Professional Documents
Culture Documents
TAXATION – ZIMBABWE
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B. COMPT HONOURS DEGREE 2010
Taxation Module
TOPIC
4 Taxation of Miners
- Prospecting Expenditure
- Capital Redemption Allowances
- Sale of Mining Claims
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B. COMPT HONOURS DEGREE 2010
Taxation Module
INTRODUCTION
The Taxation syllabus is fairly wide and any attempt to spot a particular area from which the
questions will be set will have a very small probability of success. It is, therefore, in the
candidate’s interest to be familiar with virtually all areas of the syllabus. In any case the
questions are normally integrated and the candidates who have prepared for all possible topics
are the ones likely to be successful in their endeavours.
The notes and questions in this study pack are designed to assist the student prepare for the
examination by going through summaries of the relevant legislation and working through
practical examples/questions. A number of the questions actually come from past examination
papers. It is in the best interest of students to genuinely attempt the questions before referring
to solutions provided.
The professional accountant is involved in the interpretation and application of tax law
procedures and must be able to recognise potential tax planning opportunities; and contribute
to the evaluation of existing ones. The accountant’s approach to tax matters should be
tempered with the recognition that the State is legally entitled to all taxes imposed upon
taxpayers by the statutes, but taxpayers are under no obligation to pay more than the legal
minimum of such taxes imposed upon them. This must be borne in mind at all times when
working through questions, which touch on the aspects of advice to clients on planning their
tax affairs.
It must be made clear from the outset that to become a tax expert one requires further
comprehensive study supported by sufficient practical experience. This package should set
you well on your way. Please note that the summaries have been prepared under the
presumption that you have already had an encounter with the study of Zimbabwean Tax Law
and Practice at undergraduate level, and will be based on legislation in effect as at 31 January
2010.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
1.1.1 Administration
The administration of all taxation (Value Added Tax, Capital Gains Tax,
Income Tax, e.t.c) now fall under the responsibility of the National
Revenue Authority of Zimbabwe (ZIMRA), which Authority came into
being with effect from 19 January 2001. The Commissioner-General of
Taxes is vested with the power and responsibility of administering the tax
statutes. He does this through regional offices and ports established across
the country.
Every year, three to four months after the end of a tax year the
Commissioner publishes a notice in the most commonly read press inviting
taxpayers to obtain tax returns from their nearest tax office; truthfully
complete them and return them to the respective offices for assessment.
Although Tax Offices may post some tax returns to taxpayers (on their
records), the duty to obtain a tax return rests with each individual taxpayer
who falls within the specifications outlined in The Commissioners public
notice. Tax returns for the year ended 31 December 2009 have been
notified to be due by 30 April 2010.
Self assessment legislation was introduced with effect from 1 January 2007.
Taxpayers, so specified by the Commissioner General as being those
registered or required to have registered under Category “C” for Value
Added Tax (VAT) in terms of the VAT Act as at 31st December 2007 and
thereafter or registered under the Banking Act or registered under the
Insurance Act, are required to furnish self assessment returns within four
months from the end of the tax year. Employees paying PAYE under the
FDS are not liable to furnish self assessment returns unless specifically
requested to do so. Under the self assessment legislation, the return will
constitute an assessment on either the due date of furnishing the return or
on the date that it is actually furnished.
All employers have been placed on the Final Deduction System (“FDS”).
Under the FDS, any employee who receives employment income only (i.e.
has no source of income other than remuneration), does not need to submit
a tax return. The employer is responsible for deducting the correct amount
of PAYE for the year, and no further return needs to be made to the tax
department by the employee.
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Taxation Module
Taxpayers who are not employees, but are in receipt of other income, (e.g.
sole traders, consultants and companies), are required to be on Quarterly
Payment Dates (Section 72). Under this scheme the taxpayers pay their
estimated tax liabilities, for the current tax year in which they are trading, in
four instalments on dates allocated throughout the year, as follows:
The duties and rights of representative taxpayers are outlined in the above
quoted sections. The Commissioner of Taxes also has remedies against
defaulting representatives. Where a representative has met an obligation of
the principal out of his resources, he is empowered by the Act to seek
restitution from the principal.
The administrative sections of the Act are fairly simple to read. Students
should read them in order to have an understanding of the overall
administrative framework.
The Tax questions in the 2009 Examination will be based on legislation ruling up
to and including 31st January 2010. Some of the changes in legislation brought
into effect with which you should be concerned with are outlined below:-
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B. COMPT HONOURS DEGREE 2010
Taxation Module
%
14(2)(b) Taxable income of individual from trade or investment 25
14(2)(d) Taxable income of pension fund from trade or investment 15
14(2)(e) Taxable income of licenced investor (taxed at 0% up to the
fifth year of his 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 ………………………………………………………… 25
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 (after being taxed at
0% for the first five years of his operations as such)…………… 25
14(2)(j) Taxable income of operator of a tourist facility in approved
tourist development zone (after being taxed at 0% for the first
25
five years of his operation as such) ...................................................
Operator of a tourist facility where 60% or more of the turnover 20
from such operations is in foreign currency ……………………...
14(3) Taxable income of manufacturing company which exports 50%
or more of its output ……………………………………………. 20
The rate of income tax that generally applies to companies is 25% of taxable income and
an AIDS levy of 3% of tax payable, giving an effective rate of 25.75%.
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B. COMPT HONOURS DEGREE 2010
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- Capital gains arising from the disposal of immovable property and marketable
securities are taxed at a flat rate of 20%.
- Capital gains arising from the sale of a principal private residence by an individual
who has attained fifty-five years on or before the date of sale are exempt from tax.
- Capital gains arising from the sale of marketable securities are exempt from tax up
to $1,800 if the seller is fifty-five years or over on the date of sale.
- The disposal of marketable securities listed that were acquired before 1 February
2009 is subject to capital gains tax at 5% of the gross capital proceeds.
- The disposal of marketable securities listed on the Zimbabwe Stock Exchange that
were acquired after 1 February 2009 is exempt from capital gains tax but subject to
a capital gains withholding tax of 1% of the gross capital proceeds.
- The disposal of marketable securities that are not listed and were acquired after 1
February 2009 is subject to capital gains tax at 20% (and capital gains withholding
tax of 10%).
- The disposal of immovable property that was acquired before 1 February 2009 is
subject to capital gains tax at 5% of the gross capital proceeds.
- The disposal of immovable property that was acquired after 1 February 2009 is
subject to capital gains tax at 20% of the gross capital proceeds (and capital gains
withholding tax of 15%)..
- The main deductions which are allowed in the determination of a capital gain are
the cost of the asset together with any additions after acquisition and an allowance
(calculated on cost and additions) determined by applying the Consumer Price
Index (CPI) as provided by the Central Statistical Office.
up to 1 500cc 1,800
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Taxation Module
1.2.6 With effect from 01/11/09 bonus exemption is now 10% of emoluments or
$400 whichever is smaller.
1.3.1 Overview
In terms of section 6 of the Income Tax Act (Cap 23:06) there shall be
charged, levied and collected income tax calculated on taxable income for
the benefit of the consolidated revenue fund.
- the appropriate rates of tax per the charging act for the year ; and
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= Income
= Taxable Income
Section 2 of the Act defines various terms used in the Act. Students should
be familiar with the meanings attached to words such as “amount” and
“person”. “Amount” for tax purposes embraces all receipts or accruals,
whether deemed or actual as long as they have an ascertainable monetary
value. An example of a specific inclusion is motoring benefit [section
8(1)(f)].
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B. COMPT HONOURS DEGREE 2010
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Delfos vs CIR in which the learned judge asserted that income accrues
when it becomes “due and payable”.
The following quotations are from celebrated tax cases on source of income :-
“…. Source means .. not a legal concept but something which the
practical man would regard as the real originating cause of the
income….”.
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Taxation Module
(b) Watermayer CJ in CIR v Lever Bros and Unilever Ltd 1946 AD 441 :-
Directors’ fees - ITC 235 (1932) 6 SATC 262 :- “It is quite clear that the
director’s fees are derived from the fact that the appellant is a director of
the company, and therefore must be assumed to have earned the fees at the
headquarters of the company. It is there only that he can make his voice
heard as a director.”
Interest - “ ….. Provision of credit is the originating cause hence the place
where exercised is the source ….” This was the majority
decision in CIR v Lever Bros and Unilever Ltd 1946, 14
SATC1.
The decision was that there was two activities :- curing and marketing.
Curing was the dominant activity, hence the source was deemed to be
Botswana. However, it appears from ITC 1103 (1967) 29 SATC 35, that it
is possible for the source of income to be found partly in one country and
partly in another. (See Hill textbook for details of this case.)
Gains on Stock Market - CIR v Black 1957 (3) SA 536 (A) 21 SATC 244.
Important factors identified in this case were the employment of capital and
the undertaking of business. It was ruled that the dominant factor was the
carrying on of transactions hence the source was deemed to be London,
where shares were bought and sold …., though under instruction from
South Africa.
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Taxation Module
South Africa, therefore the source is South Africa (not England were the
book was published).
Rental Income - COT v British United Shoe Machinery (SA) (Pty) Ltd
1964 26 SATC 163
Movable property : source is the country where lessor carries out his
business.
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Taxation Module
Individuals
Less : PAYE $
Double taxation relief $
Any applicable tax withheld
in advance $
__
$
__
Payable/(Refund) $
Please take care and internalise the chronology of the above steps and make sure you follow
them exactly. A lot of students have come short because they rewrote the law relating to the
above steps.
Although you are only expected to know the legislation ruling as at 31 January 2010, it makes
goods sense to follow developments that affect taxes which occur during the course of 2010.
Section 8(1)(a) :
Annuities/pension receipts :-
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Definition :-
Characteristics :-
Types :-
Purchased annuity
(I) = (P*N)-A
______
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Taxation Module
Section 8(1)(b) :
Income for services rendered - e.g. salaries, commission, cash in lieu etc.
The first $5 000 or up to a maximum of 1/3 of the first $45 000 of a lump
sum accruing by reason of the termination of employment in terms of a
Government approved scheme is exempt from taxation.
Section 8(1)(c) :
Lump sum receipts or accruals from pension or benefit funds (1st schedule).
Section 8(1)(f) :
Some examples :-
motoring :-
Engine Capacity Deemed monthly
benefit
up to 1 500cc 150
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Taxation Module
NB :- Benefits paid by the State to its employees are exempt (para 4(d) of
3rd schedule).
Section 8(1)(g) :
Timber or growing crops grown for sale, sold as part of land except where
these assets have been inherited or received as a donation.
Section 8(1)(h) :
closing stock
Section 8(i) :
mining recoupments
Section 8(1)(1) :
Recoupments of rent premium where this arises as a result of acquisition of
property formerly leased. Taxpayer can elect to spread taxation of these
recoupments over six years.
Section 8(1)(m) :
grants or subsidies
Section 8(2) :
Where amount accrued differs from amount actually received due to
fluctuations in exchange rates, effect must be given to tax amount actually
received.
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Taxation Module
Lease Premiums
Definition
A premium
Or like consideration
Or consideration in the nature of a premium
Paid for
Notes :
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Taxation Module
(b) On acquisition of ownership the lessee will cease to qualify for any
allowance in the tax year following acquisition.
(e) The characteristics of a premium were laid out in the tax case : CIR v
Butcher Bros (Pty) (1945) 13 SATC 21 as follows :-
(ii) The lessor can claim SIA or wear and tear on the full cost of
the assets purchased for leasing, under both financial and
operating leases. The exception arises where the lessee or
other person has an option to purchase the asset at the end of
the lease; in that case only wear and tear can be claimed.
(Paragraph 2(iii) of 4th schedule).
(iii) The lessee can claim deduction of the lease premiums (made
up of both capital and finance charges). In the case of the
leasing of a passenger motor vehicle, the deduction is
restricted to a maximum of $100 000. (Section 16(1)(k) of
IncomeTax Act).
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Please note that while the vehicles are not restricted in cost for
the lessor under both financial and operating leases, the
restriction in cost (of passenger motor vehicles) do apply to
lessees as provided for in Section 16(1)(k) of the Income Tax
Act.
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Definition
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Notes :
(a) On acquisition of ownership the lessee will cease to qualify for any
allowance in year of assessment following. On cessation of use of
property for purposes of trade or production of income, allowance to
be given only up to date of cessation - i.e. apportion.
Lease improvements
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Question:
Tourism P/L entered into a lease agreement with the Masvingo Municipality effective
from 1st July 2009. The agreement in part stated that the lease was for a piece of land
in Masvingo extending to 5 acres. The lease would commence on 1st July 2009 and
would be for a period of 99 years. The lessee was obliged to erect a hotel building to the
value of not less than $2 000 000. The lessee was also obliged to pay a premium of
$50 000 up front and monthly rentals of $10 000 until the end of the lease.
On the piece of land let there was a municipal hostel which Tourism used as a boarding
house for its benefit until the completion of construction of the hotel, when the hostel
building was to be demolished. Construction of the hotel commenced on 15th July 2009.
In April 2010 when $1 500 000 had been expended on the construction Tourism
approached the Masvingo municipality with a proposal to change the building clause
from $2 000 000 to $5 000 000. The municipality concurred and the hotel was
completed in September 2001 at a total cost of $5 200 000. The hotel opened for
business with effect from 1st October 2010.
Required:
Set out the income tax deductions available to Tourism (Pvt) Ltd for the tax years ended
31st December 2009 and 31st December 2010.
Suggested solution:
Tourism (Pvt)Ltd
Income Tax Deductions for 2009 and 2010 tax years
_____________________________________________________________________
____________________________________________________________________
Notes :
$5 200 000 is accepted by the Commissioner for allowance calculation purposes because
the variation to building clause was entered into before completion of construction.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Section 17 and section 18 of the Income Tax Act outline the basis of taxation of
amounts accruing under hire purchase and under credit sales. Under these
agreements the full amount of sale is receivable in instalments, which may stretch
into years. For tax purposes the full sale price is deemed to accrue on the date of
signing of the sale agreement. This would mean that taxpayers are “taxable” on
amounts not yet received.
In the case of hire purchase sales (section 17) the calculation is made in
accordance with the following formula :
D * (E - F+G)
_____________
In which :
For income tax purposes income from construction contracts is taxable on the
basis of what is due and payable in the tax year, i.e. based on percentage of
completion and progress payments due. Amounts received in advance are held in
trust and would not be taxable. Please refer to the provisions of section
15(2)(cc).
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B. COMPT HONOURS DEGREE 2010
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1.4 EXEMPTIONS
Section 14 as read together with the third schedule outlines receipts and accruals
which are exempt from taxation. Please refer to the schedule and the Students’
Guide to Tax in Zimbabwe book for detailed reading.
- bank interest.
Section 15(2)(a) outlines the general deduction formula. In terms of this section,
expenditure and losses to the extent to which they are incurred for the purposes of
trade or in the production of income will be allowed as a deduction for tax
purposes. Apportionment of expenditure is permissible, where incurred partly for
business purposes, or partly for capital purposes. It is also useful to note that
where the expense incurred is different from the amount actually paid due to the
fluctuations in exchange rates, then the amount actually paid will be allowed as a
deduction. (Section 15(1)).
One of the main tasks of a tax adviser is to analyse client circumstances in order
to take effective steps to minimise the client’s tax burden. This can be achieved
only when the tax adviser is familiar with legislative provisions, particularly
deductions available to taxpayers. The provisions in section 15 are important and
every student should make an attempt to read the provisions.
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The 4th schedule outlines allowable deductions with regard to capital expenditure
incurred for the purposes of trade in the relevant tax year. The allowances
covered by the schedule are as follows:-
Special initial
Wear and tear
Scrapping
Training Investment
Paragraph 1 of the 4th schedule outlines the definitions of assets on which capital
allowances can be granted. It is essential to be familiar with these definitions in
order to correctly determine the asset’s classification for tax purposes.. For
example, a canteen constructed within an industrial stand is defined as an
industrial building, and NOT a commercial building.
Schools/clinics - Farmers/miners
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Where the taxpayer has not made an election to claim S.I.A. on assets used
for business, the Commissioner will automatically grant wear and tear
allowances as follows :-
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- Where S.I.A. has been granted in the first year of use, then
accelerated wear and tear (at 25% on cost) is granted in the
subsequent three years.
1.6.6 Recoupments
Recoupments arise when assets which were being used for business are sold
for proceeds in excess of the income tax value. The formulae for
calculating recoupment are as follows:-
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B. COMPT HONOURS DEGREE 2010
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Recoupments are generally set off against capital allowances for all other
businesses except miners. For miners the recoupment established is first set
off against the unredeemed capital expenditure before calculation of the
year’s redemption allowances.
Section 16 of the Act outlines cases in which no deduction is allowable for tax
purposes. These prohibited deductions included :-
- entertainment expenses
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B. COMPT HONOURS DEGREE 2010
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- insurance premiums on joint life policies and life policies on partner’s lives
with the partnership as beneficiary, are not allowable deductions and are not
added to partners’ individual computation. (By disallowing their deduction in
partnership partners are already being taxed).
The actual taxation of an individual is simply to apply the rates of tax to the taxable
income established, after which the credits applicable to the individual are calculated
and subtracted. An AIDS levy of 3% of the remaining tax after credits is added, after
which P.A.Y.E. is applied in reduction of the tax liability established.
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EXAMPLE
David and Samuel practise as veterinary surgeons in Chinhoyi. Samuel joined the
practice when he qualified in July 2006. David has practised here for seven years. They
submit the following profit and loss account in support of income returns for the tax year
ended 31 December 2010.
For the purposes of the question, the following amounts are stipulated at;
Passenger motor vehicle cost for capital allowances purposes- $10 000
Blind, disabled, elderly persons’ credits - $900 p.a.
Maximum annual deduction for contributions to approved pension fund - $3 600
$ $
1. Partners drawings were Samuel $800 000 and David $900 000.
2. Bad debts recovered include an amount of $6 000 on account of a loan previously
written off as bad and not allowed as a deduction for tax purposes.
3. PUPS Residents’ tax on interest $2 400 withheld. The debentures were in a farming
company.
4. The gross dividend from Delta Corporation Ltd is $12 500 from which $2 500
resident shareholders tax has been deducted at source.
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Taxation Module
97 000
______
$
Samuel 30 000
David 60 000
This represented the cost of lectures including travelling and hotel bills.
7. (a) Fixed Assets in the hands of the partnership at the beginning of the year are
as follows :
Date Original
Description of Asset Acquired Cost
$
______________________ _________ __________
(b) During the year the truck was traded in for a second-hand land cruiser. A
trade in value of $40 000 was given on the truck and the cost of the land
cruiser was $500 000.
(c) A sterilizer (cost $400 purchased in January 2009) was scrapped during the
year 2010, and a new one purchased for $10 000.
9. David and Samuel paid $30 000 and $55 000 respectively to approved retirement
annuity funds.
10. Samuel travels extensively for the practice and provides his own transport. He
rented a car for $9 000 a month for six (6) months from 1 January 2010 and on 1
July 2010 purchased a car for $250 000. His running expenses for six months to
31 December 2010 were $100 000. It has been established that his non-business
travel has at all times been 10% of the total.
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11. Samuel is unmarried but has a disabled child aged 5. In addition to his income
from the partnership, he had the following income :
$
12. David is married with two children, and during the year his medical aid shortfalls
were $6 000.
REQUIRED :
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SUGGESTED SOLUTION
$
Profit per accounts 2 997 600
3 066 500
3 066 500
_________
Capital Allowances
Cost Wear
ITV Add and (Scrap) ITV
Asset Cost 31/12/09 (Disp) tear SIA Recoup 31/12/10
$ $ $ $ $ $ $
______ ____ _______ _______ _______ _____ ______ _______
Office Furniture
& Equipment
2004 additions 15 000 NIL - - - - NIL
Surgery
Equipment
2009 additions 70 000 35 000 (400) 17 400 (1) - (200) (1) 17 400
2010 additions 10 000 - 2 500 - 2 500
Motor
Vehicles
2007 additions 70 000 NIL - - - 40 000 (2) NIL
(3)
2009 additions 500 000 5 000 5 000
_____________________________________________________________________
TOTAL 155 000 35 000 509 600 17 400 7 500 39 800 24 900
_____________________________________________________________________
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1. Sterilizer scrapped
Cost of asset scrapped 400
ITV asset scrapped 200
Proceeds nil
Therefore accelerated
wear and tear @ 25% 17 400
______
2. Truck trade-in
ITV -
Proceeds 40 000
______
Recoup 40 000
______
3. Land cruisers are specifically included in the definition of “passenger motor vehicle”,
and are therefore subject to the $10 000 cost limit.
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Individual Computations
David Samuel
60% 40%
Less : Credits
Disabled child (900)
Medical shortfall 50% x 6 000 (3 000)
_______ _______
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3. TAXATION OF FARMERS
Section 2 :
definition
Section 8(1)(I) :
Section 15(2)(u) :
2nd schedule :
The valuation of farm trading stock is based on Fixed Standard Values (FSVs)
that are set by the Commissioner from time to time.
7th schedule :
Special deductions for farmers, drought induced relief, and restocking allowance.
4th schedule :
Capital allowances.
Section 15(2)(y) :
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Less :
XX
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No. 20 : Chinchilla and crocodile breeders are treated as farmers and are covered
in the 7th schedule.
No. 23 : Farm roads : temporary farm roads are allowable under section 15(2)(a)
while permanent roads are farm improvements on which S.I.A or wear
and tear can be claimed.
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EXAMPLE
Longhorn Ranches (Pvt) Limited was incorporated on the 1st January 2009 to acquire in
the Belingwe district from that date the farm “Cowhaven” together with improvements
thereon, for the sum of $1 810 000. According to the agreement of sale, the terms of
which are acceptable to the Commissioner of Taxes, the purchase price was made up as
follows :
$
Land 970 000
Fencing 101 000
Farm dwelling 200 000 (erected 01/05/2004)
Staff housing 334 000 (2 units of $62 000 each and 1
unit of $210 000 all erected on
01/06/2003)
Plant and equipment 205 000
________
1 810 000
________
During the year ended 31st December 2009 the company expanded and incurred the
following capital expenditure:
REQUIRED :
To calculate the maximum amount of deductions to which the company is entitled for
the year ended 31st December 2009.
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SUGGESTED SOLUTION
Fencing
Purchased -
Erected 600 000 600 000
Staff Housing
Farm dwelling
Staff housing
3 942 500
________
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4. TAXATION OF MINERS
4.1 The computation of taxable income for miners is basically the same as any other
class of taxpayer. The determination of allowances on capital expenditure for
miners are outlined in the 5th schedule.
- Definitions - section 2
- Allowable deductions :-
Section 15(2)(f)(ii) provides for the deduction of expenditure incurred during the
tax year on surveys, boreholes, trenches, pits and other prospecting and
exploratory works undertaken for the purpose of acquiring rights to minerals in
Zimbabwe.
Life of mine
Mixed method
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Under this method this method the taxpayer can make an election to
claim a portion of unredeemed capital expenditure brought forward
at the beginning of the year, by applying the life of the mine method
to it. In addition to that portion, the whole of the capital expenditure
incurred in the current year is allowed in full.
a) With effect from the year of assessment beginning on 1 January 2001 the
computed taxable income or loss for the year from each mine location of a
particular operator must be separately calculated. Thus a loss on
operations in one mine would not be available for set off against taxable
income from another but would be carried forward.
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4.6 Expenditure
The income tax rate for mining companies is 25% effective from 1 January 2010
(was 15%).
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Iron 5 years
Section 9 of the Act :- Income emanating from sale of mining claims can be
spread over four years for taxation purposes if taxpayer makes the election.
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EXAMPLE
Rare Stone (Pvt) Ltd is a nickel mining company, which has been working some claims
in the Bindura area of Zimbabwe. The mine is controlled by three shareholders. The
unredeemed capital expenditure balance on company books as at 1st January 2009 was
$350 000. During the tax year ended 31st December 2009 the company undertook the
following activities:-
$ $
Gross sales revenue of nickel 3 500 000
Shaft extensions and refurbishment 100 000
New mining equipment 500 000
Mine office building renovations 200 000
Administration expenses 900 000
Mercedes sedan bought for managing director 50 000
Construction of mine clinic 600 000
Construction of house for nurse in charge at clinic 120 000
During the year the company undertook some further exploration and registered six new
claims at an average cost of $4 000 each. The company commenced working one of the
claims near Mount Darwin and although this claim was still not producing by 31st
December 2009, the company had incurred $50 000 on it. Due to the boom in the
mining sector the company began to speculate in claims and by the end of the year they
had sold three of the registered claims for a total amount of $260 000.
Some used mining equipment was sold for $30 000 to some indigenous miners. This
equipment had cost $25 000 two years previously.
The estimated life of the nickel mine is said to be 9 years from 1st January 2009.
REQUIRED:
Compute the taxable income of the company for the year ended 31st December 2009,
taking all opportunities in the Income Tax Act to minimise its taxable income for the
year (assume that for 2009 the cost of the clinic and nursing home were allowed in
full)
(Attempt this question before looking at the suggested solution on next page).
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B. COMPT HONOURS DEGREE 2010
Taxation Module
SUGGESTED SOLUTION
$ $
Mineral sales 3 500 000
Administration expenses (900 000)
320 000
248 000
Non-Contiguous Mine
Notes :-
* add 1 cover current year
** speculative therefore taxable at normal rates
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Authority for the levying and collection of capital gains tax is in terms of section 6 of the
Capital Gains Tax Act(Chapter 23:01).
- Capital gains arising from the disposal of immovable property and marketable
securities are taxed at a flat rate of 20%.
- Capital gains arising from the sale of a principal private residence by an individual
who has attained fifty-five years on or before the date of sale are exempt from tax.
- Capital gains arising from the sale of marketable securities are exempt from tax up
to $1,800 if the seller is fifty-five years or over on the date of sale.
- The disposal of marketable securities listed that were acquired before 1 February
2009 is subject to capital gains tax at 5% of the gross capital proceeds.
- The disposal of marketable securities listed on the Zimbabwe Stock Exchange that
were acquired after 1 February 2009 is exempt from capital gains tax but subject to
a capital gains withholding tax of 1% of the gross capital proceeds.
- The disposal of marketable securities that are not listed and were acquired after 1
February 2009 is subject to capital gains tax at 20% (and capital gains withholding
tax of 10%).
- The disposal of immovable property that was acquired before 1 February 2009 is
subject to capital gains tax at 5% of the gross capital proceeds.
- The disposal of immovable property that was acquired after 1 February 2009 is
subject to capital gains tax at 20% of the gross capital proceeds (and capital gains
withholding tax of 15%)..
- The main deductions which are allowed in the determination of a capital gain are
the cost of the asset together with any additions after acquisition and an allowance
(calculated on cost and additions) determined by applying the Consumer Price
Index (CPI) as provided by the Central Statistical Office.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Less
Less
== Capital Amount
Less
== CAPITAL GAIN
If the total computed aggregate gain in a year of assessment is $50 of less no tax is
payable. A computed loss may generally be carried forward against future gains.
(a) Where amount accrued and amount actually received varies due to
exchange rates, effect shall be given to the amount actually received in
Zimbabwe dollars.
(b) Disposal other than by way of sale, Commissioner deems specified asset to
have been sold at market price of such asset.
(d) Sold in execution of court order - deemed sold for price realised.
(e) Maturity or redemption of specified asset - asset deemed sold for maturity
amount or redemption value.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
- any loan to the state, or any company all the shares of which are
owned by the state,
- local authority
- a statutory corporation
(g) Receipts and accruals from sale of specified assets by licensed investor.
(j)
(l) Amounts received by a person on the sale of his or her principal private
residence if such person was, on the date of the sale, of or over the age of
fifty-nine years.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
DEDUCTIONS
Section 11(1) :
Where amount of liability incurred and amount actually paid differ due to exchange rate
variation, then effect shall be made of the amount actually paid in Zimbabwe currency.
Section 11(2)(a) :
Costs of acquisition of specified asset which has been sold, excluding amounts allowable
as deductions for income tax purposes.
Asset acquired otherwise than by way of purchase of inheritance - if acquired prior to 1st
August 1981, taxpayer deemed to have incurred cost equal to market value at time of
acquisition, if acquired after 1st August 1981, cost is the gross capital amount as
established in the hands of person from whom acquired.
Section 11(2)(b) :
NB : In the case of capital amount arising from the sale of shares in a company which
owns immovable property, any expenditure incurred by seller on additions or
alteration to the property shall be deemed to be expenditure incurred on addition
to shares.
Section 11(2)(c) :
An amount determined by applying the Consumer Price Index at the times of sale and
purchase on;
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Section 11(2)(d) :
selling expenses
Section 11(2)(e) :
Section 11(2)(f) :
Section 11(2)(g) :
Section 11(2)(h) :
After above deductions, where profit is $50 (the effective amount is nil and the
paragraph is merely academic) or less, an amount equal to such amount shall be allowed
as a deduction.
Section 11(3) :
Taxpayers shall be allowed to deduct any assessed capital loss brought forward ; but not
those declared insolvent or had their property or estate assigned for the benefit of
creditors.
A company registered under the Companies Act, which converts into a private business
corporation can carry forward its loss ; and vice versa.
Section 11(4) :
A taxpayer shall claim a deduction only under one provision of the Act.
Section 11(5) :
Owners of immovable property who have been taxed on value of improvements in terms
of section 8(1)(e) of the income tax act, shall be deemed to have incurred a cost equal to
such amounts as have been taxed.
Section 11(6) :
Section 12 :
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Any asset damaged or destroyed shall be deemed to have been sold for the amount of
compensation receivable. Where the Commissioner is satisfied that the whole amount
of, or part of proceeds shall be expended within two years on purchase or construction of
a further specified asset, or repair of damaged asset, then such amounts shall not be
deemed proceeds of sale.
Transfer of specified assets between companies under the same control in the
course of group reconstructions, mergers and other similar business operations.
The following elections must be made by the time the returns for assessment are
submitted.
Election available (notwithstanding the terms of the sale) to transfer specified asset at
the amount equal to the deductions established in the hands of the seller. If asset
eventually sold to someone outside the group then recoupment calculated as it the
original seller was selling.
Section16 :
Section 17 :
Transfer of specified asset by individual to company under his control - same election
as above available.
Capital gain relating to amounts not due at year end allowed as a deduction, but to be
added back the following year, when a fresh calculation is then made, if applicable.
Formulae : A*(B-C)
_______
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B. COMPT HONOURS DEGREE 2010
Taxation Module
Where a taxpayer sells a principal private residence and uses the total proceeds to
acquire a new principal private residence, then capital gains tax shall not be chargeable
on such sale. If the amount used is less than the actual proceeds then the capital gain
which relates to the portion not used shall be subject to capital gains tax. When the new
PPR is sold, the capital gain not subjected to tax previously shall be deducted from the
amount mentioned in section 11(2)(a), i.e. from cost.
Where a business property is disposed of and the taxpayer disposing the property
satisfies the Commissioner that the entire proceeds will be utilised to construct or
purchase another business property within two tax years, capital gains tax shall not be
chargeable ; provided that such capital gain will reduce the cost of the new property
when it is eventually sold.
Sale proceeds are liable to capital gains withholding tax at the following rates :
The responsibility for withholding such amount rests primarily with the “depositary”.
Should the depositary fail to withhold the amount, responsibility passes to the agent and
lastly the seller. In certain circumstances, taxpayers may apply for capital gains
withholding tax clearance certificates in order to eliminate their liability. What this
amounts to is the submission of the Capital Gains Tax liability together with the
application form for the capital gains withholding tax clearance certificates.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
6. TAX PLANNING
Tax planning is the process of organising a taxpayer’s affairs in a way that legally
minimises the impact of taxation imposed by the statutes. One should always remember
that tax planning requires an analysis of all taxes, including income tax, capital gains tax
and estate duty. A plan which minimises income tax but increases estate duty is not the
best of plans.
Planning implies arranging of one’s affairs well in advance. Taxpayers often approach
their tax advisors after things have already gone wrong, for example when a tax
investigator has knocked on the door. In such cases accountants, lawyers and tax
consultants can not do much planning but can attempt to minimise damage.
Establishment of tax liabilities is normally based on facts, referenced to legislation
existing at the time. Tax consultants cannot change facts retrospectively and the
Commissioner is bound to implement the law as it existed at the time.
“…. No man in this century is under the smallest obligation, moral or other, …. to
arrange his legal relations to his business…. or property, as to enable the Inland
Revenue to put the largest possible shovel into his stores. The Inland Revenue is
not slow – and quite rightly – to take every advantage which is open to it under
the taxing statutes for the purpose of depleting the taxpayer’s pocket. And, the
taxpayer is, in like manner, entitled to be astute to prevent, as far as he honestly
can, the depletion of his means by the Revenue ….”, so said Lord Clyde in the
English case Ayreshire Pullman Motor Services and D M Ritchie v IRC.
Lord Tomlin in Duke of Westminster v Inland Revenue Commissioners said the
following :-
“Every man is entitled if he can to order his affairs so that the tax attaching under
the appropriate Acts is less than it would otherwise be. If he succeeds in ordering
them so as to secure this result, then, however unappreciative the Commissioners
of Inland Revenues or his fellow taxpayers may be of his ingenuity, he cannot be
compelled to pay an increased tax.”
The above quotations make it clear that avoidance is the legal way of minimising one’s
tax burdens while evasion is illegal. The Acts give the Commissioner authority to undo
any transaction if he is of the opinion that the transaction is abnormal and the purpose
was to avoid paying tax. He can for instance invoke what he deems to be the fair market
price in any transaction if he is persuaded to do so by the facts of the case.
Please refer to the avoidance provisions in section 98 of the Act. (Refer to some
questions on next page).
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B. COMPT HONOURS DEGREE 2010
Taxation Module
(1) The managing director of a large company comes to you and asks whether it is advisable
to form a consultancy company for purposes of limiting his personal tax. He earns well
in excess of $15 000 per year, and he says that a friend he met at the golf course advised
him that he should form a consultancy company to which his salary would be paid
without P.A.Y.E. being deducted.
(2) A owns the majority of shares in a company which owns the house he is residing in. He
wants to know whether he can invoke the roll over provisions with regard to capital
gains tax, if the company sold the house and constructed another one in a more affluent
suburb.
(3) An independent contractor whose income is on the rise would like to know his position
with regard to pay as you earn, or any other tax obligation.
(4) A taxpayer has in the past operated the business of a general dealer at a growth point.
He was operating from a building that he owns on which he had been claiming capital
allowances. He has now formed a company in which the shareholding is spread equally
between himself, his wife and his two children. The market value of the building is
several million although it had originally cost about $50 000 to construct, ten years
previously.
REQUIRED: What are the tax consequences of transferring the building to the
company ?
(5) Mrs D is a widow who has been operating a furniture shop on a cash basis in Harare for
many years. Due to the increases in supplier prices she has now decided to start selling
the furniture on credit terms extending over two to three years. She has now made sales
amounting to $10 000 and she estimates her profit to be more than $5 000.
She vaguely remembers that she is taxable on all profit made in any year. She wants to
know whether or not there is tax relief available since she will only receive the bulk of
her income in future tax years.
REQUIRED: Advise
(6) The managing director of the local branch of an international group of companies
advises that the local branch has been paying a large amount of management fees (40%
of profits) to the overseas head office for the past five years. On Friday last week he had
received a phone call from the Investigations unit of the ZIMRA for an appointment to
discuss the company’s tax affairs. He tells you that the contact with the overseas head
office has over the years been on a visit to the country twice a year by the Group
Finance Director. The visits are normally of a week’s duration. The managing director
is uneasy with the visit of the tax officials and he wants you to be present in the meeting.
REQUIRED: Advise the possible tax implications and suggest any strategy to deal
with the situation.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
(1) The major tax implications of forming a consultancy company (or operating as an
independent contractor) are as follows :
(i) Business income is subjected to tax at a flat rate of 30% (plus 3% AIDS levy) on
assessment. Tax, based on estimates if necessary, will however still need to be
paid on quarterly payment dates, during the year following the year of assessment,
as follows :
(ii) You will be required to register for Valued Added Tax should your turnover be
within the registration threshold and the services are taxable.
(iii) Business expenses are claimable provided they pass the test as laid out in section
15(2)(a), the general deduction formula.
Although the tax situation of the consultancy company / independent contractor may be
advantageous, as opposed to that of an employee, before the choice is made section 98,
which is an anti-avoidance section, must be taken into account. This section may be
invoked by the Commissioner where it is evident that the only reason for making the
choice is solely and mainly because there is a lower tax regime pertaining, and that, in
reality, an employer/employee relationship still exists. Penalties, and interest, may
therefore arise.
In order to avoid the invocation of s98, a written contract should be concluded between
the company / independent contractor and the “customer” (your previous employer).
This contract must be normal, and be in line with prevailing practice, and should steer
clear of any wording which may indicate that you are still an employee of the company.
(2) The roll over provisions with regard to capital gains tax can only be elected in the
following scenarios :
(i) Where an individual sells his sole or main residence i.e. his principal private
residence, and purchases or constructs a replacement residence before the end of
the next assessment year ;
(ii) Where a taxpayer (including a company) sells immovable property used for the
purposes of his trade, and expenditure on a replacement property is incurred
within the time limit as in (i).
In this case, the taxpayer is a company, so (i) does not apply, and, as the house is not
used for the purposes of the company’s trade, (ii) will also not apply. The roll over
provisions can therefore not be invoked.
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B. COMPT HONOURS DEGREE 2010
Taxation Module
(3) An independent contractor is not an “employee”, as defined, for the purposes of the
13th schedule which deals with Employee’s tax (PAYE). He is therefore not liable for
PAYE, but is obliged to pay tax, based on his estimated annual taxable income, on the
quarterly payment dates (see 1 above).
(4) The relevant provision, in this case, is section 17 of the Capital Gains Tax Act. Where an
individual transfers any immovable property to a company controlled by him, through
holding a majority of its shares or otherwise, the parties may elect, under this section, to
transfer the property at a value, for tax purposes, the effect of which is that no capital
gains tax arises. Full liability is swept up on any resale to a purchaser other than a
company under the same control.
In this case, although the shareholding of the company will be spread equally between
the taxpayer, his wife and his 2 children i.e he will hold only 25% of the shares (not the
majority), it may still be shown that the taxpayer will have control of the company (by
way of voting powers etc). The section does state that the taxpayer may control the
company by holding the majority of the shares, or otherwise.
In addition, this section can only be invoked where the individual used the property for
the purposes of his trade, and where the company will continue to use it for the purposes
of its trade. In this case, these conditions are fulfilled.
(5) Sections 17 and 18 of the Income Tax Act are relevant under Mrs D’s scenario. In the
case of instalment-credit sales (where transfer of ownership is immediate but payment is
by instalments), the whole of the amount payable is deemed to have accrued to the
vendor at the date on which the agreement was entered into. To prevent hardship to the
vendor, however, an allowance, in respect of payments not yet received, may be
deducted, in addition to the normal deduction for bad and doubtful debts.
The allowance is determined by the Commissioner. In the case of movable property the
method of calculation is set out in departmental practice 33. (See example in prescribed
textbook Students’ Guide to Tax in Zimbabwe 2006) The allowance granted must be
brought in as income in the following year and, at that year end, a new allowance
calculated.
(6) When dealing with investigating tax officials, always provide them with the information
and documents that they request. Do not be aggressive.
57