ZVINO MAPETERE CA(Z) 1

ZVINO MAPETERE CA(Z) 1

Lecturing Team

Zvino Mapetere – CA (Z)

Ackson Mapfundematsva

Fungai Charumbira


Course SyllabusTopic Legislation

The Administrative framework ALL

Gross Income and Case law Income Tax Act

Taxation of employment income Income Tax Act

Taxation of business income Income Tax Act

Taxation of income accruing to partnerships Income Tax Act

Withholding Taxes Income Tax Act

Double taxation reliefs Income Tax Act

Capital Gains Tax Capital Gains Tax Act

Value Added Tax Value added tax act

Partnerships Income Tax Act

Deceased Estates and Trusts Income Tax Act

Tax Avoidance and Transfer Pricing Income Tax Act


Study plan and technique

• Assumed Technical knowledge from CTA studies.

• Identify areas of weakness in terms of concept.

• Brush up.

• Practice discussing tax principles and referring to the Act.


5ZVINO MAPETERE CA(Z)

Overall Structure of the tax system

• Income Tax

• VAT

• Capital Gains Tax

• Estate Duty



• See Mind map on Gross Income


Gross Income – sect 8, 10 and 12

• Gross Income is defined as:-– the total amount ..

– received by or accrued to or in favour of a person..

– or deemed received or accrued..

– in any year of assessment…

– from a source within or deemed to be within Zimbabwe…

– excluding amounts proved by the taxpayer to be of a capital nature.


Amount

Section 2 of the Act defines ―amount as money or any other property corporeal or incorporeal having an ascertainable money value.

Case Law:

1. CSARS v Brummeria 2007

2. CIR v Butcher Bros (Pty) Ltd 1945

3. CIR v Lategan 1926


Received by

The words ―received by means ―received by the taxpayer on his own behalf for his own benefit.

Case Law:

1. Geldenhuys v CIR 1947

2. Pyott Ltd v CIR 1945


Received

• Deposits – E.g. Local cement manufacturer

- Containers

• Agents –

- Sales – E.g. Retail merchandising

- Commission


Accrued to

• Entitled or

• Due and Payable

Case Law:

1. CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990

2. CIR v Witwatersrand Association of Racing Clubs 1960


Accrued

• Instalment Credit Arrangements

• Revenue received in advance

• Rental Income

• Salaries from a contract of employment

• Wage workers

• Casuals

• Complex contracts


Deemed accrued – sec 10

1. Income invested on someone’s behalf. S10(1)

2. Partnerships s10(2)

3. Donations to a Minor child. Income accruingto donor or to parent. S10(3 and 4)

4. Donations where transfer is subject to acontingent event. s10(5)

5. Donations where donor retains controls10(6)


SOURCE• Zimbabwe’s taxation system is source basedCase law:1. Watermayer CJ in CIR v Lever Bros and Unilever Ltd 19462. ITC 235 (1932) 6 SATC 262 (director’s fees)3. CIR v Lever Bros and Unilever Ltd 1946, 14 SATC1 –

(interest)4. Transvaal Association Hide & Skin Merchants v COT

Botswana Court of Appeal (May 1962 SATC 97) –(international trade)

5. (COT V Shein 1958 14 SATC 12 – (rendering of services)6. Millin v CIR 1928 SATC 170 – (royalties)7. COT v British United Shoe Machinery (SA) (Pty) Ltd 1964

26 SATC 163 - (rental income)


Source based vs Residence Based

• When does residence matter in a source based system?

• Example of exporting persons and contract of employment in two jurisdictions.


Apply to non residents and temporary residents. Source of the following activities:

– Services – activity in Zimbabwe

– Employment – where services are rendered

– Property (sale, rent, rights) – where property is located

– Shares – resident company

– Moveable Property Rental – where it is being used

– Intellectual property disposal or licensing – used in Zimbabwe

– Interest – if debt secured by property in Zimbabwe, or where borrower is a resident or where borrowing relates to a business carried on in Zimbabwe.

– Dividend, management or directors fee – from a resident company

– Pensions – paid by a resident or the Government

– Natural Resource Payment – where relates to a Zimbabwe resource

18

Source Rules

ZVINO MAPETERE CA(Z)

Deemed source – sect 12In terms of section 12 of the income tax act income may be deemed to be from a source within Zimbabwe even if the true source is not Zimbabwe.Key sections:1. Section 12(1)(a) – goods sold in respect of contracts

signed in Zimbabwe2. Section 12(1)(b) – income from services rendered in

Zimbabwe3. Section 12(1) (c) - income earned by an employee

during temporary absence from Zimbabwe4. Section 12(1)(e) - pension and annuity receipts5. Section 12(2) - foreign interest and foreign dividends


Capital and Revenue• The definition of gross income specifically excludes

amounts proved by the taxpayer to be capital in nature.• The onus of proving that an amount is of a capital nature

and thus not part of gross income and, ultimately, not liabletoo tax rests fairly and squarely on the taxpayer.

• Apply the rule of floating vs fixed capital or the tree and thefruit approach.

Case Law:1. CIR v Richmond Estates 1956 – intention2. COT Southern Rhodesia v Levy 1952 - intention3. Burmah Steamship Co. Ltd. I.R.C. 16 T.C. 67 – hole in

profits vs hole in capital fixed assets


• Compensatory

Filling the hole

• Non-compensatory

Intention

Change in intention



Rates of Tax

• Normal taxable income - 25.75%• Foreign Co dividends – 20%• Mining

Other than companies and trusts – 25.75%Companies and Trusts – 25%Special mining lease operations – 15%

• Manufacturing companies exporting in excess of 50% of output by quantity or volume – 20%

• Pension funds - Exempt


Special Inclusions


Special Inclusion in Gross Income s8

TRADING STOCK (s8(1)(h))

• Stock on hand at year end

• Stock taken by person for domestic or private consumption/use

• Donated stock.

• The date of valuation

• Method of valuation

• Provision of the Income tax Act


Special Inclusion in Gross Income s8


Section 8(1)

(h)

Type or

Circumstance

Date of

Valuation

Method of Valuation

(Taxpayer to elect)

2nd

Schedule

paragraph

(i) Closing stock

Last day of tax year or

accounting year.

• Cost price• Cost of Replacement

• Market value4

(ii)Consumed by taxpayer orput to other use. Date of such use

• Cost price• Market value 5

(iii)

Stock on hand on date of deathor insolvency or donation.

Date of such

happening.

• Cost price• Cost of Replacement• Market value 4

(iv)

Attached by court

orderEnd of tax year.

• Cost price

• Cost of Replacement• Market value

4

(v)Sold with business pursuant tocourt order Date sold Selling price

6

(vi) Partially produced goods Last day of tax year or

acc. yr.

What the Commissioner considersto be fair & reasonable 7

Special Inclusion in Gross Income s8ANNUITIES S(8)1(a)

• Purchased Annuities

• Annuities by gift or legacy

• Annuities arising from disposal of an asset

• Annuity in the form of a pension

What is the important issue around annuities?

• Source

• Capital or Revenue


Exemptions


EXEMPTIONS s14 a.r.w. 3rd Schedule

• Companies

• Non Profit Organisations

• Dividends from local companies

• Income from which residents’ tax on interest is to be with held

• Receipt or accrual from the sale of traditional beer.

• Other receipts and accruals


Deductions


GENERAL DEDUCTION FORMULA s15

• Expenditure or losses to the extent to which;

• They are Incurred;

• For the Purposes of Trade or Production of Income

• Except to the extent to which they are capital in nature

• S15(2)(a)

• Expenditure is deducted at the earlier of payment or accrual


INCURRED• Actual Payment

• Obligation undertaken

• Legal unconditional liability to effect payment.

• Present and Inescapable debt

• Debt remains unpaid as long as a taxpayer is committed to it.

• What happens with prepayments?

• What happens with unrealised losses?

• What happens with provisions, contingencies, impairments or revaluations?


GENERAL DEDUCTION FORMULA s15

FOR THE PURPOSES OF TRADE

• Designed and fortuitous expenditure

• Capacity as a lawbreaker. (conflict between s8 principles and s15 principles?)

CAPITAL NATURE

Draw parallels with s8 capital nature principles?


SPECIFIC DEDUCTION

• Repairs (s15(2)(b)• Bad and doubtful debts (s15(2)(g)• Contributions to a benefit or pension fund (s15(2)(h)• Medical Aid Societies (s15(2)(j)• Experiments and research (s15(2)(m);(n);(o)• Educational Grant Bursary or scholarship (s15(2)(p)• Voluntary payments to former employees and or their dependants (s15(2)(q)• Donations (s15(r;r1-r5)• Subscriptions (s15(2)(s)• Expenditure prior to commencement of business (s15(2)(t)• Opening stock (s15(2)(u)• Trading stock acquired other than in the ordinary course of trade. (s15(2)(v)• Conventions and trade missions (s15(2)(w)• Legals costs on income tax appeals (s15(2)(aa & bb)• Approved Employee Share Option scheme (s15(2)(jj)• Maintenance on Behalf of Local Government (s15(2)(kk)• Export Development expenditure (s15(2)(gg)• Assessed Losses (s15(3)• Expenditure not yet incurred. (s15(2)(cc)


PROHIBITED DEDUCTIONS s16• Entertainment - s16(1)(m)• Thin Capitalisation - s16(1)(q)• Domestic or private expenditure - s16(1)(b)• Expenses recoverable under insurance - s16(1)(c)• Expenses incurred in production of exempt income or in

production of income deemed to be from a source within Zimbabwe. - s16(1)(f)

• Expenses incurred on property not occupied for purposes of trade. - s16(1)(i)

• Cost of securing sole selling rights - s16(1)(j)• PMV leasing cost excesses - s16(1)(k)• Cost of shares awarded to an employee - s16(1)(l)• Interest earned on capital employed. - s16(1)(h)


Capital Allowances


CAPITAL ALLOWANCES s15(2)(c) a.r.w. 4th schedule

Cost of asset

Purpose of the asset

Capital allowances and depreciation

Types of asset

Types of capital allowances


Cost of the Asset

IFRS initial recognition principles vs tax principles?

IFRS subsequent measurement principles

E.g. Importation of assets which have components – IFRS vs Income Tax Act principles and the resultant deferred tax for IAS12.

Personal assets brought into business and notional wear and tear


TYPES OF ASSETS – Immovables and Movables

ImmovablesCommercial Buildings – date of construction; purpose of the building(@ least 90% purpose of trade); hotel without liquor license; mannerof acquisition. Excludes, all other types below, building used 10% ormore for residential (not being a block of flats)Industrial Buildings – Purpose of the bldg. (manufacturing/industrialresearch). Inclusions list.Staff Housing – Permanent building; purpose of bldg. (wholly ormainly for housing employees); Restrictions on cost ($25,000)Farm Improvements – Permanent farm roads, clinic/hospital/schoolconstructed on the farm; restrictions on cost ($10,000 for c/h/s);qualifying requirements (usage – 50% of patients or pupils to beworking on the farm or have parents working on the farmrespectively)Tobacco Barn -


TYPES OF ASSETS – Immovables and Movables

Movables

PMV – definition of PMV; intended or adaptedpurpose of such MV; Exclusions, taxis, hotel guest vehicles, 15 or more passengers, leased vehicles; Restrictions – deemed cost is $10,000;

Articles Implements, machinery and utensils –Definition; Examples


Intangible Assets

Computer Software


Types of Capital Allowance

Special Initial Allowance

Wear and Tear

Scrapping Allowance



Special Initial AllowanceQualifying criteriaUpon electionConstruction of new immovable assetsCost of improvementsPurchased movable assetsPoints to noteCalculated on cost applying the straight line method.Never apportioned – time or usage basis.Never granted on donated and inherited assetsNever granted on commercial building (with an exception)Cannot be awarded on purchased buildings /immovable assetsTiming of commencementCannot be awarded to lessor on a financial leaseConsider percentage usage for purposes of tradeFiscalised Electronic Registers – charge SIA on 50% of the cost

ZVINO MAPETERE CA(Z)43


Wear and TearGranted on Immovable assets acquired or constructed.Granted on movables belonging to the Taxpayer.Points to noteWhere SIA has not been electedStraight line method for immovable and never apportioned in that case.Reducing Balance method for movablesApportionable on movables on: commencement of business, cessation of trade or when asset is used for dual purpose5% is the normal rate except for commercial buildings which are charges 2.5% on cost.


Cost Bases for Assets

Purchased Assets

Constructed Assets

Inherited Assets

Donated Assets

Hire Purchase Acquisitions


Scrapping Allowances

The assets must have been disposed of as scrap.

What is scrapping?

Business winding up?

4th Schedule


Recoupments s8(1)(j)

• Recovery of capital allowances

• Formulae for calculation

• Limitation to capital allowances previously granted.

• Recoupment on damaged assets.

• Transfer of assets – Companies under same control or spouses


LEASES


LEASES

Premiums & Rentals

• Lessor [Sec 8 (1)(d)]

- A lease premium is gross income in the hands of the lessor.

• Lessee [Sec 15 (2)(d)]

- Where the leased asset is used for the purpose of trade a lease premium is a business expense in the hands of the lessee over the period of the lease or 10 years whichever is shorter.


LEASESLease Improvements• Lessor [Sec 8 (1)(e)]

The value of the obligatory improvements constitutes gross income in his hands It is taxable over the period of the lease or 10 years whichever is the shorter

• Lessee [Sec 15 (2)(e)]The lessee is allowed a deduction on the value per agreement but this is spread over the unexpired period of the lease or 10 years whichever is the lesser from the date the property is first used.Capital allowances are provided as an alternative to s15 (2) (e) upon election by the taxpayer


LEASESLeasing Passenger Motor Vehicles

• Lessor

Any vehicle purchased for leasing purposes is not restricted in cost, under both financial and operating leases. (Paragraph 14(2)(c) of 4th

schedule)

• Lessee

In the case of the leasing of a passenger motor vehicle, the deduction is restricted to a maximum of $10 000. Section 16(1)(k)


SUSPENSIVE SALES AND CREDIT SALESHire Purchase and credit sales [s17 and s18]• 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.• However, sections 17 and 18 provide deductions which

enable taxpayers to be taxable on profit which relate to amounts which have become due and payable in each tax year.

• A calculation of the profit relating to amounts which are not yet due is made and deducted.

• This amount is added back to gross income in the subsequent year when a fresh calculation is then made.



Examinability


WITHHOLDING TAXES

What is the principle behind withholding taxes?

▪ This is a tax collection method used by ZIMRA where the payer (customer) deducts the tax when remitting to the payee (supplier) and remits this amount to ZIMRA.

▪ Withholding taxes can be a final tax (e.g. local dividends withholding taxes) or may be allowed as a deduction against a tax payers tax liabilities (e.g. withholding tax on contracts).


Contract Payments – sect 80

Requirement:10% to be withheld for all payments of $1,000 (cumulatively) per tax year in terms of contracts for which the payee does not provide a valid tax clearance.Key terms:• Payments: means payments by cash, cash, barter, set-off,

crediting a directors loan accounts, intercompany debits and credits or by other settlement of obligations whatsoever and in any form.

• Contract: means a contract in terms of which a registered tax payer is obliged to pay amounts totaling an aggregate amount of $1,000 or more over the year of assessment.


Shareholders tax – sect 26 & 28

• In respect of dividends to both resident and non resident shareholders.

• Dividends (15th schedule):

– Amounts distributed to shareholders but excludes bonus shares (dividend in specie); - cash dividend, deemed dividend (sect 16 (1) (q)).

• Rates : Listed companies – 10%, Non listed : 15%

• The W/T does not apply if dividend is payable to a company incorporated in Zimbabwe.


Non resident tax on fees- sect 30 & 17th schedule

Key terms:• Non resident person – person, company or

partnership not ordinarily resident in Zimbabwe (think of ordinary residence test).

• Fees – amounts paid in respect of technical, managerial, administrative or consultative services – (however think of the exclusions as per the definition).

Rate of tax: 15%When is it payable to ZIMRA: within 10 days of date of payment.


Non resident tax on remittances – sect 31 & 18th schedule

Requirement:Any non resident person who effects any remittance in respect of allocable expenditure shall pay non resident tax on remittances in relation to that remittance.Key terms:• Non resident: refer to previous slide;• Remittance: the transfer of any amount from Zimbabwe to another

country.• Allocable expenditure: expenditure of a technical, managerial,

administrative or consultative nature incurred outside Zimbabwe by a non resident person in connection with their Zimbabwean trading activities.

Rate of tax: 15%


Non Resident tax on royalties – sect 31 and 19th schedule

Requirement:Every payer of royalties to a non-resident person shall withhold non resident tax on royalties.Key terms:• Non resident: refer to previous slides• Royalties: amounts payable from a source within

Zimbabwe for the right of use or use of intellectual property. E.g. caseware annual license fees.

Rate of tax: 15%


Resident tax on Interest : sect 34 & 21st

schedule Requirement:

• 15% should be withheld from interest paid by a financial institution on loans, deposits, treasury bills, Bankers acceptance e.tc

• Please note that the withholding tax rate for fixed term deposits with a tenure of at least 90 days is 5%.


Non-executive director fees – sec 36J

Requirement:

20% should be withheld from payments to resident and non resident non executive directors who are not subject to PAYE.



Examinability


Tax Avoidance generally: sect 98

Requirement:

Where a transaction has been entered into:

⁻ In a manner which does not normally apply for similar transactions; or

⁻ Has created rights and obligations which would not normally be created between persons dealing at arms length.


Tax avoidance generally

How then will the commissioner determine tax payable?

⁻ May completely disregard the existence of such transaction or

⁻ Determine the tax payable in such a way that there is no avoidance or reduction of tax liabilities.


Implication of this requirement

▪ The provision apply regardless of whether the parties to the transactions are related.


Income splitting- sect 98A

What is income splitting?

⁻ Transfer of income or property to an associate and the sole or main reason for the transfer is to lower the tax payable on the incomes of the two parties.

What is an associate?

⁻ Refer to sect 2A & page 67 in module 1


Income splitting- sect 98A

What happens if a transactions results in income splitting?

▪ The commissioner will tax the two parties as if the transaction which resulted in income splitting never occurred.


Transactions between associates

Sect 98B & 35th schedule


Requirement – par 1

The taxable income for controlled transactions between associates shall be determined with reference to the arm’s length principle in a comparable uncontrolled transaction .

From the above key questions to answer are:

⁻ What is a controlled transaction?;

⁻ How do we determine comparability;

⁻ What is an associate?; and

⁻ How do we determine arms length price?


Comparability – 35th sch par 3

An uncontrolled transaction is comparable to a controlled transaction:

▪ Where there are no material differences between the two transactions or

▪ Where there is such differences accurate comparability adjustments can be made.


Controlled transaction – 35th

schedule par 1Uncontrolled transactions means any transaction between independent persons.

Quiz: provide examples of controlled transactions.


Arms length principle – 35th sch par 4

The arms length principle shall be used to determine the transfer price to be used in calculating the taxable income for controlled transactions between associates.

Transfer pricing methods:

1. Comparable uncontrolled price – page 71 module 1;

2. Resale price – page 71 module 1;

3. Cost plus – page 72 module 1;

4. Transactional net margin – page 72 module 1; and

5. Transactional profit split method – page 73.


Transactions with non-residents

Provisions in 98B also to transactions with non-residents.



Examinability


LEARNING OUTCOMES• To understand what employment income is and its difference from

business income.

• To understand the tax computation model of applying PAYE tables andadministration of PAYE.

• To understand employment benefits.

• To understand special treatment of certain types of employment incomesuch as pension fund transactions. (Section 8(1)(n) and section 8 (1)(r))

• To itemize the concessions available for the elderly.

• To appreciate available exemptions to individuals (section 14 and 3rd

schedule)

• To understand tax credits (section 7c)


EMPLOYMENT INCOME DEFINITION

• What is employment income and how is it different from trade and investment income or business income?

• Employment income – It is income earned by an individual i.r.o services rendered under any contract of employment and any amount received due to the cessation of employment.

• Income from Trade and investment defined – income received/accrued to a person other than a company or trust, from any trade investment or other activities, but does not include income from employment.


EMPLOYMENT INCOME DEFINITION s8(1)(b) a.r.w. 13th Schedule

• Services could have been already rendered or may be yet to be rendered.

• The amount could be due and payable or not for as long it has been received/accrued

• Cessation of trade – amount may not necessarily be for services rendered but for cessation of employment.

• What is an employee?

• An individual to whom remuneration is paid or payable at an annual rate.

• Remuneration includes – any amount of income which is paid or payable to any person by way of any salary, leave pay, allowance, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance, stipend or commutation of a pension or an annuity, whether in cash or otherwise and whether or not in respect of services rendered, including any amount referred to in s8(1)(a), (b), (c), (f).

• Remuneration excludes – (a) trade and investment income from independent party, (insurance agent and estate agent), (b) directors fees if no other amounts constituting remuneration have been paid, (c) board chairmen of statutory entities (conditional) (d)3rd

schedule exemptions, (e) amounts paid to partner from partnership, (f) reimbursement of expenditure incurred by employee for the purposes of the employer’s trade (g) commutation portion of pension or annuity not forming gross income


FRAMEWORK FOR TAXATION OF EMPLOYMENT INCOME


• Total employment Income [Sect 8 (1)(b)] xxxx

• Less Exempt income (Sect 14 & 3rd schedule) (xxxx)

• Income xxxx

• Less: s15 Allowable deductions (xxxx)• Taxable Income xxxx• Calculate tax using the tax tables xxxx• Less: Credits [Sect 7 (c)] (xxxx)• Add: 3% levy xxxx

xxxx• Less: PAYE (Remitted over the course of the year) (xxxx)• Tax liability xxxx

PAYE ADMINISTRATION (s71 and 73 a.r.w. 13th Schedule)

• Any resident or non-resident employer, who employs one or more members ofstaff whose gross pay, including benefits and allowances, exceeds USD300 permonth or the daily, weekly or annual equivalent, is required to register with therelevant Regional Manager of the Zimbabwe Revenue Authority (ZIMRA), withholdPAYE from employees and remit PAYE to the Commissioner General by the 10th ofthe month following the deduction.

• Employers are responsible for under deductions as well as late payment of PAYE.

• Interest is charged and penalties of up to 100% of the unpaid tax can be imposedon the employer.

• Personnel employed by a single employer for the full fiscal period are taxed on theFinal Deduction System.

• PAYE will be a final tax on employment income for the employee who will then notbe required to complete tax returns.

• Personnel employed by more than one employer or employed for part of a fiscalperiod and all individuals who receive pensions or annuities or taxable incomefrom trade and investment are required to complete and submit annual taxreturns.


EMPLOYMENT BENEFITS Section 8(1)(f)• What are employment benefits? How could these be possibly taxed?

• Generally taxed with reference to the cost to the employer, however for occupation or use of accommodation, the value to the employee is applied.

• Specific Employment Benefits: Which ones do we know?

• Motoring – (a)for right of use. Scopes out repairs and fuel. (b)Deemed based on engine capacity and duration of the right of use over the year of assessment.

• Disposal of Motor Vehicle to an employee – Reference to the value to the employee

• Passage benefit – defined s8(1)(g).

• Occupation of residence and use of furniture. – Reference to value to employee. Depends also location for the accommodation.

• Loan benefit – deemed benefit with reference to LIBOR

• Shares acquired pursuant to employee share option scheme – Must be exercised. Must be a share option scheme. Timing must be considered i.e. pre and post 2009.

• Educational assistance

• School fees

• Free or subsidised lunch


SPECIAL POINTS TO NOTE -

PENSIONS

Pension fund definition – section 2.

Means:

• A fund established by any law for the purpose of providing, amongst other things,annuities or pensions on superannuation or retirement; or

• A fund registered or provisionally registered as a pension fund or retirementannuity fund under the Pension and Provident Funds Act [Chapter 24:09].

What is the impact of registration in defining a pension fund?

What is an RAF?

Is an RAF a pension fund?

Contributions to pension funds by the employer are allowable subject to restrictions:

(a) Pension fund other than an RAF – 5,400. (b) RAF - $2,700 (c) aggregate max -$5,400 .


SPECIAL POINTS TO NOTEPENSION RECEIPTS.

Pension annuity s8(1)(a); Pension lumpsum s8(1)(r); RAF annuity; RAF lumpsum or commutation receipts

• Pension annuity s8(1)(a) – (taxable in equal streams in each year until person dies)refer to accrual understanding per s8 gross income definition. Adjustment is madefor the contributions disallowed. -

• Pension lumpsum s8(1)(r) – fully taxable at HMR. (excludes amounts from an RAF)

• RAF annuity – as pension annuity

• RAF lumpsum s8(1)(n) – Commutation of 1/3 of the lumpsum amount in its 1st

year of receipt. It is regarded capital in nature. Commutation is awarded afterelection.

• Retrenchment Package – Exemption is the greater of the person’s first $10,000 of the package or a 3rd of the package (up to a maximum of a 3rd of $60,000)


CONCESSIONS FOR THE ELDERLY• Who are the elderly?

• 55 years of age or more

• Exemption from income tax of the first US$3 000.00 per annum on rental income.

• Exemption from income tax of the first US$3 000.00 per annum on income earned from bankers acceptances.

• Exemption from income tax of the first US$3 000.00 per annum on income earned from interest on deposits to financial institutions.

• Entitled to an elderly persons’ credit of US$900.00 per annum.

• Pension received from a pension fund or the Consolidated Revenue Fund is exempt from income tax.

• Where an employer disposes of a motor vehicle to an employee whether on termination of employment or otherwise, the benefit is exempt from tax.


EXEMPTIONS s14 a.r.w. 3rd schedule

What are exemptions?

• They are not exclusions from Gross Income. What is the difference?

• Exemptions are gross income items that are specifically exempted by provisions of the income tax act.

• Refer to s14 and the 3rd schedule for the list of exemptions available to individuals


CREDITS (Section 7 the Charging Act)

• What are tax credits?

• Tax credits are amounts credited to the taxpayer after calculating their tax ontaxable income thereby reducing the liability.

• How are they different from allowable deductions?

• What are the key categories?

• Elderly person, Blind person, medical expenses, Mentally or Physically disabledperson.

• Tax credits have a fixed amount or may be based on an expenditure incurred.

• Apportionability – can only apportion elderly if year of assessment is less than 12months

• Transferrability between spouses – only possible for blind persons credit and formentally or physically disabled persons.

• Minors.

• Residence.



Examinability


CAPITAL GAINS TAX

• What is capital gains Tax?

• Tax levied on

- capital gain arising from;

- disposal of specified asset.

• What is the significance of a disposal in a CGT transaction? Can there be CGT consequences without a disposal occurring?

• When can a disposal be deemed to have occurred? (sect 10 (1) and(2) of the Taxes Act)


DEFINING SPECIFIED ASSETS (Sect 2)• Why should we be able to separately identify a specified

asset?

• What is a specified asset? (sect 2)

- Immovable Property; or

- Any Marketable security

• What is a marketable security?- Any bond capable of being sold in a share market or exchange.

- Any debenture, share or stock; or

- Right possessed by reason of a person’s participation in any unit trust;

Whether or not capable of being sold in a share market or exchange;

• Are listed and non-listed shares both marketable securities? Why or why not?


DETERMINATION OF CAPITAL GAINS TAX (Sect7 & 8)

• FOR ASSETS ACQUIRED PRIOR TO FEB 2009

- Apply 5% to the disposal proceeds.

• FOR ASSETS ACQUIRED POST FEB 2009

- Rate (fixed in the Finance Act) x Capital Gains of a person in the year of assessment

• Capital Gains = Gross Capital amount –Exemptions - allowable deductions


DEFINING THE GROSS CAPITAL AMOUNT Sect 8 (1)(a)

• Total amount received; (or deemed received)

• By a person;

• In any year of assessment;

• From a source within Zimbabwe

• From the sale

• Of specified assets;

• Excluding amounts proved by the taxpayer to constitute gross income

• Includes amounts allowed to be deducted in terms of

sect11(2)


DEEMED SALES (Sect 8(2))

• How else could one dispose of assets other than by way of sale?

• What is to sell? What is the significance of a consideration and its form in a sale?

- Expropriations

- Sale in execution of court order

- Maturity or redemption of a specified asset


IDENTIFYING DISPOSALS, ENTITIES AND INDIVIDUALS EXEMPT FROM CAPITAL GAINS TAX. (Sect 10)

- Who shall be exempted from Capital GainsTaxes?

- Which type of disposals shall be exempted?


IDENTIFYING THE DEDUCTIONS THAT ARE ALLOWABLE IN DETERMINING A CAPITAL GAIN

(Sect 11)

• What would be allowable as a deduction and why?

• The cost of the asset and any improvements at what value? (Sect 11(2)(a)(b))

• Why Inflation allowances? (Sect 11(2)(c))

• Selling expenses, bad debts, High and supreme court appeal costs

• Assessed capital losses brought forwardZVINO MAPETERE CA(Z) 97

DAMAGED SPECIFIED ASSETS (Sect 13)

• Are the compensation proceeds deemed to be a sale proceeds always?

• Why is it that in some cases capital gains are not calculated on the insurance proceeds?


POSTPONEMENT AND RELIEFS (Sect 15 & 16 &17 )

• When would a taxpayer be allowed to postpone the computation of capital gains tax and until when?

• The concept of companies under same control and marriage.

• The election to postpone and mechanism.

• How is a postponement different from a relief? In what circumstances do we computes a relief?


SUSPENSIVE SALES (Sect 18)

• How are suspensive sales an exception to section 8 principles?

• Suspensive sales and the due and payable concept vs accrual concept.

• How to effect a relief and the treatment of a relief granted in the subsequent tax year.


PRINCIPAL PRIVATE RESIDENCES AND SUBSTITUTION OF BUSINESS PROPERTIES (Sect

21 &22)

• What is a principal private residence (PPR)?

• What special tax treatment do PPR transactions get?

- Postponement of capital gains tax

- Taxable portion of PPR proceeds.



Examinability


VAT CONCEPT

• “A value added tax (VAT) is a consumption taxadded to a product's sales price. It representsa tax on the "value added" to the productthroughout its production process”

- definition by Investing Answers


http://www.investinganswers.com/node/5682

HOW VAT WORKS


VAT FORMULA

• Total Output VAT xxx

• Less: Total Input VAT (xxx)

• VAT Payable/Refundable XXXX


VALUE ADDED TAX – SECTION 6

There shall be charged levied and collected, a tax (outputtax) on the value of:a. The supply by any registered operator of goods or

services, supplied by him on or after the fixed date inthe course or furtherance of any trade carried on byhim. NB This shall not apply to supply of secondhand motor vehicles; and

b. The importation of any goods into Zimbabwe by anyperson on or after the fixed date; and

c. The supply of any imported services by any person onor after the fixed date; and

d. Goods and services sold through an auctioneer(s56)by persons who are not registered operators


VAT Section 6


1. What is a supply?

The definition of a supply is not concise – “includes all forms of supply,irrespective of where the supply is effected and any derivative of “supply”shall be construed accordingly. Obviously this casts the net very wide in terms of

what a supply is. E.g. tuition

2. What is a registered operator?A person who is or is required to be registered by the VAT Act. Refer to page .

3. What are goods or services?Goods – corporeal movable things, fixed property and any real right in anysuch things or fixed property. Take note of exclusionsServices – anything done or to be done, including the granting orassignment, cession or surrender of any right or the making available of anyfacility or advantage, but excludes the supply of goods, money or any stampas contemplated in para (c) of definition of goodsSecond Hand Motor Vehicles – Define second hand motor vehicles withreference to section 6 where it talks of second hand motor vehicles as defined ins172B Customs and Excise Act [Chapter 23:02].

VAT Section 6

4. What is the fixed date?

The date of commencement of the VAT Actin Zimbabwe, being ………………..???

5. What is Trade?

The definition in the VAT Act is a long one.This is a very important definition as itscopes in or out a lot of supplies for VATpurposes.


A FEW KEY ISSUES ABOUT THE DEFINITION OF TRADE

INCLUDES:1. Continuous or regular carrying out of the activity; and2. Person carrying out the trade must be carrying it out in

Zimbabwe or partly in Zimbabwe; and3. For a consideration4. Whether or not for profit

EXCLUDES:• Hobbies• Employment• Supplies to an independent branch outside

Zimbabwe. Accounting system must be separate.• Exempt supplies


IMPORTED GOODS (Section 12)

• Imported goods

• For consumption in Zimbabwe

• Import VAT to the extent that they are not exempt supplies.

• Tax Rate X Value for tax purposes = Import VAT

• Value for Tax Purposes = Value for duty purposes + duty

• Value for duty purposes = CIF


IMPORTED SERVICES

• Imported Services

• The service have to be for making non-taxable supplies for VAT to be levied on them. S2 definition of imported services.

• VOS – greater of OMV or the invoice value of the service.

• VAT is payable by the recipient of the services.


WHO CHARGES AND ACCOUNTS VAT ?

• Seller

• Imported service

• Imported goods


GOODS AND SERVICES SOLD THROUGH AN AUCTIONEER

• The owner of goods being sold through anauction may not be a registered operator. Focus ison such a transaction as the auctioneer is only anagent.

• Auctioneer - means a registered operatorcarrying on a trade which comprises or includesthe supply by him by auction or by sale, of goodsand services as an auctioneer or agent for or onbehalf of another person,

• Exclusion of second hand motor vehicles remains.


DISCUSS WHETHER VAT SHOULD BE LEVIED ON THE TRANSACTIONS BELOW

• Sale of fish by OK Zimbabwe?• Sale of fish by Ben a sole trader and registered

operator who had gone fishing with his family and his neighbour has offered to buy the fish for $20.00?

• Donation of fish with a market value of $20 by Ben to his good neighbour which fish he had ordered as inventory from Lake Harvest?

• Sale of fish by Ben (a non-registered operator) who ordered fish from Lake Harvest for home consumption but sold it to a cousin who was passing through Harare.


TAXABLE AND NON-TAXABLE SUPPLIES

• Taxable Supplies

- Zero Rated supplies

- Standard Rated supplies

• Non-Taxable Supplies

- Exempt


CLASSIFYING SUPPLIES Section 10 & 11Zero rated supplies – section 10 (0% Vat)• They are taxable supplies.• No empirical rule to determine them but generally this

concession of zero rating is on supplies likely to stimulate economic growth such as:

• Exports and a number of transactions to do with export countries;

• Supplies on temporary imports;• Supply of Business as a going concern;• Specified Drugs;• Supply of gold to specified institutions;• Supply of agricultural inputs to farmers• Common bricks• Basic commodities


CLASSIFYING SUPPLIES Section 10 & 11• Exempt Supplies Section 11• Not subject to VAT. They are excluded from the definition of trade;• The suppliers do not register for VAT;• Examples:• Financial Services;• Educational Services;• Transport for fare paying passengers;• Supplies by an association not for gain of goods;• Medical services;• Supply of goods and services by an employee organisation to its

members to the extent that consideration of supply is limited tomembership contributions;

• Supply of fuel and fuel products• Supply of residential accommodation in a dwelling under a lease or

hire agreement.


TIME OF SUPPLY Section 8

• Time of supply rules determine when a Taxpayer should account for any output tax applicable for a taxable supply.

• Generally – the earlier of an invoice being issued or payment being made.


VALUE OF SUPPLY (Sections 9)

• Value of supply

• Where the consideration is in money, the value is the consideration less VAT

• Where the consideration is not in money, the OMV becomes the consideration


DEEMED SUPPLIES (Section 7)

• Sale in execution of debt; (VOS and TOS)• Cessation of trade by a registered operator;• Door to door sales with an option to return;

goods;• Lay bye agreement of consideration not less than

$25;• Supply of a business as a going concern;• Indemnity payment under an insurance;• Transfer of goods to independent branches;• Goods repossessed;• Betting services


DEEMED SUPPLIES

• For special supplies both the TOS and VOS are varied:

• Goods supplied under rental agreements

• Instalment credit agreements

• Sales to connected persons

• Goods applied to own use


PRACTICE

Discuss the Time of Supply and Value of Supply of :

• Cessation of trade

• Lay bye agreement

• Instalment credit arrangement

• Door to door sales with an option to return the goods.


INPUT TAX (Section 16)

• Section 16(1)

• Generally claimed on all goods/services, provided:

• They are utilised in the production of taxable supplies.

• Mixed supplies – apportion using acceptable basis suchas turnover basis.

• What is the deminimus rule?

• Section 16(2)

• Prohibited deductions

• Entertainment

• Purchase of PMVs

• Subscriptions fees to clubs or associations of arecreational nature.


MIXED SUPPLY EXAMPLES – INPUT TAX

• Block of flats used for both residential and commercial.

• Entity operating hospital, pharmacy and shops.

• Transport company operating buses ferrying fare paying passengers and buses for hire.

• Car manufacturer selling cars and offering mortgage financing for the inventory.


ADJUSTMENTS (Section17)

• Change of use may cause adjustment to the initial assessment and Tax computed and or paid.

• The change is in usage from taxable supplies to non-taxable supplies or vice versa.• S17(1) – Goods subsequently used to make non-taxable supplies. Output VAT

adjustment is done. VOS is the OMV. No adj where original input tax was denied.• S17(2) – Reduction in taxable use of capital goods (deemed supply). Not necessary

if cost of the goods was less than 60 and if input tax was originally denied. VOS isthe lesser of OMV or cost. TOS is the 31st of December of the year of assessment.

• S17(3) – Fringe Benefits – deemed supply for which output tax should becalculated. VOS is the value determined for PAYE purposes. This subsection isinapplicable if:

- supplies are exempt s11- supplies are zero rated s10- supply of entertainment.- benefit granted by registered operators who are in the

business of making exempt supplies.- excludes monetary benefits because money are not goods.


ADJUSTMENTS S17(4)

• Goods acquired prior to fixed date. (subsection a)Input Tax AdjustmentApply tax fraction to Lesser of cost or OMV

• Goods acquired after fixed date. (subsection b)Input Tax AdjustmentApply tax fraction to Lesser of cost or OMV

• Fixed Property Transactions (subsection c)seller is registered operator –- charge VAT on both residential and

commercial properties- commercial property used to make both

taxable and non taxable supplies and was allowedpart of the input tax then acc for output tax on thesale and an adjustment is allowed for input tax notpreviously claimed.

- If sale is by way of instalments then acc for output whenpmt is received


ADJUSTMENTS Continued 17(4)

• Seller is a non-registered operator

- No VAT is chargeable.

- If acquirer is registered then notionalinput tax only where stamp duty ispaid or payable and restricted to thatstamp duty


INCREASE IN USE OF CAPITAL GOODS (Section 17(5))

• Timing – It is done at the end of the year of the operator’s financial year

• Tax fraction applied to the lesser of cost or OMV


SALE OF BUSINESS AS A GOING CONCERN

• Criteria for identifying a going concern• Sale is zero rated• Deminimus rule applies• Adjustments to post sale transactions may then

create output tax adjustments.• Calculation of adjustments involves determining

items that did not qualify for input tax deduction first. The proportion of use for taxable vs non-taxable is also then applied.

• Where the two parties are connected persons then deeming provisions are invoked to apply the OMV if consideration is below the market price.


VAT

• Pre-incorporation expenses – s19• Irrecoverable debts – s22• VAT Registration – s23

- Liability for registration- Voluntary registration- Registration procedure- Deregistration

• Tax Periods S27- Categories (A-D)- Submissions of returns and payments

• Tax Invoices s20- Requirements in issuing- Details on the face of the tax invoice

• Agents and auctioneers s56


OBJECTIONS AND APPEAL

• Timing

• Lodging an objection

• Grounds of an objection

• Late Objections

• Appeals



Examinability


LEGAL STATUS and TAX


• Partnership is not a juristic person.

• Income Tax Act - definition of a person – section 2specifically excludes partnerships from the definition ofa person.

• Income Tax Act - section 6 drives the charging ofincome tax on persons and since section 2 excludesPartnerships from the definition of persons thereforeincome tax is not chargeable on Partnerships.

• VAT – The VAT Act does not exclude partnership fromthe definition of a person.

• CGT – Section 9 of the CGT Act provides for mutatismutandis application of s10 of the Taxes Act.

DEEMED INCOME• Income is taxable in the hands of the individual

partners.

• Deeming provision of the Income Tax Act appliesi.e. s10(2)

• Partnership income is determined and thenshared amongst partners in the profit sharingratios per Partnership Deed.

• Partnership income is not employment incomeas it specifically excluded from the definition ofremuneration.


TRANSFER OF ASSETS

• How transfers may come about -

- Retirement or admission or the death of a partner.

- Conversion of a sole trader to partnership or partnership to a company.

• Recoupment on old partnership or sole trader. i.e. Income Tax Act. Consider CGT and VAT.

• Capital allowances claimed by the new partnership.


PARTNERSHIP TRANSACTIONS


• Bad Debts - cannot be claimed where they were not included in thetaxpayers income in prior years.

• Insurance Policies- Joint Life PolicyWhere premiums are expensed to the partnership’saccount, the deduction is not allowable if the partnershipis the beneficiary.

- Separate policy on own life ceded to the partnershipThe partnership has become the beneficiary and thereforethe premiums are no longer allowable deductions

- Separate policy for own benefit funded by partnership.This is an allocation of partnership profits and so allowableas a deduction in computing the partnership’s taxableincome and taxable income in the hands of the eachpartner to the extent the premiums were paid on theirbehalf by the partnership.

PARTNERSHIP TRANSACTIONS

• Partners’ private expenditure borne by thepartnership.

• Partners’ salaries.

• Rent received by a partner for the use of herasset.

• Contribution to a medical aid society by thepartnership on behalf of a partner is allowablededuction to the partnership and taxable in thehands of the partner.

• See table of partnership expenditures in module



Examinability


SECTION 2 AND DECEASED ESTATES & TRUSTS


Section 2 specifically interprets a person toinclude:

a. A deceased or insolvent estate; and

b. A trust, in relation to income the subject ofa trust to which no beneficiary is entitled

SECTION 11• Provision deals with INCOME DERIVED from assets in

a deceased estate.• Key terms:

a. Ascertained beneficiaries S11(1)b. Assets in a deceased estate S11(1)

• Pre and Post death income.On the death of a taxpayer an assessment is raised onthe deceased’s taxable income accruing to the date ofdeath. A new taxpayer i.e. a deceased estate, comesinto being after the death. A determination has to bemade as to in whose hands post death incomeaccrues.


SECTION 11 – POST DEATH INCOME

There are at least three possible taxpayers that may be liable to income tax after a person has died.

a. The deceased person – where income is determined to have been pre-death.

b. An ascertained beneficiary

c. The deceased estate.

Section 11 provides for the taxation of the post death income


Identifying the tax payer

Terms of a will are very important.

Section 11(2)

a. Where a specific asset is left to a specific person – ascertainedbeneficiary

b. The ascertained beneficiary is taxable on the income derived from theasset from the day after death of the deceased.

Section 11(3)

a. Residue in a will is taxable in the hands of the estate.

b. This is of income derived from the asset or residue from the day afterdeath until date of distribution by the executor.


Identifying the taxable income in post death period


Section 11(4)(a). Income by virtue of a right forming part of the assets in a deceasedestate which didn’t become due and payable before the death of the

deceased person shall be income IF the amount would have beenincome of the deceased person had it been received in his lifetime. Thisshall therefore be taxable in the hands of either the deceased estate orascertained beneficiary.(b). (a) above is not applicable if:

The deceased had no right the amount in his life time;The amount is received ex gratia.

Expenditure against post death income

• Residence status of an estate

• Medical expenses of a deceased paid afterdeath - claim a credit in the pre-death period.


Tax rates

Think of the identity of the income:

• Employment income

• Trade and investments income


TAXATION OF TRUSTS

• Section 2 includes Trusts in the definition of a person. Unless it has income to which a beneficiary is entitled.

• If a beneficiary has a vested right he then is taxable and the Trust is only a conduit.


Trust income and expenditure

• Trust income maintains its identity upondistribution to a beneficiary, unless it isdistributed by way of an annuity.

• The general deduction formula applies to trustincome. However, no expenditure is allowableagainst exempt income.


Expenditure on exempt income• In a case where trustees earn a commission on

all income they earn for the trust, and part of that income is exempt. Then the commission is only deductible to the extent that it does not relate to the exempt income.


Expenditure on exempt income

• Use the following formula to determine the non-deductible portion of the expenditure:

𝐴 ×𝐵𝐶

• A – exempt income

• B – direct expenditure in production of trust income

• C – total gross income created by trustees


Beneficiary rights

• Vested right – beneficiary has the right to all of the income in the trust, the trustee(s) have no discretion to distributed. All income taxed in the hands of the beneficiary, whether distributed or not.

• Contingent right – beneficiary only has right to income upon meeting certain conditions, e.g. passing CTA. Only the distributed income is taxed in the beneficiary’s hands, the retained income is taxed in the hands of the trust


Beneficiary rights

• Neither vested, nor contingent right – this means that distributions are made at the discretion of the trustees. All income is taxed in the hands of the trust.


Documents

ZVINO MAPETERE CA(Z) 1