease A results from a sale and leaseback arrangement. ABC Ltd sold the asset to Roller Ltd for $30,000 with the condition that it must be leased back to the company. The lease term is 2.5 years and the rentals are $1,500 per month effective from 1 January 2011.

2. The asset under lease B is a lift, which is structurally incorporated into the lessee's building. The lease rental is $2,000 per month commencing 1 January 2011 while the term of the lease is 5 years. Cost of the leased asset is $60,000.

3. The lease term for lease C commenced on 1 January 2011. Lease rentals are $2,500 for the first 24 months and $3,000 for the final 12 months. The cost of the leased asset is $70,000.

4. Roller Ltd has unabsorbed business loss brought forward of $16,000.

Required:

a) Compute the chargeable income of Roller Ltd for the year of assessment 2011.

b) Discuss the tax advantages and disadvantages in general to a lessee in a Lease agreement.

6.7.3 Suspensive sale

Diaspora Homes Developer Ltd (HDH) is a property development company based in Harare. It specializes in the development of residential stands for people based in the Diaspora seeking to buy or construct homes in Zimbabwe. In May 2010, the company purchased a piece of land in Ruwa for $100,000 and incurred the following development expenditure before it could sale the property:

- Roads & survey $20 000- Water & Sewer system $30 000

After developing the land, Diaspora Homes Developer Ltd sub divided it into 5 equal-sized residential stands which were ready for sale on 1 January 2011.

The terms of the agreement of sale are as follows:

a) 60% deposit on signing the sale agreement and balance to be paid in equal instalments starting from the year of sale

b) Interest was going to be charged at 5% on the outstanding amount from the date of payment of the instalment or deposit

c) No refund is payable in the event of the default.

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Sales took place as follows:

3 stands were sold for $50 000 each in January 20112 stands were sold for $45 000 each in January 2012No buyer defaulted in his payments

Required:

Compute the taxable income of Diaspora Homes Developer Ltd for the year of assessment 2011 and 2012.

6.8 TAX FAVOURED PROJECTS

6.8.1 Export processing zones

Tango Ltd, a resident company, is a manufacturer of agricultural products (operating in an export processing zone). Tango Ltd was incorporated in 2004. Its profit and loss account for the year ended 31 December 2011 is as follows:

Sales 3,560,000Cost of sales (1,675,000)Gross profit 1,885,000Add:Rent 185,000Less:Interest 200,000Training 123,000Marketing expenses 333,000Lease amortisation 100,000Remuneration 345,000Legal fees 32,100Bad debts 34,000Gain on disposal of general machinery 3,000Rates 12,000Depreciation 23,000 1,205,100Profit before taxation 864,900Notes:

1) The sales figure includes a sum of $22,000 received from an insurance company as compensation for the loss of trading stock during a robbery.

2) The rent received is from a shop house bought by Tango Ltd in 2009 at a cost of $365,000. The whole cost of the purchase was financed by bank borrowing. The company incurred $2,000 on rates in 2011.

3) As at 31 December 2011 the company's bank borrowing was $2 million.

4) This relates to a training programme conducted by the company to increase the productivity of its employees who are citizens of Zimbabwe.

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5) Included in the marketing expenses is a sum of $88,000 for the cost of licensing the company's products in South Africa. The expense was incurred with the aim of promoting the export of the company's products.

6) Lease amortisaton relates to the lease of a piece of land on which the company's factory was built, which is being amortised over a period of five years at $100,000 per annum.

7) This includes leave passage for:i. A trip to Nyanga organised by the company for the employees and their families, costing

$15,000.ii. The cost of overseas travel by the directors and their families during their annual leave,

costing $52,000.8) Legal fees were incurred in respect of the recovery of debts from trade debtors.

9) During the year, the sum of $26,000 was written off as bad debts, of which $12,000 was in respect of a personal loan granted to an ex-director. The net increase in the specific provision was $21,000. A sum of $23,000 was recovered from non-trade debtors.

10) The general machinery on which the company made a gain was bought in 2007 for $20,000. The machinery was sold during the year for $7,000.

Required:

a) Explain briefly the tax advantages which might accrue to Tango Ltd operating as a registered licenced investor.

b) Compute the tax payable by Tango Ltd for the year of assessment 2011.c) Explain your treatment for tax purposes of the items mentioned in notes 2, 3, 4, and 5 to the

profit and loss account, indicating the relevant facts which influenced this treatment of the items, as appropriate.

Solution

a) Tango Ltd, as a holder of an investment license issued in terms of the export Processing Zone Act, is entitled to the following incentives:

Tax on income (profits) at 0%for the first five years of operation. Thereafter the income is taxed at 15%. Exemption from capital gains tax. Exemption from no resident and resident shareholder’s taxes, non residents taxes on interest,

fees, royalties and remittances. Rebate of duty on capital equipment imported for use in the export processing zone area. Value Added Tax on goods and services is refundable.

The incentives for a licenced investor applies only to those licenced under the repealed Export Processing Zones Act. The incentives are not available to licenced investors under the Zimbabwe Investment Authority Act.

6.8.2 Boot/Bot operator

BuildCo.Ltd, a resident company, entered into tollgate building contract with the government in January 2004. To date, BuildCo.Ltd has built 26 tollgates, 20 of which have since been transferred to the State. Its profit and loss account for the year ended 31 December 2011 is as follows:

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Required:

Briefly explain what is meant by a BOOT arrangement.

Explain briefly the tax advantages which might accrue to a BOOT operator. Compute the tax payable by Tango Ltd for the year of assessment 2011.

Solution

This is where a contractor enters into contract with the State or the Statutory Corporation under which the contractor undertakes to construct an item of infrastructure for the State or a Statutory Corporation in consideration for the right to operate or control for a specified period after which the contractor will transfer ownership or control of the item to the State or Statutory Corporation.

Tango Ltd, as a holder of an investment license issued in terms of the export Processing Zone Act, is entitled to the following incentives:

a tax holiday for the first 5 years income tax at the rate of 15% for the second five years 20% for the third five years Thereafter tax is paid at the rate of 30%

6.8.3 Manufacturing Export Company

Cotton Wool Textiles (Pty) Ltd, a Zimbabwean company, manufactures fashion clothing for the local and export markets. During the current assessment year it exported 80% of its products to Asian and European markets. The company’s trading results for the year ended 31 December 2011 were as follows:

Note $Manufacturing sales: Local 1 1,000,000Exports 5,888,000Shares 2 20,000General retail sales 3 600,000Interest from Nedbank (South Africa) 4 100,000Interest from Barclays Zimbabwe 5 180,000Dividends from Zambian subsidiary 6 136,000Dividends from Zimbabwean subsidiary 7 65,000Cost of sales and operating expenses 8 2,600,000

Notes:

1. Local Manufacturing sales include value-added-tax at 15%.2. The gain is on the disposal of shares in an associated company in France. Related tax withheld,

but which is not included in the above figure, was 20% of the gross gain on the disposal of the shares. The gross gain on the disposal was 20% of the gross proceeds on disposal.

3. General Retail sales include value-added-tax at 15%.4. Interest from Nedbank (South Africa) includes the 20% tax withheld at source.

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5. Interest from Barclays is net of 15% tax withheld by the bank. It transpires that Barclays has not yet paid over the withholding tax to ZIMRA.

6. A dividend from Zambian subsidiary, withholding tax of 15% was effected. The dividend is stated net of the 15% withholding tax deducted at source.

7. Dividends from Zimbabwe subsidiary was received on 20 August 2011.8. The allowable cost of sales and operating expenses, inclusive of those relating to the retail

business, amounted to $2,600,000. The operating expenses include $6,000 Zimbabwe-source property expenses and $200,000 of export promotion expenses.

9. Cotton Wool Textiles (Pty) Ltd paid dividends of $200,000 on 1 October 2011.

Required:

a. Calculate the withholding tax payable by Cotton Wool Textiles (Pty) Ltd if any, in respect of the dividend paid on 1 October 2011.

b. Calculate corporation tax (including withholding taxes if any) payable by Cotton Wool Textiles (Pty) Ltd for the Year ended 31 October 2011.

c. State the due date of payment of the income tax and withholding tax calculated in parts (a) and (b) above.

d. What is the minimum export sale threshold required for a taxpayer to be regarded as an exporting manufacturing or processing company?

Taxable income from manufacturing or processing company that exports fifty percent or more of its output is taxed at a reduced rate of 20%.

4.1INDUSTRIAL PARK DEVELOPER

An industrial park developer is a person who owns and maintains an industrial park. An industrial park is a premise or area, other than an export processing zone, in which two or more persons, other than the industrial park developer, carry on the business of manufacturing or processing goods or components of goods for export from Zimbabwe.

Exemption from paying income tax for the first five years. Thereafter income will be paid at 10%. Exemption from payment of residence shareholder’s tax, non resident’s shareholder’s tax,

interest fees. The disposal of specified assets forming part of connected to the industrial park is exempt from

capital gains tax.

5. OPERATORS OF TOURIST FACILITIES

Tourist facility operators in approved development zones enjoy the following benefits: The first five years are exempt. Taxed at 15% after the first five-year tax holiday. Taxed at 20% after the first 10 years. Rebate of duty on approved capital goods imported for use in tourist development zones.

6. APPROVED PROJECTApproved projects enjoy the following rebates:Rebate of duty on goods imported temporarily for an approved project.

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Rebate of duty on goods for incorporation in the construction of approved projects. These should form a permanent of a finished project.

Rebate of duty on materials to be used in the preparation and packaging of fresh produce for export.

The tax concessions for industrial park developers and tourist facilitators apply only to those who commenced operation prior to 1 January 2010. The five year tax holiday extends to taxable income in approved BOOT or BOT arrangements, an industrial park developer and an operator of a tourist resort in an approved tourist development zone.

Chapter 7 Capital gains tax

7.1 DEDUCTIONS

7.1.1 Interest on mortgage

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Musariri bought a home for $400,000 in 2004 by paying $130,000 out of his own funds and $270,000 bank loan. The loan is secured by mortgage on the home. Musariri paid bank $27,000 in interest in the year he purchased the home. He sold the property for $600,000 on 2 June 2011.

Required

a) State whether Musariri is entitled to deduct the interest paid to the bank.b) Compute Musariri’s capital gain on sale of the property.

Solution

a) Interest incurred on acquisition or improvement indebtedness or home equity indebtedness with respect to a PPR of taxpayer is taxable under s.11 (2) (a) CGTA.

b) Computation of capital gain:

Gross capital amount 600,000Less DeductionCost of house 400,000Interest 27,000

427,000Inflation 400,000 x 2.5% x 8 yrs 80,000 507,000Capital gain 93,000

7.1.2 Repairs and Improvements

Repairs and maintenance expenses on a rental property (specified asset used in trade) are non-qualified expenses under s.11 (2) (a) and (b) CGTA.

Solution

True. Only expenditure that is capitalized is added to a property’s cost base is deductible under CGTA. Repairs are deductible under s.15 (2) (b) ITA, if they are incurred on income-producing property, meaning that they are not part of the fixed asset cost base.

7.1.4 Ring fencing of assessed loss

The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.

Solution

Capital loss can only be set off against capital gains. In the absence of capital gain the assessed loss is carried forward to be deducted against future capital gains. There is no limit in the number of years the loss can be carried forward. However no assessed loss shall be carried forward where:

1) a taxpayer has been declared insolvent or had his property or estate assigned for the benefit of creditors.

2) a company with assessed loss is converted to a private business corporation (PBC) or vice-versa if the conversion has been motivated solely or mainly by the existence of assessed loss.

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3) there is a change in shareholding in a:

a) company with assessed loss and the CG is of the opinion that the change has been motivated solely or mainly by the existence of assessed loss.

b) company which directly or indirectly controls a company with assessed loss and the CG is of the opinion that the change has been motivated solely by the existence of assessed loss.

A company is assumed controlled when the majority (at least 50%) of its voting shares are controlled indirectly or directly by another company.

7.2 DEEMED DISPOSAL

7.2.1 Expropriation of a specified asset

Mr. Chiwara bought a rental property in 2005 in Kadoma for $175,000. The property was expropriated by the Muzvezve local Authority on October 5, 2011 in order to build a conference centre. Chiwara eventually received compensation of replacement property from the local authority on 5 January 2008, with a fair market value of $320,000. Advise Mr. Chiwara how he should treat the compensation.

Solution

The expropriation of Chiwara’s rental property by the Muzvezve Local Authority is a deemed disposal under s.8 (2) GTA. The property is deemed to have been sold for an amount equal to the compensation received, which is the fair market value of the replacement. However Mr. Chiwara must apply the CG to be granted a tax relief, because “deemed proceeds” were used in replacing the specified asset. If the application is accepted there will be no capital gain recognized.

7.2.2 Deemed disposal

Exclusive Brew (Private) Limited owns a number of breweries across the country all specialising in the brewing of opaque beer. In February 2011, the company was approached by the National Railways of Zimbabwe (NRZ) with the information that part of its premises in the Southerton industrial sites of Harare was to be demolished to make way for the construction of a railway line. The company was given six months to 31 August 2011 in order to wind up its operations. The assets to be demolished were as follows:

Cost Income tax value

Industrial building (constructed on 30 June 2005) 200,000 NILConcrete wall (constructed on 30 June 2005) 50,000 NILLaboratory (constructed on 30 September 2005) 100,000 NILStaff canteen (constructed on 31 March 2005) 100,000 NIL

The NRZ offered to compensate Exclusive Brew as follows:

Land (note (i)) 125,000Industrial building 300,000Concrete wall 70,000

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Laboratory 220,000Staff canteen 185,000Total 900,000

Notes:a. The land was originally acquired from the City Council at a cost of $12,000 on 30 April 2005.

b. The NRZ paid half of the compensation amount on 31 August 2011 and the balance on 28 February 2012.

Exclusive Brew signed an agreement of sale on 30 September 2011 with an adjacent company for the sale of its office block at Southerton, which was not to be demolished. The office block had been constructed on 30 April 2007 for $350,000 and its income tax value on 1 January 2011 was $306,250.

The agreed selling price of the office block was $500,000 payable as to: 75% on signing the agreement of sale, and the remaining 25% on 31 January 2012.

Exclusive Brew incurred legal fees totaling $50,000 in connection with the disposal of its Southerton properties.

Required:

Calculate the capital gains tax payable by Exclusive Brew (Private) Limited as a result of the disposal of its Southerton properties, in the years ended 31 December 2011 and 31 December 2012 respectively.

7.3 DAMAGE OF SPECIFIED ASSET

7.3.1 Replacement relief

Hilda’s office building is destroyed by fire on 12 July 2011. She bought the office in 2010 for $272,000. Hilda received $320,000 from her insurer on 31 August 2011. How much should she reinvest in the new building in order to recognize a capital gain of $5,000.

ANS: $273,489 i.e. ($34,400-5,000)/34,400 x $320,000

Gross capital amount 320,000Less cost base 272,000Inflation $272,000 x 2.5% x 2 yrs 13,600 285,600Potential capital gain 34,400Less Roller over ($273,489/$320,000 x $34,400) 29,400Recognized capital gain 5,000

7.3.2 Replacement relief

Hurudza’s office building, which was acquired in 2000 for $175,000, was destroyed by fire on 5 April 2011. Hurudza received $280,000 insurance proceeds on 1 May 2011 and used it to construct a new office building for $250,000. The new office was first occupied on 1 March 2012. Compute Hurudza’s capital gain. Assume she wants to pay minimum taxes.

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Solution

Gross capital amount 280,000Cost base 175,000Inflation allowance $175,000 x 2.5% x 12 yrs 52,500 227,500Potential gain 52,500Less Rollover ($250,000/$280,000 x $52,500) 46,875Recognized capital gain 5,625

7.4 TRANSFERS BETWEEN CONNECTED PARTIES

7.4.1 Transfer between spouses

Any realized capital gain or loss on the transfer of investment property between spouses is not recognized and any property involved has a carryover basis.

Solution

It’s true. Section 16 CGTA, provides that where transfer of any specified asset is made between spouses or transfer of a principal private residence is made in compliance with an court order for the maintenance of former spouse or dividing, apportioning or distribution of the assets of the former spouses incident to a divorce capital gain recognized shall not be subjected to tax. The specified asset is carried forward to the spouse at base cost.

7.4.2 Companies under the same control

In February 2004, Mafavhuke Investments (Pvt) Ltd, a company listed on the Zimbabwe Stock Exchange, acquired a 40% shareholding in Bocha Trading (Private) Limited, a subsidiary of Serendipity (Private) Limited, for $3 million. Acquisition expenses amounted to $120 000. As part of a scheme of reconstruction to be implemented in the tax year ending 31 December 2011, Mafavhuke Investments (Pvt) Ltd agreed to:

(i) Accept an equal shareholding in Buhera Breweries (Private) Limited, another subsidiary of Serendipity (Private) Limited in exchange for the shareholding in Bocha Trading (Private) Limited. The value of this new shareholding is $80 million.(ii) Dispose to Serendipity (Private) Ltd its existing option to purchase shares in Associated Gold Mines Limited. The value of this option is $12 million.As part of the scheme of reconstruction, Buhera Breweries (Private) Limited bought the entire shareholding of Bocha Trading (Private) Limited. Prior to the scheme of reconstruction, Serendipity had held 60% of the shares in each of the two subsidiaries.

Required:Advise Mafavhuke Investments (Pvt) Ltd of the tax savings which are achievable under the scheme of reconstruction. Your advice should be supported by relevant calculations.

7.4.3 Deductions, sale to a relative and withholding tax

Mr. Elisha bought a piece of land for $280,000 in 2003 and because of the swampy nature of the area; he had to spend $100,000 to put the land in proper shape. On 2 January 2011, Mr. Elisha sold part of the land to his brother for $180,000 and on 15 September of the same year, another portion was sold to someone unknown for $120,000.

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On valuation, a professional valuer put the land sold to his brother at $220,000 while the other was valued at $120,000. The remaining parcel of land was also valued at $880,000.

a) Under the Capital Gains Tax, state 4 allowable deductions?b) How much is withholding tax and when should it be remitted to ZIMRA?c) Compute Mr. Elisha’s tax payable/refund, if he decides to submit a return for assessment.

Solution

a) Allowable deductions under Capital Gains Tax.

i. Cost of acquisition or purchase price including all costs incidental to the purchase.ii. Improvement costs – wholly, reasonably, exclusively and necessarily incurred.

iii. An adjustment for annual inflation of cost in (a) and (b) above.iv. Incidental costs of disposal, e.g. fees, commissions or remuneration paid for professional

services of surveyor or valuer, auctioneer, accountant, agent and or legal adviser, cost of transfer or conveyance, advertisement cost to find a buyer etc.

b) Withholding taxGross capital amount Rate WT Date due

Land sold to brother 220,000 15% 33,000 5/1/2011Land sold to unknown 120,000 15% 18,000 18/9/2011

The seller must withhold and remit the tax to ZIMRA by the 3rd working day of receiving the proceeds from the sale of a specified asset.

c) Computation of tax payable

Total cost of the land = $280,000 + $100, 000 = $380,000.FMV of the land = $220,000 +$120,000 + $880,000Cost of land sold to his brother = $220,000/$1,220,000 x $380,000Cost of land sold to unknown = $120,000/$1,220,000 x $380, 000 = $ 37,377

(i) Land sold to brother

Gross capital amount 220,000Less:Cost of land sold 68,525Inflation ($68,525 x 2.5% x 9 yrs) 15,418 83,943Capital gain 136,057

Capital Gains Tax @ 20% of $136,057 27,211Less Withholding tax 33,000Tax refund 5,789

(ii) Land sold to unknown person

Gross capital amount 120,000Less:

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Cost of land sold 37,377Inflation ($37,377 x 2.5% x 9 yrs) 8,410 45,787Capital gain 74,213

Capital Gains Tax @ 20% of $74,213 14,843Less Withholding tax 18,000Tax refund 3,157

Since Mr. Elisha sold land worth $220,000 to his brother not at arm’s length the CG will use its FMV as the deemed gross capital amount.

7.5 PRINCIPAL PRIVATE RESIDENCE

7.5.1 Person owning more than one PPR

A taxpayer is permitted to have two principal private residences for purposes of s. 21 CGTA (exclusion of gain on sale of principal residence).

Solution

False. A taxpayer can have only claim rollover relief on one principal private residence. If a taxpayer has two residences, the principal residence is the one he or she lives in most of the time.

7.5.2 Multiple sale of PPR

A taxpayer owns a home in Kwekwe. His company transfers him to Harare on 2 January 2010, and he sells the Kwekwe house in early February. He purchases a residence in Harare in February. On 15 December 2010, the taxpayer’s company transfers him to Bindura. In January 2011, he sells the Harare residence and purchases a residence in Bindura. Because multiple sales have occurred within a four-year period, the taxpayer is denied a rollover relief on his second home.

Solution

The taxpayer can claim rollover relief on his second home. The exception to the multiple sale rule associated with employment transfers applies. As stated in s.21 CGTA, a principal private residence is a dwelling which is proved to the satisfaction of the CG:

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a) to have been the person’s sole or main residence throughout the period he owned it, orb) to have been the person’s sole or main residence for a period of four years or more immediately

before the date of its sale, or for such shorter period immediately before the date of its sale as the CG considers reasonable in all the circumstances, or

c) to have been regarded by the person as his sole or main residence, even though he was prevented from residing in it as consequence of his employment or for such other cause as the CG considers reasonable in all circumstances.

7.5.3 Sale of PPR by an elderly person

Don, 62 years, sells his personal residence on October 5, 2007, for $380,000. His adjusted basis was $112,000. He owned and occupied the residence for 14 years. Having decided that he no longer wants the burdens of home ownership, he invests the sales proceeds in a mutual fund and enters into a 1-year lease on an apartment. The detriments of renting, including a crying child next door, cause Don to rethink his decision. Therefore, he purchases another residence on November 6, 2008, for $175,000. Is Don eligible for rollover relief under s21 CGTA?

Solution

Don would have been eligible for rollover relief under s.21 CGTA, but he is tax exempted on sale of his PPR. Amounts received by a person on sale of his or her PPR if such person is , on the date of the sale, 55 years old or above the age of 55 years, is exempted from capital gains tax – s10(l) CGTA.

7.6 REINVESTMENT RELIEF

7.6.1 Substitution of business property

Malawi Ltd sold a commercial building it acquired in 2006 at a cost of $500,000 on 1 July 2010 for $750,000. On 31 December 2010, the company re-invested $675,000 of the proceeds of disposal in the acquisition of another building. Malawi sold the replacement building when it liquidated its business on 30 November 2011 for $800,000.

a) Identify the taxes that are involved and any ways that are available to Malawi Ltd for minimising these taxes.

b) Compute Malawi Ltd taxes, assuming it seeks to minimise its taxesc) Compute capital gain tax payable on sale of the replacement on 30 November 2011.

Solution

By selling its building, Malawi Ltd activated income tax capital allowances recoveries -s.8 (1) (j) ITA and capital gains tax liability, because it has disposed a specified asset.

Under s.22 CGTA, Malawi Ltd may elect to defer the capital gain applicable on the commercial building to a future date, because it is re-investing the proceeds in the acquisition of a similar building. It must justify that the building had been used in its trade and must make the election to defer the capital gain on or before the date it is required to submit a tax return for assessment of capital gain.

There is no similar relief under ITA, unless the disposal had been due to the damage of the asset for which insurance compensation is received.

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a. The taxes are computed as follows:

i) Income tax liability (liability on recoupment)

$16,094 i.e., $62,500 x 25.75%

Item SP ITV P/R *CA ARCom/Bldg 750,000 437,500 20,000 62,500 62,500

*CA i.e. $500,000 x 2.5% x 5 years

ii) Capital gain tax liability

$3,750 i.e. $18,750 x 20%

Gross capital amount 750,000Less recoupment 62,500

687,500Less DeductionCost 500,000Capital allowances 62,500

437,500Inflation ($500,000 x 2.5% x 5 years) 62,500 500,000Potential gain 187,500Rollover relief ($187,500 x $675,000/$750,000) 168,750Capital gain 18,750

b. Capital gain tax liability on disposal of replacement building-s.22(2) CGTA

$56,219 i.e. $281,094 x 20%

Gross capital amount 800,000Less DeductionCost ($675,000 - $168,750) 506,250Inflation ($506,250 x 2.5% x 1 yr) 12,656 518,906Capital gain 281,094

7.6.2 Relief on conversion of sole trader converting into a company

Joachim set up his sole trader business in 1998. He has now decided the time has come to incorporate his business on 31 October 2011. The market value of his assets and liabilities are as follows: Premises $150,000 (cost $30,000 1/6/05) Goodwill $35,000 (nil cost) Stock $17,000 Debtors $11,000 Creditors $14,000 Loan $15,000

ABC Ltd is going to take over all of the assets and liabilities of Joachim’s business in exchange for

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paying him $62,000 and giving him 90% shares in ABC Ltd.

Requirement: a) Calculate Joe’s liability on capital gains tax now and the tax due [10 Marks] b) Calculate the base cost of Joe’s shares in ABC Ltd for future disposals. c) Discuss with Joe any advantages and disadvantages of not transferring the premises to ABC Ltd.

7.6.3 Reinvestment relief and related parties transactions

Bee Ltd sold its building on 1 July 2011 for $580,000. The building sold was acquired in 2005 for the sum of $258,000. On 31 December 2011, Bee Ltd, based on a Board Resolution decided to reinvest part of the proceeds of the building sold in the acquisition of another building for $520,000. This new building was sold on 30 June 2012 for $750,000 and no further acquisition of any building by the company was made after this.

Required:

a) Compute the Capital Gains Tax payable arising from the above transactions.

b) In the context of Capital Gains Tax Act (CAP 23.04), explain the following terms:i. Rollover relief

ii. Artificial transactioniii. Accompany connected with another company

Solution

a) Computation of Capital Gains Tax Payable

Old Asset

Gross capital amount 1 July 2011 580,000Less: Cost of acquisition 258,000Inflation ($258,000 x 2.5% x 6 yrs) 38,820 296,820Capital Gain 283,180Less: Roll over relief ($283,180 x $520,000/$580,000) 253,886Recognized capital gain 29,294

Capital Gains Tax thereon @ 20% 5,859

New Asset

Gross capital amount 750,000Less: Cost of new asset 520,000Less: Gain rolled over 253,886Cost c/f 266,114Inflation ($266,114 x 2.5% x 2 yrs) 13,306 297,420Capital Gain 470,580

Capital Gains Tax thereon @ 20% 94,116

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b) Explanation of terms

i. Rollover Relief

Where a consideration received on disposal of an old asset used only for the purposes of a trade is applied in acquiring a new asset in replacement, to be used for the purposes of the trade, and both the old and new assets are within the same class of assets as listed in the Act, the person carrying on the trade shall, on making a claim with respect to the consideration which has been so applied, be treated for Capital Gains Tax purposes: as if the consideration for the disposal of the old asset were (if otherwise of a greater amount or

value of such amount as would secure that on the disposal neither a loss nor a gain accrues to him.

as if the value of the consideration for the acquisition of the new asset were reduced by the excess of the value of the actual consideration for the disposal of the old asset over the amount of the consideration which he is treated as receiving as per above.

ii. Artificial Transactions

Transactions made between persons, one of whom either has control over the other or is related to the other or between persons both of whom are controlled by some other persons, or if the transaction has not been entered into on the terms which fairly have been expected of independent persons engaged in the same or similar activities, dealing with one another at arm’s length.

iii. A company is connected with another if:

the same person has control of both, or a person has control of one and a person connected with him or her have control of the other.

a group of two or more persons has control of each company and the group either consists of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected.

a company is connected with another person if that person has control of it or if that person and persons connected with him together have control of it.

any two or more persons acting together to secure or exercise control of a company, shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.

7.7 SUSPENSIVE SALE


Louis Prichard sold his farm on 2 February 2011. At the date of the sale, the farm had a cost base of $212,000 and was encumbered by a mortgage of $190,000. Louis had acquired the farm in 2001. The buyer paid him $110,000 in cash, agreed to take the title subject to the $190,000 mortgage, and agreed to pay him $80,000 with interest at 9 percent, one year from the date of sale.

How much is Louis’ recognized gain on the sale in 2011 and 2012?

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Solution

2011

Gross capital amount:Cash 110,000Loan taken over 190,000Note receivable 80,000

380,000Less DeductionCost 212,000Inflation $212,000 x 11yrs x 2.5% 58,300 270,300Potential capital gain 109,700Suspensive sale allowance $109,000 x $80,000/$380,000 23,095Recognized capital gin 86,605

2012

Suspensive sale brought forward 23,095Less Suspensive sale current year -Recognized capital gin 23,095

Louis will be liable to income tax on interest payable by the buyer of $7,200 ($80,000 x 9%)


In April 2011, Samuel Ncube sold his Bulawayo house under an instalment sale agreement for $250,000. He had bought the house for $150,000 in April 1997. In July 2001, Samuel effected major renovations to the house at a total cost of $45,000. Under the deed of sale the purchaser paid cash deposit of $100,000 and agreed to make three yearly payments of $50,000 commencing in October 2011.

Required:Calculate the capital gains tax payable by Samuel Ncube for each of the AYs 2011- 2013.

7.8 MISCELLNOUS

Fred Jones set up ABC Ltd on 5 June 1999. He owns 70% of the share capital and his wife May owns 30%. The value of the business is made up as follows: Premises 190,000 (cost $100,000 1/11/05) Goodwill 10,000 (no cost) Investments 25,000 (cost $19,000 1/9/07) Debtors 12,000 Current Liabilities 20,000

257,000

Fred has been a full time working director since the company began. He is 56 years and Mary has been a working director for the last 3 years and a non-executive director for the last 8 years. Mary is 54 years old. They have received an offer of $257,000 for the business.

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Required: a) Calculate the capital gains tax payable if they sell the business now. (You can assume base cost

of shares is nil) b) Demonstrate with planning how the capital gains tax liability could be reduced.

7.9.2 Rights, bonus issue etc

Simon made the following disposals in 2009: 1) 1/8/2009 He sold all his shares in PBC Ltd for €30,000. Purchase Date

No. of shares Acquired

Cost €

1/4/98 Purchase 1,000 10,000 15/99 Sold 500 shares for €5000 5/7/00 Purchase 3,000 9,000 1/6/01 Rights issue, 1 to 5 held at €2.50 per share 1/102 Bonus Issue 1-5

He had bought 100 acres of farmland in December 1999 for €60,000. He sold 20 acres of land for €50,000 on 1 December 2009. Market value of remaining land €100,000.

Requirement:

Compute the Capital Gains Tax payable by Michael and Mary for 2009. If no capital gains tax is due from a particular transaction please state why.

Solution

Shares in PBC Ltd 1/8/2009 Date

No of Shares Cost

1/4/98 Bought 500 5,000 1/6/01 Rights 100 250 1/1/02 Bonus 120 0 5/7/00 Bought 3,000 9,000 1/6/01 Rights 600 1,500 1/1/02 Bonus 720 0

7.9.3 Withholding tax

Farai Ndiweni, a widower, aged 53, was diagnosed with a terminal illness on 24 February 2011. He decided to prepare well for his fate and move into a retirement home at Athol Evans Hospital in Harare.On 15 March 2011, Farai sold his entire shareholding of 30 000 shares in Ekhaya Holdings, a listed company. The shares were quoted at $45 a share on the date of sale and had been purchased as follows:Number of shares Date purchased Total cost15 000 23 April 2008 150,00015 000 28 July 2009 375,000.

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Farai Ndiweni paid a stock brokerage commission of 1·5% on the consideration amount in connection with this transaction.

On 31 March 2011, Farai Ndiweni further disposed of his 20 000 shares in Mahogany Group Limited, an unquoted company. He sold 10 000 of these shares for $1 million and donated the other 10 000 shares to Hope Alive children’s home for the terminally ill children. The 20 000 shares had all been purchased on 25 May 2009 for $800,000.

On 10 April 2011, Farai sold his residential house in Mabelreign, Harare for $830,000 and immediately purchased his retirement home at Athol Evans Hospital for $500,000. The Mabelreign house had been acquired on 19 January 2008 for $250,000 and Farai had effected improvements to the property at a cost of $45,000 in January 2009.Farai Ndiweni incurred the following expenses in connection with the disposal of the Mabelreign property:

Estate agent’s commission 43,000Transfer fees 6,450Capital gains withholding tax 124,500

Required:

a) Calculate the withholding tax payable by Farai Ndiweni on the disposal of the shares. b) Calculate Farai Ndiweni’s capital gains tax position as a result of the disposal of the shares,

taking into account the effect of the withholding tax. c) Calculate the capital gain and the applicable tax payable by Farai Ndiweni in connection with

the sale of his principal private residence on the assumption that he made an election for roll over relief.

Solution

(a) Calculation of the withholding tax payable by Farai Ndiweni

Proceeds from listed shares (30 000 x 45) 1,350,000Withholding tax at 1% 13,500Proceeds from unlisted shares 1,000,000Withholding tax at 5% 50,000

(b) Calculation of Farai Ndiweni’s capital gains position on the disposal of the shares

Proceeds from unlisted shares 1,000,000Donated shares (deemed sale) 1,000,000Gross capital amount 2,000,000Less: Cost:Unlisted shares 800,000Inflation allowance:Unlisted shares $400,000 x 2.5% x 3 years 60,000 860,000Capital gain 1,140,000

Tax thereon @ 20% 228,000Less withholding 50,000Tax payable 178,000

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Since withholding tax on listed marketable is a final withholding tax no further tax is computed in the hands of Farai Ndiweni. No tax return is required in respect of such shares.

(b) Calculation of Farai Ndiweni’s capital gain and applicable tax in connection with the disposal of his principal private residence

Proceeds from the sale of immovable property 830 000Less:Cost 250,000Improvements 45,000Inflation allowance:250,000 x 2.5% x 4 years 25,00045,000 x 2.5% x 3 years 3,375Selling expenses:Estate agent’s commission 43,000Transfer fees 6,450 372,825 Capital gain 457,175Less roll over relief: 500,000 x 457,175/830,000 (275,407)Taxable amount 181,768

Tax thereon on @ 20% 36,354 Less withholding tax (124 500)Amount refundable (88, 146)

7.9.4 Company taking over sole trader business

Joe set up his sole trader business in 1998. He has now decided the time has come to incorporate his business on 31 October 2010. The market value of his assets and liabilities are as follows:

Premises 1,500,000 (cost $300,000 1/6/98) Goodwill 350,000 (nil cost) Stock 75,000 Debtors 21,000 Creditors 17,000 Loan 15,000 ABC Ltd is going to take over all of the assets and liabilities of Joe’s business in exchange for paying Joe $62,000 and giving him shares in ABC Ltd.

Required: a) Calculate Joe’s liability to capital gains tax now and the tax due.b) Calculate the base cost of Joe’s shares in ABC Ltd for future disposals. c) Discuss with Joe any advantages and disadvantages of not transferring the premises to ABC Ltd. Solution

If Joe holds on to the premises in his own name, he can avoid the future double tax exposure by having the premises in a company. He can also protect the premises from future creditor claims against the company.

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The disadvantage is that he cannot claim deferral of CGT if he holds on to the premises. In order to claim relief Joe would need to transfer all assets of business except cash to new a company in exchange for shares and possibly some other consideration.

7.9.5 Swap of a specified asset etc

DIY Ltd decided to streamline its operations by disposing some of its fixed assets and relocating to Zambia .On 20 Sept 2011 the company engaged a property valuation firm to value its immovable property. The valuation was as follows:

Asset Date constructed cost ITV Market value

Factory 2003 300,000 nil 720,000Office block 2006 360,000 300,000 540,000Showroom 2007 640,000 596,000 615,000

Another company offered to swap the office block for an undeveloped stand with a commercial title in Harare. The market value of the stand was $90 000. The offer was accepted and signed by both parties on 31 October 2011

The selling expenses wereLegal fees $10 000Property valuation fees $23 000

Required

a) Calculate the gross income as a result of the disposal of the immovable assetsb) Compute the withholding tax due from DIY, when should it be remitted to ZIMRA and who

should pay it?c) Briefly explain the tax implication of the swap.d) Calculate the capital gain and the tax payable / refundable by the company.

7.9.6 Suspensive sale and tax clearance

Elton inherited a residential property in June 2009, when the estate value of the house was $30,000 and had a market value of $45 000. The tax payer constructed improvements amounting to $100,000 in May 2011.

In June 2011 the tax payer decided to dispose the property for $80,000 on an installment basis.The costs associated with the disposal were(a) Valuation fees $2,000(b) General repairs $1,500(c) Estate agent`s Commission (10% of the sale proceeds)(d) Advertising $1000

The buyer agreed to pay 50% deposit on or before 31 December 2011 and the balance is paid over two years in equal installments.

Required

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(a) To calculate the capital gain tax payable in each year(b) Outline the requirements for the registration of a specified asset(c) What documents are required on application of a tax clearance for capital gains? 7.9.7 Rights issue, bonus issue

Jane, 67 years old, bought 1,000 shares in ABC Plc on 1 January 2004 at $13.65 per share. Jane’s further dealings were as follows:10 May 2006: Bonus Issue of 1 for 2.29 June 2011: Rights Issue 1 for every 5 shares held. Jane did not take up her Rights but sold them for $6,000. Following the Rights Issue, the share price fell to $10.20 per share.

Jane inherited an investment rental property on the death of her husband Nhokora, in February 1998. This property was set in eight apartments. It was originally purchased July 1979 for $47,000. The value in April 1977 was $55,000 and at the date of probate $168,000. At the beginning of 2011, Jane decided to sell the property. The auctioneer has advised her that the property should realise $1.5m if sold at auction. Auctioneers and solicitors fees would be 3% in total.Jane provides you with the following schedule of additional costs relating to the property:Purchase cost July 1979 $47,000September 1988: Re-build part of damaged boundary wall $4,000Central heating installed in April 1993 $8,500January 2002: Room wall vents installed as required by the Housing Regulations $19,700New bathroom added to rear of property in August 2004 $52,000May 2004: Re-carpeting throughout $11,250December 2007: En-suite facilities installed in each apartment $130,000May 2009: Front garden re-surfaced with tarmac to allow extra car parking $21,000January 2010: Re-painting throughout prior to auction, on the advice of the auctioneer, to ensure the best bid is achieved $5,500Current loans outstanding on the property amount to $420,000.Jane is keen to sell at a public auction as she understands that the sale must be completed within one month of a successful auction being held.

REQUIRED:a) On the basis that $1.5m is achieved at auction, calculate the likely Capital Gains Tax that would

arise on the disposal. b) After a successful sale, Jane intends to discharge all liabilities pertaining to the property and

place the money remaining on deposit with a Financial Institution. A rate of 3.5% is available.Would it make any difference if the auction is held on the 1st September or on the 1st October? Support your answer with relevant calculations. c) What is Jane’s Capital Gains Tax liability for 2006?

Solution Gross capital amount 1,500,000Cost 168,000Wall vents 19,700 Bathroom 52,000En suites 130,000Tarmacadam 21,000Auctioneers & Solicitors fees @ 3% (45,000)Painting prior to auction (5,500)

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Gain 927,807Annual Exemption (1,270)Taxable Gain 926,537Taxed @ 20% 185,307

Note: The costs incurred prior to the period when the property vested in Jane’s name and so are not included in the above calculation. The recarpeting in May 1996 is a rental expense. Wear and Tear would have been claimed in full.

(c) Cash remaining: Net proceeds 1,449,500Less tax (185,307)Less outstanding loans (420,000)Balance remaining 844,193

If the property is sold at auction on the 1st September 2006, capital gains tax will be due on the 31st October 2006. If the auction is held on the 1st October 2006, the capital gains tax will not be due until the 31st January 2007. The benefit to Jane with the October date is that she will have the balance remaining on deposit and earning interest for an additional two months, i.e. money received on 1 November and December 2006 and in January 2007 = 3 Money received on the 1st October: Interest earned for the month of October =(1)2The final result is extra interest earned of €3,939. (€844,193 x 2.8% * x 2/12).It will prove more beneficial for Jane if the auction is held on the 1st October.* 3.5% less Deposit Interest Retention Tax.

(d) Jane’s Capital Gains tax for 2006 is in respect of the Rights disposal only. The disposal of the Rights is a part disposal of the original holding.€Sale proceeds 6,000Cost €13,650 x €6,000€6,000 + €15,300 w1 (3,845) w22,155Annual Exemption w3 (1,270)Taxable gain 885 @ 20% = €177The cost base of the remaining shares is €9,805 i.e. €13,650 - €3,845.W1: €1,500 x €10.20W2: No indexation.W3: Not actually used at (a).

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Chapter 8 Value Added Tax

8.1 VAT Registration

The sole proprietor of Mama Shop seeks your advice as to whether he is subject to register for VAT.

In 2010, his monthly turnover was consistently around $2,000. In January 2011, he expanded his business premises to accommodate more tables for eat-in customers. Immediately thereafter, his monthly turnover increased to $7,000. As a regular customer, you note that Mama Shop sells food, beverages, snacks and tobacco products in a shop house.

Required:

a) State, with reasons, whether Mama Shop must register for VAT in 2010 and 2011 respectively.

b) Assuming that Mama Shop is subject to VAT provisions at some point during 2011, state when it should apply for a VAT licence and what its first taxable period will be.

Solution

a) In 201, Mama Shop’s annual turnover is about $24,000 ($2,000 x 12). This is below the minimum annual sales turnover of $60,000 for VAT to be applicable. For 2010, Mama Shop is not a taxable person and therefore not subject to VAT.

In 2011, Mama Shop’s annual sales turnover would likely to reach $84,000. Effectively from the time from July 2005, Mama Shop is a taxable person providing a taxable service.

b) Mama Shop should apply for a VAT licence on 1 July 2011 because its turnover has exceeded $60,000 by 30 June 2011.The first taxable period will be July/August 2011.

8.2 Registration, deemed supply, etc

Aroma Biscuits (Pvt) Limited commenced trading on 2 January 2011, specialising in the production and retailing of confectionary products. The company’s gross revenue and operating expenses for the year ended 31 December 2006 were as follows:

Gross revenue 130 000Raw materials purchased 52,000Utility costs 3,800Motor vehicle expenses 2,009Salaries and wages 20,362Consumables 467Communication expenses 4,300

The company’s senior managers have had free use of the following PMVs during the year:

Nissan Almeria, engine capacity, 1800ccMercedes Benz Sedan C230, engine capacity, 2300cc

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Nissan Hard Body, engine capacity, 2500ccFord Ranger, engine capacity, 3300cc

As the company has not yet registered for value added tax (VAT), so it has not been charging VAT to its customers. It has, however, been paying VAT on all of its expenses (inputs).

Required:

a. Explain the distinctive features of the value added tax (VAT) registration categories ranging from A to D.

b. State, giving reasons, why Aroma must register for VAT and when it should have done so. c. Calculate the potential VAT liability of Aroma for the year ended 31 December 2011, stating

any restrictions that might apply to the company’s ability to claim input tax.d. State ZIMRA’s possible course(s) of action to ensure compliance with the applicable statutes.

Solution

(a) VAT registration categoriesCategory ATraders registered under this category are required to submit VAT returns for the following two monthly tax periods:December and January, February and March, April and May, June and July, August and September,October and November Category BTraders in this category are required to submit VAT returns for the following two monthly tax periods:January and February, March and April, May and June, July and August, September and October,November and December Category CThe traders registered under this category are required to submit VAT returns on a monthly basis. Category DTrading periods for traders in this category can range from three months to any period as approved by the CG. Traders registered under category D normally have unpredictable trading cycles.

(b) Aroma is obliged to register for VAT because its annual gross revenue exceeds the threshold of $60,000. The company’s monthly average sales of ($130,000/12) $10,833 is way above the yearly threshold implying that the company should have registered voluntarily in the first month of trading.

(c) Calculation of Aroma’s potential VAT liability for the year ended 31 December 2011

Output tax ($130,000 x 15/115) 16,957Motor vehicle benefit:Nissan Almeria ($2,400 x 15/115) 313Mercedes Benz ($3,600 x 15/115) 460Nissan Hard Body ($3,600 x 15/115) 460Ford Ranger ($4,800 x 15/115) 626Less input tax:Raw materials ($52,000 x 15/115) (6,783)Utility costs ($3,800 x 15/115) (496)Motor vehicle expenses ($2,009 x 15/115) (262)

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Salaries and wages -Consumables ($467 x 15/115) (61) Communication expenses ($4,300 x 15/115) (561)Potential VAT payable 10,563

Aroma would only be allowed to claim the input tax above on the basis of the availability of valid tax invoices. (d) ZIMRA can impose a penalty of up to 100% of the VAT payable, which is equal to $10,563 and charge interest on the outstanding tax at the rate of 10% p.a.

Monica has registered her company for Value Added Tax and for the month of March 2010, her accountant produced the following extract from management accounts:Sales 99,950Cost of sales:Opening inventory 500Purchases 62,800

63,300Less closing inventory (650) (62,650)Gross profit 37,300Less expensesDepreciation 1,250Bad debts written off 6,500Overheads 10,600General Expenses 12,300 (30,650)Profit before tax 6,650The following additional information is also relevant:

a) Exempt supplies taken as a proportion of total sales amount to 10%. Included in the remainder are zero rated supplies of $12,500

b) 20% of the standard rated sales were made to customers who are not registered for VAT purposes

c) Purchases include exempt supplies whose value is $15,000. The remainder of the purchases are standard rated for VAT purposes.

d) 50% of the standard rated purchases were from non-Value Added Tax registered supplierse) The bad debts were written off on 31 March 2011. The figure consists of two invoices of

$3,250 each in respect of which payment was due on 1/9/2010 and 31/12/2010.f) The overheads are all standard rated supplies for the purposes of VATg) The figure for general expenses is inclusive of VAT and is made up of:

Entertaining customers who are VAT registered 2,650Telephone bills 4,000Diesel 5,650

Unless otherwise stated, all of the above figures are VAT exclusive.

Compute Monica’s VAT tax liability

Vat terms

You have recently joined Tax Commercial Services as a tax consultant. As your first assignment,

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your boss has asked you to write a letter to a new client explaining some important terms they will need to be familiar with for their business.

Please write a letter outlining the following:

a. Purchases or payments on which input credit is not allowed

b. Who must register for VAT?

c. Cash receipts basis of accounting

d. Requirements for a valid VAT invoice

Solution

a) No deduction is allowed for VAT on any of the following:

o Entertainment expenses o Purchase or hiring of passenger motor vehicles other than though purchase for resale o Purchase of petrol other than as stock in trade, can however reclaim diesel o VAT in respect of goods or services used by the taxable persons for the purposes of an exempt

activity or for personal use o VAT for goods and services for which the registered trader does not have a valid VAT invoice.

b) You must register for VAT if you are a taxable person and your annual turnover (i.e. the amount of your receipts excluding VAT) exceeds or is likely to exceed $60,000 p.a.

c) You can use cash basis of accounting if you are a local or public authority or when you obtain the approval of the CG to use this basis. This means you will be required to pay VAT to ZIMRA when you are paid for goods / services.

d) A valid VAT invoice / credit note must contain the following: o Name and address of person issuing the invoice o The sellers VAT registration number o Date of issue of invoice o Date of supply of goods / services o Full description of goods / services o Amount charged excluding VAT o Rate (including zero rate) and amount of VAT at each rate o Name and address of customer.

Imported services

HA Ltd, a local company has entered into an agreement with a foreign individual for a certain sales promotion service. The agreement states that the individual shall be paid $15,300 per quarter, net of income tax. The agreement is silent about who will bear the VAT. Advise the company whether it is liable to charge VAT on the contract as an importer of services. Assume that the foreign individual is from a non treaty country; advise HA Ltd whether it is required to withhold the tax on remittances of $15,300 per quarter.

Solution

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VAT is levied on the supply of imported services. An imported service means: a supply of services, made by a supplier who is not a resident of Zimbabwe, or who carries on a business outside

Zimbabwe, to a recipient who is a resident of Zimbabwe, to the extent that such services are not used in the course of making taxable supplies.

For example, a resident recipient has to account for VAT on imported services: where the recipient is not a registered vendor; where the recipient is a vendor, but the services are acquired wholly or partially in the course of

making exempt supplies; and where the recipient is a vendor, but the services are applied for private purposes.

VAT is therefore not payable by the recipient (HA Ltd) on the $15 quarterly, because the services are imported in the furtherance of HA Ltd’s trade.

However, HA Ltd must withhold tax on fees (quarterly payments) at the rate of 15% of the gross payment. The withholding tax per quarter is computed as follows:

Net payment expected 15,000Gross fees (gross up - 100/85 x 15,300) 18,000Withholding tax @ 15% of gross payment 2,700

Computation of Vat

Kumboedza is in business as a furniture manufacturer. He has asked you to prepare his VAT return for March/April 2011. March/April 2011 Invoices issued $30,000 Cash received from sales $15,000

Sold computer he had bought for the business that he no longer needed to another business for $2,000.

Purchases of wood $15,000 Purchases of computers $6,000 Petrol costs $2,000 Van repairs $1,200 Hotel accommodation for business trip $2,200

All above items are VAT exclusive. Required: a) Prepare the VAT return for March/April 2011.b) What date must the VAT return be filed and the tax paid in order to avoid interest and penalties.

Solution

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(a)

Sales 30,000 x 15% 4,500 Computer 2,000 x 15% 300 Output tax 4,800Purchases-input tax Wood 15,000 x 21% 2,250 Petrol 2,000 x 0% 0 Computers 6,000 x 15% 900 Van repairs 1,200 x 15% 180 Hotel not a claimable expenditure 0 3,330VAT liability 1,470

(a) The VAT return together with the tax payable of $1,470 must be submitted to ZIMRA by 20 th

May 2011 to avoid penalties and interest.

Registration

You are a tax senior in an Accountancy Practice and you have a new client Mr. Nguruve who would like to understand more about setting up in business. He plans to open a law firm and he has asked you the following questions: a) Should he register for VAT, he estimates his sales in the first year will be about $65,000. If he

registers what are the implications?

b) He is planning to work from his home. Does this have any adverse tax implications?

c) If his net profit totals $25,000, with no other sources of income what income, tax will he pay and when will it fall due?

Solution a. As his turnover is greater than $60,000 from the supply of services, he will have to register for

VAT. This means that he will charge VAT at 15% and he will be able to reclaim VAT on his business purchases. He will have to complete a VAT return every two months and he will pay his VAT liability to ZIMRA by the 20th day of the month following the bimonthly period. For example Jan/Feb VAT return 2011 due to be paid and submitted by 20th March 2011.

b. The main adverse tax consequence is that when he goes to sell his house, a portion will be used as his office and disallowed in claiming principal private residence relief for capital gains tax. Expenses have to apportion between private and business, because home expenses are non-deductible in terms of s.16 (1) (b).

c. His first year will be 2011 and he will be taxed on profits from the date he starts until 31 December 2011. Assuming he starts on 1 January 2011 and make $25,000 tax adjusted profits, his tax liability is as follows:

Tax liability - $25,000 x 25.75% = $6,438 payable as follows:

Paid Date paid %age paid 1st QPD $644 25/03/2011 102nd QPD $1,610 25/06/2011 25

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3rd QPQ $1,931 25/09/2011 304th QPD $2,253 20/12/2011 35

ETQ

Mrs. Mauro, a renowned architect entered into a lease agreement with Municipality of Beitbridge to rent a piece of land close to the busy border post. The terms of the lease agreement are such that Mrs. Mauro is required to construct a commercial building for not less than $100,000 within three months of signing the agreement.The lease period is for 12 years commencing on 1 January 2011. The monthly rent is $1,000 and the Municipality also charged a one-off lease premium of $20,000. The construction of the commercial building was completed to specification on 31 July 2011 at a total cost of $150,000.

Mrs. Mauro took occupancy of the building on 1 September 2011. He opened a grocery store on one wing of the commercial building and subdivided the other wing, which he then let out to tenants.Mrs. Mauro’s turnover (VAT exclusive) for the year ended 31 December 2011 is made up of the following:

Grocery store 92,300Rent received 15,000Grocery store returns (8 000)

99,300Purchases ledger (VAT inclusive as appropriate)Grocery store – standard rated supplies 20,000Grocery store – zero-rated supplies 6,000

26,000Overheads for the year (VAT inclusive as appropriate)Lease premium 23,000Rent 13,800Communication expenses 7,500Printing and stationery 3,000Staff costs 7,000Repairs and maintenance 6,500Transport expenses 4,000Depreciation 4,000Marketing expenses 2,000 96,800Net position 2,500

Required(a) Calculate the allowances that can be claimed by Mrs. Mauro in respect of the lease agreement for the year ended 31 December 2011. (b) (i) Assuming that Mrs. Mauro was VAT compliant, explain the due dates for the submission of her VAT returns and VAT payments for the year ended 31 December 2011 if he was registered as follows:– Under category C;– Under other categories; (ii) Calculate Mrs. Mauro’s VAT payable for the year ended 31 December 2011.

Solution

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(a) Lease agreement allowances

Rent ($1,000 x 12) 12,000 Lease premium (12/120 x $20,000) 2,000 Lease improvement (4/120 x $150 000) 5,000Total 19,000(b) (i) Due dates for the submission of the VAT returnsCategory CThe returns should be submitted monthly and the tax paid by the 20 th of the month following the end of the tax period. Other categoriesThe returns should be submitted every two months and the tax paid on the 20 th of the month following the end of the tax period.

(iii) Calculation of VAT payable

Turnover:Grocery store (15% x 450 000) 67 500 Rent received (15% x 150 000) 22 500 Returns (15% x 8 000) (1 200)Output tax 88,800Less input tax:Grocery store purchases (15/115 x 200 000) 26 087Zero-rated supplies -Lease premium (15/115 x 23 000) 3 000Rent (15/115 x 13 800) 1 800Communication expenses (15/115 x 7 500) 978 Printing and stationery (15/115 x 3 000) 391Staff costs - Repairs and maintenance (15/115 x 6 500) 848Transport expenses (15/115 x 14 000) 1 826 Depreciation - Marketing expenses (15/115 x 7 000) 913 (35,843)Value added tax payable 52 957

Exempt sales, export sales etc

a) Your friend has been in business for many years and his business consists solely of the supply of VAT exempt goods and services. Advise him on what is meant by VAT exempt and its effect on the company’s VAT liability.

b) He also operates another business in Chipinge, of selling car parts, registered for VAT purposes as Toko Spares Ltd. During the VAT period Nov/Dec 2011 he had the following transactions. Sales Local sales (VAT registered) 810,000 Mozambique export sales (VAT registered) 54,000

864,000 Purchases Purchases of materials form Irish suppliers 80,000 Purchases of spares from South Africa suppliers 20,000

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Wages 12,000 Insurance 6,000 Accountants fees 5,000 New car (passenger motor vehicle) 25,000 Machine 125,000 Diesel for car 8,000 Petrol for truck 1,000 Lease payment for machine 4,000 769,000 Net position 95,000

All the above figures are net of VAT.

Requirement:

a) Calculate the VAT liability for the period Nov/Dec 2011. Show clearly the VAT amount arising on each of the figures listed.

b) State the due date for submission of the Nov/Dec 2009 Vat return.

Solution

Exempt supplies are not liable to VAT. No VAT is chargeable on the supply and no input credit can be claimed for VAT suffered in relation to the supply. VAT records do not have to be maintained. Examples of exempt supplies are insurance, education and medical services.

Where a business has some supplies exempt and some not then the business is to be considered partially vat exempt. Where input credits apply to both exempt and taxable activities, the input credit is apportioned on a reasonable basis.

The exempt trader is not obliged to make VAT returns or maintain VAT records. Because input VAT is not recoverable, any VAT paid is an increase in the cost of a particular good or service to the exempt business.

Net VATSales Local sales (VAT registered) 810,000 121,500Mozambique export sales (VAT registered) 54,000 0

121,500Less purchases Purchases of materials from local suppliers 80,000 12,000 Purchases of spares from South African suppliers 20,000 3,000Wages 12,000 0Insurance 6,000 0Accountants fees 5,000 750New car (passenger motor vehicle) 25,000 0Machine 125,000 18,750Diesel for car 8,000 0 Petrol for truck 1,000 0Lease payment for machine 4,000 600

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Tax due 86,400

Pre-registration input tax, penalties etc

Sandra started her own business on 1 February 2011 in which she provided HR consultancy services.

Before incorporation of the trade, Sandra had incurred some expenditure relating to her business. On 1 August 2010 she bought a computer for $900 excluding VAT. In the same month, she spent $2,500 (excluding VAT) on office supplies. She also paid consultancy fees of $4,000 excluding VAT on 1 January 2011..She made sales of $5,000 in February 2011 and her sales are increasing by an additional $3,000 every month. Sandra believes that once sales reach $12,000 per month, she will have enough work to keep her fully occupied and will cap her sales at that level. Sandra believes that her monthly costs of $1,400 excluding VAT will remain constant.

Sandra is aware that she needs to consider VAT registration but is unsure what her obligations are.

Required:a. Using the information above, write a letter to Sandra stating the date on which she must register

for VAT and advise her whether or not she can recover the pre-incorporation VAT suffered on the costs she incurred.

b. Explain the process which may lead to the imposition of a default surcharge and indicate how such surcharges are calculated.

c. Explain the term "taxable person" for VAT purposes

Solution:

a) Registration

VAT registration is compulsory once taxable supplies exceed $60,000. This turnover figure is based on the value of the cumulative taxable supplies in the previous 12 months. Sandra has an obligation to inform ZIMRA within 30 days of the end of the month in which the annual limit is exceeded. Registration will become effective on the first day of the following month.

Sandra is also required to register for VAT if there are reasonable grounds for believing that her taxable supplies in the following 30 days will exceed $60,000. When determining the value of a person's taxable supplies for the purposes of registration, supplies of goods and services that are capital assets of the business are to be disregarded and abnormal sales are excluded.

In such cases, notification is required by the end of that 30 day period with registration being effective from the start of that period. Notification of liability to register must be made on form VAT 1. Simply writing to, or telephoning, a local VAT office is not enough. On registration the VAT office will send the trader a certificate of registration.

Based on her estimates of taxable supplies, she will exceed the annual limit in September 2011 when her cumulative turnover will be $68,000. She therefore has to inform ZIMRA by the end of October 2011. Her registration will be effective as of 1 November 2011.

Sandra has the option of registering voluntarily prior to her sales reaching the required threshold.

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b) Recovery of pre-incorporation VAT

A company, being a registered operator, shall be entitled to claim a refund of tax paid on acquisition of goods or services for or on behalf of that company or in connection with the incorporation of that company, if the expenditure was incurred by a person who:

o was reimbursed by the company for the whole amount of the consideration paid for the goods or services, and

o acquired those goods or services wholly for the purpose of a trade to be carried on by the company

Provided that this section shall not apply in relation to any goods or services where:

o the supply of those goods or services by that person to the company is a taxable supply, or is a supply of second-hand goods not being a taxable supply; or

o those goods or services were so acquired more than six months prior to the date of incorporation of the company; or

o the company does not hold sufficient records to establish the particulars relating to the deduction to be made.

c) Penalty

If a taxable person submits a late VAT return or makes a late payment of VAT, ZIMRA may issue a surcharge liability notice specifying a surcharge period. This surcharge is equal to the greater of £30 and a percentage of the tax which is paid late.

Penalties

Late notification

A trader who makes taxable supplies is obliged to notify ZIMRA if his/her supplies exceed the registration limit. A penalty can be levied for failure to notify ZIMRA and or for failing to register by the proper date. In addition, the VAT which would have been accounted for had the trader registered on time must be paid.

The penalty for late notification is based on the net VAT due from the date when the trader should have been registered to the date when notification is made or, if earlier, the date on which ZIMRA become aware of the liability to be registered. The rate varies as follows.

Criminal fraud

Where a person knowingly takes steps to evade VAT it amounts to criminal fraud. The penalty for criminal fraud depends on whether the conviction is summary (by magistrates) or on indictment (by a jury). On summary conviction the maximum term of imprisonment is six months, and the maximum fine is the greater of £2,000 and three times the VAT involved. On conviction on indictment the maximum term of imprisonment is seven years and the level of fine is unlimited.

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Conduct involving dishonesty (civil fraud)

This arises where a person dishonestly takes steps, or omits to take steps, in order to evade VAT. Failing to provide any information, failing to register, and therefore failing to make any VAT statement, and providing false information can count. The penalty for civil fraud is 100% of the tax involved. This may be mitigated by up to 100% in recognition of co-operation given by the trader during the investigation into the true VAT position. HM Customs & Excise need only show on the balance of probabilities that the conduct took place, whereas criminal fraud must be proved beyond reasonable doubt.

d) Taxable “person”

For VAT purposes, a taxable person is a person who is making taxable supplies and, who is (or who should be) registered for VAT. The term "person" can refer to an individual, partnership or company, as well as any other body which supplies goods or services in the course of business.

Exam type question 2

ACE Ltd. is a small company. The majority shareholder and founder Arthur Egan is also the Managing Director of the company. The profit and loss account of ACE Ltd for the year ended 31 December 2011 is as follows:Note $ $Sales 499,700Cost of sales (200,000)Gross profit 299,700Other income 1 168,500439,700Less Deduction:Depreciation 43,500Pension contributions 2 90,000Salaries and wages 3 292,000Light & heat 2,000Telephone 1,500Entertainment 4 6,530Bad debts 5 1,000Motor expenses 6 26,000Legal expenses 7 65,900Sundry 4,000 (172,430)Profit before tax 295,770

Notes:

1) Other income is comprised of:Interest from Government stocks 20,000Dividends received from a local company 8,500Gain on disposal of site 140,000

168,500

2) The company makes contributions to an approved pension fund for its 12 employees.3) Included in salaries is a figure of $48,750 that was paid to Arthur Egan.4) Entertainment expenses were incurred at Christmas:

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On customers 1,820On staff Christmas party 3,280On suppliers 1,430

5) The following is the breakdown of bad debts:

Opening provisionGeneral 27,000Specific 22,000 49,000

Bad debts written off (6,000)Closing provisionGeneral 38,000Specific 4,000 (42,000)Debited to income statement 1,000

6) The car is a 4-wheel drive (PMV). It was first leased on 1st July 2011. The leasing expenses incurred to 31 December 2011 are $12,300. The balance of motor expenses is in respect of petrol, tax and insurance. Arthur has agreed with the CG that 30% of the car is used for private purposes.

7) Legal expenses:Pursuing bad debts 600Disposal of site 3,800Defending product liability claim by customer 1,500

5,900

8) On the 1st January 2011 the company’s only plant & equipment had an ITV of $135,000. It had been purchased in December 2010 for $180,000. A grant of $30,000 was received.

You are required to:(a) Calculate the corporation tax due by ACE Ltd.(b) State the latest date for:(i) The payment of the taxes calculated and(ii) The filing of the corporation tax return?(c) What is the position regarding the private use of the car by Arthur?(d) (i) When must Ace Ltd file the VAT return for the period November/December 2011?(ii) If ACE Ltd is late in filing its return, what are the consequences?(iii) What is the relevance for ACE Ltd. if the company receives a VAT invoice from a supplier that has no VAT Number shown on it?

Transport services

Thomas Gurajena has recently been appointed as Managing Director of Softex Ltd, a Zimbabwean manufacturer, which exports 95% of its output. The company buys components from South African and exports to Mozambique and Malawi. Softex Ltd delivers its own goods to Mozambique and Malawi. It contracts with a South Africa company to deliver the goods from South Africa to its factory.

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Thomas believes that the company has excess capacity in its haulage operations and wants to tender for a contract from a Mozambique company (U.B.B. Gmbh), to transport goods from U.B.B.’s warehouse in Belgium to its retail outlet in France.

In addition, Thomas has been asked if Softex Ltd would move the furniture and other personal items of a friend of Thomas’s from Malawi to Zambia Thomas’s friend, who is relocating to Zambia, will pay the market rate for the removal. Thomas’s friend is not VAT registered.

Softex Ltd. is purchasing a warehouse in Masvingo from Mega Ltd. Mega Ltd. has advised that no VAT is payable. Thomas is very tax compliant and is concerned about this.

REQUIRED:Thomas does not understand VAT but wants to structure the company’s operations so as to optimise its cash flow position.(a) Prepare a report for Thomas, explaining the following:(i) The implications of how the export, import and transport of Soflex Ltd‘s goods are treated for VAT purposes. (ii) The exposure of Mojo Ltd. to VAT in relation to the tender, if successful. (iii) The exposure of Mojo Ltd. to VAT in relation to the removal of personal items from France to Ireland.

Your report should outline to Thomas if Mojo Ltd. has a VAT exposure outside of Ireland.(b) Advise Thomas on the tax position in respect of the purchase of the warehouse. You may need to consult with Mojo Ltd. and assume appropriate replies - state your assumptions in your answer.

Solution

REPORT TO THOMAS GORDON - Managing Director Mojo Ltd.BackgroundFor Irish VAT to apply to the supply of goods or services, the place of supply must be in Ireland. In the case of goods, where the goods require transportation, the place of supply is where the transportation begins. Transport services are supplied where the transport takes place, except in regard to intra-Community transport services where the customer is:• Registered – they are deemed to be supplied in the customer’s State.• Not Registered – where the service takes place.VAT is generally payable on all imports. If VAT were not payable on imports, it would be cheaper in many instances to import goods from abroad than to purchase them in Ireland.Imports by Mojo from Germany and FranceWhen an Irish VAT registered person purchases goods from Germany or French companies the VAT procedures on imports are as follows:• No VAT is charged on the imports, but the goods are liable in Ireland to VAT at the prevailing VAT rate in Ireland;• The VAT payable is accounted through the normal bi-monthly VAT return for the period in which the imports were made;• There is a simultaneous entry in purchases and sales which cancel out each other in the bi-monthly return;• When the goods are eventually sold, VAT is accounted for in the normal way.ExportsThe supply to the Belgian company will be zero rated provided the Belgian company provides a valid VAT number.

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Where a valid VAT number is not provided, VAT at the rate relevant to the goods must be charged. If there is a separate charge for delivery, Mojo charges no VAT for the service.VAT is charged at zero rate on exports to the US.Section 13A/13BWhere an exporter can produce Revenue confirmation that they are an authorised exporter to their suppliers and customs officials, supplies of goods and services may be made free of VAT under S.13/13B relief. The Revenue authorisation number must be stated on all invoices and export documents. The exporter must export at least 75% of sales and would consequently be in a permanently repayment situation thus assisting cash flow. The authorization is normally for a period of three years and the exporter must inform the Revenue if they cease to be a qualifying person.If there is a separate delivery charge, for exports to Belgium, Where Belgian VAT has been incurred, for example on diesel Mojo may make a claim to the Belgian Revenue for repayment. The claim must be made within the provided time limits and accompanied by the original invoices and evidence that the trader is registered for VAT in Ireland.TenderMojo Ltd is supplying U.B.B. GmbH with a cross-border transport service. Mojo Ltd charges no Irish VAT. U.B.B. is liable to VAT in other Member State under the reverse charge rule. When U.B.B. gives the Mojo details of his/her German VAT registration number the place of supply of the haulage service is Germany and U.B.B. must account for output VAT on the service.Personal EffectsThis is a cross-border transport service. As the customer is a private individual and not "in business", the general place of supply rule applies, i.e. the place of supply is where the transport begins, France. Therefore Mojo may be obliged to register for VAT in France and charge French VAT on the supply, subject to the French registration threshold for foreign traders.

Purchase of WarehouseFirstly if Mega Ltd incorrectly charges no VAT and Revenue seek to recover the “lost” VAT, the liability will fall on Mega and not on Mojo. The acquisition price paid by Mojo will be deemed to be VAT inclusive. However, in that event Mojo would have difficulty recovering the portion of the acquisition price deemed to be VAT.General BackgroundSales of completed property can be divided into two categories - sales of new and old property. Completed property is property which can be used for the purposes for which it was designed.New propertyThe sale (supply) of a completed property which is:a. A new freehold or a freehold equivalent (e.g. a leasehold of 99 years or greater) andb. Which is developed and sold (supplied) in the course or furtherance of a business ,is subject to VAT .What determines then whether a property is “new” or “old”?• The first supply of a completed property within five years of its completion of development is subject to VAT, (five year rule).• Any subsequent supply of a property that occurs within five years of its completion is subject to VAT if it takes place within two years of occupation and if a prior sale was subject to VAT and took place between unconnected parties, (two year rule).Old PropertyIn the main, sales of “old” property (for example a building sold six years after completion) are exempt from VAT.Where a sale is an exempt sale, and the property is sold within its VAT life, there is an adjustment under the capital goods scheme.

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However, where the sale of property is exempt from VAT the seller and purchaser can exercise a joint option to tax the sale. In such circumstances, the purchaser accounts for VAT on the sale on a reverse charge basis.If a property becomes old i.e. if it does not satisfy the five or two year rule it can be made “new” again by further development.Development does not include minor development. Minor development is work that does not materially alter the use of the property and which is less than 25% of the consideration for the sale of the property. Students should be aware that this is an important concept in deciding whether an old property has been made new. For example an old property purchased after July 2008 and which is either materially altered or where the development cost is greater than 25% of the consideration for the supply of the property is subject to VAT on its sale.

I trust the above addresses the questions that you raised at our meeting earlier this week. I will be pleased to provide any further information or clarification that you may require.Sincerely,Cliodhna P. AdamsTax Senior

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Chapter 9 Admin issues

9.1 WITHHOLDING TAX

9.1.1 Payment to overseas consultant Hypericum Ltd, a local company makes overseas payments aggregating to $100,000 to Maginpar Ltd. a Holland consulting company. An advance payment of $ 50,000 is made in January 2011. The services are completed in March 2011 and Hypericum Ltd receives the bill for $100,000 in April 2011. The balance payment of $ 50,000 is made in June 2011. Hypericum Ltd closes its books of accounts as on 31 December 2011.

What is the amount of VAT that Hypericum would be liable to pay? When should the VAT liability be discharged? Compute any other tax which Hypericum Ltd is liable to pay?

9.1.2 Return of capital

Ricky owns all the stock of Acacia Pharmacy. He received a dividend distribution from Acacia of $100,000, when the company earnings and profits are $80,000. Acacia Pharmacy must deduct dividend withholding tax on $94,000, which is $15,000 ($100,000 x 15%) in terms of 15th Sch ITA.

Solution

The distribution to Ricky is treated as a dividend to the extent of earnings and profits. A dividend does not include a return of capital by a company to its members. The return of capital concept applies to any excess of the amount of the distribution over the corporation’s earnings and profits. The withholding tax on dividend is therefore, $12,000 ($80,000 x 15%).

Mr. D is a Zimbabwean photographer, who is engaged by his European client to obtain photographs of few Zimbabwean models for an event to be held in Africa. The shooting of photographs takes place in Harare. The fees are received in US dollars. Is the service taxable or exempt? If however, the photographs were shot say in Mozambique, will the answer be different?

9.1.3 Training conducted by a non resident

Masters Ltd has a sophisticated plant for manufacture of their products. It engages a US Company to provide training services to its engineering personnel for operation and use of a plant. The training fee is $100,000 which Masters Ltd has to remit to USA. The US Company deputes its personnel to Zimbabwe to provide the necessary training services. The travel expense of its personnel is reimbursed by Masters Ltd, while boarding and lodging are directly met by Masters Ltd.

a) What are the tax implications?b) Would it make a difference if the entire training manual / module is put in a CD or floppy

and sent to Zimbabwe?

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c) Would it make a difference if the payment is to be made net of tax?

M Pty Ltd is a manufacturer and supplier of computer software. In July 1987 Micron Pty Ltd enters into a contract with Logic Ltd under which for a flat fee of $10,000 per year, Micron Pty Ltd will supply Logic Ltd with certain technical information relating to computer software. The contract was for 10 years. A second contract is entered into under which Logic Ltd agreed to sell to Micron Pty Ltd some of its own computer software for a total price of $100,000 (the "purchase price") payable by five annual instalments, each one being equivalent to five percent of the annual sales revenue derived by Micron Pty Ltd. If, after the fifth instalment, the total amount paid is less than or exceeds the purchase price, then the purchase price is to be adjusted accordingly.

Advise both M Pty Ltd and Logic Ltd of the taxation consequences of these arrangements.

9.1.4 Compromise payment of withholding tax May the CG compromise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax?

Solution:

No. A taxpayer who is constituted as a withholding agent who has deducted and withheld at source the tax on the income payment made by him holds the taxes as trust funds for the government and is obligated to remit them to ZIMRA. The subsequent inability of the withholding agent to pay/remit the tax withheld is not a reason for compromise because the withholding tax is not a tax upon the withholding agent but it is only a procedure for the collection of a tax.

9.1.5 Thin capitalization and dividend

ABC Limited, a locally incorporated company is owned 100% by MR Ltd, a non-resident company. ABC Ltd draws its accounts to 31 December of each year. The following further information is relevant for the year ended 31 December 2011.

FIXED CAPITALShare capital and premium 500,000Distributable reserves 200,000Total fixed capital 700,000

Loan from MR Ltd @ 10% interest rate 2,400,000

Compute disallowable interest for ABC Limited and any withholding tax in respect of interest payable to the foreign shareholder MR Ltd

Solution

Deductible interest must fall within the 3:1 guideline

Share capital ($700,000 x 3) 2,100,000Loan from MR Ltd 2,400,000Above 3.1 guideline 300,000

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excessive interest is $30,000 ($300,000 x 10%). the excessive interest is disallowable to ABC Ltd and treated as dividend to MR Ltd. withholding tax on dividend $4,500 ($30,000 x 15%) to MR Ltd. no withholding tax on the rest of the interest $210,000 ($2,400, 000 x 10% - $30,000), currently

exempted from tax in Zimbabwe

9.1.6 Withholding tax on interest, dividend etc

Morden, aged 36, is employed and earns $44,000 per annum. She has a daughter who is mentally disabled. Morden contributes $6,200 per annum to her occupational pension scheme. She received $1,020 net interest from her on-shore building society account and dividend income of $255 from her South Africa share portfolio.

Calculate, showing all your workings, Morden’s Income Tax liability for the AY 2011

Employment OtherSalary 44,000Pension contributions (5,400)Interest grossed up $1,020/ (0.85) 1,200Dividends grossed up $255/ (0.85) ……… 300Taxable income 38,600 1,500

Employment $3,960 + (38,600 -$18,000) x 35% 11,170Building society $1,200 x 15% 180Dividends $300 x 15% 45Less Tax credit – disability 3,000Tax liability 8,170 225Add 3% AIDS Levy ($8,170 x 3%) 245Tax to pay 8,415 225Less Tax credit ($180 + $45) . 225Tax liability 8,415 NIL

9.1.7 Non-resident withholding tax on interest and dividend

Whynot Limited, a foreign company, wishes to set up a business in Zimbabwe. It decides to invest $1,000,000 in the business. Initially, the company will inject share capital of $100,000 in the company and finance the balance with a loan of $900,000.

Required:Explain the tax rules governing the payment of interest expenses and dividends by a Zimbabwean subsidiary.

Solution

Payment of InterestFor the enterprise set up in Zimbabwe, the interest expense paid by the business enterprise to Whynot Limited, a foreign company is deductible from the taxable income of the Zimbabwean enterprise so long as it is incurred in the production of its taxable income and does not exceed interest computed on a debt to equity of 3:1, demonstrated as follows:

Deductible interest must fall within the 3:1 guideline

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Share capital ($100,000 x 3) 300,000Loan from Whynot Ltd 900,000Above 3.1 guideline 600,000

Interest on the excess debt ($600,000) is disallowed to the subsidiary business. When interest is paid to Whynot, Zimbabwean income tax at the rate of 0% is withheld on the deductible interest. Excessive interest paid to Whynot Ltd is treated as dividend and Zimbabwean income tax at the rate of 15% is withheld.

Payment of DividendFor the enterprise set up in Zimbabwe, Whynot Ltd is chargeable to income tax at the rate of 15% on the dividend received from Zimbabwe, and the tax is withheld by the subsidiary business.Advance Tax- pilot_1007_Q&A_jy R27/19/2010 If Whynot Ltd comes from a jurisdiction which has a double tax arrangement with Zimbabwe, the withholding tax rate on dividends may be reduced; alternatively the withholding tax paid in Zimbabwe may be treated as a tax credit and set off against Whynot Ltd’s home income tax. This depends on the terms of the double tax arrangement. If Whynot is not a resident of a jurisdiction with a double tax arrangement with Zimbabwe, the withholding rate will remain a 15%.

9.1.8 Resident tax on dividend

Transport International Ltd ("TI") is a publicly listed company. Transport International Ltd pays a dividend to its shareholders. Payments are made as follows:

a) a dividend of $1,000 to Sukai

b) a dividend of $10,000 to XYZ Ltd, another public company; and

c) a dividend of $5,000 to Brown Pty Ltd, a private company owned by the Brown family.

9.1.9 Permanent establishment

AAA Ltd is incorporated in South Africa. It sells shoes manufactured by an associated company in Dubai to distributors in Zimbabwe. In order to promote its business in Zimbabwe, it has set up a liaison office here, staffed by a manager and two clerical staff. Apart from sales income, it also derives interest income from its distributors when they fail to pay on time the purchase price for shoes which they have ordered.

Required:

Advise AAA Ltd whether it is liable to tax in Zimbabwe. Specify any additional information you need to answer this question fully.

9.1.10 Non resident

Dr Patel is a 42-year-old Indian citizen who has settled in Harare. He was accompanied to Zimbabwe by his wife Ashamed. On 2 January 2005, Dr. Patel bought a condominium in Marondera for $800,000. He also purchased shares in public listed companies, and unit trusts and purchased an exclusive office unit in Chitungwiza with an existing tenant. The office unit cost him $400,000.In the year of assessment 2011, he declared the following income to ZIMRA.

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a. Gross dividend income

Final dividend from Speed Power Ltd of $12,000 declared in December 2010 but received on 6 January 2011.

Interim dividend from Speed Power Ltd of $6,000 received on 1 September 2011. Final dividend from Speed Power Ltd of $10,000 received on 5 January 2012. A dividend of $5,600 was received on 11 July 2011 from Export Ltd, a licensed investor. Dividend income equivalent to $34,000 from share investments in South Africa received in

Zimbabwe on 2 October 2011.

b. Income from a unit trust of $9,500 from Overmars Unit Trust, Lesotho received during the year. The income was remitted to Zimbabwe from Lesotho on 5 December 2011.

c. Royalty income of $54,000 received in respect of a musical composition paid by a local radio agency.

d. Rental income

Rental income from office unit in Chitungwiza which has been rented for $11,500 per month for the last three years to a travel agent. It became vacant in 30 April 2011. It was rented to a new tenant after repairs on 1 September 2011 for $12,000 per month. For the year ended 31 December 2011, Dr. Patel incurred the following expenses towards the office unit:

Interest on bank loan 9,000Rates 3,400Fire insurance 3,200Minor repairs 4,000Installation of burglar alarm 1,700Advertisement cost to find a new tenant 1,800Service charges for building maintenance 4,800

Requireda. Compute the tax liability of Dr. Patel for year of assessment 2011..9.2 ASSESSMENTS, OBJECTIONS & APPEALS

9.2.1 Tax Appeal procedure Briefly explain the appeal procedure for an objection to a tax assessment

Solution

The appeal procedure is as follows:

(a) Notice must be made in writing for review(b) Notice must state the grounds of the objection clearly(c) Notice must be made within 30 days from the date of service of notice(d) Taxpayer must file the notice to the CG

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9.2.2 Statutory time for filing an appeal

On 12 March 2009, withholding tax was deducted on interest paid by City Bank to Maramba. A year later, Maramba discovered that he had overpaid and immediately filed a claim for refund with the CG. On 27 February 2011, he received the decision of the CG denying him claim for refund. On 24 March 2011, Maramba filed an appeal with the Special Court. Was his appeal filed on time or not?

Solution

Section 65 ITA provides for the filing of an appeal with the High Court or Special Court within 21 days of notice of objection to an assessment, a decision or the determination by the CG. The appeal was not therefore, filed on time. Maramba should have filed the appeal on or before 20 March 2011. Accordingly, he had lost his judicial remedy because of prescription, unless the Special Court, on good cause shown or by the agreement of the parties, decides to extend the appeal period.

9.2.3 Tax enforcement pending appeal

Bosco Ltd disputed a deficiency tax assessment and upon receipt of an adverse decision by the CG, filed an appeal with the Special Court of Tax Appeals. While the appeal is pending, the CG served a warrant of levy on the real properties of Bosco to enforce the collection of the disputed tax. Is the CG correct in issuing a warrant of levy against Bosco’s real properties, what could Bosco Ltd do to stop the process? Explain briefly.

Solution

An appeal to the CTA shall not suspend the enforcement of the tax liability, unless a motion to that effect shall have been presented in court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Government.

9.2.4 Omitted income in tax return

JK, a businessman paid its QPDs for 2010 based on the estimated business net income of $350,000. After filing the return he realized that his accountant incorrectly under estimated the 2010 last quarter business income by $50,000. Being an honest taxpayer, he included this income in his return for 2011 and paid the corresponding income tax thereon. In the examination of his 2010 return the ZIMRA examiner found that JK failed to report this item of $50.000 and assessed him a deficiency tax on this item, plus a 100% penalty.

Required:a) Show what JK paid in QPDs against what he should have paid, clearly indicating the dates he

paid the provisional tax.

b) Is the examiner correct? Explain.c) If you were the lawyer of JK, what would you have advised your client before he included in

his 2010 return the amount of $50.000 as 2011 income to avoid the penalty? Explain.

Solution

Estimated tax liability $90,125 ($350,000 x 25.75%)

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Paid Date paid Actual Error %1st QPD 9,013 25/03/2010 9,013 02nd QPD 22,531 25/06/2010 22,531 0 3rd QPQ 27,038 25/09/2010 27,038 04th QPD 31,544 20/12/2010 36,050 14%

While the provisional tax is paid based on estimate of annual taxable, a margin of error of more than 10% off the estimate is not acceptable to the CG. The CG is correct in assessing a deficiency income tax for taxable year 2010 plus penalty and interest because of the incorrect estimate by JK. In the light of circumstances, however, the 100% penalty seems very harsh for an honest taxpayer. The 100% penalty attaches only if a false or fraudulent return is wilfully made. The fact that JK included the income in his 2011 return belies any claim of wilfulness but is rather indicative of an honest mistake which was sought to be rectified by a subsequent act.

JK should have amended his 2010 income tax return to allow for the inclusion of the $50,000 income during the taxable period it was realized.

JK must lodge compliant within 30 days of receiving notice of assessment to question the 100% penalty and ask for the abatement thereof.

9.2.5 Payment plan/Installment Agreement

Last year, a local newspaper carried a story of 15 State enterprises which had not remitted taxes of varying ranges i.e. VAT and PAYE. It was further reported that some of those State Enterprises had made “payment plans” with ZIMRA.

a. What do you understanding by the term payment plan?b. What are the advantages of this plan?c. Is the plan enforceable by either party?

A payment plan is an arrangement whereby ZIMRA allows a taxpayer to pay liabilities over time. It can grant a payment arrangement because of the taxpayer’s temporary financial difficulties. First, a full appraisal of the taxpayer’s financial situation is completed.

Once a payment plan is established, ZIMRA will not charge penalty on the outstanding tax or take enforced collection action, including the levy of bank accounts, as long as the taxpayer remains current with all filing and payment obligations. However, interest would continue to accrue until the outstanding balance is satisfied.

ZIMRA will not agree to a payment plan until all necessary tax returns are filed. If you have other amounts of tax undergoing collection procedures by an enforcement authority, ZIMRA will also refuse to enter into a payment arrangement with you.

If you follow the terms and conditions of your payment arrangement, ZIMRA will refrain from collection procedures during the period of validity. However, delay interest will be collected. If you are eligible for a refund of tax, the refundable amount can be set off against your agreed installments.

If you fail to follow the terms and conditions of your payment arrangement, it will automatically be waived and the unpaid installments transferred to the enforcement authority. The CG may also

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consider other procedures of recovery and collection. In the case of a waived arrangement, the CG will notify the taxpayer in writing.

9.2.6 Returns, penalties and appeals

E.Nyoni runs the family retail business. She also works part-time as an accountant with a manufacturing company drawing a salary of $3,500 a month. She wants to know more about the self-assessment system. Explain to Nyoni with respect to the self-assessment system for individuals, the following should be your guideline:

a. The deadline for submitting her business tax return for the year of assessment 2010.b. How the tax payments will be made with respect to his employment income and business

income.c. The penalty for late payment of tax instalment payments.d. The time frame for a valid appeal against an assessment.e. If ZIMRA cannot come to an agreement with Edna Nyoni in the case of an appeal, to

whom should the appeal will be forwarded for determination?

Solution

a. E.Nyoni must submit her tax return by 31 December 2011, but a self-assessment return is submitted by 30 April 2011.

b. Tax on employment income is deducted on monthly basis. The employer withholds the tax and pays it to ZIMRA by the 10th of the month following that of deduction.

c. Tax on business income is paid in instalment on quarterly basis as follows:

Tax year QPD Tax due (%) Date tax due

20101st 10% 25 March 2nd 25% 25 June3rd 30% 25 September4th 35% 20 December

d. A 100% penalty is charged for late payment of installment payments

e. A taxpayer must lodge an appeal with the High Court or Special Court of Tax Appeals within 21 days of the notice to the objection decision by the CG.

9.2.7 Tax appeal, representative taxpayer

(a) On 28 April 2011, Junkie submitted her 2010 tax return to the CG. She was informed that a notice of assessment was deemed to have been issued for the year of assessment on the day she submits her tax return. Junkie wants to make an appeal as she has wrongly computed her tax payable for year of assessment 2010.

Required:

a) Briefly explain to Junkie the appeal procedure under the Income Tax Act.

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b) “Section 62 ITA stipulates that an appeal against an assessment should state the grounds of the appeal”.With reference to the above statement, briefly explain what you understand by the term “grounds of appeal” outlined in Section 62 ITA.

c) “Section 53 ITA stipulates that tax agents, tax consultants or tax advisers may represent clients in their dealings with ZIMRA”.

With reference to the above statement, outline what is understood by the term ‘tax agent’.

9.2.8 Assessment prescription period

ATS Ltd filed its 2007 income tax return on 15 April 2008 showing a net loss. On 10 June 2007, it amended its 2007 tax return to show more losses. Following a tax audit, the CG disallowed certain deductions claimed by ATS, resulting in a net income position and issued a revised assessment against it on 2 June 2009. ATS protested the assessment on the grounds of the prescription period. Advise?

Solution

The prescription period has not elapsed. Under s.47, the CG is allowed to raise an additional assessment within six years from the end of the relevant year of assessment.

9.2.9 Statutory limit and its purpose

What is the statute of limitations, and what role does it play in the filing of tax returns?

Solution

The statute limit is the period of time that the CG and/or the taxpayer have to correct an error on a return. The general limit is six years from the due date of the return. This gives both the CG and taxpayer time to correct errors on previously filed returns. If a taxpayer discovers an error in a previously filed return, the error is corrected by filing an amended return before the end of the statute of limitations.

9.2.10 Penalty, interest and tax appeals Lydia Kuseni came to you in a panic mood, after she received a letter from ZIMRA on 14 November 2011, advising her that ZIMRA will be coming to audit her for the tax year 2010 on 20 November 2011.

Lydia operates a Boutique and had tax adjusted profits for the year ended 31 December 2010 of $65,000. She has highlighted the following to you: In December 2010 she sold $32,000 worth of goods to a customer who paid her cash and she did not record this in her accounts. On 2 March 2010 she sold a holiday home in Nyanga for $320,000 that she had bought on 1 June 2003 for $25,000. She did not submit a tax return to ZIMRA. Francisca works for Lydia two days a week from her office and she invoices her at the end of the month and she pays her $1,000 gross. Francisca commenced work with Lydia on 1 April 2010. Required a. Advise Lydia of any tax liabilities she may have as a result of the audit.

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b. If she is not happy with the outcome of the audit what options of appeal are available to her.

Solution

Thank you for appointing us as your tax advisers. Below is the information which might be relevant to you for the upcoming audit:

Omitting $32,000 cash sale in your 2010 tax return exposes you to an additional tax (a penalty) of 100% of the tax chargeable on the omitted, plus 10% p.a. interest on the tax chargeable because of delay. The tax applicable on the omitted income should have been paid on 20 December 2010 when you paid your 4th QPD for the tax year ended 31 December 2010. The following is the tax due on the omitted income:

Tax unpaid ($32,000 x 25.75%) 8,240Add 100% penalty ($8,240 x 100%) 8,240Interest (10% x 335 days/365 days x $8,240) 756Tax due 17,236

Interest is computed to the day of ZIMRA’s visit i.e 20 November 2011.

Capital gains withholding tax of 15% of $320,000 ($48,000) was supposed to be paid within 3 days (by 5 March 2011) of receiving proceeds from selling your Nyanga holiday home. I believe the home is still in your name because the Deeds Office would not have effected change of ownership without valid tax clearance from ZIMRA. A tax clearance can only be issued once the withholding tax is received by ZIMRA. You are to pay interest and penalty on this item and the following is the breakdown of the tax due;

Unpaid tax 48,000100% penalty 48,000Interest (10% x 626 days/365 days x $48,000) 8,232Tax due 104,232

Because you employed a person who earns above the minimum $225 tax threshold you should have registered as an employer with ZIMRA within 14 days of being an employer. Thereafter you were supposed to deduct pay as you earn on a monthly basis on Francesca’s salary. The deducted amounts were supposed to be paid to ZIMRA by the 10 th day of the month following the month of deduction. The tax due on this item is as follows:

Tax on $9000 (1,000 x 9 months) based on 2010 rates 1,601100% penalty 1,601Tax due 3,202

NB: Interest computation is too detailed, I will have to send you this schedule later.

The CG may waive or reduce the penalty if he is satisfied that the reason for not paying tax was not due to any intent to evade the tax. He may also extend the period for payment of penalty without charging interest, but is unlikely to be lenient with delinquent taxpayers.

Statutory appeal

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Lydia must formally object to the CG’s assessment within 30 days of date of notice of assessment.

The objection will be heard by the CG who will then issue determination. •If dissatisfied, seek full rehearing from Circuit Court. •Then you can appeal to High Court and Supreme Court. •Auditor cannot appeal to the Circuit Court, he/she can only appeal to Appeals Commissioner and High Court. •All appeals to High Court can only be made on a point of law. •Taxpayer can seek review from: –District manager for tax district –Regional Director for tax district –Principal Inspector of Taxes in charge of Revenue Internal Review Unit –Jointly by Principal Inspector of Taxes in charge of Internal Review Unit and External Reviewer. –Informal review process and no system to appeal.

9.3 RETURNS AND PAYMENT OF TAX

9.3.1 Preferential claim Air Africa (AA) failed to pay its taxes of $20 million. Accordingly, the CG served AA with an attachment order. Meanwhile, the Department of Labor through its arbitrator rendered a decision ordering AA to pay unpaid wages and other benefits to its employees. AA’s computers and vehicles were levied upon by the sheriff and later sold at public auction. The CG filed a motion with the arbitrator to nullify the sale and enjoin the sheriff from disposing the proceeds thereof. He opposed the motion contending that the Labor Law give first preference to claims for unpaid wages. Resolve the motion. Explain.

Solution:

The motion filed by the CG should be granted because the claim of unpaid taxes is generally preferred over the claims for unpaid wages, while a company still subsists. A claim for wages is preferred to taxes only when there is case of bankruptcy or liquidation of the employer's business. In this case, Air Africa is not under bankruptcy or liquidation at the time the warrants of distraint and levy were issued hence, the opposition of the employees is unwarranted.

9.3.2 Conditions for claiming tax refund

State the conditions required by the tax law before the CG could authorize the refund or credit of taxes erroneously or illegally received.

Solution

The following conditions must be met:

a. There must be a written claim for refund filed by the taxpayer with the CG.b. The claim for refund must be a categorical demand for reimbursement.c. The claim for refund must be filed within six years from date of payment of the tax or penalty

regardless of any supervening cause.d. A proof that tax has been overpaid must attached e.g. tax withholding certificatee. Taxpayer must not have outstanding taxes, otherwise the CG uses rules of offset

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9.3.3 Procedure for claiming refund

What must a taxpayer do in order to claim a refund of, or tax credit for, taxes and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected?

Solution

The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected:

He should file a written claim for refund with the CG within two years after the date of payment of the tax or penalty.The claim filed must state a categorical demand for reimbursement.2 The suit or proceeding for recovery must be commenced in court within two years from date of payment of the tax or penalty regardless of any supervening event that will arise after payment.

B. Can the Commissioner grant a refund or tax credit even without a written claim for it?B. Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refund/ claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit without the need for a written claim. This is so, because a return filed showing an overpayment shall be considered as a written claim for credit or refund.

9.3.4 Statutory limit not applicable in the case of fraud

Gerry was being prosecuted by ZIMRA for failure to pay his income tax liability for 2002 AY despite several demands by ZIMRA since 2003. The information was filed with the High Court only last June 2010. Gerry filed a motion to quash the Information on the ground of prescription, the Information having been filed beyond the 6-year statutory period. Make a decision.

Solution:

Prescription of a criminal action begins to run from the day of the violation of the law. The crime was committed when Gerry wilfully refused to pay despite repeated demands in 2003. There is no time limit where a criminal offence is involved.

9.3.5 Claiming overpaid taxes

Arno, a non-resident shareholder was charged withholding tax on dividend in excess of the amount properly chargeable under the Act. What must Arno do in order to claim a refund of taxes which he alleges was excessively assessed or collected?

Solution

The CG can authorize a refund in respect of overpaid taxes, as long as the claim is made within six years of the date of payment of the tax. Arno needs to prove to the satisfaction of the CG that the tax was overpaid. He must support the claim with the tax withholding certificate issued to him by the dividend paying company or his agent. If he has outstanding taxes on other tax heads, the CG will offset and pay or demand the difference.

9.3.6 Royalties

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S Ltd is the wholly owned subsidiary of H Ltd, a non-resident French company. S Ltd has a trademark licensing agreement with H Ltd. In February 2011, S Ltd remitted to H Ltd royalties of $100,000, which S Ltd subjected to a withholding tax of 25%. Advise whether the withholding tax was properly deducted. If no, is S Ltd legally entitled to file a claim for refund of tax, in its capacity as the withholding agent?

Solution

State DTA rate

A Co., the withholding agent of the non-resident foreign corporation is entitled to claim the refund of excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding agent, it is the one held liable for any violation of the withholding tax law should such a violation occur. In the same vein, it should be allowed to claim a refund in case of overwitholding.

9.3.7 Period for claiming a tax refund

After failing to get a refund, Madudzo filed on 1 March 2011 a case with the High Court to recover the $23,000 in taxes as indicted on 15 March 2005 notice of assessment. Is the action to recover the taxes filed timely?

Solution

The action for refund was filed in the High Court on time. In the case of overpaid taxes, a taxpayer has six-year period for filing claims for refund with the CG as well as in the institution of an action for refund in the Special Court of Tax Appeal or High Court. In terms of s.48, the six year prescriptive period for tax refunds is counted from the date of notice of assessment in question.

A Co., received an income tax deficiency assessment from the CG on May 5, 2009. On May 31, 2009, A Co. filed its protest with the CG. On July 30, 2009, A Co. submitted to the CG all relevant supporting documents. The CG did not formally rule on the protest but on January 25, 2010, A Co. was served a summons and a copy of the complaint for collection of the tax deficiency filed by the CG with the magistrate court. On February 20, 2010, A Co. brought a petition for preview before the Special Court of tax appeal. The CG contended that the petition is premature since there was no formal denial of the protest of A Co. and should therefore be dismissed.

1. Has the CTA jurisdiction over the case?

Solution

Yes, the CTA has jurisdiction over the case because this qualifies as an appeal from the CG's decision on disputed assessment- s65 (1). By deciding to collect the tax assessed without first deciding on the A Co's protest, means the CG has denied or dismissed A Co’s case- s.62(4), in which event the taxpayer may file an appeal with the CTA.

.2. Is the magistrate court has the jurisdiction over the collection case filed by the CG? Explain.

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No. The filing of an appeal with the CTA has the effect of voiding the magistrate court’s jurisdiction over the collection case. There is no final, executory and demandable assessment which can be enforced by the BIR, once a timely appeal is filed. However, in terms of s. 69(1), t he obligation to pay and the right to receive any tax chargeable shall not, unless the CG otherwise directs and subject to such terms and conditions as he may impose, be suspended pending a decision on any objection or appeal case.

Does a withholding agent have the right to file an application for tax refund? Explain.

Yes. A taxpayer is "any person subject to tax." Since, the withholding tax agent who is "required to deduct and withheld any tax" is made "personally liable for such tax" should the amount of the tax withheld be finally found to be less than that required to be withheld by law, then he is a taxpayer. Thus, he has sufficient legal interest to file an application for refund, of the amount he believes was illegally collected from him.

9.3.8 Taxpayer registration

Joyce is a renowned author and the following is her income from royalties, pension and investments for the year ended 31 December 2011:Royalties 20 000Pension 8 000Treasury bills 5 000Financial institution deposit 4 000Local company dividends (gross) 7 200

44 200Joyce is not a registered taxpayer and now seeks your advice in order to regularise his situation. If she remains unregistered what are her taxes? Explain

Solution

Joyce should register for the following tax heads:

Joyce is legally obliged to register for corporate tax in connection with the royalties, interest, dividend etc (all amounts other than amounts on which PAYE is withheld in terms of 13 th Sch ITA e.g. pension). However, there is no need to register if her income was only constituted of Treasury bills, financial institution deposit and dividends because these should be taxed at source and the tax withheld is a final tax. She is legally obliged to register for value added tax in connection with her royalties income since the revenue is above the threshold of $60 million for the year. The potential penalty to be paid if she fails to register is 100% of the tax due.

She might be required to register for PAYE if she employs people in receipt of taxable income (over $225 per month) to manage her business.

If she remains unregistered will be subjected to 10% withholding tax on contracts, which is a form of presumptive tax, for every contract enters with registered taxpayers. This tax will be levied on her turnover. She will not be entitled to claim VAT input tax on her purchases, as long as she remain unregistered for VAT purposes.

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9.3.9 Estimated assessment and provisional tax

The accounts of Hurungwe Limited were delayed because of Boardroom squabbles and bickering among its members. Thus its accounts for year ended 31 December 2011 were not filed with the tax office until 31 August 2011. Before the accounts for the year ended 31 December 2010 were filed the company was slammed with an estimated assessment of $1,500,000 on 1 June 2011 and a provisional tax of $1,500,000 was raised for the company to pay. The tax paid in the previous assessment year was $1,200,000.

Required:State clearly as Tax Consultants to the company what advice you will give to deal with:(a) Estimated assessment.(b) The Provisional Tax.NB: Your answer should be in Report format, addressed to the Financial Controller of the Company.

Solution

MTZ TAX CONSULTANTSHARARE

The Financial ControllerHurungwe Ltd.P. O Box 256Harare.Dear Sir,

19 November 2011

RE: PROVISIONAL TAX AND ESTIMATED ASSESSMENT

We acknowledge with thanks, your letter dated 5 November 2009, appointing us as Tax Consultants of your company.

Our initial job is to offer you advice on the above subject matter, which confirm as follows:

(a) The estimated assessment

ZIMRA has announced the due date for submission of income tax returns for the year ended 31 December 2010, as 30 May 2011.Normally, the date is 30 April of the year following that of accounts (following 31 December of the previous year). The category of taxpayers required to submit these returns are:

registered or required to have registered under Category C for VAT registered operators in category A and B whose taxable supplies exceeded $240 000 by 31 Dec

2010 or registered in terms of the Banking Act (CAP 24:20) or registered in terms of the Insurance Act (CAP 24:07).

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Normally, all other taxpayers are also required to submit their income tax returns by the same date.

The CG resorts to assessing a company on estimated basis, after time allowed for the submission of its accounts together with its completed self assessment form, has expired. The CG is within its right to raise an estimated assessment. The company can however raise an objection to the estimated assessment, in terms of s.62 ITA. For an objection to be valid, it must be in writing, state the precise grounds of objection and be made within 30 days from the date of service of the notice of the estimated assessment.

The question that arises is what was the tax paid in 2007? Since the tax paid in 2007 was N1, 200,000 we can make a case for N1, 500,000 being excessive. Late filing of accounts

There is a penalty for failing to file income tax returns. The accounts were filed on 31 August 2011. The new penalty for late filing is $30 for each day that the return remains outstanding. The total penalty for the late filing of your accounts, is $2,790 (93 days x $30). This is in addition to interest and penalty chargeable for default.

We thank you for your co-operation and look forward to a long and beneficial relationship with you.Yours faithfully,

Zvikomborero TaperaFor: MTZ Tax Consultants

Question 6

The estimated tax liability of Petro Ltd was $6,000,000 for the 2010 tax year. The actual tax liability as computed per the audited accounts of the company was finally agreed to be $6,395,000.

You are required to:

a) Prepare the schedule of streams of payments to ZIMRA by the company for 2010 tax year.(b) Briefly state the rules estimates tax liability of the company.

The company must pay shortfall as soon as practical, if determined before the

Question 6

(a) When can an Appeal be final and conclusive?(b) Briefly describe the Self Assessment Scheme, stating FIVE advantages.(c) Distinguish between Tax Evasion and Tax Avoidance.

Solution

(b) An appeal can be said to be final and conclusive where:

There is no lodgment of a valid objection against an assessment as regards the amount of the total profits assessed.

The amount of the total profits has been agreed, after a revised assessment has been raised, on the objection raised by a Company.

The amount of such total profits has been determined on objection raised by a company.

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The amount of such total profits has been determined on objection, revision or on appeal over the assessment made, agreed or determined on appeal.

(c) Self–Assessment

This is a system in which a taxpayer is made to assess himself instead of the traditional method of the ZIMRA raising the assessment. Thus, ZIMRA is only to verify the authenticity of such returns.

The advantages of the Scheme:

o There is reduction in time taken to raise assessment by the ZIMRA.o it gives a measure of confidence to the taxpayer to willingly submit himself to be assessed.o it reduces the job load on the part of the ZIMRA staff.o it bestows a high degree of trust on the taxpayer.

C. Tax Evasion

This is a criminal offence in which a taxpayer does not pay or want to pay tax at all. A tax evader may sometimes be charged to court, fined and/or imprisoned.

Tax AvoidanceThis is a situation in which the taxpayer plans his/her affairs in a way that would make him/her pay the least possible amount of tax. This is perfectly within the law.

Hartanah Sdn Bhd has been involved in the property development business since 1999. In 2006, it purchased a piece of land in Kepong for the purpose of developing it into a residential area. It submitted an application to the Selangor State Government for approval. It had incurred development costs, such as planning and surveying costs.

However, in 2007, the land was compulsorily acquired by the State Government for the purpose of constructing a highway. The company was offered a compensation of RM10 million based on the prevailing market price.Required:State, with reasons, whether or not the compensation received by the company is taxable under the Income Tax Act 1967.

ESTATE DUTY

Estate duty

Mr. Makandionei died suddenly on 1 April 2011. The total value of his assets at the date of death amount to $450,000, of which $100,000 are the proceeds of various insurance policies. In terms of his will and the insurance policies, his assets are to be distributed as follows:

House to his wife 1 000 000Proceeds of insurance policy where wife is beneficiary 500 000Vehicle to his driver, Dracula 300 000Proceeds of insurance policy where children are beneficiaries 500 000

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Cash left to his two children 300 000Kruger rands to his wife 200 000Holiday apartment to his business partner 500 000Cash to his secretary 250 000Shares in business to eldest son 950 000

It is estimated that expenses incurred in winding up the estate will amount to R 150 000.

In addition, Mr. Count had an unpaid tax liability of R 100 000 at the date of death.

Calculate the estate duty liability of Mr. Count?

Solution

Gross value of property 4 500 000

Less: DeductionsHouse to his wife 1 000 000Proceeds of insurance - wife is beneficiary 500 000Vehicle to his driver, Dracula 0Proceeds of insurance - children are beneficiaries 0Cash left to his two children 0Kruger rands to his wife 200 000Holiday apartment to his business partner 0Cash to his secretary 0Shares in business to eldest son 0Tax liability 100 000Winding up costs 150 000 1 950 000

Net value of estate 2 550 000

Less: Abatement (2 500 000)

Dutiable amount of Estate 50 000

Estate duty payable @ 20% 10 000

Your client, Anita Marvin a successful entrepreneur is the controlling shareholder and themanager of Marvin Inc., a company engaged in website design (60% of total gross receipts) and desk top publishing (40% of gross receipts).Employee retention of the web-site designers is becoming a problem in this very competitive market and Anita Marvin wants to create an attractive benefit package for the web-designers.However, it would be uneconomical to provide the desk top publishing division which has full time staff with the same benefits as the website designers. Also, there has been talk that the desk-top publishing employees are considering unionizing.Anita Marvin’s son-in-law Ralph suggested the following re-organization.Ralph advised Anita Marvin that considerable savings could be achieved by contracting out the desk top publishing work to independent contractors. Not only would this remove the potential union problem but there would be a savings of payroll costs from decreased benefit payments and

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various employment related taxes and withholdings. Marvin Inc. would then be able to offer the website designers a new employee benefits package without creating a perception of inequality between the two divisions.Ralph recommends giving all desk-top publishers a “One Week Working Notice of Termination” and a $1,500 “settlement payment” to compensate for the “anguish and humiliation of an abrupt and unfeeling termination”. Ralph says the employees would not pay tax on the settlement payment.As part of the termination package, Marvin Inc. could offer free job counseling and educational seminars, including seminars on how to start a small business. These types of services are valued at $600 if purchased in the private market.Former desk-top employees who decide to enter into Independent Contractor Agreements with Marvin Inc. would be offered an opportunity to buy used computers for $1,500. Asindependent contractors, the former desk-top employees could set their own hours and could work for other people; however Marvin Inc. would guarantee those 120 hours a month of work for the first year. They would have access to secretarial staff, the office copying machine and an independent contractor’s lounge to work in, should the need arise.The former desk-top publishing employees would benefit as they could easily deduct the expenses related to their home offices, transportation costs going from their home office toMarvin Inc.’s office to pick up their work assignments and for meetings, as well as the cost of their computers and paper supplies.What are the tax consequences of this proposal for both Mavin Inc. and the desk-top publishing employees?

(c) Mr. Mbezi Beach is operating a hotel business in Mazvikadei and prepares its accounts to 30 June each year. The company incurred the following expenditures for the purposes of its business: (i) A generator was bought on 1 March 2011 at a cost of $22,000. Installation costs of$2,500 was incurred to install it in the premises.(ii) The company spent $120,000 on replacing linen, cutlery and glassware during the year.REQUIRED:Calculate the allowances (if any) for all the relevant years of assessment

INTEREST ISSUES/PUPS

Donald and Andrea are married. Donald is 79 years old and earns a pension of $24,000 p.a. Andrea is 68 years old and is retired. For the tax year 2011, Andrea was paid $13,400 by her pension scheme without deduction of tax. She also earned building society interest of $1,760 net of tax and net dividends of $459.

Prepare an income tax computation for Andrea for the tax year 2009/10, using allowances in the best possible manner. You should assume that any steps required to maximize the use of such allowances are to be taken, stating the conditions required for such reliefs to be claimed.

10. VALUE ADDED TAX DEFERMENTValue added tax can be deferred on some capital equipment for the mining, manufacturing, agricultural and aviation industries whose investment generally relies on imported capital.The whole amount becomes due within 90 days from the date of deferment.

tax rev (dec22)

Documents

income tax payable

htaxable income of person

gtaxable income of company

ctaxable income of company

tax credits

jtaxable income of operator

ftaxable income of holder

btaxable income of individual