Chapter 2 (Paper 3.4 - Advanced Taxation)

CHAPTER 2 PERSONAL BUSINESS TAXATION
LEAR ! " #B$E%T!&E'( After studying this chapter you should be able to: Understand the Badges of trade Compute Tax Adjusted profits for ole Traders and partnerships Compute capital allo!ances Understand Basis "eriods Understand the operation of Turno#er Tax
2.1 AN EVALUATION OF THE BADGES OF TRADE

The Definition of Trade Income Tax is charged on the Annual Profits or gains arising or accruing to any person residing in the Republic of Zambia from any trade, profession or vocation. A trade is defined as very manufacture, adventure or concern in the nature of trade. This is given by the !" Tax legislation at #ection $%& '() I*TA (+$$. A trade, is defined in the legislation as a trade,, -hich is a circular definition and does not ta.e us a great deal further. Therefore, the interpretation of -hat is meant by the term trade, has been left largely to the courts. The courts have developed a number of tests to determine -hether somebody is trading. These tests are .no-n as The Badges of Trade.
rofit !ee"in# $oti%e&

/hen a person enters into a transaction, -e need to identify -hether there is a profit see.ing motive. it is not the existence of a profit that is important, it is the motive to earn one. 0o-ever, the ZRA -ill really be interested in this issue if a profit has actually been earned, because then they have something to tax. A Taxpayer may argue that they are trading in order to utili1e a loss to reduce their Tax bill. The taxpayer must ho-ever, demonstrate the motive rather than the existence of profit to establish that a trade is being carried on. S'$$ar(& Intention to trade clearly constitutes trading. Intention to make a profit may not necessarily be so.
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L.3 Advanced Taxation Amendment Act 2006/07
In IR) V! Reinho*d +1,-./ the Tax2 payer bought four houses admittedly for resale. 0e -as held not to be trading. *onversely, the intention not to ma.e a profit -ill not necessarily mean that a trade is not being carried on. In Gro%e V! 01)A +1,2./ the canteen of 34*A made a surplus. The 5rgani1ation -as a non 6 commercial one. It -as held that the profits -ere trading profits. The !'34e5t $atter of rea*i6ation If the assets are normally held as trading stoc., the presumption that the trade is ta.ing place is higher. If the assets that have been sold are normally not held as trading stoc. it is unli.ely that the transaction may be interpreted as trading. In R't*ed#e V! IR) +1,2,/ the Tax2 payer, -hilst in 7ermany on business, purchased one and a 8uarter million toilet rolls. #hortly after his return to ngland he sold them ma.ing a profit of sterling Pounds Ten thousand. 0e -as held to be trading. In 1artin V! Lo7r( +1,28/ an Agricultural machinery merchant purchased from the 7overnment its entire stoc. of aircraft linen amounting to almost 9: million yards. 0e had hoped to sell the linen to manufactures but instead -as forced to sell it through an extensive retail operation direct to the public. 0e made a profit of almost #terling Pound t-o million. 0e -as held to be trading. The *en#th of 9eriod of o7ner!hi9 If a person sells an Asset that he has held for a long period of time it -ill be 8uite difficult to prove that the asset had been held as trading stoc.. This is because assets held for long periods of time are normally investments. In :i!do$ V! )ha$3er*ain +1,;,/ the tax2 payer had, -ith borro-ed money, purchased silver bullion as a hedge against possible devaluation. After about a year he sold it ma.ing a profit, after expenses, of approximately forty eight thousand sterling pounds. 0e -as held to be trading. 0arman ;.; said< <'ote& =This -as a transaction entered into on short term basis for purpose of ma.ing a profit> and if that is not an adventure in the nature of trade, I do not really .no-hat it is?
The fre='en5( of !i$i*ar Tran!a5tion! The more often that a tax2 payer has entered into a particular transaction, the greater the presumption of trading. In the case >. Bo*!on ? Son! Ltd V! Farre** +1,-.), 0arman ; said< =A deal done once is probably not trading. @one three or four times it usually is?
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In i5"ford V! <'ir"e +1,28), the Taxpayer had entered into four transactions each resulting in a profit. 0e -as held to be trading. In his Audgment Ro-latt ; remar.ed< )*ote =Bo- of course it is very -ell .no-n that one transaction of buying and selling a thing does not ma.e a man a trader, but if that is repeated and becomes systematic then he becomes a trader and the profits of the transaction, not taxable so long as they remain isolated, become taxable as item in trade as a -hole, setting losses against profits, of course and combining them all into one trade?.
S'99*e$entar( :or" If an asset is ac8uired -hen it is in a poor state and supplementary -or. is carried out to improve it, then such an asset -hen sold -ill give rise to a trading profit. In )a9e Brand( S(ndi5ate V! IR) +1,21/@ three individuals in the -ine trade bought (C,CCC gallons of #outh African Drandy. This -as blended, bottled and sold to over (CC separate buyers over a period of about ($ months. 0eld to be trading. Per Ro-latt. ;. They had =>bought it -ith a vie- to transport it, -ith a vie- to modify its character by s.illful manipulation, by blending -ith a vie- to alter>.? In IR) V! Li%in#!tone +1,82/@ a syndicate purchased a cargo vessel -ith a vie- to converting it into a steam drifter and selling it at a profit. They had never previously done this, but they -ere held to be tradingE
)ir5'$!tan5e! #i%in# ri!e to the Rea*i6ation

If a taxpayer sells an asset in order to raise money to help solve some financial problems it -ill be difficult to prove that he is carrying on a trade. Incidentally, there have been fe- cases on this point. In a#e V! o#!on +1,-A/ the taxpayer built a house for himself and sold it six months later after completion. 0e then built another one but had to sell it -hen his employment moved to another part of the *ountry. 0e -as held to be trading by the *ommissioners of Taxes. !pAohn .; felt unable to reverse the finding of the commissioners -hilst doubting -hether he -ould have reached that conclusion himself. In addition to the !iB 3ad#e! of trade there additional factors -hich have to be ta.en into account. These are< TaB9a(erC! other 5ir5'$!tan5e!<
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If other circumstances of a taxpayer indicate the existence of a trade then even the current transaction is li.ely to be interpreted as an indication of the existence of a trade. The :a( in 7hi5h the a!!et 7a! a5='ired< If the asset -as ac8uired by inheritance or by -ay of gift the transaction may not be considered to be a trading transaction. 1ethod of Finan5e< If the asset sold -as ac8uired by use of borro-ed funds the presumption that the asset -as held as trading stoc. is high. The presumption is even greater if some interest -as paid on the amount borro-ed.
EDA1 FO)US
The $uestion of !hether a trade is being carried on or not% often in the minds of the &e#enue Authority% !ill depend on the results of the substanti#e transactions. In#estments by an Indi#idual !ere not held to be carrying on of a trade% thus denying him loss relief against income.
2.2 )O1 UTATION OF TADABLE TRADING ROFITS The ZRA -ill normally accept profits -hich are determined in accordance -ith the accounting principles provided that there is no conflict bet-een accounting principles and tax legislation. 0o-ever, there is normally a conflict and the accounting profits re8uire several adAustments to be made to them in order to determine the taxable profits. #ome xpenses that are charged in the Accounts are not recogni1ed as expenses for tax purposes. /e have so far recogni1ed such expenses as +isa,,o-a.,e Ex/endit*re. #imilarly some Income that is usually credited to the profits is not taxed under Tax rules.
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The taBa3*e rofit i! 5o$9'ted a! fo**o7!& 1S. EAUNDA 1ULENGA

)o$9'tation of TaBa3*e Tradin# rofit for the 5har#e (ear 222;F 2228
Bet profit as per Accounts Add& Di!a**o7ed EB9endit're< @epreciation Tax Penalty Proprietor,s /ages Private Telephones Le!!& EB9endit're not 5har#ed in the ? L B't 7hi5h i! TaB A**o7a3*e in the A5t& *apital Allo-ances In5o$e )redited in the ? L 3't not TaBa3*e< Profit on Asset disposal Dan. Interest 'Taxed #eparately) AdAusted Dusiness Profit
EC222 F F F F F 22222 F
'F) 'F) 'F) 2222222222 D GGGGG
Note& This computation is usually the first to be made. It is then carried for-ard into the Personal Income Tax *omputation as a -or.ing under arned Income. The list under disallo-able expenditure is not exhaustive. 5ther items that might be included are< Hines for illegal acts, @onations to non 6approved charities, loans to employees, bad debts incurred before incorporation, costs of tax appeals, etc. Allo-able expenditure may include< 7ross -ages, Redundancy payments, compensation for loss of office, Bormal business Iosses and BAP#A *ontributions.
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2.. )O1 UTATION OF )A ITAL ALLO:AN)ES !nder #ection &+ of the Income Tax Act, capital expenditure is not allo-ed as a deduction for tax purposes. 0o-ever, under the fifth and sixth schedules of the same Act, relief is given for certain types of capital expenditure by granting *apital Allo-ances. These include buildings, implements, machinery, plant, etc. )a9ita* EB9endit're #uch expenditure brings into existence an =Asset or Advantage? for the enduring benefit of the trade. =Asset or Advantage? can be Intangible, li.e 7ood-ill or the exclusive right to use a trade 2 mar. or symbol. .g. the *apital expenditure on ac8uiring the 4aster2 *ard symbol in :a*"er V! >oint )redit )ard )o$9an( Ltd in 1,G2. The capital allo-ances system deals separately -ith different types of expenditure, -ith different rules both in terms of identifying -hich items 8ualify for capital allo-ances and in terms of the rates of capital allo-ances available. /here a person carrying on a trade incurs capital expenditure on the provision of machinery or plant for the purposes of the trade, he may be allo-ed to claim capital allo-ances. Dut Audging from reported tax cases, the meaning of 01ac2iner3 seems to cause fe- problems, but considerable difficulty has been experienced in determining -hether or not expenditure has been incurred on the provision of 04,ant. I1 LE1ENTS@ 1A)HINER0 AND LANT The starting point for any consideration of the meaning of Plant, is of course supposed to be the available statutory legislation. Dut going through the Income Tax Act reveals that #ection & of the Income Tax Act gives no precise definition of implements, 4achinery and Plant. The -ords must therefore be given their 5rdinary meaning as per the Rules of constructing the Taxing Acts. The phrase Implements, 4achinery and Plant could be said to include all moveable and fixed items of e8uipment including< lectrical devices such as F2Ray and Radar 8uipment @es.s and chairs *omputers 4oveable partitions #tationary Plant 2 4etal Tan.s, *ontainers etc. 4echanical Transport 6 Rail-ay, #team, Petrol and lectric motor vehicles 4otor Po-er and ngines
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Pullies and for. lift truc.s Actual running 4achinery etc. Although there is no general #tatutory @efinition of Plant and 4achinery, there is a great Jolume of *ase la- around this issue. In a recent case of Ben!on V! 0ard Ar$ )*'3 Ltd@ -. T), Ducley I. ; said< )5#TE( 'The tatutes ha#e not contained a definition of the meaning of "lant. Conse$uently the $uestion is !hat does the !ord mean( And ho! does it apply to the particular circumstances of the case( That is a case of )a! * being one of interpretation% but ne#er* the* less% it is a jury $uestion in the sense that the !ord '"lant+ is not a !ord of Art% it must be interpreted according to its ordinary meaning as a !ord in the ,nglish language in the context in !hich it has been construed- that is to say% the court of construction must Interpret it as a man !ho speaks ,nglish and understands ,nglish accurately ...+ In many !" Tax cases, including the one above, the courts have approved an ($$K description of Plant by Iindley I. ; in the *ase of 0ar$o'th V! Fran5e. In this case the court held that a horse used by a tradesman in his business -as part of his plant. And in so holding, Iord ;ustice Iindley said< )5#TE( 'There is no definition of plant in the Act /the ,mployers0 liability Act 12234: but% In its ordinary sense% it includes !hate#er apparatus is used by a business man for carr3ing on 2is .*siness 5 not his stock in trade% !hich he buys or makes for sale% but all goods and chattels% fixed or mo#eable% li#e or dead% !hich he keeps for permanent employment in his business+. Although the 3armouth case -as not a tax case, it has al-ays been assumed to be e8ually applicable to the tax legislation. The case ma.es it clear that things such as horses may be plant for tax purposes even though they -ould not be so considered by a layman. 0o-ever, the follo-ing are examples of items of capital expenditure, -hich the courts have decided do not 8ualify for capital allo-ances< @isplay or bac.ground lighting in a retail store 6 %o,e Bros &s 42i,i/s6 7892 6 regarded as the setting in -hich the business -as conducted rather than something used in carrying on the trade. The canopy of a petrol station -as also regarded as setting and did not 8ualify in the case of +ixon &s :itc2 "arages ,imited in 787;. Hloor and -all tiles and dLcor, shop front 6 <im/3 !nternationa, and 4i==a ,and &s <ar,and6 7898 6 again regarded as setting and part of
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the fabric of the building. Perversely, the lighting -as allo-ed as it -as regarded as necessary to create the re8uired ambience, for the fast food business. The di!tin5tion 3et7een *ant and Settin#& In practice most disputes bet-een Tax authorities and the taxpayers seem to arise -here the choice is bet-een the expenditure being on Plant or on a structure -hich is merely a setting -ithin -hich the business is carried on -hich -ould 8ualify for, at most, Industrial Duildings allo-ance. In coining this distinction, -e -ill use some of the recent court cases -hich set out to ma.e this distinction. In the cases -e are going to use belo-, you must observe that the courts have used t-o tests to determine -hether an obAect 8ualifies as Plant or not. These are< The f'n5tion or 3'!ine!! '!e te!t& H that is to say does the obAect fulfill the function of plant in the businessM If so, it can 8ualify for capital allo-ances 6 even if it is a building or structure. The 9re$i!e! te!t that is to say is the obAect part of the premisesM If so, capital allo-ances are not due, no matter -hat the function is 6 unless the premises themselves are plant. Iet us no- have a critical loo. at some of the decided court cases bordering on the above t-o tests. I must confess that some of these cases are really funny and interesting. )IR Ver!'! Bar5*a(@ )'r*e? )o Ltd A- T) 221 )a!e oint :hether a dr( do5" i! *ant. 2222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 A shipping company built a dry doc.. This involved excavating the site, lining the doc. -ith concrete and installing gates, pumping machinery, valves etc. The company argued that the -hole thing -as a single entity performing the function of a large hydraulic lift2 cum2vice. They claimed capital allo-ances on the -hole of the expenditure including the cost of excavating and lining the site. The Revenue,s case -as that each item had to be considered separately. The revenue conceded that the pumping machinery 8ualified for capital allo-ances but argued that the doc. itself -as a structure and thus the setting in -hich the trade -as carried on. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222
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R'*in#< The -hole of the cost 8ualified for capital allo-ances. The dry doc. -as not merely the setting in -hich the trade -as carried on. It played an essential part in getting a ship into the doc., holding it securely and returning it after-ards to the -ater. Although the doc. -as a structure it performed the function of plant in the company,s trade. 5ne Audge said and I 8uote< )5#TE( 6..It seems to me that e#ery part of this dry dock plays an essential part in getting large #essels into position !here !ork on the outside of the hull can begin% and that it is !rong to regard either the concrete or any other part of the dock as a mere setting or part of the premises in !hich this operation takes place. The !hole dock is% I think% the means by !hich% or plant !ith !hich% the operation is performed.+ The test referred to in the Darclay, *urle N *o case is of course supposed to be the function or business use test. ven a building or structure can 8ualify as Plant if it fulfils the function of plant in the trade. There -as no doubt that the dry doc. -as a structure but it fulfilled the function of plant and therefore capital allo-ances -ere due and claimable. TaB *annin# oint& Defore embar.ing on any maAor capital expenditure, advice should be sought on -hether capital allo-ances -ill be available. An alternative to buying an item of e8uipment on -hich capital allo-ances may not be available -ould be to lease it. Apart from the obvious cash flo- advantages 6 not having to pay the full amount no- 6 the annual leasing charges -ill normally be deducted in full in arriving at the taxable profit. The topic on leasing is covered in ade8uate detail in a later chapter. )oo"e %er!'! Bea5h Station )ara%an! Ltd A, T) -1A )a!e oint S7i$$in# 9oo* a! *ant 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 The taxpayer company o-ned a caravan par.. It provided various amusements including s-imming and paddling pools. *apital allo-ances -ere claimed on the -hole of the costs of building the pools including excavation and terracing. The Revenue accepted that the heating and pumping e8uipment 8ualified but argued that the pools themselves -ere part of the setting in -hich the business -as carried on. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2
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R'*in#& The Audge said that the pools -ere part of the apparatus -ith -hich the company carried on its business. They -ere not merely -here it,s at,. They fulfilled the function of providing safe and pleasurable buoyancy,. Thus the company got its capital allo-ances. This does not mean that any trader can build a s-imming pool and claim capital allo-ances on it. It all depends on the nature of the trade. In Deach #tation *aravans Iimited the trade -as providing leisure services and the s-imming pool -as part of the plant -ith -hich the trade -as carried on. Ben!on %er!'! 0ard Ar$ )*'3 Ltd -. T) ;8 )a!e 9oint F*oatin# re!ta'rant /e revisit this case -hich -e used earlier on. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 A company bought an old ferry boat and converted it into a floating restaurant. They claimed capital allo-ances on the grounds that it -as plant. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 4ay be before -e analy1e this case thin. of -hat your decision might have been. /ould you have accepted the claimM And -hat reasons -ould you have advanced for your particular decisionM R'*in#& The claim -as thro-n out. The court decided and held that the boat -as the place or settling in -hich the trade -as carried on. The Audge commented on the difference bet-een a structure -hich could be regarded as plant and one li.e this one -hich couldn,t. 0ere is -hat he said< )5#TE( 'The distinction% I think% is that in the one case the structure is something by means of !hich the business acti#ities are in part carried on- in the other case the structure plays no part in the carrying on of the acti#ities but is merely the place !ithin !hich they are carried on. o in the case . of a subject matter !hich is a building or some other kind of structure% regard must be paid to the !ay in !hich it is used to disco#er !hether it can or cannot be properly described as plant.+ The ferry boat -as the setting -ithin -hich the company carried on its business. It played no further part in the operations of the trade. It -as no different in principle from restaurant premises on dry land.
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TUTORIAL NOTE& 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 This case is undoubtedly a good illustration of ho- critical the nature of trade is in deciding -hether an obAect is plant or not. If the company had been in the business of operating a ferry service it -ould no doubt have got its capital allo-ances. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2
2.2, 2 -th S5hed'*e art II Ba!i5 Detai*!<
:ear and Tear A**o7an5e< Para.(C '() 6 /here a person has used any Implements, 4achinery or Plant belonging to him for the purposes of his Dusiness a deduction .no-n as a /ear and Tear allo-ance at the rate of 2- I per annum shall be allo-ed in ascertaining the profits of the business for each charge year. Hor the purposes of the second #chedule, the /ord Dusiness is as contained in #ection & but including em/,o3ment and t2e ,etting of /ro/ert3. The pooling basis for computing /ear and Tear allo-ance -as abolished as from (++(O+&. The straight2line basis for computing -ear and tear allo-ance -as introduced and is still in force. Para. '$) 6 Provides that /ear and Tear Allo-ances are not to be given on Implements re8uiring fre8uent replacement e.g. 0and tools. The cost of any additional implements is capital expenditure and cannot be allo-ed as a deduction in the Tax *omputation. Hor this reason, -hen a claim is made for the cost of replacing Implements during the year, the ZRA may find it necessary to verify that extra implements have not been included in the so called Replacements. Implements, machinery or plant ac8uired under a 0ire purchase agreement are regarded as the Property of the purchaser for the purposes of /ear and Tear allo-ance2 Para. (C'&). The /ear and Tear Allo-ance for any Implement, 4achinery, or Plant exclusively used in Harming, 4anufacturing or Tourism is given at the accelerated rate of :C P Per annum6 Para.(C ':).
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The /ear and Tear Allo-ance on the *ost of any Be- Plant or 4achinery ac8uired and used by any #oft @rin.s 4anufacturer in a Rural area is calculated on a #traight line Dasis at 22 I per annum on cost 6 Para.(C 'Q). )a9ita* Re5o%erie! fro$ I$9*e$ent!@ 1a5hiner( and *ant. A recovery from *apital expenditure on Implements, 4achinery or Plant is deemed to have ta.en place -hen the Implements, 4achinery or Plant< Permanently cease to be used for the purposes of a businessR or *ease to belong to the person carrying on a business. The amount of the recovery from *apital expenditure is the amount -hich the Implements, 4achinery or Plant -ould have reali1ed in the 5pen 4ar.et at the time the event giving rise to the Recovery occurred. Hor assets bought on hire purchase, capital allo-ances are claimed on the cash price, -hile the interest or fiancL charges are an allo-able expense against trading profits. A :or"ed EBa$9*e& H )a9ita* a**o7an5e! on A!!et! 3o'#ht on hire 9'r5ha!e& DOR)AS 1UTITI LI1ITED
@orcas 4utiti Itd, a *ompany Incorporated in the Republic bought a 4achine for ":, :CC,CCC from @ade Itd on 0ire Purchase. The terms and conditions of the 0ire Purchase included the follo-ing< @orcas 4utiti Itd -as to ma.e a deposit of "(, :CC,CCC and 9 Annual Instalment Payments of "(, CCC,CCC on %C ;une each year. The rate of interest chargeable is (C P p.a. Re='ired& *ompute Allo-ances to be claimed by @orcas 4utiti Itd.
An!7er& Dor5a! 1'titi Li$ited& @orcas 4utiti Iimited has ac8uired a 4achine. This falls -ithin the applied definition of Implements, 4achinery or Plant for the purposes of computing /ear and Tear allo-ance. The *apital *ost of the 4achine on -hich the /ear and Tear Allo-ance can be given is the *ash Price of ":.: million. The 0ire element, fre8uently described
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-rongly as Interest is not available for /ear and Tear Allo-ance but falls to be allo-ed as a Revenue *harge in the Profit and Ioss Account. Therefore<
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*ost Price '*ash Price) / N T &:P on *ost '3r.() /ritten @o-n Jalue / N T &: P on cost '3r.&) /@J
E :,:CC,CCC '(,%K:,CCC) 2222222222222 9,(&:,CCC '(,%K:,CCC) 222222222222222 2@8-2@222 GGGGGGGGG
TUTORIAL NOTE& The Interest *hargeable at the Rate of (C P Per Annum is allo-ed as a @eduction for Tax Purposes and does not come in the /ear and Tear Allo-ance computation.
)O11ER)IAL VEHI)LES
Para.(% '%) defines a *ommercial Jehicle as 4eaning< 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 A road Jehicle of a type not commonly used as a private vehicle and unsuitable to be used as such but includes all types of road vehicles used solely for 0ire or *arriage of the public for re-ard. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 All other vehicles should be regarded as non2commercial. This in particular includes< private cars, station -agons, mini2buses, motor caravans etc but excludes Jans, Pic.2up Truc.s, Iorries, Duses and other Jehicles of similar type. The /ear and Tear Allo-ance for *ommercial Jehicles is given at the rate of &: P Per Annum, -hile Bon2*ommercial Jehicles receive a &C P p.a /ear and Tear Allo-ance.
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)HALI EALU1BA
EBa$9*e& *hali "alumba #tarted in business on ( April &CCQ and prepares Accounts to %( 4arch each year. #he ac8uired the follo-ing items of Plant for business use. E (.C9.CQ #pinning 4achine Q,C:C,CCC (.C:.CQ Iathing 4achine 9,CCC,CCC (.(&.CQ Private *ar :,K:C,CCC Re='ired& #ho- the *apital Allo-ances *omputation for the *harge years affected. An!7er& )o$9'tation of )a9ita* a**o7an5e!& S9innin# Lathin# ri%ate Tota* 1a5hine +2-I/ 1a5hine +2-I/ )ar +22I/ *ost / N T &:P %(.C%.CK /NT %(.C%.CK E Q,C:C,CCC '(,:(&,CCC) 22222222222222 9,:%$,CCC GGGGGGGG 2 E 9,CCC,CCC '(,CCC,CCC) 2222222222222 %,CCC,CCC GGGGGGGG 2 E E :,K:C,CCC 2 2 :(&,CCC 2222222222222 2 2222222222222 :,K:C,CCC '(,(:C,CCC) (,(:C,CCC 22222222222222 22222222222222 A@;22@222 ;;2@222 GGGGGGGGG GGGGGGGG
S Private *ar is a non2commercial vehicle -ritten do-n at the rate of &CP p.a on *ost as per Part J of the :th #chedule to the Income Tax Act. Note& *hali "alumba -ill use the "%, QQ&,CCC to reduce her Taxable trading Profits for the *harge year &CC9 O C: to arrive at AdAusted Profit for Tax purposes.
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Va*'ation in eB5e9tiona* 5ir5'$!tan5e! Para.(% provides that in the calculation of any allo-ance, the 5riginal *ost of any Implement, 4achinery or Plant that has been< !sed outside the Republic by a person, and brought by him to the Republic for the purposes of his DusinessR !sed by him for a purpose other than the purpose of his business, and is then used for the purposes of his businessR or Ac8uired by him for no valuable consideration Is according to the *ommissioner 67eneral,s determination. The Botional -rite off is made of the /ear N Tear allo-ances -hich -ould have been due had it been used in a business. In Practice this -ill be done in the year of first business use and the net cost after Botional /ear N Tear -ill ran. for /ear N Tear Allo-ances on #traight Iine Dasis.
1U1BA )HA1F0A
EBa$9*e& 4umba *hamfya bought a #hafting 4achine locally for "K$(, ::C,CCC on &C 4ay (++9. 4ugabe *onstructions in Zimbab-e hired this 4achine until %(.C%.+K, -hen it -as brought bac. to Zambia. 4umba *hamfya immediately conceived the idea of setting up a construction business and his dream finally too. off on (.C:.+K, and he started using the #hafting 4achine from that date. Re='ired& *ompute the *apital Allo-ances.
ANS:ER 1U1BA )HA1F0A 4umba *hamfya bought the 4achine in (++9 but only engaged it in business in (++K. In 7eneral ZRA,s approach -ould be to value the 4achine at (.C:.+K, the time of first business use. Dut this is not -hat is usually done in Practice. In Practice the #hafting 4achine -ould be -ritten do-n notionally by &: P p.a for the years it -as not in use, i.e., for the years +9O+:, +:O+Q, and +QO+K. @uring these years the 4achine -as being used in Zimbab-e.
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Notiona* :ear ? Tear A**o7an5e< Botional -rite off is made of the /ear N Tear allo-ances -hich -ould have been due had the 4achine been used in business, but are not deductible -hen computing taxable profits and any resulting balancing charge is restricted to the actual allo-ances given. Therefore< *ost / N T 'Botional) &:P /@J %(.C%.+: / N T 'Botional) &:P /@J %(.C%.+Q / N T 'Botional) &:P /@J %(.C%.+K EC222 K$(,::C '(+:,%$$) 22222222222 :$Q,(Q& '(+:,%$$) 22222222222 %+C,KK9 '(+:,%$$) 222222222222 1,-@.G;S GGGGGGG
S @oes not add up to "(+:, %$$,CCC due to rounding off. The Botional -ritten do-n value as at %(.C%.+K -ill be the net cost '"(+:, %$$,CCC) for *apital allo-ances purposes. 2... DIVIDED USE Para.(& of Part II of the Hifth #chedule to the Income Tax Act provides for the Proportionate reduction of -ear and tear allo-ance on Implements, 4achinery or Plant, for non 6business use. The type of Asset, -hich is most often used privately, is the 4otor *ar. ETER )HOLA
EBa$9*e< Peter *hola bought a 4otor *ar for "&: million on (.C9.+$ and used it for both business and private purposes. 0e later sold the car on C(.C%.C( for only "(Q million. The proportion for private use is estimated at %CP. *ompute the *apital Allo-ances.
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ANS:ER< ETER )HOLA< Peter *hola -ill claim *apital allo-ances for the *harge years beginning %(.C%.++, %(.C%.CC and %(.C%.C( as follo-s< )o!t E &:,CCC,CCC ':,CCC,CCC) 2222222222222 &C,CCC,CCC ':,CCC,CCC) 22222222222222 (:,CCC,CCC (Q,CCC,CCC 2222222222222 +1@222@222/ GGGGGGGG ri%ate U!e Net Ad4'!t$entH .2I A**o7ed. E E 2 2 (,:CC,CCC %,:CC,CCC 222222222222 222222222222 2 2 (,:CC,CCC %,:CC,CCC 2222222222222 222222222222 2 2 2 2 .22@222 GGGGGGG 822@222J GGGGGG
/ N T &CP %(.C%.++ / N T &CP %(.C%.CC #ale Proceeds Dalancing *harge
The balancing charge arises -hen the @isposal Proceeds exceeds the /@J of the Asset at the time of @isposal. /here the @isposal Proceeds are less than the /@J, then a balancing allo-ance arises. In this case, the balancing charge of "KCC, CCC should be included in the Tax *omputation. The rationale behind this is that an Asset has been sold at a profit and that profit is a taxable Income. This is provided for in Para.: '()'b) of the Hirst #chedule, -hich stipulates that<
)5#TE( 'Income of a person Includes any amount paid by !hich reco#eries from capital expenditure exceed 5 in the case of Implements% 7achinery or "lant% such residue of the expenditure ranking for Capital allo!ances incurred in respect of the Implement% 7achinery or "lant as remains after deduction of any !ear and tear or other Capital allo!ances or similar deduction !hether allo!ed under the Income Tax Act or under any "ro#isions of the "re#ious )a! for any Charge year+
/here the sales proceeds exceed the original cost, the proceeds are restricted to the original cost for the purpose of calculating the balancing charge.
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FIFTH S)HEDULE ART III RE1IU1 ALLO:AN)E. Para.(9 provides that a @eduction called =Premium Allo-ance? is allo-ed in arriving at the profits of a business. This allo-ance is e8ual to the amount of any premium or li.e consideration paid for the right to use the 4achinery or Plant. The amount of @eduction should not exceed the amount of the premium divided by the number of years for -hich the right of use is granted. /here a person ac8uires Interest in the o-nership of Property for payment of a premium for the right of use of -hich he has already been allo-ed a deduction, he ceases to be allo-ed that @eduction as from the date of such ac8uisition of interest. :EKI BANDA LI1ITED
EBa$9*e& /e1i Danda Iimited has been trading for many years. Its expanding business has led to the adoption and implementation of ne- Asset ac8uisition strategies, aimed at relaxing and maintaining a buoyant cash flo- position. As an alternative to 5utright *ash purchases of e8uipment, the *ompany ac8uired a 4achine by #ubscribing "(% million for the right to use 4achinery. The right to use this 4achinery -as to last &C years. The agreement -as signed and entered into on (.CQ.+Q. 5n (.CQ.+$, the *ompany paid additional funds amounting to "(: million for the complete o-nership of the 4achinery. Re='ired& *ompute the Premium Allo-ance.
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ANS:ER& :EKI BANDA /here a premium has been paid for the use of 4achinery, Plant, a Patent, etc. a premium allo-ance is allo-ed in arriving at the profits of the Dusiness. This allo-ance is computed as follo-s< E *ost of Premium (%,CCC,CCC Allo-ance 6 +QO+K (O&Cth 'Q:C,CCC) 222222222222222 (&,%:C,CCC Allo-ance 6 +KO+$ (O&Cth 'Q:C,CCC) 222222222222222 ((,KCC,CCC Allo-ance 6 +$O++ (O&Cth 'Q:C,CCC) 2222222222222222 11@2-2@222 GGGGGGGG Note& Bo apportionment of the allo-ance is made on time basis. There -ill be no allo-ance after +$O++ because the 4achinery -as bought. The *ompany, as from (.CQ.+$ has ac8uired an interest in the o-nership of the 4achinery in respect of -hich the premium -as earlier paid for the right of use. S'3!idie! *apital allo-ances are given only for *apital expenditure incurred or actually suffered by the taxpayer. If part of the expenditure has been covered by a government grant or subsidy, the amount of capital expenditure is reduced by the amount of subsidy. This, therefore, means that capital allo-ances -ill be calculated on the net amount. ENO)E SIEAK:E EBa$9*e& noc. has been trading as a Dre-er for $ years no-. 0is business has suffered a slump in recent years follo-ing technological advancement in the industry, -hich he cannot afford. 0e has, in the charge year &CC9OC: received a grant of "(: million from the 4inistry of *ommerce for the ac8uisition of additional and more advanced 4achinery *osting ":C million. Re='ired& /hat *apital Allo-ances might he claimM
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ANS:ER& ENO)E SIEAK:E noc. has in his possession an Asset, -hich is partly financed by Public funds, i.e., a government 7rant. 0is claim of *apital allo-ances -ill, therefore, be restricted to the expenditure he has actually suffered. " Total xpenditure :C,CCC,CCC Iess< 7rant '(:,CCC,CCC) 222222222222222 %:,CCC,CCC / N T &:P '$,K:C,CCC) 222222222222222 /@J %(.C%.C( 2;@2-2@222 GGGGGGGG )ONTROLLED SALES /here Assets are sold for a sum, -hich the *ommissioner 7eneral determines, is not at =Arms Iength Price? then *apital allo-ances are calculated as if the assets had been sold for either< The 5pen mar.et PriceR or The /@J, if the parties to the sale apply in -riting for this basis. This method is applied only -here the buyer has control of the seller or the seller has control of the buyer or some third party has control of the both. This type of situation arises -here s sole trader turns his business into a private *ompany or -here sale of assets are made bet-een private *ompanies, -hich are controlled by the same group of individuals. NKALI EATILUNGU
B1ali "atilungu sold her transport *ontractor,s business to a Iimited *ompany on (.C9.+Q. #he o-ned nearly all the shares in the *ompany and thus controlled it. The /@J of his vehicles at %(.C%.+Q -as "9 million. The 5riginal cost of these vehicles had been "Q million and / N T allo-ance of "& million had been allo-ed before (.C9.+Q. 5n (.(C.+K, the *ompany ceased trading and the vehicles -ere sold for ":, &CC,CCC. The trader 'B1ali) and the *ompany made an election in -riting under Para.(K '%) of the Income Tax Act. Re='ired& #ho- the calculation of / N T Allo-ance and Recoupment for the *ompany.
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ANS:ER& NKALI EATILUNGU The calculation of / N T allo-ances and Recoupment for the *ompany -ill be as follo-s< E (++Q O +K *ost of 4otor Jehicles to the *ompany 9,CCC,CCC / N T &:P '(,CCC,CCC) 22222222222222 /@J %(.C%.+K %,CCC,CCC #ales Proceeds :,&CC,CCC 22222222222222 *ompany to be taxed on *apital Recovery 2@222@222 GGGGGGGG )A ITAL ALLO:AN)ES ON INDUSTRIAL BUILDINGS AND OTHER ASSETS
B'i*din#! An Industrial Duilding means a building or #tructure in use for the purposes of any electricity, gas, -ater, inland navigation, transport, hydraulic po-er, bridge or tunnel underta.ing, or any li.e underta.ing of public utility, or is in use for the purposes of any trade -hich< Is carried on in a 4ill, factory etc. *onsists of the 4anufacturing of 7oods *onsists of the #torage of goods to be used in 4anufacturing *onsists of the #torage of goods on Imports or for xport *onsists in the -or.ing of a mine or -ell for the extraction of natural deposits.
The statutory definition of =Industrial building or structure? concentrates on the business Activity rather than the premises as such. In general of course the type of activity re8uired is that of manufacturer, i.e., subAection of goods and materials to any process< coupled -ith some -holesale rather than retail selling< +Ei*$arno5" E='ita3*e )oo9 V! )IR A2 T).;8-/ , made it clear that some Retail activity does not debar a claim -here there is also selling -holesale.
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>i,marnoc? E@*ita.,e %oAo/erative 'ociet3 Ltd &s %!R
The #ociety erected a building to par. *oal into &$lb paper bags, -hich it sold to retail shops. The *oal -as passed by conveyor belt from -agons in the yard into a hopper near the roof, fed do-n a chute through a vibrator screen -here dross -as removed, passed by conveyor belt to the -eighing points, pac.ed into the bags and deposited at floor level to a-ait disposal. He*d& That the #ociety -as entitled to industrial building allo-ance.
)a!e Ana*(!i!& The success of the appellant,s contention depends on -hether their building is in use for the purpose of a trade, -hich consists in the subAection of goods or materials to any process. The material consideration is the purpose of the use of the premises, not the use to -hich the product is put. The *ourts have amplified the definitions set out in the #tatute and the follo-ing illustrate the vie-s of the *ourt in setting limits to them. /here claims are made for a building on the 7rounds that it is used to subAect goods to a process the nature of the =goods? is Important. The #creening and pac.ing of *oal into paper bags as -e sa- in the "ilmarnoc. case is subAecting goods to a process. 5n the other hand a building used for the *remation of human bodies does not 8ualify 6 0uman Dodies are not 7oodsE Beither does a building used for pac.ing -ages into nvelopes 6 because notes and *oins are not goods. A building for maintaining and repairing hired out Plant did not 8ualify because the Plant -as not being subAected to a process. Duildings used for #torage of 4anufactured goods before delivery to a customer. /here a retailer or -holesaler stores goods the building does not 8ualify. EB5*'ded B'i*din#!. Para.( '&) of the :th #chedule has specifically excluded certain buildings from being classified as industrial buildings. These are< @-elling 0ouses Retail #hops #ho- Rooms 0otels or offices.
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<'a*if(in# Hote*! ara.1 +./ Any building, -hich on first construction is an 0otel, or -hich is an extension made to a building first constructed as an 0otel and is certified by a relevant 7overnment 4inistry as conforming to the #tandards of the 0otel Industry, 8ualifies as an industrial building for the purposes of the Income Tax Act. =:irst %onstr*ction? means the building must have been planned and erected as a 0otel. *onversions of buildings, -hich -ere originally erected -ith some other purposes in, mind, e.g. A private 0ouse, -ill not 8ualify because they are not 0otels on first construction. All 0otels in existence at %(.C%.QQ and beyond are excluded from the definition of Industrial buildings. xtension to any 0otel, old or ne-, on or after (.C9.QQ 8ualifies to be classified as an industrial building unless the old 0otel -as made out of a *onverted building. <'a*if(in# Ho'!in# Unit! ara.1 +A/ Any building constructed or ac8uired by a person to provide housing for mployees 8ualifies for Industrial building allo-ance, as long as it is a lo- cost housing unit. The cost for each housing unit should not exceed E2 $i**ion. The cost of a housing unit, -hich exceeds "& million, -ill not 8ualify for Industrial building allo-ance. Any housing unit ac8uired or constructed on or after (.C9.+K -ill 8ualify for IDA provided the cost does not exceed "& million. A housing unit may be a separate building complete in itself or a part of a larger building, e.g. a flat or dormitory accommodation. 0o-ever, housing for domestic employees -ould not 8ualify because such employees are not usually employed for the purposes of the mployer,s Dusiness. Dra7in# offi5e If the dra-ing office is an integral part of the industrial premises and is devoted to the industrial operations carried on, it ceases to be classified as an office. Hor instance, a dra-ing office o-ned by a structural steel engineering company may not be excluded from the definition of an industrial building 6 )IR V! La$3hi** Iron7or"! Ltd .1 T)..,..
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B'i*din# '!ed for the 7e*fare of e$9*o(ee! Any building in use for the -elfare of employees engaged in the underta.ings and trades mentioned in sub2paragraph '() of the : th #chedule, 8ualifies for industrial buildings allo-ance. #ub2paragraph '9) 6 -hich deals -ith 8ualifying 0ousing units for employees, does not specify that the employees shall be employed in any particular type of business for their 0ouses to 8ualify, but sub2paragraph ':) states that for a building used for the -elfare of the employees to 8ualify as an industrial building, the employees must be engaged in the trades mentioned in sub2paragraph '() -hich includes< /or.s *anteens, /or.s sports pavilions and mine hospitals. EDA1 ALERT
5nly buildings -ill 8ualify. Bo allo-ance is given on structures li.e #-imming PoolsR #taff Tennis courts etc. because these structures are not DuildingsE
:HERE ART OF A BUILDING IS AN INDUSTRIAL BUILDING AND THE OTHER ART IS NOT. #ub2paragraph 'K) states that -here part of a building is an industrial building and a part is not, then the -hole building shall be classified as an industrial building -here the non2industrial part of the building does not exceed (C P of the total cost. Thus if an office or sho-room is housed in a factory building and costs (C P of the entire cost of the building, then the -hole building -ould 8ualify as an industrial building. If the office or sho-room is housed in a separate building sub2paragraph 'K) cannot apply. If the non2industrial part of the building exceeds (C P of the -hole, then only the Industrial part must be treated as an industrial building.
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)o$$er5ia* 3'i*din#! A commercial building means a building or structure -hich is not an industrial buildingR and is not a farm improvement or farm -or.sR and is in use for business purposesR and -as completed for first use on or after (.C9.Q+. xamples include retail shops, ban.s, office buildings, garages, sho-rooms or houses, -hich are used for business. The definition also includes #tructures and parts of a building. It is obvious therefore that a housing unit for employees -hich does not 8ualify as an industrial building only because it costs more than "& million, -ill, provided it -as constructed for first use on or after (.C9.Q+, 8ualify as a commercial building. )o!t of *and An industrial building or commercial building is a separate entity from the Iand on -hich it stands, for the purposes of *apital Allo-ances. *apital Allo-ances are to be restricted to the cost of the building or structureR they are not to be given on the cost of the land on -hich the building is erected. )HRIS IN 1UEUEA )HONTA
EBa$9*e& *hrispin 4u.u.a, a long time serving @irector at Bational 4illing decided to resign and set up her o-n *ompany in (++: at -hich time she -as only 9: years old. #he proceeded to ac8uire barren Iand in the /oodlands area at a cost of "(K million, and proceeded -ith the *onstruction of an ultra modern milling facility complex. The *omplex -as finally completed and brought into use on (.(C.+: at a cost of "(CC million. Included in the "(CC million -ere Architects fees of "9 million, "& million -as paid in connection -ith the Iand Purchase. #ho- ho- the 8ualifying cost for industrial building allo-ance -ill be arrived at.
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ANS:ER& )HRIS IN 1UEUEA )HONTA xpenditure must be incurred in construction, thus the cost of the Iand and the incidental costs associated -ith its ac8uisition do not ran. for industrial buildings allo-ances. 0o-ever, costs of -or. on the Iand that is preliminary to construction do 8ualify. #uch costs include< The preparation of the site in order to lay foundations, and cutting, tunneling and leveling the Iand in connection -ith the construction. Professional fees 6 Architects Hees, incurred as part of a construction proAect do 8ualify for industrial building allo-ances. The Tualifying cost for industrial building allo-ances -ill therefore be computed as follo-s<
Total *ost Iess< Bon 6 Tualifying xpenditure< *ost of Iand Incidental Iand ac8uisition costs
E ((K,CCC,CCC (K,CCC,CCC &,CCC,CCC 22222222222222 '(+,CCC,CCC) 2222222222222222 ,G@222@222 GGGGGGGGG
INITIAL ALLO:AN)E FOR INDUSTRIAL BUILDINGS
An initial allo-ance of (C P on an Industrial building is available. This allo-ance is only available on brand ne- buildings. Bo initial allo-ance is given on an Industrial building -hich has been in existence for sometime and -hich the taxpayer has subse8uently bought. Initial allo-ance is granted on a ne- addition to an existing Industrial building. The allo-ance is granted in the year in -hich the building, addition or alteration is brought into use. This need not necessarily be for the same year as the year in -hich the building is completed. There is no initial allo-ance for commercial buildings.
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:EAR AND TEAR ALLO:AN)E In ascertaining the business profits of any person -ho in any charge year has the use of an Industrial or *ommercial Duilding -hich he ac8uired, constructed, added to or altered, a deduction .no-n as a /ear and Tear allo-ance is granted.
Rate! of :ear and Tear a**o7an5e& Io- cost 0ousing !nits Industrial Duildings '5thers) *ommercial Duildings Implements, 4achinery and Plant Bon 6*ommercial Jehicles *ommercial Jehicles Rate (C P :P &P &: P &C P &: P
The /ear and Tear allo-ance is calculated each year on the 5riginal *ost of the Duilding, i.e., on a #traight2line basis or 8ual Instalment basis.
EBa$9*e& A factory building -as constructed and completed on %C.(C.+9 at a cost of "&CC million and -as brought into first use on (.C(.+:. #ho- ho- the allo-ances -ill be granted. An!7er& *ost +9 O+: 6 Initial Allo-ance U (C P /ear and Tear allo-ance U : P EC222 &CC,CCC &C,CCC (C,CCC 222222222 '%C,CCC) 2222222222222 (KC,CCC '(C,CCC) 2222222222222 (QC,CCC '(C,CCC) 2222222222222 1-2@222 GGGGGGG
%(.C%.+: /@J +: O+Q/ N T U : P %(.C%.+Q /@J +Q O+K/ N T U : P IT/@J %(.C%.+K
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Note& A factory 8ualifies as an Industrial building '5thers) upon -hich relief of : P p.a on cost is given. EBa$9*e H )o$$er5ia* 3'i*din#!. A bloc. of offices -as completed on %(.C$.+9 and -as brought into first use on (.(&.+9. It cost "(.& billion. Allo-ances -ill be given as follo-s for the first three years of its use< EC222 *ost (,&CC,CCC +9O+: / N T U & P '&9,CCC) 22222222222222 /@J %(.C%.+: (,(KQ,CCC +:O+Q/ N T U & P '&9,CCC) 22222222222222 /@J %(.C%.+Q (,(:&,CCC +QO+K/ N T U & P '&9,CCC) 22222222222222 IT/@J %(.C%.+K 1@12G@222 GGGGGGGG Note& The initial allo!ance is not a#ailable on Commercial buildings. It is only gi#en on Industrial Buildings.
Ba*an5in# a**o7an5e for 3'i*din#! /here a building, -hich has been used for business purposes, is sold, then a balancing allo-ance is given, calculated on the difference bet-een the last /@J and the amount obtained on the sale of the building. A balancing allo-ance is also given -here a building is not sold but permanently ceases to be used for business purposes. The *ommissioner 7eneral, under Par.: '%) has the po-er to determine the mar.et value of a building if no sale has ta.en place or if he is not satisfied that the sale has ta.en place in the open mar.et. The balancing allo-ance is given in the year in -hich the building ceases to belong to the taxpayer or in -hich he permanently ceases to use the building for business purposes.
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ABRAHA1 1ULOLANI
EBa$9*e& Abraham 4ulolani erected a factory bloc. for use in his manufacturing business. The total price of "%KC million -as apportioned as follo-s< EC222 Hreehold Iand 'Including *ost of *onveyancing) QC,CCC *utting and tunneling of site &,CCC *onstruction of Duilding *omprising< Hactory &QK,CCC mployee,s *anteen (&,CCC 7eneral 5ffices &+,CCC 22222222222 .82@222 GGGGGG The factory bloc. -as completed and paid for on (.CQ.+: and ta.en into first use on (.C$.+:. 5n (.C$.+$ the factory -as sold for "%CC million 'Including "(CC million for the Iand to *handa 4usonda. Abraham 4ulolani has al-ays prepared his accounts to %( 4arch. Re='ired& *ompute the IDA available to Abraham 4ulolani for each of the years concerned.
ANS:ER& ABRAHA1 1ULOLANI <'a*if(in# EB9endit're< Total *ost Iess< Iand N associated costs *ost of *onstruction EC222 %KC,CCC 'QC,CCC) 22222222222 .12@222 GGGGGGG
#ub2Para.'K) of the Hifth #chedule provides that -here part of a building is an Industrial building and a part is not, then the -hole building shall be classified as an Industrial building -here the Bon2Industrial part of the building does not xceed (C P of the Total *ost. In this *ase, 7eneral offices costing "&+ million needs further investigation as follo-s<
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&+ million F (CC P 2222222222222222222222222 G K.$ '#ay $P). %KC million The Bon 6 Industrial part does not exceed (C P of the total cost, so the Industrial building allo-ance is available on the *ost of the /hole structure, i.e., "%(C million. EC222 .1.2..,; *ost Initial allo-ance U (C P /NTU:P %(C,CCC %(,CCC (:,:CC 222222222 '9Q,:CC) 22222222222 &Q%,:CC 3ears ended %(.C%.+K N %(.C%.+K / N T U : P for & yrs /@J Defore #ale Tualifying #ale Proceeds '"%CC 6 "(CC) '%(,CCC) 22222222222 &%&,:CC '&CC,CCC) 222222222222 .2@-22 GGGGGG
Total period of o-nership from +:O+Q to +$O++ G 9 yrs. / N T allo-ance given for % yrs. Therefore< Dalancing Allo-ance for +$O++ G %O9 F " %&,:CC,CCC G "&9, %K:,CCC. :ho o7n! the a!!etL As a general rule, o-nership, expenditure and claims for *apital allo-ances must reside in the same person or corporate body. There are ho-ever numerous exceptions to this. Hor Instance, -e have seen that subsidies from Public sources normally reduce the amount on -hich *apital allo-ances can be claimed. #ubsidies from private sources -ill also reduce the amount on -hich allo-ances are due, -here the provider of the subsidy can themselves obtain tax relief either as a business deduction or by -ay of capital allo-ances. A trading tenant 'possibly holding only a licence to occupy the premises, rather than a more formal tenancy) incurring expenditure on items, -hich become Iand Iord,s fixtures once installed on the premises. In such circumstances the tenant may be permitted to claim the appropriate *apital allo-ances.
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Iand and Duildings cause Particular problems because of the Iegal possibility of a multiplicity of subordinate interests in the property. The legislation solves this problem by tying the right to allo-ances to o-nership of the relevant interestR meaning the Interest 'Hreehold or Ieasehold) o-ned by the person incurring the expenditure at the time -hen the expenditure -as incurred.
2.A H A))OUNTING DATES There is often an assumption for the ne-ly set up businesses that accounts should be prepared for (& months from the date of commencement. There is, ho-ever, no provision in our Zambian Income Tax Act, -hich prescribes such a practice. Taxpayers are free to choose -hatever accounting date they -ish. They may also change that chosen date as often as they li.e 6 although such changes may not al-ays be effective for Tax purposes, as -e shall see later in this *hapter. In Zambia, the Tax year, or *harge year as it is commonly called runs from (st April to the follo-ing %( 4arch. Income Tax therefore is charged by reference to the Tax payer,s Income received from a source -ithin or deemed to be -ithin Zambia in a charge year and the amount of business income assessable is the amount received in the charge year ended %( 4arch. /e can deduce from the foregoing that for tax purposes business accounts, even though they do not add up to a period of (& 4onths are re8uired to be made up to %( 4arch of each charge year. ROVISIONS OF SE)TION ;2 ITA Se5tion ;2 ITA deals -ith Dusiness Accounts. It provides as follo-s< S.;2 +1/ A person may have an accounting date, -hich does not coincide -ith the end of the *harge year, that is, -hich ends on a date other than %( 4arch. This sho-s that even though the Ia- recogni1es %( 4arch as the re8uired end of year date, it does not ma.e it the only accounting date to -hich accounts are supposed to be made. The *ommissioner 7eneral has the discretion to accept or reAect a date, -hich does not coincide -ith %( 4arch. #tudents are advised to note that the acceptance of a non %( 4arch accounting date is discretionary and as per the provisions of #ection ((9 '()'a) such discretionary acceptance cannot be 8uestioned in any proceedings. The *ommissioner 7eneral also has the po-er to accept a Period, -hich is Iess than (& 4onths as though the accounts had been made up for a period of (& 4onths.
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S.;2 +2/ /hen the *ommissioner 7eneral accepts an accounting date, it becomes the standing and binding accounting date even in subse8uent years. The accounting date can only be changed through an application to the *ommissioner 7eneral. S.;2 +./ The *ommissioner 7eneral is empo-ered to compute adAusted Income -here the accounting date has been changed. This po-er to compute adAusted Income is discretionary so the Taxpayer cannot 8uestion or appeal against such adAustment. S.;2 +.A/ This section -as introduced by the (+++ amendment Act. It provides that for a Tax payer -hose accounting date straddles %( 4arch the provisional returns should not be based on the charge year, i.e., from April to 4arch, but should be based on the accepted financial year. S.;2 +.B/ #tates that relevant accounts must relate to the accepted accounting date. BASIS OF ASSESS1ENTS Accounts that have been prepared to a Bon %( 4arch accounting date may be assessed< Hor the current charge year ' )0/. A current charge year is the charge year in -hich the accounts date falls. Hor Instance, the date %( @ecember (+++ belongs to the charge year ++O&CCC but %( @ecember (+++ falls in the year (+++ -hich -ill be ta.en as the current charge year. Hor the previous charge year + 0/. A previous charge year is the charge year ending before the accounts date. Accounts for less than (& 4oths may be assessed as if they -ere for (& 4onths 6 #.Q& '(). DATE BET:EEN 1 >UL0 AND .1 1AR)H Hor any accounting date, -hich falls bet-een ( ;uly and %( 4arch, -e use the current charge year basis +)0B/. EBa$9*e< Hor a set of accounts -ith a year2end of %(OCKOC(. This is the charge year &CC(OC&. #ince %(OCKOC( falls bet-een ( ;uly and %( 4arch, -e -ill use the *3D. Hor a set of accounts ending on %C.C+.+$. This is the charge year +$O++. And %C.C+.+$ falls bet-een ( ;uly and %( 4arch, therefore the *3D rules -ill be applied.
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DATE BET:EEN 1 A RIL AND .2 >UNE Hor any accounting date, -hich falls bet-een April and ;une the Previous, year basis 'P3D) is used. EBa$9*e!& Hor a set of accounts to (: ;une (++K. This is the charge year +KO+$ but since (: ;une (++K falls bet-een April and ;une, the P3D rules -ill apply. #o this is the charge year +KO+KE Hor a set of accounts to %( 4ay &CC(. This is the charge year &CC(OC& but since it falls bet-een April and ;une, the P3D rules -ill apply so this is the charge year &CCCOC(. FIRST A))OUNTS AFTER )O11EN)E1ENT eriod $ore than 12 1onth! 3't *e!! than 1G 1onth! /here the first accounts to %( 4arch are for more than (& 4onths but not more than ($ 4onths they may be accepted and apportioned on a time basis. The proportion from the date of commencement to the follo-ing %( 4arch -ill be assessed for the charge year ending on that date and the balance of (& 4onths for the charge year ending on the next %( 4arch. *apital allo-ances are due for the full year in both years. There is no apportionment.
EBa$9*e& A trader commences business on ( Bovember (++: and adopts %( 4arch as the accounting date. 0is trading profits for the (K 4onths to %( 4arch ((+K are "&C, CCC,CCC. 0o- -ill these profits be assessedM An!7er& This is a period of (K 4onths, -hich is less than ($ months but more than (& 4onths. The period -ill be apportioned on a time basis. The proportion from (O((O+: to %( 4arch (++Q -ill be assessed for the charge year ending on %(OC%O+Q, -hich is +:O+Q< :O(K F "&C, CCC,CCC G " ":, $$&,%:%. The remaining (& 4onths -ill be assessed on the period ending on the next %( 4arch, ie, %( 4arch (++K, as follo-s< (&O(K F "&C, CCC,CCC G " (9,((K,Q9K This is the charge year (++QO+K '*3D).
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eriod 1ore than 1G 1onth! /here the first accounts to %( 4arch are for more than ($ 4onths, separate accounts from the date of commencement up to the follo-ing %( 4arch and for (& 4onths to the follo-ing %( 4arch are re8uired. )HANGE OF A))OUNTING DATE Provided certain conditions are met, a self employed person or legal person is allo-ed to change hisOher accounting date. This provision is to be found in #ection Q& '() of the ITA. In doing so, there may be tax advantagesR hence there are conditions that must be fulfilled before the change is effected. )ondition! to 3e $et& /here a *ompany is a member of a group, it might change its accounting date to that of other group members. Hor individuals -ho are re8uired by la- to submit accounts on a particular date, they might be allo-ed to change their accounting date to that re8uired by la-. Hor farming businesses a date that falls -hen there is no gro-ing of crops is more appropriate. In Zambia most farming businesses prepare their accounts to %C #eptember, thus if a farmer -ishes to have his accounting date changed to %C #eptember, this -ill be allo-ed. /here the Tax2 payer has provided #ound *ommercial reasons for -anting to change the accounting date. Hor example, it may be easier to ta.e stoc. at certain times of the year. A!!e!!$ent Ba!i!< /here a Bon %( 4arch accounting date has been accepted the accounts -ill be assessed on a =current year basis? or =previous year basis? depending on the ne- accounting date< If the ne- accounting date falls bet-een ( ;uly and %( 4arch, the *3D -ill apply. If the ne- accounting date falls bet-een ( April and %C ;une, the P3D -ill apply. /here a change of accounting date has been effected, the action to be ta.en -ill depend on t-o things< Are the accounts to the ne- accounting date for less than (& 4onthsMR and @o the results sho- a profit or lossM
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A55o'nt! *e!! than 12 1onth! 7ith a rofit EBa$9*e& Agreed Accounting date is %C ;une, no- changed to %( @ecember. Accounts to %C.CQ.+: '(& 4onths) Profits "(: million Accounts to %(.(&.+: 'Q 4onths) Profits "$ million. Accounts to %(.(&.+Q '(& 4onths) Profits "(9 million. A!!e!!$ent!& .2 >'ne 1,,-& As far as this assessment is concerned this is the last Bormal charge year before the change. And since ;une falls bet-een April and ;une, the previous charge year basis -ill apply. 0ence this is the charge year (++9O+:. The "(: million -ill be assessed in (++9O+:. .1 De5e$3er 1,,-& The accounting date has been shifted to this date. Hrom %C ;une (++: to this date is a total period of Q months. This is .no-n as the charge year of change '*3*). /here the change results in a *3*, -hich is less than (& 4onths, the Taxpayer has an inherent opportunity of ma.ing Tax savings. In order to minimi1e the levels of abuse, the ZRA does expand the profits of this narro-ed *3* since it is a potential source of unfavorable Tax engineering. Thus the profits of the Q 4onths to %( @ecember (++: -ill be expanded as follo-s< Profits G $,CCC,CCC F (& 2222222222222222222 G "(Q, CCC,CCC Q The ne- date of %( @ecember falls bet-een ( ;uly and %( 4arch thus the *3D -ill apply. It follo-s therefore that this is the charge year (++:O+Q. The xpanded profits of "(Q million -ill be assessed in this charge year. The profit expansion gives rise to the issue of @ouble Assessment of profits. This profit, -hich has been doubly assessed, is recorded in the Taxpayer,s Permanent Botes Hile at ZRA and is given as a relief on cessation of business. The amount doubly assessed is computed as follo-s< (++:O+Q "(Q, CCC,CCC 6 "$, CCC,CCC G "$, CCC,CCC. .1 De5e$3er 1,,; This is the subse8uent *harge year after the *3*. The profit assessable is " (9 million.
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A))OUNTS LESS THAN 12 1ONTHS :ITH A LOSS The loss is to be regarded as a loss for the charge year of change based on the ne- accounting date. The loss is not expanded to (& months. EBa$9*e& Agreed Accounts date %Cth ;une changed to %( @ecember. Accounts to %C.CQ.+9 '(& 4onths) Profit "( million. Accounts to %(.(&.+: 'Q 4onths) Ioss "C.: million. Accounts to %(.(&.+Q '(& 4onths) Profit "(: million. A!!e!!$ent! The last Bormal charge year ending %C.CQ.+9 -ill be assessed on the P3D. Thus the "( million -ill be assessed in (++%O+9 The *3* falls in the charge year +:O+Q '*3D). The assessable Ioss is "C.: million. The subse8uent charge year after the year of change ending on the next %( @ecember -ill be for (& 4onths. Thus the "(: million -ill be assessed in the charge year (++QO+K under the current charge year rules. )o$$ent on the Lo!! There is no need to record it in the Permanent Botes Hile since there is no double assessment or Ioss xpansion.
A))OUNTS 1ORE THAN 12 1ONTHS :ITH A ROFIT. The profit is expanded to &9 months and then half assessed in the *3*. EBa$9*e& Agreed Accounting date %C ;une changed to %( ;uly. Accounts to %C.CQ.+: '(& 4onths) Profit "(C million. Accounts to %(.CK.+Q '(% 4onths) Profit "(% million Accounts to %(.CK.+K '(& 4onths) Profit "(9 million.
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A!!e!!$ent!< .2 >'ne 1,,-& This is the Iast Bormal year assessed under P3D rules. This is the charge year +9O+:. The profit of "(C million -ill be assessed in (++9O+:. .1 >'*( 1,,; +1. 1onth!/& Profits expanded to &9 4onths as follo-s< (%,CCC,CCC F &9 22222222222222222222 G "&9, CCC,CCC. (% The Amount -ill be half assessed in the *3*. Thus it is not the /hole "&9 million that -ill be assessed in this *3*. %( ;uly falls bet-een ;uly and 4arch -ith current charge year rules applying. 0o-ever, this is a (% 4onths period, -hich straddles t-o charge years as follo-s< *harge year ( G +:O+Q *harge year & G +QO+K "(& million. "(& million.
5ne half assessable charge year of change is the +QO+K -ith "(& million. A note in the Permanent Botes Hile of the doubly assessed profits of "&9, CCC,CCC 6 "(%, CCC,CCC G "((, CCC,CCC has to be made and adAusted on cessation. A))OUNTS :ITH 1ORE THAN 12 1ONTHS :ITH A LOSS The loss is apportioned (& 4onths to the charge year of change '() and the balance to charge year of change '&). The loss is not expanded to &9 4onths. 0EAR OF )ESSATION S.;2 +;/ ro%ide! that& 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 2 /here the period is in excess of (& months, the Income is deemed to be for the charge year succeeding that in -hich the Income based on accounts for the immediately preceding charge year -as assessed, and Income for the remaining period is deemed to be Income of the follo-ing charge year. 22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222 EBa$9*e< A *ompany prepared its accounts to %(.(&.+$ and on %(.C:.++ it ceased to trade. A!!e!!$ent!< In every case, irrespective of the accounting date, accounts for the last Bormal charge year to the date of cessation are re8uired.
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In this case the IB*3 is the period from (.C(.+$ to %(.(&.+$, -hich -ill be assessed on *3D. This is the charge year +$O++. The period from (.C(.++ to %(.C:.++ ': 4onths) falls in the charge year +$O++ under the previous year basis. The succeeding or follo-ing charge year is the charge year ++OCC. This means that the Income of the (& 4onths to %(.(&.+$ '+$O++) -ill be deemed to be Income of the succeeding year -hich is the period ending %(.C:.++, but this period has already been assessedEEE The Dalance is deemed to be Income of the follo-ing charge year, -hich is ++OCC.
S.;2 +8/ ro%ide! That& /here Income has been taxed t-ice and the business ceases, an overlap relief is given. The overlap relief only reduces profits of the year of cessation and if the profits are not sufficient, the profits of the penultimate year.
EBa$9*e& Accepted Profits for (& 4onths to %(.C(.+K is "&C million '+QO+K) Accounting date changed to %( August. Accounts for K 4onths to %(.C$.+K Profit "+.: million '+KO+$) Accounts to %(.C$.+$ '(& 4onths) Profit "(: million '+$O++)
An!7er< 1,,8F,G Profit G +.: F (& 2222222222 G "(Q.% K @oubly assessed profits G "(Q.% million 6 "+.: million G "Q.$ million. If in the year of cessation the *ompany has profits of "9.: million and "Q.& million in the year before, the relief -ill be applied as follo-s< 0ear Before )e!!ation + en'*ti$ate 0ear/ EC$ Income 'Profit) Q.& Iess< @ouble Assessment relief '&.%)S 2222222 .., GGG S "Q.$ 6 "9.: 'Dalance). 0ear of )e!!ation EC$ 9.: '9.:) 2222222 2 GGGG
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2.- H TURNOVER TAD In a bid to broaden the Tax Dase, the Income Tax Amendment Act of &CC9 introduced Turnover Tax for the very first time in Zambia. The successful implementation of the Turnover Tax Regime is going to expand the Tax base and indeed provide 7overnment -ith a buoyant Tax instrument for future Revenue collection. The potential to raise revenue in future is further enhanced by improving the institutional capacity -ithin the Zambia Revenue Authority to collect this Tax. #o far, it seems that this institutional capacity -ithin the ZRA has been created. This coupled -ith sound legislative base, public acceptance and ade8uate financing -ill most li.ely lead to the desired goal. 1eanin# of T'rno%er& Hor the purposes of Income Tax, Turnover includes 7ross< arnings Income Revenue Ta.ings 3ield, and Proceeds Lia3i*it( to T'rno%er TaB The follo-ing are liable to pay Turnover Tax< 'a) Any Person carrying on any business -ith an Annual Turnover of "&CC 4illion or Iess. 'b) Any Person -hose Dusiness earnings are subAect to /ithholding Tax and it is not the Hinal Tax. xamples include the follo-ing< Rental Income *ommissions Interest arned by *ompanies Royalties arned by Residents er!on! not Lia3*e to T'rno%er TaB The follo-ing Persons are not liable to Turnover Tax< Any Person carrying on any Dusiness -ith an Annual Turnover of more than "&CC 4illion. Any Individual or Partnership carrying on Dusiness of Public #ervice Jehicle for carriage of Persons. Partnerships carrying on any Dusiness irrespective of -hether the Annual Turnover is "&CC 4illion or Iess. Partner,s Income from the Partnership is also excluded from Turnover Tax. This is because it is the Partnership that carried on Dusiness and not the Partners. Any Person -hose Dusiness earnings are subAect to -ithholding Tax and it is the Hinal tax. These Include the follo-ing<
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'a) 'b) 'c) 'd) 'e) 'f) 'g) 'h)
Dan. Interest for Individuals @ividends Interest on 7overnment bonds Interest earned on Treasury bills for *haritable Institutions and other xempt Persons. 4anagement and consultancy Hees paid to Bon 6 Residents Payments made to Bon 6Resident *ontractors Public ntertainment Hees paid to Bon 6 Residents Royalties Paid to Bon 2 Residents
Re#i!tration for T'rno%er TaB Taxpayers -ill be re8uired to notify the ZRA -ithin %C days of commencement of Dusiness. They -ill be registered and given a Tax Payer Identification Bumber 'TPIB), Individual or *ompany Account number and a Pay As 3ou arn 'PA3 ) #cheme number -here applicable. 1onth End ro5ed're!& At the 4onth end a Taxpayer is re8uired to add up his Turnover for the month, compute the Turnover tax and Remit the Tax due by the (9 th of the Hollo-ing month. Taxpayers under the Turnover tax threshold -ill not be re8uired to submit Provisional Income Tax Returns, as they -ill be expected to ma.e monthly or 8uarterly remittances through the 4onthly Turnover Tax Remittance *ard. Dut -here a Taxpayer discovers during the year that his Turnover is going to exceed "&CC 4illion, he should notify the ZRA immediately. 0ear End 9ro5ed're!& Taxpayers -ho -ould have suffered -ithholding Tax @eductions during the year shall be refunded upon submission of -ithholding Tax certificates at the end of the charge year. The Refund -ill be determined through standard assessment issued by the ZRA at the end of the charge year. /here no declaration is received the ZRA may issue a standard assessment at the maximum rate of %P of "&CC 4illion.
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EDA1INATION T0 E <UESTIONS :ITH ANS:ERS
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<UESTION I IREEN 1A ULANGA

Ireen 4apulanga is the proprietor of Zamiga Airports Itd -hich she too. over from the 7overnment of the Republic of Zambia (% years ago. #o far, the company,s turnover has largely been represented by the invoiced value of navigation, landing, over flights, ground handling and par.ing fees relating to aircraft traffic, passenger service fees relating to passenger traffic, rentals and concessions relating to accommodation facilities provided at airport terminals and -arehouses. The company,s auditors have recommended the use of historic cost convention in the preparation of financial and statutory accounts. Hor the year ended %( 4arch &CC: the company accountant has prepared the follo-ing Hixed Asset #chedules. Air9ort@ ter$ina* Lea!ed 1otor R'n7a( ? A9ron! B'i*din# Vehi5*e! EC222 EC222 EC222 )OST& (.C9.&CC9 (+,+%%,CK& %&,+C: &,$&C,9$$ Additions +,:(:,%&& 2 (,QQK,Q&& Transfers +(%,Q$C 2 %(:,%9: Reclassifications 2 2 2 @isposals 2 2 '$&,K%+) 22222222222222222 22222222222222 22222222222222222 .1.2..222.2@.;2@28A .2@,2A@822@81; GGGGGGGGGG GGGGGGGG GGGGGGGGGG De9re5iation& (.C9.&CC9 *harge for the year @isposals .1.2..222Bet Doo. Jalue M .1.2..222Bet Doo. Jalue M.1.2..222A (,K%C,KK$ K:+,$K9 2 222222222222222 2@A,2@;-2 GGGGGGGGG 28@G81@A22 2222222222222222 1G@222@2,A 2222222222222222 +,::Q Q$C 2 22222222222222 12@2.; GGGGGGGG 22@;;, 22222222222222 2.@.A, 222222222222222 (,Q%C,++% $:K,:(( '$(,9&+) 222222222222222 2@A28@28GGGGGGGGG 2@.1.@;A1 222222222222222 1@1G,@A,2222222222222222
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The follo-ing additional schedules are also available including the overall totals< F'rnit're )a9ita* :or" Tota* ? Fittin#! In ro#re!! EC222 EC222 EC222 )OST& (.C9.&CC9 (:,::$,+&& +,:9+,%+K 9K,$+9,K$9 Additions %,+CK,$CC :K,QQ(,:Q& K&,K:&,%CQ Transfers :%,9:9,CK$ ':9,Q$%,(C%) 2 Reclassifications 2 '%,+%&,C&Q) '%,+%&,C&Q) @isposals 2 2 '$&,K%+) 22222222222222 222222222222222222 22222222222222222 .1.2..222De9re5iation& (.C9.&CC9 *harge for the year @isposals .1.2..222Net Boo" Va*'e& M .1.2..222M .1.2..222A 82@,22@G22 GGGGGGGG :,&::,9C+ K,++9,C9% 2 HHHHHHHHHHHHH 1.@2A,@A-2 NNNNNNNN -,@;81@.AG HHHHHHHHHHHHHHH 12@.2.@-1. HHHHHHHHHHHHHHH G@-,-@G.2 GGGGGGGGGG 2 2 2 HHHHHHHHHHHHHHHHHH H NNNNNNNNNNN G@-,-@G.2 HHHHHHHHHHHHHHHHHHH ,@-A,@.,8 HHHHHHHHHHHHHHHHHHHH 11;@;.2@.2GGGGGGGGGG $,Q&Q,K%Q +,Q(&,(C$ '$(@9&+) HHHHHHHHHHHHHHHHHH 1G@1-8@A1NNNNNNNNNN ,G@A8A@,12 HHHHHHHHHHHHHHHHH .,@2;G@2AG HHHHHHHHHHHHHHHHHH
Note& The leasehold building is encumbered as security for overdraft facility at a named commercial ban. -here the company has a facility of up to "(CC million secured by a first legal mortgage of "9:million and a lien for !# V (C,CCC over the company,s foreign currency accounts. Note 1& 1otor Vehi5*e Di!9o!a*! &+ EC222/ The total figure of "$&, K%+,9(Q is made of the follo-ing figures< )OST ITV 3Ff RO)EEDS Bissan (+C,9:+ 2 Q,CCC,CCC Bissan Jan Q:&,QCK 2 :,CCC,CCC 0yundai #onata Q,Q(C,CCC 2 :,CCC,CCC Hire tender &Q,CCC,CCC 2 %,:CC,CCC 0ilux (Q,:CC,CCC 2 $,CCC,CCC *orona (C,:CC,CCC 2 :,(CC,CCC 4ar. II $,%CC,CCC 2 $,+CC,CCC 4icro Dus (%,+$Q,%:C 2 Q,CCC,CCC 222222222222222 22222222222222 222222222222222 G2@8.,@A1; H A8@-22@222 222222222222222 22222222222222 2222222222222222 The accountant has estimated that a total of "%:,&%+,9(Q -ill be claimable as a balancing allo-ance in the tax computation.
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Note 2 )o$$er5ia* B'i*din#!& The buildings -ere bought as follo-s< )o!t (++C %$,C:( (++C %&,(9(,CCC (++( K&Q,CCC (++9 +,+K(,+Q9 (++: (,&9C,CCC (++Q 99K,9%$,:$Q (++K (&K,$%+,%$Q &CC( (:,CCC,CCC 2222222222222222222 ;.A@.,A@,G8 GGGGGGGGGGG Note . Ind'!tria* B'i*din#!& )o!t (++C +Q%,$:+,CCC &CC( 9Q+,Q++,%CQ 22222222222222222 1@A..@--G@.2; GGGGGGGGGG
ITV BFF &$,(:$ &%,K$9,%9C :QQ,&$C $,(KK,C(% (,C9&,Q$( %+%,K9:,+:9 ((:,C::,99+ (9,9CC,CCC 222222222222222222 --;@8,,@G8GGGGGGGGGG ITV BFF %%K,%:(,Q:C %K:,K:+,99: 222222222222222222 81.@111@2,GGGGGGGGGG
Note A Air9ort Ter$ina*!@ R'n7a(! ? A9ron! ind'!tria* 3'i*din#!& )o!t ITV BFF &CC% (&,$+K,$C+,K(9 ((,%:&,&K(,:K% &CC9 9,+QK,%CK,K(C 9,&&&,&((, ::K &CC: (C,9&+,CC&,CCC Bil 222222222222222222222 222222222222222222222 2G@2,A@11,@A2A 1-@-8G@AG.@1.2 222222222222222222222 222222222222222222222 Re='ired& Hrom the foregoing information you are re8uired to compute the capital allo-ances that are claimable by Zamiga Airports Iimited. Assume that the company has a policy to claim capital allo-ances as far as possible and at the earliest. This information is being re8uired for the Hinali1ation of the &CC9O&CC: Income Tax Assessment. /or. to the nearest million "-acha.
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ANS:ER& IREEN 1A ULANGA This 8uestion loo.s a bit too long, and yes, you,ve got to get used to this type of 8uestions. It is far much better to revise and practice -ith long 8uestions and if you are a bit luc.y encounter a short 8uestion in the actual examinations. Although the 8uestion is long, its demands and re8uirements are relatively straight for-ard, i.e. to simply compute the various capital allo-ances that are claimable. ;ust loo.ing at the Asset schedule alone should be enough to tell you -hat allo-ances are applicable. /e can tell for sure that the follo-ing *apital allo-ances are li.ely to be computed from the available information< Industrial Duildings Allo-ances Hrom the information in Bote 9 -e observe that during the current year the company has constructed ne- Airport Terminals, Run-ays and Aprons at the cost of "(C, 9&+ 4illion. #ince these ne- constructions are classified as Industrial Duildings, an Initial Allo-ance at the rate of (CP shall ariseE @id you see thatM If you did, I,m tempted to admire your mental alertness. *apital allo-ances on *ommercial buildings. *apital allo-ances on 4otor Jehicles Hrom the information given in Bote ( -e can tell that since there -ere disposals of fixed assets, either a balancing charge or allo-ance -ill arise and needs to be computed. In the 8uestion -e have been told that the accountant has anticipated a balancing allo-ance of "%:, &%+ 4illion but -e can not ta.e this literally. /e need to verify from the available information -hether or not the accountant,s estimate is accurate and above all if it is in agreement -ith the Income Tax Ia-. /e can no- get started by tac.ling the easier capital allo-ances first< Initia* A**o7an5e on Ne7 Ind'!tria* B'i*din#!& Be- AirPort Terminals, Run-ays and Aprons -ere constructed in the current charge year. All other Industrial buildings -ere bought years ago, some as far bac. as (++CE Thus Initial allo-ance -ill be computed as follo-s< "(C, 9&+ 4illion F (CP G "(, C9% 4illion. Ind'!tria* B'i*din#! A**o7an5e& The industrial Duildings Allo-ance 'IDA) is computed at the Rate of :P per annum on cost, i.e. to say straight line method.
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0ear )FF (++C &CC( &CC% &CC9 &CC: &CC:
)o!t
ITV 3Ff
:?T '9$) '&9) 'Q9:) '&9$) ':&() '(,C9%) 2222222222 2@-2, GGGGGG
ITVH &$+ %:9 (C,KCK %,+K9 $,$Q:
+Q9 %%K 9KC %K$ &,$+$ ((,%:& 9,+QK 9,&&& (C,9&+ C Initial Allo-ance
Verif(in# the a55o'ntantC! 5o$9'tation of Ba*an5in# A**o7an5e of E.- 1i**ion& )OST ITV 3Ff (+C,9:+ 2 Q:&,QCK 2 Q,Q(C,CCC 2 &Q,CCC,CCC 2 (Q,:CC,CCC 2 (C,:CC,CCC 2 $,%CC,CCC 2 (%,+$Q,%:C 2 222222222222222 222222222 G2@8.,@A1; H 222222222222222 222222222 ro5eed! A**o7an5e Q,CCC,CCC :,$C+,:9( :,CCC,CCC 9,%9K,%+% :,CCC,CCC '(,Q(C,CCC) %,:CC,CCC '&&,:CC,CCC) $,CCC,CCC '$,:CC,CCC) :,(CC,CCC ':,9CC,CCC) $,+CC,CCC QCC,CCC Q,CCC,CCC 'K,+$Q,%:C) 222222222222222 2222222222222222 A8@-22@222 +.-@2.,@A1;/ 2222222222222222 2222222222222222
Bissan Bissan Jan 0yundai #onata Hire tender 0ilux *orona 4ar. II 4icro Dus
SS /hen the total allo-ance is rounded off to the nearest 4illion "-acha -e get " %: million. This is ho- the accountant computed and arrived at a balancing allo-ance, but this computation is against the re8uirements of the Income Tax Act as -e shall see shortly. This mista.e is 8uite common in practice and you need to get straight on top of things and never be caught off guard by the Zambia Revenue Authority. #o, -hat does the lasayM Iet,s have a loo. at Para.: '() 'b) of the Hirst #chedule to the Income Tax Act again, -hich states that<
87
)5#TE( 'Income of a person Includes any amount paid by !hich reco#eries from capital expenditure exceed 5 in the case of Implements% 7achinery or "lant% such residue of the expenditure ranking for Capital allo!ances incurred in respect of the Implement% 7achinery or "lant as remains after ded*ction of any -ear and tear or other Capital allo!ances or similar deduction !hether allo!ed under the Income Tax Act or under any "ro#isions of the "re#ious )a! for any Charge year+ The .ey -ords are as remains after the deduction of any !ear and tear0 this effectively means that the figure to compare our disposal proceeds -ith is not the cost of the disposed asset but rather, it,s /@J or ITJ 'Income Tax Jalue). As can be seen the accountant -as matching @isposal proceeds -ith 5riginal cost rather than ITJ to arrive at the balancing allo-ance of "%: 4illion. /hen -e match disposal proceeds -ith ITJ the scenario loo.s li.e this< ITV 3Ff Bissan Bissan Jan 0yundai #onata Hire tender 0ilux *orona 4ar. II 4icro Dus 2 2 2 2 2 2 2 2 222222222222222 H HHHHHHHHHHHHHH ro5eed! Q,CCC,CCC :,CCC,CCC :,CCC,CCC %,:CC,CCC $,CCC,CCC :,(CC,CCC $,+CC,CCC Q,CCC,CCC 222222222222222 A8@-22@222 HHHHHHHHHHHHHHHH )har#e Q,CCC,CCC :,CCC,CCC :,CCC,CCC %,:CC,CCC $,CCC,CCC :,(CC,CCC $,+CC,CCC Q,CCC,CCC 2222222222222222 A8@-22@222 HHHHHHHHHHHHHHHH
/atch outE /hat -as predicted to be a balancing allo-ance has in fact turned out to be a balancing charge. The Zambia Revenue Authority -ould start by first and foremost reversing the earlier claim of a balancing allo-ance and then disallo-ing " 9K.: 4illion in the Tax *omputation. Bote that balancing charge is the excess of @isposal Proceeds over the Income Tax Jalue of an asset.
88
)a9ita* A**o7an5e! on )o$$er5ia* B'i*din#!< *apital allo-ances on commercial buildings are computed at the rate of &P per annum. 0ear
(++( (++& (++% (++$ (+++ &CCC &CC( &CC&
)o!t
%$,C:( %&,(9(,CCC K&Q,CCC +,+K(,+Q9 (,&9C,CCC 99K,9%$,:$Q (&K,$%+,%$Q (:,CCC,CCC ;.A@.,A@,G8
ITV BFF
&$,(:$ &%,K$9,%9C :QQ,&$C $,(KK,C(% (,C9&,Q$( %+%,K9:,+:9 ((:,C::,99+ (9,9CC,CCC
:?T
KQ( Q9&,$&C (9,:&C
ITV 5Ff
&K,%+K &%,(9(,:&C ::(,KQC
(++,9%+ K,+KK,:K9 &9,$CC (,C(K,$$( $,+9$,KK& %$9,K+K,($& &,::Q,K$$ ((&,9+$,QQ( %CC,CCC (9,(CC,CCC
--;@8,,@G8- 12@;G8@,22 -AA@111@,8-
)a9ita* A**o7an5e! on 1otor Vehi5*e!& /e have not been told -hether or not the motor vehicles ac8uired during the year -ere *ommercial or Bon2 *ommercial Jehicles. Hor the purposes of this 8uestion, -e -ill assume that all vehicles are commercial vehicles in -hich case they -ill be allo-ed a &:P /ear and Tear allo-ance on straight line basis< Additions< &CC:< 2 "(, QQK 4illion F &:P G "9(K 4illion. *ost on (.C9.&CC9< 2 "&, $&C 4illion F &:P G "KC: 4illion per annum for each year from date of ac8uisition -hich is not given in the 8uestion. )a9ita* a**o7an5e! on F'rnit're and Fittin#!& Hurniture and fitting are allo-ed a &:P /ear and Tear Allo-ance on cost. /e have not been given the date of ac8uisition of the furniture and fittings so -e can not accurately determine the ITJ of these assets to ascertain the amount remaining for the assets to be completely -ritten do-n. /e can do a simple estimate as -e did for motor vehicles to Aust sho- the annual -ear and tear allo-ance on cost and the -ear and tear relating to the current charge year, i.e. Additions to the asset register. / N T on Additions for the year &CC:< "%, +C$ F &:P G "+KK 4illion. *ost on (.C9.&CC9< " (:,::+ F &:P G "%, $+C 4illion per annum for each year from date of ac8uisition.
89
<UESTION II )HIB:E 1ATILDAH BITI :ATA 4atildah is involved in the manufacturing of farming e8uipment for small2 scale farmers. 0er business has been expanding steadily follo-ing the numerous tax incentives in agriculture announced by governmentR and no- she needs an additional factory. #he has three alternative options as follo-s< O9tion 1 #he can contract @ana constructions Itd to construct a ne- factory. This -ill ta.e $ months and -ill cost her a total of "9%+, Q%C,CCC. JAT on building materials *ost of land Architects fees Jentilation and heating systems Hire alarm *oncrete floor to support machinery 7eneral offices Hactory EC222 ($,::: &C,CCC (:,CCC :,CCC &,KK: &$,%CC 9C,CCC %(C,CCC 2222222222 A.,@;.2 GGGGG
O9tion 2 Duy an existing factory building from 4umba *hamfya at an estimated cost of "%K:, :::,CCC O9tion . 5btain a medium si1ed factory on an arranged lease for &C years. This arrangement -ill entail a monthly rental of "(, CCC,CCC and the lease premium -ill be "%CC, CCC,CCC. Re='ired Advise 4atildah of the tax implications arising from the three options above. Include appropriate computations to support your ans-er.
90
ANS:ER 1ATILDAH )HIB:E BITI :ATA The 8uestion does in fact concern the tax implications of three alternative for 4atildah -ho at the moment needs extra factory space as she is expanding follo-ing favourable tax incentives given by government to the farming community. O9tion 1 )on!tr'5tion of the fa5tor( thro'#h Dana )on!tr'5tion Li$ited The factory -ill be ne- and -ill be brought into the business for the first time after construction and -ill accordingly 8ualify and ran. for the Initial allo-ance at the rate of (C P as -ell as the : P industrial building allo-ance on cost. This -ill be as follo-s< <'a*if(in# EB9endit're EC222 9%+, Q%C '&C,CCC) '($,:::) ':,CCC) '&,KK:) 222222222222 .,.@.22 GGGGG
Total cost Iess< *ost of land JAT Jentilation N 0eating system Hire alarm
S'3 ara +8/ of the fifth schedule provides that -here part of a building is an industrial building and a part is not, then the -hole building shall be classified as an industrial building -here the non industrial part of the building, in this case the general offices, does not exceed (C P of the total cost. This can be computed as follo-s< "9C, CCC,CCC O 9%+,Q%C,CCC G +P. #ince this is belo- (C P the -hole building -ill 8ualify. The industrial building allo-ance -ill accordingly be based on the cost of the -hole structure, i.e. " %+%,%CC,CCC. The a**o7an5e 7i** 3e 5*ai$ed a! fo**o7!< '(CP F %+%,%CC,CCC) G "%+, %%C,CCC as initial allo-ance, as this is a brand ne- building. An additional industrial building allo-ance -ill be claimed at the rate of : P on cost as follo-s< ': P F %+%,%%C,CCC) G "(+, QQ:,CCC. Thus a total of ":$, ++:,CCC -ill be deducted from the taxable trading profits in the current charge year in respect of industrial buildings alone.
91
The Input JAT of "($, :::,CCC -ill be reclaimed in full assuming that 4atildah is ma.ing standard rated supplies. The cost of the ventilation and heating systems '": million) and the fire alarm '"&, KK:,CCC) -ill 8ualify as plant and machinery and -ill accordingly ran. for /ear and tear allo-ances at the rate of :C P on cost on a straight line basis. Thus "K, KK:,CCC F :C P G " %, $$K, :CC. The :C P accelerated rate applies to plant and machinery that is used directly in farming and this is -hat -e have assumed to be the case for 4atildah. O9tion 2 B'( an eBi!tin# fa5tor( 3'i*din# If 4atildah opts for this option, she -ill only be entitled to the industrial buildings allo-ance at the rate of : P. The (C P initial allo-ance is only available on brand ne- buildings upon their first construction. 0er total tax benefit -ill only amount to "%K:, :::,CCC F :P G "($, KKK,K:C. O9tion . Lea!e of the fa5tor( !nder this option the o-ner of the factory -ill be entitled to claim the capital allo-ances as title of o-nership remains -ith the lessor. 4atildah can only claim the lease rentals as a deduction in her tax computation. Thus the "( million monthly rentals -ill be an allo-able expense and this -ill total "(& million at the end of the year. The proportion of the premium assessed on the o-ner -ill also be deductible over the period of the lease as follo-s< EC222 Premium paid %CC,CCC Iess< %CC,CCC F & P F '&C 6 () '((9,CCC) 2222222222222 1G;@222 GGGGGGGG "($Q, CCC,CCC O &C years G "+, %CC,CCC per annum.
SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS
92

Chapter 2 (Paper 3.4 - Advanced Taxation)

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Chapter 2 (Paper 3.4 - Advanced Taxation)

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CHAPTER 2 PERSONAL BUSINESS TAXATION

2.1 AN EVALUATION OF THE BADGES OF TRADE

rofit !ee"in# $oti%e&

)ir5'$!tan5e! #i%in# ri!e to the Rea*i6ation

The taBa3*e rofit i! 5o$9'ted a! fo**o7!& 1S. EAUNDA 1ULENGA

'F) 'F) 'F) 2222222222 D GGGGG

2.2, 2 -th S5hed'e art II Ba!i5 Detai!<

E :,:CC,CCC '(,%K:,CCC) 2222222222222 9,(&:,CCC '(,%K:,CCC) 222222222222222 2@8-2@222 GGGGGGGGG

/ N T &CP %(.C%.++ / N T &CP %(.C%.CC #ale Proceeds Dalancing *harge

>i,marnoc? E@*ita.,e %oAo/erative 'ociet3 Ltd &s %!R

E ((K,CCC,CCC (K,CCC,CCC &,CCC,CCC 22222222222222 '(+,CCC,CCC) 2222222222222222 ,G@222@222 GGGGGGGGG

INITIAL ALLO:AN)E FOR INDUSTRIAL BUILDINGS

%(.C%.+: /@J +: O+Q/ N T U : P %(.C%.+Q /@J +Q O+K/ N T U : P IT/@J %(.C%.+K

'a) 'b) 'c) 'd) 'e) 'f) 'g) 'h)

EDA1INATION T0 E <UESTIONS :ITH ANS:ERS

<UESTION I IREEN 1A ULANGA

0ear )FF (++C &CC( &CC% &CC9 &CC: &CC:

ITVH &$+ %:9 (C,KCK %,+K9 $,$Q:

--;@8,,@G8- 12@;G8@,22 -AA@111@,8-

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