Integrity House, Corner Sam Nujoma & Bath Road

P.O. Box 1079, Causeway, Harare

TELEPHONE: 263-4-793950/471/252672

FASCIMILE: 263-4-706245

E-MAIL: [email protected]
A member of IFAC and ECSAFA WEBSITE: http://www.icaz.org.zw

Zimbabwe Certificate in
Theory of Accounting

Level 2

Zimbabwe Taxation 2024

ZIMBABWE CERTIFICATE IN
THEORY OF ACCOUNTING
(ZCTA)

LEVEL 2

ICAZ CLASS OF 2024

APPLIED TAXATION

MODULE 1 - 2024
Key personnel and contact details

Name Contact number Email

Marvellous Tapera +263 772 349 740 [email protected]
Gibson Moyo +263 777 282 421 [email protected]
Simelinkosi I Mangena +263 774 337 913 [email protected]

i
Background to Taxation

Taxation is a subject grounded in law. It provides a distinct separation between right and wrong answers,
ensuring a consistent solution format. Unlike other subjects, detailed computations are often less
intricate in taxation, offering students struggling with numbers an opportunity to improve their overall
marks.

Taxation may seem like a vast set of rules to memorise, but it's grounded in principles, objectives, and
history. Instead of fixating on "what" or "how," delve into the "why." This investment in
understanding will streamline applying legislation in exams and handling unfamiliar topics effectively.
This program aims to enhance your exam technique and refresh your technical knowledge. To optimise
its effectiveness, it's crucial to compare your solution with the model answer for each tutorial. Merely
arriving at the correct number is insufficient; you must align with the same approach, detail level, and
utilise appropriate section referencing for scoring. Even if your answer matches, consistently ask, "How
could my exam technique be improved?"

ii
Assumptions and Abbreviations

Unless otherwise stated, the following assumptions must be made when interpreting the examples and
practical questions in this volume:
• References to “the Act” bear reference to the Income Tax Act [Chapter 23:06]
• Businesses are registered operators for Value-Added Tax (VAT).
• Current year of assessment is the period from 1 January 2024 to 31 December 2024.
• The cost price of all purchases made by registered operators for VAT purposes is net after
any input tax credit (Vat Exclusive) to which they are entitled to.
• All calculations are in Zimbabwe dollars unless or otherwise stated.

iii
Abbreviations
Act Income Tax Act [Chapter 23:06]
CAP Chapter
CG Commissioner General
CGT Capital Gains Tax
CIR Commissioner of Inland Revenue (South Africa)
CIR Commissioner of Internal Revenue (for US)
COT Commissioner of Taxes
CPD Cape Provincial Division Law Reports
CSARS Commissioner of South Africa Revenue Services
DTA Double Taxation Agreement
GN Government Notice
HCA High Court of Australia
HH High Court of Harare
HM His Majesty
IMTT Intermediated Money Transfer Tax
IPEC Insurance and Pension Commission
ITA Income Tax Act [Chapter 23:06]
ITC Income Tax Case
KB King Bench’s Division
NRTF Non-resident withholding tax on fees
PAYE Pay As You Earn (Employment Tax)
Para Paragraph
(Pvt) Ltd (Private) Limited
QPD Quarterly Payment Date (Provisional Tax)
RAA Revenue Authority Act [Chapter 23:11]
S or sect Section
SA South Africa Law Reports
SATC South African Tax Cases
SC Supreme Court
SI Statutory Instrument
TC Tax Cases (United Kingdom)
TPD Transvaal Provincial Division Law Reports
USD / US$ United States of America dollar
VAT Value Added Tax
WT Withholding Tax

iv
ZIMRA Zimbabwe Revenue Authority
ZWL$ / ZW$ Zimbabwe dollar
ZLR Zimbabwe Law Report

v
TABLE OF RELEVANT STATUTES

Administration of Justice Act [Chapter 10:28]

Capital Gains Tax Act [Chapter 23:01]
Companies Act [Chapter 24:03]
Companies and Other Business Entities Act [Chapter 24:31]
Constitution of Zimbabwe (Amendment No. 20) Act, 2013
Estates Duty Act [Chapter 23:03]
Finance Act [Chapter 23:04]
Fiscal Appeal Court Act [Chapter 23:05]
Income Tax Act [Chapter 23:06]
Interpretation Act [Chapter 1:01]
Revenue Authority Act [Chapter 23:11]
Small to Medium Enterprises Act [Chapter 24:12]
Value Added Tax Act [Chapter 23:12]

vi
SYLLABUS

CTA 2024 SYLLABUS

TAXATION EXAMINABLE PRONOUNCEMENTS

Core legislation under examination and level description

The syllabus primarily covers taxes and duties levied in terms of the following five statutes:
The Income Tax Act [Chapter 23:06]
The Value Added Tax Act [Chapter 23:12]
The Capital Gains Tax Act [Chapter 23:01]
The Finance Act [Chapter 23:04]
The Estate Duty Act [Chapter 23:03]

All other taxes, duties and levies payable in terms of various statutes have been excluded from the
syllabus, unless specifically mentioned in this document. References to the relevant Act have been
inserted in the syllabus where appropriate.

Regulations, interpretation notes and binding general rulings are to be covered on the same level as the
applicable provision in the Act.
Knowledge levels as defined in the Competency Framework are summarised as follows:

Level 1 (Basic)

At this level the candidate must grasp the fundamental knowledge and understanding of the subject
matter, acknowledging its existence, significance, relevance, and defining attributes.
Consequently, the candidate is required to have a knowledge and understanding:
• Of the purpose and objective of the subject matter;
• Of the underlying principles/practices/legislation/requirements (hereafter “content”); and
• Of how the content relates to the discipline as a whole and to other disciplines (how it “fits in”); at
a broad conceptual level.

At this level, knowledge and understanding of detail, including procedural or numerical aspects specific
to the subject matter, are not required.

At this level the candidate should be equipped with the extent and depth of knowledge and understanding
which enable the candidate to recognise issues when encountered and to seek further depth of knowledge
and understanding.

Level 2 (Intermediate)

At this level the candidate is required to acquire a detailed knowledge and understanding of the central
ideas and issues that comprise the substance of the subject matter.

Consequently, the candidate is required to have a knowledge and understanding:

• Aspects of the content that are central to the subject matter, so as to achieve a sound conceptual
understanding,
• Of the detail, including procedural and numerical aspects specific to the subject matter, where
appropriate.
• Knowledge and understanding of complexities and unusual/exceptional aspects are, however, not
required.

At this level the candidate should be equipped with a sound knowledge and understanding of the
substance of the subject matter to enable them to deal with issues and solve problems that are central to
the topic. The candidate should have a sound conceptual knowledge which enables them to further
vii
explore and understand complexities, if necessary. This level includes the level of knowledge and
understanding required for level 1 (Basic).

Level 3 (Advanced)

At this level the candidate is required to acquire a thorough knowledge and understanding of the subject
matter. This level of knowledge and understanding extends beyond a sound understanding of central
issues, to include complexities and unusual/exceptional aspects associated with the subject matter.

Consequently, the candidate is required to have a knowledge and understanding of:

• All content that is required to develop a thorough understanding of the subject matter,
• Complexities, and
• Sufficient depth to clearly locate content in the general field of accountancy and to identify
implications and relationships.
• At this level the candidate should be equipped with a level of knowledge and understanding of the
substance of the subject matter that enables them to perform tasks and solve problems with a high
degree of rigour, exercising sound judgement.

This level includes the level of knowledge and understanding required for level 1 (Basic) and level 2
(Intermediate).

Income Tax Act

Sections Topics Knowledge Level
2A When persons deemed to be associates 3
2B When person deemed to control company 3
5 Preservation of secrecy Excluded
6 Levy of income tax 3
7 Calculation of income tax 3
8 (1) Gross income 3
8 (1) (a) Annuity 3
8 (1) (b) Amounts for services rendered 3
8 (1) (c) ARW 1st Sch. Pension withdrawal 3
8 (1) (d) Lease premium 3
8 (1) (e) Lease improvements 3
8 (1) (f) Fringe benefits 3
8 (1) (g) Growing crops 3
8 (1) (h) ARW 2nd Sch. Trading stock 3
8 (1) (i) Mining recoupment 3
8 (1) (j) Ordinary recoupment 3
8 (1) (k) Concessions from creditors 3
8 (1) (l) Lease recoupment 3
8 (1) (m) Subsidies and grants 3
8 (1) (n) Commutation of pension from a retirement annuity 3
fund
8 (1) (p) Gross income of a petroleum operator 3
8 (1) (r) Commutation of pension from a pension fund 3
8 (1) (s) Income from special mining lease 3
8 (1) (t) Share option 3
8 (2) Foreign exchange gain 3
8 (3) Income received in advance 3
9 Income from sale of mining claims (excluded) Excluded
10 Income deemed to have accrued (excluding s 3

viii
11 Special provisions in connection with income derived 3
from assets in deceased and insolvent estates
12 Circumstances in which amounts are deemed to have 3
accrued from sources within Zimbabwe
13 Commissioner may approve of benefit funds & 1
medical aid societies for the purposes of this Act
14 Exemptions 3
15 Deductions allowed in determination of taxable 3
income
16 Cases in which no deduction shall be made 3
17 Special provisions relating to hire-purchase or other 3
agreements providing for postponement of passing of
ownership of property.
18 Special provisions relating to credit sales 3
19 Special provisions relating to persons carrying on 3
business which extends beyond Zimbabwe
19A Non-resident companies: basis of charge to and 3
determination of company tax
19B Meaning of “permanent establishment” 3
20 Special provisions relating to insurance business Excluded
21 Special provisions relating to petroleum operations Excluded
22 Special provisions relating to special mining lease Excluded
operations
23 Special provisions relating to determination of 3
taxable income of persons buying & selling any
property at a price in excess of or less than the fair
market price & of non-resident persons exporting
products of Zimbabwe without prior sale
24 Special provisions relating to determination of 3
taxable income in accordance with double taxation
agreements
25 Deduction of tax from dividends 3
26 Non-resident shareholders’ tax 3
27 Repealed Excluded
28 Resident shareholders’ tax 3
29 Repealed Excluded
30 ARW 17th Sch. Non-residents’ tax on fees 3
31 ARW 18th Sch. Non-residents’ tax on remittances 3
32 ARW 19th Sch. Non-residents’ tax on royalties 3
33 Additional profits tax in respect of special mining Excluded
lease areas
34 Residents’ tax on interest 3
35 Exemption of petroleum operators & affiliates from Excluded
certain taxes
36 Exemption of holders of special mining leases from Excluded
certain taxes
36A Tobacco levy Excluded
36B Automated financial transactions tax Excluded
36C Presumptive tax Excluded
36D Demutualisation Levy Excluded
36E Carbon tax Excluded
36F Repealed Excluded
36G Intermediated money transfer tax 1
36H NOCZIM debt redemption and strategic reserve levy Excluded
ix
36J Tax on non-executive directors’ fees 3
36K Petroleum importers levy Excluded
36L Bookmakers’ tax Excluded
37 Notice by Commissioner requiring returns for 2
assessment under this Act and manner of furnishing
returns & interim returns.
37A Self-assessment 2
37B Duty to keep records 2
38 Income of minor children 3
39 Duty to furnish further returns and information 1
40 Commissioner to have access to all public records 1
41 Returns as to shareholdings 1
42 Duties of companies to furnish returns & copy of 1
memorandum & articles of association
43 Duty of person submitting accounts in support of 1
return or preparing accounts for other persons
44 Production of documents & evidence on oath Excluded
45 Estimated assessments 2
46 Additional tax in event of default or omission 2
47 Additional assessments 2
48 Reduced assessments and refunds 1
49 Amended assessments of loss 1
50 Adjustment of tax, etc. payable in pursuance of 1
assessments made before date of commencement of
charging Act relating to a period of assessment.
51 Assessments & recording thereof 1
52 Copies of assessments 1
53 Representative taxpayers 1
54 Liability of representative taxpayer 1
55 Right of representative taxpayer to indemnity 1
56 Personal liability of representative taxpayer 1
57 Company or society regarded as agent for absent 1
shareholder or member
58 Power to appoint agent 1
59 Remedies of Commissioner against agent and trustee 1
60 Power to require information 1
61 Public officer of companies 1
62 Time and manner of lodging objections 1
63 Burden of proof as to exemptions, deductions or 1
abatements
64 Special Court for Income Tax Appeals and 1
proceedings on appeal
65 Appeals from decision of Commissioner to High 1
Court or Special Court
66 Appeals from determination of High Court or Special 1
Court to Supreme Court
67 Assessors 1
68 Decisions not subject to objection or appeal 1
69 Payment of tax pending decision on objection & 1
appeal
70 Judge and assessors not disqualified from 1
adjudicating or advising
71 Appointment of day and place for payment of tax 1

x
72 Payment of provisional tax & Schedule 2
73 Payment of employees’ tax 2
74 Persons by whom the tax is payable 2
75 Temporary trade 1
76 No tax payable in certain circumstances 1
77 Recovery of tax 1
78 Form of proceedings Excluded
79 Evidence as to assessments Excluded
80 Withholding of amounts payable under contracts with 3
State or statutory corporations
80A Valid tax clearance certificate required before certain 3
trades, services or entities licensed or registered
80A1 Payments to non-resident artistes or entertainers 3
80B Interpretation in Part VIIIA 3
80C Use of electronic data generally as evidence 3
80D Establishment of computer systems for tax purposes 3
80DD Virtual Tax Management System 3
80E User agreements 3
80F Registration of registered users and suspension or 3
cancellation of registration
80FF Commissioner may require register taxpayers to 3
become registered users
80G Digital signatures 3
80H Production& retention of documents 3
80I Sending and receipt of electronic communications 3
80J Obligations, indemnities and presumptions with 3
respect to digital signatures
80K Alternatives to electronic communication in certain 3
cases
80L Unlawful uses of computer systems 3
81 Offences: general 2
82 Offences: wilful failure to comply with requirements 2
of Commissioner or to keep proper accounts, &
obstruction
83 Offences: increased penalty on subsequent conviction Excluded
84 Offences: wilful failure to submit correct returns, 2
information, etc.
85 Offences: false statements, etc. 2
86 Offences: wilful making of false statements, & 2
keeping of false accounts, & fraud
87 Evidence Excluded
88 Proofs of certain facts by affidavit or orally Excluded
89 Forms and authentication & service of documents Excluded
90 Regulations Excluded
91 Relief from double taxation 3
91A Collection of taxes due to another country under 3
arrangements made pursuant to section 91 agreement
92 Reduction of tax payable as a result of double 3
taxation agreements
93 Relief from double taxation in cases where no double 3
taxation agreements have been made
94 [Repealed by Act 5 of 2009.] Excluded

xi
 95 Credit where non-residents’ tax on fees has been 2
withheld
96 Credit where non-residents’ tax on royalties has been 2
withheld
97 Credit where presumptive tax has been withheld 2
97A Credit where tax on commissions paid by insurers 2
and estate agents to freelance agents has been
withheld
97B Calculation and fixing of interest payable under this 2
Act
97C Credit where tax on non-executive directors’ fees has 2
been withheld
98 Tax avoidance generally 3
98A Income splitting 3
98B Transactions between associates 3
98C Reporting of unprofessional conduct 3
99 Transitional provisions relating to separate taxation Excluded
of married women

Value Added Tax Act

Section Topics Knowledge Level

1 Short Title and Date of Commencement 1
2 Interpretations (definitions) 3
3 Determination of Open Market Value 1
4
Act to be administered by the Commissioner 1
5 Delegation of functions by the Commissioner 1
6 Value Added Tax 3
7
Certain supplies of goods or services deemed to be made or
not made 3
8 Time of supply 3
9 Value of supply of goods or services 3
10 Zero rating 3
11 Exempt supplies 3
12
Collection of tax on importation of goods, determination of
value thereof, and exemptions from tax 3
13
Collection of tax on imported services, determination of
value thereof, and exemptions from tax. 3
14 Accounting basis 3
15 Calculation of tax payable 3
16 Permissible deductions in respect of input tax 3
17 Adjustments 3
18
Adjustments in consequence of acquisition of a going
concern wholly or partly for purposes other than making
taxable supplies 3
19 Goods or services acquired before incorporation 3

xii
20 Tax invoices 3
21 Credit and debit notes 3
22 Irrecoverable debts 3
23
Registrations of persons making supplies in the course of
trade 3
24 Cancellation of registration 3
25 Registered operator to notify change of status 2
26
Liabilities not affected by person ceasing to be a registered
operator 2
27
Tax Periods 3
28
Returns and payment of tax 3
29
Special returns 1
30
Other returns 1
31
Assessments 3
32
Objections to certain assessments and decisions 1
33
Appeals to Fiscal Appeals Court 1
34
Appeals against decisions of Fiscal Appeals Court 1
35 Members of Fiscal Appeals Court not disqualified from
adjudicating Excluded
36
Payment of tax pending appeal 1
37 Burden of proof 1
38 Manner in which tax shall be paid 1
39
Penalty and interest for failure to pay tax when due 3
40
Recovery of tax Excluded
41
Liabilities for tax for certain past supplies or importations Excluded
42
Evidence as to assessments Excluded
43
Security for tax Excluded
44
Refunds 1
45
Interest on delayed refunds Excluded
45A
Refunds of tax to exempted persons Excluded
46
Calculation of interest payable under this Act 1
47
Persons acting in a representative capacity. 1
48
Power to appoint agent. 1
49
Liability of representative registered operators. 1
50
Remedies of Commissioner against agent or trustee. 1
51
Repealed Excluded
52 Separate persons carrying on same trade under certain
circumstances deemed to be single person. Excluded
53 Bodies of persons, corporate or unincorporated, other than
companies. Excluded
xiii
54
Pooling arrangements. Excluded
55
Death or insolvency of registered operator. 1
56
Agents and auctioneers. 2
57
Records. 1
58 General provisions with regard to information, documents
or items. 1
59 Furnishing of information, documents or items by any
person. 1
60 Obtaining of information, documents or items at certain
premises. 1
61
Powers of entry, search, etc. Excluded
62
Offences. 2
63
Offences and penalties in regard to tax evasion. 2
64
Offences: increased penalty on subsequent conviction. Excluded
65
Imposition of fine by Commissioner. Excluded
66
Additional tax in case of evasion 2
67
Recovery of tax from recipient. Excluded
68
Reporting of unprofessional conduct. 2
68A – 68K EXCLUDED
69 Prices deemed to include tax. 3
70 Prices advertised or quoted to include tax. 3
71 Rounding-off tables. Excluded
72 Contract price or consideration may be varied according
to rate of tax. Excluded
73 Application of increased or reduced tax rate Excluded
74 Tax relief allowable to certain diplomats and diplomatic
and consular missions. Excluded
75 Forms and authentication and service of documents. Excluded
76 Arrangements and directions to overcome difficulties,
anomalies or incongruities Excluded
77 Schemes for obtaining undue tax benefits Excluded
78 Regulations. 1
79 Tax agreements. Excluded
80 President may suspend tax payable under agreement. Excluded
81 Notice of variation of rate of tax. Excluded
82 Transitional matters Excluded
83 Act binding on State, and effect of certain exemptions
from taxes. Excluded
84 Repeal of Cap. 23:08 and savings. Excluded

xiv
Capital Gains Tax Act

Sections Topics Knowledge Level

1 Short Title
2 Interpretations (definitions) 3
3 Delegation of functions by Commissioner. 1
6 Charging of Capital Gains Tax. 3
7 Calculation of Capital Gains Tax. 3
8 Interpretation of terms relating to Capital Gains Tax. 3
9 When capital amount deemed to have accrued. 3
10 Exemptions from Capital Gains Tax. 3
11 Deductions allowed in determination of capital gain. 3
12 Circumstances in which no deductions may be made. 3
13 Damage to or destruction of specified asset 3
14 Determination of fair market price of specified assets. 3
15 Transfers of specified assets between companies under the same
control. 3
16 Transfers of specified assets between spouses. 3
17 Transfer of business property by individual to company under
his control. 3
18 Provisions for sales of immovable property under suspensive
conditions. 3
19 Provisions relating to credit sales where ownership passes. 3
20 Provisions for the reductions in costs of specified assets. 3
21 Provision for sales of principal private residences. 3
22 Substitution of business property. 3
22A Interpretation in Part IIIA. 1
22B Capital gains withholding tax. 3
22C Depositaries to withhold tax. 1
22D Agents to withhold tax not withheld by depositaries. 1
22E Payee to pay tax not withheld by depositary or agent. 1
22F Exemptions. 3
22FA Registration of depositaries. 1
22G Depositaries to furnish returns. 1
22H Penalty for non-payment of tax. 1
22I Refund of overpayments 1
22J Credit where tax has been withheld 3
22K Application of Part IIIA to sales concluded before1.1.1999 Excluded
22L
Suspension of provisions of Part II A to marketable securities. 1
23 Application of provisions of Taxes Act relating to returns and
assessments. 1
24 Application of provisions of Taxes Act relating to representative
taxpayer. Excluded
25 Objections and appeals 1
26 Day and place for payment of tax. 1
27 Application of provisions of Taxes Act relating to offences,
evidence, forms and regulations. Excluded
xv
28 Application of provisions of Taxes Act relating to relief from
double taxation. 1
29 Application of provisions of Taxes Act relating to tax
avoidance. 3
30 Transitional provision re capital gains and losses of married
women Excluded
30A Capital gains tax not withheld in terms of Part IIIA to be paid
before transfer of specified asset. Excluded
31 Returns by Registrar of Deeds, financial institutions and other
persons. Excluded
37A
Interpretation in Chapter VIII 3
38
Rates of Capital Gains Tax 3
39 Rates of Capital Gains Withholding Tax 3
39A Payment of Capital Gains Tax in foreign currency in certain
circumstances 1

xvi
Tax rates and prescribed values

Individual Tax Tables

Employment Income in ZW$ – 01 January 2024 to 31 December 2024

ANNUAL TABLE (ZWL$) Rate

From 0 To 9,000,000 multiply by 0%
From 9,000,001 To 27,000,000 multiply by 20%
From 27,000,001 To 90,000,000 multiply by 25%
From 90,000,001 To 180,000,000 multiply by 30%
From 180,000,001 To 270,000,000 multiply by 35%
From 270,000,000 And Above multiply by 40%
Aids Levy is 3% of the Individuals' Tax payable after credits

Employment Income in USD – 01 January 2024 to 31 December 2024

ANNUAL TABLE (US$) Rate

From 0 To 1,200 multiply by 0%
From 1,201 To 3,600 multiply by 20%
From 3,601 To 12,000 multiply by 25%
From 12,001 To 24,000 multiply by 30%
From 24,001 To 36,000 multiply by 35%
From 36,001 And Above multiply by 40%
Aids Levy is 3% of Individuals' Tax payable after credits

NB: Foreign employees holding temporary employment permits issued by the Department of Immigration to
work in the licensed Special Economic Zones, pay Income Tax at 15% of their taxable income.

Motoring benefits – Annual rates

Engine capacity USD

W.E.F 1 January 2024
Up to 1500 625
1501-2000 830
2001-3000 1,250
3001and above 1,660

Fringe benefits

Benefit Taxable Comment

Accommodation Cost to employee Open market rental is deemed cost to employee
Airtime allowance Cost to employer If business usage is justified there is no benefit to the employee.
Insurance polices Cost to employer Premiums paid by employers on group insurance are non-taxable.
Canteen meals and Cost to employer Cost includes both variable and non-variable (fixed) costs.
subsidised lunches
Phone Handset Cost to employer The benefit is implied whether acquisition is by an outright
purchase or leasing.
Clothing benefit Cost to employer Uniforms or protective clothing as a condition of duty in terms of
CBA is a non-taxable benefit to the employee.
DSTV Cost to employer Non-business entertainment is taxable.
Entertainment Cost to employer Business entertainment non-taxable
xvii
 Fuel coupons Cost to employer Business mileage should be recovered using AA rates. Excess
allowance is regarded as benefit to employee.
Fuel for use in private Cost to employer Business mileage should be recovered using AA rates. Excess
car for company allowance is regarded as benefit to employee.
purposes
Fuel for use in private Cost to employer Allowance is regarded as benefit to the employee.
car for personal
purposes
Gardener Cost to employer Taxable in the hands of the employee.
Interest free loan LIBOR + 5% for LIBOR is obtainable from Zimra website depending on the tenure
USD loans of the loan.
(15% in local Small loans ZW$50,000 (US$100 foreign currency) or below are
currency) tax free.
Salary advances recovered on the next pay day are not deemed loan.
Loans for education or for medical purposes are tax free.
Medical Cost to employer Amounts paid to an approved medical aid society on behalf of an
contributions employee are an exempt benefit to the employee.
Medical expenses Cost to employer medical expenses paid by employer are exempt
Motor vehicle Open market value Exempt for persons who are 55 years or above.
acquired from
employer
Passage benefit Cost to employer First passage benefits for taking up or termination of employment
(one a piece) is non-taxable.

Employee exemptions

Item ZW$ $ US
Bonus Applicable ZWL prevailing rate 400
on the date of payment
Retrenchment packages Applicable ZWL prevailing rate US$3,200 or 1/3 of package up to
on the date of payment. US$15,100 (i.e.,1/3 of US$15,100)
whichever is greater.
Pension computation when Applicable ZWL prevailing rate 1,000
employment ceases due to on the date of payment.
retrenchment
Pension accrual or receipts of Amount received or accrued Amount received or accrued
elderly persons (person over 55
years)
Sale of motor vehicle by employer Benefit or discount received Benefit or discount received
to employee who is or over age of
55 years
Medical contributions and expenses Amount paid or incurred by the Amount incurred by the employer
incurred by employer on behalf of employer
employee, his/her spouse or child.
Death benefit paid by a trade union; Amount paid Amount paid
or
from a benefit fund; or
in terms of a policy of insurance
covering accident, sickness or
death; or
By a medical aid society.
Scholarship or bursary Amount paid or value given Amount paid or value given
Civil servants benefits e.g., Amount paid Amount
representation allowance, sale or
donation of motor, entertainment
allowance etc
School benefit for teachers and non- 50% of school benefit up to 3 50% of school benefit up to 3 children
teaching staff at school children
Free use of residence or quarter or Amount paid or value given Amount paid or value given
allowance including transport for
members of staff of a mission
hospital or rural clinic

xviii
Tax credits in US$ and Zimbabwe Dollar- annual rates

Item 2024 2023 2022

p.a p.a p.a
ZW$ US ZW$ USD ZW$ USD
D
Credit to taxpayers Applicable 900 450,000 900 117,000 900
over 55 years of ZWL prevailing
age rate on the date
of payment
Blind person’s Applicable 900 450,000 900 117,000 900
credit ZWL prevailing
rate on the date
of payment
Mentally / Applicable 900 450,000 900 117,000 900
physically disabled ZWL prevailing
person credit rate on the date
of payment
Medical expenses $1 in every $2 $1 in $1 in $1 in $1 in $1 in
incurred ever every $2 every $2 every $2 every $2
y $2 incurred incurred incurred incurred
incur
red

Trade and investment income tax rates

Taxpayer 2024

Self-employed, sole trader or partners 25% (24.72

prior)
Companies and trusts 25% (24.72
prior)
Company or trust derived from mining operations; 25%
Licensed investor in Special Economic Zone (SEZ)
First five years of the arrangement 0%
licensed investor after the 5th year of operations 25%
An approved BOOT or BOT arrangement:
First five years of the arrangement 0%
Second five years of the arrangement 15%
Thereafter 24%
Industrial park developer
First five years of the arrangement 0%
Second five years of the arrangement 25%
Taxable income of operator of a tourist facility in approved tourist development zone (before the
fifth year of his or her operation as such) 0%
An operator of a tourist facility in approved tourist development zone
First five years of the arrangement 0%
Second five years of the arrangement 25%
Export manufacturing company which exports:
Export level (%) 30-40 of its output 20%
Export level (%) 41-50 of its output 17.5%
Export level (%) above 51 15%
Trade and investment for an individual,

*3% AIDS levy is applicable on income tax chargeable after-tax credits. Normal rate is 24%

Capital allowances

xix
 Type of Capital Allowance Rate
Special Initial Allowance:
Large Corporates 25% per annum
Licensed Investor 50% in first year & 25% in subsequent years
SMEs 50% in first year & 25% in subsequent years
Accelerated Wear & Tear 25%
Wear and Tear on:
Industrial buildings 5%
Farm Buildings 5%
Commercial Buildings 2.5%
Motor Vehicles 20%
Moveable Assets 10% (General Rate)

Withholding tax rates

Withholding Tax Due date Rate of tax

Non-Residents Shareholders ‘Tax Within 30days of the date of distribution 5% Victoria Falls Stock Exchange
(VFSE)
10% Zimbabwe Stock Exchange
(ZSE) listed
15% unlisted shares
Resident Shareholders' Tax Within10daysof the date of distribution 10% ZSE listed
15% unlisted shares
Non -resident tax on interest Repealed Exempt
Non-Residents' Tax on Fees Within 10 days of the date of payment 15%
Non-Residents’ tax on remittances Within 10 days of date of payment 15%
Non-resident tax on royalties Within 10days of date of payment 15%
Resident tax on interest By the 10th of the following month 15% general rate
5% deposit of at least 90 days
Exempt deposit of at least 12 months
Tobacco levy Within15daysof the date of distribution 1.5%

Automated Financial Transactions By the 10th day of the month following 0.05c
Tax the month transaction was effected

Demutualization Levy Within three months after issuing to the 2.5%

member
Intermediated Money transfer tax By the 10th day of the month following ZWL 2%, USD 1% Outbound foreign
(IMTT) the month in which it was effected. payments USD0.01 per transaction
and ZIG USD0.005
Withholding tax on local contract By the 10th day of the month 30%
following month of payment

Non-Executive Directors ‘Fees Within 10 days of the date of payment 20%

Property or insurance commission By the 10th day of the month following 20%
tax month of payment
Non-resident artists By the 10th day of the month following 15%
month of payment

Treaty rates of taxes

xx
 Country Dividends(1) Fees Royalties Remittances(3)
% % % %
Botswana 5(1)/10(2) 10 10 15
Bulgaria 10 10 10 15
Canada 10 10 10 15
China 2.5(1)/7.5(2) 7.5 7.5 15
France 10 10 10 15
Germany 10 7,5 7,5 15
Malaysia 10 10 10 15
Mauritius 10 0/15 (4) 15 15
Netherlands 10 10 10 15
Norway 15 10 10 15
Poland 10 15 10 15
South Africa 5/10 5 10 15
Sweden 15 10 10 15
United Kingdom 5 10 10 15

Notes
(1)
Only on shareholding or voting power, by a company, of at least 25%; otherwise, the rates remain (1).
(2)
The rate in scenario where voting power is below 25%.
(3)
Not applicable on DTAs hence Non-residents’ tax on remittances remains at 15% in all cases
(4)
Both rates are specified. Exemption appears to depend on there being liability in Mauritius.

Value Added Tax prescribed values

Item Amount (US$)

Compulsory VAT registration threshold 25, 000
Voluntary VAT Registration CG to fix minimum value
Qualification under VAT category C 240,000
Qualification under VAT category D 120,000
Minimum capital goods value for VAT adjustment 60
Minimum lay bye value 3,250
Value of supply not requiring tax invoice 10
Minimum VAT to be Refund 60
Civil penalty per day for late submission of returns 30
Civil penalty per day for late VAT registration 30
Civil penalty per day for late notification of change in status 30
Minimum value qualifying for VAT deferment 1,000,000

Penalty for delayed VAT arising from sale in execution of debt Amount of tax due
VAT standard rate 15%
VAT Zero rate 0%
VAT on imported services 15%
Exempt rate Nil

xxi
 Income Tax prescribed values

Item 2024 2023 2022

USD ZWL$ USD ZWL$ USD ZWL$
Contributions by Employers to benefit funds 1,000 Applicable 1,000 500,000 1,000 500,000
for each member (employee) ZWL
prevailing
rate on the
date of
payment

Allowance to former employee retiring on 500 Applicable 500 250,000 500 250,000
grounds of ill health etc. (ex gratia payment) ZWL
prevailing
rate on the
date of
payment

Allowance to former partner retiring etc. on 200 Applicable 200 100,000 200 100,000
grounds of ill health (ex gratia payment) ZWL
prevailing
rate on the
date of
payment

Allowance to dependent (s) of former 200 Applicable 200 100,000 200 100,000
employee or partner ZWL
prevailing
rate on the
date of
payment

Donations to State, local authority, or 100,000 Applicable 100,000 50,000,000 100,000 50,000,000
religious organisation hospitals ZWL
prevailing
rate on the
date of
payment

Donation to a research institution 100,000 Applicable 100,000 50,000,000 100,000 50,000,000

ZWL
prevailing
rate on the
date of
payment

Donation of educational equipment, 100,000 Applicable 100,000 50,000,000 100,000 50,000,000

construction, or maintenance, books and ZWL
other educational materials. prevailing
rate on the
date of
payment

Donation to the Public Private Partnership 50,000 Applicable 50,000 25,000,000 50,000 25,000,000
Fund ZWL
prevailing
rate on the
date of
payment

Donation to the Destitute Homeless Persons 50,000 Applicable 50,000 25,000,000 50,000 25,000,000
Rehabilitation Fund ZWL

xxii
 prevailing
rate on the
date of
payment

Trade Conventions or Trade Missions (each) 50, 000 Applicable 2,500 1,250,000 2,500 1,250,000
ZWL
prevailing
rate on the
date of
payment

Expenditure incurred on infrastructural 50, 000 Applicable 50,000 25,000,000 50,000 25,000,000
development or maintenance of property ZWL
owned by local authority prevailing
rate on the
date of
payment

Maximum lease expenses for PMV 10,000 Applicable 10,000 5,000,000 10,000 5,000,000
ZWL
prevailing
rate on the
date of
payment

Withholding tax on contracts (ITF 263 5,000 Applicable 1,000 500,000 1,000 500,000
threshold) ZWL
prevailing
rate on the
date of
payment

Exemption of annuity on retirement lump 1,800 Applicable 1,800 900,000 1,800 900,000
sum payment cap ZWL
prevailing
rate on the
date of
payment

Exemption from income tax of Lump sum 1,800 Applicable 1,800 900,000 1,800 900,000
payments from funds with changed rules ZWL
prevailing
rate on the
date of
payment

Minimum exemption of pension 1,800 Applicable 1,800 900,000 1,800 900,000

commutation from the Consolidated ZWL
Revenue Fund where employment ceases prevailing
due to retrenchment rate on the
date of
payment

Pension contribution employers per member 5,400 Applicable 3,000 1,500,000 3,000 1,500,000
ZWL
prevailing
rate on the
date of
payment

Limitation of PMV for capital allowances 10,000 Applicable 10,000 5,000,000 10,000 5,000,000
ZWL
prevailing

xxiii
 rate on the
date of
payment

Qualifying cost per unit of employee 25,000 Applicable 25,000 12,500,000 25,000 12,500,000
housing ZWL
prevailing
rate on the
date of
payment

Arrear pension contribution by employees 1,000 Applicable 1,000 500,000 1,000 500,000
ZWL
prevailing
rate on the
date of
payment

Capital tax values

Item 2024 2024 2023 2023 2022 2022 2021 2020

ZWL$ USD ZWL$ USD ZWL$ USD (ZWL$ (ZWL$)
Assessed capital loss to be Applicab 100 50,000 100 13,000 100 8,000 1,000
reduced by an amount of le ZWL
prevailin
g rate on
the date
of
payment
Exemption of amounts Applicab 1,800 900,000 1,800 234,000 1,800 144,000 18,000
accruing to persons over le ZWL
55 years on sale of prevailin
marketable security g rate on
the date
of
payment
Limitation of deduction on Applicab 50 25,000 50 6,500 50 4,000 500
computation of capital le ZWL
gains tax prevailin
g rate on
the date
of
payment

Capital gains tax rates

Date of acquisition of specified asset Applicable rate

Acquired before 1st of February 2009 and sold 5% of capital amount (proceeds less exemptions)
thereafter
Acquired after 1 February 2009 and sold before 22 nd 20% of capital gain (proceeds less exemptions less deductions)
February 2009
Acquired after 1 February 2009 and sold after 22nd of 5% of capital amount (proceeds less exemptions)
February 2019
Acquired after 22nd of February 2019 and sold 20% of capital gain (proceeds less exemptions less deductions)
thereafter
Listed marketable securities acquired after 1 Feb 2009 Increased from 1% to 1.5% for shares held for a minimum period
of 6 months.

xxiv
Capital gains withholding tax

Date of acquisition of specified asset Applicable rate

Immovable property 15% of proceeds (not final tax)
Unlisted marketable securities 5% of proceeds (not final tax)

Listed marketable securities acquired after 1 1% of gross proceeds

February 2009

Inflation adjustment rate 2·5%

xxv
Course outline

TOPIC
BLOCK 1
Theory and Concepts of Gross Income
Corporate and Income Tax
Deductions
Capital Allowances
Revision with students
TEST 1
BLOCK 2
Employment Tax
Taxation of Partnerships
Capital Gains Tax
Deceased Estates and Trusts
Revision with students
TEST 2
BLOCK 3
Taxation of farmers
Taxation of Miners
Transfer Pricing
Revision
TEST 3
BLOCK 4
VAT
Withholding Tax
Revision
TEST 4
Examinations

xxvi
Table of Contents
Key personnel and contact details i

Background to Taxation ii

Currency used in the book Error! Bookmark not defined.

Assumptions and Abbreviations iii

Abbreviations iv

TABLE OF RELEVANT STATUTES vi

SYLLABUS vii

CTA 2024 SYLLABUS vii

Course outline xxvi

PART A....................................................................................................................................................... 1
TAX ADMINISTRATION ........................................................................................................................... 1

1. The Zimbabwean Tax System 2

1.1 Introduction ................................................................................................................................... 2
1.2 The overall Function and Purpose of Taxation .............................................................................. 2
1.2.1 Purpose and effect of Taxation ................................................................................................. 2
1.3 Overall Structure of the Tax System in Zimbabwe ......................................................................... 3
1.4 Legal Basis and Nature of Taxation ............................................................................................... 3
1.5 Types of Taxes................................................................................................................................ 4
1.6 The Canons (Principles) of Taxation............................................................................................... 4
1.7 The Role of ZIMRA ........................................................................... Error! Bookmark not defined.
1.8 Tax avoidance and tax evasion ...................................................................................................... 5

2 Administrative Aspects Error! Bookmark not defined.

2.1 Introduction ................................................................................................................................... 7
2.1.1 Computation of income tax....................................................................................................... 7
2.1.2 Tax Payment Dates .................................................................................................................... 7
2.1.3 Returns and Assessments .......................................................................................................... 8
2.1.4 Other returns............................................................................................................................. 9
2.1.5 Assessments and Penalties........................................................................................................ 9
2.1.6 Estimated assessments (section 45).......................................................................................... 9
2.1.7 Additional assessment (section 47) ......................................................................................... 10
2.1.8 Reduced assessment and refunds (Section 48) ....................................................................... 10
2.1.9 Amended assessment of loss (Section 49) .............................................................................. 10
2.1.10 Penalties (Section 46) .......................................................................................................... 10
xxvii
 2.1.11 Representative Taxpayers (s53 to 61) ................................................................................. 11
2.1.12 Powers of the Commissioner .............................................................................................. 11
2.1.13 Objections and appeals ....................................................................................................... 12
2.1.14 Legal Precedent ...................................................................................................................... 13
PART B..................................................................................................................................................... 16
INTRODUCTION TO INCOME TAX ...................................................................................................... 16

3. Gross Income Concepts 17

3.1 Introduction ................................................................................................................................. 17
3.2 Gross Income – Section 8 (1)........................................................................................................ 17
3.3 Components of Gross Income ...................................................................................................... 17
3.4 From a source in Zimbabwe......................................................................................................... 18
3.5 Deemed source within Zimbabwe ............................................................................................... 19
3.6 Excluding amount of capital nature ............................................................................................ 21
3.6.1 Fixed and Floating Capital ....................................................................................................... 21
3.7 Damages and compensation ....................................................................................................... 22
3.8 Restraint of trade........................................................................................................................ 22
3.9 Meaning of “ordinarily resident” ................................................................................................. 23
3.9.1 Determination of residence status .......................................................................................... 24
3.9.2 Tax consequence of residence ................................................................................................ 24

4. General and Specific Deductions 25

4.1 Introduction ................................................................................................................................. 25
4.2 General Rule ................................................................................................................................ 25
4.3 Actually incurred .......................................................................................................................... 27
4.4 Prepayments ................................................................................................................................ 28
4.5 For the purposes of trade ............................................................................................................ 28
4.6 In the production of income......................................................................................................... 28
4.7 Not of a capital nature ................................................................................................................ 29
4.8 To the extent ................................................................................................................................ 30
PART C ................................................................................................................................................... 34
TAXATION OF COMPANIES ................................................................................................................. 34

5. An overview of taxation of businesses 35

5.1 Introduction ................................................................................................................................. 35
5.2 Framework for computing taxable income of businesses: .......................................................... 35
5.3 An overview of taxpayers ............................................................................................................ 37
5.3.1 Corporates ............................................................................................................................... 37
5.3.2 Partnerships ............................................................................................................................ 37
5.3.3 Sole Proprietorship .................................................................................................................. 37
5.3.4 Trusts ....................................................................................................................................... 38

xxviii
 5.3.5 Non-resident companies ......................................................................................................... 38
5.4 Basis of assessment ..................................................................................................................... 39
5.5 Meaning of trade ......................................................................................................................... 39
5.6 Carrying on a trade ...................................................................................................................... 39
5.7 The adjustment of profits ............................................................................................................ 39
5.8 Computation of taxable income .................................................................................................. 41
5.9 Definition of taxpayers ................................................................................................................ 42
5.10 Rates ............................................................................................................................................ 42
5.11 QPDs ............................................................................................................................................ 43

6. Special Inclusion in Gross Income of Businesses 45

6.1 Introduction ................................................................................................................................. 45
6.1.1 Lease premium [sect 8 (1) (d)] ................................................................................................ 45
6.1.2 Lease improvements [sect 8(1) (e)] ......................................................................................... 45
6.1.3 Growing crops [sect 8 (1) (g)] .................................................................................................. 45
6.2 Definition of terms ....................................................................................................................... 46
6.2.1 Concessions grant from creditors [sect 8 (1) (k)] .................................................................... 46
6.2.2 Lease recoupment [sect 8 (1) (k)] - exclusion.......................................................................... 47
6.2.3 Subsidy and grants [sect 8 (1) (m)] .......................................................................................... 47
6.2.4 Designated Area Grants [sect 8 (1) (o)] ................................................................................... 47
6.2.5 Exchange gains [sect 8 (2)] ...................................................................................................... 47
6.2.6 Annuities – Section 8 (1) (a) .................................................................................................... 47
6.3 Recoupment - Sect 8 (1) (i) .......................................................................................................... 48
6.3.1 Companies ................................................................................... Error! Bookmark not defined.
6.3.2 Non-profit Organisations............................................................. Error! Bookmark not defined.
6.3.3 Dividends from local companies ................................................. Error! Bookmark not defined.

7. Specific deductions and prohibited deductions 56

7.1 Introduction ................................................................................................................................. 56
7.2 Statutory deductions- s15 (2) – 8................................................................................................. 56
7.3 Prohibited Deductions – Section 16 ............................................................................................. 60

8. Capital Allowances and Other Special Deductions 65

8.1 Introduction ................................................................................................................................. 65
8.2 Definition of Assets (4th Schedule): .............................................................................................. 65
8.3 Special Initial Allowance (SIA) ...................................................................................................... 67
8.4 Wear and tear.............................................................................................................................. 67
8.5 Cost base of an asset for purposes of calculating capital allowances ......................................... 70
8.6 Scrapping Allowance – 4th Schedule Para 4 ................................................................................ 70
8.7 Recoupments Section 8 (1) (j) ...................................................................................................... 71
8.8 Recoupment for damaged asset .................................................................................................. 71

xxix
 8.9 Transfer of Assets – 4th Schedule ................................................................................................. 73
8.9.1 Leases ...................................................................................................................................... 73
8.9.2 Lease improvements ............................................................................................................... 74
8.9.3 Summary points. ..................................................................................................................... 75
8.10 Leasing of passenger motor vehicles ........................................................................................... 76
8.11 Personal assets brought into business ......................................................................................... 76
8.12 Suspensive Sales and Credit Sales (Sect 17 & 18) ........................................................................ 76

9. Introduction to Transfer Pricing 80

9.1 Introduction ................................................................................................................................. 80
9.2 Key Definitions: ............................................................................................................................ 80
9.2.1 ss1: General Rule ..................................................................................................................... 80
9.2.2 ss2:........................................................................................................................................... 80
9.2.3 Control - 2B when person deemed to control a company ...................................................... 81
9.2.4 Income splitting – sect 98A ..................................................................................................... 81
9.2.5 Transactions between associates – sect 98B .......................................................................... 82
9.3 Transfer pricing methods (35th schedule par 4(5)) ..................................................................... 84
9.3.1 Comparable uncontrolled price method ................................................................................. 84
9.3.2 Resale price method ................................................................................................................ 84
9.3.3 Cost Plus method ......................................................................................................................... 84
9.3.4 Transactional net margin method ........................................................................................... 85
9.3.5 The Transactional Profit Split Method .................................................................................... 85
PART D .................................................................................................................................................... 89
TAXATION OF SPECIAL TAXPAYERS .................................................................................................. 89

10. Taxation of partnership 90

10.1 Introduction ................................................................................................................................. 90
10.2 Basis of assessment ..................................................................................................................... 90
10.3 Changes in membership .............................................................................................................. 91
10.4 Assets co-owned .......................................................................................................................... 91
10.5 Goodwill....................................................................................................................................... 92
10.6 Trade convention and mission ..................................................................................................... 92
10.7 Bad debts ..................................................................................................................................... 92
10.8 Subscriptions................................................................................................................................ 92
10.9 Interest on money borrowed by partner ..................................................................................... 92
10.10 Passage benefit ........................................................................................................................... 92
10.11 Returns and assessment .............................................................................................................. 92
10.12 Assessed loss................................................................................................................................ 92

11. Taxation of Farmers 94

11.1 Introduction ................................................................................................................................. 94

xxx
 11.2 Livestock trading stock ................................................................................................................ 94
11.3 Valuation of stock in trade .......................................................................................................... 94
11.4 Definition of the methods ............................................................................................................ 95
11.4.1 Livestock reconciliation ....................................................................................................... 95
11.4.2 Valuation of farm trading stock .......................................................................................... 95
11.5 Special deduction of farmers- s15 (2) (z) ARW with para 2 of 7thSch .......................................... 96
11.6 Enforced sale of livestock ............................................................................................................ 96
11.7 Restocking allowance .................................................................................................................. 97

12. Mining taxation 99

12.1 Introduction ................................................................................................................................. 99
12.2 Mining operations ....................................................................................................................... 99
12.2.1 Definition of a mineral ........................................................................................................ 99
12.2.2 Mining capital expenditure ................................................................................................. 99
12.3 Estimate of life of mine .............................................................................................................. 100
12.4 Methods for computation capital redemption allowance (CRA) ............................................... 100
12.4.1 Recoupment ...................................................................................................................... 101
12.4.2 Prospecting or exploration ................................................................................................ 101
12.4.3 Assessed losses ................................................................................................................. 101
12.4.4 Replacement allowance .................................................................................................... 101
12.4.5 Independent mining locations .......................................................................................... 101
PART E................................................................................................................................................... 103
WITHHOLDING TAXES........................................................................................................................ 103

13. Withholding Taxes 104

13.1 Introduction ............................................................................................................................... 104
13.2 General ...................................................................................................................................... 104
13.2.1 Contract Payments- Sect 80 .............................................................................................. 105
13.3 Resident and Non-Resident Shareholders Tax: Sec 26 & 28 ...................................................... 105
13.3.1 Non-Residents Tax on Fees – Sect 30 and 17THSchedule .................................................. 105
13.4 Source of fees............................................................................................................................. 106
13.5 Double Taxation Agreement (DTA) ............................................................................................ 106
13.6 Non-Resident Tax on Remittances – Sect 31 and 18TH schedule ............................................... 107
13.7 Non-Resident tax on royalties – sect 31 and 19th schedule ...................................................... 108
13.8 Resident Tax on Interest: Sec 34 & 21st schedule...................................................................... 108
13.9 Non-Executive Directors Fees: sec 36 J ...................................................................................... 109
13.10 Foreign currency of payment of taxes ....................................................................................... 109
13.11 Intermediated Money Transfer Tax (IMTT) - s36G ARW 30th Sch .............................................. 109
PART F................................................................................................................................................... 113
Value Added Tax .................................................................................................................................... 113

xxxi
14. Value Added Tax 114
14.1 Introduction ............................................................................................................................... 114
14.2 HOW VAT WORKS? .................................................................................................................... 115
14.3 Key Definitions/Interpretations ................................................................................................. 116
14.4 Key words in the VAT Act ........................................................................................................... 118
14.5 Relevant Legislation................................................................................................................... 118
14.6 Practicality of VAT ..................................................................................................................... 119
14.7 Calculation of VAT ..................................................................................................................... 120
14.8 General Operational Aspects of VAT ......................................................................................... 120
14.9 When should VAT be charged, or output tax arise? – Section 6 ................................................ 120
14.9.1 Supply of Goods or Services - Section 6 (1) (a).................................................................. 120
14.9.2 Goods and Services .................................................................................................................... 120
14.9.3 Trade ................................................................................................................................. 121
14.9.4 Deemed Supplies – Sect 7 ................................................................................................. 121
14.9.5 Time of Supply – Sect 8 ..................................................................................................... 123
14.10 Value of Supply – Sect 9 ............................................................................................................. 123
14.10.1 Special Supplies ................................................................................................................. 123
14.10.2 Zero Rated Supplies – Sect 10 ........................................................................................... 123
14.10.3 Exempt Supplies – Sect 11 ................................................................................................ 124
14.10.4 Standard Rated Supplies ................................................................................................... 124
14.11 VAT On Imported Goods and Services ....................................................................................... 124
14.11.1 Importation of Goods: Section 12 ..................................................................................... 124
14.11.2 Importation of Services: Section 13 .................................................................................. 125
14.12 Accounting for VAT- Sec 14........................................................................................................ 126
14.13 Payment of VAT in the Currency of taxable supplies ................................................................. 126
14.14 Settlement of Principal VAT prioritised over interest and penalty ............................................ 126
14.15 Input Tax– Sec 16 ....................................................................................................................... 127
14.15.1 Extension of time in which to claim input tax ................................................................... 127
14.15.2 Input Tax Apportionment .................................................................................................. 127
14.15.3 Prohibited deductions Sect 16 (2): .................................................................................... 127
14.16 VAT Adjustments – Sec 17 ......................................................................................................... 128
14.17 Goods acquired prior to fixed date (1 January 2004) (section 17(4) (a) .................................... 129
14.18 Goods acquired after fixed date (1 January 2014) (sections 17 (4) (b)) .................................... 129
14.19 Fixed Property Transactions ...................................................................................................... 130
14.20 Increase in taxable use of capital goods (section 17(5) ............................................................. 131
14.21 Sale of a business as a going concern – Sect 18 ........................................................................ 131
14.22 Irrecoverable debts: Sect 22 ...................................................................................................... 132
14.23 VAT on Fringe benefits – Sect 17(3) ........................................................................................... 132
14.24 Pre-incorporation expenses: Sect 19 ......................................................................................... 133

xxxii
 14.25 VAT Registration Requirements ................................................................................................. 133
14.26 VAT Tax Periods – Section 27..................................................................................................... 134
14.27 Tax Invoices – Sect 20 ................................................................................................................ 135
14.28 VAT Deregistration- Section 24.................................................................................................. 135
14.29 VAT Withholding Tax ................................................................................................................. 136
14.30 Agents and Auctioneers (section 56): ........................................................................................ 136
14.31 Objections and appeals ................................................................... Error! Bookmark not defined.
14.31.1 Objections ......................................................................................................................... 167
14.31.2 Appeals –Section 33 .......................................................................................................... 167
14.32 Tax Planning .............................................................................................................................. 168
14.33 Summary VAT Mind Map........................................................................................................... 137
PART F................................................................................................................................................... 139
Employment Tax, Capital Gains Tax and Estate Planning .................................................................... 139

15. Taxation of Employment Income 140

15.1 Introduction ............................................................................................................................... 140
15.2 Statutory instruments 33 & 142 of 2019 ................................................................................... 140
15.3 PAYE in foreign currency ............................................................................................................ 140
15.3.1 Year of assessment............................................................................................................ 141
15.3.2 Employment Income Sect 8 (1) (b) .................................................................................... 141
15.3.3 Income from a source within Zimbabwe .......................................................................... 141
15.3.4 Services of a Non-Resident or Expatriates ........................................................................ 141
15.4 Computation of tax liability ....................................................................................................... 142
15.5 Employee vs Independent Contractor........................................................................................ 142
15.6 Special points to note about sect 8 (1) (b) ................................................................................. 143
15.6.1 Bonus-3rd Schedule par 4(o) ............................................................................................. 143
15.6.2 Cash In Lieu of Leave [C.I.L.O.L.] ....................................................................................... 143
15.6.3 Retrenchment payment - 3rd schedule par 4 ................................................................... 143
15.6.4 Gratuities – [Sect 8 (1) (b)] ................................................................................................ 144
15.7 Employment Benefits – Sec 8 (1) (f) ........................................................................................... 144
15.8 Annuity- sec 8 (1) (a) .................................................................................................................. 146
15.9 Pension on retirement ............................................................................................................... 148
15.9.1 Pension received in instalment- sect 8 (1) (a) ................................................................... 148
15.9.2 Pension lump sum – sect 8 (1) (r) ...................................................................................... 148
15.9.3 Lump sum or commutation receipts – sect 8 (1) (n) ......................................................... 148
15.9.4 Pension exemption............................................................................................................ 148
15.9.5 Pension refund or withdrawal- sect-8 (1) (c) .................................................................... 148
15.9.6 Exemptions (on employment income) – Sect 14 and 3rd Schedule ................................. 149
15.10 Individuals exempt from Income tax ......................................................................................... 149
15.11 Deductions ................................................................................................................................. 150
xxxiii
 15.12 Credits – sect 7 (c) & the charging Act....................................................................................... 150
15.13 Tax concessions for the elderly – over 55 years......................................................................... 151
15.14 Administration of PAYE .............................................................................................................. 152

16. Capital Gains Tax 154

16.1 Introduction ............................................................................................................................... 154
16.2 From a source within Zimbabwe ............................................................................................... 154
16.3 Payment of capital gains tax in foreign currency ...................................................................... 154
16.4 Rates of Capital gain tax and Capital gains withholding tax ..................................................... 154
16.5 Framework for computing capital gains tax liability ................................................................. 155
16.6 Gross capital amount................................................................................................................. 155
16.6.1 Deemed sales- sect 8 (2) ................................................................................................... 155
16.6.2 Exemptions- sect 10 .......................................................................................................... 156
16.6.3 Deductions- sect 11 ........................................................................................................... 156
16.7 Damage or destruction of a specified asset .............................................................................. 157
16.8 Related party transfers- sect 15 & 16 ........................................................................................ 157
16.9 Transfer of business property to company-s17 ......................................................................... 158
16.10 Hire purchase sale- sect 18 ........................................................................................................ 158
16.11 Principal Private Residence (PPR) - sect 21 ................................................................................ 159
16.12 Substitution of business property- sect 22 ................................................................................. 160
16.13 Rates of the CGWT ..................................................................................................................... 161

17. Deceased Estates 163

17.1 Introduction ............................................................................................................................... 163
17.2 Income of a deceased ................................................................................................................ 163
17.3 Ascertained beneficiaries........................................................................................................... 164
17.4 Character of income in the hands of beneficiaries .................................................................... 164
17.5 Other aspects ............................................................................................................................. 165

APPENDIX 172
Tutorial Questions and Answers ............................................................................................................ 172
Tax rates and prescribed values ............................................................................................................ xvii

xxxiv
PART A

TAX ADMINISTRATION

1
1. The Zimbabwean Tax System

1.1 Introduction

This study unit introduces the overall structure of the Zimbabwean taxation system, discussing the
functions and roles of the Zimbabwe Revenue Authority (ZIMRA).

Income tax, governed by the Income Tax Act [Chapter 23:06], features fixed rates for each assessment
year ending on the 31st of December, established by the Finance Act [Chapter 23:04] and amended by
annual Finance Acts under section 7. Interpretation and administration of the Income Tax Act fall under
the Commissioner of Taxes (Commissioner General of ZIMRA), based in Harare. Strict confidentiality
applies to information acquired by all Zimbabwe Revenue Authority employees. Policy decisions
regarding legislative changes are the responsibility of the Minister of Finance and Economic
Development. Despite its title, the Act addresses both technical and administrative matters,
encompassing various withholding and other taxes covered in this book.

Objectives: 1. To discuss the purpose, basis and nature of taxation in Zimbabwe;

2. To identify the different types of taxes in Zimbabwe
3. To discuss the role of the Zimbabwe Revenue Authority
4. To distinguish tax avoidance from tax evasion.
Act: Sect 4 of RAA
(if applicable)
Relevant case N/A
law

1.2 The overall Function and Purpose of Taxation

1.2.1 Purpose and effect of Taxation

Purpose Description
Revenue Collection Taxes generate revenue for funding public expenditures e.g., health care,
education, infrastructure development etc.
Wealth Taxation can function as a mechanism for wealth redistribution, supporting
Redistribution economically disadvantaged members of society e.g., the sick.
Re-pricing Taxes can be used in re-pricing strategies to address externalities e.g.,
imposing duty on cheap imports, taxing informal sector.
Representation Taxation fosters accountability and demands better governance from the
citizenry.
Discourage Taxes, like excise duties, are used to reduce the consumption of goods with
Consumption health implications, such as tobacco.
of Certain Goods
Taxation serves as an instrument in achieving economic objectives; for
instance, fiscal policies may use taxation to withdraw money from the
Regulate Economy economy, as seen in the 2% Intermediated Money Transfer Tax (IMTT)
targeting the informal market.
Control Taxation, such as customs duties, tariffs, and surtax, helps achieve a
international trade healthy balance of payments by reducing imports. This maintains a
favourable balance by exporting more than importing.

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 Prevent dumping of Governments use taxes to counteract "dumping" – the exportation of
goods cheaper, sub-standard goods that could undermine local industries. Taxes
are introduced to make foreign goods more expensive, protecting local
industries and maintaining competitiveness.

1.3 Overall Structure of the Tax System in Zimbabwe

Tax Type Act
1. Corporate Income Chargeable on trade and investment income Income Tax Act
Tax
2. Pay As You Earn Chargeable on employment income Income Tax Act
(PAYE)
3. Value Added Tax Chargeable on consumption of goods and Value Added Tax Act
(VAT) services
4. Estate Duty Chargeable on the deceased person’s property Estate Duty Act

5. Capital Gains Tax Chargeable on gains from sale of immovable Capital Gains Tax Act
property, marketable securities and certain
intangible properties
6. Customs Duty Chargeable on imported goods. Custom & Excise Act
7. Withholding Tax Chargeable on passive investment income Income Tax Act
8. Presumptive Taxes Chargeable on income of informal traders as Income Tax Act
identified in the 26th Schedule of the Act
9. Excise Duty Charged on specified locally manufactured Custom & Excise Act
good.
10. Surtax Charged on sale of immovable properties and Customs and
marketable securities. Levied on listed Excise Duty Act
imported goods and light passenger motor
vehicles older than five years.

1.4 Legal Basis and Nature of Taxation

In Zimbabwe taxes are levied and collected by the Zimbabwe Revenue Authority (ZIMRA) in terms of
Section 4 of the Zimbabwe Revenue Authority Act [Chapter 23:11] on behalf of the Central
Government. The Income Tax Act [Chapter 23:06] is the principal legal instrument in terms of which
income tax is levied in Zimbabwe. In the case of Nyambirai V NSSA and Another 1995 (2) ZLR1, the
court outlined the essential elements of a tax as follows:

• It is a compulsory and not an optional obligation;

• It is imposed by the legislature (Parliament) or other competent public authority;
• It is imposed upon the public as a whole or a substantial sector of the public;
• The revenue collected through taxation is to be used for the benefit of the public in general and to
provide a service in the public interest.

Countries can opt for a residence-based or source-based (territorial) tax approach. Zimbabwe follows a
source-based tax system, placing significance on the origin of income. This means that taxes are imposed

3
exclusively on income, capital, and property originating from within or considered to be within the
country's borders.

A residence-based tax approach seeks to levy tax on income, capital, property etc. of its residents
irrespective of the source of the income. An example of such a country is South Africa.

1.5 Types of Taxes

Taxation is classified into two broad categories namely direct and indirect taxes.

Direct taxes apply to the income and wealth of individuals and organisations. The responsibility for
paying these taxes falls directly on the person or organisation i.e. Corporate Tax – tax on business
income (profits).

• Pay As You Earn – tax on income earned by individuals from employment.

• Investment Income – tax on dividends and interest.
• Capital Gains Tax – tax on sale of immovable property and shares.
• Estate Duty Tax – tax on the property of a deceased person etc.

Indirect taxes are taxes levied on goods or services, with the tax being incurred upon their consumption.
Also referred to as consumption taxes (e.g., Value Added Tax, Customs Duty, Excise Duty, Liquor Tax,
IMTT, Carbon tax), the burden of payment falls on the consumer rather than the entity remitting the tax
to Revenue Authorities. Typically embedded in the price, the consumer bears the indirect tax cost.

Key difference between direct and indirect taxes are that direct taxes, like income tax, are progressive—
higher income results in higher tax payments. Conversely, indirect taxes, such as Value Added Tax and
Customs Duty, tend to be regressive, impacting on the poor more significantly.

1.6 The Canons (Principles) of Taxation

These are essentially pillars of a good tax system. The principles were originally set out by Adam Smith
in his book: An Inquiry into the Nature and Causes of the Wealth of Nations, Book 5, 1776 (see also the
Commission of Inquiry Report Zimbabwe (1986) supra and similar findings in South Africa (Report of
the Commission of Inquiry into the Tax Structure of the Republic of South Africa, 1986 – Margo
Report). Through the writings of Adam Smith, it is now accepted that the following are the principles
governing a good tax system:

Neutrality • Neutrality requires that taxpayers should not be influenced by the tax system
to choose one course of action rather than another solely or mainly because
their tax position is better under one of the options.
• A neutral tax system thus minimises as far as possible the impact of the tax
structure on unintended economic behaviour including business organisation,
work effort or savings.
Equity • Equity is based on the assumption that all taxpayers should contribute towards
the support of government in direct proportion to their respective abilities that
is in proportion to the revenue they enjoy from the State.
• Applied in taxation globally through concepts such as ‘progressive taxation’
and ‘regressive taxation’.
o Progressive taxation - tax structure which recognises the respective incomes
and ability to pay for different taxpayers
o Regressive taxation – the converse of progressive taxation i.e., lower income
earners pay higher taxes.

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Certainty and • Requires that any tax which a taxpayer is required to pay should be sufficiently
Simplicity clear and not arbitrary, and the time, amount and manner of payment should
always be clear to a taxpayer.
In terms of the Margo report:
• Taxes should be certain and simple in concept and in collection.
o Certainty requires that a taxpayer be reasonably certain of what his tax
liability will be in any given set of circumstances.
o Simplicity requires that tax should be easily assessed, collected and
administered in order to minimise the costs of the tax to both the taxpayer
and the fiscus.
Economic • Requires that taxes should not negatively affect the efficiency with which
Efficiency resources are being utilised in the economy
• Every tax needs to be set up in a way that both takes up and keeps out of people’s
pockets as little as possible over and above what is brought into the public
treasury of the State.
• An improperly organised tax system could cause economic distortions, obstruct
industry and discourage people from trading in certain industries.
• An injudicious tax system may offer a great temptation to evasion or smuggling.

1.7 Administration of taxes

1.7.1 The Zimbabwe Revenue Authority (ZIMRA)

Zimbabwe Revenue Authority (ZIMRA) oversees tax affairs, including assessment, collection, and
accounting for revenue on behalf of the State. Derived from the Revenue Authority Act and government
statutes, ZIMRA's wide-ranging duties cover tax and duty management, Customs administration,
collaboration against illegal activities, and advising the Ministry of Finance and Economic
Development. Headquartered in Harare, ZIMRA operates regionally, with taxpayers remitting payments
at the Regional Office aligned with their business location or registration.

1.7.2 The Ministry of Finance and Economic Development.

The Ministry of Finance and Economic Development oversees the Zimbabwe Revenue Authority, the
Reserve Bank of Zimbabwe, and other relevant ministries. It formulates fiscal and monetary policies,
including the National Budget and Mid & Annual Term Fiscal Policy Review. The ministry mobilises
government funds through entities like ZIMRA and negotiates grant and loan agreements with various
financial partners.

1.8 Tax avoidance and tax evasion

Tax planning involves the organising of a tax payer's affairs in a way that legally minimises the impact
of taxation imposed by statutes. The most important issues to take into account when tax planning are
tax avoidance and tax evasion.
• Tax avoidance refers to the arrangement of one’s affairs in a legal manner which results in
minimisation of tax liabilities as outlined in sect 98 of the Act. The court in F v Commissioner of
Taxes 1976 (1) RLR 106 (A) at 113D) said tax avoidance is evil. Unlike tax planning which makes
use of existing provisions within the law, tax avoidance is about manipulating the law in order to
obtain a tax advantage.

• Tax evasion refers to the minimisation (or not paying) of tax liability by means which are outside
the law e.g. falsification of records, misrepresentation etc. Tax evasion falls within the overall
definition of "tax fraud".
5
Exam tip

When answering a taxation question, you should take advantage of all the available tax reliefs and
incentives to minimise the tax payer’s tax liabilities. (Tax planning).
Tax planning is not a separate topic but shall be examined in almost every topic. Mostly it is examined
by giving the student an option to structure transactions given the known tax impact or picking the least
tax alternative in a transaction where there is more than one tax treatment. Common examples of the
above are (a) Choosing between alternatives to fund a business i.e., debt or equity (b) choosing the type
of capital allowances that minimises tax e.g., between wear and tear or SIA.

6
1.9 Introduction
Taxpayers have rights and obligations in terms of the tax law, which the Commissioner enforces through
administrative powers. This chapter looks at these matters in detail, particularly focusing on income tax
and capital gains tax administrative matters. Those relating to VAT are dealt with in the VAT Chapter.

Objectives: • To identify the tax remittance calendar in Zimbabwe for different types of
taxes and the respective returns.
• To discuss the various types of assessments
• To identify the Commissioner’s powers
• To discuss objection and appeals procedures
Act: Sect 37- 77 ITA
(if applicable)
Relevant case law • Trek Petroleum (Private) Limited v ZIMRA No. SC 56/17
• Central African Road Services (Pvt) Ltd (CARS) v ZIMRA 17-HH-110
• Time Security v Commissioner of Taxes (ZIMRA)and 4 Others HH284-18
• CRS (PVT) LTD v ZIMRA HH-728-17, FA 20/2014

2.1.1 Computation of income tax

Section 7 of the Act outlines that a person's income tax is computed based on their taxable income for
the assessment year and the corresponding rates fixed by the charging Act. Tax credits, eligible only for
natural persons, are subtracted from the income tax due. Notably, small companies can now claim Youth
Employment Tax Credits. For self-assessment returns, the tax payable is calculated consistently for each
assessment year when a taxpayer engages in trade and is obligated to submit a self-assessment return
per section 37A of the ITA.

2.1.2 Tax Payment Dates

2024 Tax Payment Calendar

Tax Head Due Date

Employees’ Tax (PAYE) By the 10th of the following month.
Business Income:
Quarterly Payment dates (QPDs) 25th March 2024
1st QPD (10%) 25th June 2024
2nd QPD (25%) 25th September 2024
3rd QPD (30%) 20th December 2024
4th QPD (35%)

Withholding Taxes:
Non-Resident Shareholders’ Tax Within 30 days of the date of distribution.
Resident Shareholders Tax Within 10 days of the date of distribution.
Non-Resident Tax on Fees Within 10 days of the date of payment.
Non-Resident Tax on Remittances Within 10 days of the date of remittance.
Resident Tax on Interest Payable by the 10th day of the month following the month of
deduction.
Non-Resident Tax on Royalties Within 10 days of the date of payment.
By the 10th day of the month following the month in which
Automated Financial Transactions Tax the transaction was affected.
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 1st Quarter (January to March)
2nd Quarter (April to June)
Presumptive Tax: 3rd Quarter (July to September)
4th Quarter (October to Dec)
Within three months after issuing the Zimbabwean member
Demutualization Levy concerned the free shares.
Tobacco Levy
48 hours after the date of the auction of tobacco concerned
or after relinquishing possession of auction tobacco
concerned.
Intermediate Money Transfer
Tax (IMTT) By the 10th day of the month following the month in
which the transaction was effected.

Withholding Amounts under On or before the 10th day of the following month after
contracts with suppliers payment.
Within 10 days of date of payment of the fees.
Non- Executive Directors’ Fees
Property of Insurance Commission Tax By the 10th day of the month following month of
Mineral Royalties
No later than the 10th day of the month following the month
in which the proceeds are received.
No Later than the 3rd working day from the date when the
Capital Gains Withholding Taxes payment was made.
By the 25th day of the following month after the end of the
VAT tax period.
Up to a maximum of 180 days from date of deferment
Deferred VAT depending on the Value of the goods.
VAT on imported services Payable by the 25th of the month that follows date of invoice
or payment of non –resident, whichever is earlier
Stamp duty By the 10th of the following month.
Betting Tax By the 25th of the next month.
Income period Date QPD is paid
December – February 25th of March
March – May 25th of June
June – August 25th of September
Income from E-commerce services September- November 20th of December

2.1.3 Returns and Assessments

According to Section 37 of the Act, the Commissioner must give public notice to individuals obligated
to submit returns for assessment each year, as specified in the notice. Once this notice is issued, returns
must be filed within thirty (30) days, unless the Commissioner, for valid reasons, exercises discretion
and grants an extended period.

For those under self-assessment in terms of s37A of the ITA do not require notification, their returns are
submitted by the 30th of April following 31 December year end.
Returns can be filed in individual or representative capacities, such as Public Officer of a company,
Trustee of a trust, Executor of a deceased estate and Administrator of an insolvent estate.

8
The public notice must specify locations for obtaining prescribed forms, and it is the responsibility of
those required to furnish returns to acquire them. Late submissions incur penalties, but estimated returns
are acceptable when information is limited.

2.1.4 Other returns

Section 38 outlines the submission of returns for minor children, specifying the parent responsible and
the income covered.
Under Section 39, a person must provide additional returns and information upon request. Employers,
for instance, may be obligated to file an annual return containing general information such as employee
salaries, interest, fees, rents, and commissions.
Every company must file a copy of its memorandum and articles of association within 30 days of its
incorporation and furnish copies of subsequent alterations (s42).
Returns necessitating balance sheets and profit and loss accounts must be supported by authenticated
documents, accompanied by a statement on the examination extent, utilising a prescribed form (Section
43).
The Commissioner holds various powers, typically reserved for suspected fraudulent actions regarding
a taxpayer's return or non-submission, but applicable to any taxpayer if necessary.

2.1.5 Assessments and Penalties

Section 2 of the Act defines "assessment" as the determination of taxable income, credits (per the
Finance Act), or an assessed loss for deduction. The term's scope was broadened by ITC 1535 (1992)
54 SATC 356 to include additional assessments by the Commissioner for amounts that should have
been taxed but weren't due to a Double Taxation Agreement misapplication. In DNS (PVT) LTD vs.
Zimbabwe Revenue Authority HH 722-19 (FA22/16), it was clarified that self-assessment constitutes
the Commissioner’s assessment.

Other assessments include provisional assessments (S37(14)) and estimated assessments (S45).
Schedules issued by ZIMRA before proper assessments don't constitute assessments (Barclays Bank of
Zimbabwe Ltd v ZIMRA 2004 (2) ZLR 151 (H)).

An assessment and notice of assessment trigger legal rights, duties, and responsibilities for both the
taxpayer and the taxman (Matrix Tax School Case Book- MA Ltd vs ZIMRA 16-HH-316). Once issued,
the Commissioner can collect tax per the assessment, with mitigation possible through a valid payment
plan or a pending objection or appeal. Assessments and notices must strictly comply with the provisions
of sections 2 and 51 of the Income Tax Act.

2.1.6 Estimated assessments (section 45)

The Commissioner holds the authority to issue an estimated assessment when there's reason to believe
that tax collection is at risk due to a taxpayer's failure to submit a return, imminent departure before
return submission, inability to provide an accurate income return, or similar circumstances. This action
is also permissible in cases lacking proper books of accounts or records.

The Commissioner and taxpayer can agree on an estimated taxable income or assessed loss. Once
agreed, it is final, exempt from objections or appeals. The Commissioner can only modify it if the
taxpayer withholds information affecting the estimate. An estimated assessment doesn't absolve a
taxpayer from penalties or interest for non-return submission, and misrepresentation may incur
additional tax.

9
2.1.7 Additional assessment (section 47)

An additional assessment may be raised where:

• income which was meant to be taxed was never charged to tax,
• in the determination of assessed loss income was excluded from tax,
• an expense was erroneously deducted, or
• Any sum granted by way of credit should not have been granted.
The Commissioner will include such income or disallow such deduction and call upon a taxpayer to
pay the right tax. However, no additional assessment or tax shall be raised or charged if;
• The assessment was made in accordance with the practice prevailing or existing at the time of
assessment.
• Six years have passed from the end of the relevant year of assessment, unless the Commissioner
considers it necessary because of fraud, misrepresentation or wilful non-disclosure of facts by a
taxpayer.
An additional assessment does not supersede the Commissioner's decision in an appeal case, where an
assessment is altered following a taxpayer's objection. Payment of additional tax may be required. The
Commissioner can estimate when issuing an additional assessment. A recent case, Bath vs. ZIMRA HH
552/20, underscores that misrepresentation, whether intentional or unintentional, can void the six-year
prescription period. Even errors in tax returns, audited by independent auditors, pose a risk of ZIMRA
disregarding the six-year limitation.

2.1.8 Reduced assessment and refunds (Section 48)

If it's proven to the Commissioner's satisfaction that a taxpayer overpaid taxes, the Commissioner issues
an amended assessment to reduce the tax and refund any excess payment. No amended assessment is
allowed if made in accordance with the law existing at the time of assessment, and six years have passed
since the notice of assessment. Amended assessments are not subject to appeal or objection.

The Commissioner is obligated to pay interest on overpaid taxes not refunded within 60 days of the
taxpayer's claim or the assessment's completion date, whichever is later. However, the Commissioner
is not liable to pay a refund if the overpayment resulted from an incomplete or defective return or
another taxpayer error.

2.1.9 Amended assessment of loss (Section 49)

If it's established to the Commissioner's satisfaction that a taxpayer's assessed loss for a particular year
is less than what it should be, the Commissioner issues an amended assessment to increase the assessed
loss. However, no amended assessment occurs if it aligns with the law at the time or six years have
elapsed since the notice of assessment. Amended assessments are not subject to appeal or objection.

2.1.10 Penalties (Section 46)

The Commissioner can impose a penalty (technically termed “additional tax”) when a person fails to
submit a return or submits an incorrect return. The maximum penalty is 100% of the tax applicable to
the default or, more precisely:
• If a taxpayer defaults in return submission, he is liable for 100% of the tax applicable to his entire
taxable income.
• If a taxpayer defaults in return submission, they are liable for 100% of the tax on their entire taxable
income. If a taxpayer submits a return but omits an amount, makes an incorrect statement, fails to
disclose facts, claims an impermissible deduction, or wrongly claims a personal credit, they are

10
 liable for 100% of the tax that would have been avoided through their actions. (Refer to section 46
for more details).

The Commissioner has the authority to remit part or all of such penalties, but practice shows that
negotiation is more common than appeals. The established principle for remittances is that it is granted
when no intent to evade is shown (ITC 1669 (1999) 61 SATC 479). However, remittance is not granted
when a taxpayer cannot prove the absence of an intent to evade tax (ITC 1334 (1981) 43 SATC 98).
The case of PL Mines (Pvt) Ltd v Zimbabwe Revenue Authority 2015 (1) ZLR 708 (H) at 730B-D
outlines penalty imposition principles, highlighting that the appeal court is not bound by the
Commissioner's considerations.

2.1.11 Representative Taxpayers (s53 to 61)

The Act defines representative taxpayers as individuals or entities, like companies or trusts, responsible
for tax matters when the taxpayer cannot deal personally. For companies, the public officer acts as the
representative; for insolvent or deceased estates and trusts, it is the trustee. Despite a representative's
existence, all Act responsibilities and duties remain binding on the taxpayer.

Non-resident broadcasters or e-commerce operators must appoint a Zimbabwean person as their

representative taxpayer within 30 days of tax liability or the Finance (No. 3) Act of 2019 promulgation,
notifying the Commissioner in writing. Failure to appoint allows the Commissioner to make the
selection. The list of representative taxpayers was expanded in 2020, including individuals appointed
by the company or entity or by the Commissioner.

Foreign broadcasting and e-commerce operators with revenue exceeding US$500,000 in Zimbabwe
face a 5% income tax liability. The representative's liability is limited to funds controlled and
recoverable from the taxpayer for taxes paid on their behalf.

Section 56 holds a representative personally liable for unpaid taxes if funds were disposed of when tax
payment was possible. Liability arises upon proper assessment and service, following the decision in
Esselmann v Secretary of Finance (1991) 53 SATC 285.

Every Zimbabwe-incorporated company must appoint a Public Officer, approved by the Commissioner,
usually a director or senior management involved in daily operations. The Public Officer must have
signing powers on company bank accounts. Section 61 details requirements and time limits for Public
Officer Appointments, with penalties for non-compliance.

2.1.12 Powers of the Commissioner

Access to all public records (Section 40) L: The Commissioner or his officer have the right to access
all public records and inspect registers, books accounts, record, return, etc.
Powers of Search and seizure (section 34F RAA): Section 34F of the RAA grants the Commissioner
and his officers’ powers to obtain information on the administration of the various tax Acts. They may
require the production of documents, such as deeds, plans, instruments, books, records, accounts, trade
lists, and stock lists, as deemed necessary.
Right to access to information, search and entry (section 44): The Commissioner may require a
taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in
writing). This right extends to information held by representative taxpayers, agents (banks), and trustees.
The Commissioner has access to public records, and secrecy provisions of other laws cannot prevent
disclosure to ZIMRA.

11
Appointment of tax collection agent (section 58): The Commissioner may declare a person as the
agent of another for tax collection. The appointed agent may be required to pay any tax due from funds
held for or due to the designated person.
Recovery of tax (section 77 ITA & 33C RAA): The Commissioner can recover taxes when due or
payable through legal action in a magistrates' court. The recovery is subject to the 6-year prescription
rule. The due tax is treated as a debt to the State, payable to the Commissioner as prescribed. Directors
held accountable for a company's debts, and forming a new company with the same business makes it
liable for old company tax liabilities (Trek Petroleum (Private) v ZIMRA Judgment No. SC 56/17).
(Trek Petroleum (Private) v ZIMRA Judgment No. SC 56/17)

2.1.13 Objections and appeals

Section 62 outlines circumstances allowing a taxpayer to file an objection:

• Against an assessment.
• Regarding decisions made by the Commissioner in the 11th Schedule. Section 68 then precludes a
taxpayer from objecting to decisions not listed in the 11th schedule.
• In case of relief from double taxation including:
o Zimbabwean income subject to both withholding tax and income tax for a non-resident.
o Foreign income subject to both Zimbabwean and foreign taxes for a Zimbabwean resident.

2.1.13.1 Objections

• Objections: Must be in writing with full grounds within 30 days; after this period, subsequent
appeals are restricted to the initial grounds (Section 65(4)).
• Response Time: The Act lacks a prescribed timeframe for the Commissioner's response to
objections, deeming objections without a response within 90 days as disallowed, potentially
encouraging procrastination.
• Advisable Action: Engaging in the appeal process is advisable after a significant time elapses
without a response.
• Burden of Proof: Rests on the taxpayer to show excessive or erroneous assessment; record-
keeping in English for six years is crucial.
• Case Law Emphasis: The case law emphasizes the taxpayer's responsibility to demonstrate, on
a balance of probabilities, any error in the Commissioner's assessment (Reliance Land and
Investment Co Ltd v CIR (1946) 14 SATC 47; CIR v Goodricke (1942) 12 SATC 279; ITC 1423
(1987) 49 SATC 85).

Appeals Process (Sections 64 to 70 and Schedule 12)

• Initiating Appeals: Taxpayers can appeal Commissioner's decisions within 21 days of
receiving objections.
• Hearing Venues: The appeal can be heard in either the Special Court or High Court; the Special
Court has lower costs due to relaxed representation rules.
• Further Appeal Right: Both taxpayer and Commissioner have the right to further appeal to the
Supreme Court.
• Tax Liability Status: An objection or appeal doesn't extinguish the tax liability; taxpayers must
first pay and then pursue remedies.
• Principle of Payment: The "pay now, argue later" principle allows taxpayers to apply for
payment deferment until the objection or appeal outcome; deferred payment includes interest
from the original date (Metcash Trading Limited v Commissioner for SARS and Another (2000)
62 SATC 84). The taxpayer can apply to the Commissioner to waive payment until the outcome
of the objection or appeal.

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2.1.13.2 Appeals

In terms of sect 65 of the Act, appeals must be made within 21 days of the Commissioner’s objection
decision. Essentials of an appeal are as follows:
Every notice of appeal should:
• Be in writing
• State whether the appellant wishes to appeal to the High Court or to the Special Court
• Be lodged with the Commissioner within 21 days of objection decision or within 90 days of filling
an objection whichever is earlier
Non-compliance Consequence: Failure to comply with stated rules renders the appeal null and void.
Exceptional Consideration: The court may grant condonation on good cause shown or with the
agreement of the parties (MA Ltd vs Zimra 16-HH-316).
Appeal Court Rules: Rules and procedures for hearing appeals in the Special Court are akin to those
in the High Court, unless otherwise provided.
Calculation of Days: The rules for counting days in the High Court also apply to the Special Court;
non-business days are excluded.
Supreme Constitutional Court Distinction: In the Supreme Constitutional Court, both business and
non-business days are counted; this distinction is seen in the case of Kombayi vs Berkout 1988(1) ZLR
53(S) at 56B, as reported in MA Ltd vs Zimra 16-HH-316.

2.1.13.3 Offences (S81 to S86)

The circumstances in which an offence will have been committed under the Act include;
• Failing or neglecting to submit a return;
• Refusing or neglecting to give information,
• Refusing or neglecting to attend an interview,
• Refusing to answer a question,
• Refusing to produce documents,
• Failing to reflect any portion of gross income or to disclose any material fact, either in one’s own
return or a return prepared on behalf of another person;
• Failing to keep proper books and accounts. These must be in English and retained for six years from
the date of the last entry therein; retention of a photographic reproduction is, however, acceptable.
(A person in receipt only of salary, wages or other personal remuneration is not required to keep
books);
• Providing incorrect information or submitting incorrect returns or certificates;
• Failing to file the memorandum and articles of association of a company;
• Failing to give security, if required;
• Making false entries in the books of account.
Representatives must exercise caution concerning the mentioned offenses, as it is the representative
who bears accountability and may face fines or imprisonment.

2.1.14 Legal Precedent

The Income Tax Act traces its origins back to the 1918 Southern Rhodesian Ordinance, drawing
influence from South African and United Kingdom Acts of that era. While the statutes have evolved
significantly, fundamental principles persist, with parallels between the Zimbabwean and Australian
Acts. Foreign court rulings are not binding on Zimbabwean courts, but shared legal roots lead to
considerable persuasive value accorded to judgments from these countries. This module highlights select
cases to illustrate principles, emphasising the importance of legal precedents.

13
This module highlights select cases to illustrate principles, emphasizing the importance of legal
precedents. Legislation alone cannot cover all circumstances, making case law crucial for interpreting
terminologies, especially in areas like distinguishing capital and revenue nature. Zimbabwe's tax
legislation relies on general principles, and the Commissioner's "departmental practices" serve as guides
but lack the force of law and can be challenged in courts. In LFCZ Ltd v Zimbabwe Revenue Authority
HH 164/2019 at pp 13-15 it was alleged that; taxpayers cannot rely on departmental practices for
interpretation; instead, they should seek advanced rulings under s34D of the Revenue Authority Act.

14
 Chapter round up

• Economic, social and environmental factors may affect the government's tax policies.
• Taxes can be classified into direct taxes and indirect taxes.
• Direct taxes are levied on income, while indirect taxes are levied on consumption.
• Tax avoidance is the legal minimisation of tax liabilities, tax evasion is illegal.
• Tax avoidance is the legal usage of the tax regime to one's own advantage in order to reduce the
amount of tax that is payable by means that are within the law.
• Tax evasion, on the other hand, efforts made by individuals, corporations, trusts and other entities
to evade taxes by illegal means.
• The Commissioner has the power of entry into a taxpayer’s premises, power to request information
and to access records of a taxpayer.
• An objection must be made in writing, state the grounds of objection and be lodged with
Commissioner within 30 days of the date of notice of assessment, decision or determination of the
Commissioner.

15
PART B

INTRODUCTION TO INCOME TAX

16
 3. Gross Income Concepts

3.1 Introduction

To compute taxable income per the Income Tax Act [Chapter 23:06], income must meet the gross
income definition. In Zimbabwe, income is taxable if sourced or deemed sourced within the country,
aligning with the prevailing source-based taxation system. This study unit will discuss in detail the
definition of gross income, the general deduction formula as well as the applicable case law which are
used to interpret these definitions.

Objectives: 1. Define gross income and identify its key elements

2. Identify applicable case law that is used to interpret elements of gross
income
3. Determine the residence of a tax payer as defined in the Income Tax Act
4. Apply the definition of gross income to different receipts accruing to tax
payers and determine whether these are taxable in terms of the Income Tax
Act.
Act: Sect 8 (1) of ITA
(if applicable) Sect 10 of ITA
Sect 12 of ITA
Relevant case Geldenhuys v C.I.R., 14 S.A.T.A. 419
law Lategan v C.I.R., 2 S.A.T.C. 16

3.2 Gross Income – Section 8 (1)

Gross income is defined as:

The total amount received by, or accrued to, or in favour of, a person or deemed to have been 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 capital in nature.

3.3 Components of Gross Income

Component Explanation

Amount Section 2 of the Act defines “amount” as money or any other property corporeal
or incorporeal having an ascertainable money value. This means items settled in
the form of barter transactions meet the above definition.
Received by The words “received by” mean “received by the taxpayer on his own behalf for
his own benefit” see (Geldenhuys v C.I.R., 14 S.A.T.A. 419). Amounts received
for the benefit of another person, such as rent collected by an estate agent for a
client landlord, are not considered gross income for the collecting agent. It is
important to note that deposits received for returnable containers are classified
as gross income, except when held in trust without commingling with the
taxpayer's funds or when serving as security for the customer's obligation to
return the container.

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 Receipts in Receipts in advance, characterised by payment received before delivering goods
Advance or services, are not considered gross income under the Income Tax Act if the
supply of goods or services is scheduled for a subsequent year of assessment.
However, if and when the goods or services are provided, the prepayment may
be proportionally included in gross income.

Accrued Income accrues when a taxpayer becomes entitled to it or when it is due and
payable to the taxpayer.
The meaning of the word “accrued” is not settled law. In Lategan v C.I.R., 2
S.A.T.C. 16, the judge concluded that income accrues to a person when one
becomes “entitled to” the income. Section 10 (7) of the Act affirms the decision
in the Lategan case.
The courts however, both in Zimbabwe and in South Africa, appear to be moving
towards the views expressed in Delfos’ case and in Hersov’s Estate v. C.I.R., 21
S.A.T.C. 106, that “accrued” means, due and payable.
Deemed The Commissioner will invoke receipt or accrual under the circumstances
received or outlined in section 10, although the income might not have been physically
deemed accrued received. An amount will be deemed to have accrued to a person if it has been
– sec 10 invested on behalf of the person.
Section 10 (2) provides that partnership business income accrues on the
accounting date. This provision reinforces the decision established in the case
Sacks v CIR.
Sections 10 (3) to 10 (6) provide for the taxation of income that accrue from
donated assets.

Section 10 (3) deems income accruing to a minor child as a result of a donation,

settlement or other disposition, to be income accruing to the parent.

Section 10 (4) counteracts tax avoidance schemes. If a minor child becomes

entitled to income in pursuance of a donation, etc. made by a third party, i.e. a
person other than his parent and the parent or near relative of the minor child has
made a donation to the third party or his near relative, the child’s income will be
taxable in the hands of the parent. (Please note the section applies to income
accruing from donated assets).

3.4 From a source in Zimbabwe

In Zimbabwe, income is subject to taxation only if it originates from a Zimbabwean source or is deemed
to have a Zimbabwean source (Section 12). While the term "source" is integral to tax matters, the
Income Tax Act does not provide a specific definition. Legal precedents, however, have extensively
addressed and clarified the concept of "source" in the absence of a statutory definition.

Specific circumstances under which income is deemed to be from a Zimbabwean source are outlined
in section 12 of the Act. The most common examples are interest and dividends from outside Zimbabwe
which are deemed to be from a Zimbabwean source in terms of section 12 (2).

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Watermayer CJ in CIR v Lever Bros and Unilever Ltd 1946 AD 441: - “…. source of receipts, received
as income, is not the quarter whence they come, but the originating cause of their being received as
income …. the quid pro quo which he gives in return for which he receives them …”

The following are some important legal precedents: -

1. Directors’ fees - ITC 235 (1932) 6 SATC 262: - “It is quite clear that the director’s fees are derived
from the fact that the appellant is a director of the company, and therefore must be assumed to have
earned the fees at the headquarters of the company. It is there only that he can make his voice heard as
a director.”

2. Interest - “…. Provision of credit is the originating cause hence the place where exercised is the
source ….” This was the majority decision in CIR v Lever Bros and Unilever Ltd 1946, 14 SATC1.
3. International Trade - Transvaal Association Hide & Skin Merchants v COT Botswana Court of
Appeal (May 1962 SATC 97). Company bought hides from a Botswana Abattoir via Botswana
subsidiary, treated them with salt and bound them into bales in Botswana. The company headquarters
in Johannesburg marketed the hides.

3.5 Deemed source within Zimbabwe

The definition of gross income modifies the fundamental principle of:
COMPONENT EXPLANATIONS
Component Explanation
Overview Section 12 sets out the circumstances in which certain types of income are
subject to tax in this country although the real source may be elsewhere or
where the determination of the actual source presents considerable practical
difficulties.
Sale of goods Section 12 (1) (a) – Sale of goods by a person conducting business operations
- The proceeds of any contract made in Zimbabwe for the sale of goods are
deemed to be from a source within Zimbabwe.
Services rendered Section 12 (1) (b) – Income from services rendered - Receipts for any services
in pursuance of rendered in the carrying on in Zimbabwe of any trade irrespective of where or
trade by whom payment is made, are deemed to be from a source in Zimbabwe.
Services rendered Section 12 (1) (c) – Income from services rendered by an employee (includes
in pursuance of a company director), who is ordinarily resident in Zimbabwe, during a period
trade of temporary absence from Zimbabwe shall be deemed to be from a source
within Zimbabwe. ―Temporary absence means an absence for a period not
exceeding in the aggregate 183 days in any year of assessment.
Services rendered Section 12 (1) (d) – Income from services rendered to the Zimbabwe
for the State Government either within or outside Zimbabwe shall be deemed to be from a
Zimbabwean source. However, an amount received by or accrued to or in
favour of a person by virtue of service rendered outside Zimbabwe shall not be
deemed to be from a source within Zimbabwe if the person was not ordinarily
resident outside Zimbabwe solely for the purpose of rendering such service.
Pension Section 12 (1) (e) – Pensions or annuities arising from services rendered which
are granted by any person wherever resident, the government of the former
Federation or the Zimbabwe government shall be deemed to be from a source
within Zimbabwe. However, provisos eliminate all.

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Dividend and Dividends or interest from foreign-held securities are deemed to be from a
interest from a Zimbabwean source under section 12(2) of the Act if received by or accruing
source outside to a person ordinarily resident in Zimbabwe at the time of accrual or receipt. It
Zimbabwe doesn't matter if the amount is invested, accumulated, or capitalised.

Section 16(1)(n) of the ITA disallows expenditure claims on foreign dividends.

If a dividend is received net of tax suffered at the source, it should be grossed
up for Zimbabwean tax computation at a rate of 20%. Income from other forms
of securities excluding dividends is taxed at an effective rate of 25%, (24.72%
prior). Relief for double taxation is provided under section 93 if there is a
double taxation agreement between Zimbabwe and the source country.
Annuity Sect 12 (3) -Income received by way of annuity from a foreign source is
deemed to be from a Zimbabwean source if the annuitant was ordinarily
resident in Zimbabwe at the time of acquiring the right to the annuity; whether
through purchase or asset disposal. This provision ensures that annuities
purchased or payable outside Zimbabwe with funds originating from a
Zimbabwean resident remain taxable. The phrase "at the time the right to the
annuity was acquired" is interpreted to mean the time when the proposal for
the annuity was accepted.
Royalty Sec 12 (4) - A royalty is deemed to be from a Zimbabwean source if or to the
extent that the income is received or accrues due to the use, privilege or right
of use of any intellectual property within Zimbabwe. This includes royalties
from the use of patents, designs, trademarks, copyrights, models, plans, secret
processes or formulas, motion picture films, television films, and the provision
of "know-how" for using any of the aforementioned items within Zimbabwe.
Recoupment Sect 12 (5) - Recouped capital allowances in respect of fixed assets sold outside
Zimbabwe are deemed by section 12 (5) to be from a source within Zimbabwe
if capital allowances in respect of those assets were claimed in Zimbabwe.

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 2Supply of Sect 12 (6)-(8) - Income of a satellite broadcasting and electronic commerce
broadcasting and e- operator, domiciled outside Zimbabwe, is deemed to be from a Zimbabwean
commerce services source to the extent that such income is received from persons resident in
Zimbabwe for services rendered in Zimbabwe.

This includes amounts receivable by or on behalf of a satellite broadcasting

service domiciled outside Zimbabwe for television or radio subscriptions or
fees paid by persons resident in Zimbabwe. Similarly, income from
electronically supplied products (such as downloaded music, books, and
software) receivable by or on behalf of an electronic commerce platform
domiciled outside Zimbabwe from persons resident in Zimbabwe for the
provision or delivery of goods or services is also taxable in Zimbabwe.

A “satellite broadcasting service” is defined as a service which by means of a

satellite (whether or not in combination with cable optical fibre or any other
means of delivery) delivers television or radio programmes to persons having
equipment appropriate for receiving that service.”

Electronic commerce operator means an operator selling, providing or

delivering services from outside Zimbabwe by use of a telecommunication or
electronic means (and whether mediated by computers, mobile telephones or
other devices) to customers or users in Zimbabwe.

To the extent that the satellite broadcasting service provider and e-commerce
service provider receive revenue from Zimbabwe in excess of US$500 000
(prior to 24 June 2019), the income will be taxed at a flat rate of 5% and no
deductions will be allowed.

Permanent establishment rules do not apply in respect of services.

Responsibility lies with the representative taxpayers of non-resident

broadcasting and e-services operators to declare total income and pay the tax
to the ZIMRA, in the absence of which the Commissioner General can make
an appointment.

3.6 Excluding amount of capital nature

The definition of gross income specifically excludes amounts proven 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 liable to tax rests fairly and squarely on the taxpayer.

3.6.1 Fixed and Floating Capital

The terms "fixed" and "floating" capital play a crucial role in determining whether an amount is of a
capital or revenue nature. While the Income Tax Act does not provide a precise definition for "of a
capital nature," understanding these terms provides guidance.
• Fixed Capital: Refers to assets that remain in ownership, such as a factory, delivery van, or
specialised equipment. For instance, rental income from a building (fixed capital) is considered
on revenue account.

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 • Floating Capital: Represents assets that are consumed or disappear in the process of
production. It includes items like raw materials or goods in the production cycle. Accruals from
the sale or exchange of such assets, indicating a change in ownership, are considered on capital
account.
This distinction helps in assessing whether a receipt or accrual should be categorised as revenue or
capital for tax purposes.

Think of capital as a tree and income as its fruit. The initial investment or ownership is the "tree"
(capital), while the returns or yields are the "fruit" (income). This metaphor helps differentiate between
capital and revenue, especially when dealing with unexpected gains like inheritances or lottery wins—
considered separate and fortuitous fruits with a capital nature.

Examples of other amounts which are capital in nature are the proceeds of life insurance policies and
the proceeds of the sale of assets in which the taxpayer does not trade e.g., the sale of a house in Harare
by an employee transferred to another town.

Unless the beneficiary continues to carry on the appropriate trade or mixes the assets with his existing
trading assets, the realisation of inherited assets results in a capital accrual. This is so even if it has
been necessary to expend money, time or energy on, for example, a growing crop to bring it to fruition
or the reduction of a piece of land saleable parcels. Darwendale Estate Ltd., v. C. of T., J.329 and I.T.C.
1196, 35 S.A.T.C. 235: Newmarch Investment and Trust Co. (Pvt) Ltd, v. C. of T., J.331.

Regard must be paid to intention antecedent to the date of acquisition (Lace Proprietary Mines Ltd, v
C.I.R., 9 S.A.T.C. 349), change of intention (C.I.R., v. Lydenburg Platinum, 4 S.A.T.C. 8) and mixed
and dominant intentions (S, v. C. of T., 24 S.A.T.C. 744: Smith v. C. of T., J.95, C. of T., v. Glass, 24
S.A.T.C 499: J. 110 and African Life Investment Corporation (Pty) Ltd., v S.I.R., 31S.A.T.C. 163).

Mixed and dominant intentions and possible change of intention or change in the nature of the
investment (from direct ownership to participation through a company) were all discussed in Davenport
v C. of T., 34 S.A.T.C. 94: J.316.

3.7 Damages and compensation

Amounts received as damages or compensation for the loss, surrender, or sterilization of fixed capital
assets or income-producing machinery are considered of a capital nature (Glenboig Union Fireclay Co.
Ltd., v. I.R.C., 12 T.C. 427). This includes receipts from agreements restricting a taxpayer from selling
or using goods other than those supplied by the payer. However, caution is needed, as certain
agreements might stipulate payments as discounts or rebates, making the receipt of a revenue nature
and not excluded from gross income. The Burmah Steamship Co. Ltd. I.R.C. 16 T.C. 67 case provides
a useful test: if the damages or compensation fill a hole in the profits, they're of a revenue nature; if
they fill a hole in fixed capital assets, they're of a capital nature.

3.8 Restraint of trade

Basing on legal precedence, a person’s right to trade freely is an incorporeal asset and an amount
received for a restriction on that right is compensation for its sterilization. Receipts in respect of restraint
of trade are thus generally of a capital nature.

Capital Receipts – Gross Income excludes any amount so received or accrued, which is proved by the
taxpayer to be of a capital nature. Examples of capital receipts are, insurance proceeds, goodwill, lottery
wins, inheritance and proceeds from sale of assets in which the taxpayer does not trade.

A rough guide to determine whether income is of revenue or capital nature would be as follows: -
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If the amount flowed from the asset but the asset remained in ownership, it should be considered as
revenue. If the amount flowed from the sale or exchange of an asset it should be considered as capital.
Capital receipts may be referred to as the tree while revenue receipts may be regarded as the fruit.

Examples

Mr C, an architect, designed all the houses in a golf course development as well as the golf course and
the golf club house, in return for being given one of the houses once it was built. Assume that the accrual
takes place when Mr C receives transfer of the house and that the value of the house at the date of
transfer is $280 000 000.

Mr C’s gross income is $280 000 000.

Accrual

The sale and delivery of goods, by a person, in terms of a credit sale, takes place on 1 December 2022
with payment to be made on 2 February 2023.

Because a valid contract has been concluded on 1 December 2022 and delivery has taken place, the
seller becomes entitled to the payment at that date. Accrual, therefore takes place on 1 December 2022
and the amount will be taxed in the 2022 year of assessment.

Source

Mr A receives $100,000 for the sale of goods in Harare. The originating cause of the $100,000 accruing
is the sale and because the sale is in Harare the source is Zimbabwean. It can be seen that the conclusion
as to the source of the income results from the answers to two questions-
What gave rise to the income? The sale.
Where is the sale? Harare.

3.9 Meaning of “ordinarily resident”

A person would be deemed to be ordinarily resident in Zimbabwe if he has a fixed place of abode in
Zimbabwe. (Levene v CIR 1928). Comments: “that ordinary residence was residence in accordance with
the way in which a man’s life is usually ordered. Placed at its lowest it seems to me the use of the word
ordinarily serves to emphasise that the residence must be settled and not temporary and casual”.

Cohen v CIR 1946

The taxpayer, a director of OK Bazaar (1929) Limited, was requested to travel to the United States to
act as the company’s buyer. He and his family did not return to South Africa for a full year of
assessment. The taxpayer sought to be exempted from tax on dividends accruing from South Africa on
the basis that he was neither ordinarily resident nor carrying on business in South Africa.

Held: The word ‘ordinarily’ was linked up with the question of whether the man could be ordinarily
resident for the purpose of the statute in more than one country. No authority existed on that question.
If a person is resident in more than one country at a time, then he could only be ordinarily resident in
one, it would be natural to interpret ‘ordinarily’ by reference to the country of his most fixed or settled
residence. His ordinary residence would be the country to which he would naturally and as a matter of
course return from his wanderings.
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3.9.1 Determination of residence status

Individuals
(including Determined by nationality, birth, fiscal domicile, real home on physical presents
partners) in the country.
Is regarded a resident if its place of management and control abides in Zimbabwe
(a place where the controlling power and authority abides – i.e., where the board
Company of Directors resides).
Is treated as ordinarily resident in Zimbabwe if part of its income is derived from
a source in Zimbabwe or the trustee is ordinarily resident in Zimbabwe or if the
person who formed the trust was ordinarily resident in Zimbabwe at the time he
Trusts made the trust instrument.

3.9.2 Tax consequence of residence

Residence Status Taxation Basis Income and Gains Covered

Income for a local source and income
Ordinarily resident Source taxing basis from a deemed source
Non-resident Source taxing basis Income from a local source
Income earned outside Zimbabwe
Temporarily resident Source taxing basis deemed to be from a source within
outside Zimbabwe (employment income) Zimbabwe.

Chapter round up

• Income must be from a source within or deemed to be within Zimbabwe to be taxed in Zimbabwe,
irrespective of the residence status of the person receiving the income.
• A person is ordinarily resident in Zimbabwe if he has a fixed abode in Zimbabwe. Ordinary residence
implies a greater degree of permanence rather than residence.
• Income tax is charged on taxable income.
• Taxable income is computed as gross income, less exemptions, less deductions.
• Receipts of a capital nature are not taxable under the Income Tax Act.
• Receipts and accruals of a capital nature arise from disposal of fixed assets or compensation in
respect of fixed assets or income producing or generating units.

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 4. General and Specific Deductions
4.1 Introduction

Section 15 (2) (a) of the Act outlines general guidelines for deducting expenditure not specifically
covered in the Act. These guidelines are supplemented by specific provisions allowing deduction of
particular expenses and Section 16, which restricts deduction for certain expenses in calculating taxable
income.
Objectives: Define general deductions and identify key elements in the definition.
Identify applicable case law that is used to interpret the general deduction
formula.
Explain income tax treatment of certain expenditure.
Act: Sect 15 (1) of ITA
(if applicable) Sect 15 (2) (a) of ITA

Relevant case DNS (PVT) vs Zimra-HH722/19

law KANGRA GROUP (PTY) LTD v COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE CASE NO: A20/18
Sub-Nigel Limited v CIR 1948 (4) SA 580 (A), 15 SATC 381).

4.2 General Rule

Deductions are allowed for expenditures and losses incurred in trade or income creation, excluding
capital expenditures and prepaid expenses. If the supplier is a VAT registered operator, a fiscal tax
invoice is necessary to deduct the expenditure for tax reasons.(Section 15(2)(a)).

If a person earns income from both trade/investment and employment, deductions must be claimed only
for the corresponding income (Section 15(1)(b)). For instance, in a small business, vehicle expenses are
deductible only for business-related use, not personal activities like school transportation.

25
Components of the General Deduction Formula

26
 4.3 Actually incurred

The terms "expenditure" and "losses" are essentially interchangeable. To qualify for a deduction, a
liability must be settled in cash or otherwise, irrespective of whether it was incurred voluntarily.
Payment is not a prerequisite; the key is that the liability has been actually incurred and has become due
and payable. The obligation must be unconditional. Provisions are considered non-deductible as they
don't meet the criteria of actual incurrence, being subject to fulfillment of conditions (DNS (PVT) LTD
vs Zimra-HH722/19). Refer to Chapter 9 of "Unpacking Tax Law and Practice in Zimbabwe 2022
edition" for a more detailed exploration of the definition of "incurred."

27
 4.4 Prepayments

The matching concept in accounting governs prepayments. Section 15 (2) (a) (ii) stipulates that expenses
involving prepayments for goods, services, or benefits consumed in subsequent years of assessment will
be deducted proportionately over the years in which the benefits are realised. In essence, the deduction
aligns with the periods during which the corresponding benefits are enjoyed.

4.5 Fiscal Tax Invoices

A Fiscal Tax Invoice is a tax invoice printed from a fiscal device used by a VAT registered operator
that prominently displays the words 'Fiscal Tax Invoice' and contains all of the features specified in
Section 20 of the VAT Act.
All registered operators and taxpayers who are required to fiscalise under the Value Added Tax (VAT)
Act were urged to upgrade fiscal devices to meet the standards of the Fiscalisation Data Management
System (FDMS), as indicated in Public Notice 50/2023. For the input tax to be allowed as a deduction,
a registered operator must hold a fiscal tax invoice for the period during which a return is needed, or 12
months, whichever is longer. Important to note; VAT Input Tax can be claimed on fiscal tax invoices
issued by current interfaced fiscal devices or upgraded fiscal devices that generate QR codes from
FDMS.

4.6 For the purposes of trade

Expenditure is deductible if incurred for the purpose of enabling a person to conduct and profit from
their trade. In practical terms, this criterion applies to businesses, especially smaller or owner-managed
ventures where assets like vehicles may serve both business and personal purposes.
Generally, recurrent business expenses, such as license fees, audit fees, rates, secretarial fees, insurance
premiums, business subscriptions, and advertising costs, qualify. Expenditure for the purposes of trade
may be classified into two categories:

• Designed expenditure is money voluntarily and designedly spent by the taxpayer for the purpose of
his trade e.g. salaries.
• Fortuitous expenditure is money involuntarily spent because of some mischance or misfortune,
which has overtaken the taxpayer.

NB: A deduction is not allowable where the expenditure, which though arising out of the manner in
which a taxpayer conducts his trade, falls upon him in his capacity as a law-breaker rather than as a
businessman, e.g., traffic fines, customs fines or parking fines. The expense should be an inevitable
concomitant of the business. In KANGRA GROUP (PTY) LTD v COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE CASE NO: A20/18, compensation paid for deliberate breach of
contract was disallowed on the basis that it was not a concomitant of production of income (see Matrix
Tax School Case Book for further detail of the case).

4.7 In the production of income

Expenses are deductible if incurred to earn income, irrespective of immediate income production. The
court emphasizes that the expenditure must be incurred with the intent of earning income (Sub-Nigel
Limited v CIR 1948 (4) SA 580 (A), 15 SATC 381). The crucial factor is the expenditure's purpose in
income generation.
Expenses are deductible if incurred with the intention of earning income, regardless of when the income
is realised. The connection between expenditure and income-earning operations, considering both
purpose and impact, determines deductibility. If an expense serves a dual purpose (taxable and exempt
income), only the portion related to taxable income is deductible.

The above principles found ground in Port Elizabeth Electric Tramway Company Ltd v CIR, supra
where the court had earlier on found as follows:

• The test for determining whether expenditure is incurred “in the production of income” is twofold:
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• The act to which the expenditure is attached should be performed in the production of income. An
act will be regarded as being performed in the production of income if it is performed bona fide for
the purpose of carrying on trade which earns the income.
• The expenditure in question should be closely linked to such act that it can be regarded as part of
the cost of performing it. Provided that it is so linked, it does not matter whether the expenditure in
question is necessary for the performance of the act, attached to it by chance or bona fide incurred
for the more efficient performance of business operations.
• Where the act in question, though performed in the production of income, is unlawful or negligent,
the expenditure attendant upon such act would probably not be deductible

Damages and losses due to embezzlements are deductible only if they fulfill the conditions specified in
section 15 (2) (a), aligning with the principles outlined in the mentioned court decisions. Deductibility
hinges on the close association of such expenses with income production.

The same cannot be said of acts perpetrated by a proprietor, partner, managing director or manager
acting as a proprietor. The court cases have tended to find that such expenditure and losses are not
deductible. (Lockie Bros Ltd v CIR 1922 TPD 42, 32 SATC 150)

In CIR v Genn & Company Limited 1955 (3) SA 293, 20 SATC 113, the court observed that an
expenditure is sufficiently closely linked to an income producing operation if it would be proper, natural
or reasonable to regard it as part of the cost of performing it, having regard both to the purpose of the
expenditure and to what it actually effects.

4.8 Not of a capital nature

Section 15 (2) (a) stipulates that expenditure and losses of a capital nature are not deductible from a
taxpayer's income, even if other requirements of the general deduction formula are met. The distinction
between fixed and floating capital serves as a starting point, where fixed capital remains intact, while
floating capital is consumed in the production process (CIR v George Forest Timber Co Ltd 1924 AD
516, 1 SATC 20 at 23).

Several tests are employed to determine the capital nature of expenditure and losses, with each case
evaluated based on its unique circumstances. Some tests include:

• Whether expenditure recurs or not - If expenditure recurs, this is often of a revenue nature.
• Whether an identifiable asset is created, acquired or owned.
• Enduring test - whether expenditure result in an enduring advantage being acquired by spending
the money. This is likely to be capital nature.
• Whether the expenditure results in the profit-making process.

For further reading refer to Unpacking Tax Law in Zimbabwe 2021 Edition Chapter 9

Examples of Capital Expenditure

Capital expenditure for tax purposes includes:

• Cost of acquiring or constructing the asset itself.
• All costs necessary to get the asset ready for its intended use:
➢ Insurance and freight charges.
➢ Traveling costs to purchase the asset.
➢ Initial set up or installation costs.
➢ Calibration and programming costs.
➢ Customs & Stamp duty
➢ Any ancillary costs related to acquisition and installation of the asset.
➢ Insurance costs related to acquisition and installation of the asset.
➢ Site preparation costs to install the asset.
➢ Professional fees in connection with construction or purchase of the asset.
➢ Finance charges on hire purchase.
➢ Borrowing costs on construction of immovable property.

29
 ➢ Demolition costs for clearing ground to construct new asset.
➢ Cost of employee benefits.
➢ Initial delivery and handling costs.
➢ Realised foreign exchange gain or loss on asset acquisition or construction.
Cost or items not to be capitalised nor deductible for tax purposes
• VAT refundable in terms of section 15 (3) of the VAT Act.
• Revaluation and fair values.
• Impairment.
• Opening a new facility.
• Introduction of a new product or service (including costs of advertising and promotion)
• Conducting business in a new location or with a new class of customers (including costs of staff
training).
• Administration and other general overhead costs (deductible).

Capital expenditure is not immediately deducted but is spread over the useful life of the asset through
capital allowances. Materiality does not play a key role for revenue purposes, and the classification of
property, plant, and equipment is based on legalistic criteria rather than the amount spent.

4.9 To the extent

The "to the extent" element allows for apportionment, ensuring that a deduction is allowed only to the
extent it relates to trade expenditure and disallowed if related to capital nature. The complexity of the
general deduction formula prevents abuse by taxpayers, ensuring only genuine business-related
expenditure and losses are deducted from taxable income. Specific rules for certain expenditures must
also be considered. In cases of uncertainty, taxpayers can seek clarification through an advance ruling
under s34D of the Revenue Authority Act.

Applying General Deduction Formula to certain expenditure

Item Treatment
Interest In the case of CIR v Genn 1955 (3) SA 293 (A), 20 SATC 113, it was established
that interest is deductible when the loan is used in the production of taxable income.
However, ZIMRA may disallow interest if the borrowing is applied to acquire fixed
assets, deeming it of a capital nature. Deductibility hinges on the purpose of
expenditure and its impact. Interest incurred on idle or unproductive property,
property producing exempt income, or income from a foreign source is generally
disallowed.
The following interest is disallowed:
• Incurred on purchase of share.
• Interest on money borrowed to pay dividend (ITC 678 (1949) 16 SATC 348).
Excessive interest in terms of thin capitalisation provisions.
• Interest related to acquisition or construction of fixed assets.
• Interest on foreign loans which is in excess of that expressed in Zimbabwe dollar
using the inter-bank rate.
Interest incurred when a business cease is deemed not incurred in the production of
income and is disallowed (ITC 411 (1938) 10 SATC 238 and ITC 1171 (1971) 34
SATC 80).
Raising fees According to the case of CIR v Genn & Co. (Pvt) Ltd 20 S.A.T.C 113, raising fees of
or finance a revenue nature are tax-deductible. The allocation of these fees should be pro-rata
charges to items on which the loan has been expended, based on the gross amount of the loan.
However, raising fees on a loan used to acquire assets eligible for capital allowances
are capitalised as part of the asset's cost, making them non-deductible. Special
deductions available to farmers and raising fees for loans used in the day-to-day
running of a business are considered deductible.

30
Legal costs Legal expenses are deductible if they are incurred in the production of income or
for the purposes of trade. To qualify for deduction, the claim, dispute, or legal
action should arise in the ordinary course of the taxpayer's trade. Some examples of
tax-deductible legal expenses include:Defending commercial contracts or other
civil claims.
• Defending a wrongful dismissal action brought by former employees or
directors.
• Preparing minutes of business and shareholders’ meetings.
• Eliminating competition, protecting an asset or removing an obstacle.
• Evicting a tenant to obtain more rent by a landlord (but not alter or change
property use).
• Evicting a rent- defaulting tenant.
• Recovering misappropriated funds.
• The issuance of bonds, mortgages, debentures, borrowing or debt restricting.
• Drawing up a lease agreement by a lessor, but not by the lessee.

Capital nature legal costs are disallowed e.g., legal costs incurred for the purpose of
acquiring a capital asset for the enduring benefit of business, costs incurred in
defending an act which is meant to protect a capital asset (land, income – producing
unit, etc.,), associated with the acquisition of a fixed asset, incorporations,
amalgamations, corporation reorganisations or share issue etc. In ITC 1528, 54
SATC 243, it was held that capital nature legal costs do not include the cost of
removing a business obstacle.

Fines and Fines, bribes, and penalties are non-deductible, regardless of whether they are
breaches of incurred in trading or in the production of income. This is because allowing
law deductions for such expenses would go against public policy and frustrate the
legislative intent to impose punishment. Examples of non-deductible items include
traffic fines and penalties for breaches of statutes, whether in Zimbabwe or any other
country.

Cost of Most employer expenditures, including salary payments and fringe benefits, are tax-
employment deductible. The key is to show that the spending was for income production or trade
purposes. This includes payments to terminate unsatisfactory employment.
However, unreasonable or excessive payments to related parties or directors, and
payments for non-compete agreements with retiring directors, are disallowed.
Relocation Moving cost and reinstalling equipment at the new site is capital in nature However,
costs cost of stock removal and rubbles within the same premises is tax deductible. Also,
deductible is the cost of relocating staff (ITC 1716 (64 SATS 27).

Sponsorship Sponsorship costs are deductible if there is a clear connection between the expense
and the taxpayer's business, even if a third party benefits from the sponsorship. The
deduction is justified when the sponsorship expenditure promotes the taxpayer's
business. For example:
• The sponsorship agreement should be a specific requirement in the promotion of
a taxpayer’s business. It should also reflect the extent and prominence of the
business exposure.
• The sponsorship arrangement is regarded as a coherent marketing strategy.
• The relationship of the potential market to the taxpayer’s business.
• The deductibility of sponsorship costs relies on establishing a clear link between
the expenditure and the generated income. Demonstrating a direct relationship,
like a farmer selling bulls at an agricultural show after sponsoring the event,
strengthens the case for deductibility.
Sponsorship costs are deductible when they are directly connected to promoting the
taxpayer's business. Expenditure aimed at creating goodwill or an image is considered
capital in nature and is not deductible. However, if the sponsorship provides opportunities
for advertising and market research, it is deemed of a revenue nature and remains tax-
deductible.

31
Patent, The acquisition or registration of know-how, patents, trademarks, etc., typically
trademark, constitutes capital expenditure, except when the taxpayer is actively trading in such
know how items. Royalties and rentals are fully deductible, whether paid in fixed or variable
etc amounts.

Cost of Expenses for rental property upkeep and management are tax-deductible, excluding
earning idle periods. Deductible costs include rates, advertising, maintenance, rent collection,
rental and eviction-related expenses. Interest on property loans is also deductible.
income Irrecoverable rent amounts can be deducted by landlords.

Licensing License payments are seen as capital expenditure related to founding and
commencing business operations. For instance, an initial cellular license fee is
considered a cost to acquire the right to operate. Ongoing annual licenses are treated
as deductible recurrent expenditure.
Royalties or franchise fees are allowed if incurred in income production but become
capital if tied to the business's structure and identity, creating goodwill or a
competitive advantage.

Insurance Deductible insurance costs for trade or income production include group-term life
insurance, public liability, loss of profits, and business-related policies. Premiums on
employees' life insurance are deductible if the employee is the ultimate beneficiary;
otherwise, deductions are disallowed if the employer is the beneficiary. Joint life
policies and ceded life policies are not deductible.

32
 Chapter round up

• Expenditure is deductible if it is incurred for purposes of trade or in the production of income, unless
it is of a capital nature.
• Expenditure is incurred when it is paid or payable.
• Provisions are non-deductible because they are estimates.
• Where the expenditure is not incurred wholly or exclusively for purposes of trade it is apportioned
and allowed to the extent it reflects business purpose, but this does not apply to employee related
expenses.
• Expenditure is considered in the production of income when it is incurred as a result of an act done
for the purpose of earning income. Prepaid expenses are deducted in the year in which the
expenditure relates in accordance with the accounting matching concept.
• Capital nature expenditure is disallowed.

33
PART C

TAXATION OF COMPANIES

34
 5. An overview of taxation of businesses

5.1 Introduction

The computation of trading income remains consistent regardless of whether it is conducted by

an individual, corporation, partnership, or trust. Those liable to pay tax on business and
investment income adhere to annual quarterly payment dates. This includes non-executive
directors and individuals whose income does not involve PAYE deductions.

Objectives: 1. Define trade and investment income

2. State how different type of taxpayers are taxed
3. Identify the various income tax rates
4. Identify persons subject to special income tax rates
5. Compute provisional and final income tax
Act: Sect 2
(if applicable) Sect 19A & B
Sect 72
Relevant case law

5.2 Framework for computing taxable income of businesses:

Tax is levied on taxable income rather than net profits. Taxable income is the adjusted net profit before
tax, as per financial statements. Adjustments are necessary because accounting systems for income and
deductions may vary from those in taxation. The process begins with the net profit figure in the income
statement and involves adjustments for:

• Capital receipts and accruals

• Statutory incomes such as recoupments, lease improvements etc.
• Income subject to final withholding tax at source
• Disallowed expenditure
• Tax incentives such as capital allowances, assessed losses etc.

The following is a recommended framework for use in the exam:

35
Income Tax
Computation
2024
(Average rate xxx
for the
Quarter)
Income Acutal Tax
Statement USD Computation

Description ZWL$ USD Total Rate ZWL$ USD

(ZWL
Equv)
Turnover xxx xxx xxx xxx xxx xxx xxx
Other xxx xxx xxx xxx xxx xxx xxx
Income
Net Revenue xxx xxx xxx
- - -
Less
exemptions - -
and non
taxable
income
Interest from xxx xxx xxx xxx xxx
financial -
institution
Dividend xxx xxx xxx xxx xxx
- -
Income xxx xxx xxx
- - -
Capital xxx xxx xxx
receipts
Proprotions xxx xxx xxx xxx xxx
Total xxx xxx xxx xxx xxx xxx
expenses -

Net profit xxx xxx xxx xxx xxx xxx xxx

before tax -
ADD: xxx xxx xxx xxx xxx xxx
DISALLOWED
EXPENSES
Depreciation xxx xxx xxx xxx xxx xxx xxx
Donations xxx xxx xxx xxx xxx xxx
Restraint of xxx xxx xxx xxx xxx xxx
trade

36
 Deduct
Allowable
xxx xxx xxx xxx xxx xxx
Expenses
Wear and
tear xxx xxx xxx xxx xxx xxx

Scrapping xxx xxx xxx xxx xxx xxx

Allowances
Total xxx xxx xxx xxx xxx xxx
Allowable
Taxable
Income xxx xxx xxx xxx xxx xxx

Tax at 25% xxx xxx xxx xxx xxx xxx

Aids levy at xxx xxx xxx xxx xxx xxx

3%
Tax Liability xxx xxx xxx xxx xxx xxx

5.3 An overview of taxpayers

5.3.1 Corporates

Corporate tax is applied to a company as a separate legal entity. Initially, corporate income is taxed within
the company as profits, and later subjected to withholding tax upon distribution to shareholders. This
distinguishes corporate income and represents a potential drawback compared to sole traders or
partnerships. Shareholders face double taxation with an effective rate of 39.72%, contrasting with the
25% rate (24.72% prior) for sole traders and partners. Company losses are not transferable to
shareholders, but can be inherited by a company under the same control, subject to conditions in section
15(3) of the Act. The double taxation of profits, first at the corporate level and then upon distribution, is
a characteristic of company tax.

5.3.2 Partnerships

A partnership, except under the VAT Act, is not treated as a separate legal entity for income tax purposes.
Instead, each partner is individually liable for income tax on their share of taxable income. The
partnership is considered a fiscal transparent entity, as it is not taxed on its profits; rather, individual
partners are individually responsible for taxes on their respective shares. This "flow-through" approach
results in a single layer of taxation at the partner level. Partnerships have the advantage of avoiding
trapped assessed losses, as these immediately flow to the partners. Additionally, partnerships do not
distribute dividends, and once partners are taxed, there is no further tax on their income. Joint ventures
follow a similar treatment unless established as a company.

5.3.3 Sole Proprietorship

A sole proprietorship, or sole trader, is a business operated by its owner alone. Unlike separate entities,
sole proprietorships are not subject to distinct taxation. Instead, the tax liability falls on the individual
owner, and the treatment is similar to that of a partner in a partnership.

37
5.3.4 Trusts

A trust is an entity established by a person known as the Founder, donor, or settlor, with its management
entrusted to Trustees for the benefit of specified beneficiaries. The beneficiaries can be specific
individuals or a group/class of persons. In Zimbabwe, a trust is a common law institution, not established
through a specific Act of Parliament but formed through a deed of trust executed by the Founder and
Trustees. This deed outlines details such as the trust's name, objectives, trustees' duties and powers,
beneficiary entitlements, and provisions for amendments or dissolution. Public trusts are exempt from
income tax under para 2(l) of the 3rd schedule of the Act.

5.3.5 Non-resident companies

A non-resident company is subject to taxation in Zimbabwe only if it has a permanent establishment (PE)
within the country. The existence of a PE is determined if the company has a fixed place of business in
Zimbabwe where it wholly or partially conducts its business or if it operates through a dependent agent.
A fixed place of business encompasses various locations such as an office, management site, branch,
factory, workshop, installation, or structures for resource exploration, a mine, oil or gas well, quarry,
building site, or construction project.

The following are excluded from the definition of a PE under the new section 19A of the Act:
• Facilities used for the sole purpose of storage, display or delivery of own goods or merchandise
belonging to the enterprise (non-resident company).
• Maintenance and display of own stock of goods or merchandise by an enterprise for the sole
purpose of storage or display or delivery.
• Maintenance of stock of goods or merchandise belonging to the enterprise solely for the purpose
of processing by another enterprise
• Stock of goods or merchandise belonging to the enterprise displayed in a fair or exhibition which
are sold at the end of the fair or exhibition
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise or for collecting information, for the enterprise
• The maintenance of a fixed place of business solely for the purpose of advertising, for the supply
of information, for scientific research or for similar activities which have a preparatory or auxiliary
character, for the enterprise

Any combination of above activities shall not constitute a PE so long as the overall activity is that of
preparatory or auxiliary character (para 4 of Article 5 of the OECD). But there are no hard and fast rules
that can be laid to determine in each case which activities constitute preparatory or auxiliary character
and those that are not. It all depends on the facts of each case (para. 24 Art 5 OECD).

Note that, a preparatory or auxiliary activity excludes management services within a group of companies.
A fixed place whose sole purpose is advertising or supplying information or for scientific research or for
the servicing of a patent or a know-how contract, provided such activities have a preparatory or auxiliary
character (para. 23 Art 5 OECD), shall not constitutes a PE.

A liaison office established in Zimbabwe merely for undertaking promotional work as a prelude to actual
commercial activities would not constitute a PE, unless it engages in commercial activities. It is deemed
to be engaged in commercial activities when it enters into negotiations with the customers in Zimbabwe
for import or purchase of goods by the Zimbabwean customers from the principal company.

Once a PE is deemed in Zimbabwe a tax nexus exists in Zimbabwe. The PE shall be required to register
and pay taxes in Zimbabwe (income tax and PAYE) as if it were a resident of Zimbabwe. A permanent
resident representative (public officer) for the registration and administration of taxes must be appointed.
Where it transacts sales value of goods or services which exceeds US$25,000 in any period of 12 months
it must also register for VAT.
38
 5.4 Basis of assessment

The ordinary tax year in Zimbabwe runs from January 1st to December 31st. This period serves as the
standard year of assessment. However, if the Commissioner-General exercises discretion under section
37(13) and approves an alternative date for a taxpayer to finalise their annual accounts, the dates for
quarterly payments will be adjusted accordingly.

Taxpayers in Zimbabwe are required to submit their returns no later than four months after the end of the
approved year set by the Commissioner. This aligns the Quarterly Payment Dates (QPDs) with the
approved year, eliminating the need for taxpayers to apply for different return submission dates and QPDs
when a distinct year of assessment is approved.

5.5 Meaning of trade

The term "trade" in Zimbabwe is broadly defined to encompass any activity undertaken with the intention
of generating income. However, it is not an exhaustive or restrictive definition, and the courts have
clarified that engaging in a trade involves risking something with the objective of making a profit. It's
important to note that not all income-generating activities fall under the category of a "trade," as certain
forms of income such as interest, dividends, annuities, or pensions are excluded from this definition.

Section 2 (1) of the Act defines “trade” to encompass “any profession, trade, business, activity, calling,
occupation or venture, including the letting of any property, carried on, engaged in or followed for the
purposes of producing income and anything done for the purpose of producing such income”.

5.6 Carrying on a trade

The legislation defines "trade," but the term "carrying on business" lacks a specific definition.
Determining whether a person is carrying on business is inferred from the facts and is a legal matter. In
the case of a company, like a shelf company with limited transactions aimed at meeting formalities to
remain on the register of companies, it may not be considered as actively carrying on business (CIR v
Stott).

The following factors are often considered by the courts in determining whether a trade is being carried
on or not:

• the manner of organisation

• information they have to run the business
• past experience
• frequency of transactions
• money put into an activity in order to make money
• existence of legal relationships
• commercial character of the activities
• the size and scale of the activities
• characteristics or quality of the property dealt in, and
• inherent characteristics of a taxpayer
• The pursuit of an operation for profit, etc.

5.7 The adjustment of profits

Tax is levied on taxable income, not net profits. Taxable income is the adjusted net profit before tax as
per financial statements. Individuals earning income from trading must pay income tax based on their
taxable income, requiring adjustments to the net profit for tax considerations. Accounting systems may

39
differ from tax systems, leading to necessary adjustments. The process begins with the net profit figure
in the income statement, and adjustments are made accordingly.

40
5.8 Computation of taxable income

Income Tax Computation 2024

(Average rate for the Quarter) xxx
Income Statement Acutal USD Tax Computation

Description ZWL$ USD (ZWL Equv) Total Rate ZWL$ USD

Net profit as per accounts before tax xxx xxx xxx xxx xxx xxx xxx
Less exemptions and non taxable income - -
Profit on sale of assets xxx xxx xxx xxx xxx -
Dividend xxx xxx xxx - xxx xxx -
Capital receipts xxx xxx xxx
Interst from financial institutions xxx xxx xxx
xxx xxx xxx xxx
ADD: DISALLOWED EXPENSES xxx xxx xxx xxx xxx xxx
Depreciation xxx xxx xxx xxx xxx xxx xxx
Penalties xxx xxx xxx xxx xxx xxx
Donations xxx xxx xxx xxx xxx xxx
Restraint of trade xxx xxx xxx xxx xxx xxx
Loss on sale of asset xxx xxx xxx xxx xxx xxx
Entrance fees xxx xxx xxx xxx xxx xxx
Entrance fees xxx xxx xxx xxx xxx xxx
Improvements to premises xxx xxx xxx xxx xxx xxx
Drawings xxx xxx xxx xxx xxx xxx
Income tax payments xxx xxx xxx xxx xxx xxx
Covenants xxx xxx xxx xxx xxx xxx
Private element of certain expenses xxx xxx xxx xxx xxx xxx
Interest on late payment of tax xxx xxx xxx xxx
Increase in general bad debts xxx xxx xxx xxx
Provision for bad debts xxx xxx xxx xxx
Entertainment xxx xxx xxx xxx
Fines xxx xxx xxx xxx xxx xxx xxx
Taxable income excluded from the accounts xxx xxx xxx xxx xxx
Recoupment
Total disallowable xxx xxx xxx xxx xxx xxx xxx

Deduct: allowable expenses xxx xxx xxx xxx xxx xxx

Special Initial allowance xxx xxx
Wear and tear xxx xxx
Scraping allowances xxx xxx xxx xxx xxx xxx xxx
Total Allowable xxx xxx xxx xxx xxx xxx xxx
TAXABLE INCOME xxx xxx xxx xxx xxx xxx xxx xxx xxx

Tax at 25% xxx xxx xxx xxx xxx xxx xxx

Aids levy 3% xxx xxx xxx xxx xxx xxx xxx
Tax liability xxx xxx xxx xxx xxx xxx xxx xxx xxx

41
FAST

5.9 Definition of taxpayers

Item Treatment
Approved Section 14 (1) of the Finance Act, 2014 define an approved BOOT or BOT
BOOT or BOT arrangement as ‘contract or other arrangement approved by the Commissioner,
under which a person undertakes to construct an item of infrastructure for the State
or a statutory corporation in consideration for the right to operate or control it for a
specified period, after which period he will transfer or restore ownership or control
of the item to the State or the statutory corporation concerned’”. BOOT means
build, own, operate, and transfer. BOT means build, operate and transfer. A
contractor, in relation to an approved BOOT or BOT arrangement, means the
person who enters into the arrangement with the State or the statutory corporation
concerned.
The Finance Act 2 of 2020 has added s 15 (2) (oo) to the Income Tax Act which
will see BOOT and BOT projects expenditure on infrastructure rehabilitation and
development being fully deductible against taxable income of the operator instead
of being capitalised.
Export Is a company that conducts manufacturing operations and in any year of assessment
manufacturing exports at least 30% (50% before 1 January 2015) of its manufactured output. The
companies manufacturing operations should be conducted in Zimbabwe during the year of
assessment to the satisfaction of the Commissioner. The output is measured in terms
of the physical units or quantities and assessed separately for each year of
assessment. A manufacturing operation is a ‘process of production which
substantially changes the original form of, or substantially adds value to, the thing
or things constituting the product’ (Section 14 (1) of the Finance Act).
Special Means any part of Zimbabwe declared in terms of the Special Economic Zones Act
economic (Chapter 14:34) (No. 7 of 2016) and that of an investment license to mean an
zones investment license issued in terms of the Special Economic Zones Act (Chapter
14:34) (No. 7 of 2016), to a licensed investor with a qualifying degree of export-
orientation and licensed investor shall be construed accordingly. It also defines a
qualifying degree of export-orientation characterising a licensed investor to mean
that the licensed investor exports all of its goods and services.

Approved Is an area declared under the Tourism Act (Chapter 14:20) as such and approved
tourist by the Tourism Authority. The operator should have at least 60% of his turnover
development denominated in foreign currency?
zone

5.10 Rates

Taxpayer 2024

Self-employed, sole trader or partners 25% (24.72 prior)

Companies and trusts 25% (24.72 prior)
Company or trust derived from mining operations; 25%
Licensed investor in Special Economic Zone (SEZ)
First five years of the arrangement 0%
licensed investor after the 5th year of operations 25%
An approved BOOT or BOT arrangement:
First five years of the arrangement 0%
Second five years of the arrangement 15%
Thereafter 24%

42
 Industrial park developer
First five years of the arrangement 0%
Second five years of the arrangement 25%
Taxable income of operator of a tourist facility in approved tourist development zone (before
the fifth year of his or her operation as such) 0%
An operator of a tourist facility in approved tourist development zone
First five years of the arrangement 0%
Second five years of the arrangement 25%
Export manufacturing company which exports:
Export level (%) 30-40 of its output 20%
Export level (%) 41-50 of its output 17.5%
Export level (%) above 51 15%
Trade and investment for an individual, 25%

*3% AIDS levy is applicable on income tax chargeable after-tax credits. Normal rate is 24%

5.11 QPDs

Income tax is paid quarterly in advance of the year-end, with payment dates on 25 March, 25 June, 25
September, and 20 December. The payments are calculated at 10%, 25%, 30%, and 35% of the estimated
annual tax liability, respectively.

Late or understated Quarterly Payment Dates (QPDs) are subject to a 150% interest rate. However, the
Commissioner has the authority to waive or reduce interest if the QPD is understated by not more than
a 10% margin of error or if the taxpayer, due to special circumstances, was unable to pay the whole or
part of the provisional tax instalment.

Provisional tax is not final tax. The Commissioner offsets the provisional tax paid against the actual tax
payable. Any overpayment is then used to settle other tax obligations, and if there's no such obligation,
the excess amount is refunded to the taxpayer.

43
 Chapter round up

• Tax is paid on taxable income, and not on net profits.

• Taxable income is the adjusted net profit before tax as per financial statements.
• Trading income is taxed at 25% from 1 January 2024, (24.72% prior) and (25.75% for periods before
1 January 2020) of taxable income.
• Special income tax rates apply to export manufacturing companies, licensed investor in special
economic zone, BOOT/BOT, power generation projects etc.
• The tax is paid in advance of year end on quarterly payment dates (known as QPDs) based on the
estimated taxable income.

44
 6. Special Inclusion in Gross Income of Businesses

6.1 Introduction

Certain incomes are deemed gross income of a business, even if of capital nature, according to the Act.
These include lease premium, lease improvement, growing crops, trading stock, mining recoupment,
general recoupment, concessions, lease recoupment, subsidies and grants, designated area grants,
income of petroleum operators, income of a holder of special mining lease, and foreign exchange gains
(ss 8 (1) (d), (e), (g), (h), (i), (j), (k), (l), (m), (o), (p), (s) and 8 (2) of the Act).

Objectives Identify specific inclusions in gross income for companies and individuals in business.
Identify exempt income for companies and individuals in business.

Act: Sect 8 ARW 2nd Schedule

(if applicable) Sect 14 ARW 3rd Schedule
Relevant Dr H C Avenant v The Commissioner For The South African Revenue
Cases Service Case (No: 367/2015 ) [2016] ZASCA 90 (1 June 2016)

6.2 Leasing incomes

6.2.1 Lease premium [sect 8 (1) (d)]

Lease premium, constituting the lessor's gross income upon receipt or accrual, is fully taxable in the
year of receipt or accrual. It includes non-returnable deposits, lease goodwill, and tenancy rights, and
will be further discussed in the following chapter.

6.2.2 Lease improvements [sect 8(1) (e)]

If a lessor, under an agreement granting another person the right to use or occupy land or buildings,
has improvements made to the land or buildings by any other person, these improvements must be
included in the lessor's gross income.

The gross income to the lessor includes either the amount stipulated in the agreement as the value of
the improvements or the amount to be expended on improvements. If no amount is specified, the
Commissioner determines the fair and reasonable value of the improvements. The taxation of the value
of improvements is effective from the completion date and is spread over the shorter of the unexpired
period of the agreement, cession, or assignment, and 10 years.

6.3 Growing crops [sect 8 (1) (g)]

Growing crops that are sold together with the farm or land constitute gross income for a farmer. Further
details on this topic can be found in the chapter on farming.

6.4 Trading stock [Sect 8 (1) (h)]

This section brings into gross income:

• Trading stock on hand at the end of a tax year. (The treatment is similar to treatment under IFRS);
• Trading stock which has, during the year of assessment, been taken by the person for his domestic
or private consumption or use; and
• Trading stock which has been donated.
45
The following is the valuation basis of the different types of trading stock.

Type or circumstance Date of valuation Method to be elected

Held on the last day of the Last day of tax year or Cost price, market value or
year. accounting year replacement cost.
Consumed by taxpayer or put Date of such use or Cost price or market value.
to other use. consumption.
On hand: Date of such happening. Cost price, market value or
On date of death, insolvency replacement cost
Attached by court order End of tax year Cost price, market value or
replacement cost

Sold with Business or Date sold Selling Price

Pursuance of court order
Partially produced goods Last day of tax year or What the CG considers as fair
(WIP) accounting year and reasonable price. (see Dr H
C Avenant v CSARS)

NB: The Act does not state the valuation method for partially finished goods but provides that value must
be fair and reasonable as held in (Dr H C Avenant v CSARS). The case also provided that trading stock is
deemed held and not disposed of if the taxpayer has dominium in it (ownership and control of property),
(despite the stock not in its custody). (Matrix Tax School Case Book-see Dr H C Avenant v CSARS)

6.4.1 Definition of terms

Item Description
Cost It includes freight in costs, import duties, rebates and discounts, wages of
employees directly engaged in the production process
It excludes:
• Unallocated overhead costs
• Abnormal freight, handling and spoilage costs are current period charges.
• General and administrative expenses unless they are clearly related to
production and thus constitute a part of inventory costs.
• Selling and marketing expenses are not inventory costs.

Market value Includes the consideration for which similar items are disposed of in the ordinary
course of trade by others in the same trade and circumstances. It excludes any
amount related to freight, handling, selling charges, and commission incurred in
the ordinary course of trade when trading stock is normally disposed of through
an agent.

6.5 Concessions grant from creditors [sect 8 (1) (k)]

When a taxpayer incurs a liability for deductible expenditure (as per section 15(2)) and the creditor later
releases or forgives that liability, the benefit derived is included in the taxpayer's gross income. Debt
forgiveness occurs when a taxpayer is relieved of the obligation to pay. However, there are exceptions,
and the forgiveness or write-off is not included in gross income if it arises as a result of:

• Winding up of a company by the court because of its inability to pay debts

• A taxpayer being adjudged or declared insolvent or assigned his property or estate for the benefit
of creditors.
• The estate of the taxpayer having been vested in the Corporation as defined in s 2 of the Agricultural
Finance Act (Chapter 18:02)

46
 6.6 Lease recoupment [sect 8 (1) (l)]

Lease recoupment (as per section 8(1)(l)) occurs when a property previously leased is sold, and the sale
price considers rent already paid, lease premium, or lease improvements made by the tenant. This
provision addresses situations where a lessee who made improvements is given an option to purchase
the property with the purchase price reduced by the cost of improvements. The recoupment is calculated
as the lower of the discount on acquisition and the expenditure previously incurred by the tenant
(aggregate of rent, lease premium, and lease improvement). Expenditure on agreed-upon improvements
is treated as "rent." The Commissioner deems the discount on the purchase price to constitute
recoupment.
6.7 Subsidy and grants [sect 8 (1) (m)]
Any amount received or accrued as a grant or subsidy related to expenditure that qualifies for a
deduction under the Income Tax Act. If a taxpayer receives a grant for the acquisition of an asset eligible
for capital allowances, the grant amount is included in gross income.

6.8 Designated Area Grants [sect 8 (1) (o)]

Grants or payments awarded to farmers under a scheme are considered gross income under this section.

6.9 Exchange gains [sect 8 (2)]

Profits resulting from changes in exchange rates are considered gross income in the year of assessment
when realised. The following, however, do not constitute gross income:

• Paper or unrealised exchange gains - taxable upon realisation provided they are of a revenue nature.
• Variation arising on conversion of USD balances to ZWL$ through SI33 of 2019.
• Exchange gain expressed in other /currencies i.e., variation that is reportable as gross income is that
resulting from Zimbabwe dollar variation not in other currencies.
• Exchange gains of capital nature i.e., on fixed asset or income generating unit of the company- these
are deducted from the cost of the asset, for purposes of s 15 (2) (c).
• Exchange gain arising from translation of balances

6.10 Annuities – Section 8 (1) (a)

An annuity is a repetitive annual payment to a specific person for life or a set period. The source of an
annuity is determined by the act or document creating it. If the annuity is a pension from a pension or
benefit fund, the source is considered to be in the country where the fund is resident. The key
characteristics of an annuity include:

• It provides for an annual payment, even if divided into instalments;

• It is repetitive, payable from year to year, at any rate, for some period and;
• It is chargeable against a person

An annuity may take any one of the following forms:

• An ordinary annuity purchased from an insurance company.

• An annuity by way of a gift or legacy.
• An annuity granted as consideration for the sale of a business or an asset or surrender of a right.
• Pension for services rendered

Purchased annuity - A purchased annuity, arising from the payment of a sum not previously allowed
as a deduction, is taxable only to the extent that it represents interest on the invested capital. The portion
deemed to be a return of the purchase price is excluded from gross income. The annual taxable portion
is determined using the following formula:

47
I = (P x N) – A
N

Where I = interest content of annuity;

P = the annual payment;

N = number of payments expected (this may be a definite period or, in the case of an annuity payable
for life, a number of years based on the life expectancy of the annuitant);

A = the purchase price of the annuity that was not allowed as a deduction

For annuities accruing over a period, apportionment based on the duration of the accrual within the year
is necessary. The expected life figure accepted should be the one used by the insurance company when
determining the annuity's purchase price. Note that:

For annuities resulting from contributions that were fully deducted, the entire annuity is taxable without
applying the above mentioned formula.

Sums received beyond the normal life expectancy are treated as taxable income since the full capital
cost of the annuity has been deducted.

The formula applies to annuities with guaranteed payment periods, even if these exceed the annuitant's
life expectancy. For instance, for a guaranteed period of 12 years, "N" in the formula would be 12.

Annuity by gift or legacy - such as a widow's pension, may be fully taxable or exempt depending on
the location of the fund. If situated outside Zimbabwe, it's not taxable in the country, even if the
deceased spouse rendered services in the past.

Annuity arising from disposal of an asset – such as selling a business, utilise the formula mentioned
for purchased annuities. The cash value of the business at the date of sale is accepted as "A," the
purchase price of the annuity. Instalments received should include interest.

Annuity in the form of a pension - The amount subject to tax cannot be reduced by the deduction of
the capital cost content if annual contributions were allowed as a deduction.

6.11 Recoupment - Sect 8 (1) (j)

See capital allowances section for details.

48
 Chapter round up

• Gross income includes trading stock, concessions, realised exchange gain of a revenue nature, subsidy
of a revenue nature etc.
• Foreign exchange gains of revenue nature are brought into gross income when realised, whereas
unrealised exchanges and foreign exchange gain of a capital nature are non-taxable.

49
 7. Exemptions Sect 14 & 3rd schedule
7.1 General overview

Exemptions from income tax are detailed in section 14 of the Income Tax Act, in conjunction
with the 3rd Schedule. Exempt income refers to income that is not subject to income tax, including
income that is not considered taxable income.

7.2 The Concept of annuity

Section 14(3) introduces the conduit pipe principle, indicating that dividends and interest,
typically exempt in the hands of the recipient, alter their nature when distributed as annuities to
beneficiaries. While dividends and interest maintain their original identity when paid to
beneficiaries, annuities deviate from this principle. An annuity's source is the trust itself, not the
origin of the income used for payment.
However, exemptions applicable to dividends and specific interest under the Third Schedule do
not extend to annuities derived from such exempt income. This aligns with the legal decision in
COT v R 28 SATC 115, particularly concerning annuities created under a will, where the source
of income is the creating instrument rather than the underlying assets.

7.3 The concept of receipts and accruals

The terms "receipts" and "accruals" encompass a broad spectrum of income, including profits
from trade, interest, dividends, rent, or any other income subject to income tax. For instance,
interest from a local financial institution, usually subjected to withholding tax at source, becomes
exempt if paid to an entity whose receipts and accruals enjoy tax exemption. However, banks
seeking to exempt withholding tax on interest paid to a statutory corporation should obtain a
statutory form from the payee. This precaution is necessary because the exemption on receipts
and accruals of a statutory corporation does not automatically extend to the exemption of interest.

7.4 Employees of exempt employers

Salaries and wages paid to individuals employed by exempt organisations, even if funded by
exempt income, are subject to tax. Exempt organisations with employees are required to register
as employers and deduct Pay-As-You-Earn (PAYE) from the remuneration paid to their
employees. For instance, a church is obligated to deduct PAYE on the remuneration, stipend, or
any benefits provided to its employees, including pastors.

7.5 Organisations not for profit

Most not-for-profit organisations have their receipts and accruals exempt in accordance with
paragraph 2 of the 3rd schedule of the Act. These organisations include:
▪ agricultural, mining and commercial institutions or societies not operating for the private
pecuniary profit or gain of the members
▪ Benefit funds
▪ Building societies;
▪ clubs, societies, institutes and associations
▪ Ecclesiastical, charitable and educational institutions of a public character;
▪ Employees saving schemes or funds approved by the Commissioner;
▪ Friendly, benefit or medical aid societies;
▪ Funds established by the Treasury in terms of the Public Finance Management Act (Chapter
22:19);
50
▪ Pension funds
▪ Any statutory corporation which is declared by the Minister to be exempt from income tax,
but the Minister may impose a limit on receipts and accruals
▪ Trade unions
▪ Trusts of a public character
▪ Deposit Protection Fund
▪ Investor Protection Fund
▪ Insurance and Pension Housing Company

7.6 Clubs, societies, institutes and associations

Clubs, societies, institutes, and associations primarily organised and operated solely for social
welfare, civic improvement, pleasure, recreation, or the advancement or control of any profession
or trade, or other similar purposes are exempted. This exemption applies only if the receipts or
accruals, whether current or accumulated, may not be divided amongst or credited to or ensure to
the benefit of any member or shareholder other than by way of remuneration for services rendered.

7.7 Ecclesiastical, charitable and educational institutions of a public

character
The term "of a public character" includes not only the general community but also specific
sections benefiting universally, not limited to selected individuals (ITC 69 (1927) 2 SATC 264;
ITC 59 (1926) 2 SATC 186). In Endeavour Foundation and UDC Ltd v COT (1995) 57 SATC
297, the court clarified that a fund benefitting only selected members, like children of specific
employees, lacks public character. The court emphasises an entity's activities benefiting a wide
cross-section of the public for public character qualification. The Shorter Oxford Dictionary
defines an institution as an establishment promoting public utility, religious, charitable, or
educational objectives. An organisation of public character benefits the community, with earnings
dedicated solely for public benefit. The exemption for such institutions may apply to investment
income, services, and sales of goods (ITC 1565 (1994) 56 SATC 1; Chancellor, Masters, and
Scholars of the University of Oxford v CIR (1996) 58 SATC 45).

However, the Finance Act No.8 of 2015 amended the Income Tax Act, making certain receipts
and accruals of these institutions taxable from 1 January 2016. The amendment includes
ecclesiastical, charitable, or educational institutions in the definition of "company" or "trust,"
subjecting income from trade or investment to a 25 % income tax rate from 1 January 2024 and
(24.72% prior as from 1 January 2020). The exemption, as per paragraph 2(e) of the Third
Schedule, is limited to:

• Donations, tithes, offerings or other contributions by the members or benefactors of the

institutions concerned
• Any other receipts or accruals that are not receipts and accruals of income from trade or
investment carried on by or on behalf of the institutions concerned
• Receipts and accruals from trade or investment by any company of the institution provided
the institution is the sole or principal member. The company should be licensed by the
Minister responsible for the Companies Act [Chapter 24:03] in terms section 26 of the
Companies Act.

Effectively, unlicensed companies of churches, schools or charitable institutions are subject to

income tax. Further, the institutions are subject to income tax on trade and investment activities.
The rules can be summarised as follows:

• A church, school or charitable institution that carries on trade and investment activities is
subject to tax on profits from those activates
• Companies of institutions carrying on trade and investment and satisfying the requirements
of s 26 of the Companies’ Act are not subject to income tax on profits from those activities
51
• Institutions not licensed in terms of s26 of the Companies’ Act are liable to taxation on both
trade and investment income or profits.
• Institutions not registered under the Public Voluntary Act or by the Ministry of Education are
not eligible for the exemptions granted to ecclesiastical, charitable, or educational entities.
All their income becomes subject to taxation.

7.8 Venture capital company

Companies primarily dedicated to offering venture capital for development purposes enjoy
income tax exemption on their receipts and accruals, provided they meet the following specified
conditions:
• The venture capital fund or company and the recipient company should be residents and
should be compliant;
• The venture capital company or fund must not reinvest the receipts and accruals subject to
exemption in a business for the sale, leasing or other dealing with immovable property,
business ordinarily carried on by financial institutions, financial or advisory services, gaming
or games of chance. Additionally,
• the recipient must not be listed on a stock exchange; and
• the recipient must be or must propose to be active in agriculture, mining, manufacturing,
tourism or other aspect of the economy deemed by the Minister by statutory instrument to be
critical for national development; and
• the venture capital company or fund must not hold shares in the recipient to the extent of
controlling it, nor must it exert
• control over the recipient directly or indirectly through a related entity; and
• The predominant mode by which the venture capital company finances recipients is by means
of equity rather than debt.

7.9 Mortgage financing

Building societies, registered under the Building Societies Act, enjoy an exemption on their
receipts and accruals as outlined in paragraph 2(c) of the 3rd schedule of the Act. This exemption,
effective from 1 January 2013, extends to financial institutions engaged in mortgage finance, but
only for the portion of receipts or accruals attributable to mortgage finance. The term “building
society” means a building society registered in terms of the Building Societies Act [Chapter
24:02], whereas a ‘financial institution’ means any banking institution registered in terms of the
Banking Act [Chapter 24:20]. Mortgage finance refers to the provision of loans for the acquisition
of immovable property for residential purposes, which loans are secured by the collateral of
immovable property.

In the case of a bank providing both taxable income and the said exempt income, section 16(1)
(f) of the ITA which prohibits deduction of expenditure related to the production of exempt
income becomes very important. Expenditure related to receipts and accruals which are exempt
from tax should not be deducted. The taxpayers should be able support the basis of apportionment
of the expenditure.

7.10 Investor Protection Fund

The Finance Act 1 of 2014 introduced paragraph 2(n) of the 3rd schedule to the Act which
exempts from income tax receipts and accruals of the Investor Protection Fund established in
terms of the Securities Regulations, 2010 published in Statutory Instrument 100 of 2010. The fund
is meant to protect investors in publicly quoted securities. The exemptions were made to apply
retrospectively from 1 January 2013.

7.11 Insurance and Pension Housing Company

52
As a measure to facilitate provision of housing to potential home seekers, the Finance Act 1 of
2014 introduced paragraph 2(m) to the 3rd schedule of the Act exempting from income tax
receipts and accruals of the Insurance and Pension Company. This is a company meant to secure
financing for home seekers that is guaranteed by the State. The shareholders of such company are
the Ministry of Finance, the Insurance and Pensions Commission and association representing
pension funds, life and funeral insurers.

7.12 Quasi-Government and other bodies

The receipts and accruals of the following entities are exempt from income tax
▪ Any agency of any government, other than the Government of Zimbabwe, approved by the
Minister by notice in a statutory instrument;
▪ Any international organisation specified in terms of section 7 of the Privileges and Immunities
Act [Chapter 3:03] which has been approved by the Minister by notice in a statutory
instrument;
▪ The organisations referred to in the International Financial Organisations Act [Chapter 22:09]
▪ The African Development Bank
▪ The African Development Fund
• The South African Reserve Bank
▪ Any foreign organisation that provides finance for development in Zimbabwe, to the extent
that its receipts and accruals are from a project approved for the purposes of this subparagraph
by the Minister.

7.13 Elderly person

An elderly person is entitled to various exemptions in terms of the Act. These include a pension
accrual or receipt from a pension fund. The person is also entitled to the following exemptions.

The first ZWL$(1,500,000) US$3,000 p.a of interest earned on any deposit with a financial
institution.
The first ZWL$(1,500,000) US$3,000 p.a of interest on a banker’s acceptances and other
discounted instruments traded by financial institutions.
The first ZWL$(1,500,000) US$3,000 p.a of rental income accruing to the taxpayer in the year of
assessment.

An elderly person is a person who is 55 years old or above. Please note the person should be above
55 years to be entitled to a pension exemption.

7.14 Dividends
Paragraph 9 of the 3rd Schedule to the ITA provides tax exemption for dividends from companies
incorporated in Zimbabwe, granted that the paying company is subject to tax. The exemption is
irrespective of whether the paying company has taxable income, emphasising its liability to pay
tax on profits. Notably, dividends from building societies are not exempt, as their income is tax-
exempt. However, dividends exempt from income tax may be subject to withholding tax. Starting
January 2017, the exemption under paragraph 9 does not apply to amounts deemed as dividends
under section 26(2) or 28(2) of the Income Tax Act, such as interest on excessive debt-equity ratio
or excess fees. This implies that deemed dividends are taxable income for the recipient company.

7.15 Interest
The following interest incomes are exempt from tax:

• Interest on Tax reserve certificates (TRCs) issued by Zimbabwe Revenue Authority.

• Interest payable to a financial institution by another financial institution
53
• Interest payable to a holder of moneylender’s license by a financial institution
• Interest payable to an insurer registered in terms of the Insurance Act (Chapter 24:07) by a
financial institution
• Interest payable to a person whose receipts and accruals are tax exempt, e.g. interest payable
to charitable organisations, trust of a public, education institutions, society or associations
etc.,
• Interest on any savings certificate issued in terms of any law,
• Interest on any sum deposited with the Post Office Savings Bank of Zimbabwe,
• Interest on any loan made by the European Investment Bank,
• Interest on any loan to the Infrastructure Development Bank of Zimbabwe made by a non-
resident institutional shareholder,
• Interest on class “C” permanent shares as defined in the Building Societies (Class “C” Shares)
Regulations, 1986
• Interest on any “agricultural bond” issued by the Agricultural Finance Corporation and a
consortium of commercial banks,
• Interest on any bond issued by the Reserve Bank of Zimbabwe on behalf of the National Fuel
Investments Company (Private) Limited.
• Interest on any “Diaspora Bond” issued by the Commercial Bank of Zimbabwe (CBZ).

7.16 Small scale gold miner loan

Paragraph 10(q) of the 3rd schedule in the Income Tax Act, interest on loans provided to small-scale gold
miners for mining or prospecting activities in Zimbabwe is exempt from taxation. This applies when the
loan is used by the small-scale gold miner exclusively for the specified operations. A "small-scale gold
miner" is an individual or micro-enterprise meeting criteria outlined in the Fourth and Fifth Schedules of
the Small and Medium Enterprises Act [Chapter 24:12].

7.17 Low-cost housing savings

Paragraph 10 (r) of the 3rd schedule in the Income Tax Act exempts interest on deposits made for
low-cost housing savings instruments, subject to regulations prescribed by the Minister. This
exemption was introduced as part of the mid-term fiscal policy in 2014. This is still a proposal).

7.18 Export incentive grant or incentive

An amount paid by the government to an exporter of goods under a scheme for the development
of export trade is exempted from tax in the hands of the beneficiary taxpayer. The exempted
amount shall not include an amount of any duty refunded in terms of the Customs and Excise Act.

7.19 RBZ export incentive

Paragraph 16 in the 3rd Schedule, introduced by Finance Act No 2 of 2017, exempts premiums
paid by the Reserve Bank of Zimbabwe under the Export and Foreign Remittance Incentive
Scheme. This applies to earnings by exporters and remittances from abroad received by residents
in Zimbabwe, channeled through authorised dealers as per the Exchange Control Act. The
exemption aligns with the introduction of the incentive from June 1, 2016.

7.20 Duty exemption certificates

An amount received by way of the sale, disposal or transfer of any duty exemption certificate
issued by the Reserve Bank of Zimbabwe to an exporter qualifying for a rebate of duty on imports
in terms of an export incentive scheme under which such certificates are issued is exempt from
income tax.

54
 Chapter round up

• The Act exempts certain income from tax in accordance with the provisions of Section 14 as read with
the third Schedule.
• Amounts that are exempted from income tax are therefore not liable to tax at all.

55
 8. Specific deductions and prohibited deductions.

8.1 Introduction
The Act prescribes certain expenses as tax deductible despite not meeting all the essentials of the
general deduction formula. These are contained in ss15 (2) (b), s15 (8), s 17 and 18. In the same
manner some expenses are disallowed despite meeting the requirements of s 15 (2) (a).

Objectives Apply the general deduction formula.

Identify statutory deductions.
Identify prohibited deductions.
Calculate and account for capital allowances in the income tax return.
Calculate recoupment and scrapping allowance.
Understand the tax implications of leasing transactions.
Calculate hire purchase (suspensive sale) relief.
Calculate and account for assessed losses in the income tax return.
Act: Sect 15 ARW 4th& 6th Schedules
(if applicable) Sect 16
Sect 17
Sect 18
Relevant D Bank v ZIMRA [2015] HHC 135
Cases MA Ltd v ZIMRA 16- HH-316
G Bank Zimbabwe Ltd v ZIMRA S15-HH-207
BT (Pvt) Ltd v ZIMRA, HH617/14

8.2 Statutory deductions- s15 (2) – 8

Expenditure Explanation
Section 15 Expenditure incurred during the year of assessment on repairs to articles,
(2) (b) implements, machinery and utensils used, and property occupied for the purposes
Repairs of trade. Repairs resulting from the letting of property.

Repairs resulting from the letting of property.

Repair is restoration by renewal or replacement of subsidiary parts of the whole i.e.
restoring an asset to its original state at the time it was first owned by the taxpayer.
It is not necessary, however that the materials used should be identical with the
materials replaced.

NB: Repairs are to be distinguished from improvements.

Examples:
• Replacement of a broken window with a shatter proof (repair).
• Replacing cement floor with tiles (repair).
• Extension of building (capital).
Section 15 A deduction can be claimed in respect of debts, which are irrecoverable as long as
(2) (g) Bad all the following conditions are met:
and Doubtful • The debt must be due and payable to the taxpayer,
Debts • The debt must be proved, to the satisfaction of the Commissioner, to be
irrecoverable as at the end of taxpayer’s financial year; and
• The debt must have been included in the taxpayer’s income either in the current
or any previous year of assessment.
Where the debts remain unpaid for a long time and with no possibility of payment,
bad debts will be assumed. (BT (Pvt) Ltd v ZIMRA, HH617/14)

56
Section 15 An amount to be determined in accordance with the Sixth Schedule in respect of
(2) (h) contributions made in the year of assessment to a benefit or pension fund or the
Contribution Consolidated Revenue Fund.
s to a benefit
or Pension Provided that no contribution to a retirement annuity fund shall be allowed as a
Fund deduction to a member of such fund who was not ordinarily resident in Zimbabwe
(A.R.W 6th at the time, he made the contribution.
schedule)
NB: The contribution paid by the employer allowed as a deduction is limited to
ZWL$1,500,000(US$3000) per employee and contributions paid by an employee
allowed as a deduction are limited to ZWL$1,500,000 per annum.
Section 15 The amount of any contributions paid to a Medical Aid Society by an employer in
(2) (j) – respect of his employees or their dependents.
Medical
Aid Societies
Section 15 A taxpayer may deduct expenditure incurred during the year in carrying out
(2) (m) experiments and research relating to his trade, other than expenditure of a capital
Experiments nature incurred on plant, machinery, land or premises or on the acquisition of rights.
and Research
Section 15 The principle is extended to sums, which the taxpayer contributes to other persons
(2) (n) – carrying out such experiments and research relating to the taxpayer’s trade or a
Experiments proportion of such contributions if the other person’s expenditure is not wholly of
and Research this nature.
The amount allowable as a deduction shall be determined by
the formula:

AxB
C
Where:
A = the amount of the taxpayer’s contributions
B = the amount incurred by the other person, which would have
been allowed as a deduction in terms of sect 15 (2) (m) above
C = is the total amount of the expenditure incurred on experiment and research.

Section 15 Deductible are contributions to approved scientific or educational bodies with the
(2) (o) condition that they be used for industrial research or scientific experimental work
Scientific connected with the taxpayer’s trade.
Research and
Experimental
Work
Section 15 A deduction is allowed of grants, bursaries, scholarship paid for a person
(2) (p) undergoing technical education, provided that the course is related to the taxpayer’s
Educational trade and that the beneficiary is not the taxpayer, his spouse or near relative of either
Grant, spouse.
Bursary or
Scholarship If the taxpayer is a company, the beneficiary should not be a near relative of the
individual controlling the company, his spouse or near relative of the spouse unless
the director works full time for the company and controls not more than 5% of the
share votes.

57
Section 15 Any amount paid during the year of assessment by way of an annuity, allowance or
(2) (q) pension is deductible subject to the following:
Voluntary • The employee must have retired because of ill health, infirmity or old age.
Payments to • The amount allowed is restricted to US$500 per tax year for each former
Former employee.
Employees • In the case of payments to dependents or persons who were dependent on a
and/or their retired or deceased former employee the annual restriction is US$200 in respect of
dependants all dependents of each ex-employee.
NB: In all cases the amount allowed is reduced by any obligatory payments (e.g.,
pension or annuity) received during the year by the ex-employee or dependant from
any fund of the former employer.
Section 15 A deduction shall be granted for payments made to the National Scholarship Fund,
(2) (r) National Bursary Fund or a charitable trust administered by the Minister responsible
Donations for either Social Welfare or Health.

Section 15 Any amount not exceeding ZWL$50,000,000(US$100,000) paid by a taxpayer

(2) (r1) during the year of assessment to the State or to a fund approved by the Minister of
Donations Health for, any of the following operated by the state, local authority or religious
organisation:
• the purchase of medical equipment;
• the construction, extension or maintenance of a hospital and or;
• the procurement of hospital drugs (including ARVs).
Section 15 Any amount not exceeding ZWL$50,000,000(US$100,000) paid by a taxpayer
(2) (r2) during the year of assessment without any consideration at all to a research
Donations institution approved by the Minister responsible for higher or tertiary education.

Section 15 Any amount not exceeding ZWL$50,000,000(US$100,000) paid by a taxpayer

(2) (r3) during the year of assessment, without any consideration at all, to the state or a fund
Donations approved by the minister responsible for education, for any of the following
operated by the state, local authority or religious organisation:
• The purchase of educational equipment;
• The construction, extension or maintenance of a school; and
• The procurement of school books or other educational materials.
Section 15 Any amount not exceeding ZWL$25,000,000(US$50,000) aid by a taxpayer during
(2) (r4) the year of assessment without any consideration to the Public Private Partnership
Donations Fund.
Section 15 Any amount not exceeding ZWL$25,000,000(US$50,000) paid by a taxpayer
(2) (r5) during the year of assessment without any consideration to the Destitute Homeless
Donations Persons Rehabilitation Fund established by the Ministry of Finance under the Audit
and Exchequer Act.
Section 15 A deduction is allowed for subscriptions paid by a taxpayer in respect of his
(2) (s) continued membership to any business, trade, technical or professional association.
Subscription Entrance fees are not allowable.
s
Section 15 A deduction is allowed from business income, in respect of expenditure which; was
(2) (t) incurred by the taxpayer, 18 months prior to commencement of business, in the
Expenditure course of establishing the business, and would have been allowed as a deduction
Prior To had it been incurred after beginning the business and is claimed in the year of
Commencem assessment in which business commences.
ent of
Business
Section 15 Accounting principles are recognised and the taxpayer is allowed to deduct the
(2) (u) value of the trading stock, which was on hand at the end of the preceding year of
Opening assessment, i.e., opening stock
Stock

58
S 15(2)(v) A deduction shall be allowed from the income derived by the taxpayer in a year of
Trading assessment, from the carrying on of a trade, an amount equal to what the
Stock Commissioner considers as, at the date it was brought to hand or at the date it was
acquired acquired, the fair and reasonable value of such trading stock of the taxpayer
other than in acquired otherwise than in the course of trade.
the course of
trade
Section 15 The cost of attending a convention or trade mission is allowed as a deduction subject
(2) (w) to the following:
Conventions • The deduction is restricted to (ZWL1,250,000) US$2,500 of the amount
and Trade spent in any one tax year and must relate to not more than one convention,
Missions which in the opinion of the Commissioner was in connection with the trade
carried on by the taxpayer or one trade mission, approved by the Minister
(not both).
• If the convention or trade mission commences in one year of assessment and
ends in another the deduction is allowed in the tax year it ends.
• If the person attending is a member of a partnership and the partnership bears
the expense, each partner is allowed to deduct an amount in proportion to his
share of profits.
• In such a case the limit of US$2,500 is applicable to one visit by each partner
Section 15 Taxpayers who appeal against any decision made by the Commissioner and whose
(2) (aa) appeal is allowed in full in the Special Court or the High Court, may deduct their
Legal costs legal costs (allowed by the registrar of the court as being in accordance with the
on Income proper scale for such costs) in the year of assessment in which the costs are so
Tax Appeals “taxed”
Section 15 Should an appeal be taken further (by either partly) to the Supreme Court, and the
(2) (bb) taxpayer’s case be upheld in full or to a substantial degree the court may, at its
Legal cost on discretion, permit the costs to be deducted.
Income Tax
Appeals
Section 15 This section allows for a deduction of the fair value of any stock, shares, debentures,
(2) (jj) units or other interest paid or given by the client to an employee of the client or for
Approved the benefit of an employee of the client pursuant to an approved employee share
Employee ownership scheme or trust.
Share Option
Scheme.
Section 15 Expenditure not exceeding ZWL$25,000,000 approved by the Minister responsible
(2) (kk) for local government on the maintenance of Government buildings, roads, bridges,
Maintenance water works, sanitation works, public works and any other utility, amenity or item
on behalf of of infrastructure.
Local
Government
Section 15 The amount of any export-market development expenditure incurred by the
(2) (gg) taxpayer during the year of assessment, together with an amount equal to one
Export hundred per centum of such expenditure. (The taxpayer gets a double deduction on
development expenditures incurred on export development).
expenditure
Export development expenditure includes:
• research into, or the obtaining of information relating to, markets outside
Zimbabwe;
• research into the packaging or presentation of goods for sale outside
Zimbabwe;
• advertising goods outside Zimbabwe or otherwise securing publicity
outside Zimbabwe for goods;
• soliciting business outside Zimbabwe or participating in trade fairs;
• investigating or preparing information, designs, estimates or other material
for the purpose of submitting tenders for the sale or supply of goods outside
Zimbabwe;
59
 • bringing prospective buyers to Zimbabwe from outside Zimbabwe; and
• Providing samples of goods to persons outside Zimbabwe.

Section 15 Where a taxpayer has income from one business activity but sustains a loss on
(3) Assessed another, the latter is set off and only the balance is taxable.
Losses If the deduction exceeds the income the excess is defined as the “assessed loss”.
Assessed loss determined in the previous year of assessment is deductible.

Except in the case of mining no assessed loss shall be carried forward after the
expiry of six (6) years from the end of the year of assessment in which it was
determined.
No assessed loss attributable to business operations carried on by a taxpayer shall
be allowable as a deduction from income received by or accruing to him under a
contract of employment.
Assessed losses from the sale or disposal of a business unit can-not be carried
forward.
Assessed losses cannot be carried forward if there is a change in shareholding with
the intent of exploiting these losses. This rule aims to prevent the manipulation of
company share transactions to benefit from assessed losses. In such cases, the
burden of proof rests on the taxpayer acquiring the shares to demonstrate that the
transaction was not motivated by a desire to exploit the assessed losses.

When a new company is established in Zimbabwe to assume the business of a

foreign company, it can inherit the assessed losses of the foreign entity. Normally,
a loss is tied to the taxpayer it was assessed on and cannot be transferred to another
taxpayer. However, in this scenario, the transfer is allowed under the condition that
the members' shareholding is exchanged for a proportionate shareholding in the new
company, and no new shareholders are introduced. If there are accumulated losses
over multiple tax years and taxable income is generated in subsequent years, the
initial assessed losses must be utilised before those incurred in later years.

An assessed loss is not cancelled by the cessation of trade for a period, a complete
change of trade or any other factor except in circumstances mentioned in the
provisos to this section.

8.3 Prohibited Deductions – Section 16

Section 16 of the Income Tax Act outlines cases in which no deduction is allowable for tax purposes.

SECTION EXPLANATION

Sect The cost incurred by any taxpayer in the maintenance of himself, his family or
16(1)(a) establishment
Sect 16 Generally, domestic or private expenses, such as commuting costs between home
(1)(b) and the workplace, are not deductible. However, if a home is equipped for the
taxpayer's trade or regularly used for business purposes, it may be considered a
deductible expense. Commuting costs between two distinct places of work may
also be allowed as deductible expenses.
Sect 16 Indemnity insurance: Any loss or expense which is recoverable under any insurance
(1)(c) contract, guarantee, security or indemnity
Example
A vehicle belonging to Company A was involved in an accident

60
Sect 16 (1) Tax on profits or income, whether payable in Zimbabwe or outside Zimbabwe, as
(d) well as interest on late tax payments, are deductible expenses for a taxpayer.
Additionally, costs incurred for complying with ZIMRA obligations, such as
preparing tax returns, conducting tax health checks, managing PAYE, handling
withholding taxes, and dealing with irrecoverable VAT, are also deductible if the
expenditure is of a revenue nature.
Sect 16 (1) Intermediated Money Transfer Tax w.e.f. the 20th of February 2019 which is when
(d1) the Finance Act 1 of 2019 was gazetted.
Sect 16 (1) Transfers and appropriations: All forms of profit appropriation, such as dividends,
(e) general reserves, or any income carried to a reserve fund, and various provisions
(e.g., for leave, bonuses, directors' fees, audit fees, etc.), including impairment
reserve and revaluations, are considered when determining taxable income. This
encompasses amounts not finalised at the year-end, like contingent liabilities. It's
important to note that these amounts are deductible only when actually incurred.
Sect 16 (1) Expenditure on exempt or non-Zimbabwean source income, which includes
(f) expenses incurred in generating exempt income, income from a source outside
Zimbabwe, private income, or related to foreign dividends, is subject to
apportionment when incurred for dual purposes—partly in the production of
income and partly for other purposes.
Sect 16 (1) Contributions to unapproved fund: Contributions made to an unapproved pension
(g) fund, benefit or medical aid fund. Benefit and medical aid funds are approved by
the Commissioner in terms of s13 of the Act.
Sect 16 (1) Notional interest: the cost of any notional interest forgone as a result of investing
(h) capital in a trade i.e. opportunity cost interest. This includes interest earned on
capital employed in business e.g., interest on preference shares.
Sect 16 (1) Vacant or unproductive property: Expenses related to vacant or unproductive
(i) property, such as rent, repairs, or other costs incurred for a property not occupied
for trade purposes, are considered domestic or private expenses and are not
deductible. However, repairs stemming from property letting or tenant occupation
qualify for deductions.
Sect 16 (1) Restraint of trade: Restraint of trade, including exclusive agency agreements that
(j) limit others from selling goods beyond those supplied by the taxpayer, is considered
of a capital nature. This also encompasses agreements aimed at eliminating
competition.

Sect 16 (1) Leasing of a passenger motor vehicle: The cost of hiring or leasing a passenger
(k) motor vehicle is subject to a limit of ZWL$5,000,000. This limit is calculated
cumulatively over the entire leasing period for the same vehicle. The restriction
applies specifically to leasing or hiring costs, while motor running expenses are
fully deductible. However, if the vehicle is used for private purposes by a
shareholder or an individual in a proprietor position (e.g., managing director,
owner, partner), limitations may apply, as defined in the 4th Schedule of the ITA.
Sect 16 (1) Cost of shares: cost of shares given to employees (including directors). Shares that
(l) are given as remuneration or as a bonus to an employee or a director are however
deductible. See also above deduction in terms of s 15 (2) (jj) of the Act

Sect 16 (1) Entertainment expenses encompass the hospitality or amusement of any kind,
(m) involving customers, prospective customers, employees, or any individuals. This
definition, as seen in Rev v Hathorn & Others 1948 (4) SA 162, 15 SATC 456 at
461, is broad and includes banquets, meals, refreshments, and other hospitable
provisions. Expenditure on entertainment is disallowed, whether incurred directly
or indirectly, including allowances provided to employees or directors for
entertaining on behalf of the taxpayer. Examples such as DSTV subscriptions, gym
fees, and holiday cottages are considered forms of entertainment expenditure. The
deductibility of such expenses is contingent on meeting the general deduction
criteria outlined in section 15(2)(a) of the Act, where if incurred for trade or income
production purposes, it remains eligible for deduction (ITC 1394 (1984) 47 SATC
119 (Z)).

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Sect 16 (1) Expenditure on dividend from a foreign source: e.g., on brokerage fees, bank
(n) charges, postage expenses, interest payable on money borrowed to purchase the
shares, etc.

Sect 16 (1) Expenditure incurred in producing interest paid by a financial institution is not
(p) deductible. If a taxpayer borrows money for on-lending to a bank, discount house,
finance house, or building societies, any interest incurred on the borrowed funds is
not deductible. This is because no deduction is allowed for income exempt from
tax. While interest payable by financial institutions is exempt from tax, it is subject
to final withholding tax at the source.
Interest on excessive debit capital (the Thin Capitalisation Rule): The Thin
Capitalisation Rule addresses companies primarily financed by debt, deeming them
thinly capitalised. To discourage excessive debt, the rule limits the deductibility of
interest on related-party borrowings to a ratio of three to one for debt to equity.
"Equity" includes issued and paid-up capital, unappropriated profits, reserves, and
interest-free loans from shareholders. Thin cap rules do not affect debt contracted
with locally domiciled, registered, or incorporated financial institutions or
individuals ordinarily resident in Zimbabwe, as long as there is no collusion
between parties. Disallowed expenditure, such as excessive interest and other
considerations, is computed as follows:

A x (B-C)
_____
B
A = the total interest or expenditure incurred during such year on debt
B =is the total financial assistance (debt)
C =is the equity capital multiplied by 3

The following is the step-by-step procedure:

1. Aggregate equity is the aggregate of share capital, share premium, revenue
or capital profits and any other owner’s permanent capital (including shareholders
loans)
2. The result is to be multiplied by three (“result 3”); and,
3. Then, result 2 shall be subtracted from the balance of all debts
4. Then, multiply excessive debt by total interest or expenditure incurred, and
then divide by total debt
5. Result will be the excessive expenditure or interest.

The excess debt is then reclassified as equity and interest or other related
expenditure on the reclassified debt is treated as dividend distribution by the
company to its shareholders. These dividends are however subject to 15% Non-
Resident Shareholder’s Tax when such interest is paid to a non-resident.

Fee, administration and management expenditure (commonly known as

management in excess of 1% (0.75% prior to commencement) of the paying entity
deductible expenditure. Deductible amount is computed as follows:

1% (or 0.75%) x [A- (B +C)]

A total expenditure qualifying for deduction under s15 of the ITA.

B management fee paid outside Zimbabwe by the taxpayer
C is the mining capital allowances (for taxpayer who is a miner)

• Withholding tax of 15% is applied on excessive fees if paid are outside

Zimbabwe
• The tax is paid to ZIMRA within 10 days of the date of payment of the fees.
• Management fees that are not commensurate to those that would have been
agreed by independent parties for the same services under the same economic
environment are adjusted accordingly using transfer pricing rules.

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 • These rules are independent of T P rules, both rules may be applied.
S16 (2) Cost not directly related to a taxpayer’s trade:

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 Chapter round up

• A bad debt is deductible if :(1) it is proved to the satisfaction of the Commissioner to be irrecoverable,
(2) was included in the taxpayer’s income and (3) the debt is due and payable to the taxpayer.
• Expenditure on convention and trade mission is deductible up to a maximum of USD$2,500 each, in
the year in which the convention or trade mission ends.
• Assessed loss can be carried forward for a maximum of 6 years.
• A double ($2 for $1 incurred) deduction is granted of export market development expenditure.

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 9. Capital Allowances and Other Special Deductions

9.1 Introduction

The expenditure on acquiring assets for trading, being of a capital nature, is not deductible. Depreciation,
as an expense, is not recognised for tax purposes. Instead, the tax system allows for specific capital
allowances such as Special Initial Allowance, Wear and Tear Allowance, and Scrapping Allowance.
Eligibility for these allowances requires that the asset is used for trade purposes. Generally, land does not
qualify for depreciation or capital allowances.

Finance Act no. 2 of 2022 provides for rebasing of assets with outstanding income tax values as at 31
December 2022 if such assets were purchased in USD.
This is the conversion of the USD invoice to ZWL$ at official exchange on 1 January 2023.
Capital allowances will then be based on the rebased invoice.

Objectives 1. Calculate and account for capital allowances in the income tax return.
2. Calculate recoupment and scrapping allowance.
3. Understand the tax implications of leasing transactions.
4. Calculate hire purchase (suspensive sale) relief.
5. Calculate and account for assessed losses in the income tax return.
Act: Sect 15 (2) (c)
(if applicable) Sect 15 (2)(d)
Sect 15(2) (e)
Sect 17
Sect 18
Relevant D Bank v ZIMRA [2015] HHC 135
Cases Goldcoast (Pvt) Ltd v ZIMRA

9.2 Definition of Assets (4th Schedule):

Railway line • Rails, sleepers, and related equipment of any railway track. However, it does not
include ballast, embankments, bridges, culverts, and other constructions associated
with the railway.
Commercial • Building constructed on or after 1975 and used to an extent of at least 90 % of its
buildings floor area for purpose of trade.
• Examples retail shops, Hotels (registered in the Tourism act), showrooms,
commercial offices etc.
• It is not:
➢ A farm improvement, industrial building, staff housing, tobacco barn.
➢ A building used 10% or more of its floor area for residential purposes, but which
is not:
➢ A block of flats, apartment or similar units of residential accommodation.
Industrial • Any building used as a factory for industrial purposes.
building • Any building containing a machinery and is used for machinery operations.
• Any building which is within the same boundaries with an industrial building.
• Any building erected for the purposes of carrying out industrial research or
scientific experiments.
• A building owned by a manufacturer and is used for storing his goods i.e. raw
material, processed goods or work in progress or finished goods.
• Canteens, garages and drawing offices used mainly in connection with a
manufacturing industry.

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 • Toll-roads or toll-bridges as declared in terms of the Toll-roads Act
• A hotel with a liquor license including permanent structures used together with
it e.g., swimming pool etc
• Tennis courts (permanent), golf courses and bowlings greens
• Fencing or tarmac, concrete of similar sealing surrounding an industrial building.
• NB: Building should be used at least 50% of the floor area for purposes of trade
• NB: Warehouse does not qualify as an industrial building if they store goods
which have not been manufactured by the taxpayer and showrooms are regarded as
commercial buildings.
Staff Houses • Any permanent building used by a taxpayer for the purposes of trade for mainly
housing its employees and not as residential units
• The erection of such buildings should have been commenced on or after 1
January 2009 and the cost should not exceed ZWL$12,500,000 (US$25,000) (the
value is w.e.f. 1 January 2023.
Farm • Any building, works or structure of a permanent nature, e.g., including any
improvements building whose construction commenced on or after 1 April 1988 and is used as a
school or as a medical establishment (a hospital, a nursing home or a clinic) in
connection with the farming operations. More than 50% of farm school pupils must be
children of farmer workers. More than 50% of the patients must be farm workers and
their families.
• It includes any building used wholly or mainly for the housing of staff employed
at the school or at a medical establishment (staff houses for teachers and nurses).
• Restricted cost for school or hospital is ZWL$5,000,000.
• Restricted cost for teacher or nurse staff house is $5,000,000.
Passenger • Vehicles powered either mechanically or electronically and used on roads mainly
Motor vehicles for conveyance of passengers
(PMVs) • PMVs include station wagons, estate cars, vans, 4x4 double cabs etc.
• The vehicle should be used at least 50% for the conveyance of passengers
• The asset has a deemed cost of ZWL$5,000,000.
• Passenger motor vehicle qualifies for both SIA and wear and tear
Articles, • Movable asset with an independent identity despite being an integral part of a
Implements and building
Utensils • The asset should not be a permanent feature of a building
• An item which is so integrated in an immovable asset that loses its independent
identity ceases to be an article
Computer • Computer software is an intangible asset that is either purchased or internally
Software developed and should be capitalised if it meets the capitalisation threshold
• Purchased computer software, including software license fees, should be
capitalised if the total dollar amount of the fee divided by the number of units served
(terminals) exceeds the capitalisation threshold.
• For internally developed software, costs associated with the application
development phase should be capitalised only if the costs were incurred subsequent
to the preliminary project stage.
• Costs associated with the preliminary project and the post-
implementation/operating phases should be expensed as incurred.
• Costs to develop or obtain software that allows for access or conversion of old
data by new information systems should also be capitalised

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9.3 Special Initial Allowance (SIA)
Act: Section 15 (2) (c) ARW para 2 of the 4th Schedule to the ITA
(if applicable)
Overview: SIA is a tax incentive available to taxpayers who construct immovable property
(if applicable) (other than commercial buildings) and incur expenditure on moveable assets. The
allowance is at the rate of 25% in the first year and 25 % in each of the 3 subsequent
years. Tax payers should make election to qualify for SIA.
Rules Items ranking for SIA:
• Expenditure incurred by taxpayer on construction of immovable property
(industrial buildings, railway lines, staff housing etc other of commercial buildings)
• Expenditure on additions to existing immovable properties as above,
• Expenditure on new or used articles implements, machinery or utensils
Items on which SIA cannot be granted:
• Purchased immovable properties (buildings)
• Commercial buildings
• Items used less than 90 % in the production of taxpayer’s income
• Assets acquired through donations or inheritance
• Assets acquired for purposes of lease under a finance lease

Conditions to qualify for SIA

• Assets should be used by taxpayer for purposes of its trade
• Assets should be in use on the last day of the year of assessment and used 90%
in trade or the production of income.
• SIA shall be forfeited if not claimed in the first year an asset is put to use, wear
and tear is however claimable
• SIA can never be apportioned on time or usage basis
• Full SIA is claimed if an asset is used at least 90% in taxpayer’s trade or in the
production of its income.
• Evidence of expenditure incurred, (such as invoice or receipt) and use of asset
during the year of assessment
• Is calculated based on cost i.e., straight-line method.
• S.I.A. is granted in the year in which asset is first put into use.

• Is granted upon election [in an exam key words are ‘’compute maximum
allowances, or minimum taxable / tax liability ‘’ when required to elect.]

• Fiscalised electronic register charge SIA on 50% of the cost (4th schedule para
2).

9.4 Wear and tear

Overview: Uniform capital allowances, known as wear and tear, are granted by the government
(if applicable) to ensure fairness among taxpayers. This applies when the Special Initial Allowance
(SIA) has not been granted on eligible assets.

Rules Items ranking for wear and tear:

• Expenditure incurred by taxpayer on construction or purchase of immovable
property.
• Expenditure on additions to existing immovable properties as above,
• Expenditure on new or used articles, implements, machinery or utensils.
• Items on which wear, and tear cannot be granted:
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 • Items that ranked for SIA
• Items not used in the production of income or trade of taxpayer.
• Items fully written off for tax purposes (ITV is zero)

Conditions to qualify for wear and tear

• Moveable assets should belong to and be used by taxpayer for purposes of its
trade
• Assets should be in use on the last day of the year of assessment.
• Wear and tear should be calculated on written down value (ITV) of moveable
asset
• Wear and tear is calculated based on cost on immoveable property
• When moveable property is used more than 10% by shareholders or owners,
wear and tear is apportioned (not applicable to taxpayer)
• For immoveable property there should be evidence of expenditure incurred on
acquisition or construction and use of asset for purposes of trade.
• For moveable property, there should be evidence of title and use for purposes
of trade (Vehicle Registration Book)

Wear and tear rates

Asset Rate Base

(1) Railway line 5% Cost

(2) Industrial buildings 5% Cost
(3) Commercial buildings 2.5% Cost
(4) Staff houses 5% Cost
(5) Computers and data processing units 10% Written down value
(Servers and networks, End user devices such
as desktops, laptops, printers etc.)
(6) Computer Software 10% Written down value
(7) Furniture and Fittings 10% Written down value
(8) Motor Vehicles 20% Written down value
(9) Office Equipment 10% Written down value
(10) Articles, Implement and utensils 10% Written down value
(11) Plant and machinery used two shifts 17.5% Written down value
(16 hrs)
(12) Plant and machinery used 3 shifts (24 25% Written down value
hrs)

Example (SIA & W&T

A taxpayer constructed a commercial building and staff housing in the first year of her trade and used
these for purposes of her trade on 1 November 2022. The commercial building cost $2,000 000 and staff
housing cost $110 000. She also acquired furniture & fittings for $50 000 on 1 July 2022

Required to compute maximum allowances.

Solution

Wear & Tear Schedule for the year ended 31 December 2022

Commercial Staff Furniture

Asset Building (ZW$) Housing (ZW$) & Fittings (ZW$)
Cost/ITV 2,000,000 110,000 50,000
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 Deemed cost - - -
W&T rate 2.5% 5% 10%
SIA (25%) NIL 27,500 12,500
W&T 50,000 Nil Nil
ITV 1,950,000 82,500 37,500

Notes for the solution:

➢ Where you are asked to calculate maximum allowances, you allow for SIA since it has more
allowances than W&T, subject to conditions stated above.
➢ A commercial building will never qualify for SIA at all
➢ The qualifying cost for a Staff housing is restricted to $12,500,000 (USD25,000) per annum.

Capital expenditure for tax purposes

➢ Cost of acquiring or construction of assets itself

➢ All costs necessary to get asset ready for its intended use:
➢ Insurance in freight charges
➢ Traveling costs to purchase the asset
➢ Initial set up or installation cost
➢ Calibration in programming costs
➢ Stamp duty
➢ Custom duty
➢ Any ancillary costs related to acquisition and installation of the asset
➢ Insurance costs related to acquisition and installation of the asset
➢ Site preparation costs to install the asset
➢ Professional fees in connection with construction or purchase of the asset
➢ Finance charges on hire purchase
➢ Borrowing costs on construction of immovable property
➢ Demolition costs for clearing ground to construct new asset
➢ Cost of employee benefits
➢ Initial delivery and handling costs
➢ Realised foreign exchange gain or loss on asset acquisition or construction

Cost or items not to be capitalised for tax purposes

• VAT refundable in terms of section 15 (3) of the VAT Act

• Revaluation and fair values
• Impairment
• Opening a new facility;
• Introduction of a new product or service (including costs of advertising and promotional
activities);
• Conducting business in a new location or with a new class of customer (including costs of staff
training);
• administration and other general overhead costs;

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 9.5 Cost base of an asset for purposes of calculating capital allowances

Purchased Assets Constructed Assets

For purchased assets the cost base is made of the The cost base would include the following:
following: • Salaries and wages for construction staff
• Purchase price • Architectures fees
• Costs necessary to bring an asset into condition • Surveyors’ fees
of use e.g., Freight costs, travel costs, insurance • Material costs
costs, installation costs • Interest cost on loan used to fund asset
• Irrecoverable taxes e.g. VAT for non-registered construction (interest is capitalised up to
operators, customs duty the date asset construction is
• Exchange gains or losses on acquiring the asset completed).

Inherited Assets Donated assets

• Cost base is the value determined for estate duty • Cost is equal to the market value of the
purposes. asset at the time of donation.
Hire purchase acquisitions:
• The cost is the full purchase price inclusive of
finance charges.

9.6 Scrapping Allowance – 4th Schedule Para 4

Scrapping allowances represent tax deductions for losses incurred upon disposing of fixed assets used
for trade when the proceeds are less than the income tax value. Scrapping involves the disposal of assets
that are no longer usable or have reached the end of their useful life. These allowances are deducted in
calculating taxable income to provide tax relief for the reduced value of the disposed assets.

The word scrap is generally taken to mean used up or discarded and no longer used by the taxpayer for
purposes of trade.

In a case where the asset has not been sold, the allowance can only be granted where the commissioner
is satisfied that the asset has become useless for business purposes or has been discarded with no intention
to use it again in the future.

When business organisations wind up operations, scrapping allowances will be allowed to the extent that
it does not exceed the recoupment arising from the business closure.

Example

In January 2021 a taxpayer acquired a lorry for ZWL$16 000 000 which was to be used for the purpose
of trade. The taxpayer elected to claim the maximum allowances available in terms of the 4th schedule.
In June 2022 the lorry was scrapped as it had been involved in an accident and was damaged beyond
repair. The taxpayer sold the scrap to a local garage for an amount of ZWL$2 000 000.

Required: Calculate the scrapping allowance available to the taxpayer.

Solution:
Since the taxpayer claimed the maximum available allowance the ITV on the date of scrapping is
calculated as follows:

Cost 16,000 000

Less SIA – 2021($16,000*25%) (4 000,000)

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 Acc W&T 2022($16,000*25%) (4 000,000)

Income Tax Value on date of scrapping 8 000,000

Therefore, scrapping allowance is calculated as follows: $

Proceeds 2 000,000
Less ITV (8 000,000)
Scrapping Allowance (6 000,000)

9.7 Recoupments Section 8 (1) (j)

Any accounting profit that may arise on sale or disposal of fixed assets is of capital nature and non-
taxable. It is replaced by recoupment, which is a tax profit on the sale of an asset for which capital
allowances were claimed in terms of section 15(2) (c). It is brought into gross income in terms of s 8 (1)
(j). It represents a recovery of capital allowances previously granted.

• Whenever taxpayer sells a fixed asset at above income tax value (ITV), it should compute
recoupment for inclusion in gross income
• Recoupment cannot exceed capital allowances previously claimed on the asset
• It is the difference between the selling price of the asset and its income tax value
• If selling price exceeds original cost, original cost is used as the selling price.
• For fixed assets with restricted qualifying costs such as. passenger motor vehicles (PMVs),
recoupment is computed as follows:

Recoup Deemed selling

= Less ITV
ment price

• Deemed selling price is computed as follows

Restricted
Recoup Actual selling
= x cost/Actual
ment price
cost
• Restricted cost is the cost qualifying for capital allowances i.e. ZWL$5,000,000(US$10,000) in
the case of a PMV

9.8 Recoupment for damaged asset

Recoupment may arise when a damage of an asset occurs and compensation is received from an insurer.
Relief is granted where such insurance proceeds are reinvested in similar property.

• Where a capital property is destroyed, the taxpayer is considered to have involuntarily disposed of
the property for income tax purposes.
• The insurance proceeds received for a destroyed capital property are treated as proceeds of
disposition of the property for the purposes of calculating recoupment and capital gain (in the case
of immovable property)
• Relief on recoupment is granted upon election if a taxpayer insurance proceeds are reinvested in
property of like nature subject the following conditions

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 ➢ It purchases or constructs or will purchase or construct, within a period of 18 months from the
date the asset was damaged or destroyed, a further asset of a like nature in replacement
thereof; and
➢ that such further asset has been or will be brought into use within a period of 3 years from the
date the aforesaid asset was damaged or destroyed;
• In the event the Commissioner is not satisfied that:
➢ Full amount recovered or recouped has been entirely spent on purchasing or constructing a
similar asset within 18 months, any unexpended amount will be included in the taxpayer's
gross income for the year in which the recovery occurred.; or
➢ A similar asset has not been put into use within 3 years, any remaining amount not previously
included in gross income will be added to the taxpayer's gross income for the year of the
original recovery.;
• Therefore, when proceeds are partially expended recoupment to be included in gross income will
be computed using the following formula:

A x B
-------------
C
A is the unexpended amount
B is the recoupment computed using the full compensation
C is the compensation received.

The following framework is used to calculate recoupments.

$
Proceeds XXX
Less ITV (XXX)
Potential Recoupment XXX
Actual Recoupment (Limited to capital allowances previously granted) XXX

Where an asset had its cost restricted for purposes of calculating allowances (e.g. passenger motor
vehicle), its selling price must also be restricted for purposes of calculating recoupment, as follows:

Example: Recoupments

A taxpayer purchased the following assets in the 2019 tax year, a passenger motor vehicle for US$15,000,
Machinery $40,000. During 2022-tax year he sold them for $9,000 and $30,000 respectively.

Required: To calculate his recoupment in the current. Assume SIA was claimed.

Solution:

Passenger motor Vehicle:

Deemed selling price US$10,000 x $9,000

$15,000
=$6,000

Recoupment
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 Deemed selling price =$6,000

Less ITV* ($2,500)

Potential recoupment $3,500

Allowances granted* =$7,500

Actual Recoupment =$3,500

*Allowances
2019 SIA ($10,000*25%) 2,500
2020 Accelerated W&T ($10,000*25%) 2,500
2021 Accelerated W&T ($10,000*25%) 2,500

NB: That prior to 1 January 2022 the deemed cost on PMV was $10,000 and the question is based on
the rules applying then.

Machinery: Recoupment $
Selling Price 30,000
Less ITV* (10,000)
Potential Recoupment 20,000
Allowances granted* 30,000
Actual Recoupment 20,000

*Allowances
Cost 40,000
Less: 2019 SIA (10,000)
2020 W&T (10,000)
2021 W&T (10,000) (30,000)
Income tax Value 10,000

Recoupment on damaged asset

Where recoupment arises on damage of an asset, and the sale proceeds are receivable through an
insurance policy, the whole amount will not be taxable provided the tax payer satisfies the commissioner
that:

Within a period of 18 months from the date of damage or destruction he has purchased or constructed
a similar asset thereof and that;
Such asset has been or will be brought into use within a period of 3 years from the date the original
asset was damaged or destroyed.

9.9 Transfer of Assets – 4th Schedule

Where assets are transferred between companies under the same control, or between husband and wife
or in a scheme of localisation if the taxpayer so elect, there shall be no recoupment in the hands of the
transferor.

The assets are deemed to be transferred at their income tax values hence no recoupment accrues.

9.9.1 Leases
A lease, a contract between a lessor and lessee, involves the hire of a specific asset. Typically, the
lessee pays a deposit, often termed a lease premium, at the beginning of the lease, followed by monthly
rental payments. Lease rentals are generally considered business expenses for the lessee when the
leased asset is utilised for trade purposes.

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A Lease Premium is a payment from a lessee to a lessor, representing a monetary consideration for the
right to use the lessor's property, such as a building, secret formula, trademarks, or machinery.

The table below looks at the tax treatment of the lease premium on both lessor and lessee.

Lessor – sec 8 (1) (d) Lessee – sec 15 2 (d)

A lease premium is gross income in • Where the leased asset is used for the purpose of trade a lease
the hands of the lessor in terms of premium is a business expense in the hands of the lessee.
sec 8 (1) (d) • Where the amount is paid in a particular year, the practice of
It is taxed in full in the year of the commissioner is to allow it as a business expense over
accrual or receipt and is never the period of the lease or 10 years whichever is shorter.
spread. • The commissioner does not, however, grant a deduction
where the leased property is used for private purposes.

9.9.2 Lease improvements

Lease improvements in the commercial sector often involve a lessee constructing a structure on a lessor's
premises. These structures, known as lease improvements, provide benefits to both the lessee and,
eventually, the lessor upon termination of the lease agreement. To qualify as lease improvements, the
structures must have a pre-agreed value between the lessor and lessee.

NB: difference between repairs and improvements.

The table below shows the tax treatment of lease improvements from a lessor and lessee perspective.

Lessor – sec 8 (1) (e) Lessee – sec 15 2 (e)

• The value of the obligatory improvements Option 1
constitutes gross income in his hands. • The lessee is allowed a deduction on the value
• It is taxable over the period of the lease or per agreement but this is spread over the
10 years whichever is the shorter, unexpired period of the lease or 10 years
commencing the date improvements were whichever is the lesser.
completed. • The period of construction and period where the
• Where the value is not stated in the property is not used for purposes of trade is
agreement the actual cost of the disregarded for purposes of computation of
improvements will be taxed in the lessor’s deduction.
hands. • The lessee is allowed a deduction from the date
• Where the initial lease period is renewed the property is first used for purposes of trade.
only the initial period of the lease is • Where the initial lease period is renewed only
considered the initial period of the lease is considered.
Option 2
Capital allowances serve as an alternative to section
15(2)(e) and can be elected by the taxpayer under
certain conditions:
When improvements are not part of the lease
obligation (voluntary improvements), the lessee can
claim Special Initial Allowance (SIA) and Wear and
Tear allowance.
The lessor will not be granted these allowances until
the property is rented out to another tenant, and rent
becomes receivable for the improvements.

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9.9.3 Summary points.

The leasehold improvement should satisfy the following conditions:

• should be paid for by the lessee (up front or over the remaining term of the lease)
▪ should be permanent in nature and affixed to the property
▪ should revert back to the lessor at the end of the lease
▪ should increase the future economic benefit of the leased asset
▪ there should be in place a lease agreement between lessee and its lessor
▪ there should be an obligation to effect improvements in terms of the lease
▪ there should be expenditure actually incurred in pursuance of such obligation
▪ lessee should use or occupy the land or building for purposes of its trade or in the production of
income
▪ Should constitute income to the lessor.
• value of lease improvements is the amount stipulated in the agreement as the value of the
improvements or as the amount to be expended on improvements
• If no amount is stipulated, value of improvements is the amount regarded as the fair and reasonable
value of the improvements (usually the cost of improvements).
• No variation of value of lease improvements, unless ratified prior to completion of construction.
• Improvements are disqualified if the actual cost is lower than the stipulated minimum cost set for the
improvement.
• If a lease agreement is cancelled, ceded or assigned, or the land or buildings on which the
improvements were affected is disposed or sold or the lessor is deceased or declared insolvent,
outstanding installment are taxed to lessor immediately.
• The initial lease period is used notwithstanding renewal or extension of lease term.
• If agreement is silent on lease term or is indefinite, 10 years should be used.

Characteristics of Leasehold Improvement

• Should be made to leased property;
• Should provide benefits that are long-term in nature
• Should become part of the landlord property.
• After the lease is terminated the improvements become the property of the landlord.
• Cannot be removed without damaging the structure or violating lease agreement.

Not lease improvements:

• Items that can be moved or taken out of the building when lease term expires
• Mobile buildings such as trailers or mobile homes.
• Repairs and Maintenance costs.
• Improvements of a temporary nature or those that are not affixed to the property
• Improvements that do not increase the economic benefit of the asset
• Improvements not in terms of the lease agreement - voluntary improvements.

Computation of allowance
• The lessee may deduct the expenditure actually incurred for lease improvements over the remaining
period of the lease, subject to certain limitations as follows:

Value of
improvements Outstandin
Allowan
= 120 months/ X g
ce
*unexpired lease months**
period in month

75
*The unexpired lease period is calculated from the date the improvements are first used by lessee for
purposes of its trade to the expiry date of the lease
**Outstanding months are calculated from the date improvements are first used by the lessee in its
trade until the last day of the year and are equal to 12months.

9.10 Leasing of passenger motor vehicles

The table below shows the tax treatment of the leasing of PMV in the hands of the lessor and lessee.

Lessor Lessee
Any vehicle purchased for leasing purposes is not restricted in cost, under both In the case of the
financial and operating leases. (Paragraph 14(2) (c) of 4th schedule). leasing of a
passenger motor
Under a financial lease (where lessor is not entitled to the re-turn of the asset vehicle, the
at the end of the lease period - i.e., option exists), the lessor can only claim deduction is
wear and tear on actual cost without restriction. SIA is not available under this restricted to a
option. maximum of
$1,300 000.
Under an operating lease (where lessor is entitled to the return of the asset at (Section 16(1) (k)
the end of lease period), SIA or wear and tear can be claimed, again on the of Income Tax
actual cost Act).

9.11 Personal assets brought into business

A taxpayer who brings into business a personal asset will be able to claim wear and tear on this asset
from the day that the asset is used for trade purposes.

However, the taxpayer has to deduct notional wear and tear from the initial purchase price of the asset
to determine the amount to be used for the purposes of claiming wear and tear.

9.12 Suspensive Sales and Credit Sales (Sect 17 & 18)

Under Section 17 and Section 18 of the Income Tax Act, amounts accruing under hire purchase and
credit sales agreements are taxed based on the full sale price, which is deemed to accrue on the date of
signing the sale agreement. This means taxpayers may be taxed on amounts not yet received. However,
deductions provided in these sections allow taxpayers to be taxed on profits related to amounts due and
payable in each tax year. A calculation of the profit related to outstanding amounts is made and
deducted, with the added amount being included back in gross income in the subsequent year for a
fresh calculation.

In the case of hire purchase sales (section 17) the allowance is calculated in accordance with the
following formula:

D*(E-F+G)
E

In which:

D=represents that portion of the amount accrued which is not due or receivable at the end of the current
accounting year (tax year).

E=represents the total amount accrued under the agreement

76
F=represents the cost of to the taxpayer of the property disposed of

G=represents that proportion of development and other charges which the Commissioner considers
applicable to such property.

Example

Alpha Electronics (Pvt) Ltd is a retail shop, selling televisions on credit to approved customers. Each
Television cost Alpha Electronics (Pvt) Ltd ZWL$400,000. The 50 television sets were bought in 2020.
You are given the following information for the year ended 31 December 2022.
20 sets sold in April 2020 at ZWL$600,000 each
16 sets sold in October 2020 at ZWL$600,000 each
14 sets sold in March 2021 at ZWL$600,000 each
The agreement terms stipulate that the customer must make a 25% deposit on the date of sale, with the
remaining amount payable over 20 months in equal instalments starting from the month following the
sale.

Required: Compute the taxpayer’s taxable income for each year during the credit period

Solution:

2020 2021 2022

Sales 21,600,000 8,400,000 -
Less Cost of sales (14,400,000) (5,600,000) -
Opening stock - 5,600,000 -
Purchases 20,000,000 - -
Less closing stock (5,600,000) - -
Gross Profit 7,200,000 2,800,000 -
Add s 17(1) Allowance b/f - 3,960,000 1,875,000
Less s17 (1) Allowance (w1) (3,960,000) (1,875,000) -
Taxable Income 3,240,000 4,885,000 1,875,000

Workings:

Monthly instalments/set: = ($600,000 – (25% x $600,000))

20

= $22,500

Allowance =Gross Profit x Debtors not yet due

Sales

Gross Profit ratio = $7,200,000/$21,600,000 X 100%

= 33 1/3%

Debtors’ schedule 2020 2021 2022

Balance b/f Nil 11,880,000 5,625,000
Sales 21,600,000 8,400,000 Nil
Less Receipts (9,720,000) (14,655,000) (5,625,000)
Deposit 5,400,000 2,100,000 -
Instalments
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20 sets 3,600,000 5,400,000 Nil
16 sets 720,000 4,320,000 2,160,000
14 sets Nil 2,835,000 3,465,000
Closing balance 11, 880,000 5,625,000 Nil
Section 17 Allowance* 3,960,000 1,875,000 Nil
NB: Once this is found it is applied throughout the period of credit unless there is a change in price
system

* The allowance is calculated by multiplying the closing balance with 33 1/3%.

78
 Chapter round up

• Capital expenditure is not deductible, but capital allowances are allowed on the expenditure.
• A commercial building is a building constructed on or after 1 April 1975 and is used to the extent of at
least 90% of its floor area for purposes of trade.
• An industrial building is a building used as a factory and loses value through the use of chemicals, and
must be used to the extent of at least 50% of its floor area for industrial purposes
• A staff house shall not include any residential unit whose cost exceeds US$187 500 000 or a building
constructed on or after 1 January 2024.
• The deemed cost for purposes of computing capital allowances on PMV is $75, 000 000.
• SIA is an elective allowance granted at the rate of 25% on cost over 4 years
• SIA is granted on constructed immovable assets and movable assets purchased by a taxpayer.
• Assets used by a taxpayer for less than 90% in his trade, acquired through inheritance or donation and
assets under a finance lease do not qualify for SIA.
• Wear & tear is granted on assets acquired or constructed where no SIA has been claimed
• The rates of W&T are 5% on cost of immovable assets, 2.5% on cost of a commercial building and
10% on movable assets based on a reducing balance method.
• Where the selling price of an asset is more than its original cost, recoupment is equal to capital
allowances previously claimed.

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 10. Introduction to Transfer Pricing

10.1 Introduction

Transfer pricing legislation, consisting of sections 98A and 98B of the Act, was implemented
on 1 January 2014, to address transactions not meeting the arm's length principle among
associates. These rules supplement the existing regulations under Section 23 and 24 of the Act,
offering a comprehensive framework for both domestic and international scenarios. The
legislation aims to prevent tax avoidance and includes provisions for Income splitting (Sect 98A)
and Transactions between Associates (Sect 98B).

Additionally, associated persons and deemed control of the company are defined in sections 2A
and 2B of the Act, while transfer pricing methods aligned with the OECD Transfer Pricing
Guidelines were adopted in 2016, effective from January 1, 2016.

Objectives At the end of this study unit students should be able to do the following:
• Define associated parties.
• Understand the arm’s length principle.
• Understand transactions that must satisfy the arm’s length principle.
• Understand the methods of transfer pricing.
• Apply the methods of transfer pricing to a transaction.

Act: Sect 2A
(if applicable) Sect 23
Sect 24
Sect 98A
Sect 98B ARW 35th Schedule
Regulations: Statutory Instrument 109 of 2019

Relevant Cases CF (Pvt) Ltd vs Zimra 18-HH-099

Nestle Zambia Trading Limited v Zambia Revenue Authority
2018/TAT/03/DT

10.2 Key Definitions:

Associates – Section 2A (when persons deemed to be associates)

10.2.1 ss1: General Rule

Associates are determined under Section 2A of the Act, particularly in Section 2A(1), which outlines a
general rule. If a person, excluding an employee, follows the directions, requests, suggestions, or wishes of
another person, regardless of their business relationship or whether the communication of such directions
is explicit, both persons are considered associates for the purposes of the Act.

10.2.2 ss2:

Without limiting the generality of subsection (1) above, the following shall be treated as a person’s
associate:

a near relative of the person, unless the Commissioner is satisfied that neither person acts in accordance
with the directions, requests, suggestions or wishes of the other.
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Near relatives are defined as (sect 2): a lineal ascendant of an individual, including a step-father or step-
mother; or a child or a lineal descendant of an individual other than a child; or a brother, half-brother, step-
brother, sister, half-sister, step-sister, uncle, aunt, nephew or niece of an individual; or the adopter or
adopters of an individual; or the spouse of a relative of an individual referred to in paragraphs (i) to (iv);

• a partner of the person, unless the Commissioner is satisfied that neither person acts in accordance with
the directions, requests, suggestions or wishes of the other.
• a partnership in which the person is a partner, if the person, either alone or together with 1 or more
associates, controls 50% or more of the rights to the partnership’s income or capital.
• the trustee of a trust under which the person, or an associate of the person, benefits or may benefit.
• a company which is controlled by the person, either alone or together with 1 or more associates;
• where the person is a partnership, a partner in the partnership who, either alone or together with 1 or
more associates, controls 50% or more of the rights to the partnership’s income or capital;
• where the person is the trustee of a trust, any other person who benefits or may benefit under the trust;
• where the person is a company— a person who, either alone or together with one or more associates,
controls the company; or another company which is controlled by a person referred to in subparagraph
(i), either alone or together with 1 or more associates.

10.2.3 Control - 2B when person deemed to control a company

A person shall be deemed to control a company if the person, either alone or together with 1 or more
associates or nominees –

• controls the majority of the voting rights attaching to all classes of shares in the company, whether
directly or through one or more interposed companies, partnerships or trusts; (Example if I hold 60%
of voting rights in Company A, then I am deemed to control company A) or

• Has any direct or indirect influence that, if exercised, results in him or her or his or her associates
or nominees factually controlling the company (Example if I have the right to appoint the majority
of the board of directors for Company A, then I may be deemed to control company A since I can
indirectly influence company A through my board appointees).

From the above definitions the use of the word person is being frequently referred to, therefore we need
to also define what is meant by persons in terms of the income tax act. Sect 2 defines person to include
a company, body of persons corporate or un-incorporate (not being a partnership), local or like
authority, deceased or insolvent estate and in relation to income, money or earnings held in a trust that
no individual has a legal right to receive.

10.2.4 Income splitting – sect 98A

Where an individual attempt to split income with an associate, the Commissioner may adjust the taxable
income of the taxpayer and the associate to prevent any reduction in tax payable as a result of the splitting
(tax avoidance).

A taxpayer is deemed to have attempted income splitting when:

1. The taxpayer transfers income, either directly or indirectly, to an associate.
2. The taxpayer transfers property, either directly or indirectly, to an associate, resulting in the
associate receiving or enjoying the income from that property.
3. The primary or main motive for the transfer is to reduce the tax liability on both the taxpayer and
the associate.
In assessing whether income splitting is attempted, the Commissioner will take into account any value
provided by the associate in exchange for the transfer of income or property.

81
Example

Company X and Company Y are associate companies as defined in section 2A of the Income Tax Act.
In July 2021 they entered into a transaction in which Company X transferred one of its rental earning
properties to Company Y. The decision was made when X’s management noted that they could reduce
their taxable income by transferring this property to Y since Y has been incurring significant losses over
the past 4 years. Discuss the implications of the above transaction with reference to the requirements of
sect 98A.

Solution

Given management’s intentions when they transferred the property to Company Y, the transactions
appear to be a tax avoidance scheme.

Therefore, we need to apply the requirements in section 98A to determine whether or not the transactions
resulted in income splitting.

Was a property transferred to an associate who now enjoys/receives the income from that property? – In
our case a rent earning property was transferred to company Y from company X, who are associate
companies, therefore this requirement has been made.

Was the reason for the transfer to lower the tax payable upon the incomes of the taxpayer and the
associate? – in this case the transfer will reduce the tax payable by company X and company Y since
they have been making losses will most likely not have any taxable income, therefore requirement met.

Therefore, since the transaction has resulted in income splitting, the Commissioner will have powers to
tax the rental income from the property in the hands of Company Y.

10.2.5 Transactions between associates – sect 98B

9.2.5.1 Introduction

Section 98B stipulates the requirements in respect of controlled transactions between associates with
the intention of addressing tax avoidance initiatives amongst tax payers. Therefore, for the rules in this
section to apply there are two main basic requirements that have to be met:

The transaction in question should be a controlled transaction as defined; and the transactions should
be affected between associates as defined.

Therefore, it becomes important to define what is meant by controlled transactions and associates.

9.2.5.2 Controlled Transactions:

Controlled transactions, as defined in the 35th schedule paragraph 1, are transactions that are not
considered uncontrolled transactions. Uncontrolled transactions involve dealings between independent
individuals. In this context, associated persons, as defined in Section 2A, are not considered independent.
Therefore, controlled transactions can include transactions between spouses, near relatives, and a person
and a company they control, among others. The term "associates" is explained in the Section 2A
discussion above.

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9.2.5.3 Section 98B Requirements in respect of controlled transactions between associate

98 B ss (1):

Section 98B(1) establishes that the taxable income for controlled transactions between associates must
adhere to the arm's length principle. This implies that the conditions of such transactions should be
comparable to those of uncontrolled transactions—transactions between independent parties under similar
circumstances.
To implement the arm's length principle effectively, it is crucial to identify comparable uncontrolled
transactions that can serve as benchmarks against the specific controlled transactions in question.

9.2.5.4 Comparability: 35th Schedule par 3

An uncontrolled transaction is considered comparable to a controlled transaction under two conditions:

1. No Material Differences: The transactions are considered comparable when there are no
substantial differences between them that could significantly impact the financial indicator being
evaluated under the relevant transfer pricing method.
2. Adjustments for Differences: Even if differences exist, the transactions can still be considered
comparable if a reasonably accurate adjustment can be made to the relevant financial indicator of
the uncontrolled transaction. This adjustment is made to eliminate the effects of differences,
ensuring a fair and accurate comparison.

Example

Company X is a subsidiary to Company Y and are therefore associated companies as defined in section
2B. Company X sold machinery to company Y for a sale price of $6,000. For the purpose of section 98B
this sale transaction would qualify to be a controlled transaction. A comparable transaction would
therefore be a sale of a similar type of machine between independent persons (uncontrolled
transaction). If the machine sold between the independent persons is not of the same age as the one sold
between company X and Y, then if a reasonable adjustment can be made to reflect the differences in the
ages of the machines it would then still qualify as a comparable transaction.

As per par 3(2) to determine whether 2 or more transactions are comparable, the following factors shall
be considered to the extent that they are economically relevant to the facts and circumstances of the
transactions—

• the characteristics of the property or services transferred; and the functions undertaken by each
person with respect to the transactions, taking into account assets used and risks assumed;
• and the contractual terms of the transactions (e.g, cash sale vs hire purchase sale); and the economic
circumstances in which the transactions take place (sale effected as part of liquidation proceedings
vs normal sale) and
• The business strategies pursued by each of the associated persons in relation to the transactions.

98B Par (2):

Section 98B(2) addresses controlled transactions between associated persons that do not adhere to an
arm's length basis, potentially leading to tax avoidance. In such cases, any income arising from the
transactions will be determined in accordance with the arm's length principle, as specified in paragraph
3 of the same section. This measure aims to prevent tax avoidance and ensure that taxable income is
assessed based on fair market values in controlled transactions.

98B Par (3):

83
The determination of whether the conditions of a controlled transaction between associated persons are
consistent with the arm’s length principle, and of the quantum of any tax payable under subsection (2),
are prescribed in the Thirty-Fifth Schedule.

35th Schedule Par 4: Transfer Pricing:

In terms of par 4 to the 35th schedule the arm’s length remuneration of a controlled transaction shall be
determined by applying the most appropriate transfer pricing method to circumstances of the case.

10.3 Transfer Pricing Methods (35th schedule par 4(5))

10.3.1 Comparable Uncontrolled Price Method

This method compares the price for property or services transferred in a controlled transaction to the
price charged for property or services transferred in a comparable uncontrolled transaction in comparable
circumstances.

10.3.2 Resale price method

The method is based on the price at which a product that has been purchased from an associated enterprise
is sold to an independent enterprise.

The resale price is reduced by the resale price margin.

What is left after subtracting the resale price margin can be regarded as an arm’s length price of the
original transfer of property between the associated enterprises, after adjustment for other costs
associated with the purchase of the product (e.g., custom duties).

Example

During the year of assessment Entity X purchased goods for a consideration of $1,500 for entity Y which
is an associated enterprise. Entity X then went to sale the goods to an independent entity for a sale
consideration of $1,700. Ordinarily Entity X earns a margin of 20% on all sales of these goods. Calculate
the transfer price for the goods purchased from entity Y, that should be used in calculating entity X’s
taxable income.

Solution: US$
Resale price 1,700
Less normal sales margin ($1,700 * 20%) (340)
Arm’s length price/transfer price 1,360

Therefore, when entity X is calculating their taxable income for the year, they should use a transfer price
of $1,360 in respect of goods purchased from entity

10.3.3 Cost Plus method

The Cost Plus method involves considering the costs incurred by the supplier of property or services
in a controlled transaction. An appropriate cost-plus mark-up is then added to these direct or indirect
costs to generate a suitable profit, considering the functions performed, assets used, risks assumed, and
market conditions. The resulting amount, after applying the cost-plus mark-up, is considered an arm's
length price for the original controlled transaction.

84
Example

During the 2021 year of assessment P ltd sold goods to S ltd an associated company for a sale
consideration of US$3,000. P ltd had originally bought these goods from an independent entity for a
purchase consideration of $2,700. Ordinarily for similar uncontrolled transactions P ltd charges a
mark-up of 25% on such sales of these goods. Calculate using the cost-plus method the transfer price
to be used for the sale transaction in determining P ltd.’s taxable income for the year.

Solution: US$

Purchase price 2,700

Add mark-up ($2,700 * 25%) 675
Transfer price 3,375

Therefore, P ltd should use a transfer price of US$3,375 in respect of the sales made to S ltd in
calculating their taxable income for the 2016 year of assessment.

10.3.4 Transactional net margin method

The method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets
etc.) that a taxpayer realises from a controlled transaction with the net profit margin relative to the
same base achieved in a comparable uncontrolled transaction.

Example

Associated Independent
parties parties
Sales price 1 200 1 320
Cost (1 000) (1 100)
Gross Profit 200 220
General Admin expenses (100) (120)
Net Profit 100 100

Required: Determine the arm’s length price that the associated parties will sell to each other

Net Profit 100 100

Net profit/sales 8.3% 7.5%

The issue to be determined is whether this net margin of the associated parties is consistent with the net
margin earned by independent parties performing comparable functions to the associated parties.

In this case using the profit indicator (PI) of Net profit/sales, the PI for independent parties in 7.5%
whilst that for connected parties is 8.3%.

This PI is too high so the selling price for associated parties should be adjusted upwards in order to get
a 7.5% PI.

10.3.5 The Transactional Profit Split Method

The transactional profit split method involves allocating to each associated person participating in a
controlled transaction a portion of the common profit or loss derived from that transaction. This

85
allocation is based on what an independent person would expect to earn from engaging in a comparable
uncontrolled transaction.

Illustration:

Entity 1 - Entity 2 -
Associated Associated Group
Sales Price 1 200 1 400 1 400
Cost (1 000) (1 200) (1 000)
GP 200 200 400

Entity 1 is the tested party. The question is whether Entity 1’s selling price of $1 200represents an
arm’s length price.

To determine the Group gross profit, use the selling price to 3rd parties which is $1 400 and the cost
(purchases) from 3rd parties which is $1 000. The GP is thus $400.

Entity 1 had costs to 3rd parties whilst Entity 2 did not have any costs to third parties. The profit will
therefore be allocated according to costs to 3rd parties as follows:

Entity 1 - Entity 2 - Group

Associated Associated
Sales Price 1 200 1 400 1 400
Cost (1 000) (1 200) (1 000)
GP 200 200 400
Cost/Total Cost 100% 0% 100%
Profit allocation based on cost allocation 400 0 400

The Selling price by Entity 1 should be adjusted upwards so as to give a GP of $400. Therefore, the
selling price is $1 400. This can be illustrated below:

Entity 1 - Entity 2 - Group

Associated Associated
Sales Price 1 400 1 400 1 400
Cost (1 000) (1 400) (1 000)
GP 400 0 400

The following criteria should be considered in identifying the most appropriate method:

• The respective strengths and weaknesses of the approved methods; and the appropriateness of an
approved method in view of the nature of the controlled transaction, determined in particular
through an analysis of the functions undertaken by each person in the controlled transaction,
taking into account assets used and risks assumed; and
• the availability of reliable information needed to apply the selected transfer pricing method or
other methods; and
• The degree of comparability between the controlled and uncontrolled transactions, including
the reliability of comparability adjustments, if any, that may be required to eliminate differences
between them.

Section 98B par 4:

86
The requirements in section 98B par 1 also applies where a person (whether or not an associated
person) who is resident in Zimbabwe engages in any transaction with a person resident outside
Zimbabwe in a jurisdiction considered by the Commissioner-General to provide a taxable benefit in
relation to that transaction.
This means that transfer pricing rules may also be applied to uncontrolled transactions where tax payer
resident in Zimbabwe transacts with a non-resident person and the commissioner is of the opinion that
the non-resident will earn a tax benefit from the transaction.

Sources of information on comparable uncontrolled transactions – 35th schedule par 7

• Internal uncontrolled transactions, which are uncontrolled transactions where one of the parties
to the controlled transaction is also a party to the uncontrolled transaction; and

• External uncontrolled transactions, which are uncontrolled transactions to which neither of the
parties to the controlled transaction is a party.

Services between associated enterprises – 35th schedule par 8

A service charge between a taxpayer and an associated person shall be considered consistent with the
arm’s length principle where –

• it is charged for a service that is actually rendered; and

• the service provides, or when rendered was expected to provide, the recipient with economic or
commercial value to enhance its commercial position; and
• it is charged for a service that an independent enterprise in comparable circumstances would
have been willing to pay for if performed for it by an independent enterprise, or would have
performed in-house for itself; and
• its amount corresponds to that which would have been agreed between independent enterprises
for comparable services in comparable circumstances.

A service charge made by an associated person is not consistent with the arm's length principle if it is
solely based on the shareholder's ownership interest in one or more other group members.

• This includes costs incurred or activities undertaken by the associated person related to the
juridical structure of the parent company.
• It also includes costs related to reporting requirements of the parent company, including the
consolidation of reports.
• Additionally, costs or activities related to raising funds for the acquisition of participations are
not consistent with the arm's length principle. However, an exception is made if those
participations are directly or indirectly acquired by the first-mentioned person, and the
acquisition benefits or is expected to benefit that first-mentioned person.

87
 Chapter round up

• A transfer price is the price charged in transactions between firms that are related.
• Transfer pricing is harmful because it can result in profit shifting, which result in lower taxes being
paid.
• An arm’s length transaction is a transaction which is entered into between a willing buyer and
willing seller and not constrained by the relationship between the parties
• Transactions made between a company and its division or branch are tax neutral
• There are five methods of establishing transactions at arm’s length:
▪ Controlled uncontrolled price method
▪ Resale price method
▪ Cost plus method
▪ Transaction net margin method
▪ Profit splitting method

88
PART D

TAXATION OF SPECIAL TAXPAYERS

89
 11. Taxation of partnership

11.1 Introduction

A partnership is a business operation between two or more parties who share liabilities, profits and
management responsibilities in accordance with a partnership agreement. It is not legally recognised as a
separate entity, and taxation is assessed individually for each partner. The partnership is deemed a resident
of Zimbabwe if any partner is a resident during the tax year. Income from services provided by a partner
is considered sourced within Zimbabwe if services are rendered in the country. Partners are not treated as
employees, and standard employment rules do not apply to them.

Objectives • Distinguish taxation of partners from companies.

• State how personal items of partner paid by the partnership are treated for income
tax purposes
• Explain how a partnership is taxed.
• Compute the taxable income for each partner following a change in the profit-
sharing ratio.
• Compute the taxable income for each partner following a change in the
membership of the partnership.
• Describe the loss relief claims that are available to partners.

Act: Sect 10(2)

(if applicable) Sect 37(15)

Regulations: None
Relevant Cases None

11.2 Basis of assessment

The assessment of a partner's taxable income begins with calculating the partnership's joint taxable
income. After determining the partnership's profits for a given period, these profits are distributed among
partners based on their agreed profit-sharing arrangements. Expenditure paid by the partnership for or on
behalf of a partner is treated separately, considering the partner as a third party in other contracts with the
partnership.

Expenditure Treatment In The Hands Of

The
Partnership Respective Partner
1) Partner’s salary Allowable Taxable
2) Joint life policies Not allowable Taxable
3) Partner’s life policy – partnership is the Not allowable Not taxable
beneficiary
4) Partner’s life policy – partner is the Allowable Taxable
beneficiary
5) Partner’s life policy – ceded to the Not allowable Not taxable
partnership
6) Partners interest on Capital Allowable Taxable

90
 7) Drawings Not allowable Not taxable
8) Interest on drawings Taxable Non deductible

9. Rents payable to a partner Allowable Taxable

10) Sports subscriptions Allowable Taxable
11) Other Club subscriptions Allowable Not Taxable if
substantially patronised
by
12) Medical aid contributions Allowable Taxable. Grant credit
13) Ex- gratia payments to former partner Allowable up to ZWL$100,000
or dependant thereof who has resigned per former partner and
Tax the full amount
from the partnership because of ill-health, ZWL$100,000 per dependent (s)
infirmity or old age of one former partner.
14) Partner’s private use of a motor vehicle Allowable Taxable
15) Retirement annuity fund contributions Allowable Taxable and, Allow
deduction up

Pension, NSSA or RAF contributions Deductible Non-deductible and non-

up to $1,500,000 p.a. taxable.

Example

Alan, Betty and Charles are partners in a partnership. Alan has an annual salary of $60,000 and annual
school fees of $10,000 for his son drawn from the partnership. Betty drew an annual salary of $20,000
from the partnership. The 3 partners share the balance of profits and losses equally. The partnership made
a net loss of $60,000 in the current tax year after adjusting for all of the above items.

Compute taxable income for each partner.

SOLUTION
Ratio share of partnership income other incomes Total
Allan 1/3 (20,000) 70,000 50,000
Betty 1/3 (20,000) 20,000 nil
Charles 1/3 (20,000) (20,000)

11.3 Changes in membership

In a partnership, changes in membership require the apportionment and sharing of profits or losses based
on the applicable ratios before and after the change.
NB: Partners will still be required to prepare the accounts for a full year up to the last day of the accounting
period. Only in a case of a death of a partner should accounts be prepared in order to ascertain the results
of the partnership operations for the period from the last accounting date to the date of the death of a
partner.

11.4 Assets co-owned

Assets co-owned by partners are not owned by the partnership itself, and capital and scrapping allowances
are divided among partners according to their sharing ratio.

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 11.5 Goodwill

Goodwill, considered capital in nature, has no tax effect on the seller or buyer, except when used in a
profit-making scheme or sold to remaining partners.

11.6 Trade convention and mission

Trade conventions and missions follow similar rules to other taxpayers, with each partner entitled to one
deductible trade convention or mission, up to a maximum of US$2,500.

11.7 Bad debts

Bad debts in a partnership are subject to conditions similar to general rules under s15 (2) (g) of the Act.
An incoming partner cannot claim bad debts arising before joining, and if a partner leaves, the remaining
partners cannot claim the full allowance for debts that were never due to them.

11.8 Subscriptions

Subscriptions paid for a partner by the partnership are deductible to the partnership and taxable to the
partner, who can deduct the same subscriptions if dual usage is established for business and private
purposes.

11.9 Interest on money borrowed by partner.

Interest on money borrowed by a partner for purchasing or on-lending to the partnership is a deductible
expense for the partner. However, interest on drawings from the partnership is not deductible, despite
being taxable in the partnership's hands.

11.10 Passage benefit

The cost of a partner's business trip is deductible to the partnership, even if the partner takes a holiday
afterward. If the partnership covers the cost of a holiday for a partner, the amount is taxable to the partner
and deductible to the partnership.

11.11 Returns and assessment

Partners must submit a joint tax return for partnership income, accompanied by a financial report. Each
partner is individually liable for rendering the joint return, taxed on their share of partnership profit or
loss.

11.12 Assessed loss

Assessed losses are deductible and carried forward at a partner level, with a six-year limit. A partner
cannot carry forward assessed losses if declared insolvent or their property assigned for the benefit of
creditors.

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 Chapter round up

• Although a partnership is not regarded as a separate taxable entity its income is first determined on
the basis that it is a separate taxable person, then shared amongst partners.
• The partners are responsible for paying tax on partnership income.
• When there is a change in membership of the partnership, profits or losses must be apportioned and
shared according to the ratio applying before and after the change.
• Assessed loss is deductible and carried forward at a partner level, subject to a six-year limit.

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 12. Taxation of Farmers

12.1 Introduction
Farming refers to operation of activities that are pastoral or agricultural in nature including hunting or
racehorses breeding, leasing of grazing lands or letting of a farm for any of these purposes. However,
farming as a hobby, for own consumption and for only selling surplus does not constitute ‘farming’
business.

Objectives • Compute tax liability of farmers

• State how farming trading stock is treated for income tax purposes
• Valuation of livestock
• Apply standard values to the valuation of stock.
• Recognise the special deductions available to farmers.
• Compute farming taxable income.
• Understand how relief for farming losses is given.
Act: Sect 8 (1) (h) of the ITA
(if applicable) Sect 15 (2) (z) ARW 7th Schedule of the ITA

Regulations: None
Relevant Cases None

12.2 Livestock trading stock

Livestock trading stock is gross income in terms of s 8 (1) (h) of the ITA. It can be classified into stud
and ordinary livestock. A stud is an animal kept for breeding purposes. An ordinary livestock is an animal
born on the farm or purchased other than for breeding purposes. Farm trading stock includes livestock.

12.3 Valuation of stock in trade

The livestock of a farmer is valued as follows:

• Ordinary livestock is valued using fixed standard value of the livestock or the cost and maintenance
value of the livestock whichever method a farmer elects in his first return of income in which that
class of livestock is included.

• Stud livestock is valued using the purchase price value of each animal or the fixed standard value of
the livestock, whichever method a farmer elects in his first return of income in which that class of
livestock is included.

The valuation is done per each class of livestock e.g., for cows, heifers, oxen, tollies, bulls and calves.
Once a farmer elects or fixes a valuation method and the value for a particular class of livestock is
approved by the Commissioner, it becomes binding and irrevocable. He must obtain the consent or
approval of the Commissioner to change the method. If he ceases to carry on farming operations and
recommences at a later date, he is entitled to make a fresh election of the valuation methods.

94
 12.4 Definition of the methods
Method Description
Cost and maintenance Comprised of cost of breeding the livestock and maintaining it in the year of
value assessment and any preceding year of assessment. It is rarely used.
Fixed standard value Value fixed by the farmer with the approval of the Commissioner. In the case
of a class of stud livestock of a farmer, where the cost price of an animal to the
farmer was less than ZWL$75,000, the standard value fixed shall be the price
fixed by the farmer. If the cost of the animal in that class was ZWL$75,000 or
more, the farmer can elect to use the fixed standard value or ZWL$75,000
Purchase price value Is the cost of the animal for an animal acquired at a price less than
ZWL$75,000 and for animal acquired at price above ZWL$75,000, the farmer
can elect to use the cost price or ZWL$75,000

Example

Lion farm has 42 heifers, 20 oxen and 4 bulls. Bulls were bought for $130 each. The FSVs for each animal
by class are: heifer $130, ox $110 and bull $170.

Compute Lion Farm ‘s trading stock (valuation of trading stock).

ANSWER

Heifers 42 x $130 = 5,460

Oxen 20 x $110 = 2,200
Bulls 4 x $170 = 680
Total 8,340

12.4.1 Livestock reconciliation

Livestock reconciliation is necessary because animals move to higher grades during the tax year due to
natural progression, e.g. calves grow to become heifers or tollies, heifers become cows and tollies grow
to become oxen etc.

Example

Calculate the closing trading stock for Mr. Baraza a farmer in Mahusekwa. He had 4 bulls, 10 cows, 14
oxen, 13 calves and 9 tollies at the beginning of the assessment year. During the year, 7 calves were born,
3 calves became heifers and 1 of them became a tollies, 3 tollies became oxen and 5 cows were sold. Mr.
Baraza purchased 10 cows and 7 heifers.

ANSWER

Details Bulls Cows Heifers Tollies Oxen Calves Total

Opening stock 4 10 9 14 13 50
Purchases 10 7 17
Births 7 7
Promotions in 3 1 3 7
Sales -5 -5
Promotions out -3 -4 -7
Total 4 15 10 7 17 16 69

12.4.2 Valuation of farm trading stock

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 Type of stock Date of Ordinary livestock Stud livestock Crops
Valuation (T/p to elect) (T/p to elect)

Closing stock Last day of tax FSV PPV Fair & reasonable
year CMV FSV
Consumed by taxpayer Date of such Fair & Fair & Fair & reasonable
or put to own use Use Reasonable Reasonable
to other use.
Stock on hand: Date of such FSV PPV Fair & reasonable
On date of death, Happening CMV FSV
insolvency
or donation
Attached by court order End of tax FSV PPV Fair & reasonable
year CMV FSV
Sold with Business or Date sold Selling price Selling price Selling price
Pursuance of court order

12.5 Special deduction of farmers- s15 (2) (z) ARW with para 2 of 7thSch

A farmer gets 100% deduction of expenditure incurred by him during the year of assessment in
connection with farming operations:

• Works for the prevention of soil erosion, i.e., planting of trees, contour ridging, etc.
• Any water conservation works and contributions towards such works done by another person.
• The stumping and clearing of land for farming purposes.
• The sinking of boreholes and wells, but borehole equipment (pipes and pumps) is granted capital
allowances.
• Aerial and geophysical surveys.
• Fencing used in farming operations.

The following points are important:

• Fence must be erected by the farmer or by any other person whose cost is recoverable from the
farmer in terms of the Fencing Act and must be used in farming operations.
• On the other hand, water conservation work means any reservoir, weir, dam or embankment
constructed for the impounding of water.
• The full deduction precludes deduction of capital allowances.
• The expenditure is not deductible if the item was acquired together with the farm, whether by way
of purchase, inheritance or donation.
• The works need not be completed; deduction is made of cost incurred in that year.

12.6 Enforced sale of livestock

Livestock sale or disposal due to stress of drought, epidemic disease or compulsory acquisition of the
farm is taxed favourable. Upon election, the famer can spread the income from such sales over three
years in equal instalments commencing in the year of sale. Such election is irrevocable.

The enforced sale taxable income is computed as follows:

Livestock enforced sales xxx

Purchases [number sold x FSV] xxx
Direct livestock expenses xxx (xxx)
Enforced sale taxable income xxx

Direct livestock expenses are expenses directly identifiable with the keeping of livestock, e.g. livestock
expenses, dipping fees, stock feeds, herd men wages, etc.

Direct expenses are computed as follows:

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Direct expenses = Number of Enforced sales x Total farm direct expenses
Average stock (number)

Average stock is the total of opening stock and closing stock divided by 2.

Example

Nelson sold 25 oxen and 10 cows for $40,000 due to drought. His FSV for each oxen and cow were
$130 and $150 respectively. Opening and closing stocks of the herd were 260 and 210 respectively. The
direct livestock expenses were $4,500.

Compute Nelson’s yearly minimum taxable income.

SOLUTION

Epidemic sales 40,000

Cows: 10 at $150 1,500
Oxen: 25 at $130 3,250
Direct expenses 670 5,420
Enforced sales taxable income 34,580

Yearly minimum taxable income = $34,580/3 = $11,527

Direct expenses = 35 x $4,500 = $670

-----------------
(260 + 210)/2

A farmer whose enforced sale taxable income exceeds his other farm taxable income can upon election
spread his total income over 3 years in equal instalment.

12.7 Restocking allowance

Para 6 of 7th Schedule allows farmers an additional deduction of 50% of the purchase price of every
animal he purchases in order to restocking his herd, subject to the assessed carrying capacity of the land
(ACCL). The formula for computing this allowance is as follows:

AxB
-------------
2C
*
A is the cost of livestock purchased for restocking purposes
B is the difference between ACCL and stock on hand before restocking
C is the number of livestock purchased for restocking purposes

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 Chapter round up

• Farmers are subject to the ordinary taxation regime except that they are entitled to special reliefs
specified under the 7th Schedule of the Income Tax Act:
• Stud livestock are valued using PPV or FSV, whichever a farmer elects ordinary livestock at CMV or
FSV, whichever a farmer elects.
• Enforced sale income shall be taxable over three years in equal instalments upon election.
• Other farm income can also be taxed over 3 years, provided that such other income does not exceed
enforced sale taxable income. An election must also be made.
• A farmer shall be granted a restocking allowance of 50% of the purchase price of every animal purchased
for purposes of restocking the herd subject to the assessed carrying capacity of the land.
• A farmer is allowed to deduct in full any expenditure incurred by him during the tax year on:
- works for the prevention of soil erosion
- any water conservation works and contributions towards such works done by another person
- stumping and clearing of land for farming purposes
- sinking of boreholes and wells
- aerial and geophysical surveys
- Fencing used in farming operations.

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 13. Mining taxation

13.1 Introduction

A miner claims capital redemption allowance in place of capital allowances (SIA and wear & tear), lease
premium, lease improvements and preproduction expenditure. Its recoupment is not limited to
allowances previously granted and is permitted to carry forward its assessed losses indefinitely.
Deductions and incomes of mining are ring fenced against set off with non-mining income or vice versa.

Objectives • Distinguish mining operations from other operations

• Distinguish between a mineral from non-minerals products
• Compute tax liability of miners
• Use different methods to compute capital redemption allowances
Act: Sect 2 of the ITA
(if applicable) Sect 15 (1) (c) of the ITA
Sect 15 (2) (f) of the ITA
5th Schedule of the ITA
Regulations: None
Relevant Cases D Bank v ZIMRA [2015] HHC 135

13.2 Mining operations

Mining operations means:

(a) Any operations for the purpose of winning a mineral from the earth; and
(b) Any operations for the purpose of winning a mineral from any substance or constituent of the earth
which are carried on in conjunction with operations in paragraph (a) by the person carrying on those
operations; and
(c) Any operations for the purpose of winning a mineral from any substance or constituent of the earth
which are not carried on in conjunction with operations referred to in paragraph (a) or by a person
carrying on those operations as the CG may determine to be mining operations”.

13.2.1 Definition of a mineral

A mineral is defined in s2 of the ITA as “Any valuable crystalline or earthly substance which was
deposited on earth by natural agencies. Excludes substances such as sand, stone, rocks, (e.g. granite),
gravel, clay (other than fire-clay), soil, petroleum, etc. or such other substances extracted by a method of
surface working, e.g. quarrying”.

13.2.2 Mining capital expenditure

Capital expenditure means expenditure incurred in relation to mining operations on buildings, residential
buildings, staff welfare facilities, works, equipment, land, shaft sinking, including premium paid for the
use of buildings, works, equipment or land etc provided that:

• Employees staff houses are not restricted

• Teachers or nurses’ houses at a mine school, clinic or hospital are restricted to ZWL$25,000,000 per
unit
• Any building used as a school or clinic or hospital etc in connection with mining operations is
restricted to ZWL$25,000,000. NB: A school must be used by at least 50% of mine pupils, whilst a
clinic, hospital etc should be used by at least 50% of persons employed at a mine and their families.

99
• Any building used mainly as a dwelling by one or more individuals who control the company, in the
case of a mine owned, tribute or leased by a company which is controlled by not more than four
shareholders or directors is restricted to ZWL$5,000,000.
• Preproduction expenditure is treated as capital expenditure when production commences. NB: This
is expenditure on mine development, general administration and management (including interest and
other charges or loans utilised for mining purposes, salaries and wages etc) incurred prior to
commencement of production or during a period of non-production.
• Passenger motor vehicle is restricted to ZWL$5,000,000.
• Expenditure on computer software is treated as mining capital expenditure effective 1 January 2020

13.3 Estimate of life of mine

The following are the maximum lives of the mines:

Type of mine Life estimate

Iron mine 5 years

Lead or zinc mine 10 years
Any other mine 20 years

Life of a mine is computed from the beginning of the tax year and revised annually, but its revision does
not affect CRA computed in any of the previous years.

13.4 Methods for computation capital redemption allowance (CRA)

Method Description -

New Mine • A new mine is a mine which commenced production on or after 1 April 1968,
basis including a mine which was closed down or which changed ownership and
subsequently reopened on or after 1 April 1968.
• Method may be elected in the first in which production commences on a new
mine.
• CRA is equal to Current capital expenditure (CCE) + unredeemed balance of
capital expenditure (UBCE) brought forward.
• Recoupment (RE) is included in gross income separately
• Thus 100% of capital expenditure is claimed as CRA
Life of • The method applies to owners of mines (individuals or companies).
mine basis • Capital expenditure incurred prior to production and the current capital
expenditure is aggregated, the total is then divided by the life of the mine.
• Therefore, CRA is equal to (UBCE –RE + CCE) /LOM
• The remaining balance after claiming CRA constitutes UBCE to be used in the
computation of CRA in the following year.
• A company which is not the owner of the mine, can claim an allowance as fixed
by the CG as considered to be fair and reasonable such as wear & tear.
• An individual who is the owner can alternatively claim an allowance considered
by the Commissioner as fair and reasonable.
• An individual who is not the owner of the mine can claim an allowance considered
by the CG as fair and reasonable.
Mixed • Accumulated capital expenditure brought forward from previous year is spread
basis over the assessed life of the mine, whilst current capital expenditure is claimed in
full.
• Therefore, CRA is equal to (UBCE – RE) /LOM + CCE
• The method is used only where a taxpayer has made an election for it.

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13.4.1 Recoupment
Miner's recoupment, as defined in s8(1)(i), equals the proceeds from disposing of a capital asset. It's set
off against unredeemed capital expenditure, and any excess over current and unredeemed expenditure is
added to gross income. The new mine method incorporates recoupment directly into gross income. For
items with cost restrictions (e.g., PMVs, schools, hospitals), recoupment equals the deemed selling price,
calculated as restricted cost divided by actual cost, multiplied by the actual selling price.

13.4.2 Prospecting or exploration

Prospecting or exploration expenditure is fully deductible in the year incurred or can be carried forward
and offset against mining income in subsequent years. This is expenditure incurred by a miner in searching
for potential claims or in searching for minerals after a claim has been pegged e.g. expenditure on
trenches, surveys, boreholes, test pits, preliminary samples and other prospecting and exploratory works
undertaken for the purpose of acquiring rights to mine minerals in Zimbabwe or incurred on a mining
location in Zimbabwe.

13.4.3 Assessed losses.

Mining losses can be carried forward indefinitely. They cannot be offset against income of other
businesses or vice-versa.

13.4.4 Replacement allowance

Replacement allowance allows a deduction for the cost of a single replacement or renewal of buildings,
works, or equipment, limited to ZWL$5,000,000. If used as a dwelling by shareholders/directors, the
deduction is restricted to US$12,000, provided the mine is controlled by not more than 4 shareholders or
directors.

Recoupment from an asset subject to replacement election is limited to previously granted allowances.
13.4.5 Independent mining locations
Independent mining locations, as per s15(1)(c) of the ITA, undergo separate assessments despite common
ownership. This mandates the ring-fencing of each location's income, preventing claims from other
locations' expenses or losses. A taxpayer with multiple mining sites must maintain distinct profit and loss
statements for each.
However, CRA can be claimed between inseparable or substantially interdependent mine locations.

Mine locations are deemed inseparable or substantially interdependent if both or all of the mining
locations are held by the same taxpayer and the minerals produced at the locations should be part of an
integrated process of beneficiation under the control of the same taxpayer.

Income from mining operations is also ring fenced against claims from trade and investment activities or
vice versa.

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 Chapter round up

• Mining operations are subject to tax on the same basis as other operations except that miners are
entitled to claim capital redemption allowances in lieu of capital allowances, lease premiums, lease
improvements and pre-productions expenditure.
• Other differences arise from the fact that miners are allowed to carry forward their assessed losses
indefinitely whereas other operators have a six-year limit.
• Mining recoupment is not restricted to capital allowances previously claimed, but equal sale
proceeds.
• CRA is claimed by a miner in lieu of capital allowances, lease premiums, lease improvements and
pre-productions expenditure.
• Expenditure on building used mainly as dwelling by one or more individuals who control the
company is restricted to $5,000,000 per unit.
• Expenditure in respect of any building used mainly as a dwelling by staff employed at the school,
hospital, nursing home or clinic is restricted to $25,000,000 per unit.
• Expenditure in respect of a school, a hospital, a nursing home or a clinic is restricted to $5,000,000
• CRA can be computed using the new mine method, life of mine method or the mixed method.
• Maximum life of an iron mine is 5 years, 10 years for a lead or a zinc mine and 20 years others.
• A single replacement or renewal of building, works or equipment which together with its accessories
does not exceed $5,000,000 is deductible in full, provided an election is made.
• CRA, assessed losses or expenditure is deducted under the mine location to which it relates
• Assessed losses from mining operations do not expire but are subject to ring fencing.

102
PART E

WITHHOLDING TAXES

103
 14. Withholding Taxes

14.1 Introduction

Withholding taxes facilitate the early collection of taxes by deducting them at the source. This method
ensures efficient tax collection from a smaller number of payers. Non-residents without a business
presence in Zimbabwe often have taxes withheld at the source, with the paying entity remitting the
withheld tax to tax authorities (ZIMRA). Some instances may treat the withheld tax as final, exempting
the income from further taxation. The withholding taxes discussed here are governed by the Income
Tax Act.

Objectives: Identify the various types of withholding taxes.

Determine the withholding taxes which are a final tax.
To clarify when withholding taxes is applicable, how it is determined and
when it is payable to Zimra.
Act: Income Tax Act:
(if applicable)
Sect 80
Sect 26 ARW 9TH Schedule

Sect 28 ARW 15TH Schedule

Sect 30 ARW 17TH Schedule

Sect 31 ARW 18TH Schedule

Sect 32 ARW 19TH Schedule

Sect 34 ARW 21ST Schedule

Sect 36J ARW 32ND Schedule

Regulations: Double Taxation Agreements- See Appendix

Relevant case law M Coy (Pvt) Ltd vs Zimra 16-HH-661

G Bank Zimbabwe Ltd vs ZIMRA S15-HH-207
ZIMASCO (Pvt) Ltd vs. CG of the Zimbabwe Revenue Authority 16-HH-149
Barclays bank of Zimbabwe Ltd vs Zimra, HH162-2004
SW (Pvt) Ltd vs Zimra HH499-19

14.2 General
All withholding taxes, except Non-Resident Shareholders’ Tax, must be remitted to ZIMRA by the
10th of the month following the withholding or payment to the payee. A REV 5 form should be filed
with ZIMRA, reaching them by the 10th of the subsequent month.
Non-Resident Shareholders’ Tax is due within 30 days of dividend distribution. Penalties of up to 100%
of unpaid tax can be imposed, with interest at 25% per month or part thereof for unpaid tax. A delayed
REV 5 may incur a civil penalty of $300 per day up to 91 days, beyond which the public officer may
face prosecution. Below we discuss the various types of withholding taxes in detail.

For withholding tax, an amount is deemed paid when credited to the payee's account or dealt with in a
way fulfilling the conditions of entitlement. (Barclays bank of Zimbabwe Ltd vs Zimra, HH162-2004).

104
Foreign exchange control approval is not necessary for payment. (SW (Pvt) Ltd vs Zimra HH499-19)

Payment can be by way of cash, payment in kind, inter-company debits or credits, barter, setoff or other
settlement of obligation whatsoever and in any form.

14.2.1 Contract Payments- Sect 80

A 30% withholding tax applies to payments exceeding ZWL$500,000 (US$1,000) annually to residents
for contracts, unless a valid tax clearance certificate (ITF263) is provided by the payee. Finance Act no
3 of 2019 exclude the following from the definition of payee (i.e., 1 January 2020):
➢ non-resident persons subject to non-resident tax on fees, remittances and royalties,
➢ a non-resident broadcaster or e-commerce operator,
➢ non-executive director for purposes of withholding tax on fees only
➢ persons making any delivery of grain to the Grain Marketing Board
➢ Small-scale gold miner delivering gold to Fidelity Printers and Refiners (Private) Limited.

NB: Deliveries to Grain Marketing Board without producing tax clearance for the period 1 August
2013 to 31 December 2019 has been condoned. The effect is that such deliveries are exempt from 30%
withholding tax, but taxes already withheld are non-refundable. The WHT exemption threshold for
delivery of grain to GMB is set at US$5,000.

Withholding tax is not deductible for non-payees, and they are not required to produce tax clearance
certificates for payment.

Exemptions from 30% withholding tax

➢ Payments made to employees
➢ A sale effected in any shop in the ordinary course of the business of such shop, or any other
consumer contract for the sale or supply of goods or services or both in which the seller or supplier
is dealing in the course of business and the purchaser or user is not.
➢ Contracts for the purchase of auction or contract on tobacco in terms of which tobacco levy may
be required to be withheld.
➢ Tax payments and any delict claim against the State.
➢ Payment of taxes to Zimra.
➢ Payments to non-resident persons in respect of fees, royalties and remittances.

14.3 Resident and Non-Resident Shareholders Tax: Sec 26 & 28

The following should be withheld from dividends paid to non-resident shareholders and resident
individuals, Partnerships and Trusts.

Dividend from Listed Companies 10%

Dividend from all other companies 15%

NB: Corporate income tax and withholding tax do not apply on dividends payable by a company to
another company.

14.3.1 Non-Residents Tax on Fees – Sect 30 and 17THSchedule

Non-residents tax on fees are levied in terms of section 30 A.R.W the 17 TH Schedule of the Income
Tax Act. In terms of the 17TH schedule par 2(1), any payer of fees to a non-resident person must
withhold non-residents' tax on fees and pay the amount withheld to the Commissioner within 10 days
of payment or within an extended time if allowed by the Commissioner. The withholding tax rate is
15%.

Two crucial terms triggering the non-resident tax on fees requirement are defined as follows:

105
Non-resident person’ - Refers to a person, other than a company, a partnership, or foreign company,
not ordinarily resident in Zimbabwe. This definition is met whenever a resident taxpayer in Zimbabwe
makes payments to a foreign resident entity or individual.
Fees - means any amount from a source within Zimbabwe payable in respect of any services of a
technical, managerial, administrative or consultative nature………. The scope of services covered
is broad, including those of a technical, managerial, administrative, or consultative nature (M Coy (Pvt)
Ltd vs Zimra 16-HH-661)

The term fees does not include any such amount payable in respect of
• services rendered to an individual unconnected with his business affairs; or
• services rendered by any person in his capacity as an employee, other than a director, of the
payer; or
• education or technical training; or
• the repair of goods outside Zimbabwe; or
• any project which is specified for the purposes of this subparagraph by the Minister by notice
in a statutory instrument.
• services rendered to a licensed investor in respect of his operations in a designated Special
Economic Zone;
• Payment of fees payable to non-executive directors who are non-resident;
• export market services rendered by an agent of a company that exports goods from Zimbabwe:
Provided, however, that the fees payable to the agent must not exceed 5% of the “free on-board
value” (as that phrase is defined in the Customs and Excise Act [Chapter 23:02]) of the exports
of the company for the year of assessment concerned, as confirmed on acquaintance by the
company of the export documentation relating to its exports in that year;

Therefore, let’s apply the above definition to the following examples of payments that may be made to
non-resident persons/entities.

Service Comment
Student registration fees paid to a This is education related and is specifically excluded from
foreign university or body e.g., the definition of fees, therefore does not attract the non-
Wits University, ACCA resident tax on fees.
Annual license fees – e.g., payment The service is in connection with the right of use rather than
for pastel accounting package technical in nature therefore does not meet the definition of
license fees. fees hence no withholding tax on fees levied but is subject
withholding tax on royalties.
Management fees paid to a foreign Managerial fees paid to a connected entity therefore subject
parent company. to the withholding tax.
Payment for repair of machinery in Specifically excluded therefore not subject to the
South Africa withholding tax.

14.4 Source of fees

Schedule 17 of the Act only imposes withholding taxes on fees deemed to be from a source within
Zimbabwe. Fees are deemed to be from a source within Zimbabwe if the payer is a resident and the
payee is a non-resident (ZIMASCO (Pvt) Ltd vs. CG of the Zimbabwe Revenue Authority 16-HH-149).
Where the services are rendered is immaterial.

14.5 Double Taxation Agreement (DTA)

Fees payable to residents of countries with tax treaties with Zimbabwe are subject to reduced rates with
the relevant DTA. E.g. South Africa DTA stipulates a tax rate of 5%, while Germany's DTA specifies
7.5% etc (see appendix for details). Treaty shopping is not permissible i.e., resident of a 3rd party trying
to get access to a DTA where their country is not a party to the DTA.

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 Example

X Ltd. a bank based in South Africa and with operations in Zimbabwe paid an amount of US$5,000 for
technical consultancy services incurred in South Africa for the benefit of its Zimbabwean operations.
X ltd. Paid for the services from its cash balances in Zimbabwe to a supplier in South Africa.
From the above since X Ltd. made a payment to a South African supplier in respect of allocable
expenditure, X will have to withhold $250 (5% * US$5,000) in respect of the payment.

There is no reduced rate for management, fee or administration expenditure which are deemed
excessive in terms of section 16 (1) (r) of the Act.

14.6 Non-Resident Tax on Remittances – Sect 31 and 18TH schedule

According to the 18th schedule, any non-resident person making a remittance related to allocable
expenditure must pay non-residents’ tax on remittances to the Commissioner within 10 days of the
remittance date or within a further time allowed by the Commissioner. The withholding tax rate for
such remittances is 15%.

Allocable expenditure: means expenditure of a technical, managerial, administrative or consultative

nature incurred outside Zimbabwe by a non-resident person in connection with or allocable to the
carrying on of any trade within Zimbabwe.
NB: Remittances usually apply to branches, subsidiaries, permanent establishments and companies
with related parties outside Zimbabwe.

From the above definitions the following requirements have to be met for a non-resident tax on
remittances be payable to ZIMRA:

Requirement Explanation
What expenditure is being Technical, managerial, administrative consultative in nature. E.g.,
paid for? management fees, training on the use of software.

Where was the expenditure For the withholding tax to apply the expenditure above should have
incurred? been incurred outside Zimbabwe, for the benefit of the taxpayers
Zimbabwe operations.

Who paid for the The expenditures would have to be paid by a non-resident person
expenditures? for the withholding tax to apply. Refer to the X Ltd. example above.
non-resident person” means a person who, or partnership which, is
not ordinarily resident in Zimbabwe, but does not include a licensed
investor;
Was a remittance in A remittance in connection with the expenditure should have been
connection with expenditure made and remittance is defined as “the transfer of any amount from
made? Zimbabwe to another country”.

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 14.7 Non-Resident tax on royalties – sect 31 and 19th schedule
Non-residents tax on royalties are levied in terms of section 31 (a.r.w. the 19th Schedule) of the Income
Tax Act. In terms of the 19th schedule par 2(1), every payer of royalties to a non-resident person must
withhold non-residents’ tax on royalties and pay the amount withheld to the Commissioner within 10
days of the payment date or within a further time allowed by the Commissioner.. The withholding tax
rate is 15%.

To determine which payments are subject to this tax, two key terms should be considered:
Non-resident person; means a person, other than a company, who; or a partnership or foreign company
which; is not ordinarily resident in Zimbabwe. This definition aligns with the one under non-resident
tax on fees.

Royalties
This includes any amount from a source within Zimbabwe payable as consideration for the use of, or
the right to use, any intellectual property, such as literary, dramatic, musical, artistic, scientific, or other
works with copyright, patented articles, trademarks, designs, models, plans, secret formulas or
processes, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial, or scientific experience. The key requirement is that
the payment should be for the right to use intellectual property to meet the definition of a royalty.

We will now apply the above definitions to the services for which ICAZ is making payments to non-
resident persons:

Service Comment
Student registration The taxpayer will not be paying for the right of use but rather their students
fees paid to a foreign will receive tuition services from the foreign university. Therefore, does not
university. trigger the non-resident tax on royalties.
LTS – Access fee for The taxpayer will be paying for the right of use of the LTS system over
a software for which a patent or copy right exists. Therefore, the taxpayer should withhold
students. a non-resident tax on royalties on payments to LTS.
Information Kinetics The taxpayer will be paying for the right of use of retainer fee for. A
–Monthly software that allows them to keep a database of consultants for a database
software. of members and students. Since the taxpayer is paying that serves both
member and for a right of use it therefore meets the definition of a student’s
royalty payment and thus subject to non-resident tax on royalties.

The taxpayer will therefore be required to withhold the non-resident tax on

royalties at a rate of 15% for each payment made on the qualifying services.

14.8 Resident Tax on Interest: Sec 34 & 21st schedule

15% should be withheld from interest paid by a financial institution (e.g., banks, building societies, the
Reserve Bank and other financial institutions (including unit trust managers, asset managers)) on loans
and deposits and income from Treasury Bills, Bankers Acceptances and instruments traded by financial
institutions.

5% should be withheld from interest on fixed term deposits for at least 90 days.

Please note that the withholding tax deducted will be a final tax on the gross income which is exempt
from regular Income tax. Exemption from Resident Tax on interest will apply on a deposit with a tenure
of a least 12 months.

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 14.9 Non-Executive Directors Fees: sec 36 J

A withholding tax rate of 20% is applied to payments made to both resident and non-resident non-
executive directors who are not subject to PAYE. The fees earned by non-executive directors are
considered business income, and the tax withheld is deductible from their income tax liabilities. Non-
executive directors were exempted from paying income tax on their fees starting from January 1, 2020.
As a result, the 20% withholding tax on directors' fees acts as a final tax, and directors no longer require
tax clearance to receive fees without incurring a 30% withholding tax.

14.10 Foreign currency of payment of taxes

• Although SI142 of 2019 prohibited the use of foreign currency in domestic transactions, there are
exceptions for the payment of certain taxes in foreign currency, such as employment tax, VAT, and
mineral royalties. However, specific withholding taxes, as of February 23, 2019, must be settled in
Zimbabwean dollars: Non-resident shareholder’s tax
• Resident shareholder’s tax
• Resident tax on interest
• Non-resident tax on fees
• Non-resident tax on remittances
• Non-resident tax on royalties
• Tobacco levy
• Automated financial institution tax
• Intermediated money transfer tax (IMTT)
• Property Insurance tax
• Tax on non-executive director’s fees

Example

Takunda is a non-executive director for H Ltd and during October 2022 he was in receipt of
ZWL$2,300,000 in respect of his board fees for the quarter ended 30 June 2022. Discuss the tax
implications of the payment to Takunda.

H ltd will be required to withhold ZWL$460,000 (20% of the ZWL$2 300 000) paid to Takunda since
the amount qualifies as a non -executive director’s fees and they should remit the amount within 10days
of making the payment to Takunda.

14.11 Intermediated Money Transfer Tax (IMTT) - s36G ARW 30th

Sch.
IMTT is levied on each transaction involving the transfer of money, excluding cheque transactions.
Financial institutions like banks, building societies, and mobile money service providers, among others,
are responsible for deducting this tax from transactions and remitting it to ZIMRA by the 10th day of
the following month. The tax rate was revised from 5 cents to 2 cents per every dollar transacted,
effective from 13 October 2018, with subsequent amendments through Finance Acts.
As of the Finance Act of 2021, the minimum transfer value not subject to IMTT increased from
ZWL$300 to ZWL$500. The Finance Act of 2022 introduced a maximum tax payable per transaction
by corporates, set at ZWL$165,000,000. For such transactions, a flat IMTT of ZWL$3,300,000 is
charged. Additionally, transactions in foreign currency with a value below US$5 remain tax-free, while
transactions above US$500,000 incur a flat IMTT of US$10,000. These amendments aim to regulate
and streamline the application of IMTT in various transaction scenarios.

The Act further provides for following transactions to be exempt from IMTT:
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1. the transfer of money for the purchase or sale of marketable securities.
2. the transfer of money for the purchase or redemption of money market instruments;
3. the transfer of money on payment of remuneration;
4. the transfer of money to or from the Zimra for the payment or refund of any tax, duty or other
charges;
5. the intra-corporate transfer of money, that is to say, transfer of money between the treasury account
and any trading account held in the name of the same company;
6. the transfer of money from (but not into) specified trust accounts;
7. the transfer of money into and from nostro foreign currency accounts;
8. the transfer of money by Government from the Consolidated Revenue Fund or from funds
established in terms of section 18 of the Public Finance Management Act [Chapter 22:19] (No. 11
of 2009);
9. the transfer of money to any pension fund or to beneficiaries of such a fund;
10. the transfer of money for the procurement, production or sale (wholesale or retail) of a petroleum
product by a petroleum company licensed in terms of Part VI of the Petroleum Act [Chapter 13:22]
(No. 11 of 2006)
11. the transfer of money between an individual’s mobile wallet account and his or her bank account;
the transfer of money from a medical aid society registered in terms of the Medical Services Act
to a medical service provider in settlement of a claim for services rendered by that provider;
12. the transfer of money in the form of insurance premiums— (i) by insurance brokers to insurance
companies; and (ii) by insurance companies to reinsures, retrocessionanaires and asset managers
registered in terms of the Asset Management Act [Chapter 24:26] (No. 16 of 2004);
13. the transfer of money to producers, sellers or exporters of minerals by the Minerals Marketing
Corporation of Zimbabwe pursuant to the Minerals Marketing Corporation Act [Chapter 21:04];
14. the transfer of money to producers or sellers of gold by Fidelity Printers and Refiners (Private)
Limited;
15. the transfer of money to a successor company of the Zimbabwe Electricity Supply Authority
(referred to in section 75 of the Electricity Act [Chapter 3:09]) from a trust fund credited with
prepayments for electricity made by a mobile banking service provider;
16. the transfer of money by travel agents to airlines on the purchase and administration of air tickets;
the transfer of money involving a transaction other than one mentioned in the foregoing
paragraphs, if the value of transaction is ten United States dollars or below”.
17. Transfer of money to purchase tobacco
18. Transfer of funds for the purchase of auction or contract tobacco from buyers or contractors to
auction floors. Effective 29th of March 2019
19. Transfer of funds by contractors and auction floors to growers of tobacco for deliveries of tobacco.
Effective 29th of March 2019
20. Transfer of funds to buyers to enable them to purchase cotton or cotton seed from growers or
contracted growers. Effective 29th of March 2019
21. Transfer of funds by buyers to purchase cotton or cotton seed from growers or contracted growers.
Effective 29th of March 2019
22. Social transfers by any organisation of body designated as a “development partner” as gazetted the
Privileges and Immunities Act. A “social transfer” means “social assistance in the form of money
paid to those living in poverty or in danger of falling into poverty”. This appears effective from 1
January 2020.
23. Transfer of money from the African Export-Import Bank (“Afreximbank”) established by the Bank
Agreement. Bank Agreement” means “the Agreement for the Establishment of the African Export-
Import Bank (“Afreximbank”) signed in Abidjan, Ivory Coast, by African States and certain
International Organisations on the 8th of May, 1993”. This is with effect from 13th of October 2018
24. Transfer of foreign currency awarded to any bidder on the Foreign Currency Auction System
operated by the RBZ to the foreign currency account of any authorised dealer
25. Transfer of Zimbabwe dollars by an authorised dealer to the RBZ in settlement of foreign currency
awarded to any bidder on the Foreign Currency Auction System operated by the Reserve Bank of
Zimbabwe
26. Transfer of foreign currency by authorised dealers in settlement of international obligations for the
importation of goods and services
27. Transfer of foreign currency by traders to the RBZ for sale on the Foreign Currency Auction
System operated by the RBZ
28. Transfer of Zimbabwe dollars by the RBZ to traders or authorised dealers as settlement of foreign
currency sold on the Foreign Currency Auction System operated by the RBZ
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29. Transfer of money from a Nostro foreign currency account in the name of a person exempted in
terms of the Privileges and Immunities Act [Chapter 3:03]
30. Transfer of the levy chargeable in terms of s53 of the Manpower Planning and Development Act
[Chapter 28:02];
31. Transfer of money if the value of transaction of not more than ZWL$500 (US$5).
32. The transfer of funds from the Carbon Tax Sinking Fund account, to which a portion of the carbon
tax revenues are dedicated in repayment of investors in the one hundred million United States dollar
bond underwritten by Afrexim bank to finance road building, irrigation works and health
infrastructure.

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 Chapter round up

• Resident Shareholder Tax applies on dividend distributed to a person other than to a resident
company at the rate of 15% (10% if the paying company is listed).
• Dividend paid by resident company to another company is exempt from RST and income tax.
• Non-resident shareholder’s tax applies at the rate of 15% (10% if the paying company is listed) on
dividend paid to a non-resident shareholder.
• 15% NRTF applies on fees paid to non-resident providers of technical, consultative, managerial or
administrative services.
• 30% withholding tax on contract applies on payment to local suppliers not in possession of
tax clearance.

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 PART F

VALUE ADDED TAX

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 15. Value Added Tax

15.1 Introduction

VAT is an indirect tax levied on the consumption of goods and services. Registered operators
charge VAT at each stage of the supply chain, from manufacturers to retailers. These operators
can claim refunds or deductions for the input tax incurred on their purchases. VAT applies
broadly to all goods and services, with specific exemptions outlined in the VAT Act. The tax
is designed to focus on transactions rather than the entities involved, and the ultimate burden
is borne by the final consumer.

Objectives At the end of this study unit students should be able to do the following:
• Key definitions in the VAT Act
• Relevant Legislation
• Application of the VAT formula
• Describe the time of supply general rules
• Identify deemed supplies
• Apply the value of supply general rules
• Identify zero rated and exempt supplies
• Calculation of VAT on imported goods and services
• VAT Adjustments
• VAT Withholding Tax
Act: VAT Act Chapter [23:12]

Relevant Cases AT International Ltd vs the Commissioner Zimra (15-HH-823)

CSARS vs Marshall NO (816/215) [216] ZASCA 158)
Law Society of Zimbabwe vs Zimra HH-409-18
S Pvt Ltd vs Zimra
RTCC vs CSARS (Case No: VAT 345)
T (Pvt) Ltd vs CG of Zimra (15-HH-285)
XO Africa Safaris vs CSARS (395/15) [216] ZASCA 160)
PIL (Pvt) Ltd vs Zimra and the CG of Zimra (HH-213-17)
Zimra vs Packers International Ltd (6-HH-316)
MC Ltd vs the Zimra (16-HH-634)
(Claremont Library Development Company (PTY) Ltd vs SARS (Case No: VAT1247)

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 Goods/services
15.2 HOW VAT WORKS?
Trade

Registration
status

Supply of goods and

When does a services - Section
VAT Supply of goods
Liability arise? and services
Imported goods –
At what rate? Section

Deemed Supply
Time of Supply Imported services
of goods
- Section 6(1) (c)
and services
Section 7
Value of Supply
Output tax
adjustments - Goods sold through
Section 17 an auction - Section

VAT
PAYABLE
or
REFUNDA
BLE Vat
Act Chapter Where we charged? Registration
23:12 status of supplier
Section 16 (1)

Do we want to use the

Supply must be standard
When do we claim supply to make taxable
rated
VAT? supplies? Section 16(1)
Sections 15 and 16
Is the supply prohibited
Supplier has met
from claiming a
relevant section 6 or
reduction? Section
section 7 requirements
16(2)

Input Tax Adjustments

Section 17

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 15.3 Key Definitions/Interpretations
Understanding the operational aspects of the VAT Act requires familiarity with key terms defined
within the legislation. When encountering these terms in later sections, interpretation should align with
the following definitions:

Term Interpretation
Ancillary transport
Services Means: cargo inspection services, preparation of customs documentation
and storage of transported goods or goods to be transported.
Association not for
Gain Means:
1. any religious institution of a public character (e.g., Roman Catholic
Church); or
2. any other society, association, organisation or educational
institution of a public character, whether incorporated or not, which:
➢ is not carried out for the purposes of profit or gain to any
➢ proprietor, member or shareholder;
➢ any property or income is utilised for the furtherance of its aims and
objects;
Examples of associations not for gain would include: Government schools;
Mission Schools and hospitals

Means any asset, or any component of any asset, which is of a character

subject to a deduction of expenditures incurred as provided in terms of
Capital goods paragraphs (c) and (f) of subsection (2) of section 15 of the Income Tax
Act;
Examples include:
a) Commercial buildings;
b) Farm improvements;
c) Machinery and utensils;
d) Capital expenditures as defined in the 5th schedule of the Income Tax
Act.

Connected persons The following are considered to be connected persons for the purposes of
the VAT Act:
a. Near Relatives (refer to interpretation of near relatives in the
Income Tax Act);
b. A trust and its beneficiaries;
c. A partnership and its members;
d. A company and a shareholder with more than 5% equity interest

Donated goods or Means goods or services which are donated to an association not for gain
services and are intended for use in the carrying on or carrying out of the purposes
of that association e.g., goods donated to a church organisation. Therefore,
if Company A transfers goods for no consideration to a natural person. This
transfer will not be a donation as defined.
Fixed Property a. Land and improvements on the land; and
b. Shares which give beneficial rights in immovable property;

A supply made by a non-resident supplier to a recipient who is a resident of

Zimbabwe and these services are consumed or utilised in Zimbabwe.
Therefore, from the above key requirements for a supply to constitute an
imported service are as follows:
➢ Supply made by a non-resident supplier;
➢ Consumed by a resident recipient; and
Imported Services ➢ Consumed or utilised in Zimbabwe
Goods Means corporeal movable things, fixed property but excluding Money; and
Right under a mortgage

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Invoice Means a document notifying an obligation to make payment
Trade Any activity carried on continuously by any person in or partly in
Zimbabwe and in which goods or services are supplied for a consideration,
whether or not for a profit:
Excludes:
➢ Hobbies
➢ Employment
➢ Activities of a local authority;
➢ Supplies to an independent branch outside Zimbabwe
Selling price for the supply, i.e., Value plus VAT. A monetary value is
Consideration usually attached but it also includes barter trade. It does not include a
deposit for future supply of goods/services. (S (Pvt) Limited vs Zimra-
Barter constitutes a consideration.)
Entertainment Provision of any food, beverages, accommodation, entertainment,
amusement, recreation or hospitality of any kind by a registered operator to
anyone in connection with his trade.
Examples:
Lunch for employees
Water dispenser in the MD’s office
Price goods/services will generally fetch if supplies to any person in an arm’s
Open Market value length deal.
If such goods/services are not on the market, the value of any similar
goods/service will be used or the Commissioner will attach a fair and
reasonable value.
Financial service
Means • any service provided by a banking institution registered or required to be
registered in terms of the Banking Act [Chapter 24:20]; or
• any service provided by a building society registered or required to be
registered in terms of the Building Societies Act [Chapter24:02]; or
• the provision of any deposit, loan or credit, including the provision of
any guarantee, indemnity, security or bond in respect of the performance
of obligations related to a deposit, loan or credit; (for example if Entity X
sells goods on credit and charges interest for the credit, then Entity X
would have provided a financial service to the extent of the interest
charged) or
• the issue or transfer of ownership of any share in a company or interest in
a private business corporation; or
• services rendered by an insurer registered in terms of the Insurance Act
[Chapter 24:07];
• the services of an actuary, insurance agent, insurance broker as defined in
the Insurance Act [Chapter 24:07] or fund administrator as defined in the
Pension and Provident Funds Act [Chapter 24:09], to the extent that those
services are rendered to or on behalf of an insurer registered in terms of the
Insurance Act [Chapter 24:07] or to or on behalf of a pension fund
registered in terms of the Pension and Provident Funds Act [Chapter
24:09]
means any agreement entered into on or after the fixed date whereby any
goods consisting of corporeal movable goods or of any machinery or plant,
whether movable or immovable are supplied under a sale under which—
• the goods are sold by the seller to the purchaser against payment
Instalment credit • by the purchaser to the seller of a stated or determinable sum of money at
Agreement a stated or determinable future date or in whole or in part in instalments
over a period in the future; and
• such sum of money includes finance charges stipulated in the agreement
of sale; and
• the aggregate of the amounts payable by the purchaser to the seller under
such agreement exceeds the cash value of the supply; and the—
➢A purchaser does not become the owner of those goods merely by virtue
of the delivery to or the use, possession or enjoyment by him thereof; or
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 ➢B seller is entitled to the return of those goods if the purchaser
• fails to comply with any term of that agreement; or

Rental Agreement means any agreement entered into before, on or after the fixed date
for the letting of goods, other than a lease referred to in paragraph (b)
of the definition of “instalment credit agreement” in this section or a
“financial lease” as defined in the repealed Act;
Exported
in relation to any movable goods supplied by any registered operator
under a sale or an instalment credit agreement, means—
a) consigned or delivered by the registered operator to the recipient at
an address in an export country as evidenced by documentary proof
acceptable to the Commissioner; or
b) delivered by the registered operator to the owner or charterer of any
foreign-going aircraft when such aircraft is going to a destination in an
export country and such goods are for use or consumption in such aircraft;
or
c) removed from Zimbabwe by the recipient, who is a resident of
Zimbabwe, for conveyance to an export country in accordance with an export
incentive scheme approved by the Minister;
d) removed from Zimbabwe by the recipient, who is not a resident of
Zimbabwe, for conveyance to an export country, subject to such conditions
as may be set by the Commissioner by notice in a statutory instrument;
Person includes any public authority, local authority, company or body of persons,
whether corporate or unincorporated, the estate of any deceased or insolvent
person and any trust fund;
includes all forms of supply, irrespective of where the supply is effected, and
Supply any derivative of “supply” shall be construed accordingly;

15.4 Key words in the VAT Act

“Means” and “includes”

• "Means" is exhaustive, providing the only accepted meaning.
• "Includes" broadens the scope, allowing for additional interpretations within certain contexts.

“Notwithstanding anything…”
• Indicates that the section or subsection must be interpreted as if the rest of the act is excluded.
• Often used in contradiction to the spirit of the Act, superseding prior provisions.

“Shall” and “may”

• "Shall" implies a duty or mandate, usually imperative.
• "May" is permissive but can be construed as imperative if legislative intent suggests.

“And” and “or”

• "And" links multiple conditions, requiring all to be met.
• "Or" provides options between conditions, with the law applying if any are met.

15.5 Relevant Legislation

Value Added Tax Act [Chapter 23:12]

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 Item Legislation
Interpretations of the Act Section 2
Charging of VAT Section 6
Deemed Supplies Section 7
Zero-rated supplies Section 10
Exempt Supplies Section 11
VAT on imported services Section 13
VAT Adjustments Section 17
Value of Supply Section 9
Time of Supply Rules Section 8
VAT on fringe benefits Section 17(3)

15.6 Practicality of VAT

Value Added Tax (VAT) is levied on consumption, and its practicality revolves around the following
principles:

1. Consumer-Driven Tax:
• VAT is triggered when a taxpayer makes purchases or consumes goods and services
unlike other taxes, it directly correlates with consumption activities.
2. Legislative Framework:
• The VAT Act (Chapter 23:12) became effective on 1 January 2004, replacing the older
sales tax.
3. Registered Operators:
• Ordinarily, only registered operators are authorised to charge output VAT on their
supplies and can claim input VAT on their purchases.

A fishery sells 10 kg The wholesaler sells The retailer sells to

to a wholesaler. the 10kg to a retailer. John Zifunzi
$ 25.00 (exc VAT) $35.00 (exc VAT) $50,00 (exc VAT)
$3,75 (VAT) $5.25(VAT) $7.50(VAT)
$28.75 (Selling price) $40.25 (Selling price) $57.50 (Selling Price)
Vat paid before - $0 Vat Paid before – Vat paid before

$3.75 $5.25
Total VAT
Net VAT Net VAT Net VAT Collected

$2.25
$3.75 $1.50 $2.25

VAT is collected at the three stages where value is added i.e., from fishery to wholesaler, from
wholesaler to retailer and from retailer to consumer. The total of the net VAT collected at every point
of the value addition stages is ultimately borne by the final consumer of the goods i.e., $7.50.

NB: Throughout this chapter the rate of VAT used in all worked examples and illustrations,
irrespective of the year attributable to the transaction is the rate applicable from 1 January 2023
(15%).

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 15.7 Calculation of VAT
VAT Payable / (Refundable) = Output Tax – Input Tax

15.8 General Operational Aspects of VAT

Understanding the operational aspects of Value Added Tax (VAT) is essential for businesses. Here are
key considerations:

1. Determining VAT Applicability (Sections 6, 12, and 13):

• Identify supplies that attract VAT (section 6 (1), section 12, and section 13).
• Note deemed supplies under sections 7 and 17.
2. Classification of Supplies (Sections 10 and 11):
• Classify supplies into standard-rated (15%), zero-rated (section 10), or exempt (section 11).
3. Determining the Value of Standard-Rated Supplies (Section 9):
• Ascertain the value of standard-rated supplies based on open market value, cost, or prescribed
values.
4. Time of Supply Determination (Section 8):
• Understand the rules defining the time of supply for registered operators.

15.9 When should VAT be charged, or output tax arise? – Section 6

15.9.1 Supply of Goods or Services - Section 6 (1) (a)

In terms of section 6 (1) (a) of the VAT Act, VAT is charged on the value of goods or services supplied
by a registered operator in the course of trade.

NB: Section 6(1) (a) shall not apply to the supply of second-hand motor vehicles that are subject to
a special excise duty.

15.9.2 Goods and Services

In the context of VAT, it's important to note key exclusions in the definitions of goods and services:

❖ Money Exclusion - Money, including employee allowances and cash donations, is excluded from the
definitions of goods and services.
❖ Distinction Between Goods and Services - Goods are distinct from services, and certain items can
be considered both goods and services, leading to simultaneous supply occurrences.

Exam Tip!!!

Supply – Normally it is not difficult to establish whether there is a supply as defined but it is the absence
of a supply that is usually examined. Also, in some cases supply is difficult to establish clearly and so the
Act provides for deeming such supplies to be supplies per section 7 of the VAT Act.

Example 1

X lends an interest free loan of $10,000 to Y, repayable in 2 months' time. What has X supplied? Is it
money or credit? X has not supplied money as they will get it back. So, there is no supply of money. X
however has supplied credit, and this is a service as defined.
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 Example 2

X gives Y $10,000 for Y to use as she pleases. Now there is a supply of money only and no credit

Example

A person may transport firewood from a bush on behalf of clients who would have gathered the firewood.
He may end up gathering and transporting the firewood to the clients’ community centre and therefore
will be offering a firewood service. Since firewood qualifies for the definition of goods, the firewood itself
shall not be a service.

15.9.3 Trade

Key aspects of trade are:

❖ The regular activity, in Zimbabwe or partly in Zimbabwe; and
❖ To supply goods or services; and
❖ For a consideration; and
❖ Whether or not for a profit.

Trade excludes: hobbies, supply to a foreign independent branch, rendering of service by an employee
to employer and the supply of exempt supplies.

15.9.4 Deemed Supplies – Sect 7

Deemed supplies are those that, by their nature, may not appear to be supplies but are considered as such
by the VAT Act when made in the furtherance of a trade.

Deemed Supply Explanation

Sale in execution of Where goods which have been acquired or produced by a person, are sold in
debt –s 7(1) execution of a debt owing by him.

Example:
Entity X borrowed funds from Bank Z and has been failing to pay back the
borrowed amounts. Through a Court order bank Z attached property
belonging to Entity X and went on to sell this property in order to recover
their monies owed. In this case Entity X would be deemed to have sold their
property even though they did not actually receive the money from the sale.

Cessation of trade by a
registered operator – s The registered operator has to account for output tax on the value of assets
7 (2) on hand at the time he ceases to be a registered operator. However, no output
tax is accounted for in respect of assets where input tax was originally
denied in terms of section 16 (2).
Example:
Y limited, a registered operator ceased its trading operations on the 30th of
June 2019 and at that time had the following assets at hand:
➢ Stove used in the staff canteen;
➢ Furniture and equipment;
➢ Standard rated trading stock (all initially bought from registered
operators)
On cessation of trade Y limited will be expected to account for VAT on the
assets as follows:
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 ➢ Stove – No output VAT since Y limited would have been denied to
claim input tax on acquisition of the stove (refer to sect 16(2))
➢ Furniture and equipment – Account for output VAT since these are
taxable supplies.
➢ Trading stock – account for output VAT.

Time of supply: a day prior to de-registration.

Value of supply: The lesser of cost or open market value.

If goods are sold to a customer with an option to return the goods to the
Door to door sales with supplier within a defined period of time, the supply will be deemed to only
an option to return have been made on expiry of the period to exercise option to return.
goods – s 7(3) Example:
Company A sold goods to its clients with an option that customers could
return the goods before the expiry of 15 days from date of sale. Discuss

VAT implications of these transactions:

1. If customers return the goods within the stipulated 15 days, Company A
would be deemed not to have made any sales to these customers.
2. If the customers do not exercise the option to return the goods, the goods
are deemed to have been supplied on expiry of the 15 days.

The goods sold on lay bye shall only be deemed to be a supply only when
they are finally delivered to the purchaser.
Lay bye agreement
of consideration not Time of supply: time the goods are delivered to the purchaser.
less than $250 –s 7(4) Value of supply: Consideration less VAT

The disposal of a trade as a going concern, or a part thereof which is capable

Supply of a business as of separate operation, shall be deemed to be a supply of goods made in the
a going concern – 7(6) course of trade.

Indemnity payment Where a registered operator receives an indemnity payment contract of

under a contract of insurance in the furtherance of trade, it shall be deemed to be a supply
insurance. s7(7) except:
• Where the indemnification is in respect of a motor vehicle or
• The registered operator was denied or was not able to claim input
tax in respect of the initial acquisition of the indemnified assets
Transfer of goods to an
independent branch – If a registered operator transfers goods or services to an independent branch
s7(8) in the furtherance of trade, the registered operator shall be deemed to have
made a supply to that branch and shall account for output VAT.

Goods repossessed –
s7(9)
This applies where a registered operator purchases taxable goods on credit
which are later on repossessed due to failure to pay back the credit
advanced. On repossession of the goods the registered operator is deemed
to have made a supply and shall account for output VAT.
Time of supply: The date of repossession
Value of supply: Balance of cash value not recovered

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 Betting services – Registered operators in the business of providing betting services shall be
s7(11) deemed to have made a supply in respect of all bets made with them.
Time of supply: The date the bet is made.
Value of supply: Amount received in respect of the bet.

15.9.5 Time of Supply – Sect 8

The time of supply rules dictate when a taxpayer should account for output tax on a taxable supply. The
general rule is the earlier of issuing an invoice or receiving payment. Amendments in the Finance No.3
Act of 2018 expanded the definition of "time of supply" to consider the nature of goods. For movable
goods, it's the time of removal; for immovable goods, it's when the recipient gets ownership. For
services, it's when the service is performed.

Time of supply with respect to imported services effective from 1 January 2024 shall be deemed to take
place at the earlier of: the time an invoice is issued by the supplier or the recipient in respect of that
supply; or the time any payment of consideration is received by the supplier in respect of that supply; or
the time the service is performed.

Generally; the time of supply is determined by the scenario that unfolds first of any of the options
provided.

15.10 Value of Supply – Sect 9

❖ Where consideration is in money, the value is the consideration less VAT.
❖ Where consideration is not in money, the open market value becomes the value of supply.

15.10.1 Special Supplies

Items Explanation
Goods supplied under rental Time of supply - 8(3a): Where payment is made in
agreements instalments the time of supply shall be deemed to take place
when a payment becomes due or when received whichever
is earlier.
Instalment credit agreements Time of supply – 8(3c): time of supply is the earlier of the
goods being delivered or the signing of the agreement.
Sales to connected persons claim input tax and amount paid where input tax is
claimable
Goods applied to own use The value of the supply is the open market value of the
goods.

15.10.2 Zero Rated Supplies – Sect 10

These are taxable supplies that attract a VAT rate of 0% and examples are:
• Exports
• Goods supplied to repair goods temporarily imported into Zimbabwe.
• Goods supplied under instalment credit agreement and are utilised in an export country.
• Goods supplied under a rental agreement if paid from an export country
• Supply of business as a going concern
• Drugs as prescribed in the Medicines and Allied Substances Control Act
• Transportation of goods or passengers to and from an export country (international carriage)
• Transportation of goods and passengers transiting Zimbabwe
• Gold supplied to the Reserve Bank or any other registered banks
• Agricultural inputs supplied to farmers e.g., animal feeds, fertiliser, pesticides, and seeds.
• Building bricks i.e., common bricks
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 • Basic commodities e.g., plain bread, cooking oil, milk, etc.
• Cognisance to note is that zero rated supplies have been reduced to section 10 items only as per
the new Finance Act No.13 of 2023 .

15.10.3 Exempt Supplies – Sect 11

These are supplies that are not subject to VAT. Suppliers of exclusively exempt supplies are not required
to register for VAT. Examples are:

• Financial services (other commission paid to brokers or agents by short term insurer)
• Educational services
• Supplies by an association not for gain of goods where such goods were manufactured using at
least 80% of donated goods.
• Transport Services for fare paying passengers
• Medical Services
• Supply of goods and services by an employee organisation to its members to the extent that
consideration of supply is limited to membership contributions
• Supply of residential accommodation in a dwelling under a lease or hire agreement.
• Supply of piped water, rates charged by local authorities and domestic electricity.
• Supply of fuel and fuel products.

There are cases where a supply may potentially qualify for more than one class of supplies such as
international carriage of fare paying passengers, and under such circumstances the Act should give
guidance of which classification takes precedence.

15.10.4 Standard Rated Supplies

Any supply by a registered operator which is not specifically identified as either exempt or zero rated is
standard rated. Standard rated supplies attract VAT at a rate of 15% eg seed; tobacco, basic commodities
including meat, rice, bath etc.

15.11 VAT On Imported Goods and Services

Students often confuse import VAT and input VAT. At this stage it is import VAT which increases the
VAT payable and if eligible to claim input tax, this shall be done in the next stage.

Time of supply with respect to imported services effective from 1 January 2024 shall be deemed to take
place at the earlier of: the time an invoice is issued by the supplier or the recipient in respect of that
supply; or the time any payment of consideration is received by the supplier in respect of that supply; or
the time the service is performed.

15.11.1 Importation of Goods: Section 12

When goods are imported for consumption in Zimbabwe, import VAT is levied on taxable supplies.

The import VAT is calculated on Value for tax purposes as follows:

Value for Duty Purpose: Cost plus insurance and freight (CIF) Add Duty = Value for Tax Purposes

Example

Takudzwa travelled to South Africa for his annual holiday in July 2019. During the period he was on
holiday he decided to acquire the following items for his boutique in the Harare CBD.

$
Clothing items 20,000
Shelve racks 1,000
Display dummies 2,000
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 23,000

He paid $4,000 as cost of delivering the goods from South Africa to Beitbridge port of entry. The customs
duty payable was calculated as $3,500 by the customs officials. Takudzwa also paid $400 for insurance
cover of his goods whilst they were in transit.

Required

Calculate the VAT payable by Takudzwa to ZIMRA.

Solution $
Total Value of imported goods 23,000
Freight costs 4,000
Customs duty 3,500
Insurance costs 400
Value for VAT Purposes 30,900

Total VAT Payable ($30,900*15%) 4,635.00

Note: The obligation to remit the VAT to ZIMRA rests with Takudzwa. However, if Takudzwa is a
registered operator and the goods purchased are used to make taxable supplies he will have an option
to claim a VAT input tax deduction in respect of the imported goods.

15.11.2 Importation of Services: Section 13

VAT is charged on imported services consumed or utilised in Zimbabwe. The value of supply is the
greater of Open Market Value (OMV) or the invoice value of the service. VAT is payable by the
recipient, and the Finance (No.3) Act, 2018 widened the tax base, requiring registered operators to
account for VAT on services imported for the production of taxable supplies.
Therefore, imported services have four key qualifying characteristics:

• There must be a foreign supplier (i.e. resident OR carries on business outside Zimbabwe) of a
service; and
• There must be a resident recipient of the service; and
• The service being supplied by the foreigner must be a standard rated service; and
• The service so supplied should be utilised or consumed in Zimbabwe.

Amendments by Finance Act No. 1 of 2019 made every importer liable to VAT on imported services,
regardless of the purpose. The recipient is responsible for collecting and paying the tax, providing the
Commissioner with transaction information. The time of supply is deemed to occur at the earlier of the
invoice issue or when any payment is made by the recipient.

NB: W.E.F. 1 January 2020, imported services are included in the definition of input tax and therefore
registered operators can claim input tax on imported services.

Example

A South African based lawyer (Thandeka Ngcukaitobi) comes and provides legal services to Zimbabwean
incorporated and resident Puma (Pvt) Ltd (Puma). Puma is an energy company selling petrol only.
Thandeka also provides legal services to another Zimbabwean resident Transaction Advisory Services
(Pvt) Ltd (TAS) who are in the consultancy business focusing on technical consultancy (IFRS, IPSAS and
Taxation). Are both legal services being provided by Thandeka imported services?

Solution
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Conclusion: The legal services to Puma are imported services whilst those to TAS are not. Application of
criteria to scenario: In both cases, Thandeka is a foreign supplier, supplying to local recipients, a taxable
supply (i.e. legal service).

In the case of Puma, Puma is going to make supplies other than taxable supplies and therefore all four
criteria are satisfied whereas with the TAS case, TAS is going to use the service to make taxable supplies
and therefore it is not an imported service.

Example

Munhondo banking has both retail and investment banking units as part of its operations. In 2019 the bank
decided to install a new banking system that would enable its clients to access the banking services over
the internet. In June 2019 the bank engaged a consultant from South Africa to install and train its staff on
the use of the new system. The consultant issued an invoice of ZAR80, 000 covering the cost of installing
the system and training staff. Since the bank had an on-going relationship with the consultant, the amount
they were invoiced was discounted. The value of the invoice would have been ZAR100, 000 if no discount
was given.

Required

What are the VAT implications of the transaction?

Solution

Munhondo has imported services it intends to utilise or consume in, hence the company should account
for VAT on the imported service. The VAT amount with be calculated as:
ZAR100, 000 (open market value which is higher) *15% = ZAR15,000. Therefore, Munhondo will remit
the VAT to ZIMRA.

NB: If the imported service constitutes supply which would have been either a zero rated or exempt
supply if the supplier was a resident of Zimbabwe, the output VAT on the transaction would be nil.

15.12 Accounting for VAT- Sec 14

Generally, VAT is accounted for on the invoice/accrual basis. VAT is accounted for on invoices
received/issued irrespective of whether payment has been made/received.

VAT may also be accounted for on the cash basis, i.e., VAT is based on cash receipts/payments. Cash
basis is only available to Local Authorities, Public Entities and Associations not for Gain

15.13 Payment of VAT in the Currency of taxable supplies

The Finance No.3 Act of 2018 indicated that if taxable supplies are paid for in foreign currency tax must
be paid to the Commissioner in that foreign currency. Secondly, VAT can be paid in either legal tender
or foreign currency if the price for the taxable supplies in question is paid for in legal tender.

15.14 Settlement of Principal VAT prioritised over interest and

penalty.

The Finance No.3 Act of 2018 amended the sequence of payment of VAT in order to reduce the perpetual
interest charges on taxpayers. Settlement prioritisation now follows principal, then penalty and interest,
effective from 1 January 2019.

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 15.15 Input Tax– Sec 16

15.15.1 Extension of time in which to claim input tax

The Commissioner may in his/her own discretion on good cause shown by the taxpayer allow input tax
claims beyond the prescribed 12 months period. The claim may be allowed from the time a registered
operator was required to make a return. This extension came into being through the Finance No.3 Act of
2018.

15.15.2 Input Tax Apportionment

Sec 16 (1): Input tax is generally claimed on all goods/services provided they are utilised in the production
of taxable supplies. Where it is incurred for mixed supplies, apportionment will be done.

Basis of apportionment e.g., turnover basis and De minimus rule applies if use is 90% and above.

15.15.3 Prohibited deductions Sect 16 (2):

Entertainment expenses, including food, beverages, and hospitality, are generally prohibited
deductions for input tax unless acquired by operators in the business of supplying
entertainment.

For example, the following is claimable entertainment expenditure.

• VAT on entertainment i.e., on accommodation, travel costs etc. of employees and holders of the office
away from home overnight on operator’s business is deductible.
• VAT on meals given to staff after a conference or seminar provided the seminar or conference fee
covered direct and indirect cost of the meal is deductible.
• VAT on entertainment expenditure in the form of promotional expenditure

Purchase of passenger motor vehicles:

• VAT incurred on PMV is disallowed no matter the purpose to which PMV is to be applied.
• The test is on the nature of the expenditure not the purpose of the expenditure.
• Operator should disallow input tax incurred on acquisition or hiring of a PMV.
• VAT incurred on modifications to a PMV incurred prior to its delivery.

For example, the following are claimable:

• VAT incurred on PMV by Car dealer or rental company.

• VAT incurred on PMV for demonstration or temporary use before sale
• VAT incurred on PMV acquired by RO for the purpose of awarding it as a prize.
• VAT incurred on PMV running expenses such as repairs, maintenance etc.
• VAT on modification costs after the passenger motor vehicle has been delivered
• VAT on the supply of PMV accessories.

Subscription fees to clubs or associations of a recreational nature e.g., VAT incurred on membership
subscription to a club of to a sporting, recreational and private clubs etc the following however are
claimable:
• VAT incurred on subscriptions to magazines and trade journals which are related in a direct manner
to the nature of the business carried on by operator.
• VAT on membership fees paid to a professional body
• VAT on any fees or subscriptions to professional organisations paid by operator on behalf of its
employees.

Disallowed input tax claim on premium on bond

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The Finance No.3 Act of 2018 has disallowed input tax claim applicable on the bond premium, namely
input tax applicable on the amount computed by applying a rate of exchange in excess of the parity rate
of one United States dollar to a bond note unit. The goods or services in question must have been acquired
in a legal tender.

15.16 VAT Adjustments – Sec 17

Adjustments are made when there's a change of use, shifting from taxable supplies to non-taxable supplies
or vice versa. Section 17(1) specifies that if goods initially acquired for taxable supplies are later used for
non-taxable supplies, an output VAT adjustment is necessary.

The value of supply is deemed to be the OMV

In the case of reduction in taxable use the formula A * (B-C) is used.

Where A is the OMV, B is the initial %age use and C is the reduced % age use.

In this case the registered operator should account for output tax by multiplying the OMV with 15%.
If originally input tax was denied when goods were acquired no adjustment is required.

Section 17(2): Reduction in taxable use of capital goods (deemed supply)

Reduction of percentage use of capital goods:

Adjustment is necessary where the operator was initially allowed to claim input tax.
Adjustment not necessary where cost of goods is less than $600.

• Formula: A *(B-C) is applied.

• A is the lesser of cost or OMV, B is initial taxable use and C is the current taxable use.
• The time of supply is deemed to be the 31stof December of that particular year of
assessment.

NB: No change of use of capital goods is required if this has been triggered by government policy w.e.f
1 January 2017.

Example

XYZ limited, a registered operator which makes both taxable and exempt supplies acquired a laptop
computer for US$1,150 (Inc. VAT) on 1 January 2023. At the time of purchase the laptop computer was
to be used 100% in the production of taxable supplies. However, on 1 February 2023 a decision was made
to use the laptop computer 60% in the making of taxable supplies and the remainder in the making of
exempt supplies. On that date the laptop computer had an open market value of $800.

Required
Calculate the VAT output tax arising from the change in use. Note: XYZ had claimed the full input tax
on the date they acquired the laptop computer.

Solution

VAT Output Tax is calculated as follows: A*(B-C)

A = $800 (lesser of cost and
B = 100%
OMV at date of change in use)
C = 60%
VAT Output = 15%*$800*(100% – 60%)
= $48.00

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 15.17 Goods acquired prior to fixed date (1 January 2004) (section
17(4) (a)

Input tax adjustment will be made if goods are eventually utilised to make taxable supplies. Formula: A
* B * C is applied

A represents a tax fraction, B lesser of cost or OMV and C percentage or ratio of intended use to total
supply.

Where C is equal to or more than 90%, such percentage shall be deemed to be 100%.
This section is not applicable if input tax would have been denied in terms of section 16 of the VAT Act,
e.g., a registered operator takes a stove from his house for use in the business’s staff canteen. Although
the stove is now used in the business, it relates to the supply of entertainment.

Example

Matamba (Pvt) Ltd acquired a manufacturing plant on 1 August 2003 for an amount equivalent to
US$15,000. However, Matamba (Pvt) Ltd only commenced its manufacturing business on 1 July 2004
where the plant was brought into use. As at that the plant had an open market value of US$13,000 (the
reduction in value was due to the fact that newer and more technologically advanced plant was now on
the market). From that date the plant was being used 100% in the production of taxable supplies.

Required
Calculate the input tax that can be claimed by Matamba.

Solution:
Apply the formula: =A*B*C
= 15/115 * $13,000 * 100%
= $1,695.65

15.18 Goods acquired after fixed date (1 January 2014) (sections 17

(4) (b))
This section applies to new VAT registrants or those registered operators who were deemed to have
made a supply by section 7(2) (cessation of trade) and input tax would have previously been denied or not
claimed:

❖ Where goods or services have been acquired by a person on or after the fixed date and tax has been
charged in respect of the supply; or
❖ Goods have been produced by a person on or after the fixed date and tax has been charged in respect
of the supply of goods or services acquired by him for the purpose of production;

When such goods or services are subsequent to the fixed date applied in any tax period by that person
wholly or partly for use in the course of making taxable supplies; such goods or services shall be deemed
to be supplied in that tax period to that person and an input tax credit shall be deducted in terms of

Section 15 (3).

The input tax deduction in terms of S15 (3) shall be determined in accordance with the following formula:
A*B*C, where –
A = the tax fraction
B = represents the lesser of Cost (including tax) and the OMV
C = represents the ratio of intended taxable usage to total intended use of goods immediately
after the supply.

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Where ratio is equal to or more than 90%, such percentage shall be deemed to be 100%.
NB!!! The above section (S17(4)(b), shall not apply where a R/O has been previously denied input tax
deduction due to him for not producing sufficient proof to support the claim but has now produced such
proof (section 15(2))

NB: No change of use of capital goods is required if this has been triggered by government policy w.e.f.
1 January 2017.

Example

On 1 September 2022 Aloice went to the Harare Agricultural show and whilst there he acquired a sadza
cooking machine (Gwatamatik) for $2,100 (Inc. VAT). At that time Aloice was contemplating starting a
restaurant business but had not yet acquired premises to conduct the business from, therefore he used the
Gwatamatik in his family home to prepare meals for his family. In January 2023 Aloice finally acquired
premises for his restaurant business and immediately commenced operations as from that date. Aloice had
already registered for VAT in anticipation of commencing operations. The Gwatamatik was transferred
to the restaurant on the same date. The Gwatamatik had an open market value of $2,500 as at the date of
transfer.

Required
Calculate the input tax that can be claimed by Aloice.

Solution
The Gwatamik with effect from December is now being used in the making of taxable supplies hence Input
tax is now claimable:
Apply formula: A*B*C
15/115* $2,100 (lesser) * 100%
$273.91

15.19 Fixed Property Transactions

• If the seller is a registered operator, VAT is applicable on the sale of residential and commercial
properties.
• For a registered operator selling a commercial property used for both exempt and taxable supplies,
output tax is accounted for, and adjustment of previously unclaimed input tax is allowed.
• Instalment sales by registered operators result in output tax being accounted for as payments are
received.
• Transactions between registered operators may qualify for zero-rated VAT if it's a sale of a going
concern.
• Non-registered operators selling property do not charge VAT.
• A registered operator purchasing property from a non-registered operator can claim notional input
tax only if stamp/transfer duty was paid or is payable, limited to the amount of duty paid.

Example

On 2 January 2023, Mr Tafirenyika a registered operator entered into the following transactions:
He started to use his personal Toyota Vigo d/cab 100% for business purposes (making taxable supplies).
The vehicle was purchased on 31 October 2015 for $24 500 (Inc. VAT) and on that same date its market
price was $25 600.
He started to use his personal computer 100% in his business. The computer cost him $750 (incl. VAT)
and had a market value of $450.
He started to use his personal printer 95% for business. The printer was bought for $350 (incl. VAT) and
its market price was $400.
He converted 80% of his private residence into offices. He bought his residence for $100,000 and paid
transfer duty of $8,000. He bought the residence on credit from the seller who is not a registered operator

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and has only paid $75000 to date. On 2 January 2023 when he started to use 80% of the offices, it had a
market value of $110,000.

Required

Calculate the VAT consequences of the above

Solution
Toyota Vigo: Cannot make an input tax adjustment as input tax was denied in terms of section 16(2) (d)
Computer: Claim input tax using the formula A * B * C (15/115 * 450 * 100% = $58.70)
Printer: Claim input tax as follows: 15/115 * 350 * 100% = 45.65 (note 1)
Offices: Claim input tax using formula A * B* C * D (15/115 * 100 000 *80% * 100% (note 2) =
$10434.78. Limit claim to stamp duty paid 8000 * 80% = $6 400.
Note 1: Since the use is 95%, the de minimus rule applies.
Note 2: Although the residence is considered second hand goods and full payment was not made, it is
fixed property and because stamp duty was paid, full input tax is claimable (D is deemed to be 100%)

15.20 Increase in taxable use of capital goods (section 17(5)

An adjustment is permissible where there is an increase in taxable use of capital goods. The adjustment
is done at the end of the operator’s financial year)
The formula A * B * (C-D) is applied where:

A- represents tax fraction,

B- the lesser of cost or OMV,
C- the current %age use and
D- the %age use prior to the increase

The time of supply will be 31 December of that particular year of assessment.

Note: A change in use resulting in the increase in the extent of taxable use results in an input tax deduction.

15.21 Sale of a business as a going concern – Sect 18

• Section 18 allows for zero-rated VAT on the sale of a business as a going concern, subject to
specific criteria.
• Criteria for identifying a going concern include a written agreement between parties, sale of all
necessary assets, and both parties being registered operators.
• If the intended use of the business upon acquisition is 90% or more for taxable purposes, zero
rating applies. It doesn't apply if the business is used 90% or more for exempt supplies.
• If the purchaser changes the use of the business from taxable to non-taxable after zero rating, an
adjustment is required, and output tax on the non-taxable use is payable.

The adjustment is calculated as follows:

• The adjustment is calculated based on the total sale price, excluding goods that didn't qualify for
input tax deduction initially, and adjusted for the proportion of taxable use.
• If assets consist of items with denied input tax deduction (e.g., a motor vehicle), the cost may be
reduced accordingly.
• If connected persons acquire the going concern for no consideration or less than market value,
the purchaser's cost is deemed to be the open market value of the business.

Example

Sale of a business as a going concern

Mr A purchased a retail business as a going concern. The business had the following assets:
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Toyota Hilux d/cab: purchase price $13000 and market price $15000.
Mazda T35: purchase price $8000, market price $6000
Computer: purchase price $250. Market price $100 (initially purchased from a non-registered operator)
Laptop: purchase price $560, market price $300
Stove: purchase price $230, market price $400 (was previously used by the seller to make staff meals.
Due to a slump in business, he decided to convert his business into a college offering tertiary education
and transferred all assets to the college. The college was registered with the Ministry of Higher and
Tertiary Education.

Required

Discuss the VAT implications of the transaction giving supporting calculations where necessary.

Solution

The conversion of the business from a taxable supply to an exempt supply requires Mr A to account for
output tax in terms of section 18(2).
Output tax will be determined by applying 15% to the full purchase price, reduced by value of assets that
did not qualify for input tax deduction on initial purchase
Output tax will be calculated as follows:
Toyota Hilux: 13000 * 0 (Input tax denied (section (16(2) (d))
Mazda T35: 8000 * 15% = 1200

Computer: 250 * 0 (no VAT charged initially as it was purchased from a non-registered operator).
Laptop: 560 * 15% = 84.00
Stove: 230 * 0 (Input tax was denied on initial purchase as it was used for entertainment).
Total output tax payable will thus be $1,284.

15.22 Irrecoverable debts: Sect 22

A registered operator is allowed to claim input tax on irrecoverable debts subject to the following
conditions:
• The supply was a taxable supply
• A return has been furnished with the Commissioner and VAT was accounted for on the debt
• The debt belongs to the operator and has been written off in his books
• Only the VAT on the cash value of an instalment credit agreement sale is claimable

Input tax deduction is not allowed for debts transferred on a non-recourse basis, but is allowed if
transferred on a recourse basis and returned to the operator, written off, and not recovered. If a claimed
debt is unpaid after 12 months, an output tax adjustment is required. If an operator hasn't paid a claimed
tax within 12 months, they must write back the input tax claimed. (Claremont Library Development
Company (PTY) Ltd vs SARS (Case No: VAT1247)

15.23 VAT on Fringe benefits – Sect 17(3)

An employer who provides fringe benefits to employees is deemed to have supplied goods or services and
output tax should be accounted for Value of supply is determined for PAYE purposes under the Income
Tax Act.

This subsection shall not apply to benefits exempt or zero-rated, entertainment, or benefits granted by
registered operators making exempt supplies such as:
❖ The supply of goods or services which are exempt in terms of section 11, e.g., residential
accommodation [section 11(1) (c)], or
❖ The supply of such goods or services attracts a rate of zero percent in terms of section 10, e.g., supply
of bread or sugar to employees [section 10(1)(g)], or
❖ The supply of entertainment e.g., free meals

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❖ The benefit is granted by registered operators who are in the business of making exempt supplies.
E.g., motor vehicle supplied to an employee by an educational institution, which is not registered for
VAT.

Example

Fringe benefit
Tanaka is employed by B Ltd a registered operator for VAT purposes. As part of his employment benefits
Tanaka has free use of an Isuzu KB (3100ccs), he also receives an entertainment allowance of US$200
monthly which he uses at his personal discretion. Tanaka uses of a company house for which he pays a
monthly rental of US$300 whereas the market related rentals for a similar house is US$750.

Required
Use of motor vehicle
The value of the benefit in terms of the income tax act is $1,660. Therefore, the Output tax is calculated
as follows:
$1,660 * 15/115 = $216.52
In B Ltd.’s records the VAT will be recorded as follows:
Dr Staff costs $216.52 (cost to B ltd)
Dr VAT Output $216.52

Entertainment allowance

In terms of the Income Tax Act the entertainment allowance is a fringe benefit since Tanaka is not using
the allowance for B Ltd.’s business. However, in terms of the VAT Act entertainment B ltd would have
been denied an input tax deduction in respect of entertainment related expenses, therefore there is no
Output tax which accrues on this benefit.

Housing Benefit

Since Tanaka is paying below market rentals a benefit of $450 ($750-$300) accrues on a monthly basis
in terms of the Income Tax Act. However, the provision of residential accommodation is exempt from
VAT; therefore, no Output tax will accrue on the value of the benefit.

15.24 Pre-incorporation expenses: Sect 19

Input tax claimed on purchases made before a company's incorporation is allowed if the company
reimbursed the full amount and the goods/services were acquired for the purpose of trade.

Input tax is not claimable if the supply is not taxable, goods/services were acquired more than 6
months before the trade commencement date or the company lacks sufficient records.

15.25 VAT Registration Requirements

For a person to charge and collect VAT they must be a registered operator. Registration can be voluntary
or mandatory per section 23 of the VAT Act [Chapter 23:12]. Non-registered operators cannot claim input
VAT as well and therefore the registration status of a taxpayer is very important in the determination of
VAT payable or refundable.

Item Explanation
Registration for VAT
– Any person who on or after the “fixed date” (effective date of the VAT Act)
Sec 23 carries on or intends to carry on any trade (s) and whose taxable value of supplies
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 exceed or is likely to exceed US$25,000 or the prescribed amount is required to
register for VAT in terms of section 23 of the Act.
Liability for
Registration
– s 23(1) A person is liable to register if: -
• At the end of any month, the total value of supplies of goods or services
(turnover) has exceeded US$25,000 or the prescribed amount in the preceding
period of 12 months, or
• There are reasonable grounds for believing that the total value of supplies
of goods and services, which will be made in the following 12 months, will
exceed the prescribed amount.
• Unless it can be shown that the prescribed amount was exceeded as a
consequence of:
➢ The sale of stock or other assets due to any cessation of or substantial
and permanent reduction in the size or scale or any trade
➢ The replacement of plant and machinery or other capital assets used in
the trade or Abnormal circumstances of a temporary nature
Registration should be done within 30 days.

Voluntary
Registration – A person can apply for voluntary registration even if the total value of taxable
sect 23(3) supplies is less than the prescribed amount per annum.
Registration is subject to a minimum turnover level set by the Commissioner
from time to time.
As a general rule of thumb, it will be advantageous for a person to register if
they supply goods or services mainly to other registered operators.
The person must satisfy the Commissioner that they are carrying on trade.

.
Advantages of voluntary registration
➢ The VAT registration certificate is a prerequisite by most suppliers for
consideration to participate in tenders.
➢ Being VAT compliant is also a consideration by ZIMRA for the
issuance of a tax clearance certificate which saves on potential withholding tax
of 30% from invoices issued to customers.
➢ Avoidance of potential penalties and interest from late VAT registration.
➢ Input tax claim from purchases obtained from VAT registered suppliers

Registration
Procedure –
23(7) Application for compulsory and voluntary registration must be made on the
prescribed registration form together with any other documents, which the
Commissioner may require from time to time (i.e., company registration
particulars, bank details, etc.) For compulsory registration, this must be
completed no later than 30 days from the date on which the registration threshold
has been reached or the date it is established that the threshold is likely to be
reached.

15.26 VAT Tax Periods – Section 27

Submission of Returns and Payments

All registered operators are required to submit returns and account for VAT to the Commissioner at
regular intervals. These intervals are called tax periods.
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A registered operator`s first tax period will commence on:
• The commencement date of VAT, or
• The date on which he becomes a registered operator, if he was not liable or carrying on any trade at
the commencement date of VAT.

The month in which a registered operator`s tax period ends will be determined by the Commissioner. Tax
periods do not all end at the same time for all registered operators.

These tax periods are as follows:

Two – month Tax Period (Category A or B)

Most registered operators will be allocated a “standard tax period” of 2 months unless otherwise requested,
but such persons can elect to be on Category C (monthly). Registered operators may choose between the
2 categories, but if no choice is made the Commissioner will allocate them either category A or B
automatically. The tax periods end as follows:
Category A: The last day of: - January, March, May, July, September and November
Category B: The last day of: - February, April, June, August, October and December
Category C: One Month Tax Period
Larger enterprises whose taxable supplies exceed USD$240,000 or the amount prescribed may submit
returns monthly.
Category D: Any Other Tax Period Registered operators whose trade consists solely of farming activities,
with a total turnover not exceeding USD$120,000 or the prescribed amount.

15.27 Tax Invoices – Sect 20

Requirements for Tax Invoices

Registered operators are generally required to issue tax invoices that meet the Commissioner's and
contracting parties' requirements within 30 days from the date of supply. Issuing a tax invoice may not be
necessary for immaterial considerations, but some form of source document is required to claim input tax.

Details on a tax invoice should include:

• The words “FISCAL TAX INVOICE” in a prominent place

• Name, address and VAT registration number of the supplier
• Name, address and VAT registration number of recipient.
• Invoice serialised number and date of issue
• Description of goods and / or services
• Quantity or volume of goods or services supplied
• Price & VAT

NB:

• A registered operator is not allowed to issue more than one tax invoice for a single supply.
• If the need arises to issue another tax invoice for same supply, a copy invoice can be issued clearly
marked “copy”.

15.28 VAT Deregistration- Section 24

A registered operator may be deregistered if: -
❖ If the value of his taxable supplies falls below the registration threshold
❖ He ceases to carry on any trade and will not carry on any trade within 12 months after that date
❖ Where he has applied for registration in anticipation of commencing a trade and has not commenced
that trade.
❖ A registered operator has successfully applied for voluntary registration and it subsequently appears
that he has not complied with the requirements.

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Cancellation of registration, with the approval of the Commissioner will take effect from the last day of
the tax period on which the application is made. A person who ceases to be registered remains responsible
for any duties or obligations under the Act while he was registered. Implying that, the deregistered person
will still be liable to pay all VAT debts which accrued during the period of being a registered operator.

15.29 VAT Withholding Tax

• VAT withholding tax agents are appointed to collect VAT on supplies subject to a 15% tax rate.
• The Commissioner can appoint companies as withholding tax agents, especially when there are
concerns about truthful VAT returns.
• Withholding tax agents withhold a portion of the output tax and remit it to the Commissioner by
a specified date.
• The Finance Act 2018 revised the rate from 10% to 5% (one-third) of the value of taxable
supplies, effective from 1 January 2018.
• The Commissioner has the authority to designate or revoke the appointment of a value-added
withholding tax agent.
• The withheld amount is credited to the account of the registered operator, but suppliers are still
obligated to account for tax as per regulations.
• Failure to withhold or pay VAT withholding tax by the agent results in liability for the unpaid
amount and additional penalties.
• Non-compliance with VAT withholding tax provisions is an offense, subject to fines or
imprisonment.

15.30 Agents and Auctioneers (section 56):

• When an agent makes a supply on behalf of a principal, the supply is deemed to be made by the
principal.
• If the agent is a registered operator, they can issue and receive tax invoices, debit notes, or credit
notes, but this doesn't relieve the principal of their tax obligations.
• If goods are imported by an agent on behalf of a resident principal, the importation is deemed to
be made by the principal.
• If goods are imported by an agent for a non-registered foreign principal, and there's a written
agreement that the principal won't reimburse the agent, the importation is deemed to be made by
the agent.
• Agents issuing or receiving tax invoices, credit notes, or debit notes must maintain sufficient
records.
• Special provisions apply to auction sales where transactions may not be a taxable supply, and the
auctioneer is deemed to have supplied the goods in the course of their trade.

Other VAT measures as per the Finance Act

Failure to acquire and install an Electronic Fiscal Device will result in a taxpayer being liable to: a penalty
of USD1,000 or equivalent ZWL, which may be suspended if remedial action is taken within 96 hours of
the civil penalty order being issued, and a cumulative penalty of USD25 or equivalent ZWL for each day
that the default exists (up to a maximum of 90 days) after the 96-hour period.

Failure to comply with FDMS interface standards within 96 hours of service will result in a penalty of
USD25 per point of sale or ZWL equivalent per day, up to a maximum of 90 days. Deliberate tampering
with Electronic Fiscal Devices carries a penalty of USD1,000 or ZWL equivalent amount per device. This
may be suspended if the alleged defaulter shows cause within 48 hours of the civil penalty order being
issued, and a cumulative penalty of USD50 or equivalent ZWL for each day that the default exists (up to
a maximum of 90 days) after the 96-hour period for correcting the default. Failure to fix a malfunctioning
gadget within 96 hours of the taxpayer's service date draws a penalty of USD25 per device or ZWL
equivalent for each day up to a maximum of 90 days.

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 15.31 Summary VAT Mind Map
Whenever you are tackling a VAT question you need to ask yourself the following questions:
❖ Have you identified and understood the details of the transaction?
❖ Has the transaction been effected as part of the taxpayer’s trading activities?
❖ Is the taxpayer a registered operator?
❖ Has the transaction resulted in income or an expense for the taxpayer?
❖ Income: possible Output VAT
❖ Expenditure: possible Input VAT
❖ Should there be output VAT? Supply of goods or services, imported goods, imported services or
goods sold through an auctioneer.
❖ Determine whether the transaction is either Zero rated, standard rated or Exempt;
❖ Determine the time of supply based on the information provided;
❖ Where applicable calculate the Output VAT or Input VAT arising from the transaction.
❖ In the case of expenditure and input tax, was the taxpayer charged VAT?
❖ Is the taxpayer going to use the supply in the making of taxable supplies?
❖ Is the supply not a prohibited deduction for input tax?
❖ Are there no VAT implications stemming from an adjustment per sections 17 and 18?

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 Chapter round up

• VAT is an indirect tax levied on the supply of goods and/or services, the goods and services must be
supplied in the furtherance of a trade carried on in Zimbabwe on a continuous or regular basis.
• Zero rated supplies are supplies on which output tax is charged at 0%.
• Exempt supplies are supplies on which output tax is not charged.
• VAT registration threshold is US$25,000 (US$40,000 prior) in any past period of 12 months or where
there are reasonable grounds for believing that the said threshold will be exceeded.
• A person who has less than sales threshold of US$25,000 in any period of 12 months may apply to
ZIMRA for voluntary registration and may be registered subject to the Commissioner’s discretion.
• There are four different tax periods or categories under which a registered operator can submit his/her
VAT returns, namely, category A, B, C and D.
• Time of supply defines the tax point for accounting of VAT. As a general rule, VAT must be accounted
for on the earlier of an invoice being issued or the time a payment is made or received for the supply.
• The value of supply is value on which VAT must be computed on.
• VAT input tax is claimed on valid tax invoice, without which input tax cannot be claimed.
• Claim of VAT is prohibited on goods or services acquired for purposes of entertainment, a supply of
passenger motor vehicle, club subscriptions, medical supplies or exempt supplies.

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PART F

Employment Tax, Capital Gains Tax and Estate Planning

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 16. Taxation of Employment Income

16.1 Introduction

Income earned by individuals from employment is subject to income taxes and is taxed using
PAYE tables. The progressive tax structure aims to tax higher-income individuals at a higher
rate compared to lower-income earners. All entities doing business in Zimbabwe, including local
and foreign companies, partnerships, associations, and trusts, must register as employers and
deduct and remit employees’ tax to ZIMRA from the remuneration they pay.
The key to this study unit is the determination of taxable amounts arising from employment.

Objectives • Define employment Income.

• Identify items for inclusion in employment income.
• Understand the basis of valuation of fringe benefits.
• Understand the treatment of proceeds from Pension and Retirement Annuity Funds.
• Identify items exempt for PAYE purposes.
• Identify expenses deductible for employment tax purposes
• Understand the concept of PAYE.
• Calculate employee’s tax liability.
• Identify concessions granted to elderly persons.
• Identify and compute tax credits available to individuals

Act: Sect 2 of the ITA

(if applicable) Sect 7 of the ITA
Sect 8 ARW the 1st Schedule of the ITA
Sect 14 ARW the 3rd Schedule of the ITA
Sect 15 ARW the 6th Schedule of the ITA

Regulations: Double Taxation Agreements- See Appendix

Relevant Heywood Haulage Investments Central Africa (Pvt) Ltd vs Zimra (HH-81-11)
Cases Six Private Schools vs the Commissioner General of ZIMRA (HH314-16)

16.2 Statutory instruments 33 & 142 of 2019

SI 33 of 2019, now incorporated into the RBZ Act, converted balances in the United States dollar into
RTGS$ on a one-to-one basis, effective 22 February 2019. As a result, expressions and figures in revenue
statutes and other Acts immediately transitioned into Zimbabwe dollars on that date. However, SI142 of
2019, enacted on the 24th of June 2019, prohibited the use of foreign currency as legal tender, introducing
the Zimbabwe dollar as the sole legal tender in the country. This decision was later reversed through SI85
of 2020, allowing the use of the United States dollar in domestic transactions again, starting from March
2020.

16.3 PAYE in foreign currency

PAYE is applicable in foreign currency for individuals earning wholly or partially in foreign currency,
with distinct tax tables implemented from 1 August 2019. From 1 January 2019 to 31 July 2019, the same
tables were utilised, with the exception that PAYE would be remitted in foreign currency during that
period. Tax credits were also denominated in foreign currency starting from 1 August 2019. Furthermore,
separate motoring benefits are assessed in both foreign currency and Zimbabwe dollars.

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16.3.1 Year of assessment
An ordinary year of assessment is a period from 1 January to 31 December.

16.3.2 Employment Income Sect 8 (1) (b)

Employment income includes earnings by an individual for services provided under a contract of
employment. It involves not only the salary but also various forms of compensation such as bonuses,
director's fees, leave pay, and other rewards directly linked to service, regardless of whether the payment
is contractual or voluntary. The term "amount" includes both monetary and non-monetary forms with an
ascertainable money value. Leave pay is considered to accrue proportionately throughout the leave period.
Therefore, from the above definition employment income includes among others:

• Salaries;
• Leave pay;
• Bonus;
• Gratuity on cessation of employment;
• Retrenchment packages;
• Commission earned as a result of employment;
• Pension;
• Superannuation allowance; and
• Commutation of a pension.

The term "employee" extends to individuals serving as directors of a company, agents, servants, or those
engaged in gainful occupation. The corresponding term "employer" for such individuals is interpreted
accordingly.
Only remuneration from a source within or deemed source within is subject to tax in Zimbabwe. We
consider the various scenarios below:

16.3.3 Income from a source within Zimbabwe

Taxation in Zimbabwe is based on source principle and not the residence status of an individual. In the
case of Commissioner of Taxes vs. Shein 22 SATC 12 the court highlighted that the source of income for
services rendered is the place where the services would have been rendered or performed. Residents and
non-residents alike rendering services in Zimbabwe, no matter where the payment is coming from are
liable to employees’ tax in Zimbabwe on such services.

16.3.4 Services of a Non-Resident or Expatriates

In terms of double tax agreement (“DTA”) rules, an expatriate or a non-resident employee can be
exempted from taxation in Zimbabwe if a “DTA” exists between his country of residence and
Zimbabwe provided all the following conditions are satisfied:

a) The employee remains treaty resident in his home country,

b) The non-resident or expatriate renders services in Zimbabwe for a period of less than 183
days in a year of assessment,
c) His/her remuneration is not paid by, or on behalf of, an employer who is a resident of
Zimbabwe and the person is taxed on this income in his/her home country,
d) The remuneration is not borne by a “permanent establishment” that the non-resident employer
has in Zimbabwe.

A “permanent establishment” is an international tax term meaning a fixed place of business through
which the business of the employer is wholly or partly conducted.

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 16.4 Computation of tax liability
The tax liability is computed by applying the tax table for each year of assessment on the
taxable income and deducting from that tax any rebates of the individual. The calculation of
taxable income includes the following:

Salary xxx
Bonus xxx
Less bonus exemption (xxx) xxx
Cash in lieu of leave xxx
Gratuity xxx
Leave pay xxx
Cash allowance xxx
Passage benefit (first time passage benefit) -
Motoring benefit (based on engine capacity of car provided) xxx
Housing benefit (open market rent) xxx
Less portion paid by the employee xxx xxx
Interest xxx
Furniture benefit value of furniture xxx
Entertainment allowance xxx
Less exemption (on expended on employer business) (xxx) xxx
Compensation for injury, sickness or death -
Pension for an elderly person -
Commission - xxx
Income xxx
Less Deduction
Pension fund contributions (ordinary & arrear) (xxx)
Retirement annuity fund contributions (xxx)
NSSA contributions (xxx)
Professional subscriptions (xxx)
Approved donations (xxx)
NEC and Union contributions (xxx)
Trade tools (xxx) (xxx)
Taxable income xxx

After the taxable income has been determined, the next step is the computation of tax payable
based on the applicable tax rates for employed individuals as set out in Appendix A.

NB: The above is the prescribed format for use in the exam. Marks will be lost for using a different
format. Physically, currently the burden of calculating is no longer on the taxpayer, an individual
puts the figures online in their TARMS handle and the system will calculate the figures on its
own.

16.5 Employee vs Independent Contractor

The distinction between an employee and a self-employed person (or a consultant/independent
contractor) is important because:
• Employment income is taxed at different rates to business income
• Employees have limited expenses to claim from employment income.
• Filing of returns and remittance of tax obligations differ between business and employment
income.

In the event of a contention as to whether an individual is an employee or a self-employed person,

the courts apply a three-pronged test as follows:

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Control test • High control suggests an employer-employee relationship.
• Low control implies a self-employed or customer relationship.

Integration • Evaluates how integrated the individual is into the alleged employer's business.
test • If the work is integral, it suggests an employee; if not, it indicates self-employment.

Economic Considers various factors:

reality test • Regularity of payment: Employees are paid regularly.
(multiple test) • Regularity of work hours: Employees have set working hours.
• Ability to delegate: Self-employed individuals can delegate, employees may not.
• Reporting for work: Employees must report regularly, whereas contractors do so
as needed.
• Leave entitlement: Employees have leave entitlement; self-employed individuals
do not
•

16.6 Special points to note about sect 8 (1) (b)

16.6.1 Bonus-3rd Schedule par 4(o)

A bonus or performance related award, e.g., profit share, accruing to an employee or agent in an
employment or an agent/principal relationship is taxable as employment income. However, there
might be exemptions applicable in certain cases.
The bonus exemption has been varied over the years as follows:

• 1 November 2012 to 21 February 2019 US$1,000 of aggregate bonus received or accruing to an

employee in the assessment year.
• 22 February 2019 to 31 October 2019 ZWL$1,000 of aggregate bonus received or accruing to an
employee in the assessment year.
• 1 November 2019 to 31 October 2020 ZWL$5,000 of aggregate bonus received or accruing to an
employee in the assessment year and US$320 for a person whose earnings are in foreign currency.
• 1 November 2020 onwards ZWL$25,000 of aggregate bonus received or accruing to an employee in
the assessment year and US$320 for a person whose earnings are in foreign currency.
• 1 November 2021 onwards ZWL$100,000 of aggregate bonus received or accruing to an employee
in the assessment year and US$700 for a person whose earnings are in foreign currency
• 1 November 2022 onwards ZWL$500,000 of aggregate bonus received or accruing to an employee
in the assessment year and US$700 for a person whose earnings are in foreign currency.
• 1 November 2023 ending 31 December 2023 the ZWL tax-free bonus amount was increased to
ZWL7,500,000 from ZWL500,000 and the USD exemption amount remained at USD700.
• 1 January 2024 onwards the USD tax-free bonus threshold was revised from USD700 to USD400
and the ZWL tax-free bonus threshold shall be pegged using the USD equivalent.

16.6.2 Cash In Lieu of Leave [C.I.L.O.L.]

Cash in lieu of leave is gross income, regardless of any contractual clause allowing an employer to make
such payments. It accrues when an employee becomes entitled to the amount.

16.6.3 Retrenchment payment - 3rd schedule par 4

A retrenchment package constitutes gross income subject to an exemption;
• The ZWL$ exemption is revised with effect from 1 January 2022 to ZWL$5,000,000 or 1/3 of package
up to ZWL$6,250,000 (i.e., 1/3 of ZWL$18,750,000) whichever is greater (prior).
• In 2024 exempt amount reduced to the greater of the first US$D3,200 or one third of severance pay up to
a maximum of USD15,100 or the local currency equivalent amount.
• The US$ exemption remains unchanged at US$10 ,000 or 1/3 of package up to US$12,500 (i.e.,1/3 of
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 US$12,500) whichever is greater.

A retrenchment package includes severance pay and other benefits granted on retrenchment, excluding
taxable elements such as pension, notice pay and cash in lieu of leave (these are taxable in full). Other
benefits in this context include various payments related to the cessation of employment, like school
fees for children (even for future periods), compensation for loss of office, awards, gratuities, etc. When
paid during employee retrenchment, these amounts are combined with severance pay to calculate the
exemption amount.

16.6.4 Gratuities – [Sect 8 (1) (b)]

A gratuity is fully taxable.

Awards, benefits and compensation - Sect 8 (1) (b)] and 3rd Schedule

Any amounts that is payable as award, compensation or benefit for services rendered is taxable (e.g., long
service awards), unless the amount is paid to the employee, his family or his estate under the following
circumstances:
• Under any law for sickness, injury disablement or death suffered in employment.
• In respect of injury, sickness or death which is paid by a trade union, benefit fund, medical society or
an insurance company on a policy covering accident, sickness or death.
• In terms of Wankie Disaster Relief Fund to employee or to employee’s dependents. In terms of any
law for employee’s personal injury, even if paid as compensation for loss of a taxpayer’s ability to
earn income in the future.

16.7 Employment Benefits – Sec 8 (1) (f)

Gross income includes benefits accruing from employment. These include board, occupation of quarters or
residence, the use of or enjoyment of any other property whatsoever, corporeal or incorporeal, including a
loan, an allowance, and passage benefit and any other advantage or benefit whatsoever in lieu of or in the
nature of remuneration as stated above. These benefits are valued as follows:

• the occupation or use of quarters, residence or furniture, by reference to its value to the employee
• any other advantage or benefit, by reference to the cost to the employer (Six schools vs
Zimra SC61/17/1)
• Specific valuation as provided in the legislation e.g. motor vehicle, motoring benefit.

Below is a summary of some specific employment benefits

Type of benefit Determination of taxable amount

Motoring benefit Engine capacity (CC) ZWL$ USD
The local W.E.F 1/1/2022
currency
equivalent.
Up to 1500 625
1501-2000 830
2001-3000 1250
3001 and above 1660
Disposal of motor In the case of a sale or disposal of a motor vehicle to an employee, whether
vehicle to any during or on termination of employment, the deemed benefit shall be determined
employee. as follows:

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 Benefit = A – B

Where:

A: Represents the market value of the motor vehicle.

B: Represents the value at which the employee acquired the vehicle

Example

Frank bought a VW Golf from his employer at US$2,400 when the market value
was US$5,400 on the date of purchase of the vehicle. How much is Frank’s
taxable income?

Solution

Frank’s taxable income is $3,000 ($5,400 -$2,400).

Note: Persons who are 55 years or above are exempt from tax on this benefit.
Market value should be obtained from motor dealers acceptable to Zimra and in
practice Zimra wants 3 quotations.

Passage benefit A passage benefit refers to the cost borne or paid by an employer towards the
journey expenses of an employee, their spouse, and children.
(a) This includes journeys related to taking up or terminating employment,
service, office, or other gainful occupation. or
(b) Any other journeys not related to business transactions of the employer, such
as holidays where the employer covers associated costs.
Exceptions to the general rule:
A journey undertaken to take up employment (or on termination) is excluded if
it's the first time such a benefit is granted by the employer to that employee.
Occupation of A benefit arises where the employer grants the employee free or subsidised
residence accommodation or pays rent for an employee. The benefit is calculated as the
open market rent less amount paid by the employee or rent paid by employer.

Loan benefit Interest free or subsidised loan from employer to an employee is a taxable benefit
to an employee at LIBOR + 5% (United States dollar loan) and 15% Zimbabwe
dollar loan
Small loans ZWL$50,000 (US$100 foreign currency) or below are tax free.
Salary advances recovered on the next pay day are not deemed loan. Loans for
education or for medical purposes are tax free.
Example1:
Mrs. Hove borrowed $150,000 from her employer on 28 February at an interest
rate of 2.6% p.a. and repaid the amount in full on 31 December of same year.
The annualised LIBOR was 0.6%.

Calculate Mrs. Hove’s taxable income.

Answer
Mrs. Hove’s taxable income is $375 {(10/12 x $150,000 x (5.6%-2.6%)}.

Example 2:
Mr. Warthog borrowed ZWL$450,000 from his employer on 01 January 2023
at an interest rate of 10% p.a and will repay the amount in full on 31 December
2023.

Calculate Mr. Warthog’s taxable income.

Answer
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 Mr Warthog’s taxable income is (450,000 x (15% - 10%)) = ZWL$ 22,500

NB: Loan for education, technical education, medical purpose or below

ZWL$50,000 is tax free
Shares acquired The exercising of an option to acquire shares pursuant to a share option scheme
pursuant to an is a taxable benefit. The benefit is calculated and accounted for as follows:
employee share
option scheme – • 5% of market value of the shares on the day of exercise if the option was
Sec 8(1) (t) granted before 1 February 2009.
• For options granted after 1 February 2009; amount is computed as follows

A – (B+C) where:

A = Market value of shares at the time of exercise.

B = Exercise price or strike price.
C = The inflation allowance on strike price
C = (D – E) x B
E
D = Consumer price index on date of share option exercise.

E = Consumer price index on date of share option offers.

Where there is no inflation, the benefit is A – B.

Example

Mr. X was offered 100,000 shares by his employer (Z Ltd) at a price of US$0.50
per share and should remain employed by Z Ltd for 5 years and assume he did
and that on the date consumer price index had moved from 1.2% to 1.65% (time
of offer to time of option). Advise Mr. X of his taxable income, if the share price
on the date of exercise is US$1.50.

Answer

A = $1.50 per share

B is $0.50 per share
C is $0.19 (0.50 x (1.65-1.20)/1.20)
Benefit = 100,000 (1.50 – (0.50 + 0.19) = $81,000

Educational Scholarships, bursaries, or educational assistance for a student at an educational

assistance establishment are tax-exempt, unless given as a reward for services rendered.
The exemption also applies if the assistance is provided to enable a person to
pursue a study or research benefiting the employer.

School fees If an employer pays school fees for an employee, spouse, or children, it is
considered a taxable benefit.

Free or subsidised Subsidised meals provided by an employer to employees result in a taxable

Lunches benefit, calculated as the cost to the employer minus amounts recovered from
each employee. Exemptions apply when meals or refreshments are supplied
during business entertainment for clients or on behalf of the employer.

16.8 Annuity- sec 8 (1) (a)

Any amount received or accrued by way of an annuity constitutes gross income.

The nature of an annuity was considered in ITC 826 (1956) 21 SATC 189 at190, as follows:

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“An annuity may be described as an annual payment in perpetuity for the life of the grantee or for a
limited period ...”

The following are the necessary characteristics of an annuity (ITC 761 (1952) 19SATC 103):

• It must be claimable from another person or body. Ex gratia payments, even though determined
annually, for example, do not constitute annuities: CIR v Watermeyer (1965) 27 SATC 117;
• It must be a fixed annual payment (which may be divided into, for example, monthly instalments);
• It must be repetitive for a period. (See also KBI v Hogan (1993) 55 SATC 329.)

An annuity may arise in various ways, such as by way of:

• purchase from an insurance company;

• a gift or a legacy;
• a pension for services rendered;
• an “annuity on retirement”; or
• a sale of assets

a) Purchased Annuity

Where an annuity is purchased by the annuitant or his spouse the taxable amount is determined by
excluding the portion that represents a return of the purchase price. The taxable portion, known as the
"interest content" of the annuity, is calculated based on the Commissioner's opinion. This interest is
calculated as follows:

I = P -A/N

I = Interest
P = Annual payment/receipt
A = Amount used to purchase the annuity
N = life expectancy of the annuity

If the annuitant survives beyond the expectation of life, subsequent receipts become fully taxable, as the
initial capital cost would have been accounted for in previous calculations.

b) Gift or legacy annuity

An annuity by way of gift or legacy is taxable in full, regardless of whether the annuity is paid partly out
of capital (CIR v Milstein (1942)11 SATC 279)

c) Annuity from services rendered (pension)

If the annuity is a pension for services rendered and there is no cost (e.g., a non-contributory fund) or if
the cost (employee's contributions) has been fully allowed, the pension is taxable in full. If the
contributions haven't been fully allowed (exceeded the deductible limit in any year), the disallowed
amount is deducted from the taxable pension.

Example

An employee who is about to retire at 31 December is entitled to a pension of US$7,200 a year from his
employer’s fund. The employee’s contributions to such fund have in recent years exceeded the deductible
limit in his hands. The aggregate of the disallowances is established at US$3,000. His life expectancy is
12 years.

Solution
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Pension $7,200
Less Disallowed portion ($3,000 /12 months*1 month) $ 250
Taxable $6,950

d) Annuity on sale of business

In the context of a sale of assets, it's essential to distinguish between an annuity and a sale price payable
in instalments. If the buyer agrees to pay a fixed amount annually for life, it is considered an annuity. On
the other hand, if the payments are part of a predetermined sale price for assets, it's not treated as an
annuity. The treatment may impact the tax implications, and the distinction is crucial for proper taxation.

16.9 Pension on retirement

16.9.1 Pension received in instalment- sect 8 (1) (a)

When an employee receives a pension upon retirement, it is considered gross income. The previously
disallowed portion of contributions made by the employee is deducted equally over the life of the pension
from the annual pension being received. This approach helps in determining the taxable portion of the
pension, considering the disallowed contributions over time.

Example

Alice Medusa who is 44 years, old retired on 1 September 2022. She was employed by Tendon Accounting
Services (Pvt) Limited, since 1994. Her employer contributes 50% to Old Mutual pension fund for its
employees. Over the years Alice’s contribution exceeded the limit by $35,000. She will be receiving
$1,000p.m. In arrears with effect from 25 September 2022. Her life expectancy is 10 years. Compute her
taxable income for 2022- tax year.

Gross pension accrual/receipt ($1,000 x 4 months) 4,000

Less Disallowed portion ($35,000/120 months * 4 months) 1,167
Taxable income 2,833

16.9.2 Pension lump sum – sect 8 (1) (r)

Any amount received by way of commutation (lump sum) of a pension or annuity, payable from the
Consolidated Revenue Fund or a pension fund (excluding a retirement annuity fund), is fully taxable.
However, there's an exemption under the 3rd Schedule Paragraph 6 (h1), allowing a certain amount to be
exempted, specifically up to ZWL$5,000,000 (US$10,000) or 1/3 of ZWL6,250,000, whichever is
greater. This exemption is applicable if the employee's employment ceased due to retrenchment.
16.9.3 Lump sum or commutation receipts – sect 8 (1) (n)
Section 8 (1) (n) authorises the commutation of pension from a retirement annuity fund (RAF). This
involves receiving a lump sum amount upon retirement, with a reduced stream of equal pension until
death. The taxable amount is calculated by deducting 1/3 of the member’s pension entitlement in the first
year of receiving the lump sum. Commutation is considered of a capital nature and requires the taxpayer's
election.
16.9.4 Pension exemption
Pensions accruing to a person over the age of 55 years are tax-exempt. To qualify for the exemption, the
individual should have attained the age of 55 before the commencement of the tax year.

16.9.5 Pension refund or withdrawal- sect-8 (1) (c)

A pension refund or withdrawal, often termed terminal benefit, is taxable. It is the amount paid to a
beneficiary due to the member's withdrawal, liquidation, or winding up of the fund before the anticipated

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benefits from the fund are due. This is brought into gross income according to section 8 (1) (c) ARW 1st
Schedule to the Act as follows:

Pension/Benefit fund

Lump sum payment (terminal benefit) xxx

Less Prescribed amount (18,000)
Less Amount used to purchase annuity on retirement (xxx)
Less transfer to pension fund (xxx)
Less transfer to benefit fund (xxx)
Taxable income xxx

Note that transfer from pension fund to benefit fund does not qualify for exemption (deduction).

A lump sum payment (pension refund) is taxed at a special rate and does not attract AIDS levy. The
special tax rate is the person’s top marginal rate of tax (highest rate on his employment income) or 20%
if the person’s employment income is below the minimum taxable threshold. A directive must be obtained
from ZIMRA for the computation of a lump sum payment.

16.9.6 Exemptions (on employment income) – Sect 14 and 3rd Schedule

• Bonus or performance related award -see above

• 50% of the amount waived in respect of tuition and boarding fees and levies payable by a member of the
teaching and non-teaching staff of a school for up to three of their children.
• Retrenchment exemption- see above
• An amount received by or accrued to or in favour of an employee participating in an approved
employee share ownership trust from the sale to or redemption by the trust of any stock, shares,
debentures, units or other interest of the employee in the scheme or trust of any stock, shares,
debentures, units or other interest of the employee in the trust.
• Medical expenses, medical treatment (including related travel), invalid appliances and the cost of
medical aid contributions paid by an employer for an employee, his spouse and minor children.
• Rewards paid by the CG for information leading to the recovery of taxation revenue.
• Allowances for accommodation and transport and grants of quarters or housing for staff of district
hospitals or rural clinics owned, operated or sponsored by a religious body or a rural district council.
• Subscriptions in respect of an employee’s continued membership of business, trade, technical or
professional paid on behalf of the employee by the employer but not club subscriptions
• Contributions paid by an employer to a pension fund or RAF e.g., NSSA contributions
• An amount accruing by way of a benefit in respect of the injury, sickness or death of a person which
is paid to the person or his dependants or deceased estate—
▪ By a trade union; or
▪ From a benefit fund; or
▪ In terms of a policy of insurance covering accident, sickness or death; or
▪ By a medical aid society.
• An amount received by way of alimony, howsoever paid.
• An award, benefit or compensation, including a pension, to any person or his dependants or heirs
under any law in respect of injury, disease, disablement or death suffered in employment.
• Civil servants benefit from employment with the State i.e., allowances, transport allowance, housing
allowance or benefits etc.

16.10 Individuals exempt from Income tax

• President – salary and emoluments paid in respect of his office and a member of staff of the
• President if the President pays such salary and emoluments.
• Allowances paid to the spouse of the President or Vice President in respect of duties the spouse
performs for or on behalf of the state.
• Salary and emoluments of persons or officials of UN organs and its agencies is also exempt.
• Allowances granted to Senior Government Officials, Minister, Deputy Minister, Provincial
• Governor, the Speaker and Deputy Speaker.
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• Allowances or value of any benefit, which is granted to any person in full time employment of the
State as specified in a Statutory Instrument e.g., housing and transport allowances.
• Allowances payable to a Chief or Headman.
• Allowances payable by the State to a person in its service in respect of the expenditure incurred by
the person in the discharge of his duties outside Zimbabwe.
• So much of the expenditure of the person in maintaining himself, his family or establishment whilst
employed on duty outside Zimbabwe as is in excess of his normal expenditure if he were employed
in Zimbabwe.

16.11 Deductions

Employees are entitled to deduction of professional subscriptions, pension contributions, NSSA

contributions etc. However, the allowable deductions are subject to the following restrictions:

Fund Maximum allowable

In relation to an employee: Pension fund contributions other than to a ZWL$1,500,000 per
RAF. 6th schedule para 15 annum.
In relation to an employer: Pension fund contributions other than to a ZWL$1,500,000 per
RAF. 6th schedule para 10 annum.
Employee RAF contributions.6th schedule para. 16 ZWL$1,500,000 per
annum.
Employer RAF contributions Disallowed.
Aggregate maximum contributions to two or more pension funds ZWL$1,500,000 per
other than RAFs.6th schedule para 18(2) annum.
Aggregate maximum contributions to two or more RAFs. 6th schedule $1,200,000
para 18(2)
Aggregate maximum contributions to two or more pension funds and ZWL$1,500,000 per
RAFs. 6th schedule para 18(2) annum.
Arrear pension contributions $500,000 per annum
NSSA (4.5%) ZWL500 966 per month
NEC contributions Full amount
Professional subscriptions Full amount

16.12 Credits – sect 7 (c) & the charging Act

Tax Credits for Individuals

When calculating income tax, individuals are eligible for various tax credits, providing deductions
against their taxable income. These credits are aimed at offering relief for specific situations, such as
medical expenses, disability, and supporting vulnerable groups. Here are some of the tax credits
available:

Elderly Blind Medical Mentally or

Notes Person Person Expenses Physically
Disability
Tax Credit US$900p.a. US$900 p.a. $1 for every $2 US$900 p.a.
paid
Apportionment of credit Yes No No No
Transfer between spouses No Yes No Yes
Blind child Grant credit
Non-resident Yes Yes Medical aid No
contributions
credit only
Blind taxpayer Yes

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 Medical expenses for a Invalid
child who is no longer a appliances or
minor child fittings only

An invalid appliance or fitting includes:

• a wheelchair or any mechanically propelled vehicle specifically designed or constructed to carry one
person who has a physical defect or disability,
• an artificial limb, leg callipers or crutch,
• Spectacles or contact lenses or,
• Any special fitting for the modification or adaptation of a motor vehicle, bed, bathroom or toilet to
suit the use by a disabled person.

Medical expense means any payment incurred or made by the taxpayer on/for:
• the purchase, hire, repair, modification or maintenance of an invalid appliance or fitting considered
to satisfaction by CG for the use by the disabled person
• the services supplied to a taxpayer or his family by a medical or dental practitioner
• drugs and medicines supplied to him or his family on the prescription of a medical / dental practitioner
• accommodation, maintenance, nursing and treatment, including blood transfusion and X-ray and
laboratory examinations, tests, etc. of the taxpayer or his family at a hospital, maternity-home,
nursing-home, sanatorium, surgery, clinic or similar institution.
• The conveyance by ambulance, including an air ambulance of the taxpayer or his family.
• The contributions to a medical aid society for the benefit of himself or his family.
No credit is granted on the cost of invalid appliance of medical expense refunded or recovered from any
source whatsoever.

An elderly taxpayer is granted to a person who is over 55 years.

A blind person is “a person whose eyesight is so defective during more than half of the period of
assessment and is unable to perform any work for which eyesight is essential.”

Mentally or physically disabled persons credit is granted for mental and physical disability of a substantial
degree and permanent nature. A disability is of substantial degree if it is certified by a doctor to be at
least 50%. A spouse who has income must claim the credit in his/her own return and only transfer to
spouse unused credit.

Non-resident persons do not qualify for medical expenses and disability credits

A spouse excludes a separated, divorced, unmaintained spouse or a wife in a polygamous marriage (not
the first wife). A child includes one’s own child, a legally adopted or step child.

Minor child means a child who is under 18 years of age and is un-married.

Lawful minor child

In relation to a taxpayer, means a lawful child of the taxpayer who-

a) is under the age of 18 years on the last day of the immediately preceding year of assessment; or
b) is born in the year of assessment; or
c) was under the age of 25 immediately prior to the commencement of the year of assessment and receives
during any part of the year of assessment full-time instruction as a student at any educational institution.

16.13 Tax concessions for the elderly – over 55 years

For the purposes of these concessions, an elderly person is a person aged 55years to be entitled to a
pension exemption

An elderly person is entitled to various exemptions in terms of the Act. These include a pension accrual
or receipt from a pension fund. The person is also entitled to the following exemptions;
• The first ZWL1,500,000 (US$3,000) p.a of interest earned on any deposit with a financial institution.

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• The first ZWL1,500,000 (US$3,000) p.a of interest on a banker’s acceptances and other discounted
instruments traded by financial institutions
• The first ZWL1,500,000 (US$3,000) p.a of rental income accruing to the taxpayer in the year of
assessment.
• 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.

16.14 Administration of PAYE

• Employer Registration: Any employer, whether resident or non-resident, must register with the
relevant Regional Manager of the Zimbabwe Revenue Authority (ZIMRA) if they employ
individuals whose gross pay exceeds the minimum tax threshold.
• Withholding and Remittance: Employers are required to withhold PAYE from employees'
salaries, including benefits and allowances. This deducted amount must be remitted to the
Commissioner General of ZIMRA by the 10th of the month following the deduction.
• Responsibility for Under-Deductions: Under-deductions and late payments can: Employers are
accountable for accurate PAYE deductions. result in penalties and interest charges. Penalties of
up to 100% of the unpaid tax can be imposed.
• Final Deduction System: Personnel employed by a single employer for the entire fiscal period
operate under the Final Deduction System. PAYE becomes a final tax on employment income,
relieving employees from the requirement to complete tax returns.
• Multiple Employers or Partial Employment: Individuals employed by more than one employer,
those employed for part of a fiscal period, and recipients of pensions, annuities, or taxable income
from trade and investment are obligated to complete and submit annual tax returns.

152
 Chapter round up

• Employment involves a contract of service whilst self-employment is a contract for services.

• The distinction between employment and self-employment is based on all the facts of the
engagement.
• Income includes amounts paid in appreciation of services rendered.
• 1 November 2023 ending 31 December 2023 the ZWL tax-free bonus amount was increased to
ZWL7,500,000 from ZWL500,000 and the USD exemption amount remained at USD700.
• 1 January 2024 onwards the USD tax-free bonus threshold was revised from USD700 to USD400
and the ZWL tax-free bonus threshold shall be pegged using the USD equivalent.
• Pension accruing to or received by a person who is over 55 years is exempt from tax.
• An individual is entitled to deduct against his income tax invalid appliances and medical expense,
elderly, blind and mental or physical disability credits.

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 17. Capital Gains Tax

17.1 Introduction

Capital gains tax is chargeable on the sale or deemed disposal of a specified asset from a source within
Zimbabwe. A specified asset means an immovable property or any marketable security and certain
intangible assets. It does not include movable property. An immovable property includes land, dams, roads,
all buildings or structures with foundations in the soil. A marketable security is any security, stock,
debenture, share or any other interest capable of being sold in a share market or exchange.

Objectives • Describe the scope of capital gains tax.

• List those assets which are exempt.
• Compute capital gains on specified assets for both individuals and companies.
• Recognise deductible expenditure, including adjustment for inflation
• Explain the treatment of capital losses for both individuals and companies
• Explain the treatment where an asset is damaged, lost or destroyed, and the
implications of receiving insurance proceeds and reinvesting such proceeds
• Explain and apply rollover relief as it applies to individuals and companies.
• Explain and apply the relief available upon the transfer of assets by an individual to a
company which he controls.
• Explain and apply the relief available for transfers of assets between companies under
common control.
• Explain and apply the relief available where the purchase price is paid by instalments

Act:(if Sect 2 of the ITA

applicable) Sect 8(1)(j) of the ITA
Sect 2 of CGTA
Sect 8-22 of the CHTA
Regulations: None
Relevant (ITC 1395 (1985)).
Cases

17.2 From a source within Zimbabwe

Only capital amount from source in Zimbabwe is taxable. Source of gain on an immovable property is
where the property is situated and for marketable securities, it is the place the investor is conducting his
investment activities.

17.3 Payment of capital gains tax in foreign currency

• Section 39A (9) of the Finance Act clarifies that, despite the use of the Zimbabwe dollar as the
sole legal tender in domestic transactions, Capital Gains Tax (CGT) transactions are not deemed
to be in Zimbabwe dollars.
• When a capital gain is received, accrued, or involves a foreign currency component, the
applicable CGT on that portion is paid in foreign currency.
• The apportionment is based on the proportion of the capital gain denominated in foreign
currency in relation to the total transaction.

17.4 Rates of Capital gain tax and Capital gains withholding tax

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Section 39A (10) provides that “for the purposes of determining the capital gain received by or accrued to
or in favour of any person in respect of a specified asset acquired on or after the 1st February, 2009, but the
22nd February, 2019, and disposed of after that date, no amounts shall be deducted therefrom that are allowed
to be deducted in terms of section 11 of the Capital Gains Tax Act [Chapter 23:01]”. This amendment is
meant to address the distortion brought about by SI33 of 2019 which provides for United States dollar values
as at 22nd of February 2019 to RTGS$ on 1:1 basis the Finance Ac.

Date of acquisition of specified asset Applicable rate

Acquired before 1st of February 2009 and 5% of capital amount (proceeds less exemptions)
sold thereafter
Acquired after 1 February 2009 and sold 20% of capital gain (proceeds less exemptions less
before 22nd February 2009 deductions)
Acquired after 1 February 2009 and sold 5% of capital amount (proceeds less exemptions)
after 22nd of February 2019
Acquired after 22nd of February 2019 and 20% of capital gain (proceeds less exemptions less
sold thereafter deductions)

17.5 Framework for computing capital gains tax liability

Gross capital amount xxx

Less Recoupment (xxx)
Less Exemption (xxx)
Capital amount xxx
Less Deduction
Cost of specified asset (xxx)
Improvements, additions or alterations (xxx)
Less capital allowances (xxx)
xxx
Inflation allowance:
Original cost x 2.5% x no. of years xxx
Improvements, additions or alterations x 2.5% x no. of years xxx
Selling cost xxx (xxx)
Capital gain/loss before relief xxx
Less Reliefs (xxx)
Less Assessed loss b/f (xxx)
Capital gain/loss xxx

17.6 Gross capital amount

Gross capital amount is ‘the total amount received by or accrued to or in favour of a person or deemed
to have been received by or to have accrued to or in favour of a person in any year of assessment from
a source within Zimbabwe. It excludes amounts subject to income tax such as recoupment.

17.6.1 Deemed sales- sect 8 (2)

Certain disposals are deemed to trigger capital gains tax as follows:

• Disposal otherwise than by way of sale e.g donation - deemed sold at fair market price.
• Expropriation of specified asset - deemed sold at an amount equal to the amount paid by way of
compensation for the expropriation of such specified asset.
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• Sale in execution of court order- deemed sold at an amount realised from the sale.
• Redemption/maturity of specified asset-deemed sold at an amount received on maturity or
redemption
• Deed of sale - deemed sold at an amount equal to the whole amount received by or accruing as a
result of the transfer.
• Cessions - A transfer of rights in a residential, commercial or industrial stand is deemed to be a
disposal of the stand. It does not matter whether the stand is serviced or not or whether the person’s
title to the stand is registered under the Deeds Registries Act (Chapter 20:05). The amount to be
included in the gross capital amount is the amount paid to or accruing to the transferor.
• Relinquishing of rights in condominium by a member- deemed to be a disposal of the property by
the member at the amount paid to or accruing to the member as a result of relinquishing his rights.

17.6.2 Exemptions- sect 10

Exemptions are contained in section 10 of the CGTA, as follows:

• Sale of a principal private residence if such person was, on the date of the sale, 55 years or above
• Sale of a specified asset by a public entity, an organisation not for profit and a quasi-Government
and other related bodies other than disposals by an agricultural, mining and commercial institution
or societies not operating for the private pecuniary profit or gain of the members, building societies
and employees saving schemes or funds approved by the Commissioner
• The first $144,000 on sale of any unlisted marketable security by a person who is 55 years or above.
• Sale of listed marketable securities, these are subject to a final withholding tax of 1%
• Sale or disposal by an employee of his shares or interest in an approved employee share or ownership
trust to the trust.
• The realisation or distribution by the executor of a deceased estate or a specified asset forming part
of such estate.
• Compensation for Commercials Farmers
• The compensation paid to commercial farmers for expropriation of agricultural land is not liable to
Capital Gains Tax (CGT, this is change put in by the new Finance Act No. 2 of 2023.

17.6.3 Deductions- sect 11

Deductions for capital gains tax purposes are as follows: EN

ATIONS
Component Explanation
Cost of acquisition Cost of acquisition or construction of such specified assets that are sold during
or construction the year of assessment includes:
• Interest on bond used to purchase or construct a specified asset
• Cost of obtaining a valuation for CGT purposes
• Cost of surveyor, valuer, auctioneer, accountant, broker, agent,
conveyancer etc.
• Stamp duty, transfer duty or similar duty
• Installation costs including foundations and supporting structures
• VAT paid and not claimed or refunded in respect of an asset
• Costs of establishing, maintaining or defending a legal title in the asset
Cost on acquisition through inheritance is the valuation of the specified asset as
used for estate duty purposes (estate value). For a donation, the taxpayer’s cost
is the amount the donor’s gross capital amount or gross income.
Cost of Cost of altering, additions or improving the specified asset in terms of s11 (2) (b)
improvement of the CGTA excluding those deductible for income tax purposes e.g repairs.
(enhancement
cost)

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 Inflation allowance 2.5% annually or part of year thereof inflation allowance on the original cost and
cost of improvement. Part of the year is treated as a full year and both years of
purchase and sale are counted.
Selling expenses Section 11(1) (d) – Disposal cost i.e., legal costs, advertising costs, selling
expenses, estate agency fees, brokerage commission or fee, valuation costs, etc.
Bad debts A bad debt, other than doubtful debts, arising out of sale of specified assets.
Legal expenses Legal expenses incurred for successful capital gains tax appeal cases in the High
Court, Special Court or Supreme Court
Foreign exchange Realised exchange losses related to specified assets.
losses
Capital loss Capital losses are deductible and carried forward indefinitely if they cannot
immediately be utilised
Avoidance of Expenditure should be deducted once if it’s provided under more than one
double deduction section

17.7 Damage or destruction of a specified asset

Deemed Sale on Destruction: In the event of asset destruction, it is treated as if it were sold, with the
amount equal to the received or accrued insurance compensation.
Comparison with Original Cost: If the insurance compensation is lower than the original cost and cost
of improvement, no deemed sale occurs. Instead, the insurance proceeds should be utilised to offset
these costs.
Exceeding Costs and Replacement/Repair: If the insurance proceeds surpass the mentioned costs and
the taxpayer opts for replacement or repair, the capital gain related to the amount spent is not subject to
taxation.
Conditions for Replacement/Repair Relief: Replacement or repair must be completed within 2 years
from the date of damage or destruction. The replacement should be of a similar nature; otherwise, the
relief may not be granted.

Example

ABC (Pvt) Ltd constructed a finished goods warehouse in June 2014 for $125,000. In July 2018 the
building caught fire and was badly damaged. As a compensation for the damage, the company was paid
$150,000 by its insurer and used $130,000 of the money to replace the building, which was brought into
use on 1 January 2019. Show the capital gains tax effect of the transaction. Maximum capital allowances
were claimed.

ANSWER

Gross capital amount 150,000

Less recoupment (125,000)
Less Deduction
Cost 125,000
Less capital allowances (125,000)
Inflation ($125,000 x 2.5% x 5 years) 15,625 15,625
Capital gain 9,375
Less Relief ($130,000/$150,000 x 9,375) 8,125
Capital gain 1,250

17.8 Related party transfers- sect 15 & 16

Subject to an election being made the following transfers or sales shall escape capital gains tax until the
sale is made to a third party
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• Transfer in a scheme of reconstruction, takeover etc between companies under the same control
• Transfer to new successor company in Zimbabwe as consequence of conversion of a foreign
company.
• Transfer as a consequence of conversion of a company to Private Business Corporation or vice
versa.
• Transfer of specified assets between spouses including those triggered by divorce.

17.9 Transfer of business property to company-s17

Capital Gains Tax Exemption:
An individual transferring an immovable asset used in trade to a company under their control can be
exempt from capital gains tax.

Condition for Exemption:

This exemption is contingent upon the individual making an election. The election must be submitted
no later than the date for filing a return for the assessment of capital gains.

Duration of Exemption:
The individual will continue to enjoy the exemption until the property is eventually sold to a third party.

17.10 Transfer of mining titles

A special CGT of 20% is charged on the value of the transaction on transfers of mining titles on
agreements entered within or outside the country this has been introduced by the new Finance Act 2023.
This is retrospective from 10 years before the 1st of January 2024. A special CGT of 5% applies on
transfer of mining title where there is express provision in the mining law for approval from the minister
of Mines and Mining Development.
No special CGT is payable where the mining title has ceased to exist due to cancellation, forfeiture,
surrender or extinction on transfers made before 1 January 2024 must be paid no later than the 1st of
April 2024. CGT on transfers made on or after 1 January 2024 must be paid no later than thirty days after
the conclusion of the transaction. In cases of multiple transfers, the amounts must be aggregated.

17.11 Hire purchase sale- sect 18

A person who sells or transfers a specified asset on hire purchase or suspensive sale is entitled to a relief
computed as follows:

A x (B-C)
D

A amount not yet receivable (debtors) under the sale agreement at the end of year of assessment.
B is the capital amount accruing under the sale agreement
C is the base cost (acquisition, improvement, inflation allowance and selling cost)
D is the gross capital amount accruing under the sale agreement

The relief is capital amount in the taxpayer’s return of the following year of assessment and to be substituted by
a fresh allowance determined in that year of assessment.

Example

HYT (Pvt) Ltd bought a factory building on 1 December 2015 for $400,000 and had been using it in its business
since that date. On 2 March 2018 the company found a buyer willing to purchase the building for $750,000. This
was the best bargain after several unsuccessful attempts by HYT (Pvt) Ltd to sale the property. Selling expenses
are 10% of the gross proceeds.

The terms of the agreement were as follows:

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a) The buyer to pay 50% of the sale price in the year of sale agreement and the balance over 2 years in equal
instalment commencing 2018.
b) Ownership to pass immediately upon payment of the first instalment
c) In the event that buyer fails to pay an instalment the property will be repossessed

Show capital gains tax of HYT (Pvt) Ltd for the periods 2018, 2019 and 2020

ANSWER

2018
Gross capital amount 750,000
Less recoupment ($400,000 x 5% x 3years) (60,000)
Capital amount 690,000
Less Deduction
Cost 400,000
Less capital allowances (3 years x 5% x $400,000) (60,000)
Inflation ($400,000 x 2.5% x 4 years) 40,000
Selling total gain 75,000 455,000
235,000
Less Hire purchase allowance ($235,000 x 375,000/$750,000) 117,500
Capital gain 117,500
Tax @ 20% 23,500

2019
Hire purchase allowance b/f 117,500
Less Hire purchase allowance ($235,000 x $187,500/$750,000) 58,750
Capital gain 58,750
Tax @20% 11,750
2020
Hire purchase allowance b/f 58,750
Less Hire purchase allowance (0 x ($690,000 -$455,000)/$750,000) .........
Capital gain 58,750
Tax @20% 11,750

Note debtors are computed as follows:

Gross capital amount 750,000
Less cash paid (50% x $750,000) 375,000
Debtors (D in the formula) 2016 375,000
Less cash paid in 2019 187,500
Debtors (D) in 2019 187,500
Less cash paid in 2020 187,500
Debtors (D) in 2020 nil

17.12 Principal Private Residence (PPR) - sect 21

A PPR is defined in three parts as follows:
ENATIONS
Component Explanation
Dwelling A dwelling which is proved to the satisfaction of the Commissioner that:
• It has been a person’s sole or main residence during the period it was owned by him
• It has been a person’s sole or main residence for at least 4 years before the date it
is sold or for such other shorter period as the Commissioner considers reasonable.
• It has been a person’s sole or main residence despite him being prevented from
residing in it due to employment or such other circumstances as the Commissioner
considers reasonable.
Land Any land, whether or not it is a piece of land registered as a separate entity in a Deeds
Registry, which:

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 • is owned by the individual concerned
• surrounds or is adjacent to the dwelling in (a); and
• is used by the individual primarily for private or domestic purposes in association
with the dwelling in (a)
• does not exceed 2 hectares or such larger area as the Commissioner having regard
to the size and character of the dwelling in (a), is satisfied for the reasonable
enjoyment of the dwelling as a PPR:

Other Any garage, storeroom or other building or structure which is owned by the individual
structures concerned and forms part of or is attached to or otherwise associated with the dwelling
and which is used by the individual concerned primarily for private or domestic
purposes in association with the dwelling.

Election for Relief: Upon making an election, the sale of a Primary Residence (PPR) or residential
stand replaced by another PPR or residential stand becomes exempt from capital gains tax.
Timing of Election: The election for relief must be made on or before the date of submitting a return
for the assessment of capital gains.
Land Ownership Requirement: The replacement PPR should be on land owned by the taxpayer in
Zimbabwe to qualify for the relief.
Partial Utilisation of Proceeds: If only a portion of the proceeds is used for the replacement, relief
applies to the gain corresponding to the amount expended.
The relief shall be on the gain applicable to the amount expended, computed as follows:

AxB
C

A is the amount used to purchase/construct a new a new PPR or residential stand

B is the potential capital gain on the old PPR or old residential stand
C is the proceeds accruing on the sale of the old PPR or old residential stand

Example

Mrs. X sold his primary home for $120,000 on 2 January 2018. She bought this house on 1 June 2014
for $65,000. Mrs. X paid $10,500 sales commission and $1,500 legal fees in connection with the sale.
A month before selling the house, she incurred $5,000 on painting the house and repaired some items of
the house at a cost of $2,500. On January 15, 2018, Mrs. X bought a new home for $95,000. Show the
minimum capital gains tax impact of this transaction.

ANSWER

Gross capital amount 120,000

Less Deduction
Cost 65,000
Improvements 5,000
Inflation
$65,000 x 2.5% x 5 years 8,125

$5,000 x 2.5% x 1 year 125

Selling costs ($10,500 + $1,500) 12,000 90,250
Capital gain 29,750
Less Rollover (29750 x 95000/120000) 23,552
Capital gain 6,198
Tax @ 20% 1,240

17.13 Substitution of business property- sect 22

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Capital gains tax can be avoided on the sale of a business property if the proceeds are used to purchase
or construct another property, with an election made before the capital gains assessment return
submission. Both properties must belong to the taxpayer and be used in their trade. Relief is applicable
to the gain equivalent to the amount expended for replacement. If the proceeds are partially utilised the
relief is computed as follows:

AxB
C
A is the amount used to purchase/construct a new property
B is the potential capital gain on the old property
C is the proceeds accruing on the sale of the old property

Example

Mr. X owned a retail shop which he acquired in 2015 for $50,000 (current ITV $46,250). He sold it in
May 2018 for $80,000 and used $60,000 of the proceeds to purchase another shop. Show the minimum
capital gain tax of this transaction.

ANSWER

Gross capital amount 80,000

Less Recoupment ($50,000 - $46,250) (3,750)
Less Deduction
Cost 50,000
Less capital allowances (3,750)
Inflation ($50,000 x 2.5% x 4 years) 5,000 51,250
Capital gain 25,000
Less rollover ($25,000 x $60,000/$80,000) 18,750
Capital gain 6,250.

17.14 Rates of the CGWT

The following are rates of withholding.

Specified asset Rate Comment

Listed shares 1% Final tax

Specified assets acquired. 5% Final tax

before 1 Feb 2009
Unlisted shares 5% Subject to assessment of capital gains tax

Immovable property 15% Subject to assessment of capital gains tax

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 Chapter round up

• Assets that are charged capital gains tax are immovable assets and marketable securities. Movable
assets are excluded.
• Gross capital amount is from a source within Zimbabwe if it arises from a disposal of an immovable
property situated in Zimbabwe or marketable securities disposed by a person carrying on investment
activities in Zimbabwe.
• A specified asset acquired before 1st of February 2009 is subject to 5% capital gain tax, computed
on the gross proceeds less any applicable exemption (no deductions are taken into account).
• A specified asset acquired after 1st of February 2009 and sold after 22 February 2019 is subject to
5% capital gain tax, computed on the gross proceeds less any applicable exemption (no deductions
are considered).
• Listed marketable securities are exempted from capital gains tax but to 1% final withholding tax
• A person who is 55 years or above is exempt from capital gains tax on disposal of his principal
private residence and on the first $144,000 on disposal of his/her unlisted marketable securities.
• Deductible costs include original cost of acquiring or constructing the specified asset, enhancement
cost, inflation and selling cost.
• Inflation allowance is computed as, 2.5% x cost x holding period.
• Capital losses which cannot be utilised are carried forward indefinitely.
• If an election is made, a transfer of specified asset between related parties is capital gains tax neutral.
• A taxpayer who sells his immovable property and uses the proceeds from that sale to purchase or
construct another immovable property can defer capital gain accruing from that sale if he makes an
election. A partial rollover is given where the proceeds are partially utilised.
• A taxpayer who sells a specified asset on hire purchase or on credit sale will be granted an allowance
on outstanding receivables. The allowance which is a deduction in the year shall be taxable in the
following year, when a fresh allowance is being computed.
• A principal private residence is a dwelling, but not all dwellings are principal private residents. A
dwelling must be the person’s main or sole residence to qualify as a principal private residence.
• Capital gain accruing from a disposal of principal private residence or a residential stand shall be
deferred, if the proceeds from its disposal are used to purchase or construct another principal private
residence or residential stand in Zimbabwe, provided an election is made.
• A disposal of principal private residence by a person who is 55 years or above at the time of disposal
of the PPR is exempt from capital gains tax.

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 18. Deceased Estates

18.1 Introduction

A deceased estate encompasses the assets, liabilities, and debts of an individual after their death. If a
person dies while employed or in business, income and expenses preceding death are assessed in the pre-
death period, while post-death income is assessed separately. The estate, represented by an executor or
administrator, is responsible for managing assets, settling claims, and overseeing taxation. In cases of a
created trust, the executor facilitates the handover to trustees. This process results in two assessments:
pre-death and post-death.

Objectives • Describe the scope of income tax on income of a deceased person.

• Explain the treatment of income accruing to a person after his death
• Identify capital items of a deceased person excluded from gross income of a
deceased person
Act: Sect 2 of the ITA
(if applicable) Sect 11
Regulations: None

Relevant Cases Hersov’s Estate v. CIR 21 SATC 106

18.2 Income of a deceased

Death doesn't alter the character of a person's income or how it's taxed. If an amount would have been
considered income for the deceased, it retains the same status when received by the executor. The
deceased's remuneration, including voluntary awards for services, remains employment income.
However, voluntary awards directly made to dependents or heirs might be treated as capital, given the
absence of rendered services.
As a general rule, a deceased estate cannot be taxed on amounts which the deceased had no right to claim
as income in his lifetime and ex gratia or in pursuance of a gratuitous act made after the death of the
deceased.

The following rules also apply:

• Cash in lieu of leave received by the executor of the deceased estate of civil servant is not taxed.
• Bonuses and directors’ fees voted after death or which are not fixed in the articles of association are
not taxable since the deceased had no right to the amount during his lifetime.
• Leave pay under an employment contract, royalties on a book, bonus or directors fees fixed in the
articles of association (despite being voted after death) and contractual commission are taxable.
• Salary, business income accruing to the date of death, bonus or director’s fees voted by the date of
death and contractual commission due at the date of death are taxed in the pre death period.
• Commission in terms of a contract or agreement which is paid after death, to the executor of a
deceased estate will be taxable either in the hands of the deceased if it becomes due and payable
before death or in the hands of the estate if it becomes due and payable after death.
• Any income made by a taxpayer as director of a company or as an employee in respect of a right to
acquire marketable securities, shall be deemed to have been made by him on the day before his death
and shall be included in his income up to the date of death.
• Any lump-sum awards from pension, provident and retirement annuity funds payable on the death of
the member of such a fund are deemed to accrue to him prior to his death.
• Tax credits to which the person is entitled to can only be claimed pre-death. No tax credit is allowed
to a deceased estate. The credits are reduced proportionately on a time basis.
• Medical expenses credit is claimed in the pre-death assessment despite being paid after death
• Life policies from an insurance paid to the estate or beneficiaries, including some other death benefits,
pension etc are generally non-taxable.

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• Lump sum directly paid to a beneficiary in terms of rules of a pension or benefit fund is of a capital
nature.

18.3 Ascertained beneficiaries.

Circumstances in which income is taxed in the Circumstances where income is taxed in the
hands of the beneficiary hands of the estate
Ascertained beneficiary who takes ownership of Prior to the distribution of an estate where a will
property upon testator’s death provides for the whole estate to go to a specific
individual
Where an asset is bequeathed to an heir Where the heirs cannot be determined such as in
the case of an inheritance to children still to be
born,
After distribution of an estate where a will Any income which cannot be linked to an
provides for the whole estate to go to a specific ascertained beneficiary
individual
Any income derived from an asset constituting the Any income derived from an asset constituting the
residue of the estate, provided that the heirs are residue of the estate where the beneficiaries are
ascertained beneficiaries in the same year. ascertained after the year it is derived,

Where the recipient of the inheritance and the In this latter case the heir cannot claim the income
income is merely postponed until some future immediately, it is nevertheless accumulated for his
dates, for example until their heir attains majority benefit. The heir may not acquire his/her right in
an asset of the estate immediately on the death of
the deceased, since executor accounts should first
be confirmed and the beneficiary should accept the
legacy or inheritance before he can be taxed on the
income accruing from legated assets.
Where income derived from the asset constituting The heirs should be ascertained beneficiaries.
the residue of the estate will be taxed in the hands
of the residuary heirs in the proportion in which
they share in the residue.

An ascertained beneficiary is an individual identified or nominated in a will who has an immediate right
to enjoy the present or future benefits of income accruing an asset formerly owned by the deceased.
He/she will, on death of testator, take ownership of the property and liable to pay tax on income derived
from the property from that date.

18.4 Character of income in the hands of beneficiaries

Income which accrues to the executor in the form of dividends or interest is passed on to the
beneficiaries as dividends or interest. However, exemptions for dividends and certain interest etc. does
not apply to annuities which form an exception to the conduit pipe principle. Lump sum receipts or
property are of capital nature and are not taxable for the beneficiary. Legacies with an income nature,
like annuities, are taxable in the hands of beneficiaries when paid.

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 18.5 Other aspects

• Carrying forward of assessed losses of a deceased person to an estate or a beneficiary is not allowed.
• A will that gives a person a right to income, but not to the ownership/inheritance of an asset is known
as a usufruct. As an example, a person may leave a house to son but grant the widower a life usufruct.
The son may not sell the asset as long as the widower remains alive.
• An estate is regarded to be ordinarily resident in Zimbabwe if the deceased was ordinarily resident in
Zimbabwe at the time of his death.
• If an asset is sold to a widow or beneficiary of a deceased employee by the company at a price below
the market value any difference or gain is not taxable in the hands of beneficiary
• Bad debts written off are a deduction on the deceased and those recovered by the heir cannot be taxed
on the heir since he is not the owner of the debts.
• Hire purchase allowance, allowed in the period up to death cannot be added back as income of the
estate after the deceased’s death. This amount is brought into gross income in full in the post death
period.

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 Chapter round up

• When a person dies, a new person known as the deceased estate is created.
• Each of the person (deceased and estate) is assessed separately (pre and post-death).
• Death does not change the nature of a person’s income or how he is taxed. If an amount would
have been income in the hands of the deceased, it will also be income when received by the executor
• Amounts received after the person’s death is gross income only if the person would have been
entitled to receive the amount during his life time
• Carrying forward of assessed losses of a deceased person to an estate or a beneficiary is not allowed.

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19. Objections and appeals

19.1 Objections

19.1.1 When Can Objections be made?

If dissatisfied with an assessment, individuals can file objections against decisions made by the
Commissioner.
Objections can relate to liability for registration, registration cancellation, refusal for refund authorisation,
or disagreements with rulings.
These objections are a means to contest and seek a review of specific decisions by tax authorities.

19.1.2 Lodging an Objection– Section 32

A person wishing to make an objection to the Commissioner’s assessment or decision must:
❖ Put the objection in writing
❖ Specify in detail the grounds of the objection
❖ Be made within 30 days after the date of the decision or assessment. In the event of a dispute, the date
of the assessment or decision will be the date the registered mail was posted to the person raising the
objection.

If the objection is received by the Commissioner within the stipulated time period, the Commissioner will
either:
❖ Alter the decision
❖ Alter or reduce the assessment, or
❖ Disallow the objection

A written notice must be sent to the person objecting to the Commissioner’s ruling/assessment etc.
informing him of the Commissioner’s decision.

19.1.3 Grounds of Objection

The grounds of objection should be stated clearly and it is important to raise all the grounds at the time of
objection. The Commissioner may, on good cause shown, give leave to the objector to amend or add to
the grounds.

19.1.4 Late Objections

If there is a delay in lodging a written objection, the Commissioner may accept it provided good reasons
are given for the delay. If an objection is not lodged, the assessment/decision becomes final after 30 days.

19.2 Appeals –Section 33

An appeal is only lodged if and when a person’s objection was disallowed. A registered operator must
appeal against the disallowance of the objection within 30 days of the date of the notice. An appeal can
be made to the Fiscal Appeal Court or to the Supreme Court depending on the nature of the dispute.

The appeal must be:-

❖ Made in writing
❖ Lodged with the Commissioner within 30 days after the date of the notice of disallowance of the
objection

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If there is a delay in the lodging of a written appeal, the Commissioner may condone the delay, depending
on the reasons. The appellant is limited to the grounds of objection stated in his original objection unless,
on good cause shown, leave is given to amend the grounds. The appellant or the Commissioner may
appeal to the Supreme Court against any decision of the Fiscal Appeal Court.

19.3 Tax Planning

Students can be examined on choosing the option that has the least VAT consequences or least tax
consequences with VAT being one of the taxes. Common examples are:

Employment costs that may have fringe benefits

Employers and employees often enter negotiations to structure fringe benefits including among other
things housing, motor vehicles, allowances and so on. The student is expected to be able to discuss the
tax implications of the various options for both the employee and the employer. The student is also
expected to apply any relevant anti-avoidance legislation. Common example is whether the employer buys
a vehicle and grants the right to use it to the employee who can later buy it at a lower price or the employer
buys a vehicle for employee and the employee pays back the vehicle through deductions or service over
an agreed period. These transactions could be viewed as loans or as remuneration and have different VAT
implications.

Financing a business
Businesses face various financing decisions such as taking out loans, or equity financing or hybrid
financing. Financing could be from local or foreign sources, and the financing exercise may involve
attendant services which could be imported services. It is important to understand the underlying
transactions and the VAT consequences of such transactions.

Structuring a sales transaction

Businesses dispose of assets from time to time for different reasons. Disposals are normally straight-
forward supplies which is; what VAT is based on and therefore often attract VAT. It is important to note
that businesses structure disposals in many varied ways and these alter both the value of supply and the
time of supply. Commonly sales could be for cash or for credit (with varied terms). In some cases, the
purchaser is renting to buy, or there could be a hire purchase agreement, suspensive sale arrangements
with or without nominal interest. The sales could also be between connected persons. The student shall
be expected to advise either the buyer or the seller or both on the best way to structure such sales
transaction taking into consideration the VAT aspect of the resultant tax.

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20. Other Amendments as per the Finance Act 12 of 2023

20.1 Specified Amounts

• The specified amounts are now pegged in USD. The ZWL equivalent amounts shall be converted
at the prevailing exchange rate on the date of payment.
20.2 Motor Insurance levy

• Introduction of a Schedule to the Income Tax Act for the Statutory Motor Insurance levy. This
did not exist previously.
20.3 IMTT
The intermediated money transfer tax, charged under section 36G(1) of the Taxes Act, is calculated as
follows;
ZWL transactions:
• 2% on transactions of ZWL equivalent of USD 5 up to ZWL equivalent amount of USD499,999.99.
• Amounts equal to or above USD500,000 are subject to a flat tax of USD10,150 per transaction.
• The currency conversion is done using the prevailing interbank rate.
Local USD transactions:
• 1% on transactions of USD5 up to a maximum of USD499,999.99.
• A flat amount of USD10,150 IMTT chargeable on a single transaction of USD500,000 and above.

20.3.1 Outbound foreign payments and Zimbabwe gold backed digital (ZIG)
tokens.
• Outbound foreign currency payments only relate to foreign currency payments made to a person
outside Zimbabwe, using funds obtained from the RBZ Dutch Auction Foreign currency market and
the interbank market operated by financial institutions.
• 1% on each outbound foreign payment of USD5 and above.
• 0,5% on each transaction of ZIG tokens of USD5 and above.
• The rates in the Act are US$0,01 (1 cent) per transaction on outbound foreign payments and
US$0,005 per transaction on (ZIG).
• The purchase of fuel and electricity is now exempt from the tax.
• Financial institutions will remit the IMTT to ZIMRA and not the Debt Redemption Sinking Fund.
• There is no maximum cap.

20.3.2 Exemption from IMTT

• Transfers to commercial farmers receiving compensation for expropriated agricultural land in terms
of the land reform programme are exempt from IMTT.
• Transfers to growers of wheat, maize and small grain by the Grain Marketing Board or persons
approved as commercial buyers by the Agricultural Marketing Board.
Note: Insertion of a section in both Finance Act and Exchange Control Act on Outbound foreign currency
charge which did not exist last year.

20.4 Domestic Minimum Top Up Tax (DMTT)

• Introduction of DMTT which is levied at a minimum corporate tax rate of 15%
• DMTT calculation is based on the effective tax rate (tax rate x annual income) charged on
jurisdictional profits.
• However, further clarification is required on the modalities surrounding this tax.
• This is effective from 1 January 2024.

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20.5 Strategic reserve levy

It is with effect from 1 January 2024.The rate of tax for the strategic levy was increased from US$0,1270
per litre for both petrol and diesel to US$0,1777 and US$0,157 per litre for petroleum products and diesel
respectively.

20.6 Wealth Tax

It with effect from 1 January 2023.A wealth tax of 1% is chargeable on residential properties with a value
of more than USD250,000.The tax payable is at most USD50,000 per annum. The tax is payable yearly,
however, taxpayers have a discretion to pay the tax at any time during the year of assessment. The tax is
paid to the local authority in which the property is located. This tax does not apply to a Principal Private
Residential Property. Value of the property is based on general valuations done by the concerned local
authority in terms of their by-laws.

20.7 Beverages Sugar Content Special Surtax

There was an introduction of a sugar surtax of USD0,002 per gram of sugar contained in beverages listed
under Statutory Instrument 249 of 2023. The ministerial statement has adjusted the surtax to USD0,001 per
gram and this is with effect from 1 January 2024.

20.8 Suspension of duty on specified new motor vehicles imported by safari and
tour operators.
With effect from 1 January 2024 taxpayers were given an extension of the relief by a further two years.
However, this is limited to a maximum of 5 motor vehicles per annum.

20.9 Suspension of duty on imported basic commodities

With effect from 1 February 2024, the suspension of duty on imported basic commodities was removed in
totality.

20.10 Fiscal Measures Relating to trade

Effective from 1 January 2024, eligibility to procure goods from manufacturers and wholesalers shall be
based on; licensing, VAT registration and compliance for wholesalers (with valid ITF263s) to acquire goods
from manufactures. Licensed, VAT registered and tax compliant retailers (with valid ITF263s) to procure
goods from wholesalers unfettered.
The Ministerial statement of 8 January 2024 further allowed bodies such as hotels, schools and other
corporates to procure goods from manufacturers provided that are VAT registered and have tax clearance
certificates. Manufacturers can also sell perishable products like milk, milk products and bread directly to
retailers.
In terms of Finance Act No 13, retailers who are not VAT registered, informal traders and individuals can
purchase from wholesalers under the following conditions:
I. Goods purchased should not exceed USD1,000 or equivalent ZWL in a period of 30 days or less and;
the purchaser must avail a receipt issued by the same supplier in the previous 30 days, otherwise
purchase will be further restricted to USD20.
II. If one is purchasing goods for the 1st time they are restricted to a maximum of USD20 or the ZWL
equivalent.
III. Wholesalers and manufacturers to collect 30% surcharge from informal traders and individuals
on the value of goods purchased which exceed the above thresholds.
IV. The Ministerial statement introduced the following:
Rural traders who are not registered for tax purposes are allowed to purchase goods from both
manufacturers and wholesalers. The manufacturer must charge a further 5% on the invoice value
for sales made directly to the above referenced rural traders.
Conclusion: However, the ministerial statement is not ultra-vires the Finance Act hence the Acy must
prevail.

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20.11 Tax compliance enforcement measures

There has been an addition to the compliance measures, the Commissioner General is now empowered to
enforce compliance by way of seizure of goods when they have a search warrant.

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APPENDIX

Tutorial Questions and Answers

TUT 1

This question consists of five independent scenarios. You should respond to each scenario by referencing
the applicable legislation and using relevant case law to support your answers.
Your answers do not need to be in any specific format (such as a memo).

Scenario A
Jill Pearson is employed as a tour operator for African Overlander Ltd, a Zimbabwean company running
tours into Botswana and Mozambique. Jill earns a fixed monthly salary of $1,200,000. Jill currently
works on a month-on/month-off basis – for one month she is out of Zimbabwe leading a tour, and for
one month she is at home in Gweru with her husband and children, and works at her office at African
Overlander planning her next tour.
Jill’s son Henry is studying Income Tax as part of his BCom degree, and recently told Jill about the
“residency” test. Jill is now considering discussing with her employer whether she can spend more time
outside Zimbabwe each year, in the hope that this will exclude her from the definition of Resident and
reduce her taxable income.
You are required to advise Jill, with reasons, as to whether her plan will exclude her from the
definition of Resident, and how else she might reduce the Zimbabwean income tax on her salary. 7
marks

Scenario B
The Seldom Active range of gyms and Crouching Tiger shoes intend brokering a deal, whereby Seldom
Active will offer free gym access to all Crouching Tiger employees, in return for which Crouching Tiger
will supply free training shoes to Seldom Active. The company will in turn provide the shoes to its
employees. The two companies believe that this will result in no gross income for either companies,
since no money has changed hands, and what has been received is for the benefit of their respective
employees.
A regular gym membership at Seldom Active costs $60,000, while the retail price of a pair of Crouching
Tiger shoes is $50,000.

You are required to advise Seldom Active, with reasons, whether it’s understanding of gross income
is correct, and if not, how ZIMRA will view this transaction. (9 marks)

Scenario C

Mike Turner runs a used car business. Mike pays a small firm of accountants to keep his accounting
records and file his tax returns. Mike’s daughter Mini (a recently-qualified chartered accountant)
recently sold her car, and Mike was surprised to hear that Mini does not believe that she will pay any
tax on the sale, even though she made a profit on the sale. “I pay a fortune in tax on my car sales,”
moaned Mike. “Perhaps I should get better accountants!”

You are required to explain to Mike why his car sales are included in gross income, while his
daughter’s sale is not, and whether either Mike or Mini are entitled to any deduction of cost in respect
of their sales. (20 marks)

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Scenario D

Extreme Sushi is a local sushi restaurant with sushi lovers who enjoy taking a risk flock to Extreme
Sushi for its potentially lethal sushi made from poisonous blowfish. The blowfish is considered a
delicacy, and an expert sushi chef removes the poisonous part of the fish during preparation.

A customer at Extreme Sushi recently died after having eaten some blowfish sushi that had been
incorrectly prepared. Following a claim for damages, the restaurant was compelled to pay the customer’s
family $2,000,000 in compensation.

You are required to advise Extreme Sushi, with reasons, whether the compensation payment for
damages will be allowed as a deduction for income tax purposes. (7 marks)

Scenario E

Agricola Ltd is a farming supply company, with divisions operating in a number of farming-related
markets. One of its divisions sells farming equipment, which is sold to commercial farmers subject to a
two-year warranty. If the machinery breaks for any reason within two years of the date of purchase,
Agricola is obliged to repair or replace the item. Agricola recognises a provision for repairs and returns
in its accounting records based on the historical rate of return and cost of repairs over the last five years.

During the current year of assessment Agricola sold its farm equipment division to a rival company,
Dear John Ltd. In terms of the agreement, Dear John agreed to take over responsibility for the repair or
replacement of any items still under warranty at the date of the transaction, in return for which Agricola
agreed to reduce the selling price of the division by the amount of the provision for repairs and returns
in its accounting records.

You are required to explain if, and when, Agricola may claim a deduction for the provision for repairs
and returns. (8 marks)

SOLUTION

Scenario A

Jill’s proposal will not reduce her taxable income. (1)

The first test is of whether Jill is resident in Zimbabwe (Zim), that is whether she is ordinarily resident
in Zim. This is true when Zimbabwe is the place to which she would “return from (her) wanderings”
(Cohen) [alternatively, Zimbabwe is where she is “habitually and normally resident” ]. (2)

Jill is ordinarily resident in Zimbabwe - her family lives here, and she has no fixed place of residence
anywhere else. (2)

Jill could however reduce her taxable income if she were to qualify as a non-resident during any given
tax year. (1)

In order to do so she would have to structure her work travel such that she would be out of the country
for more than 183 days in total, and more than 60 continuous days, during any 12-month period. (1)

The remuneration she earned while outside Zimbabwe in the qualifying 12-month period will not be
taxable in Zimbabwe. (1)

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Scenario B

Seldom Active’s understanding of gross income is not correct. It is based on an incorrect understanding
of “amount, in cash or otherwise”. (1)

An amount exists for “every form of property … which has a money value” (Lategan). (2)

Seldom Active has clearly received something that can be expressed in monetary value (Butcher Bros)
[Alternatively, there has been a quid pro quo the value of which can be expressed in monetary value
(Brummeria Renaissance]. (2)

Seldom Active’s gross income is therefore the value of what is received, i.e. $50,000 per pair of shoes.
(1)

Seldom Active cannot argue that what is received is not for its own benefit. (1)

The company benefits from the receipt, and the giving of the shoes to its employees is a second
transaction, similar to that in Witwatersrand Association of Racing Clubs. (2)

Seldom Active would be entitled to a deduction for each pair of shoes given to an employee as this is
part of the cost of their employment. (1)

Scenario C

Mike’s sales are included in gross income because they are not capital in nature, where-as Mini’s sale
is the realisation of a capital asset. (2)

Whether an asset is capital or revenue in nature is determined by the taxpayer’s intention in acquiring
the asset (unless there has been a subsequent change in intention) (Stott). (1)

Items acquired for disposal in a scheme of profit-making (Pick n’ Pay Employee Share Purchase Trust).
(1)

Mike’s cars are acquired for disposal in the ordinary course of his business. (2)

Mike’s cars are therefore his trading stock. (1)

Mini’s car is a capital asset because she acquired it to obtain benefits through use. (1)

Mini’s car is akin to a tree, the fruits of which are the benefits she obtains in driving it (Visser). (2)

Mini is entitled to realise her asset to best advantage (i.e., make a profit). This does not change the fact
that the proceeds are capital in nature (Stott). (2)

Expenditure is deductible if it meets the requirements of section 15(a), specifically if it is incurred as

part of a trade, is in the production of income and is not capital in nature. It must only be deductible to
the extent it is incurred for the purpose of trade. (1)

The essential element of trade is that it has a profit-making purpose (Burgess) (2)

Expenditure is incurred in the production of income if its purpose is to earn income (Sub-Nigel) (2)

Fixed capital is capital in nature, whereas floating capital is not (George Forest Timbers) (2)

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Alternatively, expenditure is capital in nature if it is intended to provide an enduring benefit (British
Insulated & Helmsby Cables) (2)

Mike is entitled to an s15 2 (a) deduction when he purchases a car, because the purchase is in the
production of income and is not capital in nature, since it is purchased for resale at a profit. (1)

In contrast, Mini’s purchase is capital in nature, because she obtains an enduring bene-fit from driving
the car, and the purpose in incurring the expenditure is not to produce income. (1)

Scenario D

The question to be determined is whether the payment meets the criteria of “in the production of income”
for the purposes of s15 2 (a). (1)

Expenses per se do not produce income; it is actions that produce income. It is therefore necessary to
identify the action that led to the expenditure, and to assess the closeness to which the action is associated
with the production of the taxpayer’s income (PE Electric Tramways). (2)

The action that gave rise to the payment was the serving of potentially poisonous sushi. This is a
significant component of Extreme Sushi’s business. (1)

The risk of someone being poisoned by this sushi is an “inevitable concomitant” (Joffe) of the taxpayer’s
business, which centres on the sale of potentially poisonous sushi (3)

The expenditure should therefore be allowed as s15 2 (a) deduction. (1)

Scenario E

In terms of s15 2 (a), a deduction is only allowable when it has been “actually incurred”. (1)

+This happens at the point that the taxpayer has an unconditional liability (Golden Dumps/ Nasionale).
(1)

The taxpayer has no unconditional liability until a customer returns goods. The provision is therefore
not deductible. (2)

The reduction in the selling price due to the inclusion of the provision in the net assets sold does not
represent an actual accrual of this amount (Ackermans). (2)

The taxpayer cannot claim a deduction at the point that the division is sold. (1)

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TUT 2

ECM is a company incorporated in Zimbabwe and is listed on the Zimbabwe Stock Exchange and is a
subsidiary company of Evergreen Ltd which is a Mauritius based company. ECM primary business is
the leasing out of construction equipment (this includes bulldozers, tipper trucks, jackhammers amongst
others). In recent years ECM’s business has been on the rise and management have made a decision to
seek out opportunities in neighbouring countries such as Zambia and Mozambique.

Mrs. Makova who is a finance manager at ECM recently attended a tax seminar organised by one of the
leading Chartered Accountant’s firms in Zimbabwe (TCM Chartered Accountants) and the main topic
of discussion was in reference to the definition and interpretation of Gross Income. As a follow up to
the seminar Mrs. Makova send the following request for advice in relation to transactions they entered
into during the 2020 tax year.

RE: APPLICATION OF GROSS INCOME

In light of the discussions, we had at your recently held tax seminar I am requesting advice in respect of
the following transactions we entered into during the 2020 tax year of assessment:

1. It is ECM’s practice to charge 10% non-refundable deposit in respect of all its leasing agreements
that it enters into with its clients. The deposit is payable by the customer before ECM delivers the
equipment to the client. During the year ECM received deposits amounting to $3 000,000 in respect of
its leasing agreements with clients and the normal practice for ECM has been to invest the amounts so
received in money market instruments. The money in-vested is normally held to pay for any future repair
costs on the leased equipment.

2. Due to a construction boom in Mauritius ECM sold equipment worth $3 600,000 to Evergreen Ltd
in August 2020. The $3 600,000 included a mark-up of 20% and the amount was only receivable from
Evergreen in July 2021. The finance manager was not sure of the tax implications of the $3 600,000
receipts receivable from Evergreen. When ECM originally acquired the equipment, they had wanted to
use it in their normal leasing business.

1. In April 2020 ECM was awarded a tender by the Mozambican government for the supply of
construction equipment for a road construction project in Mozambique. The terms of the lease
agreement were as follows:
• The lease period was for five months
• Commencement date of the lease agreement 1 March 2021.
• ECM had right to return of the lease equipment on expiry of the lease period.
• The monthly lease rental was agreed and set at $1 000,000

2. For the duration of the lease period ECM was to second two of its employees to operate the leased
equipment in Mozambique. The employees would still be receiving their monthly salary from ECM
and in addition to their normal salary the Mozambican government would pay the employees a
monthly allowance of $1,000 000 each. Before the commencement of the contract the two
employees were determined to be ordinarily resident in Zimbabwe. In October 2021 ECM instituted
legal proceedings against one of their clients in respect of damages to their leased equipment. In the
court proceedings that followed the client was found to be negligent in operating ECM’s equipment.
A court ruling was obtained in November in which the judge made the following judgement:

• ECM to be paid $12 000,000 as compensation for loss of business during the period the
equipment was not being used due to damages caused by the client.
• ECM to be paid $8 000,000 in respect of the costs of repairs to be incurred on the equipment.
• ECM to be paid $1 000,000 as compensation for legal costs incurred in pursuing the case.
The client paid all the amounts in respect of the court ruling on 15 December 2020.
176
3. Over the years it has been ECM’s practice to award its employees long service awards. In 2020
ECM paid $3 000,000 equivalent to an employee’s 3 months’ salary to an employee Mr Shumba
who has been in ECM’s employment for the past 10 years.

Required

With reference to information contained in note 1, 2 and 4 discuss the income tax implications of the
amount’s receivable by ECM. Bonus marks will be awarded for identification of relevant case laws in
your discussion.23 marks

Based on the information in Note 3, assuming that ECM goes ahead with the contract with the
Mozambican government discuss the following in terms of the Income Tax Act and relevant case law:

a) Whether the monthly lease income of $1 000,000 is taxable in Zimbabwe.5 marks

b) In respect of the two employees whether their salary and allowance they are receiving from the
Mozambican government qualifies as gross income and therefore taxable in Zimbabwe.8 marks
c) With reference to Note 5 discuss the Income tax implications in Mr Shumba’s hands of the long
service award he received in 2020. 4 marks

SOLUTION

Required 1

With reference to information contained in note 1, 2 and 4 discuss the income tax implications of the
amounts receivable by ECM. Bonus marks will be awarded for identification of relevant case laws in
your discussion.

Note 1
The pertinent question to answer here is whether the deposit receivable from the customers constitutes
gross income. 1

In terms of the definition of gross income an amount is deemed received by a taxpayer if the taxpayer is
able to use the received amount for their own benefit. (Geldenhuys v C.I.R). 2

In this case the deposits received by ECM are non-refundable, hence we can conclude that ECM has the
right to use the amounts for whatever purpose the company deems necessary.

This is as held in the case between Pyott Ltd v CIR 1945, where the judge concluded that the amount of
the deposit was income because it was beneficially received by the taxpayer. 1
Therefore, ECM should include the full amount of $3 000,000 in their taxable income for the 2020 tax
year.1
WW

Note 2
The pertinent question to be answered is whether the receipt of $3 600,000 from the sale of the
equipment is of a capital or revenue nature.1
Should the receipt be of a capital nature it is excluded from the gross income definition but may have
capital gains tax (CGT) consequences? 1
In this case we need to determine ECM’s intention when the equipment was acquired. (COT
Southern Rhodesia v Levy 1952) 2
The finance manager explained that the equipment was bought with the intention of including it as part
of the equipment they used in their leasing business.1
Therefore, on date of acquisition the equipment would have been held as capital assets. 1
Therefore, based on the intention on the date of acquisition the receipt of $3 600,000 is capital in nature.1

177
Even though ECM made a profit on the sale the proceeds are still capital in nature as concluded in the
case between the COT Southern Rhodesia and Levy, where the judge concluded that the taxpayer is not
required to completely exclude the contemplation of profitable resale.2

Note 4
Compensation for loss of business and repair costs

The pertinent question to be answered is whether the compensation receipt of $12 000,000 constitutes
gross income.
If the payment is made for the compensation for loss of profits it will be of a revenue nature in the hands
of the recipient. As was said in the Burmah Steam Ship Co case (bonus mark for mentioning the case)
“is the receipt to fill a hole in profits or in fixed capital, $8 000,000 (or part thereof) is of a capital or
revenue nature.1
Should the receipt be of a capital nature it is excluded from the gross income definition but may have
capital gains tax (CGT) consequences? 1
The courts have held that damages and compensation receipt will be of a capital nature if the payment
is for the loss or sterilisation of the taxpayer’s capital asset (i.e., his income producing machine) assets”.2
The receipt of $12 000,000 is compensation for loss of profits (i.e., future business generated by the
equipment whilst it is idle) and of a revenue nature and included in gross income.1
The part of the receipt relating to repairs ($8 000,000) is a recoupment of section 15 2 (b) expenses
claimed and is included in gross income.1
Therefore, the receipts of $12 000,000 and $8 000,000 should be included in ECM’s gross income for
the 2020 tax year.1
Compensation for legal costs
We need to determine whether the compensation for the legal costs is revenue or capital in nature.1
In order to make the determination we need to consider for what purpose the legal costs were incurred,
i.e., to generate revenue or capital receipts.1
In this case the compensation received from the legal proceedings has been determined to be revenue in
nature, hence the legal costs incurred will be allowed as deduction in terms of Section 15 (2) (b). 2
Therefore, in light of the above the receipts of $1 000,000 are revenue in nature and are therefore to be
included as part of ECM’s taxable income.1

Required 2

Based on the information in Note 3, assuming that ECM goes ahead with the contract with the
Mozambican government discuss the following in terms of the Income Tax Act and relevant case law:
a. Whether the monthly lease income of $10 000,000 is taxable in Zimbabwe.
b. In respect of the two employees whether their salary and allowance they are receiving from
the Mozambican government qualifies as gross income and therefore taxable in Zimbabwe.

Note 3 a:
The pertinent question to address here is whether the lease income is from a source within Zimbabwe.
1
Since the equipment to be leased to the Mozambican government is movable, the general rule is that the
source of any income generated from the leasing transaction would be where ECM’s operations are
located. 2
The period of the lease arrangement is also key in determining the source and in our case the period is
only for 5 months. 1
Therefore, based on the above (the leased equipment is movable and is being leased for a period of less
than 5 years, the source of the monthly rentals receivable by ECM will be
Zimbabwe. 1
Therefore, the $10 000,000 will be included in ECM’s gross income and taxable in Zimbabwe. 1

178
Note 3: b

The issue at stake is here is determine whether the salary and the allowance is from a source within
Zimbabwe. The general rule with regards the source of income from employment services, is where the
services are rendered by the employee.

In this case therefore the true source of the salary and allowance is Mozambique since that’s where they
would be rendering the services. 1

However, using the deemed source provisions, if a Zimbabwean resident earns employment income
whilst temporarily not resident in Zimbabwe the income will be deemed to be from a source within
Zimbabwe. 2

In our scenario the employees will be working outside Zimbabwe for a period of five months and this
constitutes temporary absence since the period of absence is less than 183 days. 2
Therefore, both the salary paid to the employees by ECM and the allowance paid to the employees by
the Mozambican government are deemed to be from a source within Zimbabwe and should be included
in the employees’ gross income. 1

The allowance and the salary are therefore taxable in Zimbabwe.1

However, there is a risk that the employees’ income may be subject to taxation twice and the employees
can apply the provisions in section 92 and 93(double taxation reliefs) of the Income tax act to minimise
their tax burdens (bonus 2)

Required 3

With reference to Note 5 discuss the Income tax implications in Mr. Shumba’s hands of the long
service award he received in 2020.

The issue to address here is to determine whether the long service award received by Mr Shumba is
revenue or capital in nature. 1
In this case since the long service award has been given to Mr Shumba as a return for 10years of service
to ECM, the amount qualifies as employment income. 2

Therefore, since the long service award is employment income it is include in Mr Shumba’s gross
income and taxed during the 2020 year of assessment. 2

179
TUT 3
Brian Mayo is a qualified chef and had been working for the Blue Tourism Group (Blue) for the past 20
years in various capacities. Brian had started working for Blue when he was only 25 years of age fresh
from Blue’s world-renowned catering school. In 2022 due to the on-going strained liquidity and financial
difficulties that the Blue Tourism Group was facing, management of Blue decided to undertake a
restructuring exercise to realign the group’s operations. As part of the re-structuring exercise Brian Mayo
was retrenched along with 20% of the entire workforce of Blue. Blue applied for the relevant approvals
in respect of the retrenchment exercise, and these were duly granted in August, 2022 assigning an
effective date of 1 October 2022 for the retrenchments to take effect.

Upon being retrenched in October 2022 Brian was in receipt of the following amounts:

Brian was offered to acquire the motor vehicle he had been using during his time of employment for an
amount of $8,000. The motor vehicle has an engine capacity of 2,300 ccs and Brian has always been
using this vehicle for the past 3 years. Blue had acquired the motor vehicle in 2012 for an amount of
$22,000 and as at 1 October 2020 the vehicle had a market value of $14,000.

Cash in lieu of leave days $3,000

Kitchen equipment with a market value of $4,000. Brian did not pay any consideration for the said
equipment.

Gratuity of $10,000

Before his retrenchment Brian had been in the process of making plans of opening his own food
restaurant in the CBD of Harare. Following his retrenchment, he fast tracked his business idea and
started his restaurant Candy Fast Foods (Pvt) Ltd (CFF). During the year ended 31 December 2022 CFF
entered into two contracts as follows:

A service contract with Blue for a period of 2 years with effect from 1 October 2022. In terms of the
contract agreement CFF would invoice Blue for any actual work done by CFF on behalf of Blue. CFF
invoiced Blue $1,200 for each of the months of October and November and an amount of $3,000 for the
month of December.

A catering service contract for $8,000 per month, with effect from 1 November 2022, with New Life
Hospital which has its operations in Harare. On 1 Oct 2022 CFF recruited a staff complement of 6
permanent employees and 3 casual workers. Permanent employees are paid a monthly salary whilst the
casual workers are paid a daily wage rate which is in line with the industry norms. Permanent employees
are paid a basic salary of $600 each per month and a monthly transport allowance of $50 each.

Brian Mayo’s related earnings for the 2022 tax year were as follows:

From Blue Tourism Group (Jan to Sept)

Item Notes ZWL$

Gross basic salary 9,000
School fees allowance 4,000
Bonus 1 2,000
Refund of benefit fund contributions 2 28,000
Annuity 3 6,000
Pension receipts 4 120,000
Employee contributions to benefit fund 2 (600)
NSSA contributions (216)
Employee pension contributions (1,200)
Retirement Annuity Fund (RAF) contributions (3,500)
Loan repayment 5 (2,400)
Employee contributions to Medical Aid Fund 6 (900)
Funeral Insurance policy contributions (300)
NSSA contributions (216)
180
 Employee pension contributions (1,200)
Retirement Annuity Fund (RAF) contributions (3,500)
Loan repayment 5 (2,400)
Employee contributions to Medical Aid Fund 6 (900)
Funeral Insurance policy contributions (300)
PAYE (1,300)

From Candy Fast Foods (Pvt) Ltd

Item Notes ZWL$

Gross basic salary 4,200
Fuel allowance 7 1,000
PAYE (800)

Notes

1. Blue’s financial year end is 30 June. During the 2022 financial year in order to appease the
employees of the impending retrenchment scheme, Blue paid a bonus of double each employee’s
basic monthly salary.

2. This amount is a refund in respect of contributions which Brian had been making to a non-registered
benefit fund administered by Blue. The amount refunded to Brian is made up of employee
contributions over the years $22,000 and interest component amounting to $6,000

3. Brian is entitled to receive this amount annually from the retirement annuity fund (RAF) which
matured during the course of the year. In terms of the RAF rules, Brian will receive the same amount
over the next 11 years (i.e. amount received over 12 years in total). A total of $12,000 was
disallowed as a deduction in Blue’s tax computation from the onset of his RAF contributions to
maturity.

4. This amount was refunded to Brian when he was retrenched from Blue and he opted to withdraw
from Blue’s employer registered pension fund. His contributions to the pension fund have been
allowed as a deduction in full in Blue’s tax computation over the years. Brian transferred $40, 000
of his pension receipts to the Catering Industry Pension Fund which he became a member of
effective 1 November 2022.

5. This amount is a repayment towards a $12,000 loan advanced to Brian in June 2022 and was to be
repaid after the expiry of 2 years. Brian paid interest of 1% p.a. on the principal amount outstanding
on the loan. Libor for the 2022 tax year was a constant 0.5%. In October 2022 when Brian was
retrenched Blue decided to waive the payment of the remaining loan balance. The $2,400 is the only
payment that Brian had made towards the principal balance of the loan.

6. During the 2022 tax year Brian incurred medical expenses amounting to $3,000 of which 60% were
reimbursed by the Medical Aid Fund
7. Brian receives a fuel allowance for using his personal vehicle for the restaurant business. 40% of
the fuel allowance was applied towards fuel expenses in conducting the restaurant business.

Additional Information

In order to finance his new business venture Brian decided to make the following disposals in November
2022:
He disposed of his Masasa house which was his Principal Private Residence as defined. The house was
sold for an amount of $120,000 through a real estate agency, which charged him a commission of 1%
of the sale proceeds. Brian had originally acquired the house in 2011 for an amount of $60,000. In
December 2022 Brian acquired a smaller house in the western suburb of Tynwald for an amount
$70,000. He sold off 2000 shares that he held in Dairyboard Zimbabwe Ltd for an amount of $1.20 per
share. Brian had bought the shares on the ZSE in 2010 for an amount of $0.80 per share.

181
Required

With reference to the retrenchment from Blue calculate Brian Mayo’s minimum taxable income arising
from the retrenchment package.8 marks

Calculate Brian Mayo’s taxable income for the 2022 tax year. For any amounts which are not taxable
or deductible indicate by the use of a zero and provide a brief explanation.20 marks

SOLUTION
With reference to the retrenchment from Blue calculate Brian Mayo’s minimum taxable income arising
from the retrenchment package. 8 marks

Item ZWL$ Marks

Motor Vehicle ($14,000 - $8.000) 6,000 1
Cash in lieu of leave* - 1/2
Kitchen equipment 4,000 1/2
Gratuity 10,000 1
Loan waiver ($12,000 - $2,400) 9,600 2
29,600
Less 3rd schedule par 4 exemption^ (29,600) 2
Taxable income from retrenchment 0

If the aggregate of retrenchment package is ZWL$50,000 or below the whole amount is tax exempt
Retrenchment package needs not be approved anymore for it to qualify for exemption
Cash in lieu of leave is not part of the retrenchment package since Brian Mayo is receiving the amount
as return for providing employment services.

Item ZWL$ Marks

Total Salary (90 000 + 42 000) – Sect 8(1) (b) 132 000 1
Cash in lieu of leave – Sect 8 (1) (b) 3,000 1
School fees allowance – Sect 8 (1) (f) 4,000 1
Bonus – Sect 8 (1) (b) 2000 1
Less exempt – 3rd schedule par 4 (2,000) 1
Refund of benefit fund contributions – Interest component only (w1) 6,000 1
Annuity – Sec 8 (1) (a) – (6,000 – (12,000/12)) 5,000 2
Loan Benefit ((0.5%+5% -1%) *12,000 * 4/12)) – Sect 8 (1) (f) 180 2
Fuel Allowance (1,000 * 60%) – Sect 8 (1) (f) 600 1
Motor vehicle deemed benefit ( 9 000 * 9) – Sect 8 (1) (f) 81 000 1
Employee benefit fund – non registered scheme hence not deductible 0 1
NSSA contributions – Sect 15 (h) (216) 1
Employee Pension contributions (1,200) 1
RAF contributions (3,500) 1
Loan Repayment – Capital in nature 0 1
Taxable income from retrenchment 0 1
Funeral Insurance policy contributions – Disallowed capital in 0 1
Nature
Total Taxable Income 226,864 1

182
TUT 4
Anna Tote, a Saudi Arabian national, moved to Zimbabwe in January 2022 with her French husband,
Nikita and their two children to take up a position as General Manager of Flamingo, a new hotel in Eastlea.
For the first two months, Anna was paid from Saudi Arabia, where her salary was taxed at the rate of 10%
(she has documentation to prove that this tax was paid to the Saudi Arabian tax authorities). However,
from March 2022 onwards, her salary was paid from Zimbabwe. Nikita also got to be employed by FAO.
They moved into an apartment, and the children are enrolled in a respected international primary school.

In February 2022, Anna’s remuneration denominated in United States, comprised the following
incomes:

Item USD

Salary 7,500
Bonus for successful opening of business 500

Housing Allowance 1,000

Medical insurance 800
Pension contribution 750

Children’s school fees 1,900

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

Anna was allocated a company car engine capacity 2000cc plus exclusive use of a driver. The driver’s
monthly salary $2,500.

Anna incurred medical shortfall of $300 which she seeks to claim as tax credit

Required

a) On what basis is Anna’s salary taxable: resident or non-resident? Give your reasons (3 marks).
b) Discuss the legal basis under which Nikita may benefit from tax exemption in Zimbabwe (4 marks)
c) Discuss the legal basis of Nikita’s earnings in United States dollar (6)
d) Comment on the medical shortfall expenses Anna wishes to claim as tax credit
e) Compute Anna’s tax liability on her February remuneration (10 marks).

SOLUTION

a) Basis of Anna’s taxable income

A person of any nationality will be deemed a Zimbabwean resident if (s)he is domiciled in or has a
principal place of residence in Zimbabwe, or is present in Zimbabwe for more than 183 days in any
period of 12 months ending in the tax year (2).

Besides, income for services rendered is taxed based on the place the services are rendered, irrespective
of the person’s residence status. In practice however, tax is activated when a person assumes 183 days
in the country (1).

b) Nikita exemption from Zimbabwe

183
Firstly, Article 27 of the Double Taxation Agreement (Tax Treaty) states that , “remuneration paid to
employees of diplomatic or consular missions of foreign governments holding an official or diplomatic
passport of that government” is exempt from tax, provided that it is received “within the framework of
fulfilling their official function” in Zimbabwe (2).

Secondly, SI 417 of 1999 provides an exemption from tax of the salaries and emoluments of foreign
officials, representatives, officers and employees employed by the Agencies of the United Nations (1).

The income of a non-resident is also exempted from tax in Zimbabwe provided that the employee’s
presence in Zimbabwe does not exceed 183 days and the remuneration for “technical assistance” is paid
by a non-resident (and not by a resident of Zimbabwe) and the employer does not have a permanent
establishment in Zimbabwe (1).

Following SI 33 and 142 of 2019 Zimbabwe has now a new currency and has outlawed the use of foreign
currency in domestic transactions in preference of the Zimbabwe dollar. (1)

However, s4A (1) a) of the Finance Act (Chapter 23:04) provides that where earnings are received in
foreign currency, Pay As You Earn should be remitted to the ZIMRA in foreign currency, whether the
payment in foreign currency is against the spirit of SI142 of 2019 or not. Taxes follow transactions not
the legality or illegality of the underlying transaction. (2)

The laws for payment of taxes in foreign currency were introduced 2009 when Zimbabwe opted for
multicurrency ahead of the defunct Zimbabwe dollar (1)

Prior to 1 August 2019 (pre-Finance Act no 2 of 2019), but post 22 February 2019 the single tables
would apply where earnings were in part foreign currency and part in Zimbabwe dollar. The Pay As
You Earn would then be split into respective currency on proportion of taxable earnings. (2)

Effective 1 August 2019 separate tax tables were introduced. Pay As You Earn on earnings in foreign
currency is computed using the United States tables and in Zimbabwe dollar, it is computed using the
Zimbabwe dollar tax tables (2).

Effective 1 January 2020 where earnings are wholly or partly in foreign currency United States dollar
tax tables should be applied. Further, Finance Act no 3 of 2019 has also introduced United States values
for certain remuneration items, exemptions, deductions and tax credits etc. For example, motoring
benefits for those earning in part or wholly in foreign currency exist (2)

c) Anna’s medical expenses

Section 13 of the Finance Act allowances for medical expenses credit of $1 for every $2 incurred.

d) Anna’s February tax liability

Item US$ Marks

Salary 7,500 0.5
Bonus for successful opening of business (500-320) 180 1
Housing Allowance 1,000 0.5
Medical insurance 0 0.5
Pension contribution 0 0.5
Children’s school fees 1,900 0.5
Travel – exempt 0.5
Hotel – exempt 0 0.5
Air Travel exempt 0 0.5
Out of Pocket Expenses exempt 0 0.5
Company driver 2,500 0.5
Motoring benefit 400 1
Taxable income 13,480 7

184
on US$3000 871 0.5
on excess ($13,480-$3,000) 4,192 1
5,063
Less Medical shortfall (n/a) 0 0.5
5,063
Add 3% Aids levy 152 0.5
Tax liability 5,215
Less PAYE 4,300 0.5
Tax payable 915 3

185
TUT 5
Dr. Joe Munjoma (aged 57) is a Zimbabwean resident taxpayer. He was employed as a dentist at Dentists (Pvt) Limited
(Dentists) in Harare, but resigned from this employment on 31 July 2019. He started his own practice (Joe Dentistry) from his
home on 1 September 2019. Information relating to Dr. Joe for the year of assessment ending 31 December 2019 is given
below.

Employment package

A cash salary of $10,000 per month and 50% of the amounts billed to patients seen by Dr Joe. Dr Joe had billings of $610,000
for the period 1 January 2019 to 31 July 2019.

Dentists contributed 10% of his salary and share of billings to its company pension fund (which is registered in terms of the
Pension and Provident Fund Act of Zimbabwe) for Dr Joe.

Dr Joe uses a company allocated laptop computer to review patient X-rays and to plan complicated dental surgery procedures.
The laptop cost $2,000 and was purchased on 1 January 2019. When Joe resigned, he took the laptop with him and continued
to use it in his own practice.

Dentists paid the sum of $500 per annum to license the specialist software used on Dr Joe’s laptop computer. Dr Joe was
permitted to continue to use the software in his own practice.

While working for Dentists, Dr Joe was allowed any dental work at no cost. Dr Joe needed some dental work and a cleaning
by an oral hygienist during the year. The cost to Dentists of providing these services amounted to $560.

Dentists contributes the entire scheme rate to the medical scheme for its employees. For Dr Joe, this amounted to $350/month
in total for his wife (as the only dependent) and himself.

Dr Joe had the flatlet on his property converted for use as a dental practice. The building work, which was completed on 1
August 2019, cost $50,000.

The dental equipment required to furnish the practice was purchased new at a cost of $100,000.

Dr Joe borrowed money from his personal bond to fund the expenditure on building work and dental equipment. Interest on
the bond amounted to $5,000 (of which 20% pertains to the dental equipment and 10% to the building work).

Dr Joe’s fee income from when he began trading in his own name, on 1 September 2019 until 31 December 2019, amounted
to $420,000.

The portion of rates, water and electricity on the property which relates to the dentistry practice amounted to $3,600 for the
period 1 September 2019 (when the conversion was completed) to 31 December 2019.

Other information:

Dr Joe contributed $200 per month to a retirement annuity fund (RAF) up to 31 July 2019 and these contributions were taken
into account by Dentists when calculating the employee’s tax withheld. When Dr Joe resigned from Dentist, he withdrew from
the retirement annuity fund and with effect from 1 August 2019 started receiving a monthly payment of $700.

Dr Joe took over payment of the medical contributions for himself and his wife with effect from 1 August 2019. In addition,
he incurred medical costs amounting to $200 on 30 July 2019, which were not recoverable from the medical scheme.

On 1 August 2019 Dr Joe also received a lump sum of $80,000 from the Dentists pension fund.

186
Dr Joe used part of the pension proceeds to acquire an office building in the Avondale suburb of Harare. He purchased the
building for a total cost of $700,000 from a non- registered VAT operator. From 1 September he started receiving a monthly
rental of $10,000.
Required

In respect of the above information calculate Dr Joe Munjoma’s employment taxable income and tax payable for the 2019 tax
year of assessment (12 marks)

In respect of the above information calculate Dr Joe Munjoma’s trade and investment taxable income and tax payable for the
2019 tax year of assessment (8 marks)

For items which are neither taxable nor deductible indicate by the use of a zero and provide a brief explanation.

SOLUTION

a) Joe’s Employment taxable income and tax payable

Item ZWL$ Marks

Cash Salary ($10,000 * 7) 70,000 ½
Based on Billings - $610,000 * 50% 305,000 1
Employer pension fund contributions- exempt 0 1
Laptop Benefit 2,000 1
Software benefit – ($500 * 5/12) 208 1
Dental work for Dr Joe – exempt 0 ½
Employer medical Aid contributions – exempt 0 ½
Contributions to RAF - $200 * 7 (1,400) 1
Receipt from RAF – Exempt – Joe is over 55 years 0 1
Receipts from Pension fund – exempt – Joe is over 55 years 0 1
Taxable income 375,808

on $240,000 76,260 ½
on excess ($13,480-$3,000) 61,114 1
137,374
Less Medical expenses credit (200* 50%) (100) ½
Elderly person’ credit (900) ½
136,374
Add 3% Aids levy 4,091 ½
Tax liability 140,465
Less PAYE - ½
Tax payable 140,465 12

187
b) Joe’s trade and investment taxable income and tax payable

Item ZWL$ Marks

Improvements Flatlet – ($50,000 + ($5,000 *10%)) *2,5%
(W&T on commercial building) (1,263) 2
Capital allowances – dental equipment ($100,000 + ($5,000
* 20%)) *25% (25,250) 2
Fee Income 420,000 ½
Rates, water and electricity (3,600) ½
Laptop computer: $2,000 * 25% (400) 1
Rental Income: 40,000 ½
Less rental income exemption for elderly persons (3,000 x 4/12) (1,000) 1
Capital allowances on office building - $700,000 *2.5% (17,500) 1
410,887
Taxable income
Tax at 25% 102,722 ½
Less Credit – Medical aid contributions ($350 * 5 * 50%) (875) ½
101,837
Add 3% Aids levy 3,055 ½
Taxable payable 104,892

TUT 6

George (Pvt) Ltd (George) is in the business of retailing top of the range furniture to an exclusive market of the affluent both
in Zimbabwe and Botswana. The shareholding structure in George is as follows:

- Geo: 25%
- Georgina 25%
- Venture Capital (Private) Limited 50%

Geo and Georgina are siblings and they were the founders of George in 1998. However, after dollarisation in 2009, Geo and
Georgina sold part of their shareholding to Venture Capital (Private) Limited in order to raise much needed working capital
for their business. Venture Capital (Private) Limited is a company incorporated and registered in Zimbabwe focusing on
providing structured finance for small to medium business. George imports the furniture components from Malaysia and
assembles the furniture items locally, in most cases at the client’s site. During the year ended 2020, George posted a net profit
before tax of $342,350.00. The following transactions amongst others were taken into account in determining the net profit
before tax: All amounts exclusive of VAT

Note 1 – Inventory and Cost of Sales

Included in George’s cost of sales are opening inventories of $61,000 (being the cost) and closing inventories of $73,250
(being the net realisable value as determined with reference to International Financial Reporting Standards requirements). The
closing inventory was acquired by George for a total cost consideration of $94,000 and the replacement cost was determined
to be $80,000.

Note 2 – Dividend income

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2.1. Included in George’s other income is dividends of $18,000 received on the 23rd of April 2020 and $13,500 received on
the 30th of May 2020 from Econet Wireless Zimbabwe and Mascom (Botswana) respectively.

2.2. George paid a total dividend of $35,000 to its shareholders allocated in their shareholding ratios. The dividends paid during
the year have been debited against retained income in the statement of changes in equity.

Note 3

3.1. During the year George acquired office furniture kits worth $43,451. Of these, kits worth $2,450 were used for its new
offices and had not been appropriately adjusted for in the books of accounts and are included in the closing inventory figure
in transaction 1 above.

3.2. George acquired a delivery vehicle for $35,000 from a local car dealer and this vehicle was immediately brought into use
during the current year of assessment. A depreciation charge of $7,000 was debited in the income statement in respect of the
delivery vehicle.

3.3 During the year George replaced the zinc roof on its office building with chromadec tiles due to their heat conducting
properties at a cost of $5,450.

Note 4

4.1. During the year George sold a delivery vehicle with a carrying amount of $34,500, for $47,500. The profit on disposal
was included in the computation of the net profit above. The delivery vehicle had initially been acquired in 2018 at a cost of
$50,000 and George has always claimed the maximum possible capital allowances in respect of the vehicle.

4.2. George received donations of $5,000 from a Wall Street banker associate of Georgina who supports growing businesses.
The donation income was appropriately accounted for as other income in determining the net profit for the year.

Note 5

During the year George incurred the following legal costs which were expensed under general administration costs in the
income statement:

5.1. $3,500 for a labour dispute on unfair dismissal with a former employee.

5.2. $23,000 conveyancing costs for acquisition of an investment property. The investment property cost $450,000 and this
amount was capitalised. As at year end George had not yet found a tenant for this property.

Note 6

George incurred the following finance costs which have all been expensed to the income statement:

6.1. $15,000.00 Interest on a bank loan used to acquire land.

6.2. $3,500 overdraft interest on a facility used to procure inventory.

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George’s debt: equity ratio at year end was 5:1

Note 7

7.1. George sells some of the furniture on credit and has provided for 5% of the total accounts receivable being unrecoverable.
As at year end the total accounts receivable balance was $300,000 and the current year’s provision for credit losses has been
debited to the income statement.
7.2. During the year wrote off the following bad debts:

7.2.1. An employee who had been advanced a loan was diagnosed with a sight impairing ailment and George wrote off a debt
of $1,500.00 as a compassionate gesture to alleviate the employee’s cash flow challenges in seeking medical assistance.

7.2.2. $3,450 being the full amount owed in connection with a trade customer who filed for liquidation during the current year
of assessment. The appointed liquidator for this customer indicated in a press release that creditors owed by the customer will
be paid $.20 for every dollar owed.

Note 8
George is penetrating the Botswana market and incurred travel and subsistence costs of $4,500.00 for its marketing team and
this amount was expensed under general expenses in the income statement.

Discuss with supporting calculations the income tax implications of the transactions in note 2 and 4
SOLUTION

Note 2:
Dividend Paid:

Sect 15: In terms of the general deduction formula in section 15, capital expenditures are not allowable as a deduction and we
need to determine what type of expenditure the dividend is paid. (1 mark)

Dividends are a return on the capital invested by the shareholders and are therefore capital in nature and not allowable as
deduction (1 mark)

Withholding taxes

Upon paying dividends to shareholders entities are to withhold dividends tax (s26 and s28) and remit to ZIMRA, the amount
to be withheld is (1 mark)

10% for quoted companies; and

15% for all other companies.

In this case, 15% will be withheld as George is not a quoted (listed) company. (1 mark)

George has an obligation to withhold 15% of the amount payable to Geo and Georgina since dividends payable by a local
company to natural persons are subject to the dividend withholding tax. (1 mark)

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If the dividends are to be paid to a company incorporated within Zimbabwe, no withholding tax shall be charged; therefore,
the portion payable to Venture Capital is not subject to the withholding tax. (1 mark)

Therefore, George shall withhold 15% of the amount payable to Geo and Georgina and remit to ZIMRA within 10 days of the
payment being made, or the shareholder becoming entitled to it. (1 mark)

The total amount of withholding tax will be: $35,000 * 50% * 15% = $2,625. (1 mark)

Dividend Received from Mascom Botswana:

Sect 8: The issue is to determine whether the dividend received from Mascom is from a source within Zimbabwe. (1 mark)

In terms of section 12 (2), foreign dividends received by a taxpayer resident in Zimbabwe are deemed to be from a source
within Zimbabwe. (1 mark)

Since George is a company registered and incorporated in Zimbabwe, the dividend from Mascom is deemed to be from a
source within Zimbabwe and therefore taxable in Zimbabwe. (1 mark)

However, the dividend from Mascom will be taxable at a special rate of 20% instead of the normal tax rate on trade and
investment income of 24.72% (1 mark)

Tax payable is therefore: $13,500 * 20% = $2,700 (1 mark)

Where foreign dividends received are net of withholding tax, and the foreign country is one where a double taxation agreement
exists, a relief may be calculated. (1 mark)

Dividend received from Econet wireless Zimbabwe:

The dividend from Econet wireless Zimbabwe meets the gross income definition as per section 8 of the income tax act but is
however exempted from income taxes in terms of the 3rd schedule par 9. (1 mark)

Also, since George is a local company, Econet will not withhold any dividends withholding tax on the payment of the dividend
to George. (1 mark)

Note 4:

Disposal of Vehicle

We need to determine whether or not the receipts from the disposal of the delivery vehicle are revenue or capital in nature. (1
mark)

As George are not in the business of buying and selling vehicles, the receipts from the sale of the delivery vehicle are capital
in nature, and thus do not fall into gross income. (1 mark)

However, since George was claiming capital allowances on the vehicle, a recoupment arises upon the sale of the vehicle and
is included in the calculation of taxable income. (Sect 8 (1) (j)). 1 mark

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Recoupment is calculated as Selling Price less Income Tax Value, limited to the Capital Allowances previously granted. (1
mark)

Recoupment = $47,500 – ($50,000*50%) = $22,500. (1 mark)

The profit on disposal is not included in gross income because it was not received. (1 mark)

Donation received

The question, with regards to the donation, is whether the amount received is capital or revenue in nature. (1 mark)

Since George had no right to claim the donation from the Wall Street banker, the proceeds would be considered capital in
nature. (1 mark)

Total Available 22 marks

TUT 7

You are a CTA student in your second-year training with GWZ Chartered Accountants. You have been recently assigned to
the tax division to work on a portfolio of clients that requires assistance on various tax issues. Your senior has asked you to
work on Bestetner Limited (BS) which is a public Zimbabwean company that manufactures and distributes office equipment.
BS have submitted their 2020 financial statements to GWZ and would like GWZ to assist them with the review of their income
tax computations in respect of the 2020 year of assessment.

BS manufactures and sells a range of office solutions, from software solutions to hardware solutions. Their hardware products
comprise of printers, copiers and projectors. They distribute these products by way of cash sales, credit sales, hire purchase
and leasing. Your senior has reviewed the tax computation that was already done by BS and has come up with queries on the
following transactions for which you must advise the correct tax treatment.

Leasing

BS leases machinery to both the local and the South African market. The leases vary from long term leases which are for more
than 5 years on a selected range of products to mainly short-term leases i.e., those with a lease term of less than 5 years. During
the year of assessment, BS leased machinery under both long term and short term to leases to South African and Zimbabwean
customers. The South African leases were classified as finance leases for financial accounting purposes as the lease periods
were for most of the useful lives of the assets and the total instalments exceeded the cash prices due to the interest components.

Sales

BS has three different categories of sales. Firstly, some of the goods are sold for cash. Secondly, some are sold on credit and BS
reserves the right to repossess the goods upon default of the instalments although title passes to their customers on delivery. Lastly
some of the goods are sold to the customer but ownership is transferred after the last payment is made and under this arrangement
BS considers clients to be hiring to buy. On introduction of Copier-Scanner combo, a product that allows you to print, scan and copy,
BS could not cope with the demand of this product and so had to take deposits ahead of the manufacturing process. In 2020 BS
received $450,000 from different customers for which it was to deliver the machines in the second week of January 2021. These
deposits were not separated from the rest of BS’ receipts. BS also entered into a sales contract in which it agreed to receive $20,000
in advance in November 2020, for a supply to be made in January 2021. BS only received the amount on the 3rd of January 2021.

Expenditure
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BS expensed (in their 2019 financial statements), finance costs for two borrowings from foreign entities.

i. ABSA loan

BS borrowed $800,000 from ABSA South Africa and used it to purchase land and the related finance charge was $80,000 for
the year ended 31 December 2020. BS expensed it as finance costs in the books of accounts.

African Development Bank (AfDB) loan.

BS received a loan of $1,500,000 from AfDB Abidjan (Ivory Coast) to acquire new manufacturing plant and machinery. The
loan accrued interest charges of $120,000 for the year and the debt-to-equity ratio of BS was 9:2 as at 31 December 2020.

BS also expensed unrealised exchange losses of $7,850 during the year.

BS engages foreign suppliers of goods or services from time to time. These include regional transporters or component
providers from Europe. Some of the same goods and services are provided by local suppliers.
During the year 2020 BS declared a dividend of $717,000 to its shareholders, both local and foreign. BS also paid directors’ fees of
$36,000 to its board members. The board comprises of ten directors 3 of which are executive and received $10,200. Of the remaining
7, 4 are independent (received $13,300) and 3 are not independent (received 12,500).
BS uses a software supplied by an Indian firm in the manufacturing process for which it paid annual licence fee of $7,300 in
the year 2020.

Required

Marks
1(a) Write a memo to the BS accountant in which you detail for him the 4
dates BS should have paid provisional income tax, the percentage
that should have been paid on each given date and the basis of the
calculated amounts per section 72 of the Income Tax Act for the
year ended 31 December 2020.
1(b) BS would like to know the following: 2 5
i. If they have to wait for a ZIMRA assessment for
them to establish and pay the income tax payable (if any) relating 2
to the 2020 year of assessment.
ii. The deadline for paying income tax due and or 1
submission of returns in respect of 2020 year of assessment.
iii. If a return is required where there is a refund due.
1(c) For the South Africa lease rentals, advise BS whether the lease 4
rentals received should be included in its gross income for the year
of assessment ended 31 December 2020 in the determination of
the taxable income.
1(d) Discuss the income tax treatment in the hands of BS for the year of 5 8
assessment ended 31 December 2020 of
i. The $450,000 and 3
ii. The $20,000 sales contracts

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 1(e) BS would like clarity on the income tax treatment of the given 5 13
expenditures for the year of assessment ended 31 December 2020. 2
i. Finance Costs 2
ii. Unrealised exchange losses 2
iii. Dividends paid 2
iv. Directors’ fees
v. Annual licence fee for software

1(f) BS would like to know whether it should have withheld any taxes 2
in terms of the Income Tax Act in the year of assessment ended 31 2
December 2020 on the following transactions and also to know the 2
amount, where applicable:
i. Foreign suppliers of transport services to and from
Zimbabwe.
ii. Dividend paid to both local and foreign shareholders
iii. Licence fees for use of software.

Total Marks 40

SOLUTION

Write a memo to the BS accountant in which you detail for him the dates BS should have paid provisional income tax, the
percentage that should have been paid on each given date and the basis of the calculated amounts per section 72 of the Income
Tax Act for the year ended 31 December 2020.

MEMO

To: The Accountant

From: CTA graduate

Date: 02 February 2021

RE: PROVISIONAL TAXES

With reference to our telephone conversation of yesterday, I have discussed below the dates for the 2020 provisional income
tax and the percentages of the estimated income taxes to be paid.

Provisional taxes are paid on prescribed quarterly payment dates (QPDs). 1mark
The QPDs for 2020 are:
25 March and 10% of the estimated taxable income; (1mark)

25 June and 25% of the estimated taxable income; (1mark)

25 September and 30% of the estimated taxable income; and (1mark)

20 December and 35% of the estimated taxable income. (1mark)

The estimated taxable income is revised for each QPD (1mark)

I hope you find this of assistance

194
Sincerely

Communication and Layout (1mark)

BS would like to know the following:

If they have to wait for a ZIMRA assessment for them to establish and pay the income tax payable (if any) relating to the
2020 year of assessment. The deadline for paying income tax due and or submitting returns.

If a return is required where there is a refund due.

BS is a taxpayer on self-assessment per section 37A and therefore should not wait for a ZIMRA assessment (1 mark). BS shall
calculate income tax per s7 and fill in an annual return based on the tax computation (1 mark)

BS shall submit the annual return 4 months from the year end i.e., by the 30th of April 2021. (1mark)

BS should also pay the tax payable, if any, by the same date. (1mark)

Annual returns shall be submitted regardless of whether there is taxable income or an assessed loss. (1mark)

For the South Africa lease rentals, advise BS whether the lease rentals received should be included in its gross income for
the year of assessment ended 31 December 2020.

Lease rentals originate from the leasing of assets. The assets were leased in South Africa and are movable. (1mark)

There is no definition of source in the Income Tax Act and so reliance is placed upon common law as to its meaning. COT v British
United Shoe Machinery (SA) (Pty) Ltd 1964 and Murray Ltd (1929). (1mark)

The true source of leasing of movable assets by residents for periods less than 5 years is Zimbabwe. (1mark)

If leased for periods longer than 5 years, then the source becomes where the asset is leased. (1mark)
BS received rentals for both long term and short-term leases. (1mark)

BS shall therefore only include in gross income those rentals from South African leases of not more than five years and exclude
the rest from gross income. (1mark)

There are no deeming provisions for the long-term leases. (1mark)

Discuss the tax treatment in the hands of BS for the year of assessment ended 31 December 2019 of the $450,000 and the
$20,000 sales contracts

The $450,000

Section 8 of the Income Tax Act requires that an amount has to have been received by or accrued to or in favour of a person
for it to be included in Gross Income. (1mark)

The $450,000 was received for tax purposes from a Zimbabwean source and is not capital in nature. (1mark)

BS received this amount for its own benefit as it could use this money. (1mark)
BS also received it on its own behalf and not as an agent of a principal. (1mark)
Cases for own benefit and own behalf. (2 marks)

The $20,000

195
An amount accrues when it becomes due and payable or when the taxpayer becomes entitled to it. (1mark)

The $20,000 became payable to BS in November 2020 and therefore it accrued to him. 1mark
BS should include in gross income the $20,000. 1mark

BS would like clarity on the tax treatment of the given expenditures for the year of assessment ended 31 December 2020.

Finance Costs
Unrealised exchange losses
Dividends paid
Director’s fees
Annual licence fee for software
Finance Costs

• Deductibility of finance costs is determined after considering what the borrowings were used for. 1mark

Part of the loan was used for the acquisition of land and this is capital in nature and the portion of the finance costs related to the
cost of the land is therefore also considered capital in nature. They are not allowed as a deduction. (1mark)
The finance costs associated with retooling are deductible. Whilst the retooling in itself is capital in nature, the tools will get capital
allowance and therefore the related interest is allowable. (1mark)
The deduction is however limited by thin capitalisation rules. s16 (1) (q). (1 mark)
[3/9 x $120,000] = $40,000 is the excess disallowed. (1 mark)
This disallowed cost is a deemed dividend to the recipient. (1 mark)
BS shall withhold taxes in terms of s26 (2) and s28 (2). (1 mark)

Unrealised Exchange losses

• Expenses or losses are generally deductible where they have been incurred for the purposes of trade and are not capital in
nature1mark

These losses have not been incurred as there is no inescapable obligation to pay them yet. 1mark

iii. Dividends paid

These are distributions and are neither expenses nor losses. They are therefore not deductible based on the general deduction
formula s15 (2) (1mark)

Dividends will however create withholding taxes obligations on BS’s part as it must withhold 10% of the dividend paid because
BS is a public company. (1mark)

iv. Directors’ fees

All directors’ fees shall be allowable deductions as they were incurred for the purposes of trade and are not capital in nature. S15
(2) (a) (1mark)

Withholding tax obligations however arise on 20% of the fees (1mark)

W.E.F. 1 January 2021 withholding tax of 20% is a final tax. No further tax is required from the non-executive director.

Annual licence fees

These were incurred for the purposes of trade as the software is used in the manufacturing process. By using the software, they
create an inescapable obligation to the vendor hence they incurred the amount in the year of assessment (1mark)

196
They are not capital in nature as they are not for the creation of an asset that BS shall own i.e., a tree in the tree and fruit
analogy. They are for access and use for a defined period which is not long term. (1mark)

BS has an obligation to pay withholding taxes on royalties of 15% of the fee. (1mark)

The rate of 15% can be reduced where there is a Double Taxation Agreement (DTA) between Zimbabwe and the supplier’s
country of residence. South Africa DTA provides for 10% withholding tax on royalties.

BS would like to know whether it should have withheld any taxes in the year of assessment ended
31 December 2020 on the following transactions and also to know the amount, where applicable:

Foreign suppliers of transport services to and from Zimbabwe.

Dividend paid to both local and foreign shareholders

Licence fees for use of software.

Transport services
Foreign suppliers of transport services are non-residents and therefore should be considered for non-residents’ taxes. The
transport services do not however constitute fees, royalties, remittance nor interest and therefore no taxes shall be withheld.
(2marks)

Dividends
BS shall withhold taxes on dividend paid to both local and foreign shareholders (1 mark)
The withholding taxes shall be 10% as BS is a listed company. S26 and 28 (1 mark)
[10% x $717,000] = $71,700 (1 mark)

License fees
BS should have withheld Non-Residents’ Tax on Royalties (1 mark)
The withholding shall be [15% x $7,300] = $1,095 (1 mark).
Royalties are income for the right of use and the supplier gave BS the right of use of a software system. (1mark)

TUT 8

Mr Cheda, a 61-year-old employee of Pine Jel, held a 4% interest in Pine Jel and managed one of the company’s divisions.
During labour unrest he was attacked by striking workers and the company paid for an air ambulance to fly him to a
Johannesburg hospital, at a cost of ZWL$64 000. Pine Jel also paid for Mr Cheda’s medical costs in Johannesburg, which
amounted to the equivalent of ZWL$4 400 000.

Mr Cheda was so traumatised by the incident that he was unable to continue to work. His doctor later advised the company
that Mr Cheda would not be able to return to work at all. Mr Cheda took early retirement on 31 July 2022.

Mr Cheda’s cumulative pay slip for the period January 2022 to 31 July 2022 showed the following:

Item ZWL$ 000

Salary 58 000
Bonus 4 000
Leave pay 2 000
Medical aid contributions 2 800
Retirement package paid by the company 60 000

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The retirement package and accumulated leave were paid to Mr Cheda by means of a single electronic transfer on 31 July
2021.

Mr Cheda had paid his annual contribution of $6 000 000 to an approved retirement fund in January 2021

Mr Cheda informed Pine Jel that he would like to dispose of his 4% shares in the company, which he had purchased in May
2017 for $7 500 000. Neither the company nor the other shareholders were aware of any person who might be interested in
purchasing the shares from Mr Cheda. The shareholders all agreed that the 4% interest was worth $40 000 000. The company
offered to buy back the shares when its cash flow position improved.

Mr Cheda was interested in buying a twin a cab vehicle for his own use. Pine Jel had such a vehicle, which has a market
value of $39 000 000, and the shareholders agreed that the company could purchase Mr Cheda’s shares in exchange for the
vehicle. This vehicle had originally cost $49 000 000. Mr Cheda accepted the offer and the exchange took place on 31 July
2021.

Mr Cheda did not dispose of any other specified assets during 2021 year and did not earn any other income during his 2021
year of assessment.

Various fees paid during the year ended 31 December 2021

Required

a) Prepare computations for Mr Cheda, taking into account all types of income for purposes of both income tax and
capital gains tax [19 marks]
b) Calculate any income tax and capital gains tax payable for the tax year ended 31 December 2021 [6 marks]

Cite relevant sections of the Acts

SOLUTION

Mr Cheda taxable income

Item $000 Marks

Salary 58,000 1
Bonus-s8(1)(b) 4,000 1
Less exemption – para 4(o) 3rdSch (500) 2
Leave pay – s8(1)(b) 2,000 1
Medical aid contributions – 3rd schedule par 8 (2) 0 1
Costs of air ambulance – exempt 3rd schedule par 8 (1) 0 1
Medical costs in Jo’burg – exempt 3rd schedule par 8(1) 0 1
Purchase of motor vehicle exempt Mr Cheda is over 55 years old 0 1
Retrenchment package 60 000 1
Less exempted retirement package – (5, 000 ,000 or 1/3 of 18 750 000 (6 250) 1
(i.e., 1 200,000) whichever is greater)
Contribution to RAF – sect 15 (h) - limited to $1 500 000 per year*7/12 (875) 2

Taxable income 116,375

Tax liability (116 375 000 * {1/(7/12)}) * 40% (*) 79 800 1

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 Less Credits
Elderly person’s credit - $450 000 * 7/12 (262.5) 2
Tax liability 79 537.50
Add 3% Aids Levy 2 386.13 1
Tax liability for a full year 81 923.63
Tax liability for the 7 months (89 263 088*7/12) 47 788.78 1

Capital Gains Tax – Disposal of shares

Item $000 Marks

Sales Proceeds – value of received vehicle – sect 8 (1) (a) 39 000 2
Less sect 10(m)exemption – Mr Cheda is over 55 years (144) 2
Capital mount 38 856

Capital gains tax 5% of capital gain (Fin Act no 2 of 2019) 1 942 2

Notes

• Finance Act no 2 of 2019 provides for 5% of proceeds for specified assets sold prior to 24 th of June 2019 and retains 20%
capital gains tax rate for disposals thereafter.
• The exemption of the elderly person is now ZWL 144,000 with effect from 1 January 2021.

TUT 9

Zuva Cards (Pvt) Ltd (Zuva) is a company resident in Zimbabwe. It designs and manufactures cards that are collected by
children and sells these cards to producers of breakfast cereals and snack foods. Its financial year ends on the last day of
December each year.
The issued ordinary share capital of Zuva was held as follows throughout the 2021financial year:
40% by Yugi Yuglyo, a resident of Armenia, a country with which Zimbabwe does not have a double tax agreement;
30% by Tinotenda Moyo, a resident of Zimbabwe;
20% by Tyson James, a resident of Zimbabwe;
And 10% by Max Mapako, a resident of Zimbabwe.

These four shareholders were also the sole directors of Zuva during the 2021 financial year. Tinotenda Moyo is its managing
director. Tinotenda Moyo, Tyson James and Max Mapako are all full-time employees and executive directors of Zuva and as
such they receive salaries from the company. Yugi Yuglyo is a non-executive director. All four directors also earn fees for
attending directors ‘meetings. The meetings are held in Zimbabwe. Directors ‘salaries and fees are included in the amount
stated under the heading ― Salaries, wages and benefits in the detailed income statement.

Yugi Yuglyo lent Zuva the equivalent of $ 65 000 000 on 30 June 2019. The funds were made available to Zuva in Armenia.
Zuva transferred the funds to Zimbabwe in July 2019 for use in its business. This loan is denominated in United States Dollars
and has no fixed terms of repayment. It bore interest at a rate of 18% throughout the 2021 financial year of Zuva, but no portion
was repaid during this period.

(It should be noted that all amounts reflected in the detailed statement of comprehensive in-come below and in the notes that
follow on it, exclude value-added tax (VAT) where appropriate unless specifically stated to the contrary. Zuva is registered as
an operator for VAT purposes.)
The detailed draft statement of comprehensive income of Zuva for the year ended 31 December 2021 is set out on the next
page:
199
 Details $ 000 $ 000
Sales 1,625,000
Less: Cost of sales
Opening stock - 152,500
Purchases - 1,157,500
Less: Closing stock 60,000 - 1,250,000
Gross Profit 375,000
Add Sundry Income
Dividend income 2 2,900
Capital profit on sale of local shares 3 8,000
Insurance settlement received 4 2,736
Prescribed debt 5 600
Profit on sale of machine A 11 6,750
20,986
395,986
Less: Expenditure
Bad debts 6 4,500
Increase in provision for doubtful debts 7 600
Depreciation on motor vehicle 8 3,705
Depreciation on computer 9 570
Finance charges 10 220
Depreciation on machine A 11 1,250
Depreciation on machine B 11 1,875
Depreciation on other machinery and
depreciable assets 12 8,625
Rentals 13 6,750
Insurance premiums 14 8,100
Salaries, wages and benefits 15 290,000
Restraint of trade 16 33,600
Provision for leave pay 17 950
Interest 18 11,700
Cost of trade mark written off 19 4,000
Other tax-deductible administrative and
Marketing expenses 4,541 380,986
Comprehensive income (Net profit) before tax 15,000

Additional notes

On 1 December 2021, Zuva concluded a contract to import raw materials from an American supplier at a cost of $24 000 000.
The raw materials were shipped free on board on 22 December 2021 but had not arrived in Zimbabwe by 31 December 2021.
The creditor is to be settled on 31 January 2022. Zuva did not, in its 2021 financial year, process any accounting entries relating
to any of these transactions.

Note 2

. The following dividends accrued to Zuva during the 2021 year of assessment

200
 $000
Dividends from resident companies operating in Zimbabwe that
accrued to Zuva during the period January 2021 to October 2021.
The shareholding of Zuva in these companies is in all cases less than 50% 2 020
A distribution from a collective investment scheme in property.
This distribution comprises interest of $880
880

Total 2 900

Note 3
During the 2021 year of assessment Zuva disposed of only the following capital assets:
Disposal of some of its share investments at a capital profit of $5 500 000 (as determined in accordance with the Capital Gains
Tax Act). The related accounting profit is $8 000 000.
Note 4
Sale (trade-in) on 31 August 2021 of machine A (see note 11).
A road freight contractor had collected an order of cards (trading stock) Zuva’s premises for delivery to a customer. On its
way to its destination the road freight contractor ‘s delivery van, along with Zuva’ trading stock, was stolen. On 15 December
2021 Zuva was awarded an insurance settlement from its insurer of $2 736 000 for the stolen trading stock. This amount does
not take any possible VAT adjustment that may have to be taken into account. You can assume that no accounting entry was
made to record the sale of the trading stock or the write of thereof as a result of the theft.

Note 5
During the 2019 year of assessment Zuva had purchased raw materials for $1 500 000, excluding VAT, from a manufacturer
that was closing down. Zuva paid $900 000 (being 60% of the purchase consideration) on the date of delivery. For the following
three years it tried unsuccessfully to pay the 40% balance of the purchase consideration ($600 000). Every cheque posted was
returned with ―address no longer valid‖ endorsed on it. Because the debt has now pre-scribed, the amount owing has been
written back in its detailed draft statement of comprehensive income.

Note 6
Bad debts written off of $4 500 000 consist of $1 800 000 for trade debtors and a loan of $2 700 000 to a supplier who has
been liquidated. This loan came about during the 2020 financial year of Zuva, when it lent $2 700 000 to a raw material supplier
who was experiencing liquidity problems. The supplier was liquidated on 1 December 2021 and Zuva has been unable to
recover any portion of the loan.

Note 7
The accounting provision for doubtful debts as at 31 December 2021 was $5 000 000, an increase of $600 000 from the balance
as at 31 December 2020. These debts would have been allowed as a deduction under any other provisions of Sect 15 of the
Income Tax Act, had it become irrecoverable.

Note 8
On 1 June 2021 a motor car used by Zuva’s sales staff for visits to customers, was purchased and immediately brought into
use. (This motor car meets the definition of a passenger motor vehicle as provided in the Income Tax Act.) It cost $29 900 000
($26 000 000 plus VAT of $3 900 000). Depreciation of $3 705 000 has been provided for on this motor car.

Note 9
On 1 December 2019 Zuva leased a computer from a financial institution under a two-year finance lease. Zuva capitalised the
financial lease for accounting purposes. It is an instalment credit agreement for VAT purposes. The computer cost the financial
institution $1 967 000 ($1 710 000 plus VAT of $257 000). Total finance charges in terms of the lease amounted to $451 and
the monthly rental to $100 000. The final lease rental of $100 000 was paid on 30 November 2021. On 1 December 2021 the
financial institution simply abandoned this computer to Zuva without requiring any further consideration by Zuva. Ownership

201
was therefore attained on 1 December 2021. On this date its fair market value was $1 150 000 ($1 000 000 plus VAT of 150
000). Despite being two years old, the computer was still in good working order and Zuva indeed used it during the entire 2021
year of assessment. Depreciation of $570 000 has been provided for on the computer.

Note 10
The finance charges of $220 000 accounted for in the 2021 statement of comprehensive income concern the finance lease for
the computer in note 9.

Note 11
On 1 March 2020 Zuva purchased a new machine (Machine A) on a cash basis in an arm‘s length transaction for $10 000 000.
Machine A was immediately brought into use in its process of manufacture. On 31 August 2021 it traded in this machine for
a more advanced manufacturing machine (Machine B). Machine B was purchased as a new machine on a cash basis in an
arm‘s length transaction for $15 000 000. A trade-in price of $13 000 000 was obtained for machine A. On that date machine
A had a book value of $6 250 000. Machine B was immediately brought into use in its process of manufacture. Zuva will elect
any option that is available to it to defer any of its tax liability.

Note 12
All other machinery and depreciable assets had a $nil tax value on 1 January 2021.

Note 13
The rentals are paid monthly for the use of a warehouse leased by Zuva for trade purposes

Note 14
Insurance premiums of $8 100 000 were incurred during the 2021 year of assessment. In addition, Zuva paid insurance
premiums of $8 875 000 covering the period 1 January 2022 to 31 December 2022 on 15 December 2021, on the advice of its
insurance broker who claimed that this early payment would secure cheaper insurance. No portion of the advance insurance
premium amount was expensed to its statement of comprehensive income for the 2021 financial year.

Note 15
Salaries, wages and benefits of $290 000 000 include directors ‘salaries and fees. On 1 June 2021 Zuva employed a learner (a
learner who is not disabled) on a full-time basis at a wage of $75 000 per week. (This learner was not previously employed by
Zuva.) Zuva entered into a 27-week, registered learnership agreement with the learner in the course of its trade. The agreement
commenced on 1 June 2021 and was completed on 6 December 2021. The learnership agreement is registered with the
Zimbabwe Manpower Development Fund (ZIMDEF). The wages paid to the learner and the levies paid to ZIMDEF are
included in the salaries, wages and benefits.

Note 16
The restraint of trade payment of $33 600 000 was paid to a designer who had been employed by Zuva. She left its employ on
30 September 2021. The restraint of trade agreement is effective for two years commencing on 1 October 2021.

Note 17
The leave pay provision was increased by $950 000 for the 2021 financial year. As at 31 December 2021 the balance on the
leave pay provision amounted to $5 450 000. Actual leave payments made during the year have been expensed directly to
salaries, wages and benefits.

Note 18

Interest incurred during the 2021 financial year on the company’s business bank account amounted to $11,700 000.

Note 19
On 1 December 2021 Zuva purchased outright the Beyblade‖ trade mark from another card manufacturer for $4 000 000. The
acquisition gives Zuva the exclusive right to market cards un-der the Beyblade trade mark in Zimbabwe.

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In November 2020 Zuva bought stock for $2 415 000 ($2 100 000 plus VAT of $315 000) from a local supplier. Zuva claimed
an input tax credit of $315 000 for its tax period 1 October 2020 to 30 November 2020. However, because of quality problems,
Zuva paid the supplier only $1 932 000 ($1 680 000 plus VAT of $252 000) on 30 November 2020, refusing to settle the
account until the quality problems had been resolved. On 31 December 2021 an amount of $483 000 ($420 000 plus VAT of
$63 000) was still outstanding despite numerous letters of demand from the supplier. The amount was reflected under creditors
in the statement of financial position of Zuva as at 31 December 2021. No VAT adjustment that may be required has been
reflected in the detailed draft statement of comprehensive income of Zuva for the 2021 financial year. None of this stock was
on hand as at 31 December 2021.

Other information

Zuva has neither an assessed loss nor an assessed capital loss to carry forward from its 2020 year of assessment.

Required

Calculate the normal tax liability of Zuva Cards (Pvt) Ltd for its 2021 year of assessment. Show all workings and address
all items. Your answer should start with the comprehensive income (net profit) before tax of $15 000 000.

SOLUTION

Item $000 Marks

Net Profit for the year 15 000
Sales – Gross Income -
Purchases – imported raw materials – obligation to pay arose on the 22nd (24 000) 1
of December hence deductible
Closing stock – Include raw materials in transit- sect 8(1)(h) 24 000 1
Dividend Income: From resident companies – Exempt 3rd Schedule (2 020) 1
Dividend Income: Interest not from financial institution hence taxable - 1
Sale of shares – Capital in nature (8 000) 1
Insurance settlement: Deemed received 2 736 1
Trading stock stolen (2 000) 1
Prescribed debt taxable since the original purchase would have been -
allowed as a deduction
Profit on sale of Machine A: accounting entry (6 750) 1
Recoupment on disposal of machine A: ($10,000 000 * 25% * 2 years) – 5 000 2
no capital allowances claimed in the year of sale
Bad debts: Trade debtors – deductible
Bad debts: loan to supplier (capital in nature since Zuva is not in the 2 700 1
business of giving out loans)
Provision for bad debts: not allowable since not actually Incurred 600 1
Depreciation on motor vehicle 3 705 ½
SIA ($10 000 000 * 25%) (2 500) 1
Depreciation on computer 570 ½
SIA on computer: ($1 000 000 * 25%) (250) 1
Finance Charges 220 1
Lease instalments paid: ($100 000 * 11) (1 100) 1
Depreciation Machine A 1 250 ½
Depreciation Machine B 1 875 ½
SIA Machine B ($15 000 000 * 25%) (3 750) 1
Depreciation on other machinery and depreciable assets 8 625 ½
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 Rentals- deductible -
Insurance premium: 2021 tax year -
Insurance premium: 2022 deductible in the period it relates (in 2022) - 1
Salaries and wages -
Restraint of trade: Capital in nature 33 600 1
Provision for leave pay – no expense actually incurred 950 1
Provision for leave pay – no expense actually incurred 950 1
Interest -
Trade mark: Capital in nature: no capital allowances are available on 4 000 2
intangible assets except on computer software
Admin and marketing expenses - 1
Taxable income 55 411

TUT 10
Mukwa Sawmills (Pvt) is located in Penhalonga. It specialises in high-end furniture for office and home use. The company
has been in operation for several years and closes its accounts on 31 December each year. For the year ended 31 December
2020, the company furnished the following financial statement:

Notes $
Sales 1,999,456
Less: Cost of sales (675,400)
Gross profit 1,324,056
Dividends 1 65,000
Interest 2 56,200
Rental 3 120,000
Gain on disposal of fixed asset 4 34,500
1,599,756
Less: Operating Expenses
Rates and rent on factory land 34,000
Bonus 98,000
Depreciation 189,100
Donation 5 1,638,000
Entertainment 6 36,400
Fines and penalties 7 10,000
Foreign exchange gain 8 ( 25,000)
Foreign exchange loss 9 45,000
Insurance Charges 10 19,800
Lease of motor vehicles 11 330,000
Legal fees 12 27,000
Loss on disposal of fixed asset 13 13,900
Promotion 14 230,000
Provision for doubtful debts 15 60,000
Repair and maintenance 16 85,056
Royalty 17 60,000
Salaries and wages 345,678
Security services 18 45,000
Shipping charges 19 82,000
Staff retirement benefits 20 153,000
Traveling 21 7,000 3,483,934
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Net loss (1,884,178)

The accounts are accompanied by the following additional information:

1. Dividends received during the year are made up of the following:

Company Gross Tax Net

Special economic zone 25,000 Exempted 25,000

Kadoma paper Mills 40,000 8,000 32,000

2. This is a non-exempt interest earned from fixed bank deposit.

3. The rental was received from a furniture subcontractor who used part of the company's factory space to store his goods
temporarily pending construction of his own warehouse.

4. An old machine was disposed of during the year to a furniture subcontractor for a small profit.

Unity Peoples’ Party (a political party) 12,000

Contribution to the State to help set up Maternity Ward unit at Parirenyatwa Hospital 926,000
Approved Destitute Homeless Persons Rehabilitation Fund 700,000

5. Entertainment expenses are made up of the following:

Drinks for office and factory staff 5,000

Drinks for clients 7,400
Annual dinner for staff 24,000

6. The company incurred a sum of $10,000 on fines and penalties during the year. It is made up of the following:

Fines for company Lorries that were caught speeding 8,000

Penalties for late submission of statutory forms to various Government offices 2,000

7. An amount of $25,000 represents gains made in forward purchases of raw materials from Brazil and Argentina. As at 31
December 2020 a sum of $12,000 out of the $25,000 was not realised.

8. Foreign exchange loss of $45,000 represents the loss made on three separate sales to a company in Italy. Of this loss, a
sum of $12,000 was not realised as at 31 December 2020.

9. Insurance charges are made up of the following:

Transit insurance paid to Export Insurer for cargoes of furniture to Italy 12,000
Insurance on stocks, factory building, plant and machinery 7,800

10. Motor vehicles are leased by the company as part of a strategy to eliminate cash being tied up on unnecessary assets. Lease
payments were made to a local motor leasing company as follows:

Model lease/bf Rental for 2020 cumulative

4 Tonnes Mitsubishi Truck 20 000 140,000 160,000
Land Cruiser for MD 50,000 120,000 170,000
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Honda CRV 50,000 70,000 120,000

The Honda CV is used to transport visiting dignitaries and important visiting clients. The 4 Tonne Truck is used occasionally
for transportation of very bulky and special-order furniture.

11. The company furnished details of the legal fees incurred as follows:
Fees paid for arranging a loan for the purchase of a special plant 3,000
Fees paid to defend the company in court against a case
brought by the Ministry of Environment in which the company was
charged with polluting a nearby river by discharging toxic wastes. 9,000
Fees paid for the recovery of bad debts arising from furniture
sales made three years ago but still outstanding. 8,000
Fees paid for patenting a new design for a new line of furniture 7,000

12. One of the Lorries owned by the company met with an accident and was written off.
13. This consists of general advertisement of the company's various products in the local newspapers and selected home and
women's magazines and $100,000 reserves for future promotion.
14. Provision for doubtful debts of $60,000 relates to provision for general bad debts.

15. The repair and maintenance expenditure provided by the company is as follows:
Minor repair and maintenance of factory building, plant and machinery 12,456
Extension of the loading and unloading bay 27,600
Construction of a new manager's room in the factory area 45,000

16. During the year the company paid a royalty to an Italian design house in consideration of technical advice and technical
assistance in respect of the manufacture of furniture of special designs. On 15 July 2020 $40,000 was paid but no
withholding tax was deducted. On 15 September 2020 another $20,000 was paid and the withholding tax was remitted to
ZIMRA on 10 October 2020.
17. The company engages security guards from a leading private security firm to guard the factory. A trespass occurred in the
factory premises. Upon investigation, it was found that the security guard on duty at the time of the incident was found to
be careless and negligent in his duties. The security firm agreed to compensate the company a sum of $30,000 for the
trespass. This amount has been netted off in the security service charges debited in the account.

18. The following are included under shipping expenses:

a) Amount of $7,000 paid to the Immigration as penalty for failing to declare in time a particular shipment of furniture
on to a ship.
b) A sum of $75,000 represents freight charges for transport of some furniture from Penhalonga to Beira Port.

19. To avoid high turnover of staff, the company decided to operate its own insurance-based retirement benefit fund. During
the year, the company paid an initial lump sum of $150,000 to an insurance company to setup this fund. The company is
then required to pay a sum of $100 per year for each new employee who joins the company during a particular year, to
entitle them to participate in the scheme. During the year 2020, the company recruited 30 new employees.

In addition, an annual fixed sum of $1,000 is payable to the insurance company to validate the scheme. This sum is payable
only from next year onwards. Manager and staff who retire or leave the company are paid a one-off retirement benefit directly
by the insurance company based on an agreed scale, one of the determinants being the employee's length of service with the
company. The company has written to the CG for approval of the retirement scheme, but as at date of close of accounts, the
approval has yet to be received.

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20. The company's marketing manager showed exceptional initiative in furthering the sales of the company's products,
especially in promoting it overseas. The company therefore awarded $7,000 an all-expense paid trip to Egypt, for him and
his family in November 2020.

21. The company has incurred the following capital expenditure for fixed assets in the assessment year ended 31 December
2020:
o purchase of a computer for a director’s use $2000) (this computer is used 65% for business purposes and 35% for private
purpose)
o purchase of computers which were leased to customers for rental income $290,000.
o Purchase of delivery vehicles $160,000
o Purchase of a private car on hire-purchase (cost = $200,000, down payment of $20,000 on 1 January 2020, monthly
payments for 10 months from February 2019, $20,000 each month (interest portion = $2,000 each month))
o Purchase of one set of network computer system $500,000
o Purchase of office furniture $80,000
o Purchase of room air-conditioners $70,000
o Built 3 dwelling units for its staff for total cost of $80,000

23. The ITVs of items brought forward from the previous year of assessment are as follows:

Plant and machinery (used 2 shifts) $500,000

Warehouse $600,000 (cost $800,000)

Required

a) Compute the tax liability of Mukwa Sawmills (Pvt) Ltd for the year of assessment 2020, together with a schedule of
capital allowances. (20 marks)

b) Comment of royalties paid to the Italian designer (3 marks)

c) Compute minimum capital allowances for Mukwa Sawmills (Pvt) Ltd for the year of assessment 2020 (12 marks).

SOLUTION

a) Computation of Mukwa Sawmills (Pvt) Ltd’s tax liability

Net loss (1,884,178) ½

Less Deduction
Dividend (non-taxable) 65,000 ½
Interest (taxed at source) 56,200 ½
Gain on sale of fixed asset (capital profits) 34,500 ½
Unrealised foreign exchange gain 12,000 ½
Wear & tear 288,530 ½ (456,230)

Add
Unity Peoples’ Party donation (not for purpose of trade) 12,000 ½
Construction of Maternity Ward (restricted to $800,000) 126,000 1
Destitute Homeless Persons (restricted to $500,000) 200,000 1
Drinks for client (non-deductible) 7,400 ½
Staff drinks (deductible if offered on non-discriminatory basis) - ½
Annual diner (e.g. Christmas are deductible) - ½
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Fines for speeding Lorries 8,000 ½
Late submission of statutory forms 2,000 ½
Unrealised foreign exchange loss 12,000 ½
Transit insurance (deductible) - ½
Insurance on stocks, fixed assets etc (deductible) - ½
Lease on 4 Tonne Mitsubishi truck (deductible) - ½
Land Cruiser for MD (restricted on PMV to $100,000) 70,000 ½
Honda CRV (deductible –restricted to $100,000) 20,000 ½
Fees for a loan to purchase a special plant (deductible) -½
Fees for defending a breach of regulation 9,000 ½
Fees for recovery debts (deductible) - ½
Fees for patenting a new design (capital nature) 7,000 ½
Depreciation 189,100 ½
Loss on disposal of asset 13,900 ½
Reserve for future promotion (provisions are not deductible) 100,000 ½
Provision for doubtful debts 60,000 ½
Minor repairs of factory building (deductible) - ½
Extension of the loading and unloading bay 27,600 ½
New Manager’s room 45,000 ½
Royalties (deductible) - ½
Fees for trespassing (correctly netted off) ½
Penalty paid to Immigration office 7,000 ½
Freight charges (deductible) - ½
Unapproved benefit fund ($150,000 + 30 x $100) 153,000 ½
Allowance for marketing manager (deductible) - ½ 1,069,000
Taxable income (1,271,408)

b) The 17thSch ITA requires withholding tax to be deducted on fees payable to non-resident from a source within Zimbabwe
in respect of any services of a technical nature. The deducted withholding tax must be remitted to ZIMRA within 10 days
of paying the fees, distribution or crediting the non-resident person’s account with the fees, whichever occurs first. The
company was supposed to withhold tax of $6,000 ($40,000 x 15%) on the $40,000 fees paid on 15 July 2020 and remit it
to ZIMRA by 25 July 2020. The company is liable to pay the tax, a penalty of 100% of tax due plus interest of 10% p.a
for each day the interest remained outstanding. Although the company correctly deducted the withholding tax on the second
payment, it delayed in remitting the tax to ZIMRA. The company is again liable to a penalty of 100% of the tax (i.e.,
$3,000) plus interest of 25% of tax due for a month or any part of month thereof. (3)

c) Computation of minimum capital allowances

Asset Cost/ITV Rate Wear & Tear ITV

Director’s computer 2,000 20% 400 1,600 1

Lease computers 290,000 20% 58,000 232,000 1
Delivery vehicles 160,000 20% 32,000 128,000 1
Private car 10,000 20% 2,000 8,000 1
Computer network 500,000 10% 50,000 450,000 1
Office furniture 80,000 10% 8,000 72,000 1
Air conditioners 70,000 10% 7,000 63,000 1
Dwelling (non-qualifying) N/A N/A N/A N/A 1
Plant & machinery 500,000 17.5% 87,500 412,500 1
Warehouse 600,000 5% 40,000 560,000 1
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Loading and Loading bay 27,600 5% 1,380 26,220 1
New Manager’s room 45,000 5% 2,250 42,750 1
Total 288,530

TUT 11

Drake Group is a computer chip manufacturing company in Zimbabwe. The group is comprised of, Drake Ltd and Drake 2.
Drake Ltd has 60% voting rights in Drake 2. Drake 2 generated a loss of $75,000 (net of deductible expenses, but before
recoupment) in the year to 31 December 2020. Drake Ltd generated a profit of $105,000 for the same period. On the 29
December 2020 the board of Drake Ltd made a resolution to rationalise its operations, accordingly it made an agreement to
dispose all Drake 2 assets to Drake Ltd.

The following was extracted from the books of Drake 2 for the year of assessment 2019:

Acquired in the year Qualifying Cost ITV Market value

31 December

Industrial building (constructed 2018) 2,000,000 1,000,000 2,300,000

Production plant 450,000 nil 564,000
Computers 15,000 nil 16,500
Commercial vehicles 2019 120,000 90,000 102,000

The following expenses were deductible in arriving at Drake Ltd profits

1. The company had a cash loss of $45,000 as a result of embezzlement by a shop assistant. The MD reported a loss of
$25,500 to a snatch thief during her trip back from the bank, having withdrawn $25,500 comprising $15,000 wages to pay
her staff and $10,000 from her personal savings for personal expenditure.
2. Drake Ltd removal costs include the following:
Transport cost to relocate Drake 2 fixed assets (see below) ……….......................... 7 500
Removal of rubbish from Drake Ltd premises …...................................................... 3 000

The transport cost to relocate the Drake 2 assets to the new premises was paid on 1 June 2020.

3. The following legal and miscellaneous were incurred and deductible in arriving at Drake Ltd profits:

Site investigation for new building 12,700

Drafting and registering a mortgage on the new building 1,500
Drafting purchase agreement for the new building 3,000
Filing a lawsuit against a supplier for breach of contract 3,500
Annual audit fee 9,000
Lease of Isuzu Double cab used by Finance Manager (ignore VAT) 122,500
Amortisation 43,000
Golf club membership dues for the MD to entertain suppliers 2,000

Required

a. Explain the group relationship that must exist in order for two or more companies to form a group for capital gains
purposes. (2 marks)
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b. State the time limit for transferor and transferee to make a joint election to transfer the capital gain on disposal of
specified asset and explain why such an election will be beneficial (3 marks)

c. Briefly explain how the taxes can be avoided on sale of assets by Drake 2 to Drake Ltd. You are also required to compute
Drake 2 income tax and capital gains tax as if measures to avoid tax has not been made (14 marks)

d. Briefly explain the income tax provisions relating to trafficking of shares with assessed loss, the loss expiry provisions
and whether Drake Ltd can utilise Drake 2’s assessed loss (4 marks).

e. State, with brief explanations, whether or not the loss of cash under each of the circumstances outlined above is an
allowable deduction in computing the adjusted income of the business (3 marks).

f. Under what other circumstances is loss resulting from theft disallowed (3 mark).

g. State, with brief explanations, whether or not the removal costs under each of the circumstances outlined above is an
allowable deduction in computing the adjusted income of the business (2 marks).
h. Compute Drake Ltd.’s minimum taxable income (8 marks)

SOLUTION

a) Group relationship

A capital gains tax group exists when one company is controlled by another. A company is deemed controlled when its
majority voting shares (at least 50% is controlled by another party). (2)

b) Time limit for election

The election must be made at the time of submitting a return for assessment of capital gains (1.5).

The election will save the transferor of capital gains tax on assets transferred, since the assets will be transferred at base cost
making neither gain nor loss (1.5).

c) Taxes to be saved by making an election

The transferor and transferee must elect to transfer assets at ITV to avoid tax on recoupment (2). The transferor and transferee
must also elect to transfer specified assets at base cost to avoid capital gains tax (2).

Income tax

Item Amount Marks

1
Industrial building ($2,000 000 x 50%) 1,000,000

Production plant ($450 000 x 100%) 450,000 1

Computers ($15,000 x 100%) 15,000 1
Commercial vehicles (102 000 – 90,000) 12,000 1
Recoupment 1,477,000
Less Loss (75,000) 1
Taxable income 1,402,000
Tax liability at 24.72% 346,574 1

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Capital Gains tax

Item Amount Amount Marks

½
Industrial building 2.300,000

Less Recoupment (1,000,000) 1

1,300,000 1
Less Deductions 1
Original cost 2,000,000 ½
Less capital allowance (1,000,000) ½
1,000,000
Add inflation $2,000,000 x 3years x 2.5% 150,000 (1.150,000) 1
Capital gain 150,000
Capital gains tax liability @ 20% 30,000 1

d) Assessed losses

• Assessed losses belong to a person and cannot be utilised by another person. (1)
• Where there is a change in control the Commissioner may not permit the carrying forward or inheritance of assessed losses
unless it can be shown that the change in control was not motivated by the existence of assessed losses. (1)
• Assessed losses can be carried forward and deducted against future income, but such losses will expire after 6 years and
would not be used when they expire. (1)
• Drake 2 and Drake Ltd are under the same control and Drake Ltd can inherit Drake 2 assessed losses, unless the change is
motivated by existence of assessed losses. (1)

e) Loss of cash

• Loss of cash as a result of embezzlement by a shop assistant is expenditure inseparable from carrying on of a business.
It is deductible (1)
• The loss of cash by MD is also deductible. It is also an inherent business expense, unless it occurred as a result of a
theft by the MD (1).
• The loss of his/her money is non-deductible, being a private expenditure (1).

f) Disallowed theft/loss

• A loss or embezzlement resulting from the acts of the shareholder or by someone in the position of a proprietor (1).
• Loss or theft not ordinarily incurred in the bona fide carrying on of a business e.g. theft by external auditors etc (1).
• Loss by junior staff where the junior is neither reprimanded nor the loss is reported to the police

g) Removal Costs

• Transportation of fixed assets is expenditure of a capital nature and non-deductible (1)

• Removal of rubbish is expenditure of revenue nature which is tax deductible (1).

h) Computation of minimum taxable income for Drake ltd

211
 Item Amount Marks
Net profit 105,000 ½
Cash loss-shop assistant 0 ½
Wage to pay staff stolen 0 ½
Personal cash of MD stolen 10,000 ½
Transport of fixed assets 7,500 ½
SIA removal cost on fixed assets ($7,500 x 25%) (1,875) ½
Removal of rubbish 0 ½
Site investigation for new building 12,700 ½
Drafting and registering mortgage 1,500 ½
Drafting purchase agreement 3,000 ½
Supplier breaching a contract 0 ½
Annual audit fee 0 ½
Lease of Isuzu (PMV 122,500-100,000) 22,500 1
Amortisation 43,000 ½
Golf club subs-entertainment 2,000 ½
Taxable income 195,325

TUT 12

Your client, Taisek (Pvt) Ltd, is an engineering company registered in Zimbabwe. They have recently been investigated by the
Zimbabwe Revenue Authority in respect of normal income tax for the year ended 31 December 2018. The financial director
of the company has requested that you assist in dealing with queries raised by the investigators from the Zimbabwe Revenue
Authority.

The Zimbabwe Revenue Authority investigators have compiled a schedule of queries, which are listed below:

1. A new machine was purchased by Taisek (Pvt) Ltd from Germany in November 2018 for $15 000. This was delivered to
the factory in Zimbabwe on 20 December, and installed and tested on 21 December 2018. As a result of factory closure
over the Christmas season, the company only started to use the machine in the production process on 6 January 2019. The
company claimed a capital allowance of $3 750 for the 2018 tax year.

2. The company’s senior engineer incurred travel expenses of $3 500 in August 2018.He went to Germany to inspect and test
a machine and to make the necessary arrangements for its delivery to Zimbabwe. The travel costs of $3 500 were charged
to ‘foreign travel’ in the profit and loss account and claimed in full for tax purposes in the 2018 tax year.

3. The company demanded upfront payments from its major customers because of tight cash-flow restrictions. The company
held payments received in advance totalling $17 500 at 31 December 2018. They were disclosed as deferred revenue in
the 2018 financial statements. No adjustments were made regarding these receipts in the 2018 tax year.

4. The company’s cut-off date for the 2018 accounting year was 21 December. Stocks were counted and all books of account
were written up to the close of business on that date. Sales totalling $71 250 were made during the period 27 to 29
December. These were processed in January 2019, but not accounted for in the financial statements for the 2018 financial
year.

5. A payment of $23 000 was made to the Zimbabwe Electricity Supply Commission in July 2018 for electricity usage. This
was erroneously posted to the ‘repairs and maintenance’ account and reflected as such in the year-end financial statements.

212
6. University fees totalling $700 were paid to the University of Zimbabwe on behalf of the managing director’s son (who is
20 years of age). (The managing director is also a shareholder in the company and holds 51% of the issued share capital.)
This payment was erroneously allocated to the ‘repairs and maintenance’ account and reflected as such in the year-end
financial statements. The son is studying for a degree in mechanical engineering, which is consistent with the main business
activity of Taisek (Pvt) Ltd. In addition, he has signed a contract to the effect that he would work for the company for a
period of three years after completion of his studies.

7. An office desk, which had been purchased in March 2018 for $2 000, was erroneously allocated to the ‘purchases’ expenses
account and reflected as such in the year-end financial statements.

8. The company carried out alterations totalling $10 000 to the administration block which the company owns. This involved
changing the position of doors and windows as well as the installation of 20 new PowerPoints. The whole amount was
claimed as repairs and maintenance.

9. Taisek (Pvt) Ltd borrowed an amount of $300 000 on 2 January 2018 at an interest rate of 15% per annum. It used these
funds to purchase shares in a building contracting company, Build (Pvt) Ltd. The shares cost $50 000 and the company
advanced an interest free-loan to Build (Pvt) Ltd of $150 000. The balance of $100 000 was used to purchase raw materials.
Taisek (Pvt) Ltd claimed the full interest on the original loan amounting to $45 000 in its tax computation for the year
2018.
10. On 1 February 2018 Taisek (Pvt) Ltd entered into a lease agreement with Mutumwa Properties (Pvt) Ltd for the leasing of
an industrial building. The details of the lease agreement were as follows:

Lease Period: 12 years

Lease Premium (paid on 1 February) $10,000
Lease rental (Monthly) $4,000

In terms of the lease agreement Taisek is obligated to make improvements with a total cost of a maximum value of $30,000.

Between February and April 2018 Taisek made capital improvements to the building at a cost of $40,000 and then commenced
to use the building in the manufacturing process with effect from 1 May 2018. In the 2018 Financial statements Taisek (Pvt)
Ltd Expensed the lease rentals and lease premiums to the Statement of profit and loss.

The lease was classified as a finance lease for financial reporting purposes hence the cost of the improvements were capitalised
to the leased building.

In preparing the tax return for the 2018 tax year no adjustments were made in respect of the above information.

Required

Advise Taisek (Pvt) Ltd with regards to the Income Tax Implications of the transactions detailed in Note 1 to Note 9. Where
adjustments are required provide the supporting calculations of amounts taxable or deductible where applicable. 20 marks

With reference to Note 10:

Advise Taisek (Pvt) Ltd of the Income tax implications of the Lease agreement and determine the deductions that would result
in Taisek paying the minimum tax possible from the lease transaction 6 marks

Discuss in respect of Mutumwa Properties (Pvt) Ltd the income tax implications of the lease agreement entered into with
Taisek (Pvt) Ltd. Provide supporting calculations were applicable. Assume that Mutumwa Properties had originally acquired
the building for $130,000 in 2009.4 marks
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SOLUTION

Advice Taisek (Pvt) Ltd with regards to the Income Tax Implications of the transactions detailed in Note 1 to Note 9. Where
adjustments are required provide the supporting calculations of amounts taxable or deductible where applicable. 30 marks

Note 1 - New Machine from Germany

In terms of section 15 (2) (c) and the 4th schedule capital allowances are claimed on assets that are used for the purpose of
trade commencing the day the asset is first brought into use. 1
Therefore, Taisek is incorrect to claim the capital allowance in 2018 as the machinery was only brought into use on the 2nd of
January 2019.
Need to add back the $3,750 in the determination of taxable income for the 2018 tax year. 1/2

Note 2 - Travel Expenses – sect 15 (2) (a)

The expenditure can be deemed as capital expenditure as it was incurred in the acquisition of machinery.1
Therefore, Taisek should have capitalised the costs to the machinery and claimed it as part of the capital allowances from the
date the machinery is first brought into use. 1
Need to add back the $3,500 in calculating the taxable income for the 2018 tax year. ½

Note 3 - Advance Payment – Sect 8 (1)

In terms of section 8(1) gross income includes amounts received, therefore the advance payments from customers should be
included in gross income upon receipt. 1
The $17 500 should be included in gross income in the 2018 tax year. ½

Note 4 – Sales Cut-off – Sect 8(1)

The tax year ends on 31 December 2018; therefore, the accounting records need to be adjusted for transactions that took place
between the 21st and the 31st. 1
Revenue of $71 250 should be included in gross income for the 2018 tax year. ½

Note 5 - Payment to ZESA – Sects 15 (2) (a)

No adjustment required since both repairs and maintenance and electricity expenses are tax deductible Sect 15 1

Note 6 – University fees

In terms of sect 15 (2) (p), a deduction is allowed of grants, bursaries, scholarship paid for a person undergoing technical
education, provided that: the course is related to the taxpayer’s trade and that the beneficiary should not be a near relative of
the individual controlling the company, his spouse or near relative of the spouse unless the director works full time for the
company and controls not more than 5% of the share votes. 1
In this case the MD’S son is studying towards an engineering degree which is connected to Taisek’s trade; however, the MD
holds more the 5% of the share capital, therefore the fees are not deductible. 1
Need to add back the $700 in the calculation of taxable income for the 2018 tax year. ½

Note 7 – Office desk

The purchase of the office desk is capital expenditure is not deductible as per sect 15 (2) (a), therefore Taisek should add back
the cost. 1
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However, since the desk is being used for the purpose of trade Taisek can claim capital allowances on the cost thereof. 1
SIA of $500 ($2,000 * 25%) ½

Note 8 - Alterations to admin Block

The question is whether the expenditures qualify as repairs and maintenance or are capital in nature. The repositioning of the
doors and windows does not add value to the building hence these qualify as repairs and maintenance – Sect 15 (2) (b). 1
The installation of new power points is also repairs since this does not constitute a significant component of the building 1
Therefore, no adjustment is required ½

Note 9 – Loan

In terms of section 15, expenditure is deductible to the extend it was incurred for the purpose of trade and is not capital in
nature. 1
The interest was incurred on the loan utilised as follows
Purchase of share – capital in nature hence interest relating to the $50,000 not deductible1
Loan to Build (Pvt) Ltd – Taisek is not in the business of giving out loans hence the interest related to the $150,000 not
deductible. 1
Loan to purchase raw materials – raw materials are used for the purpose of trade hence the interest element on the $100,000 is
tax deductible. 1

With reference to Note 10:

Advise Taisek (Pvt) Ltd of the Income tax implications of the Lease agreement and determine the deductions that would result
in Taisek paying the minimum tax possible from the lease transaction.

Lease Premium

In terms of section 15 (2) (d) the lease premium paid by Taisek is deductible over the lesser of the lease period or 10 years
beginning from when the leased asset is first put to use. 1
Therefore, the amount deductible in the 2018 tax year is $667 ($10,000/120 * 8months) ½
The lease rental payments are allowed as a deduction beginning when the leased asset is used for the purposes of trade. 1
In this case the property was used in the production process commencing 1 May hence lease rentals from May to December
2018 allowable in full. 1
The rentals paid between February and April can be claimed as preproduction expenditure in accordance with section 15 (2)
(t). ½

Lease improvement

Taisek has two options available in claiming a deduction in respect of the lease improvements.
Since the improvements are in terms of the lease agreement, Taisek can claim a deduction over the lesser of the lease term or
10 years. 1
The second option is to claim SIA since the improvements were constructed and relate to an industrial building. 1
To minimise the tax liability Taisek should claim SIA in the 2018 tax year as follows:
$40,000 * 25% = $10,000 ½

Discuss in respect of Mutumwa Properties (Pvt) Ltd the income tax implications of the lease agreement entered into with
Taisek (Pvt) Ltd. Provide supporting calculations were applicable. Assume that Mutumwa Properties had originally acquired
the building for $130,000 in 2009.

Lease Premium
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In terms of section 8 (1) (d) the lease premium is taxable in full in the year of receipts, therefore Mutumwa will be taxed on
the $10,000 in the 2013 tax year. 1

Lease Rental

The lease rentals are gross income in the hands of Mutumwa hence taxable commencing 1 February 2018 1

Lease improvements

In terms of section 8 (1) (e) obligatory improvements made in terms of a lease agreement are gross income in the hands of the
lessor. 1

The lease improvements are taxable over the lower of 10 years or the lease term. 1.
Therefore, in the 2018 tax year Mutumwa is supposed to include $2 000 ($30,000/120*8months). ½
Mutumwa is only taxed on the $30 000 which was the maximum value of the obligatory improvements in terms of the lease
agreement. 1

Capital Allowances

Since Mutumwa is earning rental income from the building they can claim capital allowances on the cost of acquiring the
building. 1
Therefore, Mutumwa will be able to claim W&T at a rate of 2.5% per annum since the property qualifies as a commercial
building as defined. 1

TUT 13

AAC (Pvt) Ltd (AAC) operates a leading business school in Zimbabwe (The Academy) and a training and advisory services
consultancy (TAS). AAC trains professional courses and the flagship course is the Chartered Accountancy one. TAS
specialises in International Financial Reporting Standards (IFRS) and International Public-Sector Accounting Standards
(IPSAS). TAS also advises on tax and audit matters. AAC is a category C VAT registered operator. You are a trainee at AAC
and are responsible for the accounting function wherein you prepare the financial reports for both the academy and TAS since
they share the Finance and Admin function. Your job also involves preparation of tax returns. AAC has just hired a university
intern in their 3rd year of an undergraduate degree program with a local university. You are responsible for the intern’s
induction. Part of the induction is a technical phase where you are to walk the student through technical aspects of their job
using live information i.e. a hands-on approach. You are currently handling tax matters in preparation for VAT returns for the
month of February, the first QPD return for the year and possible CGT on asset disposals done to date.
AAC receives tuition fees before the semester starts on the 10th of March 2021. In the month of February 2021, AAC received
a total of $1,570,000 for tuition.

During the year AAC received registration fees of $10,500 up to the 31st of January 2021 when registration closed.

Interest income
• AAC accrued interest of $450 being 10% per annum interest (accruing monthly non-compounding) on staff debtors.
• AAC also charges interest on outstanding student account balances.

TAS delivered IFRS 9 trainings to financial institutions and to ZIMRA worth $82,500.00 in the month of March 2021.
TAS developed audit manuals for a leading audit firm. The manuals included the revised methodology and charged $16,250.
TAS has not been paid for this work.

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TAS has been writing specific papers such as concept papers for entities who want advice on specific matters, comment letters
for regulatory bodies, publication and a range of technical work for which it accrued $14,500.

In March, AAC enlisted the services of a University of Johannesburg lecturer Peter Van Vuuren to provide the following
services:
• AAC dismissed two trainees for breach of ethics and the two decided to take legal action. The one was working for the
Academy and the other for TAS division. Peter assisted the legal team to interpret the code of ethics which linked to the
staff labour rules. Peter charged R13, 000 for each of the cases. The exchange rate was USD1: R13.
• Peter then went on to do two other jobs. One was to take an audit lecture for the academy focusing on ethics for R6, 500
and also attended a TAS training for a client on the same topic. Since he was presenting on behalf of TAS, Peter charged
TAS R3, 900.

During March 2021, TAS disposed of the following assets:

• A Nissan Sunny saloon 1.5 litres was sold for $5,600 and had a book value of $4,200. The vehicle cost $15,000 in 2013.
• AAC disposed of a property in Sunningdale. The property was used as a warehouse. The contract was concluded on the
19th of March. The total cash price of the sale was $150,000. The terms of the sale were that AAC would receive the
amount in 3 equal instalments of $51,500 each commencing 31 March 2021.
• The client was only able to pay the first instalment on the 15th of April and the last two instalments on the 30th of April
and the 31st of May respectively. The property was acquired in May 2018 for $108,000 from a non-registered operator.

AAC is recruiting a key staff member for TAS, a chartered accountant and is discussing with the candidate a suitable
remuneration package.

Motoring benefit

• AAC could import a passenger motor vehicle and assign it to the candidate. The candidate will then assume ownership of
the vehicle at the end of 3 years for free. The vehicle shall have a cost of $20,000 and engine capacity of 3000cc.

• AAC could assist the candidate with finances to import the passenger motor vehicle for $20,000 with an engine capacity
of 3000cc. The candidate shall then have to repay the loan by serving 3 years for AAC. If the candidate decides to terminate
employment, they shall pay for the outstanding balance allocated based on the time served.
• AAC shall provide a housing allowance of $300.
• AAC shall pay for the relocation expenses of up to $1,200 for the candidate to move from Mutare where the candidate
currently resides.
• The candidate shall receive cash allowances of $300 per month for use as the candidate pleases.
• AAC shall pay for the candidate’s ICAZ subscriptions since they are a chartered accountant for $600 per annum. AAC
shall also pay for the candidate’s Leo’s club, toastmasters’ club and golf club subscriptions for a total of $850 per annum.

Other Operating Expenses:

• AAC is renting the current premise for $5,500. TAS has a staff contingent of 5 people whereas the Academy has 25. TAS
turnover is projected to be $540,000 and the Academy at $3,450,000. TAS uses half a floor out of the four floors.

• Water is acquired in bulk and stored away. At the beginning of the year, 3 months’ worth of supply was hoarded for $350.
It was expected the TAS would use 70% of the water for trainings and conferences. However, the inventory stock cards
show that TAS actually used 85% of the water up to the 31st of March 2021. The open market value of the water over the
three months is $350.

Electricity:
• AAC was billed $160 for electricity for the month of March. AAC only paid this amount in June 2021.
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 Bad Debts:
AAC wrote of debts for the following:
• A former student who lost their parent to death and initially thought they could raise the balance on their school fees of
$320 for the 2021 academic year.
• A loan of $650 was advanced to a former attaché for fees in their final year of an undergraduate degree program, on
condition that they repay it or return to AAC to serve AAC. The attaché migrated to the United Kingdom upon completion
of their degree and has since been avoiding communication for 2 years.
• A student tuition 2019 debt of $540 which had been written off in December of 2020, was subsequently recovered. The
Commissioner had granted an allowable deduction in that year.

Required
Discuss the income tax implications for the year ended 31 December 2021 of the transactions in the following notes:

Note 9. Your discussion should focus on the tax implications in the hands of the candidate and in the hands of AAC.

Note 11. In the hands of AAC.

SOLUTION
Acquisition of Motor vehicle for use by employee

AAC Perspective
• The motor vehicle will be expenditure of a capital nature. S15 (2) general deduction formula. (1mark)
• AAC will be allowed to deduct capital allowances per s15 (2) (c) (1mark)
• AAC will be allowed to elect between Special Initial Allowance (SIA) of 25% p.a. with accelerated W&T at the same rate
subsequently on a straight-line basis for the succeeding 4 years; or W&T on a reducing balance basis at 20% per annum.
(1mark)
• After three years when the asset is given to the employee, it is deemed to be disposed at its fair value and recoupment, if
any is brought into gross income. (1mark)

Candidate’s Perspective
• The right to use the motor vehicle is a fringe benefit and brought into income per s8 (1) (f). (1mark)
• The value of the benefit is based on the engine capacity and since it is a 3000cc engine in question, then it is going to be
$9000 per month. (1mark)

Acquisition of the Motor Vehicle by Candidate via a loan arrangement

AAC Perspective

• The loan to the candidate is going to be expenditure that shall be repaid by service over the three years. This is a prepayment
of services to be rendered over the three years and therefore has already been incurred.
(1mark)
• The amount shall therefore be allowed as a deduction. (1mark)

Candidate’s Perspective
• The receipt of the loan is an advance for services to be rendered by the employee. (1mark)
• The receipt is for his own benefit and own behalf. (1mark)
• The receipt is remuneration and therefore revenue in nature (1mark)
• The entire loan amount should therefore be included in gross income in the current tax year.
(1mark)
Housing allowance

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• The housing allowance is a fringe benefit to the candidate and is included in the gross income of the candidate per s8 (1)
(f). (1mark)
• It is valued at the value to employee but since it is being awarded as an allowance it shall be at the cost to the employer
• which
) is $300 per month in this case. (1mark)
• The housing allowance is a staff cost to AAC and an allowable deduction per s15 (2) general deduction formula at $300
per month. (1mark)

Relocation Costs

• The relocation cost is a fringe benefit to the candidate but is not however included in gross income since the employee’s
journey is going to be undertaken to take up employment. (1mark)
• The relocation cost is a staff cost and is an allowable deduction per s15 (2) general deduction formula. (1mark)

Cash Allowances

• The cash allowances are a fringe benefit to the candidate and included in gross income of the candidate. (1mark)
• The cash allowance is a staff cost and an allowable deduction as per s 15(2) (a). (1 mark)
-
Subscriptions
• The payments for the ICAZ subscriptions are gross income to the candidate (1 mark)
• The $600 payment shall be an allowable deduction as they are for the purposes of trade. (1mark)
• The $850 payment to the social clubs is a fringe benefit to the candidate and will be included in his gross income. (1mark)
• The amount is a staff cost to AAC but for his entertainment. This makes the amount a prohibited deduction as per s16.
(1mark)

Bad Debts Written off

Bad debts are written off only if they meet the following criteria:
• The amount must have been included gross income. (1mark)
• The Commissioner must satisfy himself that all efforts to recover the debt have been exhausted. (1mark)
• The debt must belong to the taxpayer. (1mark)

For the $320 debt written off, more information is required as whether all efforts to recover the debt had been taken to the
satisfaction of the Commissioner. For example, was there a guarantor on enrolment and have the guarantor failed to pay?
Where the Commissioner is satisfied then a deduction will be allowed. (1mark)
For the $650 debt, the amount had not been included in the gross income of AAC previously and therefore no deduction is
allowable. (1mark)
For the bad debt subsequently recovered, it shall be included in gross income.

TUT 14

You are required to advise on the following unrelated queries

Query 1

Cathy carries on a business of manufacturing school playground equipment. In addition, she also provides consulting services
to schools about the type of playground equipment to use. On 30 June 2022 she had raw materials on hand that cost $23,000,
partly finished goods on hand that cost $25,000 to get to their current condition, finished goods on hand that cost $50,000 to
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manufacture and she has unbilled consulting fees of $12,000. What is the value of her trading stock on hand at 30 June 2022
assuming that she wishes to value her trading stock at cost?

Query 2

Civil Works Pvt Ltd operates a small manufacturing business and for the past year has been experiencing production problems.
The company seeks advice from a consultant engineer who recommends the following:

1. The furnace be relined immediately with fire bricks similar to those presently in use [cost $23,000] or with more modern
bricks that will last twice as long [cost $35,000].
2. An electrically powered forklift be purchased. A new vehicle would cost $27,000 but the engineer knows where an
identical second-hand unit can be purchased. It has only 40 hours work and will cost $23,000.
3. A new overhead crane be installed. With no modifications to the existing building this will cost $60,000. If existing
supports to the building are strengthened, the total cost will be $80,000.

Advise the company of the tax consequences of the alternative courses of action. You must cite sections and relevant case law.

Query 3

You are the newly appointed Tax Manager at Chimonera Premium Pack, a cigarette manufacturer. The Finance Director has
informed you that he is under fire from the board regarding the income tax figure on the tax computation of the company. He
asks you to recheck the tax computation before the finalisation of the financial statements. You discover the following
transactions performed by the company:

1. $50 000 000 donation to victims of cyclone IDAI paid into the Destitute Homeless Persons Rehabilitation Fund Account;
2. $ 900,000 worth of medical supplies donated to the local municipal hospital directly.
3. $ 2 000 000 annual tree planting competition sponsorship for farm schools (they get to show banners at the prize giving
ceremony where most of their clients will be in attendance).

Advise the Finance Director of the tax consequences of these transactions.

Query 4

Glimmer of Hope Trust is a not-for-profit organisation founded for philanthropic purposes. It is donor funded and its main
donor is Life Hope Global, a foundation based in the Netherlands. In 2022 Life Hope Global wrote to Glimmer of Hope Trust
that it will be cutting funding by 65% of their normal budget. In order to sustain its philanthropic projects, Glimmer of Hope
embarked on agricultural activities and retail of groceries to augment its finances to fund its projects. Glimmer of Hope has
never been registered for income tax but is registered for PAYE and other taxes. ZIMRA has raised assessments for income
tax for the period 2019 to date. The trustees are opposed to this assessment and have approached you to object to this
assessment. Advise the client on the correct exposition of the law on this matter.

SOLUTION

Query 1

The definition of trading stock will include raw materials, work in progress (partly finished goods) and finished goods. Work
in progress of a professional nature will not be included in assessable income until it has been billed. Therefore, in this question
the total value of trading stock on hand will be [$23,000 + $25,000 + $50,000] = $98,000.

Query 2
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1. If similar bricks are used, $23,000 is deductible under s15 (2) (b) (1); Modern bricks are an improvement; (increased
efficiency). But is a second element cost on which capital allowances can be claimed. No deduction for notional repairs.

2. Either forklift can claim capital allowances in terms of section 15(2) (c). The first element of ‘Cost’ for new or second-
hand items is the amount paid. For second-hand plant, the condition may be taken into account in calculating the effective
life.

3. The crane itself is a capital asset on which capital allowances can be claimed; $60,000 in terms of section 15(2) (c). The
amount of $20,000 does not form part of the cost of the crane unless it can be shown that the building is an integral part of
the plant: (Wangaratta Woollen Mills)

Query 3

1. Chimonera Premium Pack can claim deduction of up to $50,000,000 paid to the Destitute and Homeless Persons
Rehabilitation Fund for the victims of cyclone IDAI.
2. $900,000 is disallowed in full because the donation is made directly to the hospital and not through the state or an approved
fund. In future, the company must make such donations through the state or through approved funds as provided for in
section 15(2) (r1)
3. $2 000 000 annual tree planting completion sponsorship for farm schools is deductible in full because there is close
connection between the tree planting competition sponsorship and Chimonera Premium Pack’s business.

Query 4

Section 14 as read with paragraph 2 (e) (i) of the Income Tax Act exempts ecclesiastical institutions, charitable and educational
institutions of a public character — consisting of donations, tithes, offerings or other contributions by the members or
benefactors of the institutions concerned, and any other receipts or accruals that are not receipts and accruals of income from
trade or investment carried on by or on behalf of the institutions concerned;
The income that ZIMRA is seeking to tax is income from trade and investment activities being carried out by Glimmer Hope
Trust.

TUT 15

Simon Peter, trading as Peter Security Alarms, conducts an extremely successful business in the field of installation and
maintenance of burglar alarms. When Simon is not at a client’s premises, he works from home. His workshop comprises 10%
of the floor area of his home. His workshop is specifically equipped for his business and is regularly and exclusively used for
his trade purposes. Simon incurred the following expenses and losses in this regard during the 2022 year of assessment:

(i) The interest portion of the mortgage loan repayments on his home loan amounted to $ 100 000 000 during the current year
of assessment. He then paid $20 000 000 on the capital balance outstanding on the loan in respect of this same period. Simon
wishes to claim these payments as deductions for normal tax purposes. [5]

(ii) Apart from having a full-time assistant in his employment, Simon has to make use of his housekeeper to take down
messages left by clients and potential clients, when he and his assistant are engaged at a client’s premises and not contactable
on their mobile phones. He pays his housekeeper an additional $500 000 per month for performing the aforementioned task.
The housekeeper’s total annual salary is $24 000 000. Simon wishes to deduct the $ 6 000 000, for taking down the business-
related messages, that he pays per year to his housekeeper, from his income earned from his business. [3]

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(iii) While installing an alarm system at a client’s home, Simon’s assistant was bitten by a dog. Simon paid $1 500 000 as a
result of the attack, i.e. $1 000 000 for the medical treatment and $500 000 as compensation for the shock and anxiety caused
by the attack. Simon wishes to claim the $1 500 000 as a deduction against his business income. He believes it was incurred
as part of his business operations while attending to the installation and maintenance of burglar alarms at clients’ premises. (5)

(iv)While Simon was working at one of his client’s premises in an industrial area, someone broke into his bakkie (which he
uses solely for business purposes) and stole his car radio. The loss incurred amounted to $580 000 . Fortunately, his insurance
contract provides cover in respect of stolen goods, but at year-end he was still waiting for the insurance claim to be paid out.
He wishes to deduct the $580 000 expenditure incurred in the determination of his taxable income. (2)

(v) Simon purchased his assistant’s work station (i.e. computer unit) during the 2022 year of assessment and brought it into
use for business purposes during the same year of assessment. The work station was transported from the assistant’s home to
Simon’s workshop during the 2022 year of assessment, at a total cost of $2,000 000. Simon wishes to deduct the transport
costs of $2 000 000 in the determination of his taxable income. (3)

Required

Discuss, with reasons, whether each of the aforementioned expenses and losses are deductible in the calculation of Peter
Security Alarms’ taxable income for the 2022 year of assessment. In your answer you must refer to relevant legislation and
deal with each query separately.

SOLUTION

(i) The repayments on a private mortgage bond is normally private and domestic expenses. Private expenses are therefore
prohibited deductions for income tax purposes. However, in light of the fact that the workshop was specifically equipped and
exclusively used for Simon’s trade purposes, this prohibition will not apply to the extent of its use for trade purposes. (1)

Since Simon is conducting his business from his workshop, which comprises 10% of the total floor area of his residence, an
allocation of 10% of his expenses to the business should be deductible, provided the expenses satisfy the requirements of
section 15 (2) (a), i.e. incurred in the production of income in carrying on such trade and not of a capital nature. Therefore,
interest of $10 000 000 (10% of total interest of $100 000 000) paid on the mortgage bond is thus deductible in terms of section
15 (2) (a). (2)

The remaining 90%, however, is private in nature and its deduction is prohibited. Therefore, the remaining interest of L$90
000 000 paid does not qualify for a deduction. The capital repayments of ZWL$20 000 000 are not deductible as they are of a
capital nature and merely a repayment of the amount initially borrowed. (1)

(ii) The salary of $18 000 000 ($24 000 000 – ZWL$6 000 000) paid to Simon’s housekeeper is a private and domestic expense
and thus prohibited as a deduction. (1.5)

The $6 000 000 is not a private expense hence he will be entitled to deduct it, as it was actually incurred, in the production of
income, it is not of a capital nature and was incurred in the course of carrying on Simon’s trade. (1.5)

(iii) In order for the medical expenses and compensation payment to be deductible in terms of the general deduction formula
(section 15(2) (a)), all the requirements of the section must be met, i.e. the expenses must have been actually incurred, in the
production of Simon’s income, incurred in carrying on his trade, and the expenses must not be of a capital nature. (1)

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The most likely requirement to be challenged is the “in the production of income” requirement. The medical expenses and
compensation payment would be deductible if they are so closely linked to Jack Alert’s business operations to be regarded as
part of the cost of performing such operations. (1)

In Simon’s type of business, where they visit clients’ premises (both industrial areas and private residences) where the guarding
of premises by a dog(s) is a common and familiar sight, the risk of being attacked by a dog and sustaining injuries in the
process, can reasonably be expected. (1)

As a necessary consequence, Simon will have to bear the cost of the resultant medical expenses and compensation paid for
any injuries sustained by his assistant. The medical expenses and compensation payment can therefore be considered to be
sufficiently closely connected to Simon’s business to render the amount deductible. The requirement “in the production of
income” will thus be met. Furthermore, the payment of the medical expenses and compensation has not created any enduring
benefit. The expenses of $1 500 000 are therefore not of a capital nature and Simon can deduct the entire amount for normal
tax purposes. (2)

(iv)Since Simon had insurance cover for stolen goods and will thus recover his loss once the insurance claim is paid out. The
Income Tax Act therefore prohibits the deduction of the loss of $580 000 and he cannot claim it as a deduction in the
calculation of his taxable income. (2)

(v) Costs incurred in transporting a capital asset is more closely connected to the income-earning structure than to the income-
earning operations of the business and is therefore of a capital nature and not deductible in terms of section 15(2)(a). It can be
added to the cost of the asset and will form part of the capital allowance to be claimed over the remainder of the asset’s useful
life. (3)

TUT 16

Newwave Ltd (Newwave) manufactures electronic cigarettes. This is a new concept of cigarettes that was invented by the
major shareholder and CEO of Newwave. The company was listed on the Zimbabwe Stock Exchange in 2009 as it hoped to
raise more equity after its entire share capital was wiped out when Zimbabwe changed from Zimbabwe dollars to adopt multi-
currency. The electronic cigarettes are odourless, ash free and do not need a lighter. Newwave manufactures in its own factory
situated in Southerton Industrial Area. The manufacture of the cigarettes is regarded as a manufacturing process by the
Zimbabwe Revenue Authority (ZIMRA).

Newwave’s financial year ends on 31 March each year. Its 2019 annual financial statements, which include the effects of the
journal entries below, reflect profit before tax of $5 340 500. The amounts exclude VAT where applicable.

In preparation of its annual financial statements a number of unrelated journal entries were made, some of which were as
follows:

Investment in rent-producing property

Dr Cr
Investment property 250 000 Explanation:
Income statement (fair value adjustment) 250 000 Newwave
Investment in a property valued at its fair value in terms of IAS 40
participated in the
government project to encourage companies to invest in building residential accommodation to ease accommodation woes
under the operation titled ‘Operation Garikai’. In 2017 it purchased land and built cluster houses in Greendale. The houses

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where finished and brought into use on 1 April 2018 at a total cost of $750,000. The cluster houses are subject to an annual
fair value adjustment. On 31 March 2019 the fair value was $1 000 000.

Dr Cr
Bank 48 000
Income statement (rental) 16 000
Income received in advance (accounts payable) 32 000
Rental received for six months, of which four months are in
Advance

Explanation: Newwave lets the property at a market-related rental. The tenants paid $48 000 to Newwave on 3 February 2019,
being rental for the six-month period 1 February 2019 to 31 July 2019. The rental for the four months that fall in its 2020
financial year has been included in Newwave’s accounts payable.
Investment in ‘local’ listed shares
Dr Cr
Investment in a ‘local’ listed company 180 000
Bank 180 000
Investment in a ‘local’ listed company
Fair Value adjustment – Income Statement 11 000
Investment in a ‘local’ listed company 11 000
Investment in a ‘local’ listed company restated at its fair value

Explanation: On 1 September 2018 Newwave purchased shares in Econet, a ‘local’ listed company as an investment for $180
000. Newwave does not deal in shares.

On 31 March 2019 the fair value of this investment was $169 000. In accordance with IFRS 9, Financial Instruments, Newwave
classified this investment as ‘at fair value through Profit and Loss’.

Dr Cr
Bank 16 000
Income statement (sundry income: ‘local’ dividend) 16 000
‘Local’ dividend received from its investment in the ‘local’ listed
Company

Explanation: On 31 January 2019 Newwave received a ‘local’ dividend of $16 000 from its investment in Econet. This was
the only dividend that accrued to it in its 2019 financial year in the profit and loss.

Capitalised finance lease

Dr CR
Computer 300 000
VAT input account 42 000
Lease liability 342 000
224
Computer purchased under a finance lease
Lease liability 130 000
Bank 130 000
Settlement of the first annual lease rental under the finance lease
in advance
Income statement (finance charges) 2 607
Lease liability 2 607
Interest for one month (to 31 March 2019) calculated as follows:
($342 000 - $130 000) x 14,756% x 1/12
Income statement (depreciation) ($300,000 x 20% x 1/12) 5 000
Accumulated depreciation 5 000

Explanation: On 1 March 2019 Newwave leased a computer for a three-year period at a lease rental of $130,000 per annum
payable annually in advance. Newwave capitalised this finance lease in its accounting records. The lease agreement reflects a
cash cost for the computer of $300,000, VAT of $42,000 and finance charges of $48,000. On 1 February 2019 Newwave Ltd
paid its first annual rental of $130,000. ZIMRA allows a special initial allowance of 25% p.a

Impaired plant
Dr Cr
Income statement (depreciation) 30 000
accumulated depreciation 30 000
Depreciation on the plastic bottle plant at 20% per annum on the
straight-line basis
Income statement (impairment loss) 25 000
Accumulated impairment 25 000
The plastic bottle plant reflected at its recoverable amount

Explanation: Newwave used to sell its cigarettes in plastic cases, but stopped doing so in order to comply with environmental
requirements. The plant that was used to package plastic cases with cigarettes is now only used occasionally, and solely for
special export orders.

Because of the decline in popularity of plastic cases the value of this plant has also declined. After provision for depreciation
of $30 000 for its 2019 financial year, the carrying amount of the plant was $60 000. It originally cost $150 000 (excluding
VAT) and depreciation has been provided at a rate of 20% per annum on the straight-line basis. The asset was acquired, brand
new, on 1 March 2016 and it qualified for the special initial allowance from that date at 25%, and 25% wear and tear thereafter.
Its market value is now $35 000, which is both its scrap value and the recoverable amount. To reduce the value in the financial
statements to the recoverable amount, an impairment loss of $25 000 was charged to the income statement.

Depreciation on the tablet-making plant at 20% for the 2019 financial year calculated as follows: $750,000 x 20% x 6/12

Explanation: Newwave now also sells its cigarettes in biodegradable paper cases, which necessitated the purchase of plant to
package the cigarettes in those cases. Newwave purchased a new and unused packaging plant on 1 October 2018 which was
immediately brought into use.

Defined benefit pension fund

Dr Cr

225
Defined benefit pension net liability 432 000
Bank 432 000
The contribution of Newwave (as the employer) to the pension fund
Income statement (defined benefit pension expense) 253 000
Defined benefit pension liability 253 000
The charge for the net pension expense to the income statement for the
2019 financial year. This amount was determined as follows:

$
Current service costs 225 000
Plus: Interest cost on pension obligation 610 000
835 000
Less: Interest on pension plan assets (570 000)
265 000
Less: Decrease in past services costs (12 000)
Charge to income statement 253 000

Explanation: Newwave employees contribute 6% of their salaries to the company’s pension fund, while the company
contributes on the basis of $2 for each $1 contributed by an employee, which in effect means that the company contributes
12% of the value of employees’ salaries to the pension fund which is all deductible for tax purposes.

Newwave has a defined benefit fund. At the end of the company’s financial year an actuary determines the pension fund assets
and liabilities. Newwave provides for a defined benefit pension liability in terms of IAS 19, Employee benefits. On 1 March
2018 the balance of its defined benefit pension liability was $1 000 000, and benefits of $400 000 were paid out by the fund
during the year.

Prepaid expenses

Item Dr CR
Prepaid expenses (balance sheet) 60 000
Income statement (insurance) 40 000

Income statement (property rates) 15 000

Income statement (Medical Council levy) 5 000

The portion of the above expenses that relates to its 2019 financial year

226
Explanation: Newwave pays the insurance premium on its business assets, the property rates for its trade premises and a levy
to the Medical Council annually in advance.

Item Amount Date Paid Period covered

paid(excluding VAT)
Insurance premium $60 000 29 Nov 2018 1 Dec 2018 to 30 Nov 2019
Property rates $18 000 24 Jan 2019 1 Feb 2019 to 31 Jan 2020
Levy to the Medical $12 000 27 Aug 2019 1 Sept 2018 to 30 Aug 2019
Council

There were no prepaid expenses at 31 March 2018.

Doubtful debts
Dr Cr
Income statement (increase in the provision for doubtful debts and 9 000
bad debts written off)
Provision for doubtful debts 8 000
Accounts receivables 1 000
The adjustment to increase the provision for doubtful debts from $34,
000 to $42 000 and $1 000 for bad debts written off during the year

Explanation: Relates to provision for doubtful debts and bad debts written off. The accountant is unsure whether ZIMRA will
give him a deduction in respect of the amounts.

Bad debt

Dr Cr
Income statement (bad debt expense) 27 200
Loan to employee 27 200
The amount owing by an employee, Mr. Ghana, written off as a
bad debt
Explanation: Newwave is not a moneylender, but on 1 March 2016 lent $20 000 to an employee, Mr. Ghana, to partly finance
his study expenses. The loan was at an interest rate of 12% per year. However, Mr. Ghana has for the past three years neither
repaid any portion of this loan nor any of the interest due. It is clear that he will not be able to repay any of the amount owing
and the company has therefore decided to write off the amount of the loan as well as the interest as a bad debt.

Cottages for employees

Dr Cr
Buildings (ten cottages) 3 000 000
Bank 3 000 000
The erection of ten cottages at $300 000 each
Bank 3 000 000
Debentures 3 000,000

Funds borrowed to pay for cottages

Buildings (borrowing costs on the ten cottages capitalised) 67 500
Bank 67 500
The debenture interest for the first six months
227
Buildings (borrowing costs on the ten cottages capitalised) 22 500
Income statement (interest incurred) 45 000
Bank 67 500
The debenture interest for the second six months
Income statement (depreciation of buildings) 26 500
Accumulated depreciation on buildings 26 500
Depreciation on these buildings provided for in terms of IAS 16,
Property, plant and equipment, and calculated as follows: ($1 500
000 + $67 500 + $22 500) x 5% x 4/12

Explanation: On 1 April 2018 New wave commenced with the erection of ten cottages (ten dwellings) on its own premises.
These cottages were completed at a cost of $150 000 each on 30 November 2018. They were occupied rent free by ten of its
employees as from 1 December 2018. To finance the entire cost of the cottages, New wave issued 9% debentures on 1 April
2018. Interest on the debentures is payable six monthly.

Share options

Dr Cr
Income statement (staff costs - share options) 37 500
Equity (share options) 37 500
The cost of the equity settled options of the third and final year of the
vesting period recognised as follows:
(50 x 1 000 x $3) – 112 500 = $37 500
Previously recognised as follows: up to 28 February 2018
(50 x 1 000 x $3 x 27/36) = $112 500
Loan to employees 500 000
Equity (share options) 150 000
Share capital 50 000
600 000
500 000 shares with a nominal value of $1 each issued to employees in
terms of the share option scheme

Dr Cr
Loan to employees 20 000
Income statement (interest accrued) 20 000
Interest accrued on the loan to employees at a rate equal to the dividend
declared

Explanation: On 1 January 2014 Newwave granted share options to 50 of its employees, enabling each of them to purchase 1
000 Newwave shares at $10 a share.

The par value of a Newwave share is $1. Each option had a fair value of $3 on the grant date. Each grant is conditional on the
employee remaining in the employ of the company until 31 December 2018. During its 2016, 2017 and 2018 financial years
it was estimated that no employee would leave Newwave’s employ before the vesting date (31 December 2018). Indeed, all
50 employees were still employed on 31 December 2018 and exercised their options on this date. The value of a Newwave
share was then $16. In terms of the articles of association of the company, the employees are not entitled to continue to hold
the shares after they cease to be employed by the company.

228
Newwave granted loans of $10 000 each to the employees for the purchase of the shares. The loans bear interest at a rate equal
to the dividend that accrued to the employee. On 29 February 2019 a dividend of $400 accrued to each of the 50 employees
which was offset as interest on the loan.

Provisions

Dr Cr
Factory Building 180 000
Provision for Environmental Rehabilitation 180 000
Provision for environmental rehabilitation at the area of the
main cigarette processing plant
Depreciation 6 750
Accumulated Depreciation 6750

($180 000/20 x 9/12)

Dr Cr
Provision (Income Statement) 20 000
Provision for Environmental Rehabilitation 20 000
($180000x11%*9/12)

Explanation: During the year new legislation requiring companies that dispose of toxic waste in the environment to ensure that
the environment has been restored to its original conditions came into effect on 1 July 2019. Newwave, in its main location,
produces a filtered toxic substance from the manufacture of cigarettes. When they started operating the plant, the company had
not invested in the combustion machinery that breaks up the toxic substance into a detoxed form; some of the substance was
dumped behind the main factory. Environmental experts engaged during the year have provided the estimate of the amount
needed to rehabilitate the environment and the amount has been discounted correctly at 11% to $180 000. The useful life of
the plant has been estimated to be 20 years. All capital allowances on the factory building had been fully claimed in prior years.

Other Journals
Dr Cr
Commission Expense 500 000
Bank 500 000
Commission paid to a government official who helped
the company avoid censure by government over its non-
compliance with the Indigenisation and Empowerment Act
Fines 24 000
Bank 24 000
Fines paid to Environmental Management Agency (EMA), due
to unlawful dumping of expired products

229
 Dr Cr
Legal Fees 20 000
Bank 20 000

Explanation: Mr. Kitsu, the CEO and major shareholder, is Ghanaian. The company was listed in the initial list that came out
in the government gazette for companies that needed to comply with the Indigenisation and Empowerment Regulations. After
a series of meetings with some influential government officials, the company was taken off the list. However, a commission
was paid to some officials for their effort to ensure the company was removed from the list.

The amount for fines relates to amounts charged by EMA when the company’s truck driver was caught at night dumping
expired products in an undesignated place.

Legal fees were paid for a case that is still on-going against ZIMRA as a result of an allegation by ZIMRA of understating its
tax payable from 2016 to 2018 by $1 000 000. The amount of $2 500 000, which is the potential liability if the company loses
the case, (being $1 000 000 for the understated tax, $1 000 000 for penalty and $500 000 for interest) has been disclosed in the
notes.

Required

NB. (Use prescribed values as they were during the mentioned years)

Calculate the taxable income of Newwave for its financial year ended 31 March 2019. Start with profit before tax of $5 340
500. Support your answer with workings and reasons.

CAA CTA JUNE 2013 (Adapted)

SOLUTION

Calculation of taxable income $ Mark

Net income per income statement 5,340,500 1
Less fair value adjustment (gain) in investment property (no receipt or - 250,000 2
accrual, so not gross income)
Less W&T – (2.5% x 750 000) – 4th Schedule Para 2(commercial - 18,750 2
building)
Add rentals received in advance (taxed in the period it relates) 0 2
Add back fair value adjustment through profit and loss (no loss or 11,000 1
expense actually incurred)
Less ‘local’ dividend - 3rd Schedule Para 9 - 16,000 2
Add back finance charges (accounting provision) 5,000 1
Computer under lease (SIA $300,000 x 25%) -75,000 1
Add back finance charges (capital in nature) 2,607 2
Add back depreciation (accounting provision) 5,000 1
Less lease rentals incurred adjusted for input tax (100/115 X 130 000) - 113,043 1
– Sect 15(2)(d)

230
 Add back depreciation (accounting provision) 30,000 1
Add back impairment loss (accounting provision) 25,000 1
Accelerated wear and tear (25% x 150,000) -37,500 1
Add back depreciation (accounting provision) 75,000 1
Less SIA allowance: $750 000 x 25% - 187,500 1
Add back pension charge to income statement (no expense or loss 253,000 2
actually incurred)
Deduction for the employer’s pension fund contribution - 432,000 2
Insurance deductible in the period it relates 0 1
Rates - 15,000 1
Medical Council levy - 5,000 1
Add back provision for doubtful debts (accounting entry) 8,000 1
Bad debts (Allowed – no adjustment) _ 1
Add back ‘capital’ portion of the debt owing by Mr Ghana. New Wave 20,000 2
Ltd is not a moneylender and the $20 000 never formed part of its
income. However, as the interest of $7 200 was included in New Wave
Ltd’s income, it is tax deductible
Add back depreciation on buildings (accounting entry) 26,500 1
Residential units disqualified for capital allowances since construction 0 2
of each unit exceeds $250,000
Issue of debentures (receipt of a capital nature) - no adjustment 0 1
required
Debenture interest including the preproduction portion is tax (90,000) 1
deductible. Hence a further $90,000 is deductible
Interest on debentures (no adjustment necessary) 0 1
Interest accrued on employees loans form part of Newwave Ltd’s 0 1
gross income and therefore no adjustment required
Add back provision for equity (no expense or loss actually 37,500 2
incurred)
Increase in share capital and share premium (receipt of capital nature 2
not adjustment required)
Add back depreciation 6 750 1
Add back provision – no incurred 20 000 1
Other Journals
Commission - not incurred for the purpose of trade 500 000 1
Fines 24 000 1
Legal Fees 20 000 1
Taxable income 5 232 064 1
Tax and Aids levy at 24.72% 1,298,557.42 2

TUT 17
Marble Arch Hardware (Pvt) Ltd (MAH), a company registered in Zimbabwe, deals in tools, hard-ware and building supplies.
It also owns a residential property, which is let, as well as shares in listed companies, which are held as investments.
Throughout the 2022 financial year its share capital consisted of 100 shares of $10 each, which was held as follows:

231
 Item % US$
Cabriole Ltd (an unlisted company registered in the United Kingdom) 60 600
20 200
Mr. Dayle Chippen (ordinarily resident in Zimbabwe)
Camelback Trust (a Zimbabwean Trust) 15 150
Ms. Sofia Bridgewater (a resident in Canada) 5 50
100
Issued share capital 1 000
Retained profit at 31 December 2022 11 200
Equity at 31 December 2022 12 200

MAH had borrowed $40 000 from Cabriole Ltd (‘Cabriole’) at a rate of 10%. The interest had been credited to Cabriole’s
account in MAH’s books at 31 December 2022. The agreement had been authorised by Exchange Control.

MAH accrued management fees payable to Cabriole amounting to $36 010, being 2% of turnover. This had been credited to
Cabriole’s account at 31 December 2022. The agreement to pay a fee had been authorised by Exchange Control.

In November 2022 MAH declared a dividend of $60 000 after obtaining the relevant Exchange Control authorisation.

MAH has prepared the following Profit and Loss Account for the 2022 year

Item $ US$
Gross profit from trading account 1 800 500
Rental income 7 000
Dividends from quoted Zimbabwe shares 2 510
Profit on sale of residential house 36 000
Less Expenses
Agent’s commission on sale of property 8 750
Staff Christmas party 1 760
Allowance to Managing Director 630
Lunch for customers 360
Interest 4 000
Zimbabwe Revenue Authority late payment of tax 680
Legal expenses on sale of property 420
PAYE penalties 3 500
Payment to ACME Ltd to become sole agents for their
Tools 5 600
Partitions erected in office 2 920
Specific provision for doubtful debts 2 400
Specific provision for leave pay 5 100
Provision for anticipated repairs 3100
Other expenses - all allowable 1 769 580
Management fee 36 010 (1,844,810)
Net profit 1200

232
MAH sold the residential property on 5 August 2022 for $87 500. The property had been acquired in February 2015 for U$51
500. During the 2022-year MAH purchased a second-hand twin cab for $19 000 and a Fiscalised register for $2 000

Country NRST
Unlisted shares
Normal Reduced
% %
Canada 15 10*
United Kingdom 15 5*

Reduced where the recipient is a company beneficially owning at least 25% of the company distributing the dividend

Required

NB. (Use prescribed values as they were during the mentioned years)
Prepare an income tax computation for MAH for the year ended 31 December 2022, commencing with net profit of$1 200.
Where necessary motivate your answer. You are not required to calculate any income tax payable.

Calculation of taxable income $ $

Net profit 1,200
Dividend from Zimbabwe quoted shares – exempt 3rd schedule - 2,510
Profit from sale of residential house – capital in nature - 36,000
Recoupment: No capital allowances had been granted therefore no
-
recoupment
Total Capital Income -38510
Agent’s commission on sale of property 8 750
Staff Christmas party 1 760
Allowance to Managing Director 630
Lunch for customers 360
Thin Capitalisation –Interest (4000-(12200*3 /40000*4000)
Debt to equity ratio- related party debt is restricted to 3:1 to equity, the 340
company exceeded the ratio therefore excess interest is disallowed.
Zimbabwe Revenue Authority late payment of tax 680
Legal expenses on sale of property 420
PAYE penalties 3 500
Tools 5 600
Partitions erected in office 2 920
Specific provision for doubtful debts 2 400
Specific provision for leave pay 5 100
Provision for anticipated repairs 3 100
Total Disallowed 35,560
Second Hand Twin Cab – Passenger motor vehicle ($10,000 * 25%) - 2,500
Fiscalised register - SIA ($2,000 * 50% * 25%) - 250
Partitions erected in office (commercial building) – ($2,920 * 2.5%) -73
Total Allowed Expenses -2823
Disallowed Management Fees (see working below) 17,889
Taxable Income (Loss) -11,681

233
Management fee to related party is restricted to 1% of total deductible expenses and this is computed as follows:

Item $
Turnover 1,800,500
Rental 7,000
Dividend 2,510
Profit on sale of residential house 36,000
Total Income 1,846,010
Less Net profit 1,200
Total expenses 1,844,810
Less Disallowed expenses - 35,560
Add Allowable expenses 2,823
Total deductible expenditure 1,812,073
1% limit 18,121
Management fee 36,010
Disallowed management fee 17,889

TUT 18

Plastic Ltd (a Zimbabwean resident company) is a registered operator for Value Added Tax (VAT) purposes and all amounts
in the question exclude VAT, except where indicated otherwise. Plastic Ltd (Plastic) manufactures plastic household products.
This process is classified as a “process of manufacture” for purposes of the Income Tax Act. Plastic has a 31 December year-
end. The financial accountant of Plastic, Andrew, calculated the profit before tax of Plastic as $42,820,400 for the year of
assessment ended 31 December 2022.

As Andrew was uncertain as to the correct tax treatment of the following items, these items have not yet been included in the
calculation of the above profit before tax of Plastic. Plastic would like to minimise its normal tax liability whenever possible.

Importation of manufacturing machine

On 1 November 2021, Plastic purchased a new manufacturing machine for €200 000 from an independent supplier in Germany
and on this date paid a deposit of €150 000. The remaining €50 000 was paid when the machine was shipped to Zimbabwe
(FOB) on 1 March 2022 (transaction date). On 1 July 2022 the machine was cleared by Customs for home consumption after
Plastic paid the duty (levied in terms of the Customs and Excise Act) of 20% on the customs duty value ($228 000) as well as
the VAT in respect of the importation. On 1 July 2022 the machine was brought into use in the current manufacturing process.

Date Exchange rate

1 November 2021 €1 = $1.37
31 December 2021 €1 = $1.40
1 March 2022 €1 = $1.38
1 July 2022 €1 = $1.42
31 July 2022 €1 = $1.34

Average exchange rate for Plastic’s 2021 year of assessment was €1 = $1.36.
Average exchange rate for Plastic’s 2022 year of assessment was €1 = $1.39.

Second-hand plant

234
On 1 January 2022 Plastic purchased plant from Tupper Ltd for US$25,000. Plastic brought the plant into use in its process of
manufacture on the same day. This plant was independently valued at a market value of US$27,000 on 1 January 2022. Tupper
Ltd holds 60% of the shares in Plastic.

Tupper Ltd purchased this manufacturing plant new on 1 January 2020 for a cash cost of US$20,000. It was brought into use
immediately. Tupper Ltd.’s year of assessment ends on the last day of December.

Residential property

Plastic rents a house for US$500 per month from an independent letting agent. This house was made available to the managing
director as a fringe benefit for the full 12 months of the 2022 year of assessment. The Managing Director has got free use of
the house.

On 1 November 2020 Plastic bought five (5) flats in a newly erected building from the developer at a total cost of US$24 500
each. Four (4) of these flats were rented out to employees for US$200 each per month, effective from 1 December 2020. The
other flat was immediately sold to Andrew (the financial accountant) for US$23 000, financed by an interest free loan. Andrew
repaid US$6 000 of the loan in the 2020 year of assessment. Plastic does not own any other residential units within Zimbabwe.

Factory buildings and improvements to leasehold property

On 1 December 2019 Plastic purchased a plot of land for $50 000. Erection of a factory on this land commenced on 1 January
2020. It was completed on 31 August 2020 at a cost of $200 000. The factory was brought into use in a process of manufacture
on 1 September 2020.

As a result of continued unrest in the vicinity of this factory, the board of directors of Plastic decided on 1 July 2022 to dispose
of the land and buildings as soon as possible. The land and buildings were sold to a non-connected party on 30 September
2022 for $220 000, of which $30 000 was for the land and $190,000 for the buildings. Plastic continued to use the land and
buildings in its process of manufacture for the period 1 July 2022 to 30 September 2022. In anticipation of the proposed sale
Plastic, on 1 September 2022, entered into a 30-year operating lease agreement with Blue Mountain Ltd for the lease of an
industrial site. This lease agreement stipulated that Plastic would:

• pay a premium of $7 500 on 1 September 2022.

• erect a factory on the site at a cost of $320 000;
• and from 1 September 2022, pay a monthly rental of $1 400 in advance (subject to an escalation of 5% for each 18-
month period).
Erection of the factory commenced on 1 October 2022. It was completed on 30 November 2022. The factory was brought into
use on 1 December 2022. The cost of the factory was $350 000.

Lump sum paid to retired employee

Plastic covers as part of the company’s retirement benefit plan for employees, post-retirement medical aid contributions. This
is done by paying a lump sum directly to the retired employee out of which the employee then funds his post-retirement medical
aid contributions. On 31 January 2022 Plastic paid a lump sum (to fund post-retirement medical aid contributions) of $18 000
to Joshua Randals who retired at the age of 65. Plastic retains no further obligation relating to the mortality risk of Joshua
Randals.

Required

NB. (Use prescribed values as they were during the mentioned years)

Prepare the journal entries to account for the information contained in Note 1 (Importation of manufacturing machine). Your
journals should comply with the requirements of the applicable IFRS. Structure your solution as follows:
1 November 2021 – 1.5 marks
1 March 2022 – 3 marks
1 July 2022 – 5.5marks

235
Discuss with supporting calculations where relevant, the income tax implications of the information contained in Notes 1 –
10. Your discussion should cover implications from Plastics Ltd’s perspectives as well as from an employee’s perspective
where applicable. The marks will be allocated as follows;
Note 1 – 3 marks
Note 2 – 3 marks
Note 3 – 8 marks
Note 4 – 13 marks
Note 5 – 3 marks

SOLUTION

Note 1:

S15(2) ( e) 4th schedule

Capital allowances
• SIA25% On cost or Wear and tear 5% on reducing balance.
• This will be for 2022 going forward.

Exchange Differences s(15) (1)

($50 000 x $1,37)
Exchange loss = $500

Note 2

• TP adjust of $2 000
• Recoupment = cost/selling price – ITC
= $2 000 - $1 000
= $1 000
Note 3

S8(1)(f)
• Managing director has a house benefit and should be taxed $500 , the company can also claim an expense.
• Interest on loan 5%
• Loan income to be taxed from the employer.
• Valuation of houses rented and sold to employees if there is a benefit should be processed through the payroll

Proceed from sell of assets

$1 500 if the selling price is the fair value of the building.
Scrapping allowance = $24 500 -$23 000
= $1 500

Note 4
a) Compulsory Improvements:

Lease improvement according to s15(2) (e)

Rent = ($1, 400 x 4 months)

=$5 600
Unexpired lease period = (30x20) -2
=$598

Monthly allowances = $320 000 divided by 120

=$2 667
236
 b) Voluntary Improvements

See s(15) (2)(c)

$30 800 – capital allowances

Note 5

• 55years and above are exempted.

• $18, 000 is exempt from payee.
• Company to claim the expense.

1-Nov-20
US$
Dr Cr
Residential Property 122, 500
Cash 122,500
Staff Debtors - Andrew 23, 000
Disposals Account 1, 500
Residential Property 24, 500

1-Mar-22
Pre-payment - mv 69, 000
Bank/Cash 69,000

1-Jul-22
Machine 543,675
Pre-payment -mv 69,000
Customs duty 228 000
VAT Control A/K 41 178

Asset held for sale 240, 125

Land and Buildings 240,125

237
REVISION TESTS

Scenario 1
Braam Ltd (Braam) manufactures MAC devices. The company was established in 2006 and listed on the Zimbabwe Stock
Exchange in 2009 with the aim of raising more equity after its entire share capital was wiped out when Zimbabwe changed
from Zimbabwe dollars to adopt the multi-currency system. Braam is located in Workington Industrial Site and both the
factory and administrative offices are housed there. The company anticipates to increase its exports in 2020 from the current
32% to 48%. Exports are to the regional and international markets. The export department is headed by a marketing manager
Samantha Ncube, a Zimbabwean resident who spends about 7 months every year at the company’s Johannesburg (South
Africa) branch. Samantha’s payroll is processed in Zimbabwe except for the living allowances and school fees for her
children. The manufacture of the MAC devices has been regarded as a manufacturing process for tax purposes.
Braam’s financial year ends on 31 December each year, Braam’s financial statements are expressed in Zimbabwe Dollars. Its
2019 annual financial statements reflect profit before tax of $5 340 500. In coming up with this profit Braam made the
following journal entries:

Investment in rent-producing property

Dr Cr
Investment property $250 000
Statement of Comprehensive Income (fair value adjustment) $250 000
Being a fair value adjustment to investment property in terms of IAS 40

Explanation: In 2017Braam purchased land and built cluster houses in Greendale, Harare. The houses where finished and
brought into use on 1 April 2018 at a total cost of $750 000. The cluster houses are subject to an annual fair value adjustment.
On 31 December 2019 the fair value was $1 000 000.

Rent received in advance

Dr Cr

Bank $48 000

Income statement (rental) $16 000

Income received in advance (accounts payable) $32 000

Being rental received for 12 months commencing 1 May 2019 to 30 April 2020.

Dividend received
Dr Cr

Bank $16 000

Income statement (sundry income: ‘local’ dividend) $16 000

Being dividend received from its investment in the ‘local’ listed company. This was the only dividend that accrued to it in its
2019 financial year in the profit and loss.

Doubtful and bad debt

Income statement (increase in the provision for doubtful debts, $36 200
238
 bad debts written off and employee loan written off)
Provision for doubtful debts $8 000
Accounts receivable $1 000
Loan to employee $27 200

Dr Cr

239
The adjustment to increase the provision for doubtful debts from $34 000 to $42 000 and
$1 000 for bad debts written off during the year

The accountant is unsure whether ZIMRA will give him a deduction in respect of the amounts. The loan written off is in
respect of amount owed by Mr Ghana, a deceased employee whose terminal benefits were insufficient to cover the outstanding
loan.

5 Other Journals
Dr Cr
Commission Expense 500 000

Bank 500 000

Commission paid to a government official who helped the company avoid censure by government over its non- compliance
with the Indigenisation and Economic Empowerment Act.
Dr Cr
Fines 24 000

Bank 24 000

Fines paid to Environmental Management Agency (EMA), due to

unlawful dumping of expired products

Additional note: The company incurred $50 000 in respect of advertisement and promotional material in Zambia and Malawi
markets. This amount has not been included in the financial statements and the journal is yet to be processed due to late receipt
of Samantha’s itinerary

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 Scenario 2

Mrs Shungu is a very successful entrepreneur, who operates her business from her home. One of her most successful
endeavours is her illegal diamond dealings. Due to the illegal nature of her dealings, Mrs Shungu has a very specific client
base and maintains utmost confidentiality in all her business activities. As a result of a deal that went bad, one of Mrs Shungu's
clients whom she had dealt with for a long period of time reported her "illegal or corrupt dealings" to ZIMRA.As the ZIMRA
investigator, you discover the following upon looking into the matter:
Mrs Shungu’s sales for her 2019 year of assessment include a gross amount of $80 000 (actual receipt) relating to her
"diamond business".

During the course of 2019, Mrs Shungu paid $20,000 to a police officer for him not to disclose her illegal diamond business.
. She is also involved in selling gold and is a holder of a valid Gold Trade Permit. In terms of the permit, Mrs Shungu can only
sell her gold to Fidelity Printers and Refiners, a subsidiary of the Reserve Bank of Zimbabwe (RBZ) and not to third parties.
Between March and August 2019, Mrs Shungu met a foreign buyer who offered her a better price in United States dollars.
The newly introduced local currency, the RTGS dollar was very volatile and to realise value, Mrs Shungu diverted all her
gold to that new and "lucrative market". Upon discovering that breach, the RBZ instituted legal proceedings resulting in Mrs
Shungu being ordered to pay a compensation of $300 000 to Fidelity Printers and Refiners. You have raised an assessment
and excluded all of the above expenses incurred by Mrs Shungu. She intends to raise an objection, arguing that the $300 000
was incurred in the production of income.

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 SCENARIO – TAXATION 2020 CTA LEVEL 2 TEST 1
APPENDIX 1 – TAX RATES
Tax Tables Individuals
Employment Income in ZWL – 1 January to 31 December 2020

MONTHLY TABLE (ZWL$)

Rate
From 0 To 2,000 multiply by 0% Deduct -
From 2,000.01 To 7,500 multiply by 20% Deduct 400
From 7,500.01 To 15,000 multiply by 25% Deduct 775
From 15,000.01 To 30,000 multiply by 30% Deduct 1,525
From 30,000.01 To 50,000 multiply by 35% Deduct 3,025
Above
50,000 multiply by 40% Deduct 5,525
Aids Levy is 3% of the Individuals' Tax payable

Employment Income in USD- 1 January to 31 December 2020

MONTHLY TABLE (US$)

Rate
From 0 To 70 multiply by 0% Deduct -
From 70.01 To 300 multiply by 20% Deduct 14
From 300.01 To 1,000 multiply by 25% Deduct 29
From 1,000.01 To 2,000 multiply by 30% Deduct 79
From 2,000.01 To 3,000 multiply by 35% Deduct 179
Above
3,000 multiply by 40% Deduct 329
Aids Levy is 3% of the Individuals' Tax payable

❖ Foreign employees holding temporary employment permits issued by the Department of Immigration to work in the licensed
Special Economic Zones, pay Income Tax at 15% of their taxable income.

Tax Rates For Corporates

Tax Type Old Tax Rate New Tax Rate

Income Tax 25% 24%
VAT 15% 14.5%

NB: 3% AIDS levy is still applicable on income tax chargeable after tax credits

Income Tax Rates for Specific Type of Companies

Type of Corporation Tax Rate

Manufacturing company exporting at least:
30% of output (by quantity or volume) 20 %

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 SCENARIO – TAXATION 2020 CTA LEVEL 2 TEST 1
41% of output (by quantity or volume) 17.5%
51% of output (by quantity or volume) 15 %
Special Mining Lease Companies 15%

❖ Taxpayers licensed to operate in export processing zones enjoy tax holiday for the first 5 years and are
taxed at 15% thereafter.
❖ Contractors who have Build Own Operate and Transfer (BOOT) and BOT Arrangements with the state
enjoy tax holiday for the first 5 years and taxed at 15% for the second five years.

Capital allowances
Type of Capital Allowance Rate
Special Initial Allowance:
Large Corporates 25% per annum
Licensed Investor 50% in first year & 25% in
subsequent years
SMEs 50% in first year& 25% in
subsequent years
Accelerated Wear & Tear 25%
Wear and Tear on:
Industrial buildings 5%
Farm Buildings 5%
Commercial Buildings 2.5%
Motor Vehicles 20%
Moveable Assets 10% (General Rate)
TREATY RATES OF TAXES

Country Dividends(1) Fees Royalties Remittances(3)

% % % %
Botswana 5(1)/10(2) 10 10 15
Bulgaria 10 10 10 15
Canada 10 10 10 15
China 2.5(1)/7.5(2) 7.5 7.5 15
France 10 10 10 15
Germany 10 7,5 7,5 15
Malaysia 10 10 10 15
Mauritius 10 0/15 (4) 15 15
Netherlands 10 10 10 15
Norway 15 10 10 15
Poland 10 15 10 15
South Africa 5/10 5 10 15
Sweden 15 10 10 15
United Kingdom 5 10 10 15

CAA CTA JUNE 2014

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