Zimbabwe Tax System

lOMoARcPSD|3494582
Zimbabwe Tax System
Masters in accounting (University of Zimbabwe)
StuDocu is not sponsored or endorsed by any college or university

Downloaded by MK Mkl (leppyimelda@gmail.com)
lOMoARcPSD|3494582
Part A
The Zimbabwean tax system

lOMoARcPSD|3494582
The Zimbabwean Tax System
1
Topic list Syllabus reference
1. Function and purpose of taxation A1(a)
2. Different types of taxes A1(b ) & A1(c)
3. Principal sources of revenue and practice A2(a), A2(b) & A2(c)
4. Tax avoidance and tax evasion and ethical issues A2(d) & A2(e)
5. Tax obligations and penalties A3 & A4

6. Revenue powers and assessments A3 & A4
7. Enquiries and dispute resolution A5
8. Penalties for non-compliance A6
Introduction
The chapter introduces the Zimbabwean tax system. It outlines the function and purpose of taxation,
focusing on economic, social and environmental factors. We identify the type of taxes in Zimbabwe and
briefly describe the sources of revenue. In conclusion, it looks at the tax controversy and the need for
ethical behaviour in dealing with this aspect.
We show you how the Zimbabwean tax system interacts with overseas tax jurisdictions. Finally we
highlight the difference between tax avoidance and tax evasion and explain the need for a professional and
ethical approach in dealing with tax.
This chapter will enable you to describe the broad features of the tax system. In the next chapter we will
consider the computation of taxable income and liabilities.
Study guide
2

lOMoARcPSD|3494582
Intellectual
level
A1 The overall function and purpose of taxation in a modern economy
(a) Describe the purpose (economic, social etc.) of taxation in a modern economy. 2
(b) Identify the different types of capital and revenue tax. 1
(c) Explain the difference between direct and indirect taxation. 2
A2 Principal sources of revenue law and practice
(a) Describe the overall structure of the Zimbabwean tax system. 1
(b) State the different sources of revenue law. 1
(c ) Appreciate the interaction of the Zimbabwean tax system with that 2

of other tax jurisdictions.
(d) Explain the difference between tax avoidance and tax evasion 1
(e) Explain the need for an ethical and professional approach 2
A3 The systems for assessment and the making of returns

(a) Explain and apply the features of the assessment system as it applies to 2
individuals and companies.
(b) Explain the quarterly payment date system (QPD’s) as it applies to companies 2
and self- employed individuals.
A4 The time limits for the submission of information, claims and payment
of tax, including payments on account
(a) Recognise the time limits that apply to the filing of returns and the making of claims. 2
(b) Recognise the due dates for the payment of tax under the assessment system. 2
(c) Compute provisional and quarterly payments of tax. 2
(d) List the information and records that taxpayers need to retain for tax purposes. 1
A5 The procedures relating to enquiries, appeals/objections and disputes
(a) Explain the circumstances in which ZIMRA can enquire into an assessment tax return 2
(b) Explain the procedures for dealing with appeals/objections and disputes. 1
A6 Penalties for non-compliance
(a) Calculate interest on overdue tax. 2
(b) State the penalties that can be charged. 2
Exam guide
You should not expect to be asked a whole question on this chapter. You may, however, be asked to
explain the difference between direct tax and indirect tax. You may also be required to distinguish tax
avoidance from a tax evasion. Aspects in this chapter can be examined in any question of the exam as part
of the question. You will need to master the dates for payment of respective taxes, employees’ tax, QPDs,
VAT and capital gains withholding tax. The duties of the taxpayers are equally important, they are
regularly examined. Compliance issues features in all questions and can be examined as part of the
question. You will need to master the tax registration procedures, tax payment dates, timing of filing returns

lOMoARcPSD|3494582
and the keeping of records. These requirements must be known for all tax heads covered in this study text.
Knowing the consequences of failing to comply with these requirements is also extremely important.
You may also be examined on submission of returns and assessments and dispute resolution procedures.
1. Purpose of taxation in modern economy
Fast Forward
The economic, social and environmental factors may affect the government's tax policies.
1.1 Introduction
Tax is money or consideration paid to the government compulsorily and with no direct return of
value to the payer.
The levying of tax is driven by the economic, social and environmental factors. Broadly taxation performs
the following functions for the government:
 Revenue generation: Taxes generate revenue for funding public expenditures e.g. health care,
education, infrastructure development etc.
 Wealth redistribution: Taxes can be used as a mechanism of redistributing wealth among society
members to support economically disadvantaged members of the society, e.g. sick, unemployed or
elderly people, or to reduce the income gap between the rich and poor.
 Re-pricing: Taxes can be used in repricing as way of addressing externalities e.g. Green taxes or
emission taxes (carbon taxes in Zimbabwe), dumping taxes etc. They can also be used to address
market failures e.g. encourage or discourage investment in certain sectors of the economy.
 Representation: Taxes stimulate demand for representation. You demand accountability and better
governance once you are taxed
The reason why taxation is levied can also be explained in the context of its economic, social and
environmental effects to the economy. We explain this in detail below.
1.2 Economic factors

Taxation is a major fiscal tool used by most economies to influence the aggregate demand of the
economy and the operation of an efficient tax system is essential especially in the current challenging
economic environment.
As stated above, revenue is required to finance public expenditure e.g. health service, retirement pensions,
unemployment benefit and other social benefits, education, financing government borrowing (interest on
government stocks), etc. This revenue can only come from tax. Reliance cannot be placed on donor fund
and other budgetary supports, because they are no longer guaranteed
In addition, tax can also be used to address market failures e.g. encourage or discourage investment in
certain sectors of the economy or activities. For example, the government discourages the exporting of
unbeneficiated chrome by imposing a 15% export VAT, when other forms of exports are zero rated.
Tax can also be used to influence the macroeconomic performance of the economy or modify patterns of
consumption or employment within an economy, by making some classes of transaction more or less
attractive. For example economies charge VAT on luxury goods and either zero rate or exempt supply of
4

lOMoARcPSD|3494582
basic necessities. This has the progressive effect of increasing the tax burden on high end consumption and
decreasing the tax burden on low end consumption.
1.3 Social factors

Taxes are also used as mechanism of redistributing wealth among society members to support economically
disadvantaged members of the society, e.g. sick, unemployed or elderly people, or to reduce the income gap
between the rich and poor. In a free market, some individuals generate greater amounts of income and
capital than others and once wealth has been acquired, it tends to grow through the reinvestment of
investment income received. This can lead to the rich getting richer and the poor poorer, with economic
power becoming concentrated in relatively few hands. To address this economies often levy high taxes on
high income earners and give handouts to the less privileged members of the society. For example, top rate
is 50% for high income earners (i.e. persons earning in excess of $20,000 per month). On the other hand,
pension income accruing to persons over the age of 55 years is exempt from tax.
1.4 Environmental factors

In recent times, taxation has become an important economic tool in protecting the environment or
addressing market externalities, especially with the rising concerns over global warming and depletion
of non-renewable sources of energy. The following are the main categories of environmental taxes:
Energy taxes: This group includes taxes on energy products used for both transport and stationary
purposes. The most important energy products for transport purposes are petrol and diesel.
Transport taxes: This group mainly includes taxes related to the ownership and use of motor vehicles.
Pollution taxes: This group includes taxes on measured or estimated emission to air and water,
management of solid waste and noise. A good example of pollution tax is carbon tax which is levied
based on the engine capacity of the car.
Resource taxes: In addition, taxes on extraction of minerals and petroleum are often designed to
capture the resource rent, and do not influence prices in the way that other environmental taxes, e.g.
product taxes, do. In Zimbabwe a royalty tax is levied on the fair value of minerals extracted or sold.
2. Different types of taxes

Tax can be classified into direct tax and indirect tax. Direct tax is levied on income, while indirect tax is
levied on consumption
2.1Taxes in Zimbabwe
The government raises revenue through a wide range of taxes. The main taxes, their incidence and their
sources, are set out in the table below.
Tax Type Act

5

lOMoARcPSD|3494582
1. Corporate Income tax Chargeable on trade and investment income Income Tax Act
(CIT)
2. Pay As You Earn (PAYE) Chargeable on employment income Income Tax Act
3. Value Added Tax Chargeable on supply of goods and services Value Added Tax Act
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 and marketable securities
6. Customs Duty Chargeable on imported goods. Custom & Excise Act
7. Withholding Tax Chargeable on passive investment income Income Tax Act
2.2 Capital vs. Revenue taxes

Revenue taxes are those that are charged on income e.g. PAYE and CIT.
On the other hand, capital taxes are those charged on capital gains or on wealth e.g. capital gains tax and
estate duty. Note however, that estate duty is not covered by your syllabus.
2.3 Direct and indirect taxes
Tax is classified into two broad classes direct and indirect taxes.
Direct tax is tax charged directly on income or gain received by a person or an organization. The tax
burden for direct tax falls on the individual or the company which makes out the tax cheque to the
government and cannot be shifted to other parties.
Indirect tax is tax charged on goods or services. The tax is suffered upon consumption of the good or
service. The tax is borne by someone, other than the person responsible for making the payment to the
government, e.g. liquor tax. It is often included in the price of the item, so even though the seller sends the
payment to the government, the buyer is the real payer. Indirect tax is also called consumption tax. The tax
can also be called a hidden tax because the buyer may not be aware of its presence in the commodity price.
The following table classifies taxes into direct and indirect taxes:
Direct taxes Indirect taxes

Tax on business income Value added taxes
Capital gains taxes Customs duty
Estate duty Excise duty
Pay as you earn
Direct taxes tend to be progressive in nature, while indirect taxes are regressive in nature. A
regressive tax is represented by a flat tax rate. The tax percentage does not depend on the income base.
The more a person has, the lower the absolute tax as a proportion of a person’s income. This tax hurts
the poor more than the rich as each of them is required to pay the same tax irrespective of the person’s
income base e.g. value added tax since every person pays the same percentage of tax.
On the other hand, progressive tax is represented by the increase in the tax rates as income
increases (the more you have the higher the tax rate). Progressive taxes reduce the tax burden of
people with smaller incomes, since they take a smaller percentage of their income. The tax is usually
represented by tax bands which are based on the income classes (economic classes).
6

lOMoARcPSD|3494582
A good tax system should adhere to a certain set of principles:
 Vertical equity principle (ability to pay principle); - every member of the state should contribute
towards the burden of tax in accordance with his respective ability to pay.
 Horizontal equity; - taxpayers in the same economic circumstances should receive equivalent tax
treatment.
 Certainty; - the tax which each individual is bound to pay ought to be exact, and not arbitrary. The
amount, time of payment, or the manner of payment should be known. It helps in business planning
and provides a degree of revenue certainty for the government.
 Simplicity; - the tax legislation must be in simple language easily understood by the subjects. The
legislation should be stable, predictable and reliable for making long term plans.
 Tax neutrality or efficiency principle; - tax should act as resource allocation by ensuring economic
decisions are diverted to best locations i.e. tax should not distort choice.
 Flexibility principle; - the tax system should be able to accommodate changes in business, markets
or technology. However, there should be a trade-off between flexibility and certainty.
 Effectiveness; - is essentially the capacity of the tax system to achieve its objectives. Thus the tax
system should be able to generate revenues and set the desired economic incentives.
 Consistency & coherence; - transactions with the same commercial result should have the same tax
result i.e. commercial decisions should not be distorted by taxation considerations.
 Administrative efficiency- a tax should be easy and cheap to collect. Therefore in tax policy design
costs associated with the administrative options, both for the taxpayer and the taxing authority, may
have a significant bearing on what is included or excluded from the legislative definition of income.
3. Principal sources of revenue and practice

Tax is administered by the Zimbabwe Revenue Authority (Zimra).
3.1 Structure of the Zimbabwean tax system

The management of a tax system lies with the Zimbabwe Revenue Authority (ZIMRA). Zimra is a division
of the Ministry of Finance and is ultimately under the control of the Minister of Finance. Its core business is
the assessment, collection and accounting of revenue on behalf of the State through the Ministry of
Finance. It derives its mandate from obligations imposed by the Revenue Authority Act and other
government statutes. In broad terms the work of ZIMRA includes:
1) Assessing, collecting and managing taxes and duties

2) Administering the Customs regime for the control of imports and exports and collection of duties.
3) Co-operating with other state agencies in the fight against drugs, smuggling, and international trade
crime and enforcing import, export and exchange controls.
4) Provision of policy advice on fiscal and economic issues.
It has its head office in Harare with a number of regional offices throughout the country. Taxpayers must
pay their dues at the Regional Office under which the business is located or registered.
3.2 Different sources of revenue law
Countries have legislative bodies that enact tax laws, courts that adjudicate tax disputes and tax agencies
that administer the law. These, therefore form the major sources of a country’s tax law.
3.2.1 Legislative law

lOMoARcPSD|3494582
Tax legislation is drafted by or with the concurrence of the Ministry of Finance and passed by a parliament.
The law is updated each year through a Finance Bill, with the presentation each year of a new budget and
the changes to the legislation are secured through the Parliament.
The legislation includes government statutory instruments issued from time to time. The following is the
legislative process which gives rise to the annual revision to the tax law:
1. Each year after the government announces its budget, the changes to the tax legislation are incorporated
by way of the Finance Bill.
2. The Finance Bill will then be debated in the Houses of Assembly and some amendments may be made
to the draft Finance Bill at the committee and report stages. Therefore, what is announced in the budget
will not always end up being the final rules for a tax year.
3. The Finance Bill will eventually be voted through the House of Assembly, signed by the President and
become the Finance Act.
4. The Finance Act is then passed into law and incorporated into the various relevant tax Acts.
3.2.2 Judicial law
Judges preside over tax cases brought before the courts and thereby create case laws. Their opinions are
binding and they provide guidance on the interpretation and application of sources of law, but it is not the
role of judges to re-write the law.
Zimbabwe adopts the law which was in force in the Cape of Good Hope on 10 th June 1891, subject to
adjustment of English law and judicial decisions made thereafter. The law was Roman Dutch law. This law
forms the nucleus of Zimbabwean, South African, Botswana, Lesotho, Namibian and Swaziland laws. Tax
cases cited in this book are predominately based on Roman Dutch law. We will also make reference to
English cases. Because of our colonial history, the English system has a significant influence in our court
judgements.
3.2.3 Agency interpretation
The tax legislation may be difficult to interpret. Tax agencies may therefore issue written statements stating
how they interpret and apply provisions of the existing tax laws. Examples of written statements of tax
interpretation are Advanced Tax Rulings issued by the Commissioner General on request by a taxpayer or
group of taxpayers.
3.3 The interaction of the Zimbabwe tax system with other tax jurisdictions
Zimbabwe has entered into double tax treaties with a few countries. Amongst these countries are United
Kingdom, Germany, Sweden, Botswana, South Africa, France and Mauritius. The treaties contain rules
which prevent income and gains from being taxed twice, but often include non-discrimination provisions,
preventing a foreign national from being treated more harshly than a national. There are also usually rules
for the exchange of information between the different Revenue authorities.
Even where there is no tax treaty, the Zimbabwean tax system gives some relief for foreign taxes paid.
4. Tax avoidance and evasion

Tax avoidance is the legal minimisation of tax liabilities, tax evasion is illegal.

lOMoARcPSD|3494582
4.1 Tax avoidance

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 avoidance is a legitimate ordering of one’s affairs in such a way as to minimise the tax which is
chargeable. The ordering of one’s tax affairs is permissible unless it falls within the terms of the specific
anti avoidance provisions or sham transactions. The provisions targets transactions, operations or schemes
which have the effect of avoiding, reducing or postponing payment of tax. For the anti-avoidance
provisions to be evoked, such avoidance must have been the sole or one of the main purposes of the
schemes. The Commissioner is empowered to assess either as if the scheme had not taken place or in such a
manner as he considers appropriate in order to prevent or diminish the avoidance.
Examples of permitted tax avoidance schemes include the claiming of maximum deductions permitted by
tax laws, utilising tax losses, investing in exempted securities, etc. Income splitting or shifting and transfer
pricing, although not illegal are covered by anti-specific tax avoidance rules.
4.2 Tax evasion

Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and
other entities to evade taxes by illegal means.
Tax evasion is the deliberate flouting or concealment of one’s true tax affairs which will result in prejudice
of tax revenue to the government. It involves a deliberate violation of a specific part of the law. It is tainted
with dishonest and illegality undertaken for the purpose of reducing one’s tax liability.
Tax evasion is an offence which is open to prosecution. This may result in imprisonment/fines. Penalties
and interest on the prejudiced amount will also be charged. The following are examples of tax evasion:
 Falsifying invoices or records, for example, inflating or understating the price of purchases or sale of
goods and services or making false entries or manipulating financial records, etc.
 Transfer pricing, i.e. deliberately understating or overstating the prices of goods or services supplied.
 Bribery and kickbacks, e.g., paying tax officials or government agents in order to pay less tax.
 Under declaration of taxable income,
 Overstating expenses.
 Wilfully failing to comply with the legislation.
 Claiming fictitious tax deductions, credits or reliefs.
4.3 The need for an ethical and professional approach
To act on behalf of a client, an accountant must be appointed by the client through a letter to Zimra
advising the Commissioner that the accountant will handle its affairs. An Accountant must conduct himself
professionally when dealing with the tax affairs of the client. You must not advise your client to cheat and
should advise the client to correct his omissions or errors. If he refuses to act upon your advice regarding
material error or omissions, you should cease to act for the client, inform Zimra of this cessation.
Taxpayers arrange for their accountants to prepare and submit their tax returns. Material errors are first
discussed with the taxpayer before taking action. If a client makes a material error or omission in his tax
return, or fails to file a tax return, and does not correct the error, omission or failure when advised, the
accountant should cease to act for the client, inform Zimra of this cessation.
Responsibility for the submission of tax returns and payment of tax rests with the taxpayer: the
accountant is only acting as the taxpayer's advisor or representative.

lOMoARcPSD|3494582
The practicing accountant often acts for taxpayers in their dealings with ZIMRA and situations can arise
where the accountant has concerns as to whether the taxpayer is being honest in providing information to
the accountant for onward transmission.
How the accountant deals with such situations is a matter of professional judgment, but the accountant is
expected to uphold the standards of the Association of Chartered Certified Accountants. He must act
honestly and objectively, with due care and diligence, and showing the highest standards of integrity.
His conduct must not put the reputation of the association into disrepute.
If an accountant discovers a material error or an omission in a client’s tax return or a failure to file a
required tax return, the accountant has a responsibility to advise the client of that error, omission or
failure to make corrective measures.
After being advised to correct these anomalies and fails, neglects or refuses to do so within
reasonable time, the accountant should inform the client in writing that it is not possible for him to act
on his behalf. He should also notify ZIMRA that he is no longer acting on his behalf without
providing details of his resignation.
Accountants who suspect or are aware of tax evasion activities by a client may themselves commit an
offence if they do not report their suspicions. The accountant must not disclose to the client, or anyone
else, that such a report has been made if the accountant knows or suspects that to do so would be likely to
prejudice any investigation which might be conducted following the report as this might constitute the
criminal offence of ‘tipping-off’.
When you prepare the financial statements of the clients you must furnish the taxpayer with certificate or
statement. A failure to do so constitute an offence liable to a fine not exceeding level 4 ($100) or to
imprisonment for a period not exceeding 3 months or to both such fine and imprisonment.
The VAT Act also empowers the Commissioner to report you of unprofessional conduct to your
professional body e.g. ACCA for disciplinary action. As an Accountant you are deemed to have acted
unprofessionally if you do or omitted to do any of the following things:
 Intended to enable or assist the client to evade or unduly postpone the performance of any duty or
obligation imposed on such client by or under VAT Act, or
 Obtain any refund of tax under VAT Act to which such client is not entitled to, or
 Negligent which resulted in the avoidance or undue postponement of the performance of any such duty
or obligation or the obtaining of any such refund; and
The act or omission must constitutes a contravention of any rule or code of conduct laid down by the
controlling body which may result in disciplinary action being taken against such person by the body.
5. Taxpayers obligations
Fast Forward
An employer’s main tasks is to register with Zimra within 14 days of becoming an employer, deduct PAYE
on employees’ earnings and pay the tax to Zimra by the 10 th day of the month following the month of pay.
5.1 Taxpayers obligations
Every taxpayer has 5 main obligations under the tax law, as follows:
10

lOMoARcPSD|3494582
 Register as a taxpayer with Zimra

 Keep accounting records
 Deduct or compute the tax as required by the law
 Remit tax on time in the right amount
 Lodge tax returns on time as required by the law or on request of the Commissioner
In addition, to the above every taxpayer is obliged to open a bank account. There may be specific other
obligations as required for purposes of administering the law.
5.1.1 Employer obligations
Fast Forward
An employer must register with Zimra within 14 days of employing any person who earns at least $3,000
p.a. Failure to register may result in compulsory registration by Zimra. Zimra could back date the
registration to the date the employer was supposed to be registered.
a) Registration
An employer must register as an employer with Zimra within 14 days of employing any person earning at
least $3,000 p.a. It does not matter whether that person is a seasonal, casual, part-time or full time worker.
Where the employer is a non-resident employer he is required to appoint a resident representative to be his
agent for purposes of carrying out this function and administrating the pay as you earn system. This
appointment has got to be in writing and duly communicated to the Commissioner. For failing to discharge
this duty, the non-resident could have his permit or those of directors cancelled on the directive of
Commissioner by Chief Immigration officer. The Commissioner may also appoint a representative taxpayer
on behalf of the person.
All registrations (for PAYE, Income Tax or VAT) must be supported by a memorandum and article of
association, bank details, certification of incorporation, CR14, CR6, copies of identification numbers of
directors, proof of residence of directors and a completed REV1 form.
The employer must notify the Commissioner of the intention to deregister once he is no longer an employer
and this must be done within 14 days of cease to be an employer. In practice Zimra refuses to deregister
employers who no longer employ any person earning at least $3,000 with the view that in future he will
employ a person earning more than $3,000 p.a, unless the employer is ceasing operations or going out of
business. An employer must also notify the Commissioner of any change in his address within 14 days of
such change.
Where the taxpayer fails to register as an employer, Zimra can register him backing the registration to the
effective date of registration. It will then demand PAYE which should have been collected from the
effective date of registration. Zimra may also charge penalty and interest on the tax that should have been
paid had the registration been made on time. The penalty is charged at 100%, whilst interest is charged at
10% p.a.
b) Withhold and remit PAYE
An employer must deduct PAYE from every employee whose earnings are at least $3,000 p.a, unless a
directive has been obtained from the Commissioner not to withhold the tax. The employer should also act
on the directive of the Commissioner regarding how much tax should be deducted in certain instances e.g.
the Commissioner often issue a tax directive for items like pension income, gratuity and retrenchment
package.
11

lOMoARcPSD|3494582
Once tax has been withheld it must be remitted to Zimra on or before the 10th day of the month following
the month in which it was deducted.
An employer who fails to discharge any of these duties is personally liable for the payment to Zimra of the
tax not later than the date on which the tax should have been made, together with penalty and interest of
100% and 10% p.a, respectively.The principal tax can be recovered against the employee’s future pay, but
penalty and interest remains the obligation of the employer.
The Commissioner has the right to sue for any outstanding taxes together with penalty and interest and he
may recovery them through an action by him in any court of competent jurisdiction or by garnishing of the
employer’s bank accounts. The power to garnish the bank account overrides all powers which the bank may
have and the bank must act on this instruct, otherwise it may be required to pay the tax using its own funds.
c) Submission of returns
Every time an employer pays employees’ tax to Zimra, he must submit monthly PAYE returns (P2). In the
event of ceasing to be an employer before the end of the month, PAYE and the return must be submitted to
ZIMRA on or before the next day after he or she ceases to be an employer.
In addition to the P2, an employer must submit an annual return (ITF16) within 30 days of the end of the
year of assessment (end of January) or within 14 days of ceasing to be an employer. An ITF 16 is an annual
summary showing employees’ earning details (salary, wages, allowances, benefits or pensions, whether in
money or otherwise) paid to all employees during the tax year and taxes withheld.
A civil penalty of $30 a day (up to a maximum of 181 days’ penalty) is levied for failing to submit an
ITF16 (see remission table at the end of the book). If the person remains in default after 181 days he may
face prosecution.
d) Maintain records for 6 years
An employer must maintain a record of remuneration paid or payable to every employee and employee’s
tax withheld thereto in respect of each year of assessment. The record must always be available for scrutiny
by the Commissioner.
e) PAYE Offences and penalties
It is an offence for an employer and an employee to enter into an agreement of avoiding paying tax. Such
an agreement is null and void.
In addition to the penalty and interest discussed above, the employer shall be guilty of an offence and liable
to a fine not exceeding level seven or to imprisonment for a period not exceeding six months or to both
such fine and such imprisonment if he commits any of the following offence:
 Fails to withhold employees’ tax or to pay it to the Commissioner as required by the law,
 Applies for some other purpose the employees’ tax withheld by him,
 Issues or allows to be issued an employees’ tax certificate which is false,
 Fails without just cause to comply with any directive issued to him by the Commissioner,
 Fails or neglects to deliver to any employee or former employee an employees’ tax certificate.
 Fails or neglects to maintain any record as required by the law or to retain it for a period of six years,
 Fails to furnish to the Commissioner any return or any copy of any employees’ tax certificate
 Fails or neglects to apply to the Commissioner for registration as an employer,
 Fails or neglects to notify the Commissioner of any change of his address or of the fact of his having
ceased to be an employer,
 Not being an employer and without being duly authorized by any person who is an employer, issues or
causes to be issued any document purporting to be an employees’ tax certificate.
12

lOMoARcPSD|3494582
The penalty is increased on subsequent conviction.
5.1.2 VAT Registered operator
Fast Forward
Every person with taxable supplies of at least $60,000 in any period of 12 months must register as an
operator, compute and remit VAT, submit returns and maintain records.
a) Introduction
The duties under VAT include registration, withholding and remitting the tax, submit returns, keep records,
etc. The obligations to remit VAT submit and keep records also falls upon persons who have registered
voluntarily and persons who should have registered for VAT, but who have for some reasons not yet done
so. Failure to observe these duties could result in penalties, interest, fines and /or imprisonment.
b) Registration
To be registered for VAT one must produce taxable supplies (discussed later) of more than $60,000 in any
cumulative period of 12 months. Voluntary registration is also possible. See registration threshold in
chapter 19. Where the taxpayer fails to register as required, Zimra can register the operator backing the
registration to the effective registration date. It will then demand output tax which should have been
collected from date he was required to be registered. Zimra may also charge penalty and interest on the tax
that should have been paid had the registration been made on time. The penalty is charged at 100%, whilst
interest is charged at 10% p.a. Even though registration has been backed the operator will lose out on input
tax paid during the period he was not registered as this cannot be claimed.
A non-resident person must appoint a resident representative for purposes of registration and carrying out
VAT functions. He must also furnish the Commissioner with the particulars of such representative and
open a banking account with for the purposes of his trade.
A registered operator who has a taxable supplies amounting to $240,000 per annum is required to fiscalise
and issue fiscalised invoices with a fiscal or electronic signature. For failing to fiscalise, the operator will
be liable to a penalty of $25 a day/per each point of sale up to a maximum of 181 days. If the person
continues to be guilty after this period he shall be liable to a $400 fine or to imprisonment for 12 months or
to both such fine and imprisonment.
A registered operator who has ceased to trade must notify Zimra within 21 days of such cessation and must
account for VAT on stock and fixed assets held on date of ceasing to be an operator. He is also not be
exonerated of VAT obligations and liabilities that occurred whilst he was registered.
c) Compute and remit VAT
An operator must complete the VAT 7 and submit it together with payment by the 25 th of the month
following end of the tax period.
An operator who fails to pay the VAT due to Zimra is personally liable for the payment to Zimra of the tax
not later than the date on which the tax should have been made, together with penalty and interest of 100%
and 10% p.a, respectively.
EXAMPLE
Calculate the tax due by Penelope Nyati a category C registered operator. She submitted her VAT return
and payment of $15,567 in respect of August 2015 tax period tax period on 23 October 2015.
13

lOMoARcPSD|3494582
ANSWER
Principal amount 15,567

Penalty 100% x $15567 15,567
Interest 10% x $15,567 x 28/365 119
Tax due 31,253
Note that the VAT was due on 25th September 2015. You start to count the delay period from the date the
tax was due until the day immediately the tax is paid.
The Commissioner has the right to sue for outstanding taxes together with penalty and interest and he may
recovery them through an action by him in any court of competent jurisdiction or by garnishing of the
person’s bank account.
The Value Added Tax Act allows however for the deferment of VAT payable on certain imported capital
goods for period of up 90 days. The plant, equipment or plant should be exclusively used for manufacturing
mining on a registered mining location, agricultural purposes or for the aviation industry.
Where the goods are converted to/or disposed of without having used them in the manner that qualified
them for the deferment additional tax equal to the tax is chargeable. With effect from 1 January 2013, the
additional tax is extended to persons who do not settle the deferred VAT when it becomes due.
d) Submission of returns
Every registered operator is required to submit a return (VAT7) together with payment on or before the 25 th
day of the month following the end of the relevant tax period. Where this date falls on a Saturday, Sunday
or public holiday, the return and payment must reach Zimra on the last working day before the 25 th. Note
that registered operators are placed in categories when being registered. Category A and B are two months
tax period i.e a return is required for two months transaction. Thus, the return is required by the 25 th of the
month following the last day of the second month. For example a return for June and July transactions (two
transactions) is required by 25 August. Category C is one month tax period. A return is required after end of
every month. Category D also exists (see chapter on VAT).
EXAMPLE
Lullaby (Pvt) limited a category B registered operator (a return submitted is for two months) made
taxable transactions for the period 1st September 2015 to 30th October 2015.
When is its tax return due?
ANSWER
The VAT return for the tax period ending 30 th October 2015 should be submitted on or before 25th
November 2015.
A return must be completed and submitted for each tax period, whether or not VAT is payable. This
means that the operator is obliged to submit a nil return, a payable return or a refund return on time.
A late submitted return attracts a civil penalty of $30 a day (up to a maximum of 181 days’ penalty), see
remission table in the last chapter of this study text.
The Commissioner may, under certain circumstances, extend the period within which the return must be
submitted, without charging penalty.
e) Maintenance of proper records
14

lOMoARcPSD|3494582
Record keeping is important for the functioning of the VAT system, VAT is an audit and refund based
tax system. This will go a long way in minimising delays in refund processing.
All registered operators are required to keep books of account necessary for complying with the Act and
to prove to the Commissioner when necessary that the provisions of the Act have been adhered to.
Where the books of accounts are generated by the computer, they must be retained in the form of a hard
copy.
The following are records that must be kept:
 Records of all goods and services supplied by or to a registered operator as well as all invoices, tax
invoices, credit and debit notes, bank statements, deposit slips and stock lists, etc.
 Record of all importation of goods and documents relating thereto.
 Charts and codes of account, instruction manual, and the system and programme documentation
which describe the accounting system.
 Any documentary proof supporting the registered operator’s entitlement to claim zero rated supplies.
EXAMPLE
Write a note on maintaining of books of accounts and records under the VAT Act.
ANSWER
The following records should be maintained under VAT system:
1. Purchase records, showing details of purchases on which tax has been paid, purchases made without
payment of tax.
2. Sales records, showing separately sales made at different tax rates, zero-rated taxable sales and tax-
free sales.
3. VAT account - A monthly account specifying total output tax, total input tax and net tax payable or
the excess tax credit due for carry forward.
4. Details of input tax calculations where the dealer is making both taxable and exempt sales.
5. Stock records showing stock receipts and deliveries and manufacturing records.
6. Order records and delivery documents, wherever applicable.
8. Annual accounts including trading, profit and loss accounts and the balance sheet.
9. Bank records, including statements, cheque book counter foils and pay-in-slips.
10. Cash book, daybook and ledger.
The records must be kept for a period of at least six years from the date of the last entry in any book and
must be available for inspection by the Commissioner at all reasonable times.
f) Other duties of the operator
A registered operator is also required to comply with the following VAT Act requirements:
 Calculate VAT if one sells or retains stock or assets after ceasing to be a registered operator
 Allow the Commissioner to enter one’s business premises and examine goods and all business records
 Advise the tax office of any change in business details, including address, addition of/or change of
partner, cessation of trade, etc.
 Provide correct and accurate information to Zimra
 Include VAT in all prices, advertisements and quotes in connection with taxable supplies, imports and
exports of goods or services;
 Produce relevant documents and information when required by Zimra pertaining to supplies, imports
and exports of goods or services;
 Issue tax invoices, debit and credit notes; and these must be issued within 30 days of making the
supply.
15

lOMoARcPSD|3494582
The registered operator is obliged to notify the Commissioner, within twenty-one days, of any change in the
following details:
 Name , address, constitution or nature of the principal trade(s) of that registered operator
 Physical business address and trading name
 Accounting basis
 Tax category if the registered operator qualifies to be in Category C
g) VAT Offences and penalties
Any person participating in, or helping any other person to evade VAT or claim a refund to which they are
not entitled to is committing a serious offence. In such cases, additional tax of up to twice the amount of
VAT evaded or refunds fraudulently claimed could be levied. Over and above additional tax charged, a
fine or term of imprisonment could also be imposed.
5.1.3 Provisional taxpayer
Fast Forward
A provisional taxpayer means any person who earns income other than income which is subject to
employees’ tax. Provisional taxpayers must pay tax to Zimra on quarterly basis in the year of assessment in
advance of the year end.
a) Introduction
A provisional taxpayer is a person who is liable to pay tax on income from trade and investment. This
includes companies, self-employed, non-executive directors, partners or any person who earns income
which is not subject to employees’ tax.
b) Registration
Before a person can register for provisional tax he/she must have a bank account. For companies
registration for provisional tax is required within 30 days of commencement of business. When you register
you are issued with a Business Partner Number (BP) or Taxpayer Identification Number (TIN). This
number is to be used for all transactions with Zimra.
c) Remittance of tax
A person who carries on business or whose income is not subject to PAYE must pay tax on or before the
annual payment dates (QPDs). The payment dates are 25 March, 25 June, 25 September and 20 December
in advance of year end. A person who fails to pay or who under pays his provisional tax is liable to interest
of 10% p.a. However, where the underpayment is less than 10% margin of error the interest shall not be
charged.
The outstanding taxes together with the interest shall be treated as debts due to the State and may be sued
for and recovered by action by the CG in any court of competent jurisdiction, including the garnishing of
the taxpayer’s bank accounts.
d) Submission of returns
Every person who is a registered bank, an insurance company or VAT Category registered operator must
make a self-assessment of his tax liability. A self-assessment return must be furnished to Zimra by 30 April
of the following year for 31 December tax year of assessment or other period specified by the
Commissioner in a public notice. For other provisional taxpayers the date is advised by the Commissioner
in a public notice, but is usually a month later i.e 31 May. A self-assessment is an assessment by the
16

lOMoARcPSD|3494582
taxpayer of own tax liability.
e) Maintain records
The person must keep proper books of accounts including supporting documents i.e. ledgers, cash-books,
journals, paid cheques, bank statements and deposit slips, stock sheets, invoices, and all other books of
accounts. The information must be kept in English language and must be retained for a period of six years
from the date of the last entry therein unless otherwise authorized by a competent court or by the
Commissioner. A person who is in breach of this requirement is guilty of an offence and shall be liable to a
fine not exceeding level seven or to imprisonment for a period not exceeding three months or to both such
fine and such imprisonment.
f) Appoint a public officer
Every company must appoint a resident person to act as its public officer (PO) within one month of its
establishment. If an appointment is not made, the Commissioner may designate the managing director,
director, secretary or any company officer to be the public officer of the company. For a company under
judicial management or in liquidation, judicial manager or the liquidator shall be the public officer. The
public officer must represent the company in relation to all tax matters and everything he/she does shall be
deemed to have been done by the company.
In addition to the appointment of PO, a company is required to state a place within Zimbabwe at which its
correspondences with Zimra should be served or delivered. Any change of public officer or the address
must be notified to Zimra within 30 days of such change taking effect. If a company fails to appoint a PO or
specifying its postal address, its agent, manager or representative shall be liable to a penalty not exceeding
level five for every day during which the default continues. Interest is also chargeable on the penalty if it is
not paid after it becomes due, although under special circumstances the Commissioner may extend the time
for payment of the penalty without charging interest.
Every action taken against the company is served upon or taken against its PO or in his absence against any
officer or person acting or appearing to act in the management of the business or affairs of such company or
as agent of such company. The PO has a duty to collect, account for, or remit any taxes imposed on the
corporation and is personally liable for any willful failure to cause the corporation to pay the tax. Provided
that the company shall not be exonerated from any default because it has not appointed a PO.
6. Revenue powers
Fast Forward
The Commissioner has the power of entry into a taxpayer’s premises, power to request information and to
access records and books of a taxpayer.
6.1Powers of the commissioner
Zimra powers include the following:
 Access to information and documents held by a taxpayer

 Access to information and documents held by other third parties
 Access to books, records and information in the possession of the taxpayer
 Powers of entry
 Search for records and goods
 Detention and seizure of goods
 Entry into residences in accordance with a Court Order or search warrant
 Arrest persons in certain limited circumstances in accordance with the law.
17

lOMoARcPSD|3494582
6.2Access to all public records
The Commissioner or his officer has the right to access and inspect registers, books accounts, record, and
return. He shall, for no fees or charge, be permitted to inspect registers, books of accounts, records, returns,
papers, documents or proceedings and to take such notes and extracts as he may consider necessary.
6.3Appointment of tax collection agent
The Commissioner has the power to appoint any person as an agent of taxpayer in respect of the taxes due
by that taxpayer. The agent may be required to pay any tax due from any moneys in any current account,
deposit account, fixed deposit account or savings account or from any other moneys including pensions,
salary, wages or any other remuneration, which he holds for or is due and payable him to the taxpayer,
irrespective of anything to the contrary contained in any other law. An agent includes:
- A bank, building society or savings bank

- A partnership
- Any officer in the Public service
An agent is personally liable for the tax due if he fails to discharge this duty.
The Commissioner is also empowered to garnish bank of accounts a taxpayer, with the bank acting as an
agent, in demand of tax due. Garnish orders are not necessary placed on the bank or pension fund, it can
also be placed on the taxpayer’s debtors as a means of enforcing collection of tax.
6.4Power to require information, search and entry
The CG has the power to request information from any person whom he has appointed agent for the
collection of taxes. He may require that person to give him information in respect of any moneys, funds or
other assets which may be held by him for, or due by him to, any other person. He has the power to access
all public records i.e records held by POSB, public service or any government department. For this purpose
he or his appointed officers is empowered to enter or search the premises of a person, carry out an
inspection print-out or audit of any information, documents or things at any premises.
7. Corporation tax self-assessment

Fast Forward
A taxpayer who is on self-assessment must file a return within four months of the end of the year of
assessment. For those taxpayers who are not self-assessment, the Commissioner normally issues a public
notice stating the date of filing the returns.
7.1 Introduction
A self-assessment is a system where a taxpayer determines own tax liability. The system relies upon the
company completing and filing a tax return and paying the tax due. The system is enforced by a system of
penalties for failure to comply within the set time limits, and by interest for late payment of tax. Zimra’s
role in this regard is auditing and verification.
7.2 Self-assessment
Banks, insurance companies and VAT Category C registered operator are required to furnish to Zimra a
self-assessment return by 30 April of the following year for 31 December tax year of assessment or other
period specified by the Commissioner in a public notice. A Category C VAT operator is a person whose
taxable turnover exceeds $240,000 per annum.
18

lOMoARcPSD|3494582
For other provisional taxpayers, the date is advised by the Commissioner in a public notice. A person
whose income is purely in the nature of remuneration and such remuneration has accounted for under the
Final Deduction system dispense with the need to complete and submit a return.
A self-assessment implies a computation of person’s own tax liability. The Commissioner’s role is limited
to audit and investigation. The system is enforced by a system of penalties and interest.
The return (ITF 12 C) should be filed electronically and must be submitted even if there is no tax payable.
Interim returns may also be requested by the Commissioner. Meanwhile, the person should also submit a
Capital Gains Tax return in the event that there has been a disposal of a specified asset during the year of
assessment. Where the person is incapacitated his return shall be signed by the taxpayer’s legal
representative. Where a return has not been submitted the Commissioner can appoint somebody else to
submit a return on behalf of the taxpayer. For failing to furnish a return the taxpayer is liable to pay penalty
notwithstanding the fact he has not received a notice to furnish the same or the prescribed form. A penalty
of $30 per day is chargeable, up to a maximum of $5,430 (181 days x $30).
The Commissioner may, having regard to the circumstances of any case extend the time for submission
without charging the penalty. A self-assessment return of income must be signed and must also include a
declaration that the return is complete and accurate. Where the return is signed by any other person other
than the taxpayer, it shall be assumed to have been signed by the taxpayer unless the taxpayer can prove
that such return was not made or signed by him or her or on his or her behalf.
Where a return has not been submitted, the Commissioner is empowered to appoint any other person to
submit the return on behalf of such taxpayer. In the event that the taxpayer is legally incapacitated, the
taxpayer’s self-assessment return of income, and a declaration as to its completeness and accuracy, shall be
signed by the taxpayer’s legal representative.
Where a specified taxpayer has furnished a self-assessment return accompanied by the relevant documents
for a year of assessment, the taxpayer is deemed to have made an assessment of his or her taxable income
and the tax payable on that taxable income for that year, being those respective amounts shown in the
return. The self-assessment return shall be treated as an assessment served on the taxpayer by the
Commissioner-General on the due date for the furnishing of the return or on the actual date of furnishing
the return, whichever is the later. In spite of the fact that the person has submitted a self-assessment return,
the Commissioner may under certain circumstances make an assessment for additional tax in event of
default or omission by the person or additional assessment. Whenever the Commissioner makes the said
assessment he must state the reasons for raising the assessment.
8. Quarterly tax payments
Fast Forward
A person who earns income other than employment is liable to pay his tax on certain dates known as
quarterly payment dates, in advance of year end on 25 March, 25 June, 25 September and 20 December.
The percentages payable of estimated annual tax liability is 10%, 25%, 30% and 35% respectively.
8.1 Introduction
Quarterly payment system, also known as provisional tax system is a system of paying income tax on
estimated taxable income in advance of the tax year end on certain fixed annual dates known as quarterly
payment dates (QPDs).
19

lOMoARcPSD|3494582
Self-employed individuals, partners, non-executive directors, trusts and companies must pay their
tax through a system called provisional tax.
Employees, persons earning property or insurance commission and persons notified by the Commissioner
not to be provisional taxpayers are not required to pay provisional taxes. Where a person’s income is
exempt from income tax, he is also not required to pay provisional taxes.
A provisional tax is a tax paid on estimated taxable income from trading and investment activities in
advance of the tax year end. For example, tax for the year ended 31 December 2015 is settled in 2015 i.e
before the date of accounts.
At year end or when an assessment is done, the person must settle the actual tax due. Where the provisional
tax is more than the actual tax on assessment the excess is refunded and when there is a shortfall, the
taxpayer will be required to settle the difference.
The following are the ordinary quarterly payments dates and the respective tax liabilities:
QPD Tax due Date tax due

1st 10% of estimated annual tax liability 25 March
2nd 25% of estimated annual tax liability 25 June
3rd 30% of estimated annual tax liability 25 September
4th 35% of estimated annual tax liability 20 December
A taxpayer with a year-end other than 31 December may use different quarterly payment dates, subject to
an application being approved by the Commissioner.
8.2 Computation of quarterly payments

QPDs are based on the estimated corporation tax liability for the current period . A company is required to
estimate its corporation tax liability before the end of the accounting period, and must revise its estimate
each quarter. It is extremely important for companies to forecast their tax liabilities accurately. Taxpayers
who are poor at estimating may find their companies incurring significant interest charges, the reason being
that a QPD that was understated is subject to an interest of 10% p.a. A QPD which was not paid at all is
also subject to interest charges. The Commissioner may waive the interest in full where the taxpayer has
failed to forecast by not more than 10% margin of error.
The amount of each instalment is computed by:
a. Estimating the annual table income and compute the annual tax payable
b. Then multiply the annual tax payable by the relevant quarter rate of installment.
c. You will need to re-compute or estimate the annual taxable income and make necessary
adjustments as required.
EXAMPLE
Concave (Pvt) Limited has a manufacturing plant along Seke Road in Harare where it manufactures goods
all for export to Zambia and Malawi. Its estimated tax liability for the year end 31 December 2015 is
$126,000.
Show the amount (s) Concave (Pvt) Ltd must pay to Zimra and date(s) of payment.
ANSWER
QPD number Rate Due date Amount payable

1st 10% 25 March 2015 12,600
20

lOMoARcPSD|3494582
2nd 25% 25 June 2015 31,500

3rd 30% 25 September 2015 37,800
4th 35% 20 December 2015 44,100
Each payment must be accompanied by a return (ITF 12B) showing an estimated quarterly taxable income.
This return is submitted whether or not tax is payable. If the return is not submitted, the Commissioner will
make an estimate of the person’s taxable income. Once the estimate is made tax payments will be based on
such estimate and shall be final and conclusive.
8.3 Interest on late paid tax
Tax payable by way of quarterly payment date system is not subject to penalty in the event of its being
underpaid or not paid at all. It is only subject to interest payment. That interest runs from the due date a
QPD was required to be paid until the date it is paid. The interest is chargeable on both the underpaid
QPD and a QPD which was not paid at all. The statutory rate of interest on an underpaid tax is 10% p.a. It
is computed using the 365 day year, as follows:
I = [10 %( D x P)]/365 days
I is the interest
D is the delay period in days
P is the tax (QPD) due.
The delay period is counted from the due date to the day before the date of actual payment.
EXAMPLE
Bulk (Pvt) Limited which is a tax compliant taxpayer paid its 1 st QPD amounting to $50,000 on 15 March
2015. However, due to cash flow problems it was only able to pay its 2 nd QPD on 31 July 2015.
Compute the total tax to be paid to Zimra by Bulk (Pvt) Ltd on 31 July 2015.
ANSWER
2nd QPD (25%/10% x $50,000) 125,000

Interest ($125,000 x 10% x 36 days/365 days) 1,233
Total tax due 126,233
The Commissioner may however waive the interest if he is convinced that the reason for failing to pay the
tax or part of it was due to special circumstances imposed on the taxpayer or was due to an increase in the
rates of tax or for any other sufficient cause. Interest may also be waived when a taxpayer has
underestimated his QPDs within a 10% of margin of error.
EXAMPLE
Mrs. Katenha a self-employed paid her QPDs for 2015 based on the estimated business net income of
$350,000. After filing her return she realized that her accountant incorrectly under estimated the 2015 last
quarter business income by $50,000.
Show what Mrs. Katenha paid in QPDs against what she should have paid, clearly indicating the margin of
error on each instalment.
ANSWER
Item Rate Paid Correct Error Error

margin
21

lOMoARcPSD|3494582
Taxable income 350,000 400,000 50,000 14%

Tax @ 25% 90,125 103,000 12,875 14%
1st QPD 10% 9,013 10,300 1,288 14%
2nd QPD 25% 22,531 25,750 3,219 14%
3rd QPD 30% 27,038 30,900 3,863 14%
4th QPD 35% 31,544 36,050 4,506 14%
8.4 Crediting of provisional tax

The provisional tax is not a final tax. After the actual tax payable by a person has been determined, the
Commissioner will set off any amount of provisional tax paid against the actual tax payable. Where there is
an overpayment, the amount is set off against any other tax or amount due and payable to the
Commissioner by the taxpayer. If there is no such amount the amount will be refunded to the person.
9. Returns, records and claims

Fast Forward
A tax return is required for each taxpayer for each year of assessment, except for those on a final deduction
system.
9.1 Self-assessment returns

A company's tax return must be filed electronically and must include a self-assessment of any tax
payable. The return is submitted even if there is no tax payable. It is made on a prescribed form (ITF 12 C)
and should clearly show the information which is necessary for the calculation of tax liability for the year.
The taxpayer should compute the tax liability. Besides this return, the Commissioner may also request an
interim return.
If a person is incapacitated his return shall be signed by the taxpayer’s legal representative. Failure to
submit a return will cause the Commissioner to appoint somebody else to submit a return on taxpayer’s
behalf.
9.2 Returns for those not a self-assessment

The Commissioner must annually give public notice of the persons who are required by him to furnish
returns for assessment and such persons shall be prescribed in such notice. The date of submission shall be
within 30 days after the date of the notice, or within such further time as the Commissioner may for good
cause allow. The return may be submitted by the person personally or in a representative capacity. The
notice must also state the places at which the prescribed forms may be obtained, and it shall be the duty of
all such persons, and of all persons required by this Act to furnish such returns, to apply for the prescribed
forms of returns. A person shall, however not be exonerated from paying penalty by reason of not receiving
the notice or the prescribe form not been delivered to him. The Commissioner at his discretion may
however make such prescribed forms to be delivered or sent by registered or unregistered post to any
person.
A company that has not been carrying on any trade or business (dormant company) for the full year shall
not be subject to penalty for failing to furnish a return. Its public officer or a director or majority
shareholder must however make a written and sworn declaration to the Commissioner within 30 days of the
public notice. The sworn declaration is made to cover all returns, other than capital gains tax return which
depends on whether there has been a disposal or sale of a specified asset in the year of assessment.
A return of business income must be accompanied by the set of accounts and a declaration stating that the
return is complete and accurate. The return must be submitted together with a balance sheet, trading
accounts, profit and loss accounts and supporting schedules which are necessary to support the information
22

lOMoARcPSD|3494582
contained in the return. The accounts must be signed by the person rendering the return. Where the
financial statements were prepared by another person the taxpayer must submit a certificate or statement by
such other person recording the extent of his/her examination of the documents.
The obligation to file a return usually arises only when the person receives a notice requiring a
return. A return is required for each accounting period ending during or at the end of the period specified
in the notice requiring a return.
ORWARD
A person who fails to furnish a return is liable to pay a fine notwithstanding the fact he has not
received a notice to furnish the same or the prescribed form. A fine of $30 per day is chargeable, up
to a maximum of $5,430 (181 days x $30), if the return is submitted after its due date.
9.3 Assessment
After the returns have been submitted, the Commissioner will carry out an assessment and must issue
assessment and of the amount of tax payable. For those on self-assessment the Commissioner’s
responsibility is compliance check as opposed to assessment.
9.3.1 Estimated assessment
Where a taxpayer has failed to submit a return the Commissioner is empowered to raise an estimated
assessment. An estimated return may also be issued in circumstances a taxpayer is about to leave the
country before submitting a return or when a taxpayer is unable to submit an accurate return. An
estimated assessment can also be raised where there are no proper books of accounts or record.
The estimated assessment may be agreed with the taxpayer and once agreed it shall not be subject to any
objection or appeal. The Commissioner may however vary the agreed assessment if he is of the opinion
that the taxpayer withholds information which if it would have been known at the time of the estimate
would have resulted in an increase in his taxable income or reduced assessed loss.
As estimated assessment shall not relieve a taxpayer of a penalty or an interest for failure to submit a return.
9.3.2 Additional assessment
The Commissioner after making an assessment may issue an additional assessment where income was
omitted from an assessment or where an expense or tax credit was erroneously claimed. But no additional
assessment shall be raised by the Commissioner if six years have passed from the end of the relevant
year of assessment, except in cases of fraud, misrepresentation or willful non-disclosure of facts by a
taxpayer.
EXAMPLE
Dent (Pvt) Ltd filed its 2010 income tax return on 15 April 2011 showing a net loss. On 10 June 2011, it
amended its 2010 tax return to show more losses. Following a tax audit, the CG disallowed certain
deductions claimed by the company, resulting in a net income position and issued a revised assessment
against it on 2 June 2012.
The company protested the assessment on the grounds of the prescription period Advise?
ANSWER
The prescription period has not elapsed. An additional assessment can be raised within six years from the
end of the relevant year of assessment. Therefore Zimra has up to of end of 2016, when six years lapse.
9.3.3 Reduced assessment and refunds/claims

23

lOMoARcPSD|3494582
Where a taxpayer has paid tax in excess of what is required by law, the Commissioner shall issue an
amended assessment to reduce the tax chargeable and if necessary to refund the overpaid tax. But no
assessment shall be raised if six years have lapsed since the date of the notice of assessment in question. An
amended assessment shall not be subject to appeal or objection.
Wherever possible claims must be made on a tax return or on an amended return and must be
quantified at the time the return is made.
A claim may result from overpaid taxes or errors on the returns. If a person believes he has paid excessive
tax, for example as a result of an error on tax return, a claim may be made within six years from the end
of the accounting period. A claim not made within this window period is considered invalid and shall not
be entertained by the Commissioner. However, a claim cannot be made where the return was made in
accordance with a generally accepted practice which prevailed at the time.
Zimra is required to pay interest on overpaid taxes which are not refunded to the taxpayer within 60 days of
a taxpayer claiming the refund or the date of completion of the assessment, whichever is the late date,
unless the delay in paying the interest is caused by an incomplete or defective return or some other error of
a taxpayer. Zimra can also set off such refund against other taxes due to him.
An application for a refund must be in writing stating the full name of the taxpayer, his tax reference
number and must be fully supported, e.g. by a tax withholding certificate. A refund will only be made
after the required verifications have been completed and to some cases this may result in the taxpayer
being audited.
The Commissioner has the right to offset a taxpayer’s refund against other taxes due to him. Since
employees under FDS are not required to submit returns, they cannot claim a refund of overpaid taxes
from Zimra. The employee’s overpaid tax is corrected by the employer by reducing the next month’s tax
liability.
9.4 Amending a return
Errors in a return can only be corrected by amending the return in which the error or mistake was made and
not correcting the error on the subsequent year’s return.
A taxpayer may amend a return within 6 years of the end of the year of assessment. Zimra may also amend
a return to correct obvious errors, or anything else that an officer has reason to believe is incorrect in the
light of information available. The correction can only be made within 6 years of the year of assessment.
If the time limit for amendments has expired, the taxpayer or the Commissioner forfeits its right. The
Commissioner is however, not restricted to this prescription, where fraud, tax evasion or misrepresentation
is suspected.
An assessment can also be made to increase or reduce a tax payer’s assessed loss for any year of
assessment, provided that no amended assessment shall be raised if:
- The assessment was made in accordance with the law existing at the time of assessment
- Six years have passed since the date of the notice of assessment in question.
An amend assessment shall not be subject to an appeal or an objection.

9.5 Records
Any person who derives income from traded and investment must keep books and accounts of his
transaction until six years from the date of the last entry therein. The records must be kept or caused to
24

lOMoARcPSD|3494582
be kept in English. An exception to keeping of records is by authority from a competent court or by the
Commissioner.
All business records and accounts, including contracts and receipts, must be kept or information showing
that the company has prepared a complete and a correct tax return. Examples of records that must be kept
includes all ledgers, cash-books, journals, paid cheques, bank statements and deposit slips, stock sheets,
invoices, and all other books of account relating to any trade carried on by a taxpayer and recording the
details from which his or her returns for the purposes of this Act were prepared.
A person who fails to keep records is guilty of an offence and liable to a fine not exceeding level seven or
to imprisonment for a period not exceeding three months or to both such fine and such imprisonment.
9.6 Electronic filing

On 26 June 2015, Zimbabwe Revenue Authority (ZIMRA) launched a platform for filing and paying taxes
electronically. The system is envisaged will result in the shifting from the conventional way of submitting
paper returns to earn the public’s trust and confidence as well as facilitating electronic communication by
taxpayers with ZIMRA. It also hoped that the missing documents at ZIMRA and mis-postings by ZIMRA
will also be resolved through this system
The services that can be performed on the platform include registration to obtain a BP number, filing
returns of (VAT, PAYE and Income tax), processing payments, accounts statement viewing, ZIMRA
enquiries & queries, receiving tax updates from ZIMRA. The returns that can be filed online are VAT 7, P2
and ITF12C. The capturing of ITF12B, ITF12 and ITF1, ITF1A, capital gains tax returns and withholding
tax returns are currently not on-line.
Other services available include corresponding with ZIMRA on-line. It is also envisaged that tax clearances
will also be obtained online for taxpayers with update accounts. Taxpayers can also make BP registration &
update of client details online but no VAT registration online yet.
Taxpayers are encouraged to register for e-filing because there are several advantages expected to emanate
from participating under this programme. From the point of view employers E-filing is expected to reduce
the time for filing of returns and this can be done within your office or at home as long as you have access
to internet.
The system has the potential to lower the cost of handling returns—allowing administrative resources to be
reallocated to other tasks such as auditing, customer services and tracking non-compliance. It means that
ZIMRA can now deploy its staff to value adding activities such audits and investigations. E-filing systems
increase the quality and quantity of information available to tax officers, enabling them to complete
transactions faster and more accurately. Returns filed electronically have much lower error rates than paper
returns and substantially cut the need to impose penalties and other punitive measures to foster compliance.
The more efficient handling provided by electronic returns allows tax officers to issue assessments and
refunds more quickly, and taxpayers know right away if their returns have been accepted by the tax
authorities. Further, the system can better data management that can be used to implement a risk
management system for auditing and enforcement.
E-filing eliminating rent-seeking and can lower corruption by reducing face-to face interactions.
When capturing VAT returns you start with the year and the month depending on the VAT category as
follows:
• Category C - 1501; 1502; 1503

• Category A - 15A1, 15A2, 15A3
• Category B - 15B1, 15B2, 15B3
• Upload input tax schedules in correct format.
25

lOMoARcPSD|3494582
As for PAYE you start with the year and the month i.e. 1501, 1502, etc. The due date is pre-set, whilst
AIDS Levy and Total Tax Due are automatic calculated. The tax periods for an ITF12C are Yr10, Yr11,
Yr12, etc. You will need to upload any attachments. The capturing of ITF12 is work in progress.
10. Enquires
Fast Forward
Zimra’s role regarding tax returns is audit and verification as opposed to assessment. Its assessment is
limited to those taxpayers who are not on self-assessment.
10.1 Introduction
For self-assessment returns, Zimra’s role is audit and verification. These are known as compliance checks.
Checks can be made before a return is submitted, especially if fraud is suspected, but are normally carried
out after the submission of a self-assessment return. Zimra has 6 years from the end of the year of
assessment to carry out an audit or verification, unless fraud or misrepresentation is suspected.
Zimra may carry out pre-return compliance checks for companies as well as for individuals , for example if
fraud is suspected. Zimra has the same information and inspection powers in relation to companies as it has
for individuals.
Zimra often writes a letter to a taxpayer advising him of the impending audit.
11. Dispute resolution procedures
Fast Forward
A dispute resolution procedure starts with a formal objection to the Commissioner, if unhappy with
outcome appeal to the Special Court of Tax Appeals/ the High Court, if unhappy still; an appeal is made
to the High Court/Supreme Court. Taxes must be made pending the outcome of the tax appeal.
11.1 Introduction
A formal dispute procedure involves an objection to the Commissioner, an appeal to the Income Tax Court/
Fiscal Court or the High Court and final to the Supreme Court or the High Court, as shown in the diagram
below:
Dispute resolution process
26

lOMoARcPSD|3494582
Income Appeal Income Tax

tax or to Court
CGTC
Objection Supreme
to CG Court
High court
VAT Appeal
to
Fiscal court
Note that the High Court can subject, to an election be substituted for a Supreme Court in appeal cases
coming from the Income Tax Special Court of Appeal or the Fiscal Court.
11.2 Objection to the Commissioner

11.2.1 Circumstances warranting objections
a. Refusal by the Commissioner to register that person as an operator.
b. Cancellation of that person’s registration, or refusal to cancel that person’s registration
c. Refusal of VAT refund
d. Dissatisfaction with any assessment raised by the Commissioner
e. Issuance of a directive on a person deeming the different activities of that person to be one activity
for the purposes of VAT there by becoming eligible for registration
f. Any decision of the determination and decision of the Commissioner
11.2.2 The valid essentials of an objection
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.
a. Must be made in writing

b. Must state the grounds for the objection clearly
c. Must be made within 30 days from the date of notice of assessment, decision or determination.
The term grounds of appeal mean the reasons supporting the tax appeal, which is the reference tax
legislation supporting the appeal or any relevant tax re-computations.
It is up to the Commissioner to accept an objection which is submitted after the 30 day window period and
usually there must be reasonable grounds for the delay.
Upon receiving an objection, the Commissioner can reduce, alter, increase or disallow in whole or in part
the assessed tax or amend the assessment. Whatever he does, he must advise the taxpayer of his decision.
If he has not responded within 3 months (90 days) after the date of objection, then the taxpayer must
consider the objection disallowed.
27

lOMoARcPSD|3494582
11.3 Tax Appeals
A taxpayer whose objection has been disallowed or who is not happy with the decision of the
Commissioner has the right of an appeal.
As shown in the diagram an appeal on VAT or Customs goes to either the Fiscal Court of Tax Appeals or
the High Court. An income tax or capital gains tax appeal goes to Special Court of Income Tax Appeals or
the High Court
Note that, before a taxpayer exercises his right to apply for an appeal court all channels of objections
available must have been exhausted.
The requirements of a valid appeal are as follows:
a. An appeal must be in writing and must state whether the appellant wishes to appeal to the High Court
or the Court of Special Tax Appeals/ Fiscal Court of Tax Appeals.
b. It must be lodged within 21 days of the date of receiving the Commissioner’s objection decision.
c. Must include a statement of the reason for the application
An appeal not meeting these requirements is invalid and may not be entertained. The High Court or the
Appeal Court may however, on good cause being shown or by agreement of the parties extend the period
for lodging an appeal.
The appeal court, upon hearing the case, may order an assessment or determination under appeal to be
amended, reduced, withdrawn, confirmed or referred back to the Commissioner for further investigation.
A Fiscal Court/Special Income Tax Appeal Court has all the powers of The High Court. The difference is
that the person can only be represented by a legal practitioner in the High Court. In the Fiscal Court of
Income Tax Court parties can be represented by a non-legal practitioner e.g. a tax consultant. Any person
representing a taxpayer must be appointed in writing, while a person representing the Commissioner must
be authorized by him.
11.3.1 Appeals to the Supreme Court
A person who is not happy with the outcome of an appeal may appeal to the Supreme Court. His/her
appeal is limited to a decision made where it is clear that laws and regulations have been improperly
applied. It may also relate to a question of fact alone or question of mixed law and fact, if consent has been
granted by the High Court, the Special Court or with the leave of the Supreme Court.
11.3.2 Payment of tax pending appeal
The obligation to pay and the right to receive and recover any tax, additional tax, penalty or interest
chargeable shall not, unless the Commissioner so directs, be suspended by any appeal or pending the
decision of a court of law. However, if any assessment is altered on appeal or in conformity with any such
decision or decision by the Commissioner to concede the appeal to the Fiscal Appeal Court or such court of
law, a due adjustment shall be made, amounts paid in excess being refunded with interest. The interest
shall be calculated from the date proved to the satisfaction of the Commissioner to be the date on which
such excess was received, and amounts short-paid being recoverable with penalty and interest.
The role of the CTA is to give taxpayers an opportunity to resolve tax disputes with Zimra with regard to
matters arising under the tax laws.
12. Penalties, interest and additional tax

28

lOMoARcPSD|3494582
Fast Forward
A taxpayer who fails to perform his duties as required by the law may face penalties, interest and fines as
well as imprisonment.
12.1 Introduction
Penalties are levied on taxes that are not paid on time. Interest is also charged for late taxes. In addition to
penalties and interest, fines and imprisonment charges also apply for a committed tax offence. Penalties and
fines are usually waived in part or in full where the Commissioner is satisfied that the reason for default
was not due to the intent to avoid paying tax. Interest represents compensation for loss of income by the
fiscus i.e opportunity cost of money and is usually not waived.
12.2 Penalties for late payment of tax

The Commissioner has powers to impose various penalties, additional tax and fines for committed tax
offences. He also has the power to waive such penalty or fine in full or in part where he is satisfied that the
offence was not committed intentionally.
Penalty for failing to pay tax starts at 100% of the tax due. It is chargeable on late paid PAYE,
VAT and withholding taxes. A penalty is also levied where a registered operator incorrectly claims a
VAT refund. Quarterly payments do not attract a penalty. The rate of penalty for capital gains
related taxes is 15% i.e capital gains tax and capital gains withholding taxes.
The Commissioner may grant a reduction or a waiver of the penalty if he is satisfied that failure to pay the
tax was not due to intent to evade tax or was due some other justified cause.
A penalty cannot be remitted where tax evasion or fraud is taking place or is suspected.
12.3 Fine for late submission of returns

The Commissioner may charge a penalty of $30 a day for a return which is not submitted after its due date.
This penalty is limited to 181 days (i.e. $30 x 181 days = $5,430). If a return remains outstanding after 181
days, prosecution may be instituted in addition to the payment of any penalty levied.
The Commissioner has the power to waive the fine (in accordance SI 97 of 2013-coming into effect on 28
June 2013) as shown in the following table:
Delay days Remission Penalty %

0 to 10 days 100% 0% 1
11 to 20 days 75% 25%
21 to 30 days 50% 50%
31 to 60 days 25% 75%
61 to 181 days 0% 100%
1
Plus written warning
The following are the returns which attract the above fine:
Return Name of return Due date

Commissioner to advise through a public
ITF 1 Return of Income: individual from trade notice
notice Commissioner to advise through a
ITF 1A Return of Income: individual from trade public notice
29

lOMoARcPSD|3494582

ITF12 Return of Income: company notice
Self-Assessment return-individual and By 30th April following end of year of
ITF12C company assessment
By 31st January following end of year of
ITF16 Reconciliation of payroll details (PAYE) assessment
Within 10 days of payment of paying the
REV5 Return for the remittance of withholding taxes payee
By the 10th of the month following the end of
the quarter e.g. 10th April for quarter 1 (Jan-
REV5A Return for the remittance of Presumptive tax Mar)
CGT1 Return for Capital Gains Tax Within 30 days of sale of specified asset
By 25th of the month following that of the end
VAT7 Return for the remittance of VAT of the tax period.
Note that remittance advices e.g. P2 and ITF12B are not subject to penalties.
EXAMPLE
DairyDays (Pvt) Ltd submitted its self-assessment return for the year ended 31 December 2015 on 29 May
2015.
What is the fine payable by DairyDays (Pvt) Ltd for failing to comply?
ANSWER
Delays (return was supposed to submitted on 30 April) 29 days

Remission % (21-30 days) 50%
Penalty (29days x $30 x 50%) $435
12.4 Interest
A taxpayer who pays tax late is obliged to pay interest on the tax due. The rate of interest is 10% p.a,
calculated on a simple interest basis.
The Commissioner may remit the whole or any part of interest charged on QPDs where the person liable to
pay the interest has given good reasons or cause in writing for failing to pay the tax. The interest is also
chargeable on the penalty chargeable until it is discharged.
The interest is computed as follows:
I = [10% (D x P)] / 365 days
I is the interest
D is the delay period in days
P the principal amount due (the tax due)
When computing the delay period, the day the tax became due is counted and the day the tax is eventually
paid is excluded.
EXAMPLE
30

lOMoARcPSD|3494582
A VAT category C operator paid a May 2015 VAT payment of $43,123 on 3 July 2015. What is the
additional tax payable for failure to pay tax by the due date?
ANSWER
$43,218, i.e. $43,123 + $95
Penalty $43,123 x 100% = $43,123

Interest:
Date tax paid 3 July 2015
Due date 25 June 2015
Delay period 8 Days
Interest due 8days /365 days x $43,123 x 10% = $96
12.5 Additional tax
An additional tax is tax charged for deliberate understatement of taxes, tax evasion or omissions. A person,
who is required to pay additional tax, may also be charged penalty, such that the total fine becomes 200%.
12.5.1 Income tax and Capital gains tax

Additional tax is payable Tax for evading, defaulting or omitting to pay tax as follows:
a. Default in rendering a return in respect of any of assessment. The additional tax shall be 100% of tax
chargeable in respect of his taxable income for that year of assessment; or an amount equal to a fine of
$400, whichever is the greater.
b. For omitting any amount which ought to have been included in a return, the additional tax shall be
100% of the difference between the tax as calculated in respect of income returned and the tax
properly chargeable in respect of his taxable income as per correct return.
c. For making any incorrect statement in any return rendered by him which results or would, if accepted,
result in the calculation of the tax at an amount which is less that the tax properly chargeable, the
additional tax is equal to the difference between the tax as calculated in accordance with the return
made by the taxpayer and the tax properly chargeable if the incorrect statement had not been made.
d. If he fails to disclosed in any return made by him any facts which should be disclosed and the failure
to disclose such facts results in the calculation of the tax at an amount which is less than the tax
properly chargeable , the additional tax is an amount of tax equal to the difference between the tax as
calculated in accordance with the return made by him and the tax properly chargeable if the disclosure
had been made;
e. If he makes any statement which results or would, if accepted in the granting of a credit exceeding the
credit to which he is entitled, an amount equal to the difference between the tax with which he was
chargeable as a result of his statement or would have been chargeable as a result of his statement had it
been accepted and the tax with which he is properly chargeable.
12.5.2 VAT
An additional tax is also chargeable under VAT Act where any registered operator or an agent acting on
behalf of the registered operator fails to perform any duty imposed upon him by this Act or does or omits to
do anything with intent to evade the payment of any amount of tax payable by him or causing a false refund
to be made to him. The additional tax is also charged for claiming input tax refund using a valid tax
invoice, debt note or credit note. The additional tax is 100% of the input tax falsified, refund or the tax
evade, whichever is applicable. The tax is in addition to the penalty and interest sated above.
31

lOMoARcPSD|3494582
12.6 Fines and imprisonments
12.6.1 Introduction
Generally fines are levied for failing to:
 Pay taxes on time

 Submit or furnish returns
 Obstruct an officer
 Provides false statements
 Register with Zimra
 Remit the appropriate tax deductions to Zimra
 Remit the tax deductions by the due date;
 Deduct and remit the correct amount
 Pay the additional tax imposed for late payments of tax
 Errors in returns
 Keep proper books of accounts or records
 Making willful false statement or entry in a return
 Signing a false return, under-reports, under-collects,
 Prepares false books of accounts or records
 Refusal to furnish a return or document
EXAMPLE
Malachi’s final tax liability for 2014 is $20,000 and he paid quarterly payments of $18,900 in relation to
this. He filed his self-assessment tax return for 2014 on 1 June 2015.
What are the penalties involved?
ANSWER
The return is late being filed and as a result of this he will have a penalty imposed. The self-assessment
must have been filed by 30 April 2015. No penalty is charged for incorrect forecast of the liability which is
within 10% margin of profit error. His final liability for 2014 will now be:
Income Tax liability as calculated 20,000

Add Penalty for late filing – $30 x 32 days 960
Total Liability 20,960
12.6.2 Examples of offences and fines

 Willfully under reporting income
A person who willfully reports income in a return submitted by him or prepared by him on behalf of
another person or fails to disclose facts resulting in less tax being paid, is liable to a fine of not more than
level 7 or imprisonment for not more than 1 year or both the fine and imprisonment.
 Failure to register as a VAT operator
A person who fails without a just cause to apply for registration of VAT, where he qualifies, or fails to
notify of any change in his status or to furnish a VAT return is liable to pay a fine not exceeding level 7 or
to imprisonment for a period not more than a year or to both such a fine and imprisonment.
 Evading or assisting in evading tax
32

lOMoARcPSD|3494582
A person who evades or assist another person to evade VAT, to obtain a refund which he or that other
person is not entitled to is liable to a fine of not more than level 12 or 24 months in prison or to such fine
and imprisonment. Evasion is assumed if a false statement or an entry is made in return, signing a return
willfully, maintaining or caused the maintenance of false books of accounts, making a false statement in
order to obtain a tax refund or commit fraud.
 Refusing to be investigated
A taxpayer who refuses to be subjected to an investigation by or hinders an authorized officer of ZIMRA

from discharging his duties is liable to a fine of not less than level 5 or imprisonment for a period not
exceeding six months or both imprisonment and fine.
 Repeating an offence
A person who commits a similar offence is liable to a fine equal to level 14 or 12 months in prison or to
such a fine and imprisonment in addition, the conviction of a person for an offence shall not exempt the
person convicted from the payment of any tax, additional tax, penalty or interest payable.
13. Guidelines on waiver of penalty and fines

Fast Forward
The Commissioner has the powers to waive penalty, and in considering the extend of remission he is
guided by the degree of voluntary disclosure, level of cooperation, the degree of blameworthiness of the
taxpayer and other mitigating factors.
13.1 Introduction
Zimra has guidelines for the administration of penalty and level of fines. These were developed and
published with the main objective of promoting transparency, encourage voluntary compliance and enhance
a uniform application of the legal provision relating to penalties and fines.
The guidelines give the Commissioner power to remit penalties and fines. His powers will at all times seek
to maintain consistency and by the principle of fairness in that the penalty should befit the offence or crime
committed. To achieve this, the circumstances of each case and the client’s conduct leading to and at the
time of committing the offence, as well as behaviour during the compliance checks, are considered
carefully and the right of the clients to appeal is respected.
The factors which the Commissioner may into consideration when coming up with the quantum of the
penalty or fine to be waived, as follows:
13.1.1 Degree of voluntary disclosure
High degree of voluntary disclosure may lower the penalty while attempts to hide the offence or to mislead
Zimra may result in a higher penalty and prosecution. A disclosure is considered to be voluntary when it is
truthful, complete, and if it is received before:
 The commencement of investigation or audit on the taxpayer, or the authority has notified the taxpayer
that it intends to commence such an audit or investigation;
 The receipt of information from any source (e.g., informant, other governmental agency, or the media)
alerting Zimra to noncompliance of the client.
33

lOMoARcPSD|3494582
 Zimra has acquired information directly related to the specific liability of the taxpayer from any civil or
criminal enforcement action.
You must disclosure all the facts, the truth and correct statement. A partial disclosure will be inferred and
considered in light of the requirements of a full disclosure. For disclosure to be voluntary, the client must
come forward, before being confronted, audited or investigated.
However, repeated voluntary disclosures by a client may indicate that the client has failed to exercise the
reasonable care and penalty remissions may be refused or declined.
13.1.2 Level of co-operation.
A client’s willingness and actual behaviour may be helpful on the remission of penalty and fines. A
taxpayer is willing to work with Zimra, if he makes full and complete disclosure of all relevant information
and the amount of tax involved and makes immediate arrangements to settle the outstanding tax, interest
and appropriate penalty.
On the other end, a client who refuses to give requested information, and is evasive or tries to mislead the
Authority which warrants no remission for co-operation.
13.1.3 Degree of culpability
The degree of the taxpayer’s blameworthiness in the commission of an offense is also critical in
determining the level of penalty and fine. In case of intentional offence (where proved) no remission will be
given. Prosecution and forfeiture where applicable will be considered in addition or as an alternative to the
penalty or fine imposed.
13.1.4 First or repeat office
Repeat offenders will get higher penalties compared to first offenders. In each subsequent offence the levels
of remission under each consideration will be discounted by a factor of 5%, e.g. a second offence is
discounted by 5% and a third offence by 10% etc.
13.1.5 Other Mitigating factors
Taxpayer’s financial circumstances (R v Thistle, [1974] C.TC 798) i.e Da Costa’s case (47 SATC 87 AT
98); it was acknowledged that ‘the means of the taxpayer clearly may be a relevant factor in determining
the quantum of the reduced penalty”. A reasonable cause exists where a taxpayer exercised ordinary
business care and prudence and, despite inability to pay the taxes due to lack of sufficient funds or could
pay the taxes, but doing so have triggered undue financial hardship. The following factors are often
considered:
 Whether the taxpayer favour other creditors over Zimra

 A history of failing to make timely tax deposits
 The taxpayer’s financial decisions,
 The taxpayer’s willingness to decrease expense and personnel.
Courts are more inclined to find that financial difficulties warrant penalty abatement when (1) a real choice
existed between making payments to the tax authority and going out of business. (2) the taxpayer believed
that the crisis would be alleviated by the occurrence of one or more specific contingencies, (3) the duration
of the financial crisis was limited, (4) the taxpayer did not unfairly favor other creditors over tax liabilities,
(5) personal resources were contributed to avoid business collapse, and (6) the taxpayer was neither
unjustly enriching itself nor or its owners.
34

lOMoARcPSD|3494582
Zimra often requires that the amount owed must be paid, a taxpayer must not have received a waiver in the
same year, must have an excellent history of compliance and must supply a reasonable cause for waiver, in
order to remit penalty.
Interest because it is a compensation for opportunity cost of money, is never a subject of remission. It will
remain due whether or not the person is good or a bad taxpayer.
13.2 Penalty Remission Levels
Remission of penalty is high where the error is unintentional and no remission of penalty for tax evasion or
intentional errors.
13.2.1 Intentional Offences/Evasion:
No remission of penalties in cases where there was an intention to evade or postpone payment of tax. In
such situations the maximum penalty will be imposed. This category includes cases were bribery and other
forms of corruption are involved. In addition to penalty, prosecution proceedings and in the case of customs
offences forfeiture will also be considered.
Description Level of Remission Penalty Amount

(a) First Offence 0% 100% (Maximum)
(b) Repeat offence 0% 200% (Maximum)
An intentional disregard/Evasion offence is a deliberate action such as misrepresentation, concealment,

deceit, fraud and others that are adopted by a person and result in evasion, non-declaration or postponement
of the payment of tax.
13.2.2 Un-intentional Offences
A taxpayer who shows that the omission or default was not committed intentionally will get remission
using the guidelines stated in the table below. An un-intentional Offence is an unintentional error or
carelessness in disregarding the law.
Remission For Total Penalty to be charged.

Remission
Repeat disclosure Cooperation
a) First offenders: with full 100%
0% with a written
voluntary disclosure, (see
warning
above)
b) First offenders: subject to 75% 25%
partial and voluntary
disclosure
c) Second offender: Subject to 50% 50%
full disclosure
d) Third offences 25% 75%
e) Subsequent offences Maximum penalty or
Forfeiture. Prosecution
will also be considered.
14 Tax Amnesty
35

lOMoARcPSD|3494582
14.1 General overview
The Minister of Finance and Economic Development granted a limited tax amnesty to taxpayers with tax
and duty irregularities. A tax irregularity implies transgression of any covered tax. The covered tax means
any tax or duty which is administered by the Zimra in terms of the Revenue Authority Act (RAA). Eligible
taxpayers were required to voluntarily come clean by 31 March 2015 (period extended to 30 June 2015 and
again to 30 September 2015) and settle the covered taxes by 31 December 2015. Eligible taxpayers were
those that had failed to declare and pay their taxes and duties during the period 1Fe br uar y 2009 and
ending 30 September 2014 (called “the tax amnesty period”). Thus, taxpayers were required to make
disclosure regarding tax and duty irregularities to the Zimra while taking advantage of a complete waiver of
penalties and interest.
14.2 Non-application of certain criminal and other laws in respect of amnestied conduct
Any person who truthful discloses his/her becomes exempt from being prosecuted b y the National
Prosecuting Authority, to the extent of the amnestied conduct, be deemed to be criminal conduct in
terms of criminal law of Zimbabwe. Also, section 34B ("Reward for information") of the RAA shall
not apply to any information provided or measure taken which relates to an offence for which an
amnestied person is not liable by virtue of this Part to be prosecuted by the National Prosecuting
Authority.
14.3 Scope of amnesty
A tax amnesty was in respect of any unpaid tax or tax irregularities in connection with any covered tax.
Those who applied properly were relieved of interest and penalties relating to covered tax, other than the
principal amount of any covered tax. The tax amnesty also precluded the National Prosecuting Authority
from prosecuting any offender or imposing administrative penalties for false declarations or evasion of
covered tax, for failure to make the returns or payments of covered tax in due time, non-payment of
covered tax or non-submission of returns.
Application for tax amnesty was made by completing Form No. TAO1 and was supposed to be submitted
to the Commissioner any time from1 October 2014 to 31 March 2015. This was then extended to 30 June
2015 and again to 30th September 2015. However, the period for payment of the tax spanned from 1
October 2014 to 31 December 2015, with no extension being expected to be made. Taxpayers willing to
make early settlement were entitled to a discount of 5% of the amount due and such discount was to be
credited against the taxpayer’s future liabilities with Zimra. The discount was calculated a on a simple
interest basis as follows:
PV = FV .
(1+r) n
Where:-
PV= the discounted value of the assessed tax.
FV= is the assessed liability
r = is the monthly interest rate derived by dividing the prescribed rate of 5% by 12 months in a calendar
year.
n = number of months between the date of payment of assessed tax and expiry of the amnesty period”
There appear to be a drafting error regarding the factor ‘n’.
14.4 Eligibility for amnesty
Tax amnesty did not apply to cases where audit or investigation had commenced before the 1 October
2014, unless such audit or investigation -(i) had commenced before the 1st October, 20 14, and had
36

lOMoARcPSD|3494582
been completed before that date; or (ii) had commenced before the 1st October, 2014, but had not
been completed before the 31st March 2015; without uncovering any non-payment of tax or other tax
irregularity which, to the knowledge of the investigated or audited person, had in fact been committed or
had occurred during the amnesty period. It was not extended to any action resulting in the detention,
seizure or forfeiture of any property or goods, which action commenced on or before the 1st October,
2014 and to any other tax irregularities which had both been identified and the taxpayer notified of
them, on or before the 1st October, 2014.
14.5 Withdrawal of amnesty
The amnesty granted to any applicant w a s t o be withdrawn and thereby nullified if: (a) the
applicant made any false declaration to the Authority in applying for the amnesty; o r (b) the applicant
failed to pay the covered tax liabilities in full and by the due dates set out in the payment schedule form.
Chapter roundup
 The 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, is the general term for efforts by individuals, corporations, trusts and
other entities to evade taxes by illegal means.
 An Accountant must conduct himself professionally when dealing with the tax affairs of the client. You
must not advise your client to cheat and should advise the client to correct his omissions or errors. If he
refuses to act upon your advice regarding material error or omissions, you should cease to act for the
client, inform Zimra of this cessation.
 An employer’s main tasks is to register with Zimra within 14 days of becoming an employer, deduct
PAYE on employees’ earnings and pay the tax to Zimra within 10 days of the month of pay.
 Every person with taxable supplies of at least $60,000 in any period of 12 months must register as an
operator, compute and remit VAT, submit returns and maintain records.
 Provisional taxpayers must pay tax to Zimra on quarterly basis in the year of assessment in advance of
the year end.
 The Commissioner has the power of entry into a taxpayer’s premises, power to request information and
to access records and books of a taxpayer.
 Zimra’s emphasis is audit and verification as opposed to assessment. Its assessment is limited to those
taxpayers who are not on self-assessment.
 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.
Exam Bank
Question number Level Marks Time

Q1 Exam 17 25 mins
Q2 Exam 20 30 mins
Part B
37

lOMoARcPSD|3494582
Income tax liabilities
Taxable income and liabilities
2 38

lOMoARcPSD|3494582

1. The scope of income tax B1(a)
2. Computing taxable income B1(a)
3. Various types of income B1(a)
4. Tax exempt income B1(a)
5. Deductions allowable from income B1(a)
6. Computing tax payable B1(a)
Introduction
In the previous chapter we dealt with the Zimbabwean tax system. Now we look at the scope of income tax.
Recall that the basis of taxation in Zimbabwe is a source. What this means is that an amount whose origin is
outside Zimbabwe is non-taxable, unless the amount is deemed to be from a source within Zimbabwe.
We also consider the computation of taxable income. In the process we look at the gross income definition,
exemptions and deductions applicable when computing taxable income.
The chapter also introduces income tax from the point of view of an individual who only earns income
from employment.
We also look at investment and trading income. In the process will then learn how to work out the tax on
the person's taxable income from employment, investment and trading.
Finally, we consider how tax payable is computed for each class of taxable income.
In the next chapter we deal with employment income tax.
Study guide
Intellectual
level
B1 The scope of income tax
(a) Explain how the residence of an individual is determined. 1
39

lOMoARcPSD|3494582
Exam guide
The source principle, definition of gross income and knowledge of capital nature items are facts that you
will always use in the examination when you are asked to compute income tax liabilities. You will require
this knowledge for both individual tax computation and corporate tax computation. The area is likely to be
examined under section A of the examination paper, although it can also be examined in any part of the
syllabus.
You must also familiarize yourself with the layout of the computation. It is then a simple matter of slotting
the figures into the computation from supporting workings for the different types of income.
1. The scope of tax
1.1 Basis of taxation

Income must be from a source within Zimbabwe to be taxed in Zimbabwe, no matter the residence status of
the person receiving the income. To be a source within Zimbabwe an income must arise from services
rendered in Zimbabwe or an activity undertaken within Zimbabwe. Thus, a resident of another country is
taxable in Zimbabwe on income he earns in Zimbabwe.
1.1.1 Introduction
The Income Tax Act employs a source based taxing system when taxing income for both individuals and
companies. The basis provides for taxing income based on the place of an activity. It is founded on
principles that only income generated by an activity done or located in Zimbabwe is taxable in Zimbabwe.
Income from a foreign-source is excluded save for certain incomes which are deemed to be from a source
within Zimbabwe. Income is from a source within Zimbabwe if it is derived from work done or services
performed in Zimbabwe, business operations undertaken in Zimbabwe, letting of immovable property
situated in Zimbabwe, etc.
1.1.2 Meaning of source

Source is not a legal concept, but something which a practical man would regard as the originating cause of
income. It requires the consideration of two things: the originating cause and the location of the cause. To
ascertain the source of income, an inquiry should be made of what a taxpayer has done to earn the
income and where he has done it. For example, to earn a salary a person must render services. Therefore
the services are the originating cause of the salary and should these services be rendered in Zimbabwe, then
the country becomes the undisputed source of the salary.
1.1.3 Meaning of ‘ordinarily resident’
A person would be deemed to be ordinarily resident in Zimbabwe if he has a fixed abode in Zimbabwe.
Ordinary residence implies a greater degree of permanence than residence.
40

lOMoARcPSD|3494582
The term “ordinarily resident” is not defined in the Act. Departmental Practice notes states that the term
"ordinarily resident" bears no special or technical meaning, it depends on the facts of each case. The following
general principles however emerged:
 In the majority view residence is primarily a question of fact based on degree.

 The word "resident" refers to a quality of the person charged.
 To determine this quality the way of life and the nature and cause of his physical presence in a place must
be considered.
 Physical presence in a place does not by itself constitute residence, but neither is it absolutely necessary to
constitute residence.
 A person may be resident in more than one place.
 There is a distinction between living in a country and being resident there.
 It is not necessary that a person should have a residence before he can be said to be resident.
 Residence for one purpose might not be residence for another.
Relevant case
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 emphasize 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 United States to act as the
company’s buyer. And 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 dividend accruing from South Africa on the basis that he was
neither ordinarily resident nor carrying 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. This might not be his country of domicile because it might not have formed the fixed and settled
intention, which excludes all contemplation of any event on the occurrence of which the residence would
cease. His ordinary residence would be the country to which he would naturally and as a matter of
course return from his wanderings.
1.1.4 Residence status of “persons”
 Individuals (including partners) - determined by nationality, birth, fiscal domicile, real home on
physical presents in the country. A real or permanent home is a place a person returns to at the end of
his wanderings (see above comments).
 A company is regarded as resident if its place of central management and control abides in Zimbabwe
(a place where the controlling power and authority abides – i.e where the board of directors resides).
 A trust is treated as ordinarily resident in Zimbabwe if part of its income is derived from sources in
Zimbabwe or the trustee is ordinarily resident in Zimbabwe or if the person who formed the was
ordinarily resident in Zimbabwe at the time he made the trust instrument.
1.1.5 Tax consequences
41

lOMoARcPSD|3494582
The residence rules are less relevant as far as taxation in Zimbabwe is concerned. The following are,
however the rules for taxing residents and non-residents, respectively:
Residence Status Taxation basis Income and gains covered
Ordinarily resident Source taxing basis Income from a local source

&
Income from a deemed source
Non- resident Source taxing basis Income from a local source
A person who is resident in Zimbabwe and who goes abroad as an employee for a period (s) which
does not exceed in aggregate 183 days in a tax year is regarded as remaining resident and ordinarily
resident in Zimbabwe throughout the period of his absence.
1.2 Sources of income
1.2.1 Business operations
Business income is assigned a geographical location by reference to the location of the assets and activities
that are used to generate the income or to the place where the operations are carried out. Where all of those
assets and activities are located in Zimbabwe, Zimbabwe is considered to be the unambiguous source of the
income. If some of the assets or activities generating income are located in more than one State, the source
of the income is less clear. In such circumstances, source rules might apportion the income between the two
claimant States or they may assign it to one State exclusively.
1.2.2 Rent
Rent from an immovable property has its source in the country or place where the property is situated
Income from sale or leasing of immovable property- the income has its source in the country or place where
the property is situated. On the other hand, the source of rental income from the letting of a movable asset
depends on the type of the rental agreement. In a short term lease agreement, the source is where the owner
of the asset is resident. For a long term lease agreement, the source is where the asset is used. A long term
lease is a lease with a period of more than 5 years.
1.2.3 Income from services rendered

The source of income for services rendered is the place where the services are performed, regardless of
where the contract is made, the place of payment or the residence of the payer. An employee's principal
place of work is usually the place where he spends most of his or her working time. If there is no one place
where most of the work time is spent, the main job location is the place where the work is centred, i.e.
where the employee reports for work or is otherwise required to base his or her work.
If the income is for services performed partly in Zimbabwe and partly outside Zimbabwe, an allocation of
income for services performed in Zimbabwe should be based on a time basis.
The only time income for services rendered outside Zimbabwe is taxed in Zimbabwe is when the services
carried outside are incidental to those carried out in Zimbabwe (see Nell case below).
Relevant cases:
COT v Shein, 1958
The taxpayer was employed to manage a store in Bechuanaland. He sub-contracted, at own expense, a
storekeeper to run the store on a day to day basis, while he live in Bulawayo. He was personally to
42

lOMoARcPSD|3494582
discharge the other duties as required by the contract. He spent first 4 days of each month at the store and
about ½ a day whilst in Bulawayo on store business. The Commissioner taxed him on the income of the ½ a
day.
Held: When responsibility is accepted, it is accepted at the place at which the relevant undertaking for
which responsibility is accepted is carried on, wherever the person accepting the responsibility may happen
to be. The work he did himself must be equated with the work done by the storekeeper and profits must be
regarded to be derived from their joint wok in Bechuanaland, which makes the work done in Bulawayo
trivial and incidental and did not affect the main issue. It was artificial to allot a portion of his earnings to
the subsidiary and incidental services when the taxpayer was not paid separately for them.
CIR v Nell, 1961
The taxpayer, a consulting electrical and mechanical engineer had an office and technical staff in
Johannesburg. In pursuance of his profession in Johannesburg, he went to Southern Rhodesian (Zimbabwe)
on different occasions to render certain services pertaining to his profession. For the earnings he received
for the work done in Southern Rhodesian, he excluded them on the basis that there were not from a source
within South Africa.
Held: that there had to be a closer link between the work done outside the Union (South Africa) and the
carrying of a trade within the Union than the mere fact that the taxpayer is carrying on a trade in the Union
and that the work done outside the Union is in the way of such trade or of the same nature as the work done
by the taxpayer in the Union. The work done in Southern Rhodesia required greater skill and experience
and was not merely incidental and subsidiary to the services rendered in South Africa. Hence, there was no
closer link between the work done in South Africa and that done in Southern Rhodesia.
1.2.4 Partnership income
The source of partnership income is the place where the partner renders his services to earn the partnership
income. In Epstein vs. CIR, it was held that profits of a partner who earned his income from rendering
services in South Africa were within South Africa, irrespective of the source of the partnership’s profit.
1.2.5 Dividends
The source of dividend is the place where the shares are registered or the country of incorporation of a
company. Shares are situated at the registered office of the company or the country of incorporation.
Shares in a branch register are situated in the company’s country of incorporation, if the branch register
forms part of the main register.
1.2.6 Directors’ fees

Fees paid to a director of a corporation whose effective management is exercised in Zimbabwe are sourced
within Zimbabwe. The office of a director of a corporation is located at the place the effective management
of the corporation is exercised (McMillan v. Guest, 24 TC 190), i.e. the head office. For working directors,
the source of income remains the place where the services are rendered.
1.2.7 Royalties
Royalties come from the author’s wits and labour. The source of such royalties is therefore the place where
the wits and labour are exercised, regardless of the place of publication.
43

lOMoARcPSD|3494582
The same rule applies to royalties from patents, trademarks, secret formula, musical or some other similar
works. The source is the place where these works were created or perfected.
Relevant case
Millin v CIR, 1928
The taxpayer composed and wrote works of fiction in South Africa which were printed and published in
England and the United States of America .The royalties were remitted to the taxpayer in South Africa in
terms of contracts entered into by her with her publishers. The Commissioner sought to tax the royalties, on
the basis that they were from a source within South Africa.
Held: the income did accrue to her form a source within South Africa. The following dictum of Solomon
CJ, at 216, is pertinent: “...It is true that in this case no capital in the ordinary sense of that term was
employed by Mrs. Millin. It was the exercise of her wits and labour that produced the royalties. They were
employed in South Africa. Her faculties were employed in South Africa, both in writing the book and in
dealing with her publishers...”
1.2.8 Interest
The source of interest is determined by the place where the funds which attracted the interest are made
available to the borrower. As held in CIR v Lever Bros and Another 1946 AD 441, the source of interest is
what a lender does to earn the interest which is the provision of credit and where this act is done so is the
source of interest.
1.2.9 Annuity
The source of annuity is the act, instrument or document under which it is created. Therefore, an annuity
arising out of a trust situated in Zimbabwe is from a source within Zimbabwe, no matter the origin of the
trust income. This is the place where the contract is made. While an annuity from a pension/ benefit fund
has its source in the country where the fund is resident or situated.
1.3 Deemed source of income

Because source is sometimes hard to pin down, the Income Tax Act deems certain types of incomes to be
from a Zimbabwean source in certain circumstances. As long as there is a deemed source rule applicable to
a particular type of income, then the deemed source is the originating cause of such income.
1.3.1 Dividend
Dividend on foreign securities is deemed to be from a source within Zimbabwe if it is received by or
accrues to a person ordinarily resident in Zimbabwe at the time such dividend is received or accrues.
Whenever the dividend is received net of tax suffered at source, it should be grossed up so that
Zimbabwean tax is computed on the gross dividend. It is then chargeable to tax in Zimbabwe at the rate
20%. Any other expenses suffered should also be added back when computing the tax on the dividend.
A relief for double taxation is granted for tax suffered in the foreign country. The computation of the
double tax relief is dealt with later in the text.
1.3.2 Interest
Interest on foreign securities is deemed to be from a source within Zimbabwe if it accrues to or is received
by a person at a time the person is ordinarily resident in Zimbabwe.
44

lOMoARcPSD|3494582
This interest is treated as investment income, which is subjected to tax at 25.75%. Just like dividend, an
adjustment by grossing up of tax deducted at source and expenditure incurred in procuring the income is
required. However, any expenses incurred in earning this income are deductible.
Like dividend, a relief is granted in respect of tax suffered in the foreign country.
1.3.3 Sale of goods

Whenever income is a result of contract of sale of goods concluded in Zimbabwe, such income is deemed
to be from a source within Zimbabwe. This is regardless of where payment will be made or where the
goods will be sold from.
1.3.4 Royalty
A royalty is deemed to be from a Zimbabwean source if or to the extent that such income is received or
accrues as a result of the use or the privilege of use or right of use of any intellectual property within
Zimbabwe.
The term intellectual property broadly refers to any patent, design, trademark, copyright, model, plan,
secret process or formula, musical, motion picture film or television film or any sound recording or
advertising matter used or intended to be used in connection with such film.
Royalties paid to non-residents are subject to 15% withholding tax. Royalties paid to a Zimbabwean
resident are not subject to the withholding tax, because they are taxed in full (at 25.75%).
1.3.5 Income for services rendered outside Zimbabwe

The liability to tax in Zimbabwe also arises when the income is deemed to be from a source within
Zimbabwe. Income is deemed to be from a source within Zimbabwe if it arises from services rendered
outside Zimbabwe during the employee’s temporary absence.
For the above to apply, the employee must be an ordinary resident of Zimbabwe. The term employee
includes a director carrying out executive functions. A period of temporary absence is a period or periods
not exceeding in the aggregate 183 days in the year of assessment.
The income earned during the period of temporary absence should be aggregated with local source income
for purposes of determining the person’s tax liability in Zimbabwe.
1.3.6 Services for the Zimbabwean government
The income earned by an employee for services rendered to the Zimbabwean government and paid to that
employee in another country, such income is deemed to be from a source within Zimbabwe. The person
must be an ordinary resident of Zimbabwe and only present in the other State for purposes of rendering
services for the Zimbabwean government.
The income is exempt from Zimbabwean tax in the hands of a non-resident who renders services for the
Zimbabwean government in his home country e.g. a South African resident who renders services for
Zimbabwean Embassy in South Africa.
2. Computation of taxable income
Income tax is charged on taxable income. Taxable income is computed as gross income less exemptions
less deductions.
45

lOMoARcPSD|3494582
Gross income less exemption result in income. Income net of deductions equals taxable income.
If deductions are greater than income the result is an assessed loss for the year. No taxes are paid in that
year and the loss is carried forward to be off set against the person’s future income.
Key term
Gross income 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 or deemed to be within Zimbabwe excluding any amount so received or accrued which is proved by
the taxpayer to be of a capital nature
2.1 Total amount
There must be an identifiable amount with an ascertainable money value before gross income arises. The
fact that the item is a corporeal or incorporeal property does not mean that it cannot be called gross income.
As long it is has an ascertainable monetary value, there is an amount for purposes of gross income
definition. An amount also includes debts and rights of action.
2.2 Received by or accrued to or in favour of a person
The second element of the gross income definition is merely related to timing of revenue recognition. It
refers that, an amount is brought into gross income when received or when it accrues to the taxpayer,
whichever occurs first. However, it is never intended that income is taxed twice. This makes prepaid
income or advance income taxable in the year in which it is received, despite the income being recognised
for accounting purposes on late date.
An amount is received by a taxpayer only if it received by him or by someone for his benefit. Suffice to say
that an agent who receives money on behalf of a principal cannot be taxed on such amount because the
amount has been received for the benefit of the principal. A taxpayer must be entitled to an amount for him
to be taxed on that amount. Therefore a loan is not received because the borrower falls under an obligation
to repay it. This is different from a prepayment, a taxpayer does not have to repay it and only liable to repay
it if the goods are never supplied or the service is never rendered.
An amount accrues to a taxpayer when he becomes entitled to the income. The right must be supported by
a legal agreement contestable in a competent court of law. All conditions precedent must be satisfied before
a taxpayer can be entitled to an amount. In other words, events that determine the liability must have
occurred and the liability must be ascertained with reasonable accuracy. For example, where goods are
shipped in terms of FOB contracts, ownership of the goods passes upon the handover of a bill of lading to
the purchaser in respect thereof. However if the purchaser can refuse to accept the goods upon inspection,
the handover of a bill of lading is not sufficient, because conditions precedent for a sale to take place i.e
price or quantity cannot be determined at that point.
2.3 Capital nature
2.3.1 Introduction
Receipts of a capital nature are not taxable under the Income Tax Act. Receipts and accruals of capital arise
from disposal of fixed assets or compensation of fixed assets or income producing or generating units.
46

lOMoARcPSD|3494582
Receipts from the sale, disposal, loss or destruction of a fixed asset are capital in nature and not subject to
income tax. The nature of capital receipts is a question of fact to be determined from the circumstances of
each particular case. There is no hard and fast rule. Very often it is a matter of degree. The Income Tax Act
does not lay down any definition of capital receipts or fixed assets. Reference must be made to the large
body of case law.
2.3.2 Definition of capital nature receipts
Distinguishing capital nature receipts from revenue receipts has remained one of the most contentious tax
issues. In practice the following tests, not conclusive, are often applied:
Income flow (product of capital) - Income is what capital produces or something in the nature of interest
or fruit as opposed to principal or tree. But is not definite, e.g. what might be a capital receipt to one person
can be a revenue receipt to another. For example, a motor vehicle held by a farmer is a fixed asset, but can
be trading stock for a motor dealer.
Recurrent test – this is based on the premise that a recurring receipt has the character of income, while
an irregular or once off receipt is usually of a capital nature,but this cannot be determinative.
Profit –making structure or the profit making process- A receipt arising out of profit making scheme
has the character of an income. Whether a scheme is undertaken for a profit, an enquiry must be made of
the intention of a taxpayer, which must be determined at the time an asset is acquired.
Source of receipt test -a receipt out of a disposal of a fixed capital is more likely to be of a capital nature,
and a receipt out of a disposal of a circulating capital is more likely to be of revenue
Relevant cases:
Glenboig Union Fireclay Co Ltd v CIR, 1922
A railway was to be built over fireclay mines operated by the taxpayer so that the mines could no longer be
operated. The taxpayer was paid compensation.
Held: the compensation was capital in nature as the loss was permanent. This was so even though the
compensation was computed on the basis of profits lost due to the destruction.
Burmah Steamship Co v CIR, 1930
A shipping company placed a ship with a repairer to be overhauled. The delay by the repairer resulted in a
claim for damages by the shipping company which was calculated by reference to the estimated loss of
profit due to the delay.
Held: The compensation was held to be a taxable receipt. If a receipt fills the hole in profits it is revenue in
nature and capital in nature if it fills the hole in assets
2.3.3 Gain from realisation of property
Whether proceeds from disposal of property will constitute revenue or capital income, it will depend on the
circumstances of each case. We summarise the rules as follows:
47

lOMoARcPSD|3494582
Was it a Was there a Yes

scheme of No subsequent
profit- change in
making at circumstances?
inception?
No Capital
nature
Yes Non-taxable
Yes Was there a

subsequent No Taxable
change in income
circumstances?
Relevant cases:
CIR v Wyner, 2004
Taxpayer was the lessee of a Clifton bungalow which was subsequently offered by the lessor. The lessee
could not afford to buy and retain the bungalow at the time when it was offered to her, nor could she afford
to continue as lessee at market-related rentals. She was however offered a bridging loan by a bank on
condition that she agreed to sell the bungalow within a period of a year. She purchased the property and
sold it as agreed. The property was sold at a profit, which the Commissioner sought to tax.
Held: it was well established that if receipt was “a gain made by an operation of business in carrying out a
scheme of profit-making’ then it was revenue derived from capital productively employed and had to be
income". This meant that receipts or accruals bore the imprint of revenue if they were not fortuitous, but
designedly sought for and worked for.
Two factors which were always of great importance in deciding whether the proceeds of the sale of
property were of revenue or of a capital nature were the intention with which the taxpayer acquired the
property and the circumstances in which it was sold. The taxpayer entered the transaction knowledgeable of
the eventual profit and had accordingly devised a scheme with the assistance of the bank. The profit was of
a revenue nature.
CIR v Pick’ n Pay Employee Share Purchase Trust, 1992
The taxpayer Pick’ n Pay Employee Share Purchase Trust (the Trust), formed by Pick’ n Pack Stores Ltd to
benefit qualifying employees with the Pick’ n Pay group, acquired shares in Pick ‘ n Pay Stores by initial
allotment and thereafter in one of three ways:
a) From employees who had paid for their shares and wished to realise their holdings (acquired at current
market price)
b) As a result of shares forfeited by employees in terms of the scheme (acquired at the amount owed to the
trust by the employee)
c) By purchase on the open market when required
48

lOMoARcPSD|3494582
The funding for the acquisitions was borrowed from the companies by which participants in the scheme
were employed
Shares were sold to eligible applicant at the middle market price at the time of acceptance of the
application. Employees were entitled to pay for their shares after five years and obliged to pay for them not
later than 10 years after their acquisition. If a participating employee's services were terminated within the
five year period, or at any time due to dishonest or fraudulent conduct, the Trust was entitled and obliged to
acquire the relevant shares for the amount of the share debt.
The Commissioner sought to tax the disposal of shares (trust activities) on the basis that the activity was of
a revenue nature.
Held: the test for distinguishing between capital and revenue receipts or accruals from the sale of asset is
the inquiry whether the taxpayer was engaged in a scheme of profit-making’. Even where a business is
carried on, receipts and or accruals will only be of a revenue nature if the business was conducted with a
profit-making purpose. This inquiry is concerned with the taxpayer’s object, his aims, his actual purpose”
and not with what might have been contemplated or foreseen. The only exception to this is if the making of
profits was inevitable. The receipts of the Trust were not intended or worked for, but purely fortuitous in
the sense of being an incident by-product, and they were therefore of a capital nature. Where no trade is
conducted there cannot be floating capital. The trust did not trade in shares for profit and the shares
therefore not floating capital in its hands. Disposals were of a capital nature.
C.I.S v Lydenberg Platinum ltd, 1928
The company first operated as a mining venture. Subsequently commenced a programme of buying and
selling properties, ceased its mining operations and disposed of its original mining assets. The
Commissioner sought to tax profit from sale of mining assets.
Held: that even though the assets were originally purchased for the purpose of carrying on the business of
mining, the subsequent events pointed to a clear change of policy in regard to the use to which they were
put. By reason of a change of intention, the original mining assets had become merged into the general
profit-making was taxable.
2.3.4 Examples of capital nature items

Windfall gains
A windfall gain, unless embraced by some specific provision of the tax law the amount is capital in nature.
For instance, a prize won by a journalist in a literary competition was taxed, due to its relatedness to
employment. Windfall gains include:
 Gamble or lottery, other than those of professional punters or gamblers.

 Gains under an exceptional event or a once off event (Moore v Inspector of Taxes).
 Gifts or testimonials in recognition of employee personal qualities
 Amounts explained by events clearly external to employment relationship (e.g. wedding gifts)
 Spontaneous gifts from members of the public
 Mere personal gifts made purely as a mark of affection, esteem or respect
 Gifts and inheritances, other than gifted or legacy annuities
Exclusions:
 Customers tips, etc., unless such gifts or testimonials are:

 Gifts or testimonials disguised remunerations.
 Gifted or legacy annuities
49

lOMoARcPSD|3494582
Restraint of trade
Must be paid in pursuance of a genuine restraint of trade agreement, to be regarded as capital in nature. A
genuine restraint of trade is where a taxpayer gives up something in exchange of the payment. There has to
be a sacrifice on the part of recipient. A restraint of trade must have a clause with regard to the restraint act,
the restraint period and area.
3. Various types of income

The classes of income includes; employment income, investment income and trading income. Employment
income is taxed separately, while investment income (excluding investment income which is subjected to a
final withholding tax) and trading can be aggregated because they are taxed at the same rate.
3.1 Introduction
The term income includes gains or profits of revenue from any business or profession, employment income
and property and investment income excluding gains of a capital nature.
Employment income is assessed to tax separately, with the rest aggregated for purposes of computing the
tax liability. The tax is calculated by applying the relevant rates of tax, determined by reference to the
Charging Act and subtracting any allowable tax credits to which the person is entitled to. Any withholding
tax charged at source will reduce the person’s tax liability.
3.2 Employment income

The concept of “employment” is central to the definitions of “employee” and “employer”. An “Employee”
is defined to mean “an individual engaged in employment”. An employment relationship does not include
an individual engaged on his or her own account as an independent contractor. However, other office
holders such as directors, managers and associates (including certain relatives) of the employees may be
treated as employees. This type of income is considered in the next chapter in detail.
3.3 Property and investment income
Property income is income from renting out property. It includes rental income, lease premium and lease
improvement, royalties, natural resource payments and any other amount arising from the provision, use or
exploitation of property and gifts received in connection with the provision, use and exploitation of
property.
Investment income includes dividends, interest and discounts.

Generally, a taxpayer who derives investment income can deduct the expenditure which he would have
deducted as if he had been earning income from business. The rules relating to profits from trading apply
equally to income arising from the letting of property i.e rental income. Local bank interest and
dividends are exceptions; no expenses must be deducted against these incomes.
Property and investment income is covered in detail in chapter 4
3.4 Trading income
The net profit in the statement of profit or loss must be adjusted to find the taxable income from trade.
50

lOMoARcPSD|3494582
3.4.1 Introduction
A trade is defined as including a trade, a profession, a vocation, an occupation, venture or an isolated
transaction of a business character exclusive of employment. Trading income includes any amount of
revenue accruing to a taxpayer during a year of assessment from a trading or a business activity.
Taxable income from a trading activity is computed starting off from the net profit per financial statement,
unless the accounts have not been prepared. Adjustment is necessary because of the following:
 Income taxable as trading income but excluded from the accounts
For example receipts paid in advance are included in the tax computation on cash basis, but are matched
with relevant expenses or period for accounting purposes.
 Accounting profits not taxable as trading income
Non- taxable receipt must be deducted from the net profit. For example, interest from local financial
institution, local dividend and receipts from disposal of fixed assets.
In arriving at net profit capital receipts, income taxed in another way (e.g. income taxed at source) and
income specifically exempt from tax are added. These incomes are however non- taxable and must be
deducted from the net profit to arrive at the tax adjusted profit.
 Expenditure not deductible charged in the accounts
There are certain expenses which are deductible when computing accounting profit which are completely
disallowed for tax purposes. For example, depreciation, loss on sale of assets, entertainment expenses,
fines, penalties, interest on tax due etc. Such expenses must be added back to the net profit.
 Deductible expenditure not charged in the accounts
Expenses not charged in the accounts that are deductible from trading profits must be deducted when
computing the taxable trading income. For example, capital allowances and scrapping allowances.
51

lOMoARcPSD|3494582
3.4.2 Illustrative adjustment
Here is an illustrative adjustment of a statement of profit or loss:
Net profit as per accounts before tax xxx

Less
Interest from financial institution included xxx
Dividend xxx
Capital receipts xxx
Profit on sale of assets xxx (xxx
Add: Non-deductible expenditure charged in the accounts
Depreciation xxx
Fines xxx
Penalties xxx
Donations xxx
Restraint of trade xxx
Loss on sale of asset xxx
Entrance fees xxx
Improvements to premises xxx
Drawings xxx
Income tax payments xxx
Covenants xxx
Private element of certain expenses xxx
Interest on late payment of tax xxx
Increase in general bad debts xxx
Provision for bad debts xxx
Entertainment xxx xxx
Add: Taxable income excluded from the accounts
Recoupment xxx
Income received in advance xxx xxx
Less: Expenditure not charged to accounts
Lease improvement allowance xxx
Special initial allowance xxx
Wear & tear xxx
Accelerated wear & tear xxx
Scraping allowances xxx (xxx)
Taxable income xxx
Exam focus point

You must start the adjustment with the net profit before tax and deal with all the items listed,
indicating with a zero (0) any items which do not require adjustment. Marks will not be given for
relevant items unless this approach is used. If you attempt to rewrite the statement of profit or loss
you will be penalized.
Trading income is considered in detail in chapter 6.
4. Exemptions
Exemptions are incomes which are free from tax. They are useful for tax planning purposes.
52

lOMoARcPSD|3494582
4.1 Introduction
An exemption is a gross income item which is non-taxable. It is different from deduction because it is
income earned, whereas a deduction is expenditure incurred.
If an item is exempt from tax you should state in your answer that the income is exempt to show that you
have considered it and have not just overlooked it, otherwise the relevant marks will not be awarded.
There are exemptions that are based on the identity of the recipient and those based on the nature of
income. Below is a brief of some of the types of income that are tax exempt. We will consider other forms
of exemptions in the next chapters.
4.2 Bank interest

Interest on any savings certificate of any law and interest on the Post Office Savings Bank of Zimbabwe are
exempt. You must deduct them if they were included in the net profit. If they are being accounted for the
first time you will need to state in your answer that the income is exempt.
4.3 Dividend income

Dividend income received from a company incorporated in Zimbabwe is exempt from income tax, provided
that the company paying the dividend is chargeable to income tax. Thus, dividends paid by entities which
are exempt from income tax e.g. building societies, pension funds etc., and are taxable.
4.4 Elderly person exemptions
A pension accruing to person who is over the age of 55 years is exempted from tax. The person must
have turned 55 years before the year of assessment.
An elderly person (a person who is 55 years or above) is also entitled to the following exemptions;
 The first $3,000 p.a of interest earned on any deposit with a financial institution.
 The first $3,000 p.a of interest on a banker’s acceptances and other discounted instruments
traded by financial institutions
 The first $3,000 p.a of rental income accruing to the taxpayer in the year of assessment
Please note the person must be above 55 years to be entitled to a pension exemption, whereas for
others he should be 55 years or above.
You must master all exemptions of an elderly person. In the exam the examiner may ask you indirectly to
consider exemptions by giving a life history of the person, without being specific on the person’s age.
4.5 Tax reserve certificates

Tax reserve certificates (TRCs) are issued by Zimbabwe Revenue Authority. They are redeemable in cash
or can be used to pay off any tax liability that is due to Zimra. Interest earned on TRCs is exempt from tax.
5. Deductions
Taxpayers are only taxed on net position, i.e gross income less exemptions and deductions. To this end, the
Income Tax Act provides for the deduction of expenditure and losses of a revenue nature incurred in the
production of income or necessarily incurred for the purpose of trade and disallow expenditure not meeting
these conditions.
53

lOMoARcPSD|3494582
In other words, the expenditure is non-deductible if it is of a capital nature, is private or domestic in nature
or when it is incurred in producing exempt or income not from a source within Zimbabwe. Deductions have
own chapter and we will consider them in detail.
6. Computation of tax payable

Tax payable is arrived at by applying the tax rates to the taxable income. After computing the tax, they shall
be deducted applicable tax credits from the tax of a natural person.
6.1 Employment Tax

The employee’s tax is computed using progressive rates. See table of employment rates in Appendix A.
The process of obtaining employee’s tax is as follows:
a) Identify a bracket in which the taxable income falls into

b) Take the cumulative tax of the prior bracket i.e the bracket before the one in which your total taxable
income falls into.
c) Compute tax on the excess amount by applying the given tax rate of the bracket in which your total
taxable falls into
d) Aggregate b) and c) to obtain aggregate tax
e) Deduct from the aggregate tax the tax credits an individual is entitled to (see Appendix A).
f) From the answer in e) add AIDS Levy 3% to obtain the person’s tax liability
g) To obtain tax payable or refund deduct prepaid tax (PAYE) from the answer in f)
EXAMPLE
Mark is employed as an accountant by Tropical (Pvt) Ltd. He received a salary of $55,000 (PAYE $12,000)
and $10,000 housing allowance. Mark paid $1,000 for his family medical costs (tax credit is 50% of the
medical costs paid).
Compute Mark’s tax payable or refundable for the year.
ANSWER
Salary 55,000
Housing allowance 10,000
Taxable income 65,000
Tax 16,330
Less credits ($1000 x50) - 500
15,830
Add 3% AIDS Levy 475
16,305
Less PAYE 12,000
Tax payable 4,305
6.2 Property and investment income
Rent, royalties and fees are taxed at 25.75%, while bank interest and dividend from a local source are
subject to final withholding tax at source.
54

lOMoARcPSD|3494582
6.2.1 Introduction
Rent, royalties and fees are taxed in the same way as trading income, which is taxed at 25.75%. Bank
interest and dividends from a local source are subject to a final withholding tax. Interest receivable from
sources other than financial institutions (other than interest which is exempt) is also taxed at 25.75%.
A withholding tax system is however operated on royalties and fees paid to non-residents. We consider
each of these in detail below:
6.2.2 Bank interest and dividend

The basic withholding tax rate is 15% for bank interest and dividend. If the bank interest is earned on a
fixed deposit with tenure of at least 90 days the rate is reduced to 5%. A dividend distributed by a company
listed on Zimbabwe Stock Exchange (ZSE) is subject to 10% withholding tax.
Tax must always be computed on the gross amount and not on the net amount. Where tax has been
deducted already and you are asked to show how much amount tax has been deducted you must gross up
the interest or dividend. The grossed up amount is computed using the following formula:
100/ (100-R)
R is the withholding tax rate applicable on the income.
EXAMPLE
Mrs. Marie Makuru, born in 1980 has the following items for the year ended 31 December 2015:
Income:
Interest on bank deposit (net) 1,275
Dividend from a local company (net) 1,800
Bank interest (fixed term deposit –net amount) 1,500
The Deposit interest income arose on an ordinary deposit account with the Kingdom Bank.
Show the tax which was deducted at source.
ANSWER
Gross Rate WHT
Bank deposit interest tax at source (gross 100/85 x $1,275) 1,500 15% 225
Dividend from Zimbabwe Co. (gross 100/85 x $1,800) 2,118 15% 318
Bank interest fixed term deposit (gross 100/95 x $1,520) 1,600 5% 80
Withholding tax 623
No further tax is chargeable in the hands of the recipient
Withholding tax is deducted at source and is a final tax, i.e no further tax will be computed in the hands of
the beneficiary. We consider this class of income in detail in chapter 5.
6.2.3 Interest receivable

Interest receivable from a source other than financial institution is taxed at 25.75%. The tax is borne by
the recipient of the income, as opposed to being deducted at source. An individual is entitled to a
deduction of tax credits, which are deducted before application of AIDS Levy.
Interest paid or payable to a non-resident from a local source is exempt from both withholding tax
and income tax.
55

lOMoARcPSD|3494582
EXAMPLE
Skate (Pvt) Limited borrowed $200,000 from a local bank at an interest rate of 15% p.a. The loan was on
lent to its holding company. The holding company pays an interest of 24% p.a.
Compute Skate (Pvt) Limited’s tax payable
ANSWER
Interest on lend loan ($200,000 x 24%) 48,000

Les interest paid to the bank ($200,000 x 15%) 30,000
Tax payable ($18,000 x 25.75%) 4,635
6.2.4 Property income

Rental income, royalties and fees are treated as trading income, which are taxed at 25% plus 3% aids levy.
The tax is borne by the recipient of the income, as opposed to being deducted at source. An individual
is entitled to a deduction of tax credits, which are deducted before application of AIDS Levy.
EXAMPLE
Zanile, 57 years, receives rent from the letting of property of $55,000. She also wrote a book from which
she is receiving annual royalty amounting to $45,000. Her operating costs are $32,000 p.a.
Compute Zanile’s tax payable.
ANSWER
Rent 55,000
Less Elderly person’s exemption (3,000)
Royalties 45,000
Income 97,000
Less operating costs 32,000
Tax @ 25% 16,250

Less Elderly credit 900
Tax liability 15,350
Add 3% AIDS 461
Tax payable 15,811
Royalties paid to a non-resident are subject to withholding tax at the rate of 15%, but a non-resident
wishing to be assessed locally can claim the withholding tax as credit against income tax payable on the
income. The income tax is chargeable at 25.75%.
EXAMPLE
Southton Leasing Co. a company established in South Africa is contemplating a cross-border lease
arrangement, leasing out commercial equipment for a period ranging from 12 months – 36 months to
Zimbabwean lessees. What is the income tax implication from the perspective of the lessor?
ANSWER
The lessee is required to deduct 15% non-resident tax on royalties (NRTRoy) on any payment made to a
non-resident lessor for the use of, or the right to use the commercial equipment in Zimbabwe.
56

lOMoARcPSD|3494582
6.2.5 Dividend from a foreign source

Dividend received or accruing to a resident person (individual, company, trust or partner) from abroad is
taxed at 20%. The dividend is taxed separately. Where the person was taxed on the dividend in the foreign
country, a tax relief will be given. We consider double taxation relief in chapter 10.
6.2.6 Fees
Fees are treated in the same manner as trading income; they are taxed at 25.75% in the hands of the
recipient of the fees. For example if company A, charges management fees to company B, company A will
be required to pay income tax on the fees at the rate of 25.75%, while company B will be entitled to a
deduction of those fees.
EXAMPLE
Dew Management Services (DMS) charges management fee of $80,000 to Zvevahera (Pvt) Limited its
subsidiary.
Compute DMS’s income tax liability.
ANSWER

Tax @ 25.75% 20,600
Fees that are paid to a non-resident for example management fee, consultancy fees, administration
fee or technical fee are subject to withholding tax of 15%. The withholding tax must be deducted by the
payer of the fees. A non-resident may however claim the withholding tax as credit against income tax
chargeable on the fees. The income tax is computed at 25.75%.
Fees paid to a non-executive director are subject to 20% withholding tax. The withholding tax is not a
final tax; the director must then pay income tax at the rate of 25.75% and should claim the withholding tax
against the income tax chargeable on the fees.
Executive directors are employees and must pay employees’ tax
EXAMPLE
Sibusiso is a non-executive director of BlackPlanet (Pvt) Ltd. During 2015, she received board fees
amounting to $60,000. BlackPlanet (Pvt) Ltd is a tax compliant company.
Compute tax payable or refund to Sibusiso.
ANSWER
Board fees 60,000

Income tax @ 25.75% 15,450
Less withholding tax deducted by BP (60,000 x 20% 12,000
Tax payable or refund 3,450
57

lOMoARcPSD|3494582
6.2.7 Trading income

Trading taxable income is computed starting off with the net profit per financial statement before tax. You
then make adjustments of items not recognized for tax purposes. After the adjustments you apply the
normal tax rate of 25% plus 3% AIDS levy to obtain the tax liability, giving a marginal rate of 25.75%.
EXAMPLE
Calculate tax payable by Boats Ltd. Its P&L for the year to 31 December 2015 is as follows:
Gross profit from trading 350,000

Bank deposit interest 2,500
Zimbabwean dividend received 2,000
Profit on sale of fixed assets 10,000 14,500
Less operating costs

Wages and salaries 148,700
Depreciation 25,870
Penalties & Fines 4,500
Audit and accountancy 600
Sundry expenses 17,000 (196,670)
Net profit for the year 167,830
ANSWER
Net profit as per statement 167,830

Add back
Depreciation 25,870
Penalties & fines 4,500 30,370
Less Bank deposit interest 2,500

Zimbabwean dividend received 2,000
Profit on sale of fixed assets 10,000 14,500
Tax there on @ 25.75% 47,303
58

lOMoARcPSD|3494582
Chapter roundup
 Income must be from a source within Zimbabwe to be taxed in Zimbabwe, no matter the residence
status of the person receiving the income.
 A person is ordinarily resident in Zimbabwe if 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 capital arise from disposal of fixed assets or compensation of fixed assets or
income producing or generating units.
 The classes of income includes; employment income, investment income and trading income.
 Employment income is taxed separately, while investment income (excluding investment income which
is subject to a final withholding tax) and trading can be aggregated and taxed at the same rate.
 The net profit in the statement of profit or loss must be adjusted to find the taxable income from trade.
 Non- taxable receipt must be deducted from the net profit. For example, interest from local financial
institution, local dividend and receipts from disposal of fixed assets.
 Exemptions are incomes which are free from tax. They are useful for tax planning purposes.
 Rent, royalties and fees are taxed at 25.75%, while bank interest and dividend from a local source are
subject to final withholding tax at source.
Exam Bank
Q3 Introductory 16 29 mins
59

lOMoARcPSD|3494582
EMPLOYMENT INCOME
3
1. Factors that determine an employment or self-employment B2(a)
2. Basis of assessment for employment income B2(b)
3. Computation of taxable income B2(c ), B2(d) & B2(e)
4. Computation of tax liability B5(c) & B5(d)
5. The PAYE system B2(f)
Introduction
Employment income is income that accrues to an individual from rendering services. An employer-
employee relationship should exist. Payments made to partners by a partnership are not covered by
employment rules. The employment rules also cover a person’s relationship with past and prospective
employers.
The chapter looks at the distinction between employment and self-employment.
Next, we consider the items that enter the employee’s gross income and how fringe benefits granted in an
employment relationship are valued for inclusion in the employee’s gross income. We discuss valuation of
housing, right of use of employer’s car, passage benefit and loan benefit.
The chapter also looks at exempt incomes and deductions.
We conclude the chapter by looking at the operation of the PAYE system.
In the next chapter we look at NSSA and pension fund.
60

lOMoARcPSD|3494582
Study guide
Intellectual
level
B2 Income from employment
(a) Recognise the factors that determine whether an engagement is treated as employment or2
or self-employment.
(b) Recognise the basis of assessment for employment income. 2
(c) Compute the taxable income 2
(d) Recognise the exemptions and allowable deductions 2
(e) Compute the value of taxable benefits 2
(f) Explain the PAYE system 1
B5 The comprehensive computation of taxable income and income tax liability
(c ) Compute the amount of income tax payable (including AIDS levy). 2
(d) Compute the amount of applicable tax credits 2
Exam guide
The question could range from a discussion of the distinction between employment and self-employment to
a full computation of employment income. Fringe benefits will be key elements in the computational part,
notwithstanding the fact that you may also be asked to give a brief explanation of some of the fringe
benefits. The topic is likely to be examined under section A – multiple choice section and also carrying 15
marks to be examined under section B of the examination paper.
1. Employment and self-employment
Employment involves a contract of service whereas self-employment involves a contract for services. The
distinction between the two is decided by looking at all the facts of the engagement.
1.1 Employment income

Employment income includes income arising from an employment under a contract of service. When you
set yourself as a business and carry out work for customers under a contract for services that is self-
employment.
An employee is generally subject to the superior’s whims and dictates of the mandatory often expressed in
the statutory phrase control and supervision (Rampai J, in ITC 17674). He/she renders continuous service
for a salary.
1.2 Employment and self-employment

An independent contractor is a person or entity hired to provide a specific service or product. He usually
contracts to do a piece of work according to his own methods and is subject to his employer’s control only
as to end product or final result of his work. His work is characterised by a great measure of independence
61

lOMoARcPSD|3494582
or degree of freedom. He has no restricted working hours and is not tied to a particular contract. The person
is at a financial risk for any defective work and must deliver a fine finished product chiselled and shaped by
his use of unbridled or free productive capacity.
An independent contractor can, in general terms, be described as one that is an entrepreneurial enterprise,
enjoying such a degree of independence that it can survive the termination of the relationship with its
employer or client. Whether an individual is employed rather than self- employed this can be implied in the
facts of the engagement.
RWARD
Exam focus point
In the exam you may be asked to identify, usually within the context, the factors that differentiate a
self-employed from an employee.
37
1.3 Factors that determines employment or self-employment
It can be difficult to distinguish between employment and self-employment. However, the difference lies in
the facts of the engagement. But proving the relationship’s true nature is difficult.
The following are some of the factors used to differentiate an employment from self-employment:
 An employer exercises a degree of control over an employee regarding the output, working time or
reporting time, while in a client and consultant relationship the focus is on the products or the
deliverables, not on how each will do its work.
 An employment relationship is governed by the Labour Act, whereas a consultant and client
relationship is regulated by mercantile law
 A worker is entitled to employment benefits such as sick pay, holiday pay and pension facilities.
 An independent bears the financial risk for bad workmanship, whereas an employer is “vicariously
liable” to third parties for its employees’ acts, as long as the employee is acting within the scope of his
or her employment.
 An independent contractor has his or her own business entity, with its own profit or loss;
 An employee reports for work whether or not there is nothing to be done, whereas the relationship with
independent contractor may be limited to the task/project
 An employee usually has an exclusive relationship with one employer, while an independent contractor
can contract with several people or organisation at the same time.
 An independent contractor submits invoices for payment as opposed from being paid from the
business’s payroll account
 An independent contractor has the right to delegate, whereas an employee must appear in person.
 A worker is deemed to be an employee if he is subject to the control or supervision of the employer as
to the manner and/ or hours that worker is to work.
 An employee is supplied with detailed instructions, tools and equipment
 An employee has established starting and finishing working times.
 A worker is usually paid regularly on daily, weekly, monthly or at other intervals, whereas a contractor
is usually paid on completion of the task or project.
 Employers are not liable to pay employees' tax to Zimra in respect of payments made to independent
contractors, as this tax is only applicable to employees.
 An employer has obligations to pay NSSA, Medical contributions, PAYE, minimum wage, overtime,
and holiday pay.
 An employer also has obligations to its employees for fair employment or non-discrimination
1.4 Tests that determine engagement

There are no guidelines for distinguishing an employee from a self-employed. In practice we tend to use the
rule of dependency and the Labour Act. The courts also apply the following tests:
a) Control test
62

lOMoARcPSD|3494582
 Does an individual work under the direction or supervision of the corporation, and whether the
corporation dictates how and when the work will be done.
 A person’s ability or freedom to act for suppliers, working procedures, reporting times for work,
delegation abilities, can the work be internalised.
 Key Q: Is the person being controlled by the payer?
b) Integration and Organization test
 Is an individual an integral part of the organization

 Is the employee part of a group benefit plan,
 Can the individual perform the same services in the absence of the organization
 Separate invoicing, approach to market, vicarious liability.
 Key Q: Is the person having a separate operating system?
c) Economic Reality test or financial independence
 Does the individual incur business risk, legal liability, and his/her own expenses
 Determines own rate of pay, ability to take financial risk, incurs expenses, pays own.
 Key Q: Does the person face entrepreneurship risk?
d) Specific Results test
 Whether the corporation has contracted the individual for a specific result or if the individual was
employed for a given time period.
 Is the person paid based on output
 Key Q: is the engagement for a defined duration or output?
Relevant cases:
Amm v. COT
The taxpayer was employed by a company in Zimbabwe, which was a subsidiary of a company in South
Africa. The taxpayer was requested by the South Africa Company to render services in South Africa whilst
still being employed by the Zimbabwean company. In carrying out these services he was given complete
discretion as to the manner and time to be devoted to the assignment in South Africa. The Commissioner
sought to tax the taxpayer on the income earned on the basis that he was an employee. The question is
whether the duties were carried by the taxpayer as an employee or independent contractor.
Held: an employee is normally to render continuous service and that he normally receives leave and
contributes to pension or medical aid funds. He is not usually given one task on the completion of which his
employment ends. Taxpayer was an independent contractor.
1.5 Tax treatment of an independent contract vs. employee
Taxpayers tend to prefer self- employment, because the rules on deductions for expenses are more
generous. Other differences in treatment are as follows:
 Deductions from employment income are limited

 Employment income is subject to deduction of income tax at source by the employer
 A self-employed person is taxed as a business income i.e. 25.75%
 A self-employed person must pay tax on QPDs
 Contractor to register for VAT if annual turnover is at least $60,000
 10% withholding tax on contract applies to income of a contractor
 Contractor submit a tax return for assessment to Zimra
63

lOMoARcPSD|3494582
 Employee does not submit a return to Zimra for assessment, unless he is not on FDS
2. Basis of assessment of employment income
2.1 Basis of taxation

The source of payment or the place where the contract is concluded is irrelevant. Of significance is the
place where the services were rendered.
2.1.1 Employment inside Zimbabwe
As discussed in the previous chapter, Zimbabwe is a source based country. The liability to tax in Zimbabwe
arises only if the income is from a source in Zimbabwe or is “deemed” by the legislation to be from a
source within Zimbabwe. Therefore any person who renders services in Zimbabwe, no matter his country
of residence is liable to pay employees’ tax in Zimbabwe, unless the amount is specifically exempted tax.
2.1.2 Employment outside Zimbabwe
Income is deemed to be from a source within Zimbabwe if it arises outside of services rendered outside
Zimbabwe during the employee’s temporary absence from Zimbabwe. The term employee includes an
executive director. Whereas income includes any salary, bonus, leave pay, fees, fringe benefits etc. or any
form of remuneration.
A period of temporary absence is a period or periods not exceeding the aggregate 183 days in the year of
assessment.
Note
1. In practice these provisions apply to employees seconded outside Zimbabwe

2. Income for days physically rendered in Zimbabwe is taxable even if the person’s aggregate days or
work outside Zimbabwe in year of assessment exceeds 183 days.
3. The payment must relate to employment. Independent contractors (self-employed persons) may not
claim the 183 days exemption.
4. The 183 days exemption does not apply to government employees or persons rendering services for the
Zimbabwean government.
2.1.3 Services for the Zimbabwean government
Income accruing to a person from a source outside Zimbabwe is “deemed” to be from a source within
Zimbabwe if it is paid in respect of services rendered for the State. The income is exempt from
Zimbabwean tax in the hands of a non-resident who renders services for the Zimbabwean government in
his home country e.g. a South African resident who renders services for Zimbabwean Embassy in South
Africa.
2.2 Outline of the charge
For the income to be regarded as employment income, three elements must exist, namely an employee,
employer and remuneration.
2.2.1 Employer
64

lOMoARcPSD|3494582
An employer is any person who pays or is responsible of paying an amount by way of remuneration to an
employee. It includes the State, statutory corporation, a representative of the employer and administrator of
pension or provident fund .A representative of the employer is a person who acts in the capacity of an
employer e.g. company public officer, the liquidator or judicial manager, a member of the association of
persons appointed by its governing body, an officer of the local authority, the trustee or an agent of
nonresident employer.
2.2.2 Employee
An employee is an individual to whom remuneration is paid or payable at an annual rate that is more than
$3,000 in respect of the year of assessment concerned. This is a person who renders services for
remuneration.
2.2.3 Remuneration
Remuneration includes amounts such as salary, leave pay, allowances, wages, overtime pay, bonus,
commission, fees, emolument, pension, superannuation allowance, retiring allowance, stipend or
commutation of a pension or an annuity, whether in cash or otherwise and whether or not in respect of
services rendered and fringe benefits.
Remuneration does not include:
 Fees paid or payable to non-executive directors who have no other income paid by the same payer
 Fees paid or payable to the chairman or a member of a board of any statutory corporation for services
rendered if no other amounts constituting remuneration are paid or payable to the person by the
statutory corporation.
 Income exempt from income tax by the Third Schedule of the Income Tax Act
 Any payment paid to a member of partnership (a partner) by the partnership
 An employee’s expenditure reimbursed by the employer which the employee incurred in the course of
his employment.
 Amounts paid to an independent contractor (self-employed)
Note that if a non-executive receives income, in addition to fees which constitutes remuneration e.g. fringe
benefits he ceases to be a non-executive director and will be treated like an executive director for tax
purposes. Meaning the fees and such other income will be subject to PAYE rules
Exam focus point

An examination question may test your understanding of tax treatment of director’s fees. Fees paid
to an non-executive director are subject to withholding tax as opposed to employees' tax, unless the
director in addition to the fees receives any amount constituting remuneration from the same payer.
2.2.4 Non-executive directors
• Fees are subject to 20% withholding tax

• A non-executive director is a provisional taxpayer –pays QPDs
• Withholding tax to be used a credit against income tax chargeable
• Submit an income tax return (ITF1) to Zimra annually as per Zimra public notice
• The non-executive director must register for VAT if annual turnover is at least $60,000
• The company must deduct 10% withholding tax on contract if a non-executive director fails to avail a
tax clearance (IFT263).
2.3 When are earnings received?

65

lOMoARcPSD|3494582
Taxable earnings from an employment in a tax year are the general earnings received by or accruing to an
employee in that tax year. A tax year or year of assessment is a period of 12 months beginning on the 1 st
January and ending on 31st December, each year.
Exam focus point

Where the period of assessment is less than earnings or other person’s entitlements may need to be
apportioned, unless the item is not required by law to be apportioned.
Employment income is received when the payment is made or when a person becomes entitled to the
amount, whichever occurs first. This is regardless of what the person does with the income thereafter. For
example, reinvested, capitalised or accumulated income is still deemed to have accrued to a person as long
as it is dealt with on his behalf or as he directs. The income is deemed to be dealt with in the name of the
taxpayer when it:
a. has been invested, accumulated or capitalised by him

b. has been credited to an account, re-invested or accumulated for a taxpayer’s benefit
c. is due and payable to a person, even if not actually paid over to him/her
Parents are taxable on settlements, dispositions or donations in favour of or for the future benefit of
his/her minor child (whether legitimate or illegitimate child).
The tax implication of above rules is that the income remains taxable in the hands of the person regardless
of his effort to absolve himself of the tax liability.
3. Computation of taxable income

As seen from the previous chapter taxable income is equal to gross income less exemptions and deductions.
Gross income from employment is comprised of cash remuneration, fringe benefits and pension
receipts and accruals. Cash remuneration and fringe benefits are dealt with in this chapter, while pension
receipts and accruals are covered in the next chapter.
3.1 Amount for services rendered

Amounts derived in connection with employment include all amounts received or accruing to a person by
reason of employment. It does not matter whether such amounts are paid in terms of a signed contract
or paid under an implied contract or is paid by a Past, Present or Prospective employer.
The income includes any payment in respect of services or in appreciation of services rendered if there is a
casual link between the services and payment. For example gratuitous payments coming from employer’s
clients e.g. tips of waiters, given in appreciation of services rendered or connected to the rendering of
services constitute income for services rendered. Even ex-gratia (voluntary) payments paid in
contemplation of services will constitute employment income.
The duration of a contract is of no significance as far as liability to tax is concerned. As such part-time
workers, casual workers or temporary workers are required to pay tax as long as their earnings meet the
minimum tax threshold. If a person works for a day, a week, month or a year applicable tax rates should be
used to determine the tax liability (Zimra has daily, weekly, monthly and annual tax tables) and if the
person has worked less than a year then he needs to submit a tax return.
Amounts received or considered to be employment income is gross income of that employee. Tax will be
calculated after considering exempt amounts.
Examples of amounts for services rendered:
66

lOMoARcPSD|3494582
 Salary or wages or an allowance, bonus, extra pay, or gratuity,

 fees, commission, prizes, awards, compensation etc.,
 executive directors or manager fees
 compensation for loss of employment or service
 Termination payments, e.g., payments for unused annual leave, golden handshake’ etc.
 Payments from third parties in appreciation of services rendered e.g. tips or gifts etc.
 Christmas hampers, overtime pay, premiums, gratuity, given or granted to the employee in respect of
any employment, whether in money, goods, land, meals, sustenance etc.
Capital gifts or shares for services rendered- An amount cannot be excluded from payroll by reason of it
being a capital award or gift. As long such award or gift is granted in contemplation of services rendered or
there is a casual relationship between the awards or gift being paid and the rendering of services the amount
constitutes gross income(R v. C of T SATC 150). Shares therefore given as a compensation for services
rendered are included in gross income of an employee.
3.2 Fringe benefits

3.2.1 Introduction
To the extent a benefit or an allowance is used for the purpose of the business transactions of the employer, or
to the extent that an employee pays something for it, there shall be no benefit
Remuneration includes any amount which is equal to the value of any advantage or benefit in respect of
employment services or other gainful occupation in connection with taking up employment whether in cash
or kind. The benefit must be given in respect of office or to the holder of an office. In other words there
must be a causal link between the benefit granted and the employment.
Key term
An "Advantage or benefit" is defined as board, the occupation of quarters or a residence, the use of furniture
or a motor-vehicle, the use or enjoyment of any property whatsoever, corporeal or incorporeal, and an
allowance granted by or on behalf of an employer to an employee, his spouse or child.
An employee includes a person, a director of a company, an agent or a servant or a person otherwise

gainfully occupied.
The following are the valuation rules to be applied on fringe benefits for purposes of taxing them:
1. Cash benefit e.g. transport allowance the amount or consideration given.

2. Provision of accommodation or the use of furniture, the value to the employee
3. Any other non-cash benefits with reference to the cost of the item to employer.
4. Purchasing of depreciable items e.g. company IPADs etc. fair market value on date of purchase
EXAMPLE
A company’s selling price is arrived at by adding a mark-up of 20% to the cost of production. The
company’s employees are offered a 15% discount on all purchases of the firm’s products. It has been
established that goods which cost the company $5,000 were sold to employees for $5,100 instead of the
normal retail price of $6,000. Zimra officials contend that the discount of $900 should be treated as a
taxable benefit liable to employee’s tax (PAYE.). What is the benefit to each employee?
ANSWER
$5,000, i.e. what it cost the employer to provide the benefit.
Specific valuation rules however exist for housing, furniture, motor vehicle, loan benefits, etc.
67

lOMoARcPSD|3494582
3.2.2 Housing benefit
The value for a free use of a residence or quarters granted by an employer or its associate to a director or an
employee is the residence or quarters’ open market rental. For a house located outside the municipal
area, the benefit to the employee is 12.5% of his salary or 7% of the cost of construction of the house,
whichever is greater.
Where an employee is also granted the right of use of the employer’s furniture a further benefit of 8% of
the cost of the furniture accrues to the employee. Also, where in addition to the right of use of the house,
the employer pays for water, electricity, telephone bills; etc. this gives rise to a taxable benefit.
Above benefits are reduced by an amount paid by the employee to the employer towards the benefit
e.g. rent paid by a person for the occupation.
If an employer pays rent on your behalf, the benefit to you is the cash or consideration paid. If your
conditions of service require you to stay in a company house, there is no benefit to you.
Exam focus point

You should only use the 12.5% of the employee’s basic salary when you are not given the open
market rental and unless the examiner requires its use never use 7% of the construction of the house.
EXAMPLE
John pays $250 per month for occupying his company house. The prevailing charge for renting a similar
house within the area is $3,500 per annum.
How much is John’s taxable income?
ANSWER
Annual prevail rent 3,500

Less Rent paid by John 3,000
Taxable income 500
Shareholders and directors with substantial shareholding must be assessed on true values should they occupy
company houses or use any company facilities i.e. based on the fair market price (arm’s length price).
3.2.3 Passage benefit
"Passage benefit" covers the cost borne by an employer for journeys made on taking up employment, on
termination of employment and any other journey made by the employee, his spouse and children in so far as it
is not made for the purpose of a business transaction of the employer. This refers to the cost of employee’s
private trip which is sponsored by the employer.
All recruitment and repatriation journeys are passage benefits, as well all other journeys paid for by an
employer to the extent that they are not made on account of the employer's business.
Exam focus point

The first journey on taking up employment and first journey on termination of employment, with
each employer, are excluded from the person’s gross income i.e. they are non-taxable.
68

lOMoARcPSD|3494582
EXAMPLE
Mr. Tao, a Chinese, was recruited from China by a Harare based company. The company sponsored his
relocation by paying $9,000 to purchase air tickets for him and his family. His contract was to last 2 years
and the company paid $9,500 to purchase air tickets for him and his family to relocate them back to China
on expiry of the contract. They made a stopover visit of 2 days in Singapore en route to China and the
company paid $2,000 extra to cover the stopover expenditure.
How much is Mr. Tao’s taxable income?
ANSWER
Mr. Tao’s taxable income in respective of the trips is nil. The amounts were paid in connection with
journeys excluded from gross income. The stopover visit in Singapore is disregarded; it is incidental to the
main tip.
All your private trips and family member trips sponsored by your employer are taxed to you, whilst all your
business related trips (other than those of your family) are exempted from tax. Since your family members
are not employed by your employer they cannot be said to be representing your employer or be on business
of your employer, their trips are 100% private.
EXAMPLE
F Ltd purchased a business class ticket for $30,000 for Mr. Sango to travel to India for business purposes.
Mr. Sango exchanged the ticket for 2 economy class tickets and paid a sum of $4,000 to the airline
company for the transaction. His wife travelled with him on one of the economy tickets.
How much is Mr. Sango’s taxable income?
ANSWER
The travel of Mr. Sango’ wife is for holiday purposes and hence the amount paid by the employer
attributable to her economy ticket will be included as Mr. Sango’s assessable income. The chargeable
amount is ($30,000 + $4,000)/2 - $4,000, i.e. $13,000.
A trip which accounts for less than 10% of its time on the business of the employer is regarded as a100%
private trip. The business time is considered incidental to your holiday trip.
EXAMPLE
Fatima was on a 20-day holiday in Zanzibar. Fatima extended her stay by 2 days in order for her to attend a
2-day business meeting in Nairobi, Kenya. The company paid $19,500 to cover the holiday and the
business meeting.
How much is Fatima’s taxable income?
ANSWER
Taxable income to Fatima is $19,500. The trip is deemed 100% holiday because business is less than 10%
of the total trip time i.e. 9.09% (2 days/22 days).
3.2.4 Entertainment and subsistence allowance
An entertainment or subsistence allowance is gross income in the employee‘s hands to the extent that it is
not expended on the employer’s business.
69

lOMoARcPSD|3494582
In practice therefore travel and subsistence allowance does not constitute gross income if the employee is
able to prove that it was expended on the business of the employer. Therefore necessary document should
be obtained and retained. Cost of a trip which is not supported by documentation constitutes gross income.
3.2.5 Right of use of company cars
An employee is taxed on the right of use of the employer’s vehicle based on the vehicle’s engine capacity
which is all inclusive of cost of running the vehicle incurred by the employer, but fuel granted separately
maybe considered a separate benefit.
A motoring benefit is an advantage obtained by a taxpayer for the private use of an employer’s vehicle.
Private usage includes travelling between home and place of work or between two distinct businesses or
use of the vehicle over the weekends for private purposes. The benefit is computed based on the following
deemed annual costs:
Engine capacity $
1- 1500cc 3,600
1501 - 2000cc 4,800
2001 - 3000cc 7,200
3001 - and over 9,600
The above deemed costs may be reduced proportionately only where the period of use is less than the year
of assessment i.e. where the car is available for part of the year because it was first provided or ceased to be
provided part way through the year, for instance if you use the car 6 months in the year your benefit is 6/12
of the deemed annual cost.
Although paid by the employer, costs, such as licenses, insurance, repairs and maintenance or other cost of
running the vehicle, also inure to the benefit of the employee. They do not constitute additional taxable
benefit.
Sometimes the fuel benefit may be regarded as a separate benefit. To avoid this situation, it must be
allocated based on grades or nature of work in each grade. An excessive fuel especially to senior
management may then be viewed as additional remuneration and may be taxed separately from the motor
vehicle benefit. Where an employee does not have a company car, fuel allowance is taxable and the benefit
is the cost of the fuel to the employer.
Exam focus point

Fuel given separately in the exam must be apportioned as a proportion of private mileage to the total
mileage (business plus private mileage)
EXAMPLE
Mr. Fish was granted the use of an Isuzu double cab, 2700 cc, on 1 May 2015, which he drives from home
to work and also uses it during the weekends. During the year his private mileage amounted to 15,000km
against the total mileage of 33,000km.
How much is Mr. Fish’s taxable income?
ANSWER
Mr. Fish’s taxable income is $4,800 (8/12 x $7,200). No apportionment is made due to business usage of
the car by Mr. Fish.
70

lOMoARcPSD|3494582
3.2.6 Mileage allowances
Employers may pay a mileage allowance to employees who use their own car on business journeys.
The business mileage should be recovered using AA rates and any excess allowance is regarded as a benefit
to the employee. There is no income tax on payments on the reimbursement for use of own cars on the
employer’s business. The AA rates do not prevent employers from paying higher rates, but excess shall be
subject to income tax.
EXAMPLE
Norest used his own car when he went to Kwekwe for tax presentation on behalf of his employer, HBT
Accounting Firm. He travelled 470 km. The employer gave him an allowance of $315 to cover his fuel and
wear& tear on the car. You are told that the all-inclusive AA rate is 50cents per km.
Compute Norest’s taxable income.
ANSWER
Allowance from employer 315

Less Business Allowance (50 c x 470 km) 235
Taxable income 80
3.2.7 Sale of motor vehicle to an employee
A benefit may arise when an employee acquires property from an employer or its associate at a discount.
The benefit is the difference between the fair market price of the property and its discounted price. In the
case of a motor vehicle, the benefit is computed as follows:
A–B
A = market value of motor vehicle at the time of sell to an employee

B = the cost at which the employee acquired the motor vehicle
In the case of a motor vehicle which was acquired before the 1st January 2009 in Zimbabwean dollar the
cost (B) shall be United States dollar equivalent i.e the United States dollar equivalent of converted
Zimbabwean dollar as at 31 December 2008. The Government Notice 274 of 2010 Gazetted 1st October,
2010 provided the guidelines on the rate to be used.
The tax office usually uses the vehicle’s market value of motor valuers or dealers it trusts, e.g. the
Automobile Association of Zimbabwe and Central Mechanical Equipment Department.
This benefit is exempted if the vehicle is sold to an employee who is or over 55 years on the date of sale of
vehicle.
EXAMPLE
Frank bought VW Golf from his employer at $2,400 when the market value was $5,400 on the date of
purchase of the vehicle.
How much is Frank’s taxable income?
ANSWER
Frank’s taxable income is $3,000 ($5,400 -$2,400).
71

lOMoARcPSD|3494582
3.2.8 Interest free or subsided loans
Key term
Loan is any form of loan or credit granted directly or indirectly to an employee, his spouse or child by or
on behalf of his employer or a person associated with his employer, but does not include any such loan or
credit which is proved to the satisfaction of the Commissioner to have been granted for the purpose of the
education or technical training or medical treatment of such employee, spouse or child”.
A person “associated”, in relation to an employer, means:
1. In the case of an employer that is a company, any other company that is managed by or under the same
control as the employer; or
2. In the case of an employer that is not a company:
- any company managed by or under the control of such employer; or
- any partnership of which such employer is a member; or
3. Any person to whom or fund to which the employer makes or has made any contribution, loan or other
payment in order that such person or fund may pay or grant pensions, loans or any other amounts
whatsoever to or in respect of his employees or their spouses or children
The value of the loan granted by an employer or its associate to an employee or a director is computed as
follows:
A–B
A is Libor + 5%
B is the interest rate paid on the loan by the employee
Libor stands for London inter-bank offer rate. The benefit is apportioned where the loan tenure is less than
a year. If Libor is not given, A will be equal 5%.
EXAMPLE
Mrs. Hove borrowed $15,000 from her employer on 28 February 2015 at an interest rate of 2.6% p.a and
repaid the amount in full on 31 December 2015. You are told that the average annual Libor during 2015
was 0.6%.
Calculate Ms. Hove’s taxable income.
ANSWER
Mr. Hove’s taxable income Error! Bookmark not defined.is $375 {(10Error! Bookmark not
defined./12 x $15,000 x (5.6%-2.6%)}.
Exam focus point

Loan for education, technical education or medical cost of taxpayer, his/her spouse or any child of
his/her child is not considered to be a loan for purposes of interest. The interest on such loan is
completely excluded from the definition of gross income.
If an employer reimburses any expense incurred by an employee in acquiring a loan from a third party, this
is deemed to be a fringe benefit to an employee, taxed based on the actual value paid.
A cancellation or discharge by employer or its associate of your indebtedness gives rise to a taxable event.
This does not apply to your domestic or private loan discharged by a third party.
72

lOMoARcPSD|3494582
The interest on loans which are below $100 and loans whose interest rate exceeds Libor + 5% are
exempted from tax.
3.2.9 Free or subsidized lunches

Subsidized meals provided by an employer give rise to a taxable benefit. The benefit is the cost to the
employer reduced by amounts recovered from each employee.
No benefit arises which is taxed in the employee’s hands on meals or refreshments supplied by an employer
to any employee during business hours or extended working hours or special occasions, or when the
employee is entertaining business clients or someone on behalf of the employer.
EXAMPLE
Super Mart offers free meals to its staff members in its staff canteen during lunch time. The cost of meal
per head is $4. What is the cash equivalent to be included in gross income for each of them?
ANSWER
$4 per head
3.2.10 Subscriptions for social or sports Club
An employee’s membership in a sports or social club borne by his employer or an associate of the
employer is taxable. Where the subscriptions are for an employee’s professional membership of an
association, it appears these are exempted because if the employee pays for himself he gets a full
deduction of the expenditure.
EXAMPLE
Mrs. Aileen Changara is employed as an executive of a company at a monthly salary of $13,000. In March
2015 she joined a golf club under individual membership with an entrance fee amounting to $980 and
monthly subscriptions amounting to $80 commencing from March 2015. Both these payments were paid
for by the company.
Compute Mrs. Aileen Changara’s taxable income in 2015
ANSWER
Salary ($13,000 x 12) 156,000

Entrance fee 980
Monthly subscriptions ($80 x 9) 720
3.2.11 Clothing benefit
The value of clothing provided by the employer to an employee may result in a taxable benefit. This
includes an allowance for clothing which the employer has no control over its use. However, the cost of
distinctive uniforms, protective clothing or footwear required to be worn during employment (employer
uniforms and protective clothing), including related laundry expenses is exempted from employee’s tax.
The uniform must be worn as part of the employee’s condition while he is on duty, for example uniforms
offered to security guards, nurses and police officers.
3.2.12 Mobile phone usage
73

lOMoARcPSD|3494582
Expenditure incurred on cell phones and similar devices used primarily for business purposes would not be
taxable in the hands of employees, as long as the business usage can be proved or justified. The
Commissioner General’s view is that a benefit should arise on an employer funded cell phone expended on
private calls of the employee. In practice, the split of business and private usage is by analysis of the bill.
3.2.13 Grossing up of Benefits
A benefit may also arise when an employer grosses up the employees benefits. Grossing up is the paying of
tax by an employer on behalf of an employee. The Zimbabwean legislation does not specifically provide for
a method of grossing up of salaries; however this is implied by the Act which brings into gross income
every benefit (including the tax paid by employer on behalf of the employee). When an employer pays tax
on behalf of an employee this constitute a taxable benefit. Because the employee has been taxed on amount,
the tax so paid by the employer is treated as a credit against the tax liability of the employee.
3.3 Exemptions
The following items are exempt from tax:
3.3.1 Bonus or performance related award
The first $1,000 of a bonus or a performance related award, e.g. profit share, accruing to an employee or
agent in an employment or an agent/principal relationship in a year of assessment, is exempt from tax.
Where the bonus is less than the prescribed exemption amount, the full amount is exempted.
EXAMPLE
Derrick works for Triangle (Pvt) Ltd. His basic pay is $2,000 p.m. and is paid a thirteenth cheque of $600
plus a performance related bonus of $900.
Compute Derrick’s taxable income.
ANSWER
Salary 2,000
Thirteenth cheque 600
Performance related bonus 900
Aggregate bonus 1,500
Less exemption 1,000 500
3.3.2 Bursaries and scholarship
A scholarship, bursary, payment in respect of tuition fees or other educational allowance to a student
receiving instructions at a school, college or university is exempt from tax. The exemption does not apply if
the amount is paid to a student as remuneration for services rendered or to be rendered by the student or his/
her near relative or paid to enable him to pursue a study or a research benefiting an employer.
3.3.3 Teachers and non-teaching staff
A benefit includes school fees paid by an employer on behalf of an employee for his/her, spouse or children
education.
For teachers and non-teaching staff employed by the school, the benefit is the whole or a portion of tuition
fees, levies and boarding fees that would otherwise be payable by him/her for any of his/her child who is a
student of that school or another school. The person would then be entitled to an exemption of 50% of the
value of the benefit on a maximum of 3 children. A school is as defined in the Education Act.
74

lOMoARcPSD|3494582
EXAMPLE
Henry is a grounds man at Norton Primary School. He has 4 children learning at the school. The school
offered him 20% school fees discount. The school fees payable by a pupil at the school is $1,300 per child
per term.
How is Henry’s taxable income?
ANSWER
Total fees schools (1,300 x 4 x 3) 15,600

Less Paid by him (15,600 x 80%) 12,480
Benefit 3,120
Less Exemption 50% on school fees of 3 children ($3,120 x 50% x ¾) 1,170
3.3.4 Member of staff of a mission hospital or rural clinic
A member of staff of a mission hospital or rural clinic is exempted on accommodation allowance, transport
allowance and the value of quarters or residence. For the purpose of the exemption, a mission hospital or a
rural clinic is a private hospital or a rural clinic owned, operated or sponsored by a religious body or a rural
district council.
EXAMPLE
Sam is employed by St John’s Mission Hospital as a senior matron. He was granted a company car engine
capacity 3500cc and the right to use the mission house. His monthly salary is $2,500.
How is Sam’s annual taxable income?
ANSWER
Salary ($2,500 x 12) 30,000

Housing benefit 12.5% of salary 3,750
Less exemption of housing benefit 3,750 -
Motoring benefit 9,600
3.3.5 Expatriates or non-resident employees
An expatriate or a non-resident who performs services in Zimbabwe is liable to employees’ tax in

Zimbabwe based on the place the services are performed. However, his/her employment income for
services performed wholly outside of Zimbabwe is exempted.
In the event that a double taxation agreement exists between a non-resident’s country and Zimbabwe, any
employment income for services rendered in Zimbabwe may be exempt should the person be employed in
Zimbabwe for a period of less than 183 days in a year of assessment. The following conditions must also be
satisfied:
a. The person’s remuneration must be paid by, or on behalf of, an employer who is not a resident of
Zimbabwe and the receiver of this remuneration will be taxed on this income in the home country.
b. The remuneration must not be borne by a “permanent establishment” that the non-resident employer
has in Zimbabwe.
75

lOMoARcPSD|3494582
A “permanent establishment” means a fixed place of business through which the business of the employer
is wholly or partly conducted. It includes a branch of a non-resident company etc.
3.3.6 Employees of foreign governments working in Zimbabwe
The remuneration of an employee of a foreign diplomatic or consular mission in Zimbabwe is exempt from
tax in Zimbabwe if the foreign employee is stationed in Zimbabwe for the sole purpose of holding office in
Zimbabwe as an official of a foreign government; and not ordinarily resident in Zimbabwe.
In the event that the employee applies for and receives a permit for permanent residence in Zimbabwe, the
exemption no longer applies and liability for normal tax arises from the date of issue of such permit.
Furthermore, where a foreign government carries on business activities in Zimbabwe, the remuneration
payable to its employees could also be taxable in Zimbabwe.
3.3.7 Awards, benefits and compensation
The following items are exempt from tax:
 An award, a benefit or compensation, including a pension, paid in respect of injury, disease,

disablement or death suffered in employment.
 Any amount paid to the employee, his family or his estate for injury, sickness or death by a trade union,
a benefit fund, a medical society or by an insurance company on a policy covering accident, sickness or
death
 Any amount paid in respect of personal injury, disablement or death in terms of War Victims
Compensation Act or paid from the Wankie Disaster Relief Fund
3.3.8 Allowances of government employees
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 are exempted.
The following are some of the items that have been specified:
- Representation allowance and entertainment allowance granted to full-time government employee (SI
319 of 1985)
- The sale or donation of a motor vehicle by the State to Minister, Constitutional appointee or full –time
government retiring or leaving employment (SI 87 of 2005).
Generally, all allowances or benefits granted to civil servants are tax exempt.
3.3.9 Medical expenses and contributions
The value of medical treatment or of travelling to obtain medical treatment paid for by an employer for an
employee, spouse or child of an employee is tax exempt. The employee is also exempted from tax on
employer-mandated medical examination required as a condition of employment or medical contributions
paid by employer his behalf. The exemption only applies when the expenditure is incurred on behalf of the
employee, his/her spouse or child and not on behalf of other near relatives of a taxpayer.
76

lOMoARcPSD|3494582
EXAMPLE
NRT (Pvt) Ltd has its own medical aid fund registered in terms of the Medical Schemes Act. In the current
year of assessment, it made the following contributions on behalf of its chief executive Mr. Kainos
Kutenda, who has an annual salary of $80,000.
Contributions for Mr. Kainos Kutenda and his family $3,100

Contributions for Mrs. Edina Kutenda (mother) $1,250
How much is Mr. Kutenda's taxable income?
ANSWER:
Salary 80,000
Contributions for him and his family (exempt) -
Mrs Edina Kutenda (mother) 1,250
Where an employee is paid in cash for medical expenses or for medical contributions, such payment is a
taxable benefit. In addition, medical expense or medical contribution paid by the employer for the benefit
of the employee’s relatives, other child or spouse of the employee, is a taxable benefit.
EXAMPLE
Mr Glee, an employee of Smear Ltd receives a monthly salary from January 2015 up to 31 August 2015,
$1,400 p.m. and thereafter at $1.500 p.m., $4,500 leave travel allowance (entire amount spent).Cash
allowance medical contribution $400 per month. Reimbursement of medical expenses $3,150 (Private
Hospital). He has been provided with a rent free flat (rent paid by the company $11,000 p.a), facility of a
watchman and a cook ($200 each per month), interest free loan for purchasing home appliances $12,000
(date of loan borrowed 01-04-15 and Libor on 01-04-15 is 1% p.a.).
Compute Mr Glee’s taxable income for the tax year 2015.
ANSWER
Salary ($1,400 x 8 + $1,500 x 4) 17,200

Leave travel allowance 4,500
Cash medical contribution ($250 x 12) 3,000
Reimbursement of medical expenses -
Rent for the flat 11,000
Watchman and cook (fringe benefits s.8 (1) (f) ITA) ($400 x 12) 4,800
Interest free loan ($12,000 x 6% x 9/12) 540
3.3.10 Pension accruals
A pension paid from a pension fund or the Consolidated Revenue Fund received by a person who has
attained the age of 55 years before the commencement of the year of assessment is tax exempt.
3.3.11 Alimony
An amount received by a taxpayer from his/her spouse or former spouse, under any judicial order or written
agreement of separation or under any order of divorce is tax exempt. It includes any allowance paid
towards the maintenance of the children.
77

lOMoARcPSD|3494582
3.4 Deductions
Employees are entitled to deduct expenses provided for in Section 15 of the Income Tax Act
(Chap23:06) as follows:
3.4.1 Pension contributions
Employee pension contributions are tax deductible, subject to a maximum of $5,400 per annum. This
includes contributions to a retirement annuity funds or NSSA (refer to the next chapter for details). The
contributions are deducted before applying tax.
3.4.2 Professional, trade or technical Associations
Subscription fees paid to registered bodies by qualified members are tax deductible in full in the year in
which they are paid. A receipt must support the claim and this should be filed by the employer and be
provided as proof in the event of Zimra audit. The subscriptions should be for the employee’s continued
membership of a professional association, which automatically disqualifies entrance fees, annual student
subscriptions and those made to sporting or recreation clubs. The following are some of the registered
associations.
 The Association of Certified Chartered Accountants

 The Dental Association of Zimbabwe
 The Zimbabwe Medical Association
 The council of Veterinary Surgeons
 The Architects Council of Zimbabwe
 The Zimbabwe Teachers Association
 The Zimbabwe Institute of Engineers
 The Institute of Chartered Secretaries and Administrators
 The Institute of Chartered Accountants of Zimbabwe
 Institute of Bankers Association(IOBZ)
 Institute of Marketing Management
 Zimbabwe Association of Accounting (ZAAT)
 Chartered Institute of Management Accountants(CIMA)
 Institute of Accounting and Commerce (IAC)
 Law Society of Zimbabwe
 Zimbabwe Nurses Association(ZINA)
 National Employment Council(NEC)
 Zimbabwe Congress of Trade Unions(ZCTU)
3.4.3 Tradesman`s tools
Costs of tradesman’s tools are allowed in full on purchase and on replacement (if it is in terms of the
employment contract).Receipts should be retained by the employer for a period of not less than 6 years.
Only qualified journeymen are eligible, trainees and apprentices are not.
3.4.4 Donations
Employees who have the capacity to donate are allowed as deductions made to:
 National Scholarship Fund or the National Bursary Fund.

 A charitable trust administered by the Minister responsible for Social Welfare or Health in their
official capacity or their respective officers in their official capacities, and
 To the State for use in Construction, extension or maintenance of hospitals, purchase of medical
equipment for hospitals, and procurement of drugs for hospitals maximum $100,000.
 See chapter 7 -donations (for details)
78

lOMoARcPSD|3494582
The benefiting hospitals must be operated by State, local authorities, or religious organisations.
Documentation is required to be kept as proof for deduction and this must bear the registration number
of the beneficiary organisation. As further the donor must be able to prove that the organization holds a
registration certificate issued by the Ministry of Public Service, Labour and Social Welfare. Employers
should confirm with the provincial offices of the Social Welfare Department if in doubt.
a) Harare
Children's Homes Old People's Homes
SOS Children's Home Society for the Destitute Aged

Chinyaradzo Children's Home Waterfalls
Upenyu Hutsva Children's Home Bumhudzo Old People's Home
Matthew Rusike Children's Home Salvation Army Old People's Home (Braeside)
Harare Children's Home (Esatlea) Athol Evans
Emerald Hill Children's Home Dorothy Duncan
Northcot Children's Home Nazareth Home for the Aged
b) Masholnaland West
Vimbainesu Children’s Home Kadoma Old People's Home

Chengetanai Old People's Home
c) Manicaland
Chirinda Orphanage Chitenderano Old People's Home

Chitenderano Orphanage Zororai Old People's Home
Bonda Orphanage Zimbabwe New Hope Home
R G Mhlanga Orphanage Chengetanai Old People's Home
Fairfield Orphanage
Forward In Faith
Sacred Heart
Mt Mellay
Hot Bag
d) Masvingo
Alpha Cottages Children’s Home Mucheke Old People's Home
John Mutikizizi Old People's Home
Ngomahuru Resettlement
e) Mashonaland east
Marondera Child Care Society Ida Wokwako Old Peoples Home
Shirley Cripps Children’s Home
Borrowdale Trust
Marondera Children’s Home
Kukura Neshungu Home for the Handicapped
and Mentally Retarded Children
Mother of Peace
f) Matebeleland south
White Water Children’s Home Indlu Yokukhanya
Esigodini Old People’s Home
Umzingwane Old Age Association
79

lOMoARcPSD|3494582
g) Mashonaland central
SOS Children’s Village
Montogomery Heights
Ponesai Vanhu
Mazoe River Bridge Centre
h) Matebeleland North
Thembiso Children’s Home Dete Old People’s Home
Queen Elizabeth Children’s Home Chinotimba Old People’s Home
Emthunzini Children’s Home Entembeni Old People’s Home
K.G. VI Children’s Home Ekuphumuleni Old People’s Home
Sir Humphrey Gibbs Bottle Block
SIbantu Banye Children’s Home
Simanyane Children’s Home
St Francis
Khaya Elihle Children’s Home
SOS Children’s Home
i) Midlands
Maryward Children’s Home Batanai Old People’s Home
Midlands Children’s Home Rugare Old People’s Home
St Agnes Children’s Home Boogie Trust
Driefontein Children’s Home Huis Vergesig
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.
4.1 Calculation of individual’s tax liability

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 or 12.5% of basic salary) xxx
Interest xxx
Furniture benefit (8% of cost 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
80

lOMoARcPSD|3494582
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 using the tax
rates for employed individuals as set out in Appendix A. The format for computing tax liability is as
follows:
Tax on (see below) xxx

Add tax on excess xxx
Total liability xxx
Less Tax credits
Blind credit xxx
Elderly credit xxx
Disability credit xxx
Medical expenses credit (50% of cost) xxx
Medical contributions credit (50% of cost) xxx (xxx)
Tax liability xxx
Add 3% Aids levy xxx
Tax liability xxx
Less PAYE (xxx)
Tax payable/ (refund) xxx
Steps
a. identify a bracket in which the taxable income falls into

b. Take the cumulative tax of the prior bracket i.e the bracket before the one in which your total taxable
income falls into.
c. Compute tax on the excess amount by applying the given tax rate of the bracket in which your total
taxable amount falls into.
Example
Assume an employee has a taxable income of $65,000

1. $65000 falls into the $60,000 - $90,000 bracket
2. The rate for that bracket is 35%
3. You multiple taxable income by the rate and subtract $6,420 for the bracket
4. Therefore the total tax liability on $65,000 is $65,000 x 35% - $6,420 i.e. $16,330
4.2 Credits
After applying the tax rates the next step is to deduct the tax credits to which an individual is entitled. An
individual is entitled to deduction against his income tax the cost of incurred by him in acquiring invalid
appliances and of medical expense and specified amounts as elderly, blind and mental or physical disability
credits.
Exam focus point

You must not deduct credits against the income tax of a company or a trust. You will also need to
note that credits never exceed tax payable before applying credits.
Note that although the Finance Act only provides for apportionment of elderly credit, the examiner
however apportions blind, elderly and disability credits if the period of assessment is less than 12
months.
4.2.1 Summary of tax credits
81

lOMoARcPSD|3494582
Elderly Blind Medical Mentally or

Notes Person Person Expenses Physically
Disability
Tax Credit $900 p.a $900 p.a $1 for every $2 paid $900 p.a
Apportionment of credit Yes No No No

Transfer between spouses No Yes No Yes
Blind child Grant credit
Taxpayer not ordinarily resident inYes Yes Medical aid contributionsNo
Zimbabwe during any part of the credit only
period of assessment
Blind taxpayer Yes

Medical expenses for a child Invalid appliances or
who is no longer a minor child fittings only
4.2.2 Invalid appliances and medical expenses
a) An Invalid appliance or fitting
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.
b) Medical expense
A 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.
 Medical expenses or drugs must be prescribed by a doctor
No credit is granted on the cost of invalid appliance of medical expense refunded or recovered from any
source whatsoever or recovered from a medical aid society. Medical expense credit is only granted on
medical expenses incurred by the taxpayer on himself/herself, his/her spouse or child and not on behalf of
other near relatives of a taxpayer e.g. mother, father etc.
The cost incurred can be claimed as a credit.
EXAMPLE
82

lOMoARcPSD|3494582
Musanhu is employed as an architect. For the calendar year 2015, she paid the following medical
expenses:
Medical insurance contributions 7,800
Doctor bills for Amos and Junior (Musanhu’s parents) 7,300
Doctor and dentist bills for Musanhu 2,500
Prescription medicines for Maria (Musanhu’s daughter) 750
Non-prescription drugs for Musanhu 950
Maria is blind. Musanhu filed a claim for reimbursement of $1,000 of her own expenses with her
employer and received the reimbursement in 2016. What is Musanhu’s total tax credit in 2015? Explain.
ANSWER
Musanhu’s total tax credit is $6,425, determined as follows:
Medical insurance contributions 7,800

Doctor bills for Amos and Junior (Musanhu’s parents) -
Doctor and dentist bills for Musanhu 2,500
Prescription medicines for Maria (Musanhu’s daughter) 750
Non-prescription drugs for Musanhu -
Total 11,050
Medical expense credit (50% x $11,050) 5,525

Add Maria blind credit 900
Total 6,425
Amos and Junior cannot be claimed as Musanhu’s dependents, only medical expenses applicable to
taxpayer, his/her spouse and children are claimable in a taxpayer’s return.
Non prescribed drugs do not qualify as medical expenses. The medical reimbursement was not received
until January 2016. It can only affect the tax credits of 2016.
4.2.3 Elderly person’s credit
An elderly taxpayer is granted to a person who is at least 55 years (55 years old or above).
4.2.4 Blind Workers
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.” Refer table for credit. A
spouse who has income must claim the credit in his/her own return and only transfer to spouse unused
credit.
EXAMPLE
Amanda and James are married. James is blind and 56 years old. He has a taxable income of $8,000.
Amanda earns $16,800 per month.
Compute Amanda’s and James’ tax liability in 2014

James Amanda
Taxable income 8,000 16,800
Cumulative tax 1,000 1,800
Tax on excess - --- 1,200
Tax liability 1,000 3,000
Less Tax credits
Elderly credit (900)
83

lOMoARcPSD|3494582
Blind credit (100) (800)

Tax liability --- 2,200
Aids levy 3% 66
Tax payable 2,266
Non-transferred credits should be claimed first, e.g. elderly credit. Because James’ tax cannot cover his
blind credit, the uncovered amount is transferred to the spouse.
4.2.5 Mentally or physically disabled persons credit
A credit is granted for mental and physical disability of a substantial degree and of a permanent nature. A
disability is of substantial degree if it is certified by a doctor to be at least 50%.
Refer to the tax credits table set out above. A spouse who has income must claim the credit in his/her own
return and only transfer to his/her spouse the unused credit.
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.
5 PAYE SYSTEM
Fast forward
Persons who have been issued with a directive to use a final deduction system dispense with the need to
issue P6 forms a key feature of the old PAYE system. The employer assesses the tax of its employees
under FDS and that tax is deemed final.
5.1 Introduction
The PAYE system envisaged a situation where employees are issued with P6 forms (employee
withholding tax certificate), and then complete a tax return to Zimra for assessment. The system result in
delays in processing of employees’ refunds and requires Zimra to dedicate resources to carry out the
exercise at the expense of more beneficial tasks e.g. audit and investigation. FDS transfers the
responsibility for assessment to the employer.
5.2 The operation of FDS

FDS is operated on directive of the Commissioner. It is a system of withholding employee’s tax by
employer in such way that the amount so withheld in any year of assessment is as nearly the same as the
income tax liability for the employee concerned. The employee tax computed by the employer is final and
the employer is authorised to refund excess PAYE and to collect additional PAYE from the employees as
appropriate. Employees should furnish information regarding their tax credits employees, additional income
accruing to them and deductions to the employer. This should be done within 7 days of being employed or
of change of any of his particulars. It is not the obligation of the employer to know the employee’s other
source of income. Rather, the employee should voluntarily declare other employment income including
pension if they wish to have it taken into account when calculating the tax liability.
In so far as the person is only receiving employment income throughout the year from one employer, he
will not be required to submit a return to Zimra for assessment. The system dispense with the need for all
employees on FDS to submit returns for assessment by Zimra. Also, the Commissioner shall not be liable
to make any refund of income tax overpaid on account of any failure by an employer to make an
appropriate adjustment of the amounts of employees’ tax to be withheld or refunded in accordance with the
FDS.
84

lOMoARcPSD|3494582
Zimra directive to an employer to use FDS shall have effect notwithstanding any other provision of the Act.
The employer should ensure that a document setting out the terms of the directive is available for inspection
at all reasonable times by any employee who may be affected by it.
5.3 The difference between PAYE and FDS

 The PAYE system requires the employer to only deduct employees’ tax and no credits were processed
by the employer, whereas under FDS the employer is required to take them into account when
computing the employee’s tax
 The PAYE system obliges employees to submit income tax returns after the end of the year.
 The PAYE system is a non-cumulative method whereas FDS.is cumulative
 If for any reason there is an over or under-deduction of tax the employer can make an adjustment
under the FDS which he could not do with the PAYE system.
 The PAYE system delays the finalisation of the employee’s assessment until after year end, whereas
with FDS overpaid or under payment in one month is corrected in the next month and by the last day
of the year the employee’s tax balances out.
5.4 Advantages of FDS

 Accuracy is achieved, as the system calculates the correct amount of tax given time.
 Tax refunds are done promptly, within the payroll.
 Deductions and credits are allowed as they are claimed.
 Reduction in tax returns submitted by employees and the need for assessments.
 Reduced employee visits to the Revenue Office, a saving in terms of man-hours.
5.5 Methods for computing employees’ tax
The tax is computed on a progressive/cumulative basis in the course of the year. The system ensures that
the amount of PAYE withheld and paid in respect of each employee during a year of assessment matches
the amount of income tax that a person would have to pay upon assessment. It is intended that under this
system, at least in the last month of the tax “year”, that the calculation of PAYE should be by reference to
the total “taxable income” for the “year of assessment” and the total PAYE due in that year. The PAYE for
the final month should be a residual amount, being the difference between PAYE due for the year less the
amount paid to date. The CG does not make any refund of income tax overpaid. Any refund or payable is
made by the employer in the month following that of over/under payment, by reducing or increasing that
month’s PAYE.
In computing the tax, the employer is required to take into account the following:
 any credits to which the person is entitled to

 any circumstances of the employees, including any additional income accruing to them, which affects
their liability to income tax,
 refunds by the employer of amounts withheld by way of employees’ tax;
 Any other information furnished by the employee in regard to their liability for income tax.
There are two recommended methods of calculating PAYE under FDS namely the forecasting and
averaging methods. The employer is not restricted to one method of PAYE calculation, but should either
method provided it yields the desired results.
5.6 Who should submit returns
85

lOMoARcPSD|3494582
A person on FDS and with no other employer is not required to submit a return. The following are
circumstances in which employees are required to submit tax returns:
 Change jobs during the year or receiving income from more than one employer
 Started employment during the year (new employees)
 Employees who terminated employment
 Persons who received pension
 Part-time employment
 Deceased employees (died during the year)
 Casual or temporary employees
The employer should issue above employees with a form P6 within 30 days of within the happening of the
event e.g. death, termination of employment etc.
Part-time employees are taxed using progressive employment rates, but should submit tax returns to Zimra
for assessment. An employer must maintain records produced under the FDS and should make them
available for inspection at all reasonable times by any employee who may be affected by it.
Chapter Roundup
 Employment involves a contract of service whereas self-employment involves a contract for services.
The distinction between employment and self-employment is decided by looking at all the facts of the
engagement.
 For the income to be classified as employment income three elements must exist, namely an employee,
employer and remuneration.
 Employment income is received when the payment is made or when a person becomes entitled to the
amount, whichever occurs first.
 Income includes amounts paid in appreciation of services rendered if there is a casual link between the
services and payment e.g. tips from customers
 The following are the specific valuation rules for some benefits:
– Right of use of house - open market rental or the greater of 12.5% of employee salary and 7% of the
cost of construction of the house in the absence of open rental.
– Right of use of furniture- 8% of the cost of the furniture
– Right of use of motor cars is based on the engine capacity of car provided (see table)
– Interest free on subsided loans is Libor + 5%
 Bonus exemption is $1,000
 Pension accruing to or received by a person who is over 55 years is exempt from tax
 Contributions to a Pension fund, retirement annuity fund or NSSA are deductible up to $5,400
 An individual is entitled to deduct against his income tax invalid appliances and medical expense,
elderly, blind and mental or physical disability credits.
Exam Bank

Q4 Introductory 12 18 mins
NSSA and Pension funds
4
86

lOMoARcPSD|3494582

1. NSSA contributions E1(a),E2(a) &E2(b), E3
2. Pension contributions E1(a),E2(a) &E2(b), E3

3. Income from NSSA or pension fund E1(a),E2(a) &E2(b), E3
Introduction
In the previous chapter we dealt with tax of employees and self-employed persons. In this chapter, we look
at NSSA and Pension funds contributions and receipts.
All individuals (employees, partners or independent contractors) are entitled to a deduction of contributions
they make to an occupational pension scheme, a National Social Security Authority or a retirement annuity
fund.
Employees would normally contribute to an employer’s sponsored fund. On the other hand, a self-
employed or a partner can only make provision for a pension using a personal pension scheme, but it is
unsurprising for the partnership or the company to contribute on behalf of the partner or the self-employed
person.
In this chapter we discuss the tax implications of contributions made to pension funds, NSSA, benefit funds
and retirement fund to the member (employee, independent contractor or partner), the employer and the
partnership.
First we look at NSSA, then pension fund, retirement annuity fund, benefit fund and unapproved fund.
The next chapter is on trade and investment income.
Study guide
Intellectual
level
E1 The scope of the national social security system
(a) Describe the scope of pension/benefit fund and national social security contributions. 1
87

lOMoARcPSD|3494582
E2 The computation of national social security and pension/benefit fund contributions
(a) Compute the contributions payable by employed persons. 2
(b) Compute the contributions payable by self-employed persons. 2
E3 Computation of allowable national social security and pension/benefit 2

fund contributions for personal pension schemes and occupational
pension schemes.
Exam guide
Pension and NSSA contributions can be examined on any question dealing with computation of
employment income, property income or trading income. They apply to all persons, individuals and
companies. You may be required to discuss the types of pension schemes available and the limits on the tax
relief due, or you may have to deal with them in an income tax computation. Appearing under multiple
choice questions is also a possibility.
1. National Social Security

An employee and an employer are required to each contribute 3.5% of the employee’s insurable earnings
towards the employee’s pension (NSSA).
1.1 Introduction
The Government of Zimbabwe instituted a social benefit structure in 1994 which offered coverage to
employee and their beneficiaries. This scheme is administered by the National Social Security Authority
(NSSA). The scheme is compulsory and all employers and employee should contribute to NSSA. Members
qualify by virtue of being employed and both employer and employee contribute to the plan
NSSA has two schemes, the Pension and other Benefits Scheme and the Accident Prevention and Worker’s
Compensation Insurance Fund (WCIF). The purposes of the scheme is to offer members pension on
retirement and other benefits envisaged in the fund such as a compensation for injury, death or sickness at
work (workmen’s compensation). The pension on retirement is financed by pension contributions, whilst
the compensation is financed by WCIF.
1.2 Pension scheme

NSSA contributions are made by every person in formal employment i.e excluding domestic workers. The
employee and the employer are required to each contribute 3.5% of the employee’s insurable earnings to
NSSA, up to a maximum of the employee’s pensionable earnings of $8,400 per annum ($700 per
month).
The pensionable earnings are the employee’s basic salary exclusive of any fringe benefits or any
other form of remuneration.
Before 1 June 2013, the rates were fixed at 3% of the employee’s pensionable earnings up to a maximum of
$2,400 ($200 per month) employee’s annual pensionable earnings. Therefore for the 2013 year of
assessment the maximum NSSA contributions are $201.50 by the member (same amount for the employer),
computed as follows:
Jan- May ($200 x 3% x 5 months) 30.00

Jun- Dec ($700 x 3.5% x 7 months) 171.50
88

lOMoARcPSD|3494582
Total 201.50
EXAMPLE
Ian’s basic salary for the year is $6,000 and total annual fringe benefits of $3,600.
Compute NSSA contributions by Ian for the 2013 tax year.
ANSWER
NSSA contributions Jan –May ($200 x 3% x 5 months) 30.00

NSSA contributions Jun –Dec ($500 x 3.5% x 7 months) 122.50
Total contributions 152.50
For the financial year 2014, employee annual contributions are $294 (3.5% x $8,400) and the same amount
by the employer.
1.3 Accident Prevention and Worker’s Compensation scheme

The purpose of this scheme is to cushion members and their dependants in the event of the employee’s
injury or death at work or work related injury or death. The scheme is employer funded. Employees do not
contribute to this scheme. As for the contribution to worker’s compensation, the employer is required to
pay an amount calculated using a risk factor which depends on its type of the industry. The contributions
are called WCIF.
1.4 Administrative issues

An employer is required to register with NSSA within 30 days of commencing business. To register as an
employer, a P2 form is completed, while employees are registered by completing a P3 form. An employee
must be 65 years old or below to be registered and make contributions to NSSA. Failure to register for
NSSA when required to do is an offence. The employer will be registered compulsorily by NSSA and such
registration will take effect the day the employer was first required to register. In other words, registration
will be backdated to the day the employer was first required to register. This would result in the
contributions being backdated to that date and penalties also computed from that day.
Both the NSSA contributions and the WCIF must be remitted to NSSA by the 10 th day of the month
following the month of the deduction. A surcharge is levied for payments which are not paid on time as
follows:
Late by 1 month 10% of the amount due

Late by 2 months 20% of the amount due
Late by 3 month 30% of the amount due
Late by 4 months 40% of the amount due
Late by 5 months or above 50% of the amount due
1.5 NSSA receipts

Pension receipts from NSSA accruing to the member are treated in the same manner as those from a
pension fund. We consider the pension receipts below.
A compensation for employee’s injury or death at work or work related injury or death paid by NSSA i.e as
envisaged by workers’ compensation fund is exempted from tax.
89

lOMoARcPSD|3494582
2. Pension and retirement annuity fund
A tax relief is granted on contributions made to a pension fund or a retirement annuity fund.
2.1 Introduction
Pensions funds are supposed to be registered in terms of the Pension and Provident Fund (Chapter 24:09).
They are regulated by the Insurance and Pensions Commission falling under the Ministry of Finance. A
pension fund must be registered or provisionally be registered as a pension fund or retirement annuity fund
under the Pension and Provident Funds Act if it is established by any law for the purpose of providing,
amongst other things, annuities or pensions on superannuation or retirement.
Civil servants contribute to the State Services Pension Fund under the State Services Act.
Contributions made to unapproved or registered fund are non-deductible.
Certain organisations offer personal private pension or annuity schemes where members of the public, an
employers or individuals can contribute or buy into e.g. Old Mutual Pension Fund. Company specific or
industry specific pension funds also exist, for example Mining Industry Pension Fund (MIPF), Local
Authority Pension Fund (LAPF) etc.
2.2 Pensions contributions

A member can deduct contributions made by him to a pension fund, limited to an amount equal to 7.5% of
his annual emoluments or $5,400 p.a ($450 pm), whichever of the two figures is the lesser amount.
An employer is also allowed to deduct pension fund contributions made on behalf of a member up to a
maximum of $5,400 p.a ($450) per member.
2.2.1 Ordinary contributions
Ordinary pension contributions to a pension fund are tax deductible. A member (i.e an employee, a self-
employed or a partner) is allowed to deduct the contributions made by him to a pension fund or a
Consolidated Revenue Fund (State fund).
The contributions shall however be limited to an amount equal to 7.5% of the member’s annual
emoluments or $5,400 p.a ($450 pm), whichever of the two figures is the lesser amount.
 Step 1 Determine the actual amount contributed
 Step 2 Determine 7.5% of the member’s annual emoluments
 Step 3 compare amounts in Step 1, Step 2 and $5,400, whichever is the lowest amongst the three is the
deduction permissible.
EXAMPLE
Mr.Njere is a manager in J Pvt Ltd earning a salary of $4,500 p.m. He contributes 12% of his salary to a
pension fund.
Calculate Mr. Njere’s taxable income.
ANSWER
90

lOMoARcPSD|3494582
Salary (12 x $4,500) 54,000

Pension contribution (see workings) (4,050)
Workings
Step 1 ($4,500 x 12 months x 12%) 6,480
Step 2 ($4,500 x 12 months x 7.5%) 4,050
Step 3 deduction is the lowest of $6,480, $4,050 and $5,400 = 4,050
An employer is allowed to deduct the contributions made by him to a pension fund or a Consolidated
Revenue Fund (State fund) on behalf of a member up to a maximum of $5,400 p.a ($450) per member.
Exam focus point

In the exam, the employer’s limit is computed using the averaging basis i.e the amount to be
deducted in the hands of the company is computed as the number of employees multiplied by $5,400.
EXAMPLE
JM Motors (Pvt) Limited has 20 employees. During the year it contributed $120,000 to a pension fund for
these employees.
Compute the pension contributions that are not deductible to JM Motors (Pvt) Ltd
ANSWER
Contributions 120,000
Less Deductible contributions ($5,400 x 20) 108,000
Disallowed amount 12,000
Only for purposes of contribution to pension fund or benefit fund, a partner is treated as an
employee of a partnership. This means that a partnership is allowed to deduct contributions it makes
on behalf of a partner to pension fund or benefit fund, restricted to $5,400 per annum and $1,500 per
annum, respectively. Please note that employers normally do not contribute to retirement annuity fund
and the Act has not provided for it. It is therefore submitted that retirement annuity fund contribution
should be treated as expense of partner i.e it is deductible in full to the partnership and taxable in full to
the partner.
EXAMPLE
A partnership owned by Kevin and Moses made a net profit of $50,000. The partnership made
contributions to a pension fund for Kevin and Moses amounting to $7,500 each. These amounts have not
been accounted for yet. Kevin and Moses share profit and losses equally
Show how the pension is treated in the hands of the partnership and partners.
ANSWER
Partnership
Net profit 50,000
Less pension fund contribution for partners ($5,400 +$5,400) 10,800
Partnership taxable income 39,200
91

lOMoARcPSD|3494582
Partners
Kevin Moses
Share of profit ($39,200/2) 19,600 19,600
Taxable income 19,600 19,600
An independent contractor (self-employed) is also allowed to deduct contributions made by him up to a

maximum of $5,400 p.a.
2.2.2 Arrear contributions
Members are allowed to deduct arrears pension contributions for past services payable to a pension fund up
to a maximum of $1,800 p.a. Employers are also allowed to deduct lump sum contributions to a pension
fund subject to an amount approved by the Commissioner.
In addition to the ordinary pension contributions, members are also allowed to deduct arrears pension
contributions for past services payable to a pension fund up to a maximum of $1,800 p.a. Members of a
retirement annuity fund and the Consolidated Revenue Fund (State pension fund) are however not allowed
to deduct arrear pension contributions.
An employer is allowed to deduct lump sum contribution to a pension fund made by him on behalf of the
member, provided that the Commissioner may direct that the lump sum contribution shall be treated as an
expense to be spread over such period of years as the Commissioner may determine.
2.3 Retirement annuity fund contributions

Retirement annuity fund contributions made by a member are allowed, limited to an amount equal to 7.5%
of a member’s annual emoluments or $5,400 p.a, whichever is the lesser amount. Employers are not
entitled to a deduction of contributions made by them to a retirement annuity fund.
A retirement annuity is a pension that is purchased from an insurance company. The scheme’s purpose is to
provide the employee with a pension on retirement, just like a pension fund. The employee purchases this
pension without the assistance of the employer.
Employer’s contributions to a retirement annuity fund are therefore not deductible.
Contributions to a retirement annuity fund are tax deductible to the member (an employee, a partner or a
self-employed), limited to an amount equal to 7.5% of a member’s annual emoluments or $5,400 p.a,
whichever is the lesser amount.
A non-resident person is not allowed to deduct contributions made by him to a retirement annuity
fund unless he:
 Was ordinarily resident in Zimbabwe at the time of joining the fund.

 Became a member of the fund before 1 April 1967.
 Is not allowed to deduct the same contributions in his country of residence.
2.4 Summary contributions table
Maximum contribution to be deducted in the hands of a member in respect of one and all funds (NSSA,
ordinary pension fund, arrear pension and retirement annuity fund) is $5,400 p.a.
The following table is a summary of allowable pension, RAF, NSSA and benefit fund contributions by
members and employers:
92

lOMoARcPSD|3494582
Fund Member1 Employer

Ordinary pension fund Limited to the Lesser of: Contributions made up
contributions  $5,400 per annum or to a maximum of $5,400
 7.5% of member’s annual emoluments or p.a per member
contributions made
Arrear pension contributions Limited to $1,800 per annum Limited to amount approved
by the Commissioner
NSSA Maximum contributions for 2013 Maximum contributions
$201.50 for 2013 $201.50
Retirement annuity fund Limited to the Lesser of: No deduction.
membership of one RAF  $5,400 per annum or
 7.5% of member’s annual emoluments or
contributions made
Benefit fund No deduction $1,500 p.a per member
1
A member can be an employee, a partner or a self-employed person
EXAMPLE
Mr. Nikita Zororai has the following annual income and expenses for the year ended 31 December 2015.
Salary 24,000
Retirement annuity fund contributions 1,400
Pension fund contributions 4,000
Arrear pension fund contribution 2,000
Calculate Mr. Nikita’s taxable income.
ANSWER
Salary 24,000
Less RAF (Lesser of 7.5% x $24,000 or $1,400) (1,400)
Less Pension fund contributions (Lesser of 7.5% x $24,000 or $4,000) (1,800)
Less Arrear pension fund contribution (1,800)
Maximum contribution to be deducted in the hands of a member in respect of one and all funds (NSSA,
ordinary pension fund, arrear pension and retirement annuity fund) is $5,400 p.a.
Where the limit will be exceeded, the Commissioner prefers to deduct ordinary pension fund contributions
first, followed by NSSA, then arrear pension contributions and finally retirement annuity fund
contributions.
EXAMPLE
Felicia who has a salary of $36,000 p.a made the following contributions during the year ended 31
December 2015.
Calculate Felicia’s deductions in 2015.
ANSWER

93

lOMoARcPSD|3494582

RAF (restricted because limit will be exceed if allowed in full) 900
Maximum deduction 5,400
Workings
RAF (Lesser of 7.5% x $36,000 or $2,400) 2,400
Pension fund contributions (Lesser of 7.5% x $36,000 or $5,000) 2,700
The same applies to contributions made by the employer to NSSA and pension fund.
2.5 Pension receipts
Pension on retirement is taxable in full. However, the amount is exempt from tax if received by or accruing
to a person who is over the age of 55 years.
2.5.1 Pension received on retirement
A pension on retirement received by a taxpayer is taxable income to the employee or member. Should the
pension include an amount which was not allowable as deduction at the time of contribution (i.e a
member’s excess contributions); such amount shall be deducted from the pension. The amount is deducted
in equal instalment from each pension instalment over the person’s life expectancy.
EXAMPLE
Michelle aged 49, had an early retirement from her job. On 1 July 2015, she received $4,000 from a
pension fund, being the first of her 60 monthly payments. Over the years, Michelle had contributed $60,000
to the pension fund which was not allowable as deduction at the time of contribution.
Calculate Michelle’s taxable income in 2015.
ANSWER
Pension received ($4,000 x 6 months) 24,000

Less Contributions disallowed ($60,000/60 months) x 6 months 6,000
A member who elects to commute his pension on retirement may however be taxed favourably. When
one commutes his pension, he receives a lump sum payment then a reduced monthly pension over his life
expectancy. Once an election is made to commute the pension, a third of the person’s pension
entitlement is treated as pension commutation (capital nature amount), which is non-taxable. The
lump sum payment remaining after the commutation, plus the pension which is received or accrues
thereafter is taxable in full when received or accrues.
EXAMPLE
Mr. Dean aged 51 retired on 2 May 2015. When he retired he elected to commute his pension. As a result,
he received a lump sum payment amounting to $18,000. From 1 June 2015 onwards, Mr. Dean will be
entitled to $200 monthly pension. His pension entitlement prior to the commutation was $42,000.
Calculate his taxable income in 2015.

ANSWER
94

lOMoARcPSD|3494582
Lump sum payment 18,000

Less Pension commutation ($42,000/3) 14,000
Add Reduced pension in 2015 ($200 x 7) 1,400
A pension accruing to a person over the age of 55 years is however tax exempted. The person should
have attained 55 years before the commencement of the tax year to qualify for the exemption.
2.5.2 Pension refund
When a member’s membership of a pension fund is terminated before the envisaged benefits are due to
commence a lump sum payment (pension refund) is paid or payable by the fund. Early termination often
arises as a result of a member (employee, self-employed or partner) resigning, withdrawing from the fund
or when the fund is wound up before the member reaches the age stipulated for the payment of the pension
i.e. retirement benefits. The following is how lump sum payments from pension funds are taxed:
a) If the member is receiving a lump sum payment from a pension fund he joined on or after 1 July 1960,
the lump sum payment is taxed after exempting $1800, the amount the member has used to purchase an
“annuity on retirement or transferred to another pension fund. Also non-taxable is any part of the lump
sum payment which represents a return of a member’s contributions which were disallowed as a
deduction at the time they were paid.
b) If the member is receiving a lump sum payment from a pension fund he joined on or before 1 July
1960, but the rules then changed, the lump sum payment is taxed after exempting the greater of $1800
and the amount the member would have received had rules not changed, amount he used to purchase an
“annuity on retirement or transferred to another pension fund. Also non-taxable is any part of the lump
sum payment which represents a return of a member’s contributions which were disallowed as a
deduction at the time they were paid.
c) If the member is receiving a lump sum payment from a pension fund he joined on or before 1 July
1960, but whose rules did not change, the whole lump sum payment exempt.
A lump sum payment (pension refund) is taxed at a special rate and do not attract AIDS levy. The special
tax rate is the person’s top marginal rate of tax (highest rate on his employment income). If the
person’s employment income is less than the zero rate tax bracket, the pension refund will be taxed
at the rate of 20%. A directive must be obtained from Zimra for the computation of a lump sum payment.
EXAMPLE
Walter aged 37, resigned on 30 April 2015. When he resigned he received a lump sum payment amounting
to $18,000 from a pension fund he joined in 1993. He purchased an annuity on retirement for $10,000 and
transfer $2,000 to another pension fund. His salary before resigning was $5,000 per month.
Calculate his tax liability income in 2015.
ANSWER
Salary ($5,000 x 4) 20,000

Less Amount used to purchase an annuity 10,000
Less Transfer to another pension fund 2,000 6,000
95

lOMoARcPSD|3494582
Tax on $20000 3,380

Less credits -
3,380
Tax liability 3,481
Add Tax on LSP ($6000 x 25%) 1,500
Tax liability 4,981
Less PAYE -
Tax payable 4,981
2.5.3 Annuity
An annuity is an amount which is received regularly, for life or for a limited period. It is payable on an
annual basis, even if it is divided into annual instalments e.g. weekly or monthly, it is repetitive, payable
from year to year, at any rate, for some specific period and is chargeable against a “person” and claimable
by a specified person.
A pension income is a form of an annuity, which is a result of contributions made by the member. An
annuity can also be purchased by the member from an insurance company or received as legacy (inherited
annuity) or gift (gifted annuity).
In the case of a purchased annuity, that part of the annuity which in the opinion of the Commissioner
represent a return of capital or used to purchase the annuity shall not be taxed. The taxable income is the
interest component, which is calculated as follows:
I = Interest
P = Annual payment/receipt
A = Amount used to purchase the annuity
N = life expectancy of the annuity
EXAMPLE
Mufaro paid $150,000 for an annuity that will pay her $20,000 a year for the next 10 years. In the current
year, Mufaro commenced receiving an annual annuity of $20,000 from the fund.
Compute Mufaro’s gross income.
ANSWER
$5,000, i.e. $20,000 -$150,000/10years.
After the full cost of an annuity is recovered, all future instalments accruing to the taxpayer are taxable.
EXAMPLE
Mufaro pays $150,000 for an annuity that will pay her $20,000 a year for 10 years. In the 11 th year, how
much will she include in her gross income?
ANSWER
96

lOMoARcPSD|3494582
$20,000, which is $20,000 -$0/10years
An annuity which is received by way of legacy or gift is fully taxable.
3. Benefit fund
Employer’s contributions are deductible up to a maximum of $1,500 p.a per member. Members’
contributions to benefit fund are deductible.
3.1 Introduction
A benefit fund is an insurance product and regulated by the Insurance Act. It can be established for
purposes of providing disability, sickness or unemployment benefits. Benefit funds are usually established
by an employer to mobilize funds to meet the envisaged benefits. Where it is of a type which provides
group life cover, it needs to be approved by the Commissioner. In which case, the Commissioner will need
to be satisfied that the benefit fund is a permanent fund and that it is bona fide established for the purpose
of providing sickness, accident or unemployment benefits for its members or benefits for the widows,
children, dependants or nominees of deceased members.
3.2 Contributions
Contribution rates to a benefit are generally in the range of about 5% to 8% of basic salary. Other ancillary
benefits provided and paid for by either employee and or employer would Group Life Assurance (GLA)
benefits and rates would be generally about 1% to 3% of basic salary.
Employer’s contributions to an approved benefit fund are deductible up to a maximum of $1,500 p.a
per member. Members’ contributions to benefit fund are deductible. A partnership is also treated as
an employer of a partner for purposes of contributions made on behalf of the partner to a benefit
fund. It can therefore deduct contributions it makes on behalf of a partner, but up to a maximum of
$1,500 p.a.
3.3 Receipts
As stated above the intended purpose of a benefit fund is to cover sickness, death or
unemployment risk. Therefore benefits from a benefit fund paid as envisaged by the fund i.e as
disability, sickness or death benefit are non-taxable.
However, when a member’s membership of a benefit fund is terminated before the envisaged benefits are
due to commence or when the amount is paid out of the benefit fund for to cover a purpose not intended the
amount paid out to the member is taxable. Early termination often arises as a result of a member (employee,
self-employed or partner) resigning, withdraws from the fund or when the fund being wound up.
The following is how lump sum payments from benefit funds are taxed:
a) If the member is receiving a lump sum payment from a benefit fund he joined on or after 1 July 1960,
the lump sum payment is taxed after exempting the first $1,800, the amount the member has used to
purchase an “annuity on retirement or transferred to another benefit fund or pension fund. Also non-
taxable is any part of the lump sum payment which represents a return of a member’s contributions
which were disallowed as a deduction at the time they were paid.
b) If the member is receiving a lump sum payment from a benefit fund he joined on or before 1 July 1960,
but the rules then changed, the lump sum payment is taxed after exempting the greater of amount the
97

lOMoARcPSD|3494582
member would have received had rules not changed and $1,800, amount he used to purchase an
“annuity on retirement or transferred to another benefit fund or pension fund. Also non-taxable is any
part of the lump sum payment which represents a return of a member’s contributions which were
disallowed as a deduction at the time they were paid.
c) If the member is receiving a lump sum payment from a benefit fund he joined on or before 1 July 1960,
but whose rules did not change, the whole lump sum payment exempt.
A lump sum payment (pension refund) is taxed at a special rate and do not attract AIDS levy. The special
tax rate is the person’s top marginal rate of tax (highest rate on his employment income). If the
person’s employment income is less than the zero rate tax bracket, the pension refund will be taxed
at the rate of 20%. A directive must be obtained from Zimra for the computation of a lump sum payment.
EXAMPLE
Fadzi aged 27, resigned on 30 June 2015. When she resigned she received a lump sum payment amounting
to $6,000 from a benefit fund he joined in 2008. She purchased an annuity on retirement for $1,000 and
transfer $2,000 to another benefit fund and $1,200 to a pension fund. Her salary before resigning was
$6,000 per month.
Calculate his tax liability income in 2015.
ANSWER
Salary ($6,000 x 6) 36,000

Less prescribed amount 1,800
Less Amount used to purchase an annuity 1,000
Less Transfer to another benefit fund 1,000
Less Transfer to pension fund 1,200 1,000
Tax on $36000 7,380

Less credits -
7,380
Tax liability 7,601
Add Tax on LSP ($1000 x 25%) 250
Tax liability 7,851
Less PAYE -
Tax payable 7,851
4. Unapproved fund
4.1 Introduction
Any fund which is not an approved pension fund, a retirement annuity fund or a benefit fund,
established by an employer to fulfil any of the functions of a benefit fund or pension fund which
does not meet the criteria, is an unapproved fund.
98

lOMoARcPSD|3494582
4.2 Contributions
Contributions made by both members and employers are non-tax deductible.
4.3 Receipts
Receipts from unapproved funds are non-taxable since they were made out of contributions which were not
allowable as a deduction .Only amounts representing an interest component paid out of an unapproved are
taxable.
5. Summary of the tax implications of receipts to member
Pension Benefit Fund Unapproved Fund

Withdrawals  Exempt when payable  Taxable after  Refund of member
to a person over the age excluding amount own contributions are
of 55 years reinvested on non taxable
 Taxable after excluding retirement annuity  Other, only taxable if
amount reinvested on or transferred to a entitlement is
retirement annuity or pension fund or obtainable on
transferred to another another benefit fund withdrawal as opposed
pension fund to point of
contribution
Retirement  Taxable in full  Exempt if represent  Exempt if represent

excluding disallowed pay-out for injury, pay-out for injury,
contributions sickness or death sickness or death
 I/3 of the pension
entitlement is tax free
when taxpayer
commutes his/her
pension
Chapter roundup
 The employee and the employer are required to contribute each 3.5% of the employee’s insurable
earnings towards the employee’s pension.
 A tax relief is granted of contributions made to a pension fund or a retirement annuity fund.
 A member can deduct contributions made by him to a pension fund, limited to an amount equal to 7.5%
of his annual emoluments or $5,400 p.a ($450 pm), whichever of the two figures is the lesser amount.
 An employer is also allowed to deduct pension fund contributions made on behalf of a member up to a
maximum of $5,400 p.a ($450) per member.
99

lOMoARcPSD|3494582
 Members are allowed to deduct arrears pension contributions for past services payable to a pension
fund up to a maximum of $1,800 p.a. Employers are also allowed to deduct lump sum contributions to
a pension fund subject to an amount approved by the Commissioner.
 Retirement annuity fund contributions made by a member are tax deductible, limited to an amount
equal to 7.5% of a member’s annual emoluments or $5,400 p.a, whichever is the lesser amount .
Employers are not entitled to a deduction of contributions made by them to a retirement annuity fund.
 Maximum contribution to be deducted in the hands of a member in respect of one and all funds (NSSA,
ordinary pension fund, arrear pension and retirement annuity fund) is $5,400 p.a
 Pension on retirement is taxable in full. However, a pension received by or accruing to an elderly
person is exempt from tax.
 Employer’s contributions are deductible up to a maximum of $1,500 p.a per member. Members’
contributions to benefit fund are deductible.
Property and investment income
5
100

lOMoARcPSD|3494582

1. Property business taxable income B4(a)
2. Taxation of lease premiums and improvements B4(b)
3. Exempt and taxable interest income B4(c)
4. Tax payable on saving and other incomes B4(d)
5. Tax payable on dividend income B4(e)
6. Property and investment business losses B4(f)
Introduction
Employment income and business income are not the only sources of income for individuals and corporate.
For example, when we invest in a financial institution we earn bank interest. A share investment earns
dividend income or capital appreciation, whereas an annuity pays a monthly amount over a period of time.
Although a form of business income, the letting of property can also earn us rental income, while the
deployment of intellectual property brings us royalty, etc.
The chapter deals with these kinds of incomes and we commence the discussion with income from the
letting of property. Generally, the letting of property is a trading activity and rules applicable to trading
income apply to this income. Next we look at other incomes which are incidental to the letting of property
i.e a premium for the granting of a lease and the consideration resulting from obligations under leasing.
We will also consider the tax treatment of interest income arising from deposits with local financial
institutions and interest from other forms of investments. Next, we deal with the taxation of dividend
income.
Finally, we show how property and investment business losses are treated for tax purposes.
In the next chapter, we look at trading income.
Study guide
Intellectual
level
B2 & B3 PROPERTY AND INVESTMENT INCOME
B4(a) Compute property business taxable income 2
B4(b) Compute the taxation of premiums receivable/payable in conjunction to a lease. 2
101

lOMoARcPSD|3494582
B4(c) Distinguish between exempt and taxable interest income. 2
B4(d) Compute the tax payable on savings income. 2
B4(e) Compute the tax payable on dividend income. 2
B4(f) Understand how property and investment business losses can be carried forward. 2
Exam guide
Taxable income from letting of property is likely to be examined as part of a question. Lease premium and
lease improvements will be examined under a 15 mark question. You may be asked to compute the
allowances of the lessee or compute the taxable income in the hands of the lessor. You may find it in the
context of income tax or corporation tax – the basic computational rules are the same. Elderly person’s
reliefs on rent and interest must be mastered because they will always feature in the exam and can be
examined in any part of the paper. Topic is also examinable under section A of the examination i.e multiple
choice questions.
1. Property business income
1.1 Introduction
Unlike an activity for making loans (unless done by a moneylender) for interest, the letting of any property
is a trading activity. The definition of trade as contained in the Income Tax Act the letting of any property.
Thus, a person who earns rental income is deemed to be carrying on trade and should be assessed to tax
based on rules applying to businesses. There must however be a system or plan which shows some
regularity and some degree of continuity. Still it is not possible to ascertain with some degree of precision
whether the letting of property is a business or not. One should however look at the activities concerned as
a whole and then ask whether the activity concerned as a whole is the sort of activity which could
commercially be regarded a trade or business.
Relevant case
COT v Estate G, 1965
The taxpayer a non-resident formed four companies in Zimbabwe and made loans to them to avoid being
taxed in South Africa. He also invested in immovable property with the main idea of gaining capital
appreciation but also to derive income from rents. The question for consideration was whether he was
carrying on trade in Zimbabwe.
Held: trade was not being carried on. The properties were held mainly as an investment and that the earning
of rents was a side line and similar to interest on a loan. The actual letting did not show degree of continuity
and regularity to warrant carrying on business as a professional landlord.
1.2 Rent receivable
Rental income is brought into gross income when received or when accrued, whichever occurs first.
As discussed in chapter 2, the source of rental income from the letting of a fixed property i.e land and
buildings is based on the place the property is situated. If the property is situated outside Zimbabwe, there
is no tax liability in Zimbabwe. Should the property be situated in Zimbabwe, the profit will be computed
and be taxed for each year of assessment. Additionally, the landlord should register for VAT and charge
VAT on the rent where the annual rental charged exceeds $60,000 per annum.
1.3 Rent relief

102

lOMoARcPSD|3494582
Where the landlord is 55 years old or above the first $3,000 ($250 per month) shall be exempted from tax.
Exam focus point

Remember to exempt $3,000 per annum (apportioned where period of assessment is less than a year),
if the rental income is accruing to or is being received by a person who is 55 years or above. The
exemption is annual exemption and not for each property.
1.4 Deductions
Expenditure deductible should be to the extent it is incurred in the production of rental income. During the
period the property is idle, vacant or unproductive no deduction is allowed.
A landlord’s deductible expenses include rates, advertising for tenants, water, repairs and maintenance of
the property, interest on loans to buy or improve the rented property. The cost of evicting a tenant is
deductible too if the tenant is being evicted for purposes of obtaining more rent or of evicting a rent
defaulting tenant. If the reason for evicting the tenant is to alter or change the use of property, the
expenditure is non-deductible.
The landlord can also deduct irrecoverable rent. Steps should have been taken to recover the rent
without success. The general principle is that legal fees will be allowed if they were incurred in the
production of income. They must not be related to items of capital assets i.e. .related to acquisition of fixed
assets. The following is the tax treatment of some legal costs:
 Collection of trade debts – deductible.
 Breach of contract / dispute over a contract –deductible if the contract relates to taxable trading
activities.
 Legal expenses and stamp duty incurred by a tenant in connection with letting of an immovable
property are not deductible because the tenant obtains a right to occupy a property for a period and this
right is a capital asset of the tenant.
 Legal expenses for drafting the lease agreement are allowed to the lessor, but not when the
expenditure is incurred by a tenant.
Exam focus point

Never deduct expenditure incurred on an unproductive property i.e. on a property which does not
produce income or which is not occupied for purposes of trade.
EXAMPLE
Gogo Curran, 60 years old owns a flat in Avondale. The flat has two equal sized floors. Curran and her
family occupy the ground floor and let the first floor to tenants for a monthly rental of $2,500. She
estimates that her annual costs are $1,250 on electricity, and $500 on insurance and $9,000 in repairs and
maintenance.
What is Curran’s taxable income for the year?
ANSWER
Rent ($2,500 x 12) 30,000

103

lOMoARcPSD|3494582
Less Elderly person exemption (3,000)

Income 27,000
Less Deduction
Electricity (50% x $1,250) 625
Insurance (50% x $500) 250
Repairs & maintenance (50% x $9,000) 4,500 (5,375)
Exam focus point

Do not deduct expenditure on a property not genuinely available for rent (to be deductible the
property must be available for rent – i.e. usually excludes construction/renovation periods).
1.4.1 Summary of Deductible Items
Expenses for which the landlord may deduct include:
 Advertising for tenants

 Bank charges
 Body corporate fees and charges
 Cleaning
 Council rates
 Electricity and gas
 Gardening and lawn mowing
 Insurance: Building, Contents and public liability
 Interest on loans
 Lease document expenses: preparation, registration
 Legal expenses (excluding acquisition costs and borrowing costs)
 Mortgage discharge expenses
 Property agent’s fees and commission
 Repairs and maintenance
 Secretarial and bookkeeping fees
 Security patrol fees
 servicing costs – for example, servicing a water heater
 Stationery and postage
 Telephone calls and rental
 Tax-related expenses
 Travel and car expenses:
 Rent collection
 Inspection of property
 Maintenance of property
 Water charges.
Expenses for which a landlord cannot claim:
 Acquisition and disposal costs of the property

 Expenses not actually incurred by him, i.e. water or electricity charges borne by tenants
 Expenses that are not related to the rental of a property, i.e. expenses connected to landlord’s use of
rented out property.
1.5 Repairs and maintenance
There is a fine difference between repairs and maintenance and improvement. However, repairs are
deductible and improvements are not deductible.
104

lOMoARcPSD|3494582
Repairs are deductible in full in the year which they are incurred. In determining deductibility, the
courts look for the presence of three characteristics to determine whether a repair has actually been
effected:
1. The expense of the repair is the restoration of an income producing item to its previous condition;
2. An item must be in need of restoration before it can be "repaired" for taxation purposes; and
3. A repair involves replacement or renewal of a part of an item, rather than the entire item.
Additions and improvements: These costs are capital expenditure and are not deductible, but capital
allowances can be claimed. Improvements can fall into four categories:
 Notional repairs - A taxpayer cannot, where an item of property could have been repaired, carry out
a non-deductible capital improvement and claim the "notional" amount which it would have cost just
to repair the item (FC of T v Western Suburbs Cinemas Ltd (1952) 86 CLR 102)
 Additions - When an addition is made to a property, this does not constitute a repair - rather capital
expansion.
 An improvement makes an item functionally better than it was previously, for example, use of
modern, more efficient materials.
 Initial repairs occur when the taxpayer makes good defects that existed at the time the property was
acquired, regardless of whether the taxpayer was aware of the need of the repair at the time the
property was purchased (The Law Shipping Co Ltd v. The Commissioners of Inland Revenue
(1923) 12 TC 621).
1.6 Capital allowances

No capital allowances are granted on commercial buildings used less than 90% floor of its area for purposes
of trade or in the production of income.
The costs of acquiring rental property or any other fixed asset cannot be deducted in the computation of
income tax. Examples of expenses of this kind include the purchase cost of the property, conveyancing
costs, and advertising expenses and stamp duty on the transfer of the property. However, these costs may
form part of the cost base of the property for Capital allowances and Capital Gains Tax purposes.
For purposes of capital allowances a leased property is treated as a commercial building. It only qualifies
for wear & tear and never qualifies for Special initial allowance (SIA). The rate of wear& tear applicable is
2.5% on cost, whether the building is purchased or constructed. To qualify for wear & tear, the commercial
building must be used at least 90% of its floor area for the purposes of trade or in the production of income
to qualify for wear & tear.
EXAMPLE
Macho purchased a rental property for $170,000 in July 2014. He also paid surveyor’s fees of $350 and
stamp duty of $750 on the transfer of the property. The property is used 100% to produce rental income.
State how the above costs are treated for tax purposes.
ANSWER
None of these expenses is deductible against the Macho’s rental income. However, in addition to the
$170,000 purchase price, the incidental costs of $350 and $750 –totalling $1,100 – must be included in the
cost base for purpose of wear & tear.
105

lOMoARcPSD|3494582
Macho should claim capital allowances on the expenditure i.e $4,278 ($171,100 x 2.5%).
Besides claiming capital allowances on the commercial building, the landlord may also qualify for capital
allowances on plant, machinery, furniture, equipment, articles or vehicles etc. used in the production of
rental income.
1.7 Summary rules on taxation of rental income

The following diagram summaries how rental income is taxed in Zimbabwe.
Immovable Exempt
property Yes Landlord a Yes $3,000 p.a if
situated in natural person 55 years or
Zimbabwe above
Taxable income
No taxed @25.75%
No Non-
taxable
2. Lease premium receivable and payable
Lease premium means a consideration having an ascertainable monetary value passing from lessee to lessor
whether in cash or in kind but is distinct from and is in addition to or in lieu of rent. A landlord and a tenant
may provide in the lease agreement that over and above the normal rent a lump sum is to be paid to the
lessor for the right to occupy premises or for the right of use of asset so leased. These and similar sums
constitute premiums and thus forms gross income of the lessor provided it is receivable for the right of use
of or occupation of land or buildings, plant or machinery, any patent, design, trade mark, copyright, model,
plan, secret process or formula or any other property which, in the opinion of the Commissioner is of a
similar nature, any motion picture film or television film, sound recording or advertising matter connected
with such film or recording.
The lease premium or like consideration is taxable in full in the hands of the lessor in the year of accrual or
receipt. On the other hand, the same amount is a deduction in equal instalments over the life of the lease or
10 years whichever is shorter, in the hands of the lessee.
2.1 Introduction
As consequence of letting the property a landlord may be paid a lease premium by the tenant in addition to
rent. This too is considered to be gross income to the landlord.
Key term
Lease premiums are non-returnable deposits, lease goodwill and tenancy rights. It is a consideration
expressed in money which passes from a lessee to a lessor, in addition to or in lieu of rent. It can also pass
from a sub-lessee to a sub-lessor. As a matter of fact, a lease premium can only occur in landlord-tenant
relationship.
106

lOMoARcPSD|3494582
In addition to being paid or payable as a consideration for right of use or occupation of land or building, a
lease premium is also paid or payable for the right of use of movable property or for the use or right to use
intellectual property.
2.2 Treatment in the hands of a lessor
To the landlord, a lease premium represents gross income and shall be taxable in full whenever it is
received or accrues.
2.3 Treatment in the hands of a lessee

A provision is made for the deduction of an allowance in respect of a premium or consideration in the
nature of a premium which is paid by the lessee to the lessor for the right of use of an asset used by the
lessee for the purposes of trade or in the production of income.
The deduction in the case of lease premium may not reflect in respect of any single year exceed an amount
determined by dividing the total premiums by the number of years representing the duration of the
agreement. If the lease period is longer than 10 years or for an indefinite period, the amount of annual
deduction is determined by dividing total premium by 10 years. If the lessee has an option to sub-let, such
option is ignored in determining the amount of annual deduction.
The property in respect of which the premium is paid must be used or occupied for the purposes of the
lessee’s trade. If there is say partly private use, an apportionment is made. If the lessee subsequently buys
the property, any unclaimed amounts fall away.
Exam focus point

You compute the allowance on a monthly basis, such that if the period of assessment is less than 12
months the allowance is given only for the applicable period.
EXAMPLE
Frank and Ben entered into agreement for the leasing of equipment for a period of 12 years. The agreement
was entered on 3 March 2015. Ben paid a lease premium of $2 000 at inception and $4,000 monthly rent.
Compute Ben’s deductions in 2015.
ANSWER
Rent ($4,400 x 10) 44,000
Lease premium ($2,000 x 10/120) 167
Total deduction 44,167
2.4 Conditions
The following conditions apply to a lessee and a sub-lessee, in respect of lease premium:
 Where the period of lease is not stated or is for an indefinite period, the limit is 10 years.
 A renewal or revision of the lease term does not affect subsequent computations.
 No deduction is made of lease premiums applicable to property not used in trade.
 Where the property is no longer used for the purposes of trade before lease expires, the allowance is
immediately lost. But if the lessee or another person purchases the leased property the allowance is
claimed up to the end of the tax year.
107

lOMoARcPSD|3494582
3 Lease improvements
Fast Forward
Value of lease improvement is taxable in equal instalment to the lessor over the shorter of 10 years and
unexpired lease period commencing date improvements are completed
To the lessee the amount is deductible in equal instalment over the shorter of 10 years and unexpired lease
period commencing date improvements are first used by him for purposes of his trade.
3.1 Introduction
It may also happen that the lessee may be obliged in terms of the lease agreement to effect improvements to
the leased property either by erecting a building on the land or improving an existing building. Such
obligation has tax consequences to both the lessor and the lessee.
Where a lessor in terms of any agreement relating to the grant to any other person of the right of use or
occupation of land or buildings or by the cession or assignment of any rights under any such agreement, has
accrued in year of assessment the right to have improvements effected on his land or to the buildings by any
other person he must include such improvements in his gross income. The reason being since the land
belongs to the lessor and because in law buildings are attached to the land, the building becomes the
property of the lessor when it is built. As a result an advantage accrues to him.
The amount to be included in gross income of the lessor is (i) the amount stipulated in the agreement as the
value of the improvements or as the amount to be expended on improvements or (ii) if no amount is so
stipulated, an amount representing, in the opinion of the Commissioner, the fair and reasonable value of the
improvements (usually the cost of improvements). In case either the value of improvements is taxable
effective the date improvements are completed spread over the shorter of unexpired period of such
agreement, cession or assignment and 10 years. On the other hand, the lessee is entitled to deduct from
his income the same value of the improvements over the shorter of the unexpired period of the lease and 10
year, effective the date such improvements are used by him for purposes of his trade.
The fair and reasonable value of the improvements is usually the cost. Where the lease agreement provides
that the lessee is to erect the improvements to a value of say $120,000 but then the lessee effect
improvements to the value of $150,000, the lessor will only be taxable on the agreed amount the excess
being regarded as voluntary improvements. Where however the parties agree to vary the value of
improvements by including a clause in the agreement, in order to cater for the increased cost, the amended
value of improvements will only be accepted if the variation is done prior to completion of construction.
However, where the variation is done after completion of construction, the lessor would only be taxed on
the agreed original figure and the excess treated as voluntary improvements.
Where the lessee is required to construct improvements with certain specifications (certain minimum value)
e.g. a national stadium containing toilets and offices, value of improvements for inclusion in the lessor’s
gross income is the fair and reasonable value (actual cost) and not merely the minimum amount stated. The
lessor is not simply asking for a building to be erected, he is requesting for a particular building, and the
lessee must meet his requirements even if the cost exceeds the state minimum value in the lease.
As held in ITC 767 (1953) 19 SATC 206, there must be legal and enforceable obligation on the part of the
lessee to effect improvements before gross income may accrue to the lessor. A legal and enforceable obligation
while not specifically expressed in a contract may in certain cases be implied or inferred. Also, it is possible in
terms of law of contract principles to conclude an enforceable oral lease agreement.
If the lessee does not have an obligation to effect the leasehold improvements, it will be regarded as
being voluntarily undertaken, and the lessee will not be entitled to claim a leasehold improvements
allowance and the lessor will not be taxable on the improvements.
108

lOMoARcPSD|3494582
In the event that the lease agreement is cancelled, it is ceded or assigned, or the land or buildings on which
the improvements were effected is disposed or sold or the lessor is deceased or declared insolvent, the
instalments which were still to be included in gross income of the lessor shall be deemed to have accrued to
him immediately. Where the lease term is renewable or extended or renewed for a further period or periods,
the period to be used in computing the lessor’s gross income shall be deemed to be the initial lease term
only. Where no lease period is stated or is for an indefinite period, the lease period is deemed to be to 10
years
3.2 Computation of lessor’s gross income
The value of improvement (as stipulated in the agreement) is taxable over the unexpired period of the lease,
or 10 years (whichever is shorter) to the lessor. The first date for including the improvements in the lessor’s
gross income is the date they are completed.
The following steps should be followed when computing lessor’s taxable income:
 Step1: Compute the lease period in months

 Step 2: Deduct from the above computed lease period the period taken to construct the property (in
months).
 Step 3: Compare the result in 3 with 120 months, then divide the value of the lease improvements by
the shorter of these periods
 Step 4: To obtain lessor’s taxable income, multiplier the answer obtained in step 3 by the number of
months remaining in the year from the date the construction is completed.
Step 1 and 2 is the computation of the unexpired period of the lease.
EXAMPLE
On 1 June, 2015, Tanker (Pvt) Ltd (the lessor) signed a 9- year lease agreement with Iscor (Pvt) Ltd Error!
Bookmark not defined.. In the agreement, Iscor effected lease improvements valued at $55,000. The work
was completed on 30 August, 2015 and first used by Iscor on 1 November 2015.
Compute Tanker (Pvt) Ltd’s taxable income in 2015.
ANSWER
Value of lease improvements 55,000

Step1: (9 years x 12 months) 108
Step 2: Unexpired lease period (108 months – 3 months) 105
Step 3: Monthly taxable income ($55,000/105) 524
Step 4: Taxable income in 2014 ($524 x 4) 2,096
Exam focus point

Note that the date of accrual to the lessor is the date the improvements were effected (i.e. completed
date), whereas to the lessee it’s the date improvements are first used.
There has to be an obligation to effect the improvements. However, the obligation may not necessarily be
expressed in the contract; but may be implied.
If agreement stipulates no amount or where the amount is unrealistic, the Commissioner can decide on a
fair and reasonable value of the improvements.
109

lOMoARcPSD|3494582
In the event that the lease agreement is cancelled, the agreement is ceded or assigned, or the land or
buildings on which the improvements were effected or the lessor is deceased or declared insolvent, the
balance of untaxed lease improvements will be brought into gross income immediately.
EXAMPLE
On 1 April 2013, Foss (Pvt) Ltd signed a 6- year lease agreement with Bushy (Pvt) Ltd. In the agreement,
Bushy was to effect lease improvements valued at $105,000. The work was completed on 3 June, 2013 and
immediately brought into use. However, the lease agreement was prematurely cancelled on 2 February
2015, when Foss (Pvt) Ltd ceded the improvements to Filter (Pvt) Ltd.
Compute Foss (Pvt) Ltd’s taxable income resulting from cession of the lease improvements.
ANSWER

Unexpired lease period (72 months -2 months) 70
Monthly taxable income ($105,000/70) 1,500
Taxable up to 2 February 2015 ($1500 x 20) 30,000
Outstanding amount to be taxed immediately i.e 2015 75,000
3.3 Computation of lessee’s allowance
A lessee is allowed to deduct the cost of the leasehold improvements on an annual basis over the unexpired
period of the lease, or 10 years (whichever is shorter), provided that the land or building is occupied or used
by him for the production of income.
Key term
The unexpired period is the lease period remaining from day the property is first used by the lessee i.e
initial lease period less period of construction and period spent before the property is first used.
The first date the lessee is entitled to the deduction is the day the improvements are first used by him
for purposes of his/her trade. No deduction is granted if the property is not used in the lessee’s trade.
The following steps should be followed when computing the lessee’s allowance:
 Step1: Compute the lease period in months

 Step 2: Deduct from the above computed lease period the period taken up the date the property is first
used for purposes of the lessee’s trade (in months).
 Step 3: Compare the result in 3 with 120 months, then divide the value of the lease improvement by the
shorter of these periods
 Step 4: To obtain the lessee’s allowance, multiplier the answer obtained in step 3 by the number of
months remaining in the year from the date the improvements are first used in the lessee’s business.
Step 1 and 2 is the computation of the unexpired period of the lease.

EXAMPLE
Farai Investment and Boxcar (Pvt) Ltd entered into an 11 year leasing agreement on 2 March 2014. The
leasing object is a warehouse which Farai Investment is using to store its goods. On 5 April 2014 an
agreement was entered to extend the showroom. Farai Investment was tasked to effect these improvements
which were capped at $40,000, which it completed on 2 March 2015, but were brought into use on 1
September 2015.
Compute Farai Investment’s allowance in 2015.
ANSWER
110

lOMoARcPSD|3494582

Unexpired lease period (132 months -18 months) 114
Monthly allowance ($40,000/114) 351
Allowance in 2015 ($351 x 12) 4,211
Exam focus point

Never adjust the 10 years, only the lease period is adjusted to account for construction period and the
period the property is not used prior to its first use. If this later period is still longer than 10 years,
use 10 years.
Whenever the lease agreement is terminated before the end of the lease period or the property is no
longer used for purposes of trade, the allowance is immediately stopped. However, on acquisition of
ownership of the leased property, the deduction of the allowance is stopped in the following year of
assessment.
3.4 Conditions for lease improvements

The following conditions should be observed whenever you are computing the taxable income of the lessor
and the allowance for the lessee.
1) The value of improvements must be agreed upon before construction commences, otherwise any
subsequent variation in value is not accepted unless it is ratified before completion of construction.
2) If no amount is stipulated, the Commissioner’s practice is to take the actual cost unless the lessor is able to
substantiate that such a figure is unreasonable in all the circumstances.
3) If an agreement states a minimum value of the improvements, its value shall be the higher of the
minimum value stated and the actual cost incurred. And if the lessee constructs something which is less
than the prescribed minimum value, then such improvements will not be recognised because it is
assumed that it has not met the specifications.
EXAMPLE
Fast-MF (Pvt) Ltd, the tenant, concluded a 7 year lease agreement with Oldways (Pvt) Ltd on 2 February
2015. A monthly rental of $4,400 is payable and Fast-MF (Pvt) Ltd was requested to pay an upfront deposit
of $5,000. In addition, Fast-MF was required to effect improvements to a minimum value of $90,000. The
improvements were completed at an actual cost of $120,000 on 2 July 2015 and only brought into use on 2
September 2015.
Calculate Fast-FM’s total deductions in 2015
ANSWER
Rent ($4,400 x 11) 48,400

Add Lease premium ($5000/7 x 11/12 655
Lease improvements ($120,000 x 4/77) 6,234
Total deductions 55,289
4) If the lease term is renewed, improvements will still be assessed based on the initial lease term.
5) if no lease period is stated or is for an indefinite period, the period is restricted to 10 years
111

lOMoARcPSD|3494582
6) If the agreement states the erection of improvements to the value of, say, $10 000 and in fact the final value
ends up being above the state value, the extra amount is voluntary improvements and thus not within the
terms of the agreement.
3.5 Capital allowances on lease improvements

Instead of claiming the lease improvement allowance as contemplated above, an option is available to claim
capital allowances on the improvements, subject to the following conditions:
2) Where the erection is not in terms of an obligation in the lease (voluntary improvements):
• Lessee - Allow special initial or wear and tear allowances.

• Lessor - No special initial or wear and tear allowances until property is rented out to another tenant
and rent is thus receivable for the building.
3) Where the erection is in terms of an obligation in the lease

• Lessee - Special initial or wear and tear allowances allowable if elected as an alternative to the
lease improvement allowance.
• Lessor - Wear and tear allowances only.
4) Where the erection is in terms of an obligation in the lease and the cost exceeds the stipulated amount
• Lessee - Special initial or wear & tear allowances on the whole or the stipulated part as an
alternative to lease improvement allowance or on the excess if lease improvement allowance is
taken.
• Lessor - wear and tear allowance on the stipulated amount but not on the excess until the property
is re-let to another tenant.
Exam focus point

You should compute capital allowances on improvements which did not rank for lease improvements
allowance (voluntary improvements) in the hands of the lessee, when asked to compute the lessee’s
minimum taxable income or minimum tax liability.
4 Lease recoupment
Fast Forward
Lease recoupment is the lower of discount on acquisition of property and expenditure previously incurred
by the tenant (i.e aggregate of rent, lease premium and lease improvement).
4.1 Introduction
A lease recoupment arises when a tenant or somebody else subsequently buys the property which was being
leased for a reduced price after taking into account the rent already paid, lease premium previously
paid or lease improvements incurred by the tenant. The recoupment is gross income to the buyer.
4.2 Computing the recoupment

As long as the Commissioner is of the opinion that purchase price of the property has been discounted, that
discount is deemed to be a recoupment.
112

lOMoARcPSD|3494582
The lease recoupment is computed as the lesser of A and B:
A is difference between the property fair market price and price paid to acquire it
B is the expenditure previously incurred by the tenant
Exam focus point

The recoupment should be limited to the actual gain i.e the discount
EXAMPLE
Winston Chabuda who has been a tenant of an industrial building became the owner of the building in the
current year after paying $60,000 to acquire the property. On the date of property acquisition its fair market
value was $90,000. Winston had paid $20,000 in rentals over the years.
Compute Jerry’s taxable income.
ANSWER
Recoupment is $20,000 i.e the lesser of A and B
A $90,000 - $60,000 = $30,000

B = $20,000
4.3 Election to spread lease recoupment

The taxpayer may elect to be taxed on the lease recoupment over 6 years in equal instalments. The first
instalment shall be taxed in the year of acquisition of the property. The election is binding. This means that
once the election is made it cannot be reversed.
If the property is sold before the expiry of six years, any outstanding amount shall be included in gross
income on the date the property is sold.
This is a tax planning opportunity, but a taxpayer who has a sizable balance of Assessed loss which is
almost approaching maturity must not elect to spread the lease recoupment.
Exam focus point

Make an election for the relief always when you are required to compute minimum tax liability
EXAMPLE
On June 30, 2012, FTE entered into a 9 year lease agreement with the City of Harare to rent office
premises. The agreement grants FTE the option to purchase the premises on termination of the lease
agreement for $170,000. The option was exercised on 1 November 2015 when the market value of the
property was $250,000. FTE effected lease improvements amounting to $30,000 in terms of the contract
which were first used for purposes of FTE’s trade on 1 January 2013. Monthly rentals of $500 were payable
under the lease agreement until 30 October 2015.
Compute FTE’s:
1. Total deductible lease improvement

2. Total deductible rent
3. The minimum lease recoupment in 2015
ANSWER
113

lOMoARcPSD|3494582
1. Lease improvement
Lease improvements 30,000

Unexpired lease period (9 x 12)-6 102
Monthly allowance (30000/102) 294
Completed months to 31 Dec 2015 36
Total 10,588
2. Rent
Rent (period June10 to 31 Oct 14- $500 x 40) 20,000
3. Lease recoupment
Minimum lease recoupment ($50,000 / 6 years) 8,333
Workings:
Recoupment is the lesser of A and B, as follows:
A = Discount ($250,000 - $170,000) 80,000
B
Lease improvement paid 30,000
Rent previously deducted 20,000
Total 50,000
Note
Expenditure incurred by a tenant in terms of an agreed obligation to make improvements is treated as “rent”
for the purposes of the operation of the above. This means that the recoupment is on the part of lease
improvement is the cost incurred not the amount allowed.
Lease improvements are deductible up to year end when the property is acquired.
5 Interest receivable
Fast Forward
Interest from local banks is subject to final withholding tax, interest paid to a non-resident is exempt and
other forms of interest are taxable in the hands of the beneficiary.
5.1 General
Interest may be received from funds invested in the money market i.e local financial institutions, funds or
loans invested abroad or funds or loans invested locally other than financial institutions. Interest may also
accrue from working capital e.g. interest on debtors or short investments.
Generally, interest constitutes gross income when received or accrues to a resident taxpayer. What may
differ is the point of taxation. With regard to interest from financial institutions, the interest is taxed at
source i.e the bank deducts the tax and pays it to Zimra then the bank will credit the customer’s account
with the net after tax. For other forms of interest, tax is assessed in the beneficiary’s hands i.e the payee of
the interest must include the interest in his gross income.
The following diagram is a summary of how interest is taxed in Zimbabwe.
114

lOMoARcPSD|3494582
Yes Exempt
Interest is Paid by a local Recipient No

from a local Yes Financial No non-
source Institution resident
Bank to withhold
Yes 15%/5% tax 1
No Recipient
ordinarily Yes Tax @
resident 25.75%
No Not from
Zimbabwean
source
1
The withholding tax to be deducted by the bank is 15% and 5% on a fixed deposit (a deposit with tenure of at
least 90 days).
5.2 Resident tax on interest

5.2.1 Introduction
Interest paid by a local financial institution to its resident customer who holds a deposit, a treasury bill, a
discount instrument or a bank’s acceptance with it is subject to a final withholding tax at source.
Resident tax on interest is a tax deducted at source on interest payable or paid to a resident taxpayer by a
financial institution.
A resident taxpayer means a resident individual, partner, company or trust. The resident status of the
payee is determined on the date interest is paid by the financial institution.
Interest is deemed paid to a person when it is credited to his account or dealt in such a way that the
conditions under which he is entitled to it are fulfilled, whichever occurs first. For example, interest on
a 10 year redeemable loan compounded annually attracts tax when interest accrues in each year, despite the
capital and interest being payable at the end of year 10. Interest on a Treasury bill, Banker’s Acceptance or
discounted instrument is paid on the date of maturity of the note or bill.
Withholding tax must be deducted at the point of payment. The point of payment is when an amount is
paid, accrued, credit or dealt with the name of the payee whichever occurs first.
Key term
A financial institution includes any of the following:
115

lOMoARcPSD|3494582
• A banking institution registered or required to be registered in terms of the Banking Act.

• Any building society registered or required to be registered in terms of the Building Societies Act
• The Reserve Bank of Zimbabwe;
• A company acting as trustee or manager of a unit trust scheme registered in terms of the Collective
Investment Schemes Act
• The Zimbabwe Development Bank
• An asset manager as defined in the Asset Management Act
• A collective investment scheme as defined in the Collective Investment Schemes Act
Key term
Interest means any amount from a source within Zimbabwe payable by a financial institution on any loan
or deposit and including any of the following:
• Income or interest from Treasury bills
• Income or interest from a banker’s acceptance
• Income or interest on discounted instruments traded by a financial institution.
• Building Society dividend, other than dividend paid on class “A” shares or ordinary fully paid up
shares or foundation fully paid up shares.
5.2.2 Withholding tax rates
The rate of tax is 15% on interest earned on all other deposits and 5% on interest earned from a fixed term
deposit. A fixed term deposit is a deposit with tenure of at least 90 days. This is a final tax, i.e. no other
taxes shall be chargeable after the financial institution has deducted the tax.
EXAMPLE
Mr. Churchill holds a 180 day fixed deposit account with a local bank which pays a 10% interest p.a.
During the current year the bank paid gross interest of $3,200.
Calculate the withholding tax which the bank is required to withhold.
ANSWER
Gross interest 3,200

Withholding @ 5% (tenure is at least 90 days) 160
5.2.3 Interest exempt from resident tax
Fast Forward
A person who is 55 years or old is exempt from withholding tax on the first $3,000 p.a of bank deposit
interest and another $3,000 p.a of interest on banker’s acceptance and other discounted instruments traded
by financial institutions
The following forms of interests or incomes are exempt from withholding tax:
 Interest payable to another financial institution,

 Interest payable to a holder of moneylender’s license,
 Interest payable to an insurer registered in terms of the Insurance Act,
 Interest payable to a person whose receipts and accruals are tax exempt, e.g. interest payable to
charitable organizations, trust of a public, education institutions, society or associations etc.,
 Interest on any savings certificate issued in terms of any law,

116

lOMoARcPSD|3494582
 Interest on the Post Office Savings Bank of Zimbabwe,

 Interest on any tax reserve certificate,
 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
 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.
 The first $3,000 p.a of interest on any deposit with a financial institution accruing to a person who is of
or over the age of 55 years
 The first $3,000 p.a of interest on banker’s acceptances and other discounted instruments traded by
financial institutions, accruing to a person who is of or over the age of 55years
 Interest on any “Diaspora Bond” issued by the Commercial Bank of Zimbabwe (CBZ).
Exam focus point

You must exclude interest from a local bank included in the net profit when computing taxable
income. This interest is subject to a final withholding tax on interest at source.
5.2.4 Deductions allowable
No deduction is allowed against interest subject to withholding tax. The interest is exempt from income tax.
No expenditure is ever deducted against income exempted from income tax.
A taxpayer is not allowed to deduct expenditure incurred in the production of interest payable by a financial
institution. In other words, if a taxpayer borrows money for on-lending to a bank, any interest incurred by
him on the borrowed funds is not deductible.
In the same manner trading and investment losses cannot be set off against interest payable by a financial
institution on any loan or deposit placed with the financial institution. In other words a taxpayer who incurs
trading losses on his trading or investment activities is not allowed to claim those losses against interest
received or received from a financial institution.
5.3 Interest paid to a non-resident

Any interest payable from a local source to a non-resident person, i.e. a non-resident individual,
partnership, company or trust is exempt from tax.
The residence status of a “person” is determined by reference to the date the interest is paid to the “person”
by the payer. See definition of an ordinary resident in chapter 2.
5.4 Non-financial institutions

Interest payable to a resident taxpayer from a source other than a financial institution is taxed in the hands
of the beneficiary, unless such interest is exempt from tax.
Any interest received by a resident person (a resident individual, company or trust) is treated as investment
income. The income is subject to tax in the hands of the beneficiary at the rate of 25.75%. You however
need to note that some interests are exempted from tax, as considered above.
Note that where the interest is from foreign securities, the person must be ordinarily resident in
Zimbabwe at the time such interest is received to be taxed in Zimbabwe.
Where tax has been deducted in the foreign country from the interest, you will need to add back such taxes
and compute the tax based on the grossed up amount.
117

lOMoARcPSD|3494582
A person who earns interest is entitled to a deduction of expenses incurred in earning that income including
expenses suffered in remitting the interest to Zimbabwe.
Double taxation relief may be granted in respect of interest taxed in another country. Generally the relief is
the lower of the Zimbabwean tax on the interest and the tax paid in the foreign country on that interest.
Chapter 10 deals with computation of double taxation relief.
EXAMPLE
Melissa, a resident of Zimbabwe received interest from funds invested in Zambia amounting to $12,500
(net of tax $1,500). She incurred $50 for the interest to be remitted to Zimbabwe. Interest expense paid to
the bank on the reinvested funds amounted to $3,250. Error! Bookmark not defined.
Calculate Melissa’s tax liability
ANSWER
Gross interest ($12,500 + $1,500) 14,000

Less Expenses
Remittance expenses 50
Interest paid 3,250 3,300
Tax @ 25.75% 2,755
6 Taxation of dividend
Fast Forward
Dividend paid to a local company is completely exempt from tax; other local dividends are subject to
withholding tax at source, while foreign dividend is taxed at 20% in the hands of a resident
6.1 Introduction
The following diagram is a summary of the treatment of the dividend in Zimbabwe.
118

lOMoARcPSD|3494582
Is dividend Is recipient a Exempt

paid by a Yes local Yes
local company?
company?
Withhold 15%/10%
No tax 1
No Is recipient
ordinarily a Yes Tax @
resident in 20%
Zimbabwe?
No Non-
taxable
1
Dividend to be withheld by the local company is 15% and 10% where the company is listed on the
Zimbabwean Stock Exchange.
6.2 Local company dividend

6.2.1 Introduction
Dividend is income distributed by the company to its shareholders, other than distribution which in the
opinion of the Commissioner represents a return of shareholder’s capital.
Exclusions:
• Amount from a Building Society on a paid up permanent class “A” shares or an ordinary permanent
fully paid-up shares or foundation fully paid up shares.
• Bonus shares
• A distribution to Industrial Development Corporation or Development Trust of Zimbabwe.
• Distributions of profits by partnerships
• Distributions by licenced investors and industrial park developers
6.2.2 Computation of withholding tax
A resident company which pays a dividend to any of the persons listed in the following table must deduct
15 per cent (10% a company listed on ZSE) of the gross dividend:
Ordinarily resident Non-resident
Individual Individual
Partnership Partnership
Trust Pension fund, benefit fund or medical aid society
Foreign company or foreign life insurance company
The withholding tax is a final tax and no further tax will be payable by the beneficiary.
119

lOMoARcPSD|3494582
6.2.3 Exemptions
A resident company which pays dividend to another resident company is not required to withhold tax. The
same dividend shall not be included in the taxable income of the recipient local company.
Exam focus point

You must exclude dividend included in the net profit when computing taxable income. But you must
tax dividend from a foreign source separately at a special rate of 20%.
EXAMPLE
Barcode Corporation, a listed company paid the following dividends to its shareholders.
a) A dividend of $1,000 to Mrs. Panganai
b) A dividend of $10,000 to Shared Times (Pvt) Limited, a local company
c) A dividend of $5,000 to Malting Inc. a foreign company.
State how the above dividends should be treated in the hands of each of the beneficiary (payee)
ANSWERS
a) A dividend paid by a local company which is taxable on its profits is exempted from income tax in the
hands of the payee. Barcode must however; withholding tax at source at the rate of 15%. Mrs. Panganai
is therefore not liable to any tax in her hands.
b) A dividend paid by a local company to another local company is exempted from both withholding tax
and income tax in the hands of the beneficiary.
c) A dividend paid to a foreign company is subject to a final withholding tax at source. Barcode
Corporation must deduct 15% withholding tax on the dividend paid to the foreign company.
6.2.4 Administration
The company is responsible for withholding the tax on the dividend. If it fails to do so, an agent who
receives a dividend on behalf of a shareholder must do so. In case a shareholder receives a dividend on
which the tax has not been withheld he must pay the applicable tax to Zimra.
The withholding tax is due to Zimra within 10 days of payment of the dividend to a resident shareholder
and within 30 days for a dividend paid to non-resident shareholder.
A dividend is paid when distributed to a shareholder, credited to his account or so dealt with in the name of
the shareholder so that he becomes entitled to it, whichever occurs first. A dividend is also assumed paid
when funds are put at the disposal of the shareholders in the manner required by the contract.
Whenever tax on dividend is withheld, the payer must give the shareholder a withholding tax certificate.
This certificate must show the gross dividend paid and the tax withheld. In the event that, the payer has
failed to issue a certificate, the agent who withholds the tax must do so.
6.2.5 Refund of withholding tax
a) Resident shareholders
120

lOMoARcPSD|3494582
The CG shall authorise a refund of RST where a person’s aggregate of dividend from a local source and
interest from a local financial institution are below certain threshold. The refunded amount depends on the
age of a taxpayer and the aggregate dividend and interest in a tax year as follows:
Shareholder is at least 55 years old A resident shareholder below 55 years
Aggregate dividend & interest Refund % Aggregate dividend & interest Refund %
Up to 600 100 Up to 480 100

601 to 720 75 481 to 600 75
721 to 840 50 601 to 720 50
841 to 960 25 721 to 840 25
The refund is reduced proportionately where the period of assessment is less than 12 months. The refund
must be claimed within 6 years of the date of payment RST, otherwise it is non-refundable.
EXAMPLE
Vimbai is 66 years old. During the year she received dividend and interest as follows:
Dividend from a local company (net) 340

Interest from a local bank (net) 204
Compute the refund due to Vimbai.
ANSWER
Payment Net Tax deducted source Gross Amount

Dividend 340 60 400
Interest 204 36 240
Aggregate dividend and Interest 640
Rate of refund on dividend (range $601- $720) 75%
Tax refund ($60 x 75%) $45
b) Non-resident shareholders
A non-resident shareholder may be refunded tax on dividend paid under the following circumstances:
 Where the amount has been overpaid.

 Where the dividend is rescinded with the approval of the Minister for purposes of complying with any
exchange controls.
 Where it is in respect of a dividend which is subsequently utilized to import essential goods into
Zimbabwe.
A claim for any refund must be made within six years of the date of payment of such tax, otherwise it will
be forfeited.
6.3 Dividend from foreign source

A dividend from a foreign source received by or accruing to a resident person (a resident individual, a
company or a trust) is subject to tax in Zimbabwe.
Note that the dividend must be received or accruing at a time the person is ordinarily resident in
Zimbabwe.
121

lOMoARcPSD|3494582
The dividend is taxed at the rate of 20%. It does not form part of the trading income, but is taxed separately.
The tax is computed on the grossed up amount, i.e adding back any taxes or expenses suffered in remitting
the dividend to Zimbabwe.
EXAMPLE
Upstream (Pvt) Ltd a company ordinarily resident in Zimbabwe received a dividend from shares held in
Pikwe (Pvt) Ltd, a company resident and registered in Botswana. The details are as follows:
Net dividend 700

Commission and remittances expenses 50
Withholding tax 150
Compute Upstream’s tax liability in Zimbabwe.
ANSWER
Net 800
Commission and remittance expenses 50
Withholding tax 150
Gross dividend 1,000
Tax payable @ 20% 200
7 Taxation royalties
Taxable royalties are those:
 Derived from author’s wits, labour or intellect exercised Zimbabwe or on an intellectual property
created or perfected Zimbabwe.
 Paid to a non-resident from a source within Zimbabwe no matter where the intellectual property is
used
 Paid for the use or right to use intellectual property in Zimbabwe, no matter (1) where the
intellectual property was created or (2) where the owner of the intellectual property is resident or
(3) where the payment the use is paid from.
7.1 Introduction
In chapter 2 we stated that royalty is from a source within Zimbabwe if it is derived from the author or
artist’s labour, wits and intellect exercised in Zimbabwe or if it is derived from an intellectual property that
was perfected or created in Zimbabwe.
Tax is also chargeable on royalties paid from a source within Zimbabwe payable for the use of, or the
right to use intellectual property or industrial, commercial or scientific equipment, or information
concerning industrial, commercial or scientific experience.
Thirdly, royalties are deemed to be from a source within Zimbabwe if they arise from the use of, or the
right to use in Zimbabwe of intellectual property. It does not matter (1) where the intellectual
property was created or (2) where the owner of the intellectual property is resident or (3) where the
payment for the use is paid from.
7.2 Royalties paid to resident
122

lOMoARcPSD|3494582
Royalties accruing to a resident taxpayer are taxed on the same basis as trading income. The taxpayer will
be entitled to deduct any expenditure incurred by him in earning the royalties. The tax payable on such
royalties is computed using the 25.75%.
7.3 Royalties paid to non-resident

The royalty paid to a non-resident is subject to 15% withholding tax. Lower withholding tax rates may
apply where a Double Taxation Agreement is in place between the non-resident’s country of residence and
Zimbabwe.
Exam focus point

You are not required to know the reduced DTA withholding tax rates with each country.
EXAMPLE
John Laura, a resident of Angola, is planning to work on a new machine which treats waste more efficiently
and with limited carbon emissions. He is planning to patent the machine. All the search and development
work will be carried out in Zimbabwe. Mike wants to use this machine for Mike Enterprise, an Enterprise
in Zimbabwe. Laura expects to receive royalties of $20,000 per annum from Mike Enterprise.
Compute the tax if any.
ANSWER
Withholding tax
Gross royalties 20,000
Withholding tax rate 15%
Withholding tax 3,000
7.3.2 Exemptions
Withholding tax is exempt on royalties paid by a licensed investor and those payable under any agreement
entered into by the Government of Zimbabwe with any other government or international organization if
the agreement provides for the exemption of the withholding tax.
The payer of royalties to a non-resident is responsible for withholding the tax on royalties. The payer can be
an individual, a partnership or a company, the State, a statutory corporation or an agent who is responsible
for paying the royalty.
If it fails to do so, an agent who receives the royalties on behalf of a payee must do so. In case a payee
receives royalties on which the tax has not been withheld he must pay the applicable tax to Zimra.
The withholding tax is due to Zimra within 10 days of payment of the royalties to a payee. Penalties and
interest are administered on late payments.
A royalty is paid when credited to the payee’s account or so dealt with that the conditions under which he is
entitled to them are fulfilled, whichever occurs first.
7.2.4 Crediting of withholding taxes
123

lOMoARcPSD|3494582
A non-resident is entitled to a credit of withholding tax against income tax chargeable on the royalties
concerned. The royalties will be treated as trading income on which expenses incurred in earning royalties
will be deducted.
EXAMPLE
Safina Ngole, a resident of Tanzania receives royalties from a Zimbabwean source amounting to $12,750, after
deduction of withholding tax on royalties. Her cost of producing the royalties is $6,000
Compute Safina’s tax liability.
ANSWER
Gross royalties (100/85 x 12,750) 15,000

Less cost 6,000
Tax @ 25.75% 2,318

Less withholding tax 2,250
Tax payable 68
There is a limit on the amount of credit claimable. Its computation is outside the scope of your syllabus.
8 Fees
Fast Forward
Fees are taxable in Zimbabwe if they are earned for services rendered in Zimbabwe or if they are paid to a
non-resident by a payer who is a person or a partnership which is ordinarily resident in Zimbabwe.
8.1 Introduction
A person who renders services in Zimbabwe for a fee shall be taxable on those fees. Fees paid to a non-
resident are deemed to be from a source within Zimbabwe if the payer is a person who or a partnership
which is ordinarily resident in Zimbabwe and are also taxable in Zimbabwe.
8.2 Fees paid to resident
Fees paid to a resident taxpayer (other than fees paid to a person in his capacity as an employee), are
subject to tax on the same basis as trading income. The taxpayer will be entitled to deduct any expenditure
incurred by him in earning such fees. The fees are subject to tax at 25.75%.
8.3 Non-executive director fees

A non-executive director who entirely gets his income as fees is not subject to employee’s tax. It is only
when he receives fees and other amounts constituting remuneration that he should pay employee’s tax. For
example if the director is granted the right of use of a company car or any other benefit, he will
automatically become an employee and will be liable to employees’ tax.
Instead, fees paid to a non-executive director are subject to 20% withholding. This tax must be deducted at
source by the payer of the fees e.g. the company. The fees however must be from a source within
Zimbabwe. Directors fees are from a source within Zimbabwe if the central management and control of the
company is exercised in Zimbabwe, i.e. the head office should be situated in Zimbabwe.
124

lOMoARcPSD|3494582
The tax withheld must be paid to Zimra within 10 days of date of payment of such fees, otherwise penalties
and interest will apply.
The withholding tax is not a final tax. It is credited against tax paid in respect of the fees. The income tax so
chargeable shall be reduced accordingly and any excess refunded. The excess withholding tax paid is first
off set by other tax obligations of the person to Zimra and balance will then be refunded to the taxpayer.
The refund must be claimed within 3 years of the date the tax is paid, otherwise it will not be refunded.
8.4 Fees paid to non-resident

In the context of fees paid to a non-resident by a resident payer, a fee is defined as amount paid or
payable for the services of a technical, managerial, administrative or consultative nature provided by
the non-resident.
The fees paid to a non-resident are subject to 15% withholding tax. Lower withholding tax rates may apply
where a Double Taxation Agreement is in place between the non-resident’s country of residence and
Zimbabwe.
Exam focus point

You are not required to know the reduced DTA withholding tax rates with each country.
8.4.2 Exemptions
Fees paid to a non-resident for the following services are not subject to withholding tax:
 Services rendered to an individual unconnected with his business affairs

 Services rendered by the payer’s employee, other than a director of the payer,
 Education or technical training,
 repair of goods outside Zimbabwe; or
 Any project which is specified by the Minister by notice in a statutory instrument; or
 Any project which is the subject of any agreement entered into by the Government of Zimbabwe with
any other government or international organization entitling the person to an exemption
 Servicess rendered to a licensed investor or an industrial park developer.
EXAMPLE
XZY Ltd, a domestic corporation, commissioned SBU Wan networking, supplied by a Zimbabwean based
company. It paid a cheque of $33,000 to the Zimbabwean based company, which was broken down as
follows:
Training of staff 5,000
Technical and support 16,000
Payment to XYZ Ltd employees involved in the project 7,500
Commissioning fee 4,500
Compute the withholding tax on fees
ANSWER
Training of staff (exempt) 0

Technical and support 16,000
Payment to XYZ Ltd employees (exempt) 0
Commissioning fee 4,500
Fees subject to withholding tax 20,500
125

lOMoARcPSD|3494582
Withholding tax ($20,500 x 15%) 3,075
The responsibility to withhold the tax on fees lies with the payer. If he fails to do so, a n agent of the payee
who receives the fees must do so. Should the payee receives fees on which the tax has not been withheld he
must pay the applicable tax to Zimra.
The withholding tax is due to Zimra within 10 days of payment of the fees to a payee. Penalties and
interest are administered on late payments.
Fees are paid when credited to the payee’s account or so dealt with that the conditions under which he is
entitled to them are fulfilled, whichever occurs first.
8.4.4 Crediting of withholding taxes
A non-resident can claim a credit of withholding tax against income tax chargeable on the fees concerned.
The fees will be treated as trading income on which expenses incurred in earning the fees will be deducted.
There is, however a limit on the amount which can be claimed as a credit. Its computation is outside
the scope of your syllabus.
9 Trading loss
An assessed loss occurs when deductible expenses exceed income. They arise from the same computation
as taxable income i.e.making the same adjustments to the accounts profit or loss.
If in the year of assessment a taxpayer has an assessed loss, then no taxes are paid in that year. To the
extent to which the loss has not been relieved in the year of assessment, it may be carried forward and be
set against the first available future taxable income of the same person. But, an assessed loss which does
not exceed $100 cannot be carried forward.
Also, assessed loss cannot be carried forward for a maximum of 6 years.
Rules for claiming assessed loss by a person earning property income are the same as those of ordinary
trading income. We consider in detail assessed loss in chapter 7.
Chapter roundup
 Rental income is taxable when it is received or when it accrues, whichever occurs first.
126

lOMoARcPSD|3494582
 A person who is 55 years old or above is exempted on his first $3,000 p.a of rental income.
 Lease premium is taxable in the hands of the lessor in full as when it is received or accrues, and
deductible in equal instalment over the shorter of 10 years and lease period in the hands of the lease.
 The value of lease improvement is taxable in equal instalment to the lessor over the shorter of 10 years
and unexpired lease period, commencing date improvements are completed.
 The value of lease improvement is deductible in equal instalment to the lessee over the shorter of 10
years and unexpired lease period commencing date improvements are first used by lessee for purposes
of his trade.
 Lease recoupment is the lower of discount on acquisition of property and expenditure previously
incurred by the tenant (i.e aggregate of rent, lease premium and lease improvement).
 Interest from local banks is subject to final withholding tax, interest paid to a non-resident is exempt
and other forms of interest are taxable in the hands of the beneficiary.
 A person who is 55 years or old is exempt from withholding tax on the first $3,000 p.a of bank deposit
interest and another $3,000 p.a of interest on banker’s acceptance and other discounted instruments
traded by financial institutions.
 Dividend paid to a local company is completely exempt from tax, other local dividends are subject to
withholding tax at source and foreign dividend is taxed at 20% to a resident.
 Fees are taxable in Zimbabwe if they are earned for services rendered in Zimbabwe or if they are paid
to a non-resident by a payer who is a person or a partnership which is ordinarily resident in Zimbabwe.
Exam Bank
Q5 Exam 23 34.5 mins
Part C
127

lOMoARcPSD|3494582
Corporation tax liabilities
Trading Income
128

lOMoARcPSD|3494582
6
1 Basis of assessment B3(a)
2 Adjusted net profit B3(b)
3 Trading income B3(b)
4 Exemption B6(c)
5 Pre-trading expenditure B3(c)
6 Commencement and on cessation B3(d)
7 Change of accounting date B3(e)
Introduction
The previous chapter covered income tax on property income. This chapter looks at trading income, which
is no different from property income in terms of tax treatment.
It does not matter whether the trade is carried on by an individual, a corporation, a partnership, or a trust,
the computation of trading income remains the same. Further, whether the person is a company, a trust the
subject of which no beneficiary is entitled to or an individual, tax on business or investment income is
settled by way of quarterly payments on designated quarterly payment dates. Business income including
non-executive director’s fees, income of an independent contractor and any other income which is not
subject to PAYE rules.
We are going to look at the computation of profits of self- employed and companies. Later chapters will
consider capital allowances, which are allowed as an expense in the computation of profits, the taxation of
business profits, and how trading losses can be relieved. We will then extend our study to partnerships, i.e.
a group of two or more individuals trading together.
Study guide
129

lOMoARcPSD|3494582
Intellectual
level
B3 Self-employment income
B3(a) Recognise the basis of assessment for self- employment income. 2
B3(b) Recognise the expenditure that is allowable in calculating the tax-adjusted trading 2
profit.
B3(c) Recognise the relief that can be obtained for pre-trading expenditure. 2
B3(d) Compute the taxable income on commencement and on cessation. 2
B3(e) Change of accounting date 2
Exam guide
Trading income is examined in question 2. The computation may be for an individual, a partnership or a
company. In each case the same principles are applied. You must however, watch out for the adjustments
which only apply to individuals, such as private use expenses.
Basis of assessment
1.1Trading
The basis of assessment of business income is based on the place the business operations are being carried
on. Residents and non-residents alike are taxed in Zimbabwe on income derived by them from furtherance
or carrying on a trade in Zimbabwe.
Trading income is taxed at 25.75%. The tax is paid in advance of year end on quarterly payment dates
(known as QPDs) based on the estimated taxable income.
1.2 Definition of a trade

The definition of a "trade" is a very wide intended to embrace every activity undertaken with a view to
produce income. Even the courts have interpreted trade to be neither exhaustive nor restrictive and will
include any activity where a person risks something with the objective of making a profit. But this does not
mean to say that all income generating activities would constitute a "trade", as the term "trade", "does not
embrace all activities that might produce income, for example, income in the form of interest, dividends,
annuities or pensions. These will nevertheless fall under investment.
Key term
A “trade” includes 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.
1.3 Characteristics of trade

The legislation has defined what a “trade” is, but the expression “carrying on business” has not been
defined. There are no badges of trade like other countries do e.g. United Kingdom. As point out by a judge
130

lOMoARcPSD|3494582
in CIR v Stott, whether a person is carrying on business is an inference from the facts, which inference is a
matter of law.
There is not much case law in Zimbabwe regarding the meaning of the term ‘carrying on of trade’, but we
rely on other jurisdictions regarding its meaning. The following are some of the factors used in other
jurisdictions in determining whether a trade is being carried on or not:
 The manner of organization

 Information a person has 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
 Inherent characteristics of a taxpayer
 The pursuit of an operation for profit, etc.
Notwithstanding the above factors, still there is no definitive answer as to whether a trade is being carried
on or not. It all depends on the circumstances of each case.
Relevant cases
C of T v Swansea Services Pty Ltd (McKerracher J)
Over several years Swansea accumulated a valuable collection of artwork and antiques which it treated as
‘creditable acquisitions’ so as to attract ‘input VAT’ and very occasionally made a modest sale. In the eight
years to November 2005, Swansea:
 had no employees of its own;
 spent $4.8 million on the acquisition of 225 antique items and 87 paintings;
 retained contractors and consultants to provide expert advice on art;
The question was whether the collection of art work and antiques by a firm without employees constituted a
trade.
Held: the evidence showed that the business and commercial activities of Swansea were conducted in
accordance with a pre-formulated policy coupled with a carefully devised investment strategy. The
activities were characterized by systematic repetition and regularity which were consistent only with the
carrying on of a business and the carrying on of an enterprise. Specialist consultants were retained, detailed
records were kept, budgeting, insuring, storage and protection of the assets was carried out on a business
like basis. The sums involved in the investment were millions of dollars.
Arbico Ltd v. FBIR, 1996
The taxpayer had acquired a plot of land, erected a building, and sold the property at a profit. The taxpayer
was subsequently assessed for tax on the proceeds of the sale of property, which he objected on the basis
that the transaction was a one-off and therefore did not constitute 'trade'.
The question for consideration was whether a once off deal amounted to a trading activity.
Held: the word 'trade' should be interpreted in its widest sense; in accordance with its common everyday
meaning and that an isolated one-off transaction can still constitute a "trade", as long as other factors are
met.
131

lOMoARcPSD|3494582
Burgess v CIR 1993
The term "carrying on a trade" should be interpreted in the broadest possible sense.
Held: one’s motive for carrying on a trade is irrelevant. If a taxpayer’s sole or main intention is merely to
gain a tax advantage as a result of the "trade", this does not detract from the fact that a "trade" as defined is
being conducted. Furthermore, the absence of risk will not preclude an activity from being regarded as a
"trade". The court came to the conclusion that any profitable activity, even an activity carried out only
once, rather than on a continuous basis, could be regarded as a "trade".
ITC 1476, 1989
Held: for a trade to be present there must be an active step taken and subsequently a person, natural or
juristic in nature, who invests his or her savings in interest or dividend bearing securities or shares, does not
derive an income from a "trade", as these passive income sources are not viewed as the carrying on of a
"trade".
Modderfontein Deep Levels Ltd v Feinstein, 1920
That it is possible for a taxpayer to carry on a non-profit making activity and have it regarded as a "trade".
"The absence of a profit does not necessarily exclude a transaction from being part of a taxpayer's trade",
provided there is at least an expectation of acquiring a profit or a profit motive which is the driving force
behind the activity.
De Beers Holdings (Pty) Ltd v CIR, 1986
Corbett JA agreed that, earning a profit was not the sole identifier of a "trade". Where a taxpayer enters into
a transaction with no intention of acquiring a profit, or further still, with the intention of incurring a loss, it
is possible that such an activity could be regarded as a "trade" provided a commercial benefit was derived
from the transaction.
2 The adjustment of profits

Fast Forward
Tax is paid on taxable income, and not on net profits. Taxable income is the adjusted net profit before tax
as per financial statements.
2.1 Introduction
Any person who derives income from trading must pay income tax on his taxable income. The taxable
income is the adjusted net profit as per the financial statements.
Net profits must be adjusted because systems used to determine trade income may differ in some areas with
those of tax. You will therefore need to adjust the net profit so that it equals tax income. The starting point
is the net profit figure in the income statement then adjusts as follows:
Adjustment required Examples
Proceeds from disposal of fixed asset

Deduct capital nature receipts and
Compensation or insurance monies for loss of fixed assets
132

lOMoARcPSD|3494582
accruals Profit on sale of fixed asset

Restraint of trade income, sale of goodwill etc.
Deduct exempt income and Bank interest, dividend etc.

income subject to final withholding tax
Add trading income not in net profit Recoupment, deferred income or income received in advance
Add back disallowed Donations, provisions, entertainment, fines, depreciation etc.

expenditure deducted in arriving at (refer to chapter 7 for details)
the net profit
Deduct allowable deductions not in Capital allowances, scrapping allowance, assessed loss, export
net profit market development expenditure etc.
The rules relating to profits from trades apply equally to profits from all professions and vocations, i.e. self-
employed persons, partners, companies and cooperatives.
2.2 Explaining the adjustments
Exam focus point

When computing taxable income from trading you will need to start the adjustment with the net
profit as per the accounts and to deal with all the items listed, indicating with a zero (0) any items
which do not require adjustment. Marks will not be given for relevant items unless this approach is
used. Therefore students who attempt to rewrite the statement of profit or loss will be penalized.
2.2.1 Capital nature receipts
Capital nature receipts must be deducted from the net profit. Receipts of a capital nature are those derived
from the sale, disposal, loss or destruction of a fixed asset, but the nature of capital receipts is a question of
fact to be determined from the circumstances of each particular case.
Capital nature receipts include compensation of fixed assets or for cancellation of contract with a major
impact on the organisational structure of the company. Compensation for cancellation or loss of
trading or commercial contract, lost trading stock or other working capital, is of a revenue nature. No
further adjustment is required. The general principle is that a compensation must take the character of an
item being compensated for e.g. if an item being compensated for is a fixed asset the compensation is also
capital in nature.
2.2.2 Exempt in income and income taxed at source
Bank interest is exempt from taxable income and must be deducted from net profit. See a list of interest
incomes in the previous chapter. Other interest receivable for example, interest on receivables, working
capital, any interest local bonds or debenture, interest received from a foreign source, etc. are all taxable.
FAST FO
2.2.3 Trading income not in net profits
Recoveries of amounts previously allowed not included in net profit must be added to the net profit e.g. bad
debts recovered recoupment of capital allowances etc. Deferred income or income received in advance
must be included in gross income.
133

lOMoARcPSD|3494582
2.2.4 Disallowed expenditure
Disallowable (i.e. non-deductible) expenditure must be added back to the net profit in the computation of
the taxable trading profit. Any expenditure not incurred for purposes of trade or in the production of income
or to the extent it is of a capital nature is disallowable expenditure. Certain other items, such as
depreciation, are specifically disallowable and others are specifically disallowed by the legislation.
We cover trading deductions in detail in the next chapter.

FAST FO
2.2.5 Deductions not in net profit
Amounts not charged in the accounts that are deductible from trading profits must be deducted when
computing the taxable trading income. Capital allowances are an example of such expenditure. Another
example is a lease improvement allowance to the lessee, which must be spread over the shorter of 10 years
and unexpired period of the lease (see earlier in this text). In practice a lease amortization deduction which
will have been deducted in the accounts, must be added back to the net profit.
Example
3 Trading income
Fast Forward
The Income Tax Act specifically includes trading stock, concessions, realised exchange gain of a revenue
nature, subsidy of a revenue nature etc., into gross income.
3.1 Trading stock
Trading stock at the end of a tax year is gross income, while the opening stock is a deductible expenditure.
The accounting practice satisfies this requirement; hence no adjustment is required other than that
emanating from the valuation methods.
3.1.1 Introduction
Trading stock, in relation to a business, means property of any description, including livestock, i.e:
a) Purchased or manufactured etc. for purposes of being sold in the ordinary course of the business,
b) Materials used in the manufacture, preparation or construction of any such property as is referred to
above, and includes any work in progress
c) Partially manufactured, produced, constructed, improved, consumed or used goods
d) Advertising, packing or other materials, the acquisition, manufacture or production of which is

incidental to the disposal in the ordinary course of trade of goods or other property, including livestock
3.1.2 Importance of trading stock valuation
In ascertaining the taxable income from a business, the value of the stock in trade at the beginning and at
the end of the period should be taken into account. The trading stock at the beginning is deductible
expenditure, while the trading stock at the end of the year is gross income. The accounting practice of
taking into account the value of the stock in trade in the profit and loss account satisfies this requirement.
3.1.3 Value of stock in trade at the beginning of the year
134

lOMoARcPSD|3494582
The value of opening stock at the beginning of the tax year, unless it is in the year of commencing of a
business, must always be the same as the value of the stock in trade at the end of the immediately preceding
basis period.
3.1.4 Bases of valuation of stock in trade
In the actual accounts prepared by the taxpayer, however, stock in trade may be valued on a basis which is
not acceptable for income tax purposes. Where this occurs, an adjustment must be made in the computation
to bring the valuation of stock in trade in line with the requirements of the Income Tax Act. The taxpayer
must make the appropriate adjustment so that the adjusted income is correctly computed.
3.1.5 Market value, cost or replacement value
The income tax gives taxpayers the option of using the market value, cost or replacement value in the
valuation of their trading stocks. The taxpayer needs to choose the valuation method at the time of
submitting the return of income in which the trading stock is included. However, if the Commissioner is
satisfied that it is impossible or impracticable to use any of these valuation methods, he may accept such
other method of valuation as he considers the circumstances warrant.
Market value is a price obtained for selling stock of the same kind, quality and condition in the normal
course of trade, under similar conditions, excluding selling costs, freight handling costs and selling
commission.
The term “cost price” includes the freight charges, insurance premium, duty and other costs and
expenses incurred by the person in bringing the trading stock to hand i.e all costs of acquiring that item
and bringing it to its condition and location or the cost of replacing that item.
In the case of a manufacturing business, the total cost or the historical cost should include:
‘The direct cost of material and labour used in the manufacture of the finished products,
‘A proportion of production overhead costs that relate to the manufacture of the finished products, and
‘Any other cost of putting the stock in trade in its present location and condition.
In the case of a retail business, total cost should include the cost of acquiring the stock in trade and the cost
of bringing it to its location and condition (e.g. custom duties, transportation costs and packaging costs).
The cost of keeping the asset in its condition should not be added to its original cost. The total cost method
adopted for accounting purposes should use the FIFO (first-in, first-out) or the weighted average cost
formula.
3.1.6 Valuation of trading stock
a) Stock on hand at year end
A taxpayer can opt to value his closing stock at either (a) cost price (b) market value (c) or replacement
cost, whichever the person or his trustee may elect at the time of the return of income in which the trading
stock is included. The date of valuation of the stock is the last day of the tax year or accounting year. The
taxpayer is not bound to use one valuation method from year to year or to apply the same method to all
items of his stock. For example he can opt to value bolts using market value and nuts at cost. Where the
Commissioner is satisfied that it is impossible or impracticable to determine the value of trading stock he
may accept such other method of valuation as he considers the circumstances warrant;
b) Stock vested in the trustee, an insolvent, wound-up or deceased person
With regard to stock vested in the trustee, an insolvent, wound-up or deceased person, a taxpayer can opt to
use cost, market value or replacement, whichever he or his trustee may elect at the time of the return of
income in which the trading stock is included. The date of valuation of the stock is the date of the event i.e.,
135

lOMoARcPSD|3494582
wound-up of the taxpayer etc. Where the Commissioner is satisfied that it is impossible or impracticable to
determine the value of trading stock, he may accept such other method of valuation as he considers the
circumstances warrant.
c) Stock given to some other person (gift)
A taxpayer can opt to value gifted stock using cost, market value or replacement cost whichever he or his
trustee may elect at the time of the return of income in which the trading stock is included. The date of
valuation for this type of stock is the day it was gifted. Where the Commissioner is satisfied that it is
impossible or impracticable to determine the value of trading stock, he may accept such other method of
valuation as he considers the circumstances warrant.
d) Stock disposed of otherwise than by sale or exchange etc.
A taxpayer can opt to value his stock disposed of otherwise than by way of sale using cost, market value or
replacement cost, whichever he or his trustee may elect at the time of the return of income in which the
trading stock is included. The date of valuation for this type of stock is the date it was disposed of. Where
the Commissioner is satisfied that it is impossible or impracticable to determine the value of trading stock,
he may accept such other method of valuation as he considers the circumstances warrant.
e) Stock taken for own use
If goods are purchased and put in stock but are then withdrawn by the taxpayer for private or domestic
purposes there is no deduction to be granted to the taxpayer. Such goods must be brought in to the gross
income of the taxpayer at an amount equal to the cost price to the person or the market value of the trading
stock, whichever the person may elect.
f) Stock disposed of in pursuance of the sale or other disposal of his business
Trading stock sold in pursuance of the sale or other disposal of his business constitutes gross income at
amount at which it was sold or disposed of. Thus, the price stipulated in the sale agreement for trading
stock will accordingly bind the buyer and the seller, unless the Commissioner is of the view that the
transaction is a sham or disguise one.
g) Stock sold in pursuance of an order of court;
Goods sold in pursuance of an order of court constitutes in gross income at the amount at which they are
sold at.
h) Partially manufactured trading stock
If any of the above stock (other than stock actually sold) was partially manufactured, the Commissioner
may however consider the value of the stock to be the fair and reasonable value at the date of valuation.
i) Scheme of taxation avoidance
In case of trading stock given away for free or disposed of otherwise than by sale or exchange, if the
Commissioner is of the opinion that such trading stock has been given away or disposed of in pursuance of
a transaction, operation or scheme whose sole or main purpose is tax the avoidance or postponement of tax
liability, he shall determine the amount which he considers such trading stock would have realized had it
been disposed of by sale in the ordinary course of trade and such amount shall constitute gross income to
the transferor.
j) Trading stock lost or destroyed
As goods lost or destroyed by fire, theft etc., during the year could not be on hand at the end of the income
year, the taxpayer obtains a deduction in full in respect of goods lost or destroyed by accounting only the
136

lOMoARcPSD|3494582
values of those actually on hand. Since the stock would have been deducted as an expense as purchases
there is no further adjustment required. In the same manner no adjustment is required of obsolete stock or
provision for stock loss. An amount recovered under insurance policies in respect of such loss or
destruction is however brought into gross income.
3.3.12 Summary valuation table
Type of stock Date of valuation Method to be elected
Trading stock at year end

Last day of tax year or accounting year. Cost price, market value
or replacement cost
Consumed by taxpayer Date of such use or consumption Cost price or selling price
or put to other use.
Stock on hand: Date of such happening Cost price, market value

On date of death, insolvency or replacement cost
or donation
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 (WIP) Last day of tax year or accounting year What the CG considers as fair
and reasonable price
3.2 Concessions
3.2.1 Introduction
If as a result of any concession granted by, compromise or an arrangement made with a creditor a taxpayer
is relived of a liability which arose from expenditure in respect of which a deduction has been made under
the Act, the relieved or partially relived expenditure shall be included in the taxpayer’s gross income. A
concession includes a discount, a refund, rebate, write off or a waiver obtained by the taxpayer from a
creditor. It may also be represented by an expenditure incurred and deductible to the taxpayer and written
off by the supplier. The same principle applies to a concession granted for on assets ranking for capital
allowances. The taxable benefit shall be the aforesaid allowances.
3.1.2 Exclusions
A concession which arises as a result of winding up of a company by the court because of its inability to
pay debts or when a taxpayer is adjudged to be or is declared insolvent or assigned his property or
estate for the benefit of creditors is not taxable.
3.3 Grants / Subsidies

A grant or subsidy in respect of any expenditure allowed as a deduction must be added to the net profit. An
example would be any subsidy paid by Government after say, the construction of a farm dam. The subsidy
is subject to tax in the year in which it accrues, even though the project in respect of which it arises may
have been completed during the previous year.
3.4 Foreign exchange
Foreign exchange gains of revenue nature are brought into gross income when realised, whereas unrealised
exchanges gains and capital nature foreign exchanges gains are non-taxable.
137

lOMoARcPSD|3494582
A realised foreign exchange gain on revenue nature items is included in the trading income gain. A foreign
exchange gain is of a revenue nature if it arises from the sale of goods or services in the course of a
taxpayer’s trade or if it arises on working capital items i.e. debtors, settlement of trade creditors, on bank
deposits used in the day to day business activities of the taxpayer or on inventory.
Any capital nature foreign exchange gain included in the net profits must be deducted because it is non-
taxable. A capital nature foreign exchange gain arises on acquisition or disposal of fixed assets, on long
term loans and capital account. Realised capital nature foreign exchange gain must be capitalized.
Unrealised exchange foreign gain must be deducted from net profit. It is taxable when realized i.e when an
amount is received or settled.
EXAMPLE
Brighton Investments bought goods for resale from Britain for £15,000 on 2 September 2015. The
following foreign exchange rates are applicable:
2 September 2015 $1=£0.60

31 December 2015 $1 =£0.70
Compute the amount Brighton Investments must include in taxable income
(a) Is paid on 31 December 2015?

(b) Is paid on 4 January 2016?
ANSWER
(a) £15,000/0.70 – £15,000/0.6 = $3,571
(b) Nil the liability must be settled – a gain is realised when a liability is settled.
A realised foreign exchange loss of a revenue nature is deductible. However, realised foreign exchange
losses of a capital in nature, e.g. foreign exchange losses on loans, advances, capital repayments, debts etc.,
are disallowed. They must be capitalised and shall qualify for capital allowance when incurred on assets
that rank for capital allowances.
4 Exemptions
4.1 Introduction
Exempt income means income which is exempt from income tax and includes income which is not taxable
income. According to the Shorter Oxford Dictionary, to exempt is “To grant to a person, etc. immunity or
freedom from a liability to which others are subject”
4.2 Receipts and accruals

The terms receipts and accruals broadly cover all forms of income i.e. profits from trading, interest,
dividend, rent, or any other form of income chargeable to income tax.
4.3 Employees of exempt employers

Salaries and wages of persons employed by exempt organisations, although paid out of exempt income, are
subject to tax. Where the organization has employees, it should register as an employer (within 14 days of
138

lOMoARcPSD|3494582
becoming an employer) and deduct PAYE from the remuneration paid to the employees. For example, a
church is liable to remit PAYE on remuneration (stipend, benefits, etc.) it pays to its employees including
pastors.
4.4 10% withholding tax on contracts

An institution has an obligation to deduct 10% withholding tax on local contracts notwithstanding the fact
that its receipts and accruals may be exempt from income tax. This obligation stem from the fact that it may
be a registered taxpayer for other purposes i.e. employees’ tax or VAT etc. Thus, when a public entity or a
trust of public etc. buys goods or services from a person not in possession of a tax clearance, it should
deduct 10% withholding tax on the payment made to that person.
4.5 Public entities

The following orgainsation are exempt on their receipts and accruals
• Local Authorities;
• The Reserve Bank of Zimbabwe;
• The Zambezi River Authority;
• The Environment Management Board;
• The Peoples Own Savings Bank
4.6 Organisations not for profit

Most organisations which are operated not for profit have their receipts and accruals exempt from tax:
 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
 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
4.6.1 Clubs, societies, institutes and associations
Only clubs, societies, institutes and associations primarily organized and operated solely for social
welfare, civic improvement, pleasure, recreation or the advancement or control of any profession or
trade or other similar purposes if such 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 are exempted.
4.6.2 Ecclesiastical, charitable and educational institutions of a public character;
The expression “of a public character” does not necessarily mean the general community. It includes
sections of the public when the benefit to that section is universal and not individual to certain members of
139

lOMoARcPSD|3494582
that section. It was submitted that where a fund benefit a selected members of the society i.e. children of
selected employees of various benefactor companies it is not a fund of public character. Generally, schools
owned by trusts of a public character, mission schools, charitable organisation or government schools are
also regarded to be of a public character. An institution is defined in the Shorter Oxford Dictionary is an
establishment, organisation or association , institute for the promotion of some object especially one of
public utility, religious, charitable or educational etc. The word education is defined in case law as
consisting of elements of systematic or formal instructions, schooling or training.
A charitable organisation of a public character is an organisation that benefits the community or an

appreciably large number of the community, and not merely for the benefit of private individuals.
However note the following proposed changes for 2016:
a) Rates of tax on trade and investent income of non-profit organisation
Rate of tax on trade and investment income of ecclesiastical institutions, charitable and educational
institutions of a public character other than trade and investment income strickly applied to the objects
of the organisation fixed at 25.75%.
b) Receipts and accruals of non-profit making organisations
Exemption on receipts and accruals of ecclesiastical institutions, charitable and educational institutions
of a public character limited to:
 Donations, tithes, offerings or other contributions by the members or benefactors of the institutions
concerned
 Any other receipts or accruals of the insitution concerned that are not derived from trade and
investment
 Receipts and accruals of income from trade or investment by any company of which that institution
is the sole or principal member, and in respect of which the Minister responsible for the Companies
Act [Chapter 24:03] has issued a licence in terms of section 26 of that Act.
It is proposing to ring fence the exemption of receipts and accrual of ecclesiastical institutions,
charitable and educational institutions of a public character to those derived from non-trading and
investment activities of the orgainsation.
4.7 Mortgage financing

A building society is exempted on its receipts and accruals. Effective 1 January 2013 the exemption was
extended to financial institutions providing mortgage finance, but only to the extent of those receipts or
accruals of the financial institutions which are attributable to the provision of mortgage finance. 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 that immovable property. Bank providing taxable services and
the said exempt services should apportion expenditure and only deduct expenditure related to taxable
services.
4.8 Investor protection fund
With effect from 1 January 2013, receipts and accruals of the Investor Protection fund established in
terms of the Securities regulations, 2010, published in Statutory Instrument 100 of 2010 are exempt
from tax.
4.9 Insurance and Pension Housing Company
140

lOMoARcPSD|3494582
Receipts and accruals of the Insurance and Pension Company are exempt from tax. This is a company
established 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 and life and funeral insurers.
4.10 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 organization 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 organizations referred to in the International Financial Organizations Act
 The African Development Bank referred to in the African Development Bank
 The African Development Fund referred to in the African Development Fund
• The South African Reserve Bank;
 Any foreign organization 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, etc.
4.11 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 $3,000 p.a of interest earned on any deposit with a financial institution.
 The first $3,000 p.a of interest on a banker’s acceptances and other discounted instruments traded by
financial institutions
 The first $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
4.12 Dividends
A dividend from a company incorporated in Zimbabwe, provided that the paying company is chargeable to
tax on its profits, is exempt from tax. However, dividends received from building societies and other
companies not chargeable to tax are not exempt from tax.
4.13 Interest
The following interest incomes are exempt from tax:
 Interest on Tax reserve certificates (TRCs) are issued by Zimbabwe Revenue Authority.
 Interest payable to another financial institution by a financial institution
 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 by a financial institution
141

lOMoARcPSD|3494582
 Interest payable to a person whose receipts and accruals are tax exempt, e.g. interest payable to
charitable organizations, trust of a public, education institutions, society or associations etc.,
 Interest on any savings certificate issued in terms of any law,

 Interest on 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
 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).
 Interest on loans to small scale gold miners
4.14 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.
5 Pre-trading expenditure
Pre-trade expenditure of a revenue nature is deductible if incurred within 18 months before the
commencement of trade, provided the expenditure is deductible only when trade commences.
Preproduction expenditure is deductible if it incurred within 18 months before the commencement of

trade. The following are further conditions that must be satisfied:
• A trade must be carried on by a taxpayer

• The expenses must have been incurred in the process of establishing a business
• The expenditure must not be of a capital nature
• The expenses are deductible when trade commences.
Company formation expenses and preliminary expenses are disallowed even if they meet the above
conditions.
A business commences when the actual income producing operation has started i.e. the date a taxpayer
starts marketing his products or the date when he opens his premises for business.
6 Year of Assessment
A year of assessment is a period of twelve months beginning on the 1st January in any year in respect of
which tax is to be charged, levied and collected and includes any period within such a year of assessment.
6.1 Introduction
The year of assessment is a period of twelve months ending on 31 December and this is the ordinary year of
assessment. The Commissioner may, on written application by a taxpayer grant a permission to use a
different twelve months as the year of assessment and this shall be called a substituted year of assessment.
142

lOMoARcPSD|3494582
Such notice shall take effect at the end of the taxpayer’s substituted year of assessment. The person may
also be granted different dates for payment of his provisional tax. The granting of different quarterly
payments dates (QPDs) is not automatic. The Commissioner may accept a different year of assessment and
yet requiring a taxpayer to pay provisional tax (QPDs) based on the normal dates.
A provisional tax is paid based on estimated annual tax liability in advance of year end on 25 March, 25
June, 25 September and 20 December i.e. as follows:
QPD Tax due Date tax due

1st 10% of estimated annual tax liability 25 March
2nd 25% of estimated annual tax liability 25 June
3rd 30% of estimated annual tax liability 25 September
4th 35% of estimated annual tax liability 20 December
QPDS are discussed in detail in chapter 21.
6.2 Change in year of assessment

When a taxpayer’s year of assessment changes from the ordinary year of assessment to a substituted year of
assessment to an ordinary year of assessment or from one substituted year of assessment to another, the
period between the last full year of assessment prior to the change and the date on which the changed year
of assessment commences is be treated as a separate year of assessment, i.e. a “transitional year of
assessment”.
6.3 Effect of short year of assessment

Apart from the first tax year of trade and the last tax year of trade, a period of assessment must have 12
months of profits. Since the periods of account may not be 12months long in the opening and closing years,
the current year basis may be impossible to apply.
The first tax year is the year during which the trade commences. For example, if a trade commences on 1
June 2015 the first tax year is 31 December 2015.The basis period for the first tax year runs from the
date the trade starts to the next 31 December (or to the date of cessation if the trade does not last until
the end of the tax year).
6.4 The choice of an accounting date
The application for a different year of assessment must be supported by valid reasons. The permission to
use a substituted year of assessment can be withdrawn by a written notice issued by the Commissioner.
A new trader should consider which accounting date would be best. There are a number of factors to
consider from the point of view of taxation.
143

lOMoARcPSD|3494582
Chapter roundup
 Trading income is taxed at 25.75%. The tax is paid in advance of year end on quarterly payment dates
(known as QPDs) based on the estimated taxable income.
 Tax is paid on taxable income, and not on net profits. Taxable income is the adjusted net profit before
tax as per financial statements.
 Gross income includes trading stock, concessions, realised exchange gain of a revenue nature, subsidy
of a revenue nature etc.
 Trading stock at year end is gross income, while the opening stock is a deductible expenditure. The
accounting practice satisfies this requirement; hence no adjustment is required other than that
emanating from the valuation methods.
 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.
 Pre-trade expenditure of a revenue nature is tax deductible if incurred within 18 months before the
commencement of trade, but only deductible when trade commences.
 A year of assessment is a period of twelve months beginning on the 1st January each year and includes
any period within such a year of assessment.
 Apart from the first tax year of trade and the last tax year of trade, a period of assessment must have 12
months of profits.
144

lOMoARcPSD|3494582
TRADING DEDUCTIONS
7
1. Expenditure allowable and disallowable C2(b)
2. Relief for pre-trading expenditure C2(c)

3. Interest paid and received. C2(g )
4. Donation C2(h)
5. Assessed loss C2(i), C2(j) & C2(k)
Introduction
This chapter lays the foundation to the computation of corporate tax liability. It looks at the expenditure
side of the computation of taxable income. First we deal with the general deduction formula, a guideline
which lays the framework for treating the expenditure as deductible or not. It is not always possible for the
tax legislation to cover every expense that a taxpayer would incur in his business. To this end the general
deduction formula is a template that should be used.
Next we look at expenditure that is specifically stated in the Income Tax Act as deductible. We also discuss
certain expenses which are strictly prohibited in the computation of taxable income.
Our next topic is relief for expenditure incurred before commencement of trade. This is followed by a
review of the tax treatment of interest paid and received by the business. From time to time a business may
incur certain expenses purely for philanthropic (i.e. wholly gratuitous) purposes. The chapter will help you
identify those expenses and give details of them.
We conclude the chapter by looking at the relief available for trading losses. After this, you must be able to
answer a full a question on computation of taxable income.
The next chapter deals with capital allowances and recoupment, and then followed by a chapter on
computation of corporate tax liability.
Study guide
145

lOMoARcPSD|3494582
Intellectual
level
C2 Trading deductions
(a) Recognise gross income 2
(b) Recognise the expenditure that is allowable in calculating taxable business income. 2
(c) Explain how relief can be obtained for pre- trading expenditure. 1
(d) Compute capital allowances(as for individual/personal income tax) 2
(e) Compute investment incentives (as for individual/personal income tax) 2
(f) Compute property business taxable income 2
(g) Explain the treatment of interest paid and received 1
(h) Explain the treatment of donations 2
(i) Understand how assessed trading losses can be carried forward 2
(j) Understand how assessed trading losses can be claimed against income of the 2
current accounting periods
(k) Recognise the factors that will influence the choice of assessed loss relief claim. 2
(l) Explain how relief for a property business assessed loss is given 1
(m) Compute the taxable income chargeable to corporate tax 2
Exam guide
The bulk of deductions will be examined in question 2, which is a question on corporate tax. They are also
examined in questions 1, 4 or 5 and you must be sure that you understand them thoroughly. Note that the
general deduction formula is the engine that drives the computation of taxable income and this rule must be
fully understood. It is also crucial to master the list of all prohibited expenses as these will always be there
in the exam. We cannot further emphasis the need to know how to deal with pre-trade expenses, donations,
interest and Assessed loss which have been specifically given space in your syllabus and study guide.
1. Expenditure allowable and disallowable

Expenses are deductible in three parts. Firstly they are those which are deductible in terms of the general
deduction formula, which is the broad guideline meant to deal with expenses not highlighted in the Act.
Next are those expenses which are specifically incorporated in the Income Tax Act as deductible.
Finally there are those expenses which are completely denied as deductible in the Act; i.e. prohibited
deductions. They can also be referred to as “inadmissible expenditure”
The diagram in the next page gives a summary of the tests which an expense must meet to be deductible in
the computation of taxable income:
146

lOMoARcPSD|3494582
Yes Has the expenditure No

actually been incurred?
Is it in the Is the No Is it
Yes
production expenditure specifically Yes
of income or disallowable
capital in
for purposes by the Act?
of trade? nature?
Yes
No
Is the expenditure
specifically Yes
allowed by the Allow
Act?
No
Disallow
No
1.1 General deduction formula

A deduction must meet the rules implied to be deducted, unless it is specifically provided for in the Act.
Key term
Deduction allowable shall be expenditure and losses to the extent to which they are incurred for the
purposes of trade or in the production of income, except to the extent to which they are expenditure or
losses of a capital nature.
1.1.1 Actually incurred
The word incurred ordinarily means an actual payment or an obligation undertaken i.e. (1) moneys actually
paid out; or (2) moneys which a trader is legally liable to pay”. Expenditure is actually incurred if the
taxpayer is under a legal, unconditional liability to effect payment, even though the actual payment may
only be made after the end of the relevant tax year (Nasionale Pers Bpk v KBI 1986 (3) SA 549 (A), 48
SATC 55; Edgars Stores Ltd v CIR 1988 (3) SA 876 A, 50 SATC81).
It is not a requirement that the expenditure should be discharged for it to be deducted, because “actually
incurred” does not necessarily mean “actually paid”. This means that the actual payment may fall due in a
later year, while a deduction may be made in the year the amount is actually incurred.
Key point
147

lOMoARcPSD|3494582
Expenditure is incurred when:

• There is an unconditional legal liability to pay.
• One owes a present and inescapable debt.
• Remains unpaid, as long as a taxpayer is committed to it.
• A payment is made in the absence of an existing liability
• A taxpayer receives the goods or services from a supplier despite payment remaining outstanding
Expenditure is not deductible if there is no outgoing or when there is no absolute or certain amount to be
paid. Because of this no deduction is made of provisions, contingencies, impairments or revaluations in the
computation of taxable income. See exceptions later in the chapter.
Zimra, however in practice disallow prepayments for goods to be delivered in the following year of
assessment, but prepayments of services of a revenue nature laid out in the production of income are
deductible i.e. insurance, electricity, water, audit fees etc.
Relevant cases:
Concentra (Pty) Ltd v CIR 1942
The taxpayer had agreed with its directors that they would be compensated for the use of their own motor
cars on the company’s business. Due to cash-flow problems the amounts could not be settled immediately.
When the amounts were eventually settled the taxpayer deducted the amounts in its accounts in the year it
paid the expenditure.
Held: the liability to compensate its directors for the use of their motor cars arose as and when the cars were
used, even though the amounts could have been subject to discussion and adjustment. The liability arose
when the work was performed for which the taxpayer had agreed to make payments.
Ackermans Limited v CSARS 2011
The taxpayer sold a business as a going concern, which included liabilities arising in connection with the
business, in respect of period prior to effective date of sale, which were known to the taxpayer. The
liabilities contained contingent liabilities which were conditional as at effective date of sale. The taxpayer
sought to deduct these liabilities.
Held: the expenditure incurred meant the undertaking of an obligation to pay or- which amounted to the
same thing- the actual inccural of a liability. No expenditure had been actually incurred by the taxpayer on
the effective date of the sale agreement. Claim rejected.
Edgars Stores Ltd v CIR 1988
The taxpayer rented business premises under an agreement which provides for the payment of the greater a
basic rental (the minimum rental payable) and turnover rental i.e based on the taxpayer’s level of turnover
in the year of lease. The year of assessment did not coincide with year of assessment. The question was
whether excess of turnover rental over basic rental had been actually incurred at year end in respect of a
lease which will end after year of assessment. The turnover rental was undetermined at year and contingent
on an event (level of turnover) which was only determinable in the succeeding year of assessment.
Held: the obligation to pay turnover rental was contingent until the turnover at the end of the lease year
could be determined, and the expenditure relating to the turnover rental was therefore not actually incurred
in a year of assessment which ended prior to the termination of the lease year. It was therefore not
deductible in that year of assessment.
1.1.2 For purposes of trade
148

lOMoARcPSD|3494582
Key term
A trade means “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”
A trade implies an active occupation, as opposed to passive investment. The letting of property and royalty
earning activities, although they are passive investment activities, are also considered trading activities.
A trade does not necessarily need to be profitable, what is important is that it must be entered with the hope
or expectation of making a profit (refer previous chapter).
Expenditure is not deductible if it is not for purposes of trade. 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 (the duality test). The private proportion of payments for motoring expenses, rent, and
travel and telephone expenses of a taxpayer is non-deductible. Where the payments are to or on behalf
of employees, the full amounts are deductible but the employees are taxed under the benefit code.
EXAMPLE
David is a motivational speaker and presenter and does this for a living. His articles are prepared at his
home and it can be estimated that he uses 25% of his home exclusively for this purpose. The following are
the details of his expenses for year ended 31 December 2015:
Staff costs 24,000

Printing and stationery 2,000
Home utilities (full cost) 600
Home repairs & maintenance (full cost) 1,400
Excess of income over expenditure 28,000
Compute David’s allowable and disallowable expenditure:
ANSWER
Item Allowable Disallowable

Staff cost 24,000
Printing & stationery 2,000
Home utilities apportioned 150 450
Home repairs apportioned 350 1,050
Total 26,500 1,500
1.1.3 In the production of income
Key term
Expenditure is in the production of income if it is incurred as a result of an act which is done for purposes
of earning income (see Rendle case below).
This phrase is the most onerous requirement of the deduction formula. In simple terms, if expenditure does
not result in taxable income, even if it is for purposes of trade, it is not deductible. Laterally, an
expenditure which produces exempt income or income not from a source within Zimbabwe is not
deductible. Expenditure on idle, unproductive or vacant property is disallowed since such do not
produce income.
Relevant cases:
149

lOMoARcPSD|3494582
Port Elizabeth Electric Tramway Co. Ltd v CIR 1936
A driver employed by the taxpayer, a tramways company, was killed in an accident while driving the
company vehicle in the course of employment. The widow claimed compensation from the company,
which the taxpayer unsuccessfully resisted in a legal proceeding. The company sought to deduct the
compensation and the cost of resisting the claim, which the CIR denied on the basis that the costs were not
incurred in the production of income.
Held:
 The test for determining whether expenditure is incurred “in the production of income” is twofold:
 The act to which the expenditure is attached must 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 must 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
 The compensation to the widow resulted from the act which was done in the process of producing
income, while the legal costs for resisting the claim was not an operation entered upon for the purpose
of earning income. The compensation was deductible and legal costs disallowed.
COT v Rendle (1964) (A.D)
The taxpayer mediated property sales on behalf of customers. The company employed a clerk whose
functions included receipting and bank depositing of proceeds from the property sales. The taxpayer had an
independent audit carried out which revealed that the clerk had been stealing client and the taxpayer’s
monies. The taxpayer sought to deduct the cost of audit and compensation it paid to its clients, on the basis
that were incurred in the production of its income.
Held: an expense is incurred in the production of income if:
 It is necessary for the performance of the business operation
 It is attached to the performance of the business operation by chance or closely connected to the
performance of the business operation
 It is a bona fide expense incurred for the more efficient performance of business operations
The compensation paid to clients was a cost attached to the performance of the business operation by
chance and was sufficiently closely connected to the taxpayer’s business operation. The act leading to the
cost occurring was a necessary concomitant of the operation. The risk of the mishap or misappropriated
became inherent when the clerk was employed and the loss became inseparable from or a necessary
incident of the carrying on of the business. The same risk cannot be implied if the act is perpetrated by
a person other than an employee or agent e.g. by a proprietor, partner, managing director or
manager acting as a proprietor.
Sub-Nigel Ltd v CIR
150

lOMoARcPSD|3494582
The taxpayer, a company carrying on the business of gold mining, had taken out certain insurance policies
against loss of profits occasioned by fire and standing charges but had made no claim on the insurer. The
taxpayer sought to deduct the premiums, which the Commissioner disallowed on the basis they were not in
production of income.
Held: in determining whether expenditure was incurred in the production of income, it was irrelevant
whether the expenditure actually produced income; provided that it was incurred for the purpose of earning
income the expenditure is allowable. The premiums were incurred for purpose taxpayer’s trade and
accordingly deductible.
ITC (1661) 1998
An external auditor who had been given authority to sign cheques by the client (taxpayer) stole the client’s
monies. The taxpayer sought to deduct the stolen amounts, on the basis that they were incurred in the
production of the taxpayer’s income.
Held: such theft was not the kind of misfortune which should be expected to occur when running a
business. An auditor is in a fiduciary relationship with client, fact remains he is at all times an independent
contract.
1.1.4 Capital or capital nature
Capital nature expenditure is not deductible even if it is ‘in the production of income’ or for purposes of
trade. Depreciation and loss on sale of fixed asset are disallowed, while profit on sale of fixed asset is
not recognised as income.
Capital nature expenditure includes cost of acquiring fixed assets, share capital or capital employed in
business, an income-producing unit, goodwill, intellectual property (software, patents, trademarks etc.), and
cost of improving or enhancing any of these items plus related expenses.
Some of the related expenses which must be capitalised, as opposed to being deducted are:
 Money spent in order to create a source of income

 Travelling costs to purchase fixed assets,
 Installation costs,
 Transfer duties, non-refundable VAT, import tax, etc.
 Cost of altering share capital, memorandum or articles of association
 Underwriting expenses, adverting for share offer, brokerage fees etc.
Distinguishing capital nature expenditure from revenue expenditure has remained one of the most
contentious tax issues. In practice the following tests, not conclusive, are often applied:
 Need or occasion which calls for the expenditures i.e. what prompts the expenditure and whether the
surrounding circumstances and ultimate objective of the expenditure supports a capital or revenue
classification.
 Recurrent test – this is based on the premises that a recurring expense is often revenue in nature,
while a once off expense is usually of a capital nature. But this is not definite. e.g. Irregular
expenditure can be of revenue in nature.
 Identifiable asset test- expenditure is regarded as of a capital nature if an identifiable capital asset was
acquired or it results in an asset being owned
 Enduring benefit test- if an enduring advantage is acquired by expending the money, the expenditure
is likely to be of a capital nature. An enduring benefit can arise from expenditure made to relieve the
business of an onerous asset.
151

lOMoARcPSD|3494582
 Profit –making structure or the profit making process- an expenditure which relates to a business’s
structure (i.e. assets used to carry on the business) is capital in nature .In some businesses the structure
may mainly consists of intangible assets, e.g. goodwill. This test is often linked to the identifiable asset
and enduring advantage tests.
 Source of payment tests -if expenditure is made out of fixed capital it is more likely to be of a revenue
nature, and expenditure made from circulating capital is more likely to be of revenue nature.
Relevant cases:
CIR v George Forest Timber co. Ltd 1924
A taxpayer carrying on the business of timber merchants had purchased 600 morgen of indigenous forest
land for £8,000. The taxpayer claimed as a deduction from the proceeds of its timber sales for the year of
assessment an amount of £1,000 representing a proportionate share of the purchase of the timber sold by it,
which the Commissioner disallowed on grounds that it was of a capital nature.
Held: money spent in creating acquiring an income producing concern or a source of future profits (as
opposed to money spent in working it) was capital expenditure. Since the expenditure sought to be
deducted was incurred in acquisition of revenue-producing asset to be worked for future profit, it was
capital nature.
SIR v Cadac Engineering Works (Pty) Ltd 1965
A taxpayer incurred cost for an application to court for an interim interdict restraining of a company,
Homegas, which it purported to be infringing the registered design licensed to the taxpayer. The interdict
was meant to restrain Homegas from manufacturing or dealing with its appliance pending the institution of
an infringement action to be brought. The application was dismissed with costs and the taxpayer duly
incurred the costs of R3 854 in terms of its indemnity undertaking and sought to deduct this expenditure.
Held: the object of the ligation had been to eliminate Homegas as a competitor. The fact that the
expenditure neither created a new asset nor made addition to an existing asset does not rule the expenditure
in favour of it being of a revenue nature. The expenditure incurred was akin to the cost of buying out a
competitor, which ordinarily falls into category of capital expenditure.
Nchanga Consolidated Copper Mines Ltd COT 1962
The taxpayer and two other companies, Rhokana Corporation Ltd and Bancroft Mines Ltd, were each
copper mining companies with the Anglo-America group. Owing to decrease in world market for copper,
the taxpayer and Rhokana agreed to pay Bancroft Mines Ltd a total sum of £2,165 as consideration for
Bancroft not to produce copper for one year. The taxpayer sought to claim a share of its cost.
Held: the expenditure was cost of producing the taxpayer’s copper output for the year in question, incurred
as a part of temporary arrangement to meet a temporary situation. The benefit to the taxpayer was of no
more than one year’s duration, accordingly brought no enduring benefit to the taxpayer’s trade, a test
closely associated with capital nature expenditure.
1.2 Expenses treated under the general deduction formula
The deductibility of the following expenses is governed by rules outlined in the general deduction formula:
1.2.1 Legal expenses
Legal expenses include fees for services of legal practitioners, expenses incurred in procuring evidence or
expert advice, court fees, witness fees and expenses, taxing fees, the fees and expenses of sheriffs or
152

lOMoARcPSD|3494582
messengers of court and other expenses of litigation etc. The general principle is that legal fees will be
allowed if they were incurred in the production of income. The claim, dispute or action at law should arise
in the ordinary course of or by any reason of the taxpayer’s trade
Legal and related expenses of a capital nature or not incurred in the production of income or for purposes of
trade are non-deductible. For example, legal cost 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 reorganizations or share issues.
Legal costs of a capital nature must be capitalized.
Deductible legal and related costs when incurred in the production of income or purposes of trade
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 to 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.
1.2.2 Fines and breaches of law
Whether incurred in trading or in the production of income, fines, bribes and penalties are non- deductible.
They are contrary to public policy and allowing them would frustrate the legislative intent, i.e .causing the
punishment imposed to be diminished or lightened. Examples include traffic fines and penalties for
breach of any statute whether of Zimbabwe or any country.
1.2.3 Employment expenses
Where the payments are to or on behalf of employees, the full amounts are deductible to the
employer, but the employees are taxed under the benefits code. Therefore, all employment related
expenses, e.g. fringe benefits, incentives, gratuities or bonuses incurred by an employer, whether for past,
current or future services are deductible.
However, unreasonable or excessive payment paid to related parties or directors are disallowed e.g.
excessive salary paid to a family member.
A payment to get rid of an unsatisfactory director is a normal revenue expense (Mitchell v Noble (BW)
Ltd (1926) 11 TC 372). No new asset was created; goodwill was not enhanced.
Payments to retiring directors for agreeing not to compete with the company were held to be capital
expenditure because this increased the company’s goodwill (Associated Portland Cement Manufacturers
Ltd v Kerr (1946) 27 TC 103).
1.2.4 Employee personal expenses
Employees cannot claim any expense against employment income, other than those outlined in chapter
3. More specifically, an employee is not allowed to claim any of the following expenses:
 Cost incurred for purposes of improving his knowledge or on self-education

 Cost of securing employment and relocation expenses
 Interest on loan used to purchase shares as a condition for increased emoluments
 Cost of travelling from home to place of work or vice versa.
153

lOMoARcPSD|3494582
 Cosmetics and grooming expenses, unless the person is an artist or is in trade
1.2.5 Insurance policies
Insurance costs incurred for purposes of trade, or the production of income is deductible. Examples of
deductible insurance cover includes group-term life insurance policies, public liability policies (third party
policies), loss of profits, fire, theft or any business related insurance etc. The insurance covers which are
disallowed are joint life policies and ceded life policies.
1.2.6 Removal expenses
When taxpayer incurs the cost of moving and reinstalling the equipment at the new site the cost is non-
deductible on the basis that it is of a capital nature. The expenditure should be capitalized and be granted
capital allowances. Cost of moving sock removal expenses and rubbles within the same premises is
different; this is an expenditure of a revenue nature which should be claimed as a deduction. Regarding the
cost of relocating staff or retrenching them because they cannot move to the new site, this too was ruled in
ITC 1716 (64 SATS 27) to be deductible. A taxpayer that incurs cost to reinstall property as part of a project
to improve other property must capitalize such costs.
However, stock removal expenses and other expenses incurred in moving property within the same
premises are tax deductible.
1.2.7 Miscellaneous expenses
You may come across some the following expenses in the exam.
Item Treatment Comment

154

lOMoARcPSD|3494582
Debt factoring expenses Allow

Debt collection costs Allow Those incurred on non-trading debts are
of capital nature
Cost of licence renewal Allow New licence and entrance are disallowed.
Same as to acquisition of a right
Cost of distributing dividend Allow Interest on money to pay dividend is disallowed
Removal of stock Allow

Cost of moving business to a new premises Disallow Capital allowances must be claimed on the cost of
and in adapting to new premises moving ranking assets
Connection fee for water, electricity, Allow

sewerage or telephone
Acquisition of water rights Disallow Common to farmers
Installation of drainage system Disallow
Installation of window lighting Disallow
Cost of evicting lessee Allow Unless the eviction is for purposes of changing
the use of the property
Drafting a lease agreement by lessor Allow When incurred by lessee is disallowed, same as
acquisition of a right
Cost of eliminating competition Disallow
Restraint of trade Disallow
Fee paid by a money lender or landlord to Disallow
a person introducing a client
Advertising of a permanent nature e.g. Disallow Claim capital allowances on the expenditure
neon signs purchased, billboards,
model house on rented site, sign writing
on office windows are all capital in nature.
Exam focus point

Whenever an item has been ranked to be an improvement you will need to compute capital allowance
should the item be an identifiable ranking asset.
1.3 Specific deductions
The following expenses are specially allowed in terms of the Income Tax Act:
1.3.1 Repairs and improvements
General repairs that are non-capital are deductible in full in the year it is incurred. In determining
deductibility, the courts look for the presence of three characteristics to determine whether a repair has
occurred:
1. The expense of the repair is the restoration of an income producing item to its previous condition;
2. An item must be in need of restoration before it can be "repaired" for taxation purposes; and
3. A repair involves replacement or renewal of a part of an item, rather than the entire item.
The repairs must be incurred during the year of assessment on property occupied or used for purposes of
trade or in the production of income or they are a result of the letting of a property.
Key term
A repair is:
155

lOMoARcPSD|3494582
• A restoration of property to its original state.

• A restoration by renewal or replacement of subsidiary parts of the whole.
• it is not necessary that the materials used should be identical with the materials replaced
• key to the above, is that it is necessary that the original property must have become impaired
An improvement: An improvement results in creation of a new asset. It is the reconstruction of the

entirely, meaning by the entirely not necessarily the whole, but substantially the whole subject matter. An
improvement is non-deductible, but qualifies for capital allowances if it is in respect of a ranking
asset (see next chapter).
The following are characteristics embedded in an improvement:
You must not make a mistake of incorrectly claiming the cost of structural improvements as repairs
when they are capital works. You must claim capital allowances on such expenditure.
Examples
Item Type Comment

Replacing a car engine by a new Repair But not when a diesel engine is replaced by a petrol
Engine engine or vice versa or the car has become
unserviceable
Initial repair to property Improvement Claim capital allowances
Underpinning of foundation Improvement Claim capital allowances
Cost of replacing broken windows Repair
and mending cracks
Exam focus point

You must not deduct repairs on a vacant, idle property or property which is not producing taxable
income. Repairs are deductible when actually incurred during the year of assessment.
Relevant cases
Rhodesia Railways Ltd v COT, Bechuanaland
The railway line was in a bad state. The taxpayer embarked on an extensive programme of renewal which
was beyond normal maintenance, in laying new sleepers, rails and fastenings on 74 miles of the 588 miles
railway line in length. The result of the renewals was to restore the track to its normal condition, in which it
was capable of giving the same service as before. Taxpayer sought to deduct the expenditure as a repair.
Held that the periodical renewal by sections of the rails and sleepers of a railway line as they were worn out
by use in the earning of income was in no sense a reconstruction of the whole railway. The expenditure did
not create a new asset but was an ordinary incident of railway administration incurred to maintain the
existing line in an income-earning state and was not of a capital nature.
CIR v African Products Manufacturing Company Ltd, 1944
The taxpayer had a factory whose roof over the kilns forming part of the factory was in a bad and
dangerous condition, which the taxpayer decided to replace. As the standard material for such roofing was
unobtainable due to war, the taxpayer was advised to erect a concrete roof which would cost more than the
roof in its original form. The Commissioner considered the excess as an improvement.
156

lOMoARcPSD|3494582
Held: the taxpayer had expended the amount in question on restoring the roof to its original condition. The
different materials had been used for this purpose and not for the purpose of effecting an improvement. The
full cost was treated as expended on repair.
Rialto and Variali v COT, 1977
The taxpayers had residential property, from which it derived rental, which had developed extensive
cracking in the walls of the building. The taxpayers, on the advice of consultants, felled the trees whose
roots were affecting the foundations and strengthened the foundations by underpinning. The taxpayer
claimed the cost of felling the trees and the consultants’ fees.
Held: the underpinning did not constitute a repair of any part of the premises but was a modification to the
foundation, designed to eradicate what was apparently an original structural defect and it was an
improvement. The felling of the trees also did not constitute a repair of any part of the premises but
eliminated a source of danger to the foundations and a lighting hazard, and was an improvement. Cost of
felling the trees and consultants’ cost were disallowed.
EXAMPLE
Dombo made the following expenditures with respect to his apartment building. Discuss whether each of
the expenditure is deductible or constitutes capital expenditure.
1. $500 for re-painting one of the apartments and $15,000 to have entire building re-painted.
2. $1,000 for patching roof of his building and $5,000 to have a new roof.
3. $500 for some rewiring and plumbing work. Would the answer change if Dombo paid $4,500 to have
the rewiring and plumbing done as part of the overall renovation of the building?
4. $1500 for wages paid to carpenter who spend three weeks building a large carport for the apartment
building. He failed to have the new carport painted at time it was constructed, but paid $400 in the
following year to have it done.
5. $2000 in legal fees to block efforts by the city council to condemn some of Dombo’s land adjacent to
his building in order to widen a nearby highway.
ANSWER
1. The cost of re-painting one of the apartments or the entire building is deductible. It merely restores the
property to its working condition, deductible.
2. The patching of a roof is deductible (same reasoning as above), while $5,000 spent on new roof is not
deductible. It is a major improvement and more than keeping the building in operating condition. It will
improve the building or extend its working life for a number of years.
3. The rewiring and plumbing work is a repair, which is deductible. The overall renovation constitutes
permanent improvement. Note that, expenditure that is alone viewed as repair can be a capital
expenditure if done in whole as a part of a major renovation.
4. Wages are deductible, but wages paid for an asset being created must be capitalized to form part of the
cost of the asset. The fact that the carport was not painted at the time of construction does not change
the nature of expenditure. It was just a delayed part of the construction and must be capitalized.
5. The cost of defending or perfecting a title to a property is considered as a capital expenditure.

Therefore, the legal fees incurred to protect property must be capitalized to protect the title.
1.3.2 Capital allowances
Refer to next chapter.
1.3.3 Lease premium

157

lOMoARcPSD|3494582
Refer to previous chapter.
1.3.4 Lease improvements
Refer to previous chapter.
1.3.5 Bad debts
A debt is deductible as bad debt when it satisfies all the conditions laid out below:
a) Debt must be proved to the satisfaction of the Commissioner to be irrecoverable. Provisions for
bad debts and untraceable debts cannot be allowed because of this reasoning.
b) Debts must be due and payable to the taxpayer. Bad debts on debts sold or ceded by the taxpayer are
disallowed because of this reasoning, unless sold with the condition that the seller will inherit them if
they cannot be recovered by the buyer.
c) Debts must have been included in the taxpayer’s taxable income in the current year or in any
previous year of assessment. Disallowed because of this condition are:
 Irrecoverable advances
 Irrecoverable loans, except if a taxpayer is in the business of lending money e.g. banks
 Bad debts on purchased or acquired debts
A taxpayer need to show that he has ceased active recovery collection or handed the debt over to a lawyer
or debt collector to prove that the debt is irrecoverable. The following conditions are acceptable to the
Commissioner as proof of debts being irrecoverable:
- The debtor has died without leaving sufficient assets for debts.
- The debtor has become insolvent.
- The debtor is untraceable and the creditor has taken reasonable steps to ascertain the existence of the
debtor without success.
- The debtor is liquidated or is in liquidation with insufficient funds for paying debts
- The creditor has taken all the available legal steps to recover the debt
- The debtor has absconded and his whereabouts are unknown
Irrecoverable advances to employees are deductible where it is the custom of the trade of the taxpayer to
make advances in order to ensure the retention of a satisfactory labour force or as custom of farmers or of
insurance companies in relation to irrecoverable agent’s commission.
Bad debts on debts sold or ceded can still be deductible if they are sold with a condition that the seller may
repossess or reimburse the buyer of the debts the buyer was unable to collect.
EXAMPLE
Spendthrift (Pvt) Ltd writes off the following as bad debts on 31 December (its year end).
a) Mr. Mapuwapuwa a deceased employee to whom the company advanced a loan $3,000
b) Stony (Pvt) Ltd a customer of the company’s products, Stony (Pvt) Ltd was recently declared insolvent
$15,000
158

lOMoARcPSD|3494582
State, giving reasons, how each of the above bad debt is treated for tax purposes.
ANSWER
Mr. Mapuwapuwa, the amount is disallowed because it was never part of Spendthrift (Pvt) Ltd’s taxable
income
Stony (Pvt) Ltd, the amount is allowed because the amount was part of Spendthrift (Pvt) Ltd’s taxable
income and can be proved to the satisfaction of the Commissioner to be irrecoverable.
In practice, a claim for a bad debt must be supported by a statement showing, the debtor‘s name date on
which the debt was incurred, amount and nature of the debt and reasons for regarding the debt as
irrecoverable must be convincing e.g. customer is deceased or is under liquidation.
1.3.6 Pension and arrear pension contributions
Employer’s contributions that are made to a Pension fund or the Consolidated Revenue Fund, NSSA or a
benefit fund or on behalf of member are deductible to the employer (taxpayer) per member as follows:
Order of deduction Limitation
Pension fund contributions Limited to the LESSER of

Ordinary contributions -$5,400 per annum per employee or
-7.5% of member’s annual emoluments or
-Contributions made
Arrears
Such amount as approved by the CG
NSSA Limit 3.5% of employee’s basic salary of $8400 p.a.
Benefit fund $1,500 per annum per employee
Note that the maximum deduction that an employer can ever claim per employee where
contributions are for ordinary pension, arrear pension and NSSA is $5,400 p.a.
Where the pension fund or the benefit fund contributions have already been deducted in arriving at the
taxpayer’s (employer’s) net profit, excess contributions (amounts exceeding the prescribed limits) must be
added back.
Exam focus point

Use the averaging method in the exam to compute the portion of contributions to pension fund or
NSSA (subject to NSSA limit) i.e multiply number of employees by $5,400. You will then need to
disallow the excess.
EXAMPLE
Sunbath (Pvt) Ltd makes contributions to NSSA and pension on behalf of its employees. The amount
contributed for NSSA pension and the ordinary pension, deductible in its account amounted to $91,000.
The company has 15 employees. The company also contributed $30,000 to an approved benefit fund.
Sunbath (Pvt) Ltd has a net profit for the year amounting to $65,000.
Compute Sunbath’s taxable income.
159

lOMoARcPSD|3494582
ANSWER
Net profit 65,000

Add excess benefit fund contributions ($30,000 – 15 x $1,500) 7,500
Add NSSA & Pension excess ($91,000 - $5,400 x 15) 10,000
1.3.7 Lump sum contribution to pension fund
The Act provides for deduction of amounts (lump sum payments) made during the year of assessment by
the employer to a pension fund to which his employee are members for purposes of capitalising the
fund. The Commissioner must however be satisfied that the contribution is necessary for the said
purpose and must be furnished with an actuarial certificate by the employer or someone on behalf of the
employer. Another certificate from the Minister, in consultation with the Insurance and Pensions
Commission, certifying that the lump sum contribution will result in increased pensions or benefits for
members is also required.
1.3.8 Medical costs
The Act provides for the deduction of the amount of any contributions paid to a medical aid society by
an employer on behalf of its employees or their dependents. A medical society is defined in the Act as
‘any society or scheme which is approved by the Commissioner in respect of the year of assessment in
question …’ This makes contributions made to unapproved funds such as in-house medical schemes or
foreign medical aid societies non-deductible. The Commissioner approves a medical aid society or
scheme if he is satisfied that it is a permanent society or scheme bona fide established for the purpose of
providing benefits for its members and their dependants in respect of expenditure incurred on medical,
dental or optical treatment, including treatment prescribed by a medical or dental practitioner, the
provision of drugs for medical, dental or optical purposes, the provision of medical, surgical, dental or
optical appliances or the provision of ambulance services.
It can be submitted that, medical expenses or reimbursements of medical related travelling cost of
employees or their families actually incurred by the taxpayer are also deductible.
To the employee medical contributions, medical expenses or travelling paid on his behalf or his family by
an employer are exempt from employees’ tax. Whereas, amounts that an employee pays for himself or for
his family are non-deductible but qualify for a 50% credit in his hands.
1.3.9 Experiment and research
A taxpayer is entitled to claim expenditure incurred by him during the year of assessment in carrying
out experiments and research related to his trade, other than those of a capital nature, e.g. cost of plant,
machinery, land, premises, acquisition of rights, development cost, etc.
EXAMPLE
Early Birds (Pvt) Ltd, a sizeable chick breeder in Zimbabwe, conducted a research to test existence of
salmonella in its birds. The research was conducted from 2 August 2014 to 28 July 2015. The following
were the research expenses:
Monthly Total
Computers (January 2015) 6,000
Monthly salary and wages 9,000 108,000
160

lOMoARcPSD|3494582
Monthly consumable 2,000 24,000

Total 11,000 138,000
Compute the expenditure Early Birds (Pvt) Ltd must claim in 2015.
ANSWER
Computers (capital nature expenditure) -

Salaries and wages (Jan- July) 63,000
Consumables (2,000 x 7 months) 14,000
Total 77,000
1.3.10 Jointly conducted experiment and research
A taxpayer is allowed to deduct any sum contributed by him during the year of assessment in respect of
expenditure incurred by any other person to which the above paragraph would have applied had the
expenditure been incurred by him. The deduction should not however exceed an amount that is computed
using the following formula:
AxB
C
A is the amount of contribution made by the taxpayer
B is the cost which would have been deductible to another person had it been incurred by him
C is the expenditure incurred on the experiment or research (both revenue and capital costs)
EXAMPLE
Assume the same facts as above, except that National Birds (Pvt) Ltd contributed $12,000 towards the
research on 1 May 2015.
Compute National Birds’ deductible expenditure in 2015?
ANSWER
Deduction $12,000 x 77,000/95,000 = 9,726
A 12,000
B 77,000
C 95,000
Early Birds 2014 total expenditure 83,000
National Birds 12,000
C is Early Birds’ expenditure in 2015 (both capital and revenue costs) plus National Birds contribution as
follows:
Computers- Early Birds 6,000

Revenue expenditure- Early Birds 77,000
National Birds 12,000
Total 95,000
1.3.11 Contributions to scientific, public institutions, etc.
161

lOMoARcPSD|3494582
Contributions made by a taxpayer during the year of assessment to a scientific or educational society or
institution or other similar body of a public character approved by the Commissioner (e.g. SIRDC, UZ,
NUST etc.) are deductible. The sum must be utilised by the society, institution or body solely for the
purpose of industrial research or scientific experimental work connected to the taxpayer’s business.
1.3.12 Scholarship, grants and bursaries
A scholarship includes an exhibition, bursary or any educational endowment. A scholarship, grant or

bursary which is paid by a taxpayer on behalf of a person taking a course in technical education at any
educational institution is allowable subject to the following conditions:
1. The education or training must be related to a taxpayer’s trade, and

2. The beneficiary or trainee must not be connected to the taxpayer.
3. The expenditure to be allowable is that incurred during the year of assessment
A connected person is a person who is a spouse or a near relative of a taxpayer. If the taxpayer is a
company, a connected person is an individual:
- Controlling the company, his/ her spouse, near relative or nominee, spouse ‘s nominee or near relative
- Who is a director, director’s spouse, near relative or nominee, including near relative and nominee of a
spouse of a director.
A near relative is a person who is:
(a) A linear descendant of a taxpayer , step father or step mother

(b) A child or a linear descendant of a taxpayer
(c) A brother or sister, half-brother/sister, step brother/sister, uncle , aunt, nephew or niece of a taxpayer
(d) A spouse of any of the person stated in (a) to (c) above
A near relative excludes taxpayer’s cousin. A director excludes a person holding less than 5% of voting
shares of the company and an executive director. A nominee is a person who can vote in a company
meeting on behalf of a taxpayer or who have shares in a company, whether directly or indirectly on behalf
of a taxpayer
EXAMPLE
Promised Hotel (Pvt) Ltd, is a hotel owned 4% by Hilda, 30% by Mr. Pesa and 66% by a foreign company.
During the year the company paid the following amounts as bursary and grant.
a) $5,000 to Hilda’s sister Janet taking a course in Hotel management at a college in South Africa.
b) $7,500 to Hilda attending a 2-week hotel management forum in South Africa.
c) $12,000 to Maurice a cousin to Mr. Pesa taking the same course as Janet.
d) $10,000 to Heather a daughter to Mr. Note taking a course in guest management at a college in
Bulawayo. Heather is a junior manager at Promised Hotel. Mr. Note and Mr. Pesa control each 20% in
Sunset (Pvt) Ltd a subsidiary of Promised Hotel (Pvt) Ltd.
Compute the total amount deductible to Promised Hotel (Pvt) Ltd in terms of this section. Support your
answer.
ANSWER
Beneficiary Deduction Comment

Janet Janet not related to Promised Hotel, Hilda controls less than 5%
5,000 voting shares
Hilda - a seminar, not technical course at an educational institution
162

lOMoARcPSD|3494582
Maurice 12,000 Not a relative of Mr. Pesa, course is related

Heather 10,000 Course related, not a relative of Mr. Pesa
Total 27,000
1.3.13 Pensions, Annuities and Allowances
The Act provides for the deduction of voluntary pensions, annuities and allowances paid by an employer or
a partnership to former employees or partners who retired due to grounds of ill health, infirmity or old age,
or to dependents of such former employees or partners. There are payments of an ex-gratia in nature. An
ex-gratia payment is not a matter of right, but something which is voluntarily given or paid. It is
comparable to a gift i.e. a mere casual payment which depends upon somebody else’s goodwill. These
payments are deductible subject to the conditions stated below:
Conditions:
 The expenditure must have been incurred during the year of assessment
 The expenditure must be an annuity, pension or allowance of an ex-gratia nature
 The expenditure must be paid to a former partner or a former employee who must have retired due to
ill-health, old age or infirmity.
 The expenditure must be paid to dependants of a deceased former partner or a deceased former
employee.
 The deduction for a payment to a former employee is a maximum of $500.
 The deduction for a payment to a former partner is a maximum of $200.
 The deduction for a payment to one and all dependents of a former partner/ employee is a
maximum of $200.
However, a full deduction is allowed to an employer or a partnership of payments made to employees or

partners when they retire or cease employment, should the payments have been stipulated in the
employment contract.
EXAMPLE
Muguta, who was seriously injured at work, was retired on grounds of ill-health. He was paid an ex-gratia
allowance of $5,200 and $4,500 contractual pension.
Compute the employer’s deduction.
ANSWER
$5,000 i.e. $500 + $4,500
Please note, a director of a company, other than a working director or a managing director, is not an
employee (Leopard Rock Hotel Company (Pvt) Ltd v C. of T., J. 345). Therefore, any ex-gratia payment
(voluntary payment) made to non-employee i.e. anon-executive director, shareholder or a third party is
completely disallowed. It is similar to a gift and it’s not in the production of income.
1.3.14 Subscriptions
A deduction is granted of subscriptions paid during the year of assessment for purposes of retaining a
membership of a professional institution, trade or technical association. It does not matter whether the
association or trade is connected to a taxpayer’s trade. For example, an engineer can pay subscriptions
to an accounting body and can claim the deduction as long as the subscription is for the purpose of his
continued membership of that association.
163

lOMoARcPSD|3494582
Subscriptions to business associations e.g. subscriptions to Standard Association of Zimbabwe, Zimbabwe

National Chamber of Commerce, are also deductible. No deduction is granted of entrance fees.
1.3.15 Opening trading stock
Opening trading stock, inherited stock and stock acquired by way of a donation are all deductible. The
donation is valued at fair and reasonable value (which is the cost to the donee), while inherited stock is
valued at the value used for estate purposes. If the inherited or donated trading stock is immediately sold or
disposed of i.e. without incorporating in business no deduction is allowed of such stock and the proceeds
from sale of such stock are also non- taxable. The trading stock will be regarded to be of a capital nature.
1.3.16 Trade convention and mission
A deduction is granted of expenditure incurred by the taxpayer during year of assessment on one
convention and one trade mission, subject to the conditions stated below.
Conditions:
 The expenditure must be in respect of a convention which, in the opinion of the Commissioner, was
connected to the taxpayer’s trade
 The expenditure must be in respect of a trade mission approved by the Minister, in connection with the
taxpayer’s trade
 The deduction is allowable only of one convention and one trade mission, up to a maximum of $2,500
each.
 If a trade convention or mission commences in one year of assessment and ends in another, the
deduction is granted in the year in which it ends
1.3.17 Court expenses
Legal cost associated with the preparation and filing of an objection or appeal on tax issues in the High
Court or Supreme Court is deductible. The taxpayer must win the case to qualify for a full deduction. If the
case is partially won the expenditure is apportioned.
1.4 Prohibited deductions
The following are cases in which no deduction shall be made:
1.4.1 Cost of maintaining a taxpayer and his family
Examples:
 Personal expenses and household expenses e.g. food, clothing and shelter etc.:
 Medical expenses, but an employee can only claim 50% medical expense credit
 Clothing as opposed to protective clothing or compulsory work cloth and those worn by television
presenters and related cleaning cost.
Exception
Home can be a place of work especially if it is specifically equipped for the purposes of the taxpayer’s trade
or regularly and exclusively used for such purposes. To that end costs of working from home, e.g. a
proportion of rates, rent, water, lighting and heating may be deductible.
1.4.2 Travelling expenses
164

lOMoARcPSD|3494582
Expenditure for travelling between getting home to place of work or the place the person carries on a trade
(or vice versa). So is the cost of travelling between two places of work / trade whose businesses are distinct
in nature.
Exceptions:
 Cost of travelling between business activities which are similar in nature.

 Travelling expenses for business purposes.
 Cost of travelling from home to another place whose activities are similar to those carried at home, in
the event that home is deemed to be a place of work.
Exam focus point

You must apportion the expenditure in the exam where it incurred for dual purposes.
1.4.3 Indemnity insurance
Deduction is prohibited of any loss or expense which is recoverable under any insurance contract, guarantee,
security or indemnity. The reason is that no expenditure has actually been incurred by the taxpayer, since the
insurance compensation restores the taxpayer of the loss suffered.
1.4.4 Tax and interest thereon
Deduction is prohibited of tax on profits or income of taxpayer (income tax) whether payable in Zimbabwe
or outside Zimbabwe. The following expenses are also disallowed:
 Interest chargeable on late paid tax

 Penalty chargeable on late paid tax, additional tax, duty or levy
 Tax planning or tax advice expenditure
Exceptions:
 Cost of complying with an obligation imposed by Zimra in relation to the tax affairs e.g. cost for
preparing tax returns, tax health checks etc.
 Pay as you earn
 Withholding taxes
 Irrecoverable VAT if expenditure is of a revenue nature
1.4.5 Transfers and appropriations
Deductions is prohibited of appropriations i.e. dividend, general reserve, transfers to capital reserve or
capitalised profits, contingent liability and provisions.
The provisions are for leave, bonuses and directors fees are however deductible, provided that:
 The amounts are voted on or before the date of the relative accounts or the annual general meeting at
which they were considered, and
 The income is taxable in the year of assessment following that in which it is allowed as a deduction
The following conditions are also important.
 A provision for leave must relate to a leave the right to which has vested in the employee on his
employer’s accounting date
 For a bonus and director’s fee an economic performance must have taken place i.e. services meeting the
criteria for entitlement to the bonus or fees must have been rendered or performed.
165

lOMoARcPSD|3494582
1.4.6 Expenditure on exempt or non-Zimbabwean source income
Deduction is prohibited of any expenditure which is incurred in the production of exempt income, income
not from a source within Zimbabwe or private income. The expenditure is apportioned if it is incurred for
dual purposes i.e partly in the production of income and partly for some other purposes
1.4.7 Contributions to approved funds
Contributions made to an unapproved pension fund, benefit or medical aid fund are disallowed.
1.4.8 Notional interest
Deduction is prohibited of cost of any notional interest forgone as a result of investing capital in a trade i.e.
opportunity cost interest. This includes interest earned on capital employed in business e.g. interest on
preference shares.
1.4.9 Vacant or unproductive property
Domestic or private expenses, including rent, repairs or expenses incurred on a vacant, domestic, private,
unproductive property or property not occupied for the purposes of trade are disallowed.
Exception:
 Repairs resulting from the letting of property or resulting from the occupation by the tenant.
1.4.10 Restraint of trade
Expenditure in restraint of trade is disallowed on the basis that it is of a capital nature. Restraint of trade
includes an exclusive agency agreement which restraints another person from selling goods other than those
supplied by the taxpayer or an agreement entered for purposes of eliminating competition
1.4.11 Leasing of a passenger motor vehicle
Deduction is prohibited of the cost of hiring or leasing a passenger motor vehicle (PMV) which is in excess
of $10,000. The limit is determined on a cumulative basis i.e. over the life of leasing the same vehicle. For
example if a taxpayer had commenced leasing a PMV last year and had been allowed $8,000 in that year,
he should only deduct $2,000 in this year so that the aggregate expenditure does not exceed $10,000.
Key point
A passenger motor vehicle (PMV) is a motor vehicle propelled by mechanical or electrical power and
intended or adapted for use or capable of being used on roads mainly for the conveyance of passengers”.
EXAMPLE
On 1 December 2014, LTM Investments commenced hiring a PMV from a local motor hirer company.
LTM is required to pay monthly rental of $3,000.
How much of lease expenses would be deductible in 2015?
ANSWER
Maximum required by law 10,000

Less Paid the previous year(s) (3,000)
166

lOMoARcPSD|3494582
Deductible in 2014 7,000
A PMV embraces station wagons, estate cars, vans, 4x4 double cabs.
Exclusions:
 Vehicles used to convey passengers for gain (taxis, commuter buses, etc.)
 Vehicles used by hotel operators to convey their guests (hotel courtesy cars)
 Vehicles carrying 15 or more passengers excluding the driver
 Vehicles purchased by a taxpayer for leasing under a finance lease.
 Caravans and ambulances
1.4.12 Cost of shares
Deduction is prohibited of cost of shares awarded to an employee or a director.
Exceptions:
 Shares which are given as remuneration or as a bonus to an employee or a director.

 The fair value of shares given to an employee or for his benefit in pursuance of an approved employee
share scheme (Refer donation section below)
1.4.13 Entertainment expense
Entertainment is construed to mean hospitality or amusement of any form. Broadly covers “entertainment”
of customers, prospective customers, employees or any person.
Entertainment expenditure incurred by any taxpayer whether directly or indirectly through provision of any
allowance to any employee or director to incur expenditure or entertainment on behalf of the taxpayer is not
deductible. This now includes general canteen meals; Zimra appears to be changing the stances in the old
days they used to be allowed.
Exceptions:
 Costs of lunch provided to staff that are required to work during lunchtime because of nature of their
work e.g. bank tellers.
 Office teas and Christmas parties for staff members.
1.4.14 Expenditure on dividend from a foreign source
Expenditure incurred by a resident in respect of dividend from a foreign source e.g. brokerage fees, bank
charges, postage expenses, interest payable on money borrowed to purchase the shares, etc. is disallowed.
1.4.15 Expenditure incurred in the production of interest paid by a financial institutions
Expenditure incurred in the production of interest payable by a financial institution. In other words, if a
taxpayer borrows money for on-lending to a bank, any interest incurred by him on the borrowed funds is
not deductible.
1.4.16 Excessive borrowing costs
See interest below
1.4.17 Excessive general administration expenditure or management charge
The Act restricts deduction of general administration or management expenditure (i.e non-specific general
admin expenditure or management fees) paid by a local holding company, branch or subsidiary of a foreign
company or local company.
167

lOMoARcPSD|3494582
The deduction is restricted to limited to:
(a) 0.75% x [A-(B +C)], when incurred prior to commencement of production of the paying company
A is the total expenditure qualifying for deduction in terms of section fifteen;
B is the expenditure on general administration and management paid outside Zimbabwe by the
taxpayer
C is the mining capital allowances (applicable only to a taxpayer who is a miner)
(b) 1% x [A-(B+C]when incurred prior to commencement of production of the paying company
The excess expenditure which is disallowed is treated as a dividend for purpose of withholding tax.
1.4.18 Cost not directly related to a taxpayer’s trade
Expenditure which the Commissioner is not satisfied that it is directly related to the trade carried on by the
taxpayer in Zimbabwe is disallowed.
Exception:
 Contribution made to approved benefit fund, pension fund or retirement annuity fund
 Ex-gratia payments considered above.
1.4.19 Anti-double deduction
Where an expense is deductible, a deduction of such an expense shall not exceed the actual cost incurred.
The only exception is expenditure on export market development. If there are more than one provision in
the Act resulting in the expense being deducted more than once, a taxpayer must elect the provision which
he wants the expense deducted.
2 Relief for pre-trading expenditure

Fast forward
Preproduction expenditure is deductible if it is incurred within 18 months before the commencement of

trade.
Company formation expenses and preliminary expenses are disallowed even if they meet the above
conditions.
Key point:
Conditions that need to be satisfied for preproduction expenditure to be deductible are:

• A trade must be carried on by a taxpayer
• The expenses must have been incurred in the process of establishing a business
• The expenses must qualify as a deduction in terms of the general deduction formula
• Capital nature expenditure is disallowed
• The expenses are deductible when trade commences.
EXAMPLE
168

lOMoARcPSD|3494582
Smartax (Pvt) Ltd was incorporated in May 2013 and only commenced business on 28 April 2015. The
company paid $2,500 for office supplies in May 2013. In December 2013, he bought a laptop for $900 and
paid consultancy fee of $4,000.
State, with reasons how each of the above item should be treated by Smartax (Pvt) Ltd for tax purposes
ANSWER
1. Office supplies expenditure is disallowed since it was incurred more than 18 months prior to commence
of business.
2. Cost of a laptop is disallowed it is of a capital nature; instead the company should claim capital
allowance.
3. Consultancy fee is deductible it is of a revenue nature and was incurred within 18 months prior to
commencement of business.
A business commences when the actual income producing operation has started i.e. the date a taxpayer
starts marketing his products or the date when he opens his premises for business.
3 Interest paid and received
3.1 Interest expense

For the interest to be deductible the loan should be used by the taxpayer in the production of income i.e
to produce taxable income. Interest paid by a taxpayer on borrowings for trade purposes is deductible,
even if the borrowings are applied in the acquisition of fixed assets, but such fixed assets should be
used in the production of taxpayer’s income.
However, interest (and borrowing costs) is not deductible where the loan is used on construction of an
immovable until the property is completed. Instead, the interest expense is treated as a capital cost which
form part of the cost base of the building for capital allowances and Capital Gains Tax purposes.
Generally, interest is deductible, provided the following circumstances apply:
• The interest is not incurred on a loan used to purchase shares which produce dividend income
• The interest is not incurred on money borrowed to pay dividend,
• The interest expense is not “private or domestic” in nature
• The interest expense is not on money borrowed to pay tax or interest on overdue tax.
• Interest incurred during the period an old building is being demolished and a new building erected is
not deductible since during that no income is being produced.
• The interest is incurred with “one view”, -- income production. Therefore interest expense in respect of
idle, vacant or unproductive property or property used to produce exempt income or income not from a
source within Zimbabwe cannot be deducted.
EXAMPLE
U-Peak (Pvt) Ltd borrowed $900,000 from G Bank to be used in its trade to finance various activities as
follows:
Increased its stake in V-Peak (Pvt) to 80% shareholding 550,000

Acquisition of pelting machine 140,000
On-lending to its employees 200,000
Renovations of old warehouse (used during the year) 150,000
180 day Treasury bill purchased from local bank 90,000
Zimra liabilities 120,000
Total 1,250,000
Interest paid to the bank 187,500
169

lOMoARcPSD|3494582
Compute the deductible and non-deductible portion, explain your answer.
ANSWER
Interest
Item Loan Allow Disallow Reason
V-Peak shares 550,000 82,500 Shares result in increase in dividend
which is exempt income
Machinery 140,000 21,000 Used in production of income
Employees loans 200,000 30,000 For purposes of producing income
Old warehouse 150,000 22,500 Building producing income, unless during
Construction
Treasury Bill 90,000 13,500 Interest from bank is exempt so not
production of income
Zimra liabilities 120,000 - 18,000 No production of income
Total 1,250,000 51,000 136,500
Relevant cases:
CIR v Drakensbug Garden Hotel (Pty) Ltd 1960
The taxpayer, a company of which husband and wife were the sole shareholders, leased a hotel from
another company, and sublet the hotel to the partnership (partnership of husband and wife control). The
partnership carried on hotel business. They also leased a trading store from the same lessor; the trading
store was used by the company, the taxpayer. The income of the taxpayer consisted of rent from the
partnership and trading store.
In order to obtain control of the hotel and the store, the taxpayer bought all the shares of the lessor of the
hotel and trading store. This provided the taxpayer with security of tenure, the rights to make improvements
as desired, the rights to sub-let at an increased rental etc. The purchase was financed by a loan which
attracted interest, which the taxpayer sought to deduct. The Commissioner disallowed the deduction that
interest was not expended in the production of income, but to produce dividend which was exempt from
tax.
Held: the purpose for buying the shares was to ensure the continuance of, and an increase in, its income
from subletting and trading and there was therefore a clear connection between the purchase of the shares
and the production of the taxpayer’s income
ITC 1171, 1973
The taxpayer, a director and employee of various companies, also carried on a general dealer’s business
which it financed through an interest bearing loan. When the business failed to prosper, the taxpayer closed
the business. The issue in contention was whether the interest on the loan will continue to be deductible
after the business had ceased.
Held: once the taxpayer had ceased trading the choice of retaining the use of the money was no longer
made for the purpose of earning income. Accordingly, the interest expenditure incurred after the taxpayer
had ceased trading was not incurred in the production of income and therefore non- deductible.
Financier v COT 1950
The taxpayer carried on business as a moneylender by discounting bills and making loans, and also invested
some of its funds in the shares of various companies. The shares produced dividend income from which no
taxable income was derived. The company borrowed on account of these activities from which it sought to
deduct the interest against its income.
170

lOMoARcPSD|3494582
Held: interest on money specifically borrowed for an investment that would not produce taxable income
was not allowable.
SIR v Eaton Hall (Pty) Ltd 1975
The taxpayer owned a building which it lets to a lessee who carried on therein the trade of hotelkeeper. The
taxpayer erected a new wing to the building and the cost of the erection was financed by the loan secured
by increasing the amount of an existing mortgage bond over the property. The interest on the loan was
capitalised in the cost of the new wing for purposes of claiming capital allowances, which the tax authority
rejected.
Held: the interest paid merely represented part of the cost of financing the cost of the new wing, and as
such, was not directly or closely connected with the price or consideration given or paid for the erection of
the new wing. Therefore the tax authority was correct.
Steele v Deputy Commissioner of Taxation, 1999
Comment: It may be noted that in determining whether interest is an outgoing ‘incurred in gaining or
producing the assessable income’ it is not always necessary to distinguish between the purpose of the
taxpayer and the use to which the borrowed funds are put.
Southern Products (Rhodesia) (Pvt) Ltd v COT
The taxpayer conducted a business in which skill and expertise was necessary. A company which carried
on the same business approached the taxpayer with an offer to manage its business for a fee and to purchase
a minority shareholding. The taxpayer was interested in the possibility of a lucrative management fee but
was disinclined to the purchase of shares. It was made clear that the management agreement would not be
granted without the purchase of shares and the package deal was accepted.
The taxpayer borrowed to finance the acquisition of shares, upon which interest was paid. During the year
the company received management fee and dividends.
Held: the acquisition of the shares and the payment of interest were directly and closely connected with the
production of income in its ordinary trade and the interest was deductible.
3.2 Interest on excess debt capital

Notwithstanding the various disallowed interest expenses stated above, total interest deductible is restricted
to expenditure computed on Debt: equity ratio of 3: 1. If this ratio is exceeded, any interest or related
expenditure on excess debt is disallowed. This applies to debt incurred in the production of income of a:
 A local branch or subsidiary of a foreign company,

 A local company (whether local or foreign borrowings)
 A subsidiary of a local company
The excessive interest is computed as follows:
Ax (B-C)
________
B
A = is the total interest or expenditure incurred during such year on debt

B = is the total financial assistance (debt)
171

lOMoARcPSD|3494582
C = is the equity capital multiplied by 3
The following is the step by step procedure:
Aggregate equity is the aggregate of share capital, share premium, revenue or capital profits and any other
owner’s permanent capital.
The result shall be multiplied by three (“result 3”); and,
Then, result 2 shall be subtracted from the balance of all debts
Then, multiply excessive debt by total interest or expenditure incurred, and then divide by total debt
Result 4 will be the excessive expenditure or interest.
EXAMPLE
Metro Holdings Ltd, a Zimbabwean company, borrowed $450,000 from its South African subsidiary. The
interest payable on the loan is $45,000 p.a. Metro Holdings has an equity base of $120,000. How much of
the interest is disallowable to Metro Holdings for tax purposes?
ANSWER
$9,000, i.e. $45,000 x ($450,000-(3 x $120,000)/$450,000
The excessive interest is treated as a dividend made by the company to its shareholders. It then attracts a
dividend withholding tax, currently standing at 15%.
3.3 Raising and finance charges
Raising fees that are deductible are those of a revenue nature, those incurred on items of a capital nature
and unproductive activities are disallowed. As held in CIR v Genn & Co. (Pvt) Ltd 20 S.A.T.C 113, raising
fees and finance charges must be allocated on a pro rata basis to items on which the loan has been
expended, based on the gross amount of the loan,.
Key points
Summary treatment of loan raising fee
• Raising fees a loan incurred on special deductions available to farmers (see farming chapter) are
deductible
• Raising fees on loan is used to purchase assets ranking for capital allowances is capitalised
• Raising fees on a loan used for the day-to-day running of a business are deductible
• Raising fees on a loan is used on assets which do not rank for capital allowances is disallowed
3.4 Interest receivable

Refer to property income chapter
4 Donations
4.1 General principles

172

lOMoARcPSD|3494582
A donation is an expenditure made purely for philanthropic (i.e. wholly gratuitous) purposes. Because it is
not linked to the production of income or made for purposes, the expenditure is disallowed. Examples of
disallowed donations include donations to political parties, churches or social clubs etc.
4.2 Donations to public benefit organisations

The following donations are specifically provided as deductible in terms of the Act:
 Amounts paid during the year of assessment, without any consideration, to the State or to a fund
approved by Minister of Health— for the purchase of medical equipment, construction, extension or
maintenance or the procurement of drugs, including anti-retroviral drugs, to be used in a hospital
operated by the State, a local authority or a religious organisation. The maximum deduction in a year
of assessment is $100,000.
 Amounts paid during the year of assessment, without any consideration, to the State or to a fund
approved by Minister of Education— for the purchase of educational equipment or, the construction,
extension or maintenance of school or the procurement of books or other educational materials to be
used in a school operated by the State, a local authority or a religious organisation. The maximum
deduction in a year of assessment is $100,000.
 Any amount paid by the taxpayer during the year of assessment, without any consideration
whatsoever, to a research institution approved by the Minister responsible for higher or tertiary
education. The maximum deduction in a year of assessment is $100,000.
 Any amount paid by the taxpayer during the year of assessment to a Public Private Partnership Fund.
The maximum deduction in a year of assessment is $50,000.
EXAMPLE
As a Tax manager of Pre-pep Accounting firm, you have been tasked to review a tax return of ABC
Limited, a hotel business in Chivi. From the company’s ledger, promotional activities account code, you
discovered the following on which you are required to offer an advice:
Inputs support for Chivi cotton growers 2,000

Contributions towards construction of Mudadisi Police Station 4,670
Borehole for Mandamabwe villagers 3,600
Takavarasha Clinic extension 120,000
Purchase of books for Chigwikwi Primary school 45,000
ANSWER
 The inputs support for growers non-deductible (donation not approved)

 The construction of Police station disallowable (donation not approved)
 Borehole expenditure non-deductible (donation not approved)
 Cost of clinic extension maximum deduction is $100,000
 Purchase of books for Chigwikwi Primary school deduction is $45,000 (i.e actual amount incurred
or $100,000, whichever is lesser).
Note that the approved donations must be paid to the State, not directly to the school or clinic, otherwise
they may be disallowed.
4.3 Donation to a local authority

173

lOMoARcPSD|3494582
A taxpayer who incurs any expenditure at the request of a local authority qualifies for a deduction of that
expenditure up to a maximum of $50,000. The expenditure must be approved by the Minister of Local
Government and must be incurred on construction or maintenance of any of the following items, which
should be under the management of a local authority;
a) buildings
b) roads
c) sanitation works
d) water works
e) public works
f) any other utility, amenity or infrastructure works
4.4 Donation to a community share ownership trust

The Finance Act 1 of 2014 introduced new deductions for the promotion of indigenisation, but backdated to
1 January 2013. The deductions are available to both the corporate taxpayer and the indigenisation partner.
Thus, donations made to a community share ownership trust or scheme set up in compliance with the
Indigenisation and Economic Empowerment which was enacted in 2007 are deductible. The deductions
permitted include:
 Any contributions or donation paid by a taxpayer in the year of assessment to a community share
ownership trust or scheme established by the taxpayer in compliance with the Indigenisation and
Economic Empowerment Act [Chapter 14:33].
 The value of the shares of corporate taxpayer that are lent in the year of assessment to an indigenisation
partner of the taxpayer pursuant to a corporate vendor-financing loan, allowable equally over the period
of the loan.
 Interest payable by an indigenisation partner in the year of assessment on any loan advanced to him or
her to purchase shares in the company of which he or she is indigenisation partner.
A community share ownership trust or scheme is a scheme approved in terms of the Indigenisation and
Economic Empowerment (General) Regulations, 2010, published in SI 21 of 2010. Corporate vendor-
financed loan is loan of shares in a corporate taxpayer to an aspirant shareholder of that taxpayer which are
purchased by the aspirant shareholder by means of dividends forgone on those shares in favour of the
taxpayer. On the other hand, indigenisation partner is an indigenous person who benefits (whether as an
employee or in any other capacity) under an indigenisation implementation plan approved in terms of the
Indigenisation and Economic Empowerment (General) Regulations, 2010, published in SI 21 of 2010
4.5 Social welfare
Any of the following amounts paid by the taxpayer during the year of assessment, without any
consideration whatsoever, are deductible.
 Payment made to the National Scholarship Fund established in terms of the Audit and Exchequer Act
 Payment made to the National Bursary Fund established in terms of the Audit and Exchequer Act
174

lOMoARcPSD|3494582
 Any amount made to charitable trust administered by the Minister responsible for social welfare or the
Minister responsible for health, in his capacity or by any official in his Ministry on his behalf
 Any amount paid to the Destitute Homeless Persons Rehabilitation Fund, being a fund established by
the Ministry of Finance in terms of the Audit and Exchequer Act to alleviate the condition of destitute
homeless persons. The maximum in year of assessment is $50,000.
4.6 Approved employee share trust

The fair value of any stock, share, debenture, unit or other interest awarded to an employee in terms of a tax
approved employee share scheme is deductible. Deductible too is the cost of shares awarded to employees
or directors in lieu of cash remuneration or bonus. Any other shares awarded by the company to employees
or directors are disallowed.
4.7 Sponsorship
Sponsorship cost is deductible if a nexus exists between the expense and a taxpayer’s business, no matter a
third party is also to benefit out of the sponsorship. The nexus is reflected by the fact that business is being
promoted by incurring the sponsorship expenditure, 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, e.g. sponsoring of F6 study text by
M. Tapera at ACCA Student winter school.
 The relationship between expenditure and the ultimate income derived, i.e. can it be proved that the
income is a result of sponsorship? For example, a sale of bulls at an agricultural show by a farmer
sponsoring the event in return for being able to display the bulls shows a direct relationship between the
sponsorship expenditure and the resultant income.
A sponsorship expenditure of a capital, private or domestic nature is not deductible.
EXAMPLE
Mary operates a retail business in Gweru. During the year, she gave $1,500 in the name of her business to
Gateway School in Harare, a school attended by her son. She did not stipulate how the school is to use the
money or that her business should be promoted. Nevertheless, her business’s name appeared in a list of
donors on the back page of the school’s annual magazine. In all, there were 20 donors and Mary’s business
name is not distinguished in any way from the other 19 donors. Is this amount deductible?
ANSWER
The expenditure is not deductible. There was no stipulation that Mary’s business would be promoted. The
fact that there was some business promotion in the form of her business’s name appearing in the magazine
is not determinative, unless Mary can show that such promotion was a purpose of the expenditure .The fact
that her son’s school is in Harare is likely to mean that little, if any, increase in revenue would be expected
to result to her business since it operates in Gweru. The expenditure does not have the requisite nexus with
the earning of her business income.
A sponsorship cost is of a capital nature if its main purpose is to create an image or goodwill. On the other
hand, sponsorship is of a revenue nature if it provides an opportunity for the taxpayer to advertise and also
to conduct market research. For example, any corporate social responsibility (CRS) activity which is linked
to publicity campaign or advertising is deductible.
175

lOMoARcPSD|3494582
Relevant cases:
Shell Rhodesia (Pvt) Limited v COT
The taxpayer awarded bursaries to Rhodesian citizens and also paid £100 to the Rhodesian College of
Music to enable that college to assist its students. There was no obligation on any of the recipients of the
bursaries to enter the taxpayer’s employ on completing his education. The taxpayer sought to deduct the
amounts as advertising expenditure, incurred wholly and exclusively for purpose of its trade.
Held: the expenditure was of a capital nature because the object of the expenditure was not immediately
and directly to increase taxpayer’s sales but to improve its public image and so to build up goodwill
Rothmans of Pall Mall (Rhod) Limited v COT, 1973
Over the four tax years concerned the taxpayer, a cigarette company, had paid $ 33 332 in sponsoring the
National Sports Foundation. It was common cause that the payments were made to secure an advantage
over its competitors in the advertisement of its name and in marketing research. The Commissioner
contended that the expenditure was meant to create goodwill.
Held: the taxpayer’s main purpose was not to create an image and thus to create goodwill but to provide an
opportunity to taxpayer to advertise and also to conduct market research. The advantage or benefit obtained
was not long term or enduring. The expenditure was of a recurrent nature and was more closely related to
the performance of the income producing operation than to the income producing machine.
5 Assessed loss
Fast Forward
An assessed loss is deductible expenditure against future taxable income, provided that the assessed loss
may not be carried forward for more than six years from the end of year of assessment it arose.
5.1 Introduction
An assessed loss occurs when deductible expenses exceed income. They arise from the same computation
as taxable income.
If in the year of assessment a taxpayer has an assessed loss, then no taxes are paid in that year. To the
extent to which the loss has not been relieved in the year of assessment, it may be carried forward and be
set against the first available future taxable income of the same person. The relief is available to
individuals, partners, companies and trusts. But, an assessed loss which does not exceed $100 cannot be
carried forward.
EXAMPLE
Ruvarashe has taxable profits for the year to 31 December 2015 of $26,000. The trade losses brought
forward from previous amounts to $7,120.
Compute Ruvarashe’s taxable income in 2015.
ANSWER
Trading profits 26,000

Assessed loss b/f 7,120
176

lOMoARcPSD|3494582
5.2 Offsetting Assessed loss

5.2.1 Against other tax heads
Assessed loss from a trading or an investment activity is only set off against income from another trading or
an investment activity. This means a taxpayer who has trading losses cannot set it off against capital gain or
his employment income or vice-versa. Each tax head is assessed to tax separately.
EXAMPLE
Henry has the following items in 2015 tax year
Assessed loses b/f 20,000

Trading income 12,000
Taxable income from employment 60,000
Compute Henry’s tax position in 2015
ANSWER
Tax due on employment income i.e $60,000 (see table Appendix A) 15,600
Add 3% Aids Levy 468
Tax liability 16,068

Less Assessed loss (20,000)
Assessed loss C/F (8,000)
5.2.2 Against other trading activities
An individual or a partner who is engaged in several trading activities can offset assessed loss from one
trading activity against the income of another trading activity which is carried on by him. However, were
the assessed loss belongs to a corporate this relief is not unavailable, unless the other trading activity is
carried on under a branch or a division of that corporate. Corporates are separate legal entities.
EXAMPLE
Mr. Tapera has a tax consultancy business. He also writes books on tax. The following are his results in
2015 tax year
Royalties 19,000
Consulting business assessed loses b/f 30,000
Consulting business current taxable income 11,000
Taxable income from employment 60,000
Compute Mr. Tapera’s tax position in 2015
ANSWER
Royalties 19,000
Consulting business current taxable income 11,000
177

lOMoARcPSD|3494582
Current year taxable income 30,000

Less Assessed loses b/f 30,000
Taxable income/ (loss) Nil
5.3 Expiry of Assessed loss

When losses incurred in two different assessment years are being carried forward and deducted against
future profits, the loss incurred first (i.e first in first out-FIFO) will be relieved first. The maximum period a
year’s assessed loss can be carried forward is six years from the year of assessment the assessed loss was
first established, after which any unabsorbed loss becomes unusable. The following example illustrates loss
that expired.
EXAMPLE
CHAI Enterprise has taxable profits of $40,000 for the year ended 31 st December 2015. Its results for the
past several years are as follows:
31 December 2008 (18,000) 31 December 2012 (11,000)

31 December 2009 (13,000) 31 December 2013 2,000
31 December 2010 3,000 31 December 2014 (9,000)
31 December 2011 8,000
Compute CHAI’s tax liability for 2014 tax year and the losses to be written off
ANSWER
Tax liability for 2015

Year 09 10 11 12 13 14 15
$000
Trading profits for the year (13) 3 8 (11) 2 (9) 40
Less loss b/f
2006 Assessed loss (18) (18) (15) (7) (7) (5) (0)
2007 Assessed Loss (13) (13) (13) (13) (13) (13)
2010 Assessed Loss (11) (11) (11)
2012 Assessed Loss (9)
Taxable income (loss) (31) (28) (20) (31) (29) (38) 7
Tax @25.75% 1.8
Assessed loss written off ($000)

Aggregate taxable 2008 -15 53
Aggregate losses 2008-15 (51)
Less Taxable income 2015 (7)
Assessed loss written off (5)
5.4 Cases in which Assessed loss cannot be inherited

Where a taxpayer has been declared insolvent or had his property or estate assigned for the benefit of
creditors, he is prohibited from carrying forward assessed loss. The person and the estate are treated as
separate persons. When the person is rehabilitated or commences business again he becomes a new
taxpayer with new tax obligations and rights.
If a sole trader or partnership transfers its business to a limited company, there is a cessation of trade.
Accordingly, trading losses at the date of transfer are not available for set-off against any future corporation
tax profits of the new company.
178

lOMoARcPSD|3494582
5.5 Transfer of Assessed loss in group companies

Refer to chapter 10.
5.6 Tax planning

A trader who has a sizable balance of Assessed loss which is almost approaching maturity must not
accelerate deduction of expenses. He must minimises his deductible expenses and bring forward income.
For example he can opt for wear & tear as opposed to SIA. You he can also opt to defer the claiming of
expenditure and claim the expenditure in future years, unless the expenditure will be lost if it is not claimed
in the year in which it is incurred. You can also maximize your incomes, for example disposing unusable
assets which will give rise to taxable recoupment. These may be useful tax planning points to preserve
your assessed loss.
Chapter roundup
 Expenditure is deductible if it is incurred for purposes of trade or in the production of income, unless it
is of a capital nature
 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
 An expenditure is in the production of income if it is incurred as a result of an act which is done for
purposes of earning income
 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 $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.
 Pre-trading expenditure incurred within the 18 months prior to the commencement of trade is
allowable if it would have been allowable had the trade commenced.
Exam Bank
Q6 Exam 14 21 mins
Capital allowances
179
8
lOMoARcPSD|3494582

1. Qualifying assets B3(f)(i) & B3(f)(v)
2. Compute special initial allowance B3(f)(ii) & C2(d)
3. Compute wear & tear B3(f)(ii) & C2(d)
4. Compute recoupment B3(f)(iv)
5. Compute scrapping allowance B3(f)(iv)
6. Incentives B3(g)(ii) & C2 (e)
Introduction
Capital allowances are granted to all taxpayers earning trading or property business income, no matter such
income is earned by a sole trader, a self-employed, a partnership or a company.
In this chapter, we define rules for calculating capital allowances. This is broken down into three parts.
First, we define the qualifying assets and the cost to be used when computing capital allowances. Next we
deal with the computation of special initial allowance and then wear & tear.
After that, we deal with recoupment. We define the term recoupment, show how it is computed and outlines
the recoupment reliefs available to both companies and individuals.
Lastly, we look at rules on scrapping allowance, the incentives for small businesses and export incentive.
In the next chapter, we look at the computation of corporate tax liability.
Study guide
Intellectual
level
180

lOMoARcPSD|3494582
B3 Capital allowances and recoupment

B3(f)(i) Define plant and machinery for capital allowances purposes 1
B3(f)(ii) Compute annual wear and tear (reducing balance method allowances and special 2
initial allowances)
B3(f)(iii) Compute capital allowances for commercial and passenger motor vehicles 2
.
B3(f)(iv) Compute balancing allowances and balancing charges 2
B3(f)(v) Define an industrial building and a commercial building for capital allowance 1
Purposes
B3(f)(vi) Compute industrial building allowance and commercial buildings allowance for 2
new and second-hand buildings
B3(g)(ii) Recognise the special deductions available for exporters and manufacturing
employment creation
Exam guide
Capital allowances are examined in any part of the examination paper, including multiple choice questions.
They are examined as part of computation of taxable income. You will need to look out for private use
assets; only restrict the capital allowances if there is private use by traders, never restrict capital
allowances for private use by employees. This means that when you calculate capital allowances for a
company there will never be any private use adjustments. You will also need to watch out for the limits
placed on passenger motors, staff houses and certain farm improvements. SIA may only be granted on
constructed immovable, while movable assets must be purchased, an election is required either way.
1. Capital allowances
1.1 Introduction
Capital allowances are given on an asset in the first year in which such asset is put into use e.g. where an
asset is constructed or acquired in one tax year but put into use in a later tax year, then the taxpayer gets
allowances in the year in which it is first put into use. An asset must be held on the last day of the tax year
and if sold by that time no allowances are given to it.
Expenditure on property, plant and equipment is never deductible in the computation of taxable income.
Instead capital allowances are granted as relief of this expenditure. In fact, the net profit shown in the
financial statement must be adjusted by adding back depreciation, loss on disposal of assets and
deducting profit on sale of assets. Capital allowances and scrapping allowances are then deducted, while
recoupment is added to the adjusted net profit.
Every taxpayer who incurs expenditure on qualifying capital expenditure and is using such asset for
purposes of his trade or in the production of income qualifies for capital allowances. Thus, sole traders,
partnerships and companies all are entitled to capital allowances.
1.2 Terms
Recoupment is the profit on sale of an asset for tax purposes, but must be restricted to capital allowances
previously granted. Scrapping allowance is a tax loss on sale of an asset. The income tax value (ITV), also
known as the written down value, is the difference between cost of the asset and capital allowances.
181

lOMoARcPSD|3494582
The following below shows the tax terms and the equivalent accounting terms:
Accounting Tax
Cost and revaluation Cost
Depreciation and impairment Capital allowance
Net book value Income tax value (ITV)
Profit/loss on sale of fixed asset Recoupment/scrapping allowance
1.3 Timing of claiming capital allowances

To qualify for capital allowances, an asset must be held by the taxpayer on the last day of the year of
assessment, whereas those that are sold during the year would not qualify for allowances . Therefore in
practice capital allowances are not computed in the year in which an asset is sold.
Capital allowances are granted in the first year in which an asset is put into use. This means that an asset
which is constructed or acquired in one tax year but put into use in a later tax year, shall only be
given capital allowances in that later year. It is not about when the expenditure is incurred, but it’s
about when the asset is first used for purposes of the taxpayer’s trade.
2. Qualifying capital expenditure

Fast Forward
Expenditure must be incurred on a ranking asset to be granted capital allowances. Ranking assets include
commercial buildings, industrial buildings, staff houses, farm improvements, implements, machinery or
utensils, railway lines, pipe lines, tobacco barns, but excluding land, domestic premises and intangible
assets.
2.1 Introduction
Capital expenditure that qualify for capital allowances include the cost of acquisition or construction of
commercial buildings, industrial buildings, staff houses, farm improvements, implements, machinery or
utensils, railway lines, pipe lines, tobacco barns, etc.
Expenditure on land, unproductive assets, assets producing exempt income, dwellings, intangible assets
(i.e. software, intellectual property, goodwill etc.) all do not qualify for capital allowances.
2.2 Commercial building

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. Generally, all buildings used for commercial purposes
are commercial buildings, e.g. retail shops, supermarkets; hotels registered in terms of Tourism Act, leased
blocks of flats, office buildings, showrooms, warehouses for storing other people’s goods.
Exclusions:
182

lOMoARcPSD|3494582
 farm improvements, industrial buildings, tobacco barns, staff houses,

 flats or apartments used by partners or shareholders for residential purposes,
 Additions, improvements or alterations made to a commercial building which was constructed before 1
April 1975,
 A building which is used to the extent of at least 10% of its floor area for residential purposes, unless it
is used as a block of flats, apartments or as licensed hotel.
Whether constructed or purchased, a commercial building will never be granted SIA. It is only
granted wear & tear at 2.5% on cost ("straight line" basis).
Exam focus point

You will need to exercise caution in the exam to ensure that you only compute wear & tear on a
commercial building which is used in business to the extent of least 90% of its floor area. If it is used
for less than this threshold, it ceases to be called a commercial building and no allowances are
granted.
2.3 Industrial Building

An industrial building is a building used “mainly as a factory or for industrial purposes, to the extent of
least 50% of its floor area. An industrial building includes:
 Any building containing a machinery and is used mainly for the purposes of operating machinery
worked by steam, electricity, water or other mechanical power
 Any building which is on the same premises with such building and which suffers depreciation by
reason of the operation of machinery installed in such other building.
 Any building which, in the opinion of the CG, suffers depreciation by reason of the use of chemicals,
corrosives, furnaces of any description or any other agent directly utilized in the particular trade or
industry of which the building forms an integral part.
 A hotel with a permanent liquor license or a casino license, including ancillary structures such as
swimming pools, changing rooms, permanent tennis courts, golf courses, bowling greens, etc. used
together with the hotel building.
 A building owned by a manufacturer and used by him 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.
 Toll-roads or toll-bridges as declared in terms of the Toll-roads Act
 Fencing or tarmac, concrete of similar sealing surrounding an industrial building.
Key term
Fencing includes walls of bricks or concrete etc., while sealing would embrace car parks, courtyards and
driveways. Any other fencing, e.g. fencing or a permanent sealing surrounding a commercial building, staff
housing, tobacco barn etc. does not rank for capital allowances.
Exam focus point

You will need to pay attention to the proximity factor. For example a showroom or administration
office would be an industrial building if it is situated next to the industrial building on the basis that
the building would suffer wear & tear due to a manufacturing process taking place in the industrial
building.
A constructed industrial building is granted SIA upon election. It is granted wear & tear at 5% on
cost ("straight line" basis). Wear and tear is only where SIA has not been granted or if the building
was acquired. Full year SIA or wear & tear is granted even if the building is used less than 12
months.
Exam focus point
183

lOMoARcPSD|3494582
You will need to watch out for the usage requirement of an industrial building. If the building is not
used in business for industrial purposes to the extent of least 50% of its floor area, it does not fit to be
called an industrial building. You must not give it capital allowances.
2.4 Staff housing
The Act defines a “staff housing” as any permanent building used by the taxpayer for the purposes of his
trade wholly or mainly for the housing of his employees, but does not include a residential unit the erection
of which commenced on or after 1 January 2009 whose cost exceeds $25,000. The erection of the staff
housing need not necessarily be done by the taxpayer. A “residential unit” means an apartment, flat, house
whether detached, semi-detached or terraced, or similar unit of residential accommodation. The element of
a permanent building, rules out temporary houses or moving houses e.g. caravans etc.
If any unit amongst the attached units exceed $25,000 the whole block is disqualified.
The $25,000 limit is for purposes of defining what constitute staff housing. The law appears silent on the
cost to be used for purposes of computing capital allowances. This used to be the case in the past. Thus, the
$25,000 is the maximum cost to be used in the computation of capital allowances on staff housing.
Subject to an election being made a staff housing constructed by the taxpayer would rank for special initial
allowance. Where SIA has not been elected a constructed staff housing would rank for wear & tear at 5%
on cost. Whereas, purchased staff housing is granted wear & tear at 5% on cost.
Exam focus point

You must disregard staff housing whose cost exceeds $25,000 per unit. If the cost of a unit does not
exceed $25,000, compute allowances on the actual cost incurred.
EXAMPLE
AMT Limited constructed two blocks of staff houses. Block M has two units A and B whose cost are
$20,000 and $25,000 respectively. Block S comprise of Unit C and D, with a cost of $15,000 and $30,000
respectively.
State, with reasons which units are disqualified.
ANSWER
Although the average cost per unit in each block is below $25,000, Block S is qualified (none of its units
qualify) because one of the units’ cost exceeds $25,000.
2.5 Passenger motor vehicle
Key point
A passenger motor vehicle (PMV) is a motor vehicle propelled by mechanical or electrical power and
intended or adapted for use or capable of being used on roads mainly for the conveyance of passengers.
A PMV embraces station wagons, estate cars, vans, 4x4 double cabs.
Exclusions:
 Vehicles used for conveying passengers for gain (taxis, commuter buses, etc.),
 Vehicles used by hotel operators to convey their guests (hotel courtesy cars),
 Vehicles carrying 15 or more passengers excluding the driver,
 Vehicles purchased by a taxpayer for leasing under a finance lease,
 Caravans and ambulances.
184

lOMoARcPSD|3494582
Capital allowances on a PMV are computed based on a maximum cost of $10,000. A vehicle which is
not a PMV qualifies for capital allowances based on its full cost.
All motor vehicles (PMVs or not), qualify for SIA, upon election if used at least 90% for purposes of trade.
Where SIA has not been granted, they are granted wear & tear at 20% computed based on the reducing
balance method ("on ITV).
EXAMPLE
Mumba Hotel, a hotel business in Vumba, purchased the following vehicles during the year ended 31
December.
Isuzu Double cab for MD 32,000

Staff bus 80,000
Nissan Pickup 2.7 allocated to the marketing manager 30,000
State, with reasons, which of the above vehicles are PMVs and which ones are not?
ANSWER
Vehicle Type Reason

Isuzu a PMV Carrying less than 15 passengers
Staff buses Not a PMV Carrying 15 or more passengers
Nissan 2.7 Not a PMV Carrying 15 or more passengers
2.6 Farm improvements

A farm improvement means any building, works or structure of a permanent nature, e.g. sheds roads,
canals, dip tanks, bridges, water furrows, etc. used in farming operations. It includes any 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.
A school must be used by more than 50% of farm pupils to qualify as a farm improvement. A clinic,
a hospital, etc. must be used by more than 50% of farm people to qualify.
A farm improvement 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).
The housing for all other farm employees (who are not teachers or nurses) are staff housing as
defined above (are based on qualifying limit of $25,000 per unit).
All buildings, works or structure of a permanent nature used in connection with farming operations are
farming improvements. Recreational amenities such as beer halls, cinema, swimming pools, social clubs,
etc. often found on the farms are however not farming improvements.
A farmer’s dwelling or homestead used or occupied by a taxpayer and his family is specifically
disqualified as a farm improvement.
185

lOMoARcPSD|3494582
Expenditure used in calculating capital allowances is limited to:
A constructed farm improvement qualifies for S.I.A, where a taxpayer has made an election for it. A
farm improvement’s rate of wear & tear is 5% on cost per annum.
EXAMPLE
Mr Gara bought a farm in Murombedzi for $310,000. The price included the cost of land $90,000, a green
house $80,000, farm house $30,000 and 2 units of staff housing $70,000, which were constructed by the
previous owner in 2011. He added a school and houses for 3 teachers, costing $50,000 and $90,000
($30,000 per unit), respectively.
Show the cost which will rank for capital allowances. State the reasons for your decision.
ANSWER
Asset Ranking cost Reason

Land - Non ranking asset
Green house 80,000 Ranking asset at full cost
Farm house - Non ranking asset
Staff housing - Disqualified, cost exceed $25,000/ unit
School 10,000 Ranking asset cost limited to $10,000
Teachers' houses 30,000 Ranking assets cost limited to $10,000/unit
Total 120,000
Exam focus point

You must not confuse general employees’ staff houses and houses for nurses or teachers. A general
staffing is disqualified if the unit cost exceeds $25,000. If the cost does not exceed this amount, capital
allowances are then computed on the actual amount and not $10,000 per unit.
2.7 Articles, implements, machinery and utensils
Capital allowances are granted on implements, machinery and utensils belonging to and used by the
taxpayer for the purposes of his trade. An article includes a movable asset with an independent identity,
despite it being an integral part of a building. It can be mounted or demounted.
If an article lacks an independent identity from a building to which it is attached or forms part of, e.g. a
storage platform or mezzanine floor, it ceases to qualify as an article. Carports erected by taxpayers in the
hotel industry (with an intention to later dismantle) qualified as articles because they had an independent
identity. Where an item becomes so integrated into a building or structure of a permanent that it loses its
own separate identity, it can no longer be regarded as an article. For example, windows, doors etc.
However, demountable partitions which can be removed and be moved to suit tenant’s requirements can
qualify for capital allowances as independent units, e.g. office separators, mezzanine floors etc.
A taxpayer is also allowed to claim capital allowance on expenditure on additions or alterations to articles
implements, machinery or utensils not owned by him, but are used by him for the purposes of trade.
However, the granting of some other allowances e.g. repair deduction precludes the taxpayer from claiming
capital allowances on those assets.
186

lOMoARcPSD|3494582
The definition of articles, implements, machinery and utensils is widened to include tangible and intangible
property in the form of computer software that is acquired, developed or used by the taxpayer for purposes
of his/her trade, otherwise than as trading stock. Computer software means an set of machine-readable
instructions that directs a machine’s processor to perform specific operations.
This means that expenditure on acquiring or developing software ranks for capital allowances, deductible
over 4 years equally (25% p.a.), with effect from 1 January 2015. Where SIA has not been elected the
expenditure ranks for wear & tear, at an ordinary rate of 10% computed on the balance of the expenditure.
The cost paid in purchasing or acquiring of know-how, a patent or a trademark, goodwill and other
intangible assets is capital expenditure. The cost of registering the trademark or patent, etc. also constitutes
capital expenditure,
2.8 Railway lines

A railway line refers to the rails, sleepers and equipment pertaining thereto of any railway track but does
not include ballast, embankments, bridges, culverts and other railway constructions.
A railway line that has been constructed by the taxpayer qualifies for S.I.A, where a taxpayer has
made an election for it; otherwise it qualifies for wear & tear at 5% on cost per annum.
2.9 Assets not belonging to the taxpayer
A person is allowed to claim capital allowances on assets that do not belong to him. Therefore capital
allowances on an asset which is acquired for leasing purposes can only be claimed by the lessor, but must
use it wholly or almost for the purposes of trade and accordingly the lessor.
However, a lessee is only allowed to claim capital allowance on the cost of additions, alterations or
improvements on movable assets if used by him for the purposes of trade and on lease improvements, when
elected as an alternative to lease improvement allowances.
2.10 Non-ranking assets
Generally, an asset must be used by the taxpayer for purposes of his trade to be granted capital allowances.
2.10.1 Introduction
We have already seen that a commercial building must be used at least 90% of its floor area to qualify for
capital allowances and the threshold for an industrial building is at least 50% of its floor area. When these
thresholds are not met, then the building ceases to be a ranking asset.
Expenditure on structures and on works involving the alteration of land does not qualify as ranking assets.
Land or an interest in land does not qualify as ranking assets.
Capital expenditure on acquisition of patents, goodwill and other intellectual property (other than computer
software) do not qualify as expenditure ranking for capital allowances.
2.11 Computation of cost
2.11.1 Introduction
The cost base of an asset for capital allowances is comprised of the cost of purchase or construction of the
asset, freight, custom duty, travel cost to purchase the asset, insurance and other ancillary costs related to
the acquisition and installation of the asset. Example of ancillary costs are, site preparation to install the
187

lOMoARcPSD|3494582
asset, installation cost, irrecoverable VAT, raising fees, professional fees incurred in the construction of a
qualifying asset, etc.
Relevant case
ITC 1333
The taxpayer purchased new machinery from overseas, for which it obtained Swiss francs from a local
merchant bank. Repayments had to be made in five (5) half yearly instalments. Any losses arising from
adverse variations in the exchange rate had to be met by the taxpayer. During the period of repayment the
francs strengthen resulting in the taxpayer paying an additional amount over the years. The taxpayer sought
to claim SIA on the additional amount.
Held:
1. The loan transaction was, in fact, a purchase of Swiss francs; acceptance of the exchange variation
liability was for the purchase of machinery. The losses, being capital, were not deductible.
2. SIA is based on expenditure incurred which is of wider connotation and effect than the words
“purchase price” alone. It also calculated on cost, which include freight, insurance and other charges
related to the acquisition and installation of machinery. The expenditure incurred by the taxpayer on the
rising value of the franc must be included in the expenditure or cost contemplated for purposes of
claiming capital allowances.
Exam focus point

You must also compute capital allowances on improvements (items disqualified as repairs), which
you have added back to net profit. The nature of the allowance depends on the class of asset on which
the improvements are being effected. For example if improvements are on a commercial building you
must give them wear & tear at the rate of 2.5% of cost.
EXAMPLE
Leroy99 (Pvt) Limited incurred the following capital expenditure relating to an industrial building during
the year
Cost of acquiring site 90,000

Site preparation cost 45,000
Factory construction costs 700,000
Bank interest incurred in funding construction 12,000
Heating and air conditioning systems 22,000
Lifts, movable partions 120,000
A government grant of $200,000 is receivable representing 40% of the factory construction costs.
Compute the cost of the factory and wear &tear on the factory.
ANSWER
Cost of acquiring site (land) N/A

Site preparation cost 45,000
Factory construction costs 700,000
Bank interest incurred in funding construction 12,000
Heating and air conditioning systems 22,000
Lifts, movable partions (demountable articles-movable asset) -
Government grant (200,000)
Cost of the factory building 579,000
188

lOMoARcPSD|3494582
Wear & tear ($579,000 x 5%) 28,950
2.11.2 Donations or inheritances

The fact that the asset was acquired without paying a valuable consideration e.g., by way of inheritance or
donation, does not preclude it from qualifying for allowances. For purposes of computing the allowances,
the value for estate duty purposes is used in the case of an inherited asset. For an asset acquired through a
donation or gift, the cost used is the fair market value of the asset at the time of such donation or bequest.
Assets acquired by these means do not qualify for SIA. This means you should grant wear and tear on
assets acquired by way of inheritance on donation.
2.11.3 Hire purchase acquisitions

Acquisitions include acquisitions by way of hire purchase agreement. Therefore the buyer and not the seller
must claim capital allowances. The cost to be used in the computation of capital allowances is the purchase
price, i.e. including finance charges on a hire-purchase transaction.
3. Special initial allowance

Businesses which construct ranking immovable property or purchase ranking movable property are entitled
to an investment allowance of 25% p.a of the capital expenditure incurred, over 4 years.
3.1 Introduction
Special initial allowance (SIA) is a first year investment allowance granted on constructed ranking
immovable assets and ranking movable assets purchased by a taxpayer. SIA is 25% of the cost incurred.
Once SIA has been granted, the taxpayer will automatically qualify for an accelerated wear & tear, which is
25% of the cost incurred, over 3 years.
A taxpayer must make an election to qualify for SIA.
Key points:
SIA is claimed upon election on:

 Cost of immovable asset constructed by the taxpayer, e.g. farm improvements, industrial buildings,
railway lines, staff houses and tobacco barns, excluding commercial buildings
 Cost of additions, alterations or improvements to the above qualifying immovable properties,
 Purchased movable assets i.e. articles, implements, machinery, utensils and motor vehicles,
 50% of the cost of fiscal electronic register (the other 50% qualifies for VAT input tax under the VAT
Act)
Exam focus point

You must make an election for SIA when asked to compute minimum tax liability or exposure or
maximum capital allowances. Other indicators – “taxpayer maximises tax benefits”, “the taxpayer is
an aggressive taxpayer”, etc.
3.2 Computation of SIA

When computing SIA, the following principles must be observed:
 SIA is 25% of the cost of the asset in the year in which the asset is first put into use.
 A taxpayer is granted accelerated wear & tear in year 2 until year 4 at 25% p.a. on cost
189

lOMoARcPSD|3494582
 For an asset first used in 2009, SIA was 50% and accelerated wear & tear was 25% p.a. on cost over 2
years.
 An asset must be used to the extent of at least 90% in a taxpayer’s trade or in the production of income
to qualify for SIA.
 SIA cannot be apportioned according to usage or time basis. If an asset is in use at the end of the tax
year, even for a single day, a full year’s SIA is granted.
 SIA is not granted on assets acquired by way of inheritance or donation.
 SIA cannot be claimed on movable assets purchased by a taxpayer for the purpose of leasing under a
finance lease.
EXAMPLE
Max Investments completed the construction of its raw material stores on 2 July 2011 at a cost of $60,000
and first used it on 1 January 2012.
Compute Max Investments’ maximum allowances over the asset’s life span.
ANSWER
Cost 60,000
2012 SIA 25% 15,000
ITV 45,000
2013 Accelerated wear & tear 25% 15,000
ITV 30,000
ITV 15,000
ITV nil
3.3 Fiscalised electronic register

Expenditure on acquisition of fiscalised register is split between VAT and income tax. Half of (50%) the
cost is claimed as an input tax under the VAT Act and the other half is treated as capital expenditure for
purposes of capital allowances. The amount that is treated as capital expenditure will qualify for the special
initial allowance (SIA).
EXAMPLE
GTR Enterprise, a category C operator, purchased a fiscalised register for $7,500 in the current assessment
year.
Compute GTR’s relief.
ANSWER
VAT input tax claim ($7,500 x 50%) 3,750
Capital expenditure 3,750

SIA ($3,750 x 25%) 938
190

lOMoARcPSD|3494582
4. Wear & tear allowance
4.1 Introduction
Fast Forward
Businesses which incur ranking capital expenditure will automatically qualify for wear & tear allowance.
The allowance is computed on the cost of immovable assets and on the written down value of the movable
assets.
Wear & tear is a method of writing off capital expenditure through the passage of time or use against
trading and investment income. The allowance is granted where SIA has not been granted. It is computed
on the written down value of the asset for movable assets and on cost for immovable assets. Unlike SIA, a
trader need not elect to be granted wear & tear; he/she qualifies for this allowance automatically.
Key points
Wear & tear is claimed on:
 Cost of immovable asset purchased or constructed by the taxpayer
 Cost of additions, alterations or improvements to the above qualifying immovable properties,
 Purchased movable assets i.e. articles, implements, machinery, utensils and motor vehicles, belonging
to and used by a taxpayer in trade.
4.2 Computation of wear & tear

When computing wear & tear, the following principles must be observed:
 Wear & tear on immovable property is calculated on cost i.e. using straight line method.
 Wear & tear on movable property is calculated on the written down of value the asset (ITV) i.e. on
reducing balance method.
 The rate of wear & tear on rank immovable property, other than a commercial building, is 5% on the
cost of the property
 The rate of wear & tear on a ranking commercial building is 2.5% on the cost of the property.
 Wear & tear is never apportioned at all on immovable assets
 Wear & tear is apportioned on movable assets:
– If the asset is used for dual purposes, or
– In the year of commencing or ceasing to trade.
 The general rate of wear & tear on a ranking movable asset is 10% on the written down value of the
asset, subject to some of the following exception( refer to the back of this book for detail):
– Motor vehicle 20%

– Tractors 20%
– Televisions 20%
– Bicycles 25%
– Machinery running day and night (working 2 shifts) 17.5%
– Machinery working 24 hours a day (working 3 shifts) 25%
– Motor cars used on rough roads 25%
– Graders 25%
Exam focus point

When the question is silent about capital allowances policy and has not demanded minimum tax
liability or maximum capital allowances or gave a similar hint, you must compute wear & tear and
not SIA
4.3 Detailed example

191

lOMoARcPSD|3494582
EXAMPLE
Jetty Master (Pvt) Ltd is a manufacturer of home use two-door refrigerators. It has been in business since 1
July 2009. The following is an extract of its asset register as at 31 December 2013.
Constructed/Acquired Note Date $

Bonded warehouse 2 Aug 20109 120,000
Lease improvements 3 Nov 2010 62,600
Commercial building Jan 2011 150,000
Office building Sept 2010 80,000
Machinery (cost before below items) 4 June 2014 110,000
Lawn mower second hand Dec 2014 2,500
A canteen and restrooms (constructed) Dec 2009 36,000
Living quarters for factory workers (3 units) Jul 2012 90,000
Living quarters for administrative staff (5 units) Aug 2013 120,000
Delivery van Jul 2009 20,000
Motor vehicles 5 2011 240,000
Storage building 6 Sept 2012 54,000
Additional information
1. All buildings were constructed by Jetty Masters (Pvt) Ltd

2. Construction of the bonded warehouse was completed in August 2010 and was brought into use in
January 2011. During 2014, upon the advice of a consultant, the company incurred $12,000 in
underpinning the warehouse’s foundation and $400 in replacing its broken windows. It used the
warehouse to store its products.
3. The lease improvements are in terms of the agreement with the lessor for the leasing of a shop in
Westgate. The shop is used as retail shop for the company’s products. The amount stated above is the
excess cost over the amount agreed in the lease agreement.
4. The machinery was purchased from Japan by the procurement manager on 2 June 2014. He incurred
$2,000 travelling cost. It was bought on credit terms and the company realised an exchange gain of
$1,000 when it settled the amount on 2 December 2014. The company also incurred $5,000 on cutting
and levelling the land to prepare a site for the installation of this machinery.
5. The company purchased four (4) commercial vehicles for $180,000 and two (2) passenger motor
vehicles for $60,000 were acquired in 2011.
6. The storage building is used for the storage of a sister company’s products for a fee. The fee is deemed
to be fair and reasonable.
7. Jetty Master (Pvt) Ltd always endeavours to minimise its tax liability.
Compute Jetty Master (Pvt) Ltd’s total deductions for the tax year ended 31 December 2014.
ANSWER
Item SIA Acce. W&T W& T Expense Total

Bonded warehouse ($120,000 x 25%) 30,000 30,000
Underpinning cost ($12,000 x 25%) 3,000 3,000
Broken windows 400 400
Lease improvements ($62,600 x 2.5%) 1,565 1,565
Commercial building (150,000 x 2.5%) 3,750 3,750
Office building ($80,000 x 2.5%) 2,000 2,000
Machinery ($116,000 x 25%- see below) 29,000 29,000
Lawn mower ($2,500 x 25%) 625 625
Commercial vehicles ($180,000 x 25%) 45,000 45,000
Passenger motor vehicles ($20,000 x 25%) 5,000 5,000
Quarters for factory staff (disqualified)
Quarters for admin staff ($120,000 x25%) 30,000 30,000
192

lOMoARcPSD|3494582
Storage building ($54,000 x 2.5%) 1,500 1,500

Total 32,625 110,000 8,815 400 151,840
Supporting notes:
a) The bonded warehouse is an industry building; a warehouse is only a commercial building if used to
store other people’s goods. The building commenced qualifying for capital allowances in the year in
which it is first put into use, allowances are not granted until the asset is used for purposes of taxpayer’s
trade. The underpinning represents an addition to the building (i.e it is capitalized). Cost of broken
windows is repair, which is deductible expense.
b) The excess or voluntary lease improvement may be granted capital allowances in the hands of the lease.
The capital allowances to be granted depends on the class of asset on which improvements are effected.
Since the improvements were effected on a retail shop, which is a commercial building, 2.5% wear &
tear on cost of the improvements is granted.
c) An office building is a commercial building unless it is inside a factory building or suffers deprecation
by reason of being affected by machinery in the close by factory building.
d) Acquisition cost for purposes of computing capital allowances includes travelling cost to purchase a
fixed asset, installation cost and realised exchange loss/gain. Therefore the cost of the machinery is:
- Original cost 110,000

- Travelling cost 2,000
- Exchange gain (1,000)
- Installation cost 5,000
Total 116,000
e) Lawn mower- SIA is granted on second hand items.
f) Canteen building and delivery van were first granted SIA in 2009 and have been fully written off (i.e
50% in 2009, 25% in 2010 and 25% in 2011) no further allowances are granted.
g) Storage building is a commercial building since it is used to store other people’s goods.
h) Staff housing: Living quarters for factory workers is disqualified since the cost per unit exceeds
$25,000, while the living quarters for admin staff are within the required limit.
4.4 Tax planning

Accelerating capital allowances is one of the techniques taxpayers can use to minimise their tax liabilities.
SIA must therefore be claimed ahead of wear & tear in order to accelerate deduction of capital allowances.
Generally, SIA offers more allowances compared to wear &tear. This way the tax liability can be
minimised.
A taxpayer who has assessed loss which is likely to expire must opt for wear & tear in order not to lose the
tax benefit of assessed loss relief.
Exam focus point

You must claim SIA in the exam when asked to compute minimum tax liability or calculate
maximum allowances, unless the SIA conditions are not satisfied.
4.5 Assets not used exclusively in business

193

lOMoARcPSD|3494582
The reference to private usage of asset applies to taxpayers (owners) and not to usage by employees. A
taxpayer will only be entitled to the full claim of wear & tear where an asset is used by an employee.
4.5.1 Private usage of taxpayers (owners)
Wear & tear is restricted when a car or other movable property is not used wholly in business by a taxpayer
(i.e the owner or a shareholder). A taxpayer will only be entitled to the wear & tear applicable to the
business use of the asset.
However in arriving at ITV, the full wear & tear must be deducted, but only wear & tear relating to the
business use of the asset should be deducted against the taxable income.
EXAMPLE
Mr. Zenzo, a self-employed financial consultant bought a car in 2012 for $18,000, which he has been using
60% in the business and 40% for private purposes. Mr. Zenzo’s pre-capital allowances profits are $5,000.
Compute Mr. Zenzo’s wear & tear for 2015 and his taxable income in 2015.
ANSWER
Wear & tear in 2015

Long version
Motor car
Business use
Wear & tear
Cost 18,000
Less wear & tear 20% 3,600 60% 2,160
ITV end of 2013 14,400
Less wear & tear 2014 20% 2,880 60% 1,728
ITV end of 2014 11,520
Less wear & tear 2015 20% 2,304 60% 1,382
ITV end of 2015 9,216
Short version
80% x 80 % 20% x 18,000 x 60% (business usage) 1,382
Mr. Zenzo’s Tax liability in 2015

Pre-capital allowances profit 5,000
Less Wear & tear 1,382
Explanation of shorter version
The shorter version of computing wear & tear will save you the valuable time in the exam; you may need to
master it. You can apply the following formula
C *Dy * R
C is the original cost of the asset
D is 100% - R
R is the statutory rate of wear & tear for the class of the asset
194

lOMoARcPSD|3494582
y
is the holding period of the asset excluding the current year (number of years wear & tear was
claimed excluding current year)
Warning: The formula should only be used on movable assets (assets on which wear and tear is
computed on ITV). It’s not mandatory to use short version, if you cannot master it use the long
formula.
EXAMPLE
Express Valley (Pvt) Ltd bought a fruit packing machine in 2011 for $120,000, which it has been using
100% in its business. The machine has always been used 2 shifts a day.
Compute Express Valley’s wear & tear in 2015.
ANSWER
$120,000 x (100%- 17.5%)4 x 17.5% = $9,728
4.5.2 Other cases of private usage
There is no apportionment or private usage, capital allowances are claimed in full, under the following
circumstances:
 By reason of the asset being used in a business for revenue and capital purposes.
 By reason of the asset being used by an employee for his private purposes.
 If the asset is used at least 90% of total usage for purposes of trade i.e. less than 10% private.
Exam focus point

You must compute 100% capital allowances on a car or other movable property used by an employee
despite the employee using the car for his private purpose. The private use implied is that of the
taxpayer (owner of the company or shareholder).
EXAMPLE
So-Much (Pvt) Ltd bought a Ford Range (double cab 2.7 cc) for $55,000 on 2 June 2015. The vehicle was
allocated to the procurement manager and it is confirmed that the procurement manager is using the vehicle
40% of the time privately. So-Much (Pvt) Ltd is not an aggressive taxpayer.
What is the tax implication of this arrangement to So-Much (Pvt) Ltd and the manager in 2015?
ANSWER
So-Much (Pvt) Ltd – W&T

Wear & tear (SIA not elected) $10,000 x 20% = $2,000
Procurement manager – fringe benefit

Benefit (based on engine capacity and time apportioned) $7,200 x 7/12 =$4,200
4.6 Accounting period less than 12 months

195

lOMoARcPSD|3494582
4.6.1 Introduction
A shorter year of assessment may cause capital allowances to be apportioned. In practice SIA is never
apportionment, while wear & tear is only apportioned on movable assets. A shorter year of assessment may
occur on commencement of business, cessation of trade or when there is a change in the year of assessment.
We saw above that SIA is never apportioned at all. Wear & tear on immovable property is computed on
cost and is never apportioned. The asset must either rank for capital allowances or not rank at all. For
movable assets wear & tear can be apportioned where an asset is used by the taxpayer for dual purposes, as
seen above.
Dealing with an accounting period less than 12 months, is another situation which might call for
apportionment of wear & tear. This is the case on commencement of trade, cessation of trade or where a
taxpayer transits to a different year end i.e when a taxpayer changes his year end from a 31 December to
another date or vice versa. We consider how each of these cases is dealt with.
4.6.2 Commencement of trade
In the year of starting a business wear & tear on movable assets is computed for the period of accounts
which starts on the date the business begins until the accounting date. A fixed asset acquired before the
commencement date is treated as having been acquired on the first day of commencement of business,
bearing in mind that no allowances are granted until the asset is used in trade.
EXAMPLE
Transite (Pvt) Limited commenced its business operations on 1 July 2015. The company chose 31
December as its year end. In the current year pre-capital allowances trading profits amounted to $90,700.
You are given the following as its capital expenditure for the two-year period:
1 May 2014 IT equipment 6,000

10 June 2014 Office furniture 3,500
3 August 2014 Isuzu KB (for the accountant) 45,000
17 May 2015 Ford Mondeo (for the MD) 72,500
25 June 2015 Plant and machinery (used 24 hours) 90,000
You can establish that the vehicles are used 60% in business and that the MD has 30% voting rights in the
company. The company has no capital allowance policy.
Compute Transite (Pvt) Limited’s capital allowances in 2014 and its 2015 taxable income.
ANSWER
Asset Cost Rate W& T 2013 ITV W&T 14 Comment

IT equipment 6,000 10% 300 5,700 570 6 months in use 2014
Office furniture 3,500 10% 175 3,325 333 6 months in use 2014
Isuzu KB (deem) 10,000 20% 833 9,167 1,833 5 months use in 2014
Ford Mondeo (deem) 10,000 20% 10,000 1,200 60% business use
Machinery 90,000 25% 90,000 22,500
Total 1,308 26,436
Taxable income
Pre-capital allowances trading profits 90,700
Less Capital allowances 26,436
Note that SIA is not applicable no election for SIA was made.
196

lOMoARcPSD|3494582
4.6.3 Cessation of trade
When a business ceases other than on the last day of the year of assessment, wear & tear on movable assets
must be apportioned. The allowance is computed for the period of accounts up to the date the business
ceases.
EXAMPLE
Cartech (Pvt) Ltd ceased trading on 30 June 2015. The company has been making accounts to 31December
each year. Cartech (Pvt) Ltd’s only tangible assets on date of ceasing to trade were a van purchased for
$24,000 in June 2013 and a retail building constructed in May 2011 for $75,000. The company’s policy is
to claim SIA on immovable property, whenever an opportunity arises and wear & tear on movable assets.
Compute Cartech (Pvt) Ltd’s capital allowances in 2015.
ANSWER
Van (PMV) $6,400 x 20% x 6/12 640

Retail building (commercial building) 75,000 x 2.5% 1,875
Capital allowances in 2015 2,515
Note ITV on PMV as at 1 January 2015 $10,000 x 80% x 80% = $6,400
Exam focus point

You must not apportion SIA and wear & tear on immovable assets at all. Once the asset is in use at
the end of the tax period – even if only for 1 day, a full year SIA or wear & tear is calculated, even if
the tax year has less than 12 months, subject to above exceptions for movable assets.
4.6.4 Change in accounting year
On the change of an accounting year, wear & tear should be calculated for the period covered by the
accounts, whether the period is less than or more than 12 months.
4.7 Adjustment for notional wear & tear

A taxpayer who buys an asset and uses it for personal purposes cannot claim capital allowances on the
original cost of the asset, should he decides to use the asset in his business. An adjustment is required of
wear & tear on the asset from the date it was bought until the date it is used in business.
Notional wear & tear is an allowance applicable to the usage other than for purposes of trade or in the
production of income e.g. personal usage. Notional wear & tear is not a deductible allowance for tax
purposes. The rate of notional wear & tear is however, similar to the statutory rate for the applicable class
of the asset. Under the above circumstances, the taxpayer adjusts his cost in the year in which the asset is
brought into business. A notional wear & tear is not deductible, but only used in so far as getting the value
for capital allowances when an asset is introduced into business. Afterwards, the ordinary wear & tear shall
be computed on the asset. S.I.A is not given for assets qualifying on notional cost.
The three circumstances in which you are required to compute notional wear & tear are:
 An assets bought for private purposes now introduced in business
 An asset not used in Zimbabwe now brought into business in Zimbabwe
 Assets bought in Zimbabwean dollar converted to United States dollar on 1 January 2009
197

lOMoARcPSD|3494582
4.7.1 Personal assets brought into business
A taxpayer who bought a movable property and uses it for private purposes must compute wear & tear on
the cost of asset after adjusting for cumulative notional wear & tear in the first year of use of the asset in
business. Thereafter, the wear & tear will be computed on the asset written down value.
EXAMPLE
In January 2015, Mr Ndebele commenced using his private car in his business. He purchased the car in
2012 for $60,000 and used it privately since that time.
Show the computation of notional wear & wear for each year since 2012 and the wear & tear to be claimed
in 2015.
ANSWER
Cost 60,000
2012 notional wear & tear 20% 12,000
48,000
38,400
Cost introduced into business (1/1/2015) 30,720
Wear & tear 2015 ($30,720 x 20%) = $6,144
4.7.2 Asset previously used outside Zimbabwe
An asset used in a trade outside Zimbabwe does not rank for capital allowances in Zimbabwe since the
income earned by that asset is not from a source within Zimbabwe. If it is then brought into use in a
business in Zimbabwe it will qualify for wear & tear from the first day it is used in a trade in Zimbabwe.
The value on which wear & tear will be computed on it is the original cost of the asset less cumulative
notional wear & tear in relation to the usage outside Zimbabwe. Thereafter, the wear & tear will be
computed on the asset written down value.
EXAMPLE
In January 2012, Mr Jamani Kweli commenced business operations in Tanzania until 31 December 2015
when he decided to transfer his business to Zimbabwe. He brought with him a lorry which he bought in
2012 for $18,000 and would use it 100% in his Zimbabwean business.
Compute Mr. Jamani Kweli’s wear & wear in 2015.
ANSWER
$18,000 x (100%- 20%)3 x 20% = $1,843
5. Scrapping allowance
Fast Forward
A scrapping allowance arises when an asset is sold below is written down value. The allowance is tax
deductible
198

lOMoARcPSD|3494582
5.1 Introduction
A scrapping allowance is a loss on sale of an asset for tax purposes and is a deductible allowance.
Scrapping allowance occurs when the written down value of the asset (income tax value) exceeds the
proceeds from the disposal of the asset. Most commonly this happens when the trade is ongoing, while
scrapping allowance arising when a business ceases to trade is not automatically deducted. Restriction is
also placed on deduction of scrapping allowance arising from an asset simply withdrawn from trade without
proof that it will not be used again in business in the future.
5.2 Discarded assets

An asset does not necessarily have to be sold to qualify for the scrapping allowance; it merely has to be
removed from use. However, the Commissioner must be satisfied that it has become useless for business
purposes or is discarded with no intention to use it again for him to grant scrapping allowance. A decision
to scrap the asset must be made and be accompanied or followed by the cessation of use of the asset. In
other words, the asset should be worn out and no longer be usable.
5.3 Dual usage of asset

Where an asset has not been used exclusively for business purpose, only scrapping allowance applicable to
the asset’s use in business is deductible
For scrapping allowance to be claimed as a deduction the asset must have been used by the taxpayer for the
purpose of trade. In ITC 1538 (1991) 54 SATC387 scrapping allowance of a helicopter exclusively
damaged in accident day after delivery, while the taxpayer’s pilot had commenced training for conversion
certificate was allowed as a deduction. It was held that the training was directly related to taxpayer’s trade
and that the helicopter was used for that trade.
EXAMPLE
GUG (Pvt) Ltd sold an asset for $2,300. The asset was used 30% privately by the shareholder. It was
originally purchased for $23,600 (ITV $6,600).
Compute the deductible scrapping allowance.
ANSWER
-$3,010 i.e. ($ 2,300-$6,600) x70%
5.4 Scrapping allowance on closure of business

If an asset is sold only because the taxpayer has ceased trading or sold his business, this is not regarded as
scrapping. The allowance is disallowed. Under those circumstances, the allowance can only be at best be
set off against recoupment, if any. If the result is a net recoupment it is taxed and disallowed if it is a net
scrapping allowance.
EXAMPLE
Joker (Pvt) Ltd which had been facing trading difficulties for a long time ceased trading on 31 October
2015. Its year end was 31 December. Its trading income before asset sale amounted to $20,000. Below is
the summary of assets sold.
Asset Cost ITV Selling Price

Date 31/12/14 31/10/15
Equipment 27,700 20,000 13,000
Lorry 15,000 12,000 16,200
199

lOMoARcPSD|3494582
Commercial building 30,000 9,000 1,000
ANSWER

W&T 4,417
Scrapping allowance (non-deductible on cessation of business) -
Asset Equipment Lorry Commercial Building Total

Rate 10% 20% 2.5%
Cost/ITV 1/1/2015 20,000 12,000 9,000
W&T 1,667 2,000 750 4,417
ITV 31/10/2015 18,333 10,000 8,250
Selling Price 13,000 16,200 1,000
Potential Recoupment -5,333 6,200 -7,250
Capital Allowances 9,367 5,000 21,750
Scrapping allowance -5,333 5,000 -7,250 -7,583
Note W&T is apportioned on movable assets in the year of cessation of trade, computed to date of sale i.e.
31 October 2015.
6. Recoupment
Fast Forward
Recoupment is restricted to capital allowances previously granted. It is computed as the asset selling price
less its income tax value (ITV). If the selling price exceeds the original cost of the asset, then it is computed
as original cost less ITV.
6.1 introduction
Recoupment means a recovery or refund. For example when you recover debts previously written off that is
a form of a recoupment. When a ranking asset is sold above it’s written down value there is a deemed
recovery of capital allowances, which is a form of recoupment.
Recoupment of capital allowances can be referred to as a profit on sale of an asset for tax purposes. It
is added to the adjusted net profit. An accounting profit on sale of a fixed asset which is included in
the net profit must be deducted when computing the adjusted net profit.
6.2 Computation of recoupment

The recoupment of capital allowances is limited to capital allowances previously claimed. To do this, the
selling price to be used in computing recoupment must never exceed the original cost of the asset. So as the
general rule if selling price exceeds cost, cost then becomes the selling price. OR take capital
allowances previously claimed as your recoupment.
Recoupment is a profit on sale of an asset for tax purposes. It is the difference between the selling price of
the asset and its income tax value (ITV). To ensure that recoupment is a maximum of capital allowances
previously granted, the selling price to use in the computation must always be capped at original cost of the
asset.
200

lOMoARcPSD|3494582
EXAMPLE
Kelvin (Pvt) Limited, a manufacturer of gearboxes, constructed a manufacturing building in June 2011 for
$150,000 and the building has been in use since then. In 2015, it closed its business and sold the asset for
$170,000. Kelvin (Pvt) Limited always maximizes its tax benefits.
Compute Kelvin (Pvt) Limited’s recoupment.
ANSWER
Selling price (maximum original cost) 150,000

Less ITV (150,000 – 150,000 x 100%) 0
Recoupment 150,000
Alternatively your recoupment is (capital allowances claimed) $150,000 x 100% = 150,000
Note SIA is 25% (2011) then followed by 25% accelerated wear & tear over 3 years (2012 -2014)
Exam focus point

You must restrict recoupment to capital allowances previously granted. If the original cost of the
asset exceeds its selling price, the quickest way of getting recoupment is to take the capital allowances
claimed on the asset as the recoupment.
You can also use the following table to compute the recoupment;
Asset Selling price ITV Potential Capital Recoupment

Recoupment Allowances
Xxx xxx xxx xxx xxx Xxx
Potential recoupment is the actual selling price less ITV

Recoupment is the lower of potential recoupment and capital allowances
The golden rule #
Where the selling price of an asset is more than its original cost (deemed cost), then recoupment is
equal to capital allowances previously claimed.
EXAMPLE
Season5 (Pvt) Limited bought a commercial building in June 2011 for $90,000 and has been using it in its
business since that time. In 2015 the company sold its building when it re-located to a better premise. The
building was sold for $95,000. Appropriate capital allowances were claimed.
Compute Season5 (Pvt) Limited’s recoupment
ANSWER
Asset Selling price ITV Potential Recoupment Capital Allowances Recoupment
Commercial 95,000 81,000 14,000 9,000 9,000

building
Note, wear and tear is $90,000 x 2.5% x 4years = $9,000
201

lOMoARcPSD|3494582
6.3 Recoupment relief on damaged asset

A tax relief is given on a recoupment that arises as a result of damage or a destruction of an asset, for which
an insurance compensation is received.
The conditions that a taxpayer must satisfy are:
 Must use the compensation to purchase or construct or will purchase or construct an asset of a like
nature within a period of 18 months from the date the asset was damaged or destroyed,
 The asset must be brought into use within a period of 3 years from the date the aforesaid asset was
damaged or destroyed.
In the event that only part of the compensation is expended as aforesaid, recoupment applicable to the
amount not expended is taxable. That recoupment will be computed using the following formula:
Ax B
-------------
C
A is the unexpended amount
B is the recoupment computed using the full compensation
C is the compensation received
EXAMPLE
Mr Masikati a self-employed received $65,000 from the insurance compensation following the damage by
fire of his raw material warehouse. The warehouse had been constructed in 2011 for $60,000 and had an
ITV of $45,000 on the date of its destruction. Mr Masikati intends to construct another warehouse at a cost
of $50,000 before the end of the year
Compute Mr. Masikati’s taxable recoupment.
ANSWER
Selling price (maximum of original cost) 60,000

Less ITV 45,000
Recoupment 15,000
Less ($15,000 x $50,000/$60,000) 12,500
Taxable recoupment 2,500
Exam focus point

You must make sure a taxpayer has replaced the asset with an asset of a similar nature and the new
asset is brought into use within 3 years of date of destruction of the old asset, or else the is no relief.
6.3 Deemed selling price

We saw earlier on that certain assets e.g. PMVs, schools, hospitals and staff house are subject to cost
limitation for purposes of qualifying capital allowances. To ensure that the recoupment is limited to capital
allowances, selling prices of these assets must also be restricted. The adjusted selling price is called deemed
selling price.
202

lOMoARcPSD|3494582
We compute the deemed selling price is as follows:
Deemed sale price (DSP) = Deemed cost x Actual sale price

Original cost
We must also stick to our rule that selling price must not exceed cost of the asset. Therefore, the
deemed selling price must not exceed the deemed cost.
EXAMPLE
Mr. Smart, a self-employed sold a passenger motor vehicle for $25,000 on the 4 thof June 2015. The car had
been allocated to his accountant, since the date of its purchased on 1 June 2012. The vehicle was bought for
$30,000. Mr. Smart always maximises his tax benefits.
Compute the taxable income to Mr. Smart.
ANSWER
Selling price (10,000/30,000 x $25,000) 8,333

Less ITV ($10,000 – (25% x 3 years $10,000)) 2,500
Recoupment 5,833
7. Incentives
7.1 Small and medium enterprises

An S.M.E qualifies for S.I.A of 50% on the cost of the asset in the 1 st year of use of the asset and 25% p.a
accelerated wear and tear in the next two years.
EXAMPLE
XYZ has been in operation since 2012 and meets all the criteria for qualification as a small business
corporation. It earns a profit of $405,000 in respect of the tax year in question.
XYZ acquired an equipment for $40,000 during the year and recorded a depreciation of $10 000 in the
profit of $405,000.
Compute the taxable income for XYZ in 2015.
ANSWER
Trading profit 405,000

Add Depreciation 10,000
Less SIA ($40,000 x 50%) 20,000
An S.M.E is an enterprise which meets the following criteria:
A+B+C
A is average maximum total number of full-time employees during any calendar year of a business
B is maximum total annual turnover of a business or enterprise
C is maximum gross value of the assets (excluding immovable) of a business or enterprise
203

lOMoARcPSD|3494582
Each of the letters A, B & C is assigned some points as shown below
Letter Descriptions Points

Above 75 employees 4
A 41- 75 employees 3
6- 40 employees 2
Up 5 employees 1
Above $1,000,000 turnover per annum 4
B $500,000 to $1,000,000 turnover per annum 3
$50,000 or above but less than $500,000 turnover per annum 2
Less than $50,000 turnover per annum 1
Asset value exceeding $2,000,000 4
C Asset value of $1,000,000 to $2,000,000 3
Asset value of $50,000 or above but less than $1,000,000 2
Asset value of less than $50,000 1
The following scores are used to classify the firm or enterprise. The scores are obtained after summing A +
B + C.
Scores for defining an S.M.E

Score Type of enterprise
8 -9 points Medium sized business
5-7 points Small sized business
3-4 points Micro enterprise
EXAMPLE
Crow Enterprise employs 80 employees, has an annual turnover of $700,000 and an asset value of
$1,200,000. Show whether Crow Enterprise is a Small to Medium Enterprise.
ANSWER
Crow Enterprise is not an S.M.E, i.e. A + B + C = 4 + 3+ 3 = 10 points
7.2 Export market development expenditure

A taxpayer is granted a double deduction ($2 for every $1 incurred) on an export-market development
expenditure, other than on expenditure of capital nature, incurred by him during the year of assessment in
developing export markets.
Export market development expenditure is an expenditure incurred in the process of creating or expanding
a presence in foreign markets, it includes expenditure incurred on any of the following activities:
- 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 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,
- bringing prospective buyers to Zimbabwe from outside Zimbabwe,
- Providing samples of goods to persons outside Zimbabwe.
204

lOMoARcPSD|3494582
The expenditure must be related to the export of goods and not for services. Goods refers to ‘anything that
has , in Zimbabwe, been manufactured, produced , grown, assembled, bottled , canned packaged, graded,
processes or otherwise dealt with in such manner as the CG may approve”.
The expenditure must be proved to the satisfaction of the CG to have been incurred wholly for the purpose
of seeking opportunities for exporting goods from Zimbabwe or increasing demand for such exports.
EXAMPLE
Greenfields (Pvt) Ltd grows peas for export to regional and international markets. During the year ended 31
December it incurred the following expenditure:
1. An amount of $27,500 to obtain the European Economic Community certification of Quality Standard
from Brussels, for purposes of facilitating the export of its products to European countries
2. Cost of a trip to Zambia amounting to $3,000 and another trip to India amounting to $5,000, undertaken
by the marketing director. The trip to Zambia was for the purposes of participating in that country’s
trade fair. The company is unable to provide support documents for the Indian trip
3. Award of $7,000 to its marketing manager who had shown exceptional initiative in furthering the sales
of the company’s products, especially in promoting it overseas.
4. $35,000 for freight and insurance paid to a clearing company, company’s exporting agent
Compute the deductible amount to Greenfields (Pvt) Ltd in 2015.
ANSWER
Cost item Deduction Comment

Quality certification 55,000 market development cost x 2
Zambia trade fair 6,000 market development cost x 2
India trip 5,000 Staff cost
Award to marketing manager 7,000 Staff cost
Freight & insurance 35,000 carriage cost
Total 108,000
205

lOMoARcPSD|3494582
Chapter roundup
 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 $25,000 for such building
constructed on or after 1 January 2009.
 The deemed cost for purposes of computing capital allowances on PMV is $10,000.
 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.
 A fiscal electronic register qualifies for SIA on half of the cost not deducted for VAT purposes.
 The golden rule: Where the selling price of an asset is more than its original cost, recoupment is equal
to capital allowances previously claimed.
 A double ($2 for $1 incurred) deduction is granted of export market development expenditure.
Exam Bank
Computation of corporate tax liability

206

lOMoARcPSD|3494582
9
1 Year of assessment C1(a) and C1(b)
3. Residence of a corporate C1(c )

4. Exemptions and reduction of tax C4(b) & C4(c
5. Corporate tax liability for short accounting period C4(d)
Introduction
In the previous chapters you learnt how to compute the taxable income from both investment and trading of
individuals and companies.
In this chapter, you will learn how to compute the tax liability on trading income. You will recall from
chapter 6 that the net profit as per financial statement is adjusted to result in taxable income and it is on the
adjusted profit that the tax is computed on.
We look at the general rate applicable on the adjusted profit. The rate is generally the same; no matter the
taxable income is for a self-employed, a partner, a trust, a cooperative or a company. While small
businesses are also required to comply with the law and pay income tax at the general rate, the Act imposes
certain taxes on them if they do not comply. We also consider the taxes which small businesses are required
to pay i.e. referred to as presumptive taxes.
We conclude the chapter by looking at certain categories of taxpayers whose receipts and accruals are taxed
at rates other than the general rate of tax.
In our next chapter we deal with income tax at group level. Essentially, there is no group tax in the country
except that there are transactions which are tax neutral when transacted between group members.
Study guide
207

lOMoARcPSD|3494582
Intellectual
level
C1 The scope of corporation tax
(a) Define the terms ‘period of account’, ‘accounting period’, and ‘year of assessment 1
(b) Recognise when an accounting period starts and when an accounting period finishes. 1
(c ) Explain how the residence of a company is determined. 2
C3 The comprehensive computation of corporation tax liability
(a) Compute the corporation tax liability (including AIDS levy). 2
(b) Explain and apply the exemptions from and reductions in tax payable available to2
taxpayers in growth point areas and industrial parks, and under BOOT arrangements.
(c) Explain the obligation to withhold tax at source when making payments to both residents2
and non-residents.
Exam guide
The topic may also be examined as part of computational questions in section B or in part under multiple
choice questions. You must ensure that you know how to adjust the net profit as given in the income
statement so that it equals the taxable income. This you can only be able to do if you are knowledgeable of
deductible and non- deductible trading expenses. A sound knowledge of computation of capital allowances
and recoupment is a key skill required throughout the paper. To arrive at the tax liability, it will be crucial
for you to know the marginal rate of tax to be applied on taxable income.
1. Year of Assessment
Fast Forward
A year of assessment is a period of twelve months beginning on the 1st January in any year in respect of
which tax is to be charged, levied and collected and includes any period within such a year of assessment.
1.1 Introduction
An ordinary tax year starts on 1 January and ends on 31 December. This is the ordinary year of assessment.
The Commissioner may, on written application by a taxpayer grant a permission to use a different twelve
month as the year of assessment and this shall be called a substituted year of assessment. The application
must be supported by valid reasons. For example this can be extended to subsidiaries of foreign entities or
entities that have income of a seasonal nature.
The Commissioner may, by notice in writing, withdraw a taxpayer’s permission to use a substituted tax
year and any such withdrawal shall take effect at the end of the taxpayer’s current substituted year of
assessment. An interim period is a separate tax year (transitional year of assessment).
The person may also be granted different dates for payment of provisional tax (QPDs).
1.2 Effect of short year of assessment
208

lOMoARcPSD|3494582
Where the year of assessment for a taxpayer changes from the ordinary year of assessment to a substituted
year of assessment to an ordinary year of assessment or from one substituted year of assessment to another,
the period between the last full year of assessment prior to the change and the date on which the changed
year of assessment commences shall be treated as a separate year of assessment, to be known as a
“transitional year of assessment”.
See chapter 6 for details.
2. Residence status
Generally, the residence of a corporate is based on the place central management and control abides. Under
Zimbabwe tax treaties the other criteria used is the place of effective management.
2.1 Introduction
Despite the foregoing source rules, international tax law generally does not permit taxation by a country of
an enterprise of another state, unless the enterprise establishes a place of business in the other country. This
is known as the concept of “Permanent Establishment” (PE). If the enterprise carries on business as
aforesaid, the business profits of the enterprise may be taxed in the other State but only on so much of them
as attributable to that permanent establishment. A PE is a fixed place of business with some degree of
permanence through which a business is wholly or partly carried out.
As far as Zimbabwe is concerned residence rules matter for this purpose.
Note the concept of PE is not covered by your syllabus.
2.2 Domestic rules
A company is regarded as resident if its place of central management and control abides in Zimbabwe (a
place where the controlling power and authority abides – i.e. where the board of directors resides).
Accordingly, a company is resident in the country where its head office is situated. This is because the law
has always recognised that central management and control is found at head office
In practice, a company registered or incorporated in Zimbabwe and operating in Zimbabwe is a resident of

Zimbabwe despite its central management and control placed elsewhere.
2.3 Double taxation treaties

In the majority of treaties which Zimbabwe has concluded, the place of effective management of the
legal entity is used as the basis of determining resident status of the corporate. The place of effective
management is the place where key management and commercial decisions that are necessary for the
conduct of the entity’s business are in substance made. This is the place where the board of directors
makes its decisions. However, no definitive rule can be given and all the relevant facts and
circumstances must be examined to determine the place of effective management.
Relevant cases
Reema Construction Pvt Ltd v COT
A company incorporated in Rhodesia was owned by Mr. S, Mr. H and a company resident in the Bahamas.
Between them Mr. S and Mr. H held less than 1% of the voting shares, whilst the company held at least
99% of the shares. The shares in a Bahamas company were in turn under the control of another which was a
subsidiary of a large holding company. It was accepted that the Rhodesian Company was controlled by
more than 4 nonresident individuals so that the case turned on whether the company was ordinarily resident
in Rhodesia. The company had 3 directors. Mr. H a resident of Rhodesia. Mr. G had never been resident.
209

lOMoARcPSD|3494582
Mr. S had lived in Rhodesia but spent some time overseas. All meetings of the directors were held in
Rhodesia.
It was agreed that a company is resident where its “central management and control actually abides”
Commissioner to refute the notion that central management and control was exercised in Rhodesia on the
basis that directors could have been puppets acting on the instructions of the Bahamas Company.
Held: that even though the directors may have been guinea pig directors, they must be regarded as having
the control of the company and that the central management and control of the company was in Rhodesia,
which made the company a resident.
3 Corporate tax liability

The general rate of tax on trade and investment income is 25% plus 3% AIDS levy. It is the same rate for
self-employed persons, sole trades and partners, who derive income from trade and investment. Individuals
are however entitled to tax credits which are deducted before application of AIDS Levy.
3.1 The general rate of tax

Income tax is computed by reference to the taxable income of a person in the year of assessment and the
appropriate fixed rate of income tax. The general rate of tax is 25% plus an AIDS levy rate of 3%, which
result in a marginal rate of tax of 25.75%. Other special rates of tax exist.
EXAMPLE
CAPM Corporation, a manufacturing company prepares its accounts to 31 December. The company made
taxable income of $250,000 for the year ended 31 December 2015.
Compute CAPM’s tax liability for the year ended 31 December 2015
ANSWER

Tax liability @ 25.75% 64,375
Individuals are entitled to claim tax credits (refer to chapter 3 for details of tax credits) against tax
chargeable before application of AIDS levy.
EXAMPLE
Mrs. Chibanda, 62 years old owns rented property, which earns her a monthly rental of $4,000. The
breakdown of her expenses for the year ended 31 December 2015 is as follows:

Staff costs 7,000
Medical expenses for her disabled child 4,000
Repairs and maintenance 6,500
Depreciation 4,000
Drafting the lease agreement 1,000
Total costs 25,500
Compute Mrs. Chibanda’s tax liability for the year ended 31 December 2015.
ANSWER
210

lOMoARcPSD|3494582
Rent (4,000 x 12) 48,000

Less elderly person’s exemption 3,000
Income 45,000
Less Deduction
Staff costs 7,000
Medical expenses for her disabled child (private expense) 0
Depreciation (disallowed) 0
Drafting the lease agreement 1,000 17,500
Tax liability @ 25% 6,875

Less Tax credits
Elderly taxpayer’s credit 900
Disable child’s credit 900
Medical expenses for disabled child ($4000 x 50%) 2,000 3,800
Tax liability 3,075
Add 3% AIDS Levy 92
Tax payable 3,167
3.2 Rates of tax for small businesses

Presumptive tax, which is tax on turnover, is administered on income of small businesses who do not keep
proper books of accounts.
3.2.1 Introduction
The law requires every person who derives income from a trading activity to pay tax at the marginal rate of
tax stated above. However, small businesses (e.g. informal traders, small scale miners, cottage industry
operators, transport operators, hair saloons etc.) rarely comply.
These operators are required to pay presumptive taxes, unless the operator is tax compliant operator (i.e.
keeps proper books of accounts furnish tax returns and pay taxes). When an operator is tax compliant or
pays the presumptive tax, Zimra will issue to the operator a tax clearance.
3.2.2 Presumptive taxes payable
Key terms
a) An informal trader is a person whose annual gross sales do not exceed $6,000, e.g. Vendors, hawkers,
flea market operators and persons manufacturing or processing items from residential premises.
b) A cottage industry is a home industry which is furniture-making or upholstery trade, metal fabrication
trade or any other activity as prescribed by the Minister by a notice in a statutory instrument.
c) A commercial water borne vessel includes any ship, cruiser, houseboat, canoe or any other waterborne
vessel of whatever description that is employed for the carriage of passengers for profit on inland
waters, or fishing rigs.
d) A lessor means:
• A local authority to which an informal trader pays rent in respect of residential accommodation or
• Any person, including a local authority, to whom an informal trader pays rent in respect of premises or
a place he/she carries on trade
The presumptive taxes payable are as follows:

 Hairdressing salons $1,500 every quarter.
211

lOMoARcPSD|3494582
 Small Scale Miners. An agent (buyer) to withhold 2% of the gross value of the minerals on every
purchase of precious metals or stones from a small scale miner.
 Informal cross border traders 10% of the value for duty purposes of the imported goods
 Informal trader 10% of the gross rentals payable to the lessor
 Owner or a person in charge of cottage industry $300 every quarter.
 Owner or a person in charge of a restaurant or a bottle store $300 every quarter
 Transport operators as follows:
Operators Description Quarterly/vehicle
8 to 14 passengers 150
Omnibuses
From 37 passengers and above 450
Taxi-Cabs All 100
Driving Schools Class 4 vehicles 500
Class 1 and 2 vehicles 600
More than 10 tonnes, but less than 20 tonnes 1 000

Goods Vehicles
More than 20 tonnes 2 500
10 tonnes or less, but with combination of truck
2 500
and trailers of more than 15 tonnes, but less than 20 tonnes
 Fish rigs and commercial water borne vessels
Type of Size per Vessel (number of Rate per Quarter (US$)

Operator passengers)
Fishing rigs 350
1-5 250
6-15 500
Commercial waterborne vessel
16-25 1 000
26-49 1 500
50 and above 2 000
3.2.3 Dues dates for paying presumptive taxes
The presumptive tax must be remitted to Zimra as follows:
a) All operators who must pay tax quarterly basis must pay the tax as follows:
 1st quarter January – March by the 10th April

 2nd quarter April – June by the 10th July
 3rd quarter July – September by the 10th October
 4th quarter October – December by the 10th January
212

lOMoARcPSD|3494582
b) An agent (buyer) who buys minerals must withhold tax and pay it to Zimra by the 10th of the following
month after the month of sale
c) A lessor who withhold tax from rent received from an informal trader must pay the tax to Zimra within
30 days of receiving the rent
d) Informal cross border traders pays presumptive on the spot (when declares goods at the border).
An operator who fails to pay the tax by the due date is personally liable to pay that tax, interest and
penalties when levied.
3.2.4 Miscellaneous points
 Operator to keep tax clearance certificate in the vehicle for inspection. A driver who fails to produce a
tax clearance is liable to a fine of 100% of the tax due or to imprisonment for a period not exceeding
six months.
 Local authorities are agents for collection of presumptive tax on behalf of Zimra, at the time of issuing
or renewing (point of licensing) an operator’s licences. For this duty they are required to retain 10% of
the collected revenue to cover their administration costs.
 Failure or refusal to pay the tax by the informal trader shall constitute a breach of the lease, causing the
lessor to terminate the lease without notice
 A person withholding the tax must issue to a payee a withholding tax certificate
 A presumptive tax is not a final tax. It can be claimed as credit tax against tax chargeable on trade and
investment income when he renders a tax return. The credit should be claimed in the same year in
which the presumptive was incurred.
 The payment of presumptive tax does not exempt the payee from furnishing tax and payment of tax,
unless a person is exempted by the CG from furnishing tax returns.
 An overpaid presumptive tax is refundable, provided that a claim is made within 6 years of the date of
the overpayment.
3.3 Withholding taxes on contracts

3.3.1 Introduction
Withholding tax on contracts is a form of penalty for non-compliance. It is levied on every contract which
is entered by a taxpayer who has no tax clearance. To be issued with a tax clearance, a taxpayer must be up
to date with all tax payments and all tax returns. Withholding tax on local contract is a form of tax that is
deducted on any payment made to a local counterparty (supplier) which has no tax clearance. The
responsibility to withhold the tax lies with every person registered in the books of Zimra as a taxpayer, the
State, a statutory body or a quasi-government body which enters into a contract for the supply of goods or
services to it by any person worth $250 or aggregating $250 per annum. The payer must withhold 10% of
the payment made to supplier with no tax clearance. The aggregate of $250 per annum was introduced
effective 1 September 2014 to counter the practice of some suppliers who were splitting the payment so as
not to fall within the $250 threshold. Again this threshold was increased to $1,000 per annum with effect
from January 2015. Before 1 September 2014, the limit was $250 per transaction.
Key term
A registered taxpayer is a person registered with Zimra as an employer, a depository (Capital Gains
Tax), VAT registered operator or any person in the Commissioner’s records (e.g. churches, benefit fund,
trusts etc.).
213

lOMoARcPSD|3494582
A “payee” is a person to whom any amount is payable in terms of a contract.

To encourage tax compliance, a registered taxpayer, the State, a statutory body or a quasi-government body
is required to deduct 10% of payment made to a non-compliant taxpayer for the supply of goods or
services. The contract must be totalling or aggregating $250 or more.
The tax is not deducted on payment made to a compliant payee. A compliant payee is one who holds a tax
clearance (ITF263). An ITF 263 is only issued to tax compliant persons (i.e. with no income tax, VAT and
PAYE arrears). Tax clearances are issued biannually i.e. for period 1 January to 30 June and 1 July 31
December.
The term registered taxpayer includes churches, religious organisation, benefit funds etc. even though they
are exempted from paying income tax, these organisations are registered taxpayers because they have an
obligation to deduct and remit employees’ tax. A registered taxpayer does not include a non-resident who
does not carry on business in Zimbabwe.
3.3.2 Meaning of contract
Key term
A contract is an agreement in which the State or a statutory body, a quasi-Governmental institution or
a registered taxpayer is obliged to pay one or more persons an amount or amounts totaling or
aggregating $1,000 or more in a year of assessment. It includes a contract for the sale, letting or hire
of immovable property
A contract ” means a contract in terms of which the State or a statutory body, quasi-Governmental
institution or registered taxpayer is obliged to pay 1 or more persons an amount or amounts totalling or
aggregating $1,000 or more per annum. The law definition of a contract is that it is an agreement between
two or more persons which gives rise to personal rights and corresponding obligations. It is an agreement
which is legally binding on the parties i.e agreement must be enforceable at law. From the law definition
virtually all forms of agreement falls within the definition of a contract. A donation for instance should be
followed by offer and acceptance. Director’s loan is also a form of contract.
Exclusions
• a contract to settle a delictual claim against the State or a statutory corporation,

• an employment contract
• a sale effected in any shop in the ordinary course of the business of such shop,
• 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
Withholding tax is withheld on contracts and not withheld on exclusions
The term registered taxpayer includes churches, religious organisation, benefit funds etc. even though they
are exempted from paying income tax, these organisations are registered taxpayers because they have an
obligation to deduct and remit employees’ tax. A registered taxpayer does not include a non-resident who
does not carry on business in Zimbabwe.
3.3.3 Meaning of payment
The term ‘payment’ means payment by cash, barter, setoff, crediting a director’s loan accounts,
intercompany debits and credits or by other settlement of obligations whatsoever and in any form. The
practical consideration of the definition is that the moment a debt is extinguished whether by cash or
some other form; if ITF 263 is not held by the payer withholding tax must be deducted. Merely passing
214

lOMoARcPSD|3494582
a journal in an intercompany account could also trigger 10% withholding tax, despite the intercompany
balances being settled at year end.
There is a misconception that no withholding tax is deducted if an ITF 263 is held at the time of
receiving an invoice. 10% withholding tax on contracts is applied strictly at the time of making
payments. If ITF263 is not held at the time of making payment, notwithstanding it was held when the
invoice was received, withholding tax must be deducted.
3.3.4 Cases in which 10% must not be deducted
Contract excludes the following cases; therefore 10% must not be withheld for lack of tax clearance:
 Amounts paid in terms of any employment contract (salaries and wages).

 contract or payments for supply of electricity, water or telephone services to an operator
 Sales affected by retailers or wholesalers in the ordinary course of trade.
 Payments for the supply of farm produce and livestock to farmers, excluding payments for farm
produce to persons who buy for resale, i.e. traders, retailers or wholesalers.
 Tax payments and any delictual claims against the state.
3.3.5 Obligations
A paying officer and the buyer (a person who concludes a contract) are duty bound as follows:
 Withhold 10% tax of each amount payable under a contract

 Remit the tax to Zimra with by the 10th day of the month following the month of pay.
 Issue to the payee a withholding tax certificate setting out the amount of the payment made and the
amount of tax withheld from the payment.
 The contractor must ensure that a person with whom a contract is concluded is made aware of the
provisions relating to withholding tax on contracts
A failure by the contractor to comply with the requirement does not relieve a paying officer of his
obligations.
There is no action to be levelled against the State, a quasi-government, a statutory body, an operator, a
paying officer who withholds the tax on contract as required by the law. In addition, the withholding of the
tax shall not constitute a breach of contract.
3.3.6 Penalties for non-compliance
Refer to chapter for details on remission of penalty.
For failing to withhold and remitting the tax there is a 100% penalty and interest of 10% p.a on the
outstanding amount.
When a penalty is not paid on time it will also attract interest at 10% p.a.
The penalties and interest are debts due and payable to the State and may be sued for and recovered by the
Commissioner in any court of competent jurisdiction.
EXAMPLE
215

lOMoARcPSD|3494582
Mr. K the finance director of Cues Ltd failed to remit tax on a building contract of $353,250. The contract
was paid on 1 July 2015, but he was convicted on 30 October 2015. Compute the tax due.
ANSWER
Payment Gross Amount Amount Due

Contract $353,520
WHT 10% = $35,325
Penalty 100% = $35,325
Total Amount due = $70,650
The Commissioner will retain the tax withheld until such time a payee is assessed for the respective tax
year, at that time the amount will be allowed as a credit against any tax due or refunded where it exceeds
the income tax chargeable on assessment.
3.4 Withholding taxes on payments to non-residents

The Act requires every registered taxpayer (an employer, registered VAT operator and any other person in
Zimra’s records as taxpayer) who enters into contract with any non-resident entertainer or sportsperson to
withhold 15% on all amounts it pays in respect of any personal activity exercised by an entertainer or
artiste. “Contractor” means a contractor of the services of any payee who is a non-resident artist or
entertainer contracted to perform in Zimbabwe.
The withholding tax is triggered by payment. The term payment is wide and includes cash settlement,
barter, setoff, crediting a director’s loan accounts, intercompany debits and credits or by other settlement of
obligations whatsoever and in any form.
The responsibility to withhold lies with the withholding agent i.e a contractor, or person who is employed
by a contractor and who is responsible for paying a payee any amount due in terms of a contract. The agent
must remit the tax to Zimra within 10 days of payment of the fees to the non-resident or within such further
time as the Commissioner may allow. The agent must also file a withholding tax return on or before the 10 th
day of payment of the fees to the payee. For failing to withhold tax and remit tax on time, the agent is liable
to pay the tax due together with 100% penalty and interest of 10% p.a on the tax due. The Commissioner
can sue and recover such taxes through an action in any court of competent jurisdiction. If the
Commissioner satisfied that the reason failing to pay tax was not due to any intent to evade tax he may
waive the full or part of the penalty.
The withholding tax is not a final tax, non-resident who wishes to submit the return can obtain a tax credit
against the income tax payable by him and where the amount exceeds the income tax payable by the non-
resident, the Commissioner shall forthwith refund the excess to the non-resident.
No action shall lie against a contractor or withholding agent as result of properly exercising his duty nor
shall the withholding of the amount constitute a breach of the contract concerned.
4. Exemptions and reduction of tax

A person, other than a company or trust, deriving taxable income from trade and investment is liable to pay
tax on such income at 25.75%. Taxable income from trade or investment is that part of the taxable income
accruing or received by the person from any trade, investment or other activity, other than taxable income
from employment. This covers sole traders and partners in partnership. A company or a trust is liable to pay
tax on its taxable income at 25.75%, whereas pension funds are currently exempt from tax.
4.1 Introduction
216

lOMoARcPSD|3494582
Exporting manufacturer, BOOT operators, approved tourist operators and licensed investors are taxed at
reduced rates, ranging from 0% to 25%, but are charged 3% AIDS levy.
Licensed investors, industrial park developers, BOOT operators, exporting manufacturers and tourist
operators have privileged tax rates and other tax concessions which are not available to ordinary taxpayers.
The concessions are policy directions intended to achieve desired results, e.g. the creation of foreign
currency and promotion of investment in public utilities.
In the exam you must ensure that you have applied the correct tax rate when computing the tax liability of
taxpayer by considering the type of taxpayer or the business being carried. This same rate will be used to
compute the QPDS.
We consider each of the entities below:
4.2 Exporting manufacturer

A manufacturer who exports at certain sales thresholds his manufactured outputs is taxed at special rates
see below. The output is measured in physical units and assessed on an annual basis.
4.2.1 Introduction
An exporting manufacturing company refers to a company that conducts manufacturing operations and in
any year of assessment exports at least 30% (50% before 1 January 2015) of its manufactured output.
Where an operator (e.g. a sugar farmer and manufacture) is engaged in manufacturing and non-
manufacturing operations, the special rate shall apply only to profits from manufacturing operations and
expenses must be ring fenced accordingly. The following are the special income tax rates according to level
of exports effective 1 January 2015 (20% before this date):
Export threshold (% manufactured) Corporate rate

30-40 20%
41-50 17.5%
Above 51 15%
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’. The output is
computed 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. The manufacturing operations
should be conducted in Zimbabwe during the year of assessment.
4.3 Infrastructure developer entities

4.3.1 Introduction
An approved BOOT or BOT arrangement is a ‘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. A BOOT or BOT operator is taxed on its profits at
0% in the first 5 years of the arrangement, 15% in the second 5 years of the arrangement and ordinary rates
217

lOMoARcPSD|3494582
(25.75%) thereafter. The taxpayer is not chargeable to 3% AIDS Levy on special rates, but on the ordinary
rate i.e. 25.75% AIDS Levy is included.
A BOOT and BOT can also have a national project status, i.e. a government funded projects with a
national impact. This is often measured by massive size of capital (both financial and plant and
equipment) that would be needed for that type of investment and exempted from duty payments and
other tax payments requirements. 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;
4.4 Export process zone companies

4.4.1 Introduction
A licensed investor is a person licensed under the Export Processing Zones Act. The Exported Processing
Zones Act was repealed by the Zimbabwe Investment Authority Act (ZIA) with effect from 1 st January
2007
A licensed investor is a “person” registered under the Export Processing Zones Act, which manufactures
and exports at least 80% of her EPZ output.
The trading profits of a licensed investor are taxed at 0% in his the first 5 years of its operations and
25% thereafter. The taxpayer is not chargeable to 3% AIDS Levy
The trading income or profits to which the concessionary rates shall apply must be attributable to the
operations to which taxpayer’s investment licence relates.
4.4.2 Other benefits
The following are further concessions granted to the licensed investor:
 Exempt from withholding any tax on dividends, fees and royalties in relation to his operations and from
paying capital gains tax.
 Exports sales are zero rated
 Rebate of duty on capital equipment imported for use in his business
4.4.3 Warning
Warning: The Zimbabwe Investment Authority Act, which superseded the now repealed Export Processing
Zones Act, does not recognise licensed investors and industrial park developers (considered
next).Therefore, the licensed investors and industrial park developers entitled to the reduced rates
are those who commenced operation prior to 1 January 2010. From the practical point of view this
legislation appears to be redundant as most of these operators, last licensed in 2006, have lived the full life
span for which the reduced rates apply.
4.5 Industrial park developer

4.5.1 Introduction
An industrial park developer is a person owning an industrial premise. The premise must be used by two
or more persons, excluding the developer, to carry on the business of manufacturing or processing
goods or components of goods for export from Zimbabwe.The premises must be located outside the
export processing zone.
218

lOMoARcPSD|3494582
The trading profits of an industrial park developer are taxed at 0% in his the first 5 years of its operations
and 25% thereafter.
EXAMPLE
Binomial (Pvt) Ltd was licensed as an industrial park developer in 2004 and commenced operations in the
same year. During the current year of assessment it made taxable income amounting to $289,000 from its
industrial park operations.
Compute Binomial’s tax payable in the current year of assessment. You must explain your answer.
ANSWER

Tax payable @ 25% 72,250
Note Binomial (Pvt) Ltd is in its 10th year of operation and the tax rate applicable is 25%.
4.5.2 Other benefits
The following are further concessions granted to the industrial park developer:
 Exempt from withholding any tax on dividends, fees and royalties in relation to his operations and from
paying capital gains tax.
 Exports sales are zero rated
 Rebate of duty on capital equipment imported for use in his business
4.6 Tourist development zone
An approved tourist development zone is an area declared under the Tourism Act as such and approved by
the Tourism Authority. The requirement is that the operator must have at least 60% of his turnover
denominated in foreign currency.
His trading profits are taxed at 0% in his the first 5 years of its operations, 15% in the 5 year of operation (6
-10th year) and 25% thereafter.
Only tourist facilitators registered or who commenced operation prior to 1 January 2010 would qualify for
the above incentives.
Error! Bookmark not defined.
4.7 Small or medium enterprise
A small or medium enterprise shall qualify for S.I.A of 50% in the year of use of an asset and accelerated
wear and tear of 25% each in the 2nd and 3rd years of use of the assets, provided the conditions for S.I.A are
met.
219

lOMoARcPSD|3494582
Chapter roundup
 The general rate of tax is 25% plus 3% AIDS Levy, i.e marginal rate of 25.75%.
 Informal traders are required to pay presumptive taxes, generally payable to Zimra on a quarterly basis,
provided a tax compliant tax shall not pay presumptive tax.
 Informal cross border traders must pay a presumptive tax of 10% of the value for duty purposes of the
imported goods
 The presumptive tax for Informal traders is 10% of the gross rentals payable to the lessor
 The payment of presumptive taxes shall not exempt an operator from filing income tax returns and pay
income tax as required by the law.
 An operator who pays income tax will offset the presumptive tax paid against the tax chargeable on his
trading income
 A person who exports at least 50% of his output manufactured in Zimbabwe is liable to tax at the rate
of 20%, the applicable rate is determined on annual basis.
 Industrial park developers and licensed investors are taxed at 0% in its first 5 years of its operations and
25% thereafter.
Exam Bank

220

lOMoARcPSD|3494582
Taxation of group companies
10
1 Definition of a group C4(a), C4(b) & C4(c)
2 Assessed loss relief C4(b) & C4(c)

3 Capital loss relief C4(b) & C4(c)
4 Recoupment relief B3(f)(iv)
5 Capital gains tax relief C4(d)
6 Double taxation relief C4(d)
7 Transfer pricing C4(e)
Introduction
In the previous chapters we covered taxation of single companies, including the reliefs for losses.
In this chapter we consider the extent to which the tax law recognises group relationships. Companies in a
group are separate entities with their own tax liabilities, but tax law recognises the close relationship
between group companies. The advantages of a group are that it facilitates the re-organisation of assets
within the group envelope in a tax neutral fashion and sharing of Assessed loss.
Next, we look at how the transfer pricing legislation applies and conclude by considering how relief may be
given for overseas taxes suffered.
In our next chapter we deal with partnership, which is a group of persons coming together to do business in
an unincorporated entity. The tax liability is assessed and payable in the hands of the individual partner as
opposed to the partnership.
221

lOMoARcPSD|3494582
Study guide
Intellectual
level
C4 Taxation of group companies
C4(a) Define an associated company and recognise the effect of being an associated company 2
for corporation tax purposes
C4(b) Define a 51% group, and recognise the reliefs that are available to members of such 2
a group
C4(c) Define a 51% capital gains group, and recognise the reliefs that are available to members 2
of such a group
C5 The use of exemptions and reliefs in deferring and minimizing corporation tax liabilities 2
C4(d) Calculate double taxation relief for withholding tax and underlying tax. 2
C4(e) Explain the basic principles of the transfer pricing 2
Exam guide
Groups may feature in your examination as part of question 2, which will always be on corporation tax or
in questions 4 or 5. Your first step in dealing with any group question must be to establish the relationship
between the companies and identify whether a group exist. The next steps will be to identify whether there
is transfer of Assessed loss and assets and to work out your strategy for maximizing tax benefits.
1 Definition of a group
A company is deemed controlled by another when its majority (at least 50%) of its voting shares are
controlled indirectly or directly by that other person or company. The new rules also provides that a person
is deemed to be controlling a company if he, 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. Another scenario
of deemed control is when the person 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. In substance the person should
influence the strategic and commercial decisions of an enterprise. So a company can be controlled or be
under the same group with another by virtue of its majority shareholding being controlled by that other
person or that other company having the ability to exert direct or indirect influence in its affairs. The
definition applies equally for income tax and capital gains tax purposes.
2 Assessed losses
2.1 General overview (rewind)

Assessed loss can be carried forward and deductible against future taxable income, provided that assessed
loss can only be carried forward for a maximum of six years from end of year of assessment in which the
222

lOMoARcPSD|3494582
assessed loss first occurred. However, assessed loss are ring fenced to a person and cannot be offset against
income derived by another person. So for example moving assessed loss from an individual to a company
or from company to another company is prohibited by law. However, assessed loss from a trading or an
investment activity can be off set against income from another trading or an investment activity carried on
by the same person. Separate assessments are also done for employment income, capital gains tax and
income tax. Where assessed loss does not exceeding $100, it cannot be carried forward. Whilst assessed
loss of a general business can be carried forward for six years and be deducted against future profits on
First in First out (FIFO), those of a miner are carried forward indefinitely. There is no provision for the
carrying back of an assessed loss to a previous year.
Assessed loss is an asset if properly managed and should not be made to expire without realizing. When
assessed loss is approaching maturity, avoid maximizing deduction and it is also the right time to dispose of
non-core business assets yielding recoupment. New initiatives such as business restructuring could be
helpful mandatory if ever there is no hope for business recovery.
2.2 Anti-tax avoidance measures

Fast Forward
The Act has specific anti-tax avoidance measures which discourage carrying forward under certain
circumstances as follows:
2.2.1 Insolvent taxpayers
Firstly, a person that has been declared insolvent or had his property or estate assigned for the benefit of
creditors, is prohibited from carrying forward assessed loss.
2.2.2 Related companies
Where there is a change in the shareholding of a company with assessed loss or which directly or indirectly
controls any company with an assessed loss and the Commissioner is satisfied that such change has been
effected solely or mainly in pursuance of or in connection with any scheme for taking advantage of such
assessed loss, no assessed loss incurred prior to that change is deductible. The Commissioner can disallow
the set-off against assessed loss of that company by any future income. A taxpayer who satisfies the
Commissioner that the change in shareholding was done for non-tax or non-fiscal reasons is allowed to
carry forward assessed loss. For example non-tax reasons could include rationalising operation, accessing
trading licence of the other, synergy etc. In ITC 983 the taxpayer, a company was engaged in clothing
manufacture. It bought shares in a company also engaged in clothing manufacture and which had an
assessed loss. The court held that the main purpose of buying the shares was to enable the purchasing
company to obtain a productive manufacturing unit that could go into immediate operation to supplement
its own productive capacity. Accordingly the assessed loss was granted. The case of New Urban Properties
Ltd SIR distinguished, the shareholders in successful land dealing companies bought the shares of another
land dealing company but which was hopelessly insolvent, had an enormous deficit and assessed loss. It
was held by the court that the obvious intention was to channel profits of the successful companies to the
unsuccessful one and, thereby, take advantage of the assessed loss. Relief denied.
A company is deemed controlled by another where its majority (at least 50%) of its voting shares are
controlled indirectly or directly by that other person or company.
Conditions that need to be satisfied
 The transfer must be triggered by a scheme of reconstruction, merger, takeover or some other similar
business combination, which in the opinion of the Commissioner is of a similar nature
 There must be a change in shareholding in a company with assessed loss or in a company which
directly or indirectly controls a company with assessed loss
223

lOMoARcPSD|3494582
 A company is deemed controlled by another where its majority (at least 50%) of its voting shares are
EXAMPLE
During the year D Ltd acquired 40% voting shares in B Ltd, a company with assessed loss of $101,000.
Comment whether D Ltd is entitled to takeover of Assessed loss of B Ltd
ANSWER
No assessed loss relief is available to D Ltd, even if the takeover was not meant to take advantage of
assessed loss. The acquisition of stake in B Ltd by D Ltd does not result in it acquiring more than 50%
voting shares of B Ltd.
As pointed above, the control need not be direct. An indirect acquisition of interest in a company can also
entitle the acquirer to relief of the loss as long as the effective interest is at least 50%.
EXAMPLE
D Ltd has a 60% voting shares in B Ltd, a company with assessed loss of $101,000. On 30 June 2014, C
Ltd, a new entity, bought 85% equity shares in D Ltd.
Is C Ltd entitled to inherit B Ltd’s assessed loss?
ANSWER
Yes assessed loss relief is available to C Ltd, unless the takeover was motivated by the existence of
Assessed loss. The purchase of shares in D Ltd will result in C Ltd having an effective interest in B Ltd of
51% (85% x 60%).
As stated above, the change must not only occur in a company with assessed loss for the relief to be
granted. It can also occur in a company that controls the one with an assessed.
2.2.3 Conversion of foreign company
A third anti-tax avoidance measure involves a transfer of assessed loss where a company formally
incorporated outside Zimbabwe (non-resident company), which was carrying on its principal business
within is about to be wound up voluntarily in its country of incorporation for the purpose of the transfer of
the whole of its business and property wherever situate to its successor Zimbabwean incorporated company
a company. Assessed loss shall not be inherited by the Zimbabwean company unless the Commissioner is
satisfied the sole consideration for the transfer will be the issue to the members of the old company of
shares in the new company in proportion to their shareholdings in the old company; and no shares in the
new company to any new shareholder.
2.2.4 Conversion of a company to private business corporation or vice-versa
A company which is incorporated under the Companies Act [Chapter 24:03] which converted into a
private business corporation or vice versa cannot carry forward assessed loss into the new entity if the
conversion has been motivated solely or mainly by the existence of an assessed loss.
224

lOMoARcPSD|3494582
2.2.5 Assessed loss- employment income
The Act prohibits the deduction of an assessed loss attributable to business operations carried on by a
taxpayer against income received by or accruing to him under a contract of employment or vice versa. .
3 Consolidation
There is no provision for the filing of consolidated returns. Each company within a group of companies is
liable in its own right. As a result a company or a taxpayer cannot transfer its Assessed loss to another
group member, unless there is a change in control. It must carry forward the unexpired loss and charge
them against its future profits, subject to a six year limit.
3.1 Tax planning

As a tax planning measure an election to transfer losses must be taken in conjunction with the rollover of
recoupment. It helps because a transferor may transfer losses which he could have used to set off against a
recoupment realised from assets transferred together with the business. A company should make a claim to
use a loss itself rather than surrender the loss to other group companies if the claim against its own total
profits would lead to a tax saving.
The companies do not necessarily have to be both domiciled in Zimbabwe. This makes the group relief
available to companies resident anywhere in the world.
A claimant company is assumed to use its own current year losses or losses brought forward in working-
out the taxable total profits against which it may claim group relief, even if it does not in fact claim relief
for current losses against total profits.
If control of a corporation is acquired, its tax year is deemed to end, and any accrued but unrealized losses
are deemed to be realized immediately before that year-end.
4 Capital loss
Fast Forward
Capital loss can be transferred between members of the same group where there is a change in
shareholding.
4.1 Introduction
The Capital Gains Tax Act makes a provision for the deduction from capital gain any assessed capital loss
determined in respect of the previous year of assessment. Further, any capital loss before it is carried
forward to the following year it is set off against any computed gain on disposal of another specified asset
in the same year of assessment, no matter the specified assets are not of a similar nature. If loss is not fully
exhausted it is carried forward and be deducted from gains arising in the future years. Unlike the Income
Tax Act, the Capital Gains Tax Act there is no limit on the number of years a capital loss can be forward
into the future, but loss of $100 or less cannot be carried forward, i.e. the loss is reduced to nil in the year of
assessment in which it is incurred. Capital loss is also ring fenced to capital gains tax, meaning it cannot be
set off against other tax heads or vice versa.
4.2 Anti-tax avoidance measures
225

lOMoARcPSD|3494582
Capital loss is specific to a taxpayer and cannot be transferred from one taxpayer to the other. In this regard,
a taxpayer who is adjudged or declared insolvent or who had his property or estate assigned for the benefit
of his creditors cannot pass on his capital losses to a rehabilitated taxpayer or another taxpayer.
Whenever there is conversion of a company into a private business corporation or vice versa, the
Commissioner will permit the capital loss to be inherited or transferred from the company to the private
business corporation or vice versa. It does matter the scheme was made with the motive of taking advantage
of capital loss.
Related companies (companies under the same control) are permitted to transfer capital loss to each other.
Therefore if during any year of assessment there is a change in the shareholding of a company with an
assessed capital loss or in the shareholding of any company which directly or indirectly controls any
company capital loss can be transferred to the transferee. The Commissioner may however not sanction the
transfer of the capital loss if he is of the view that the change in control was made with view take to
advantage of capital loss. A company is deemed controlled by another where its majority (at least 50%) of
its voting rights attaching to all classes is controlled indirectly or directly by that other person or company.
Conditions that need to be satisfied
 The transfer must be triggered by a scheme of reconstruction, merger, takeover or some other similar
 There must be a change in shareholding in a company with assessed loss or in a company which
directly or indirectly controls a company with assessed loss
 A company is deemed controlled by another where its majority (at least 50%) of its voting shares are
5 Recoupment relief
Fast Forward
Companies within the same group can transfer assets that are subject to capital allowances without
suffering tax on recoupment if an election is made.
5.1 Introduction
We rewind recoupment principles as follows:
5.1.1 General recoupment
A recoupment of capital allowances is the difference between the selling price and the asset income tax
value but restricted to the amounts previously allowed as capital allowances. To ensure that recoupment is
restricted to capital allowances previously granted, the selling price should be limited to the lower of cost
and actual selling. For assets that qualified on a deemed cost a deemed selling price should be used instead
of actual selling price.
5.1.2 Damaged asset
When an asset is damaged or destroyed and compensation is then applied in constructing or purchasing a
similar asset within 18 months of date of damage or destruction of the original asset and such new asset is
brought into use within 3 years of damage or destruction recoupment shall not be taxed.
5.1.3 Deemed selling price
226

lOMoARcPSD|3494582
Assets that qualify for capital allowances based on a restricted cost e.g. PMVs, schools, hospitals and
residential units for teachers or nurses should have their selling price restricted for purposes of computing
recoupment. The restricted selling price referred to as deemed selling price, is computed as follows:
Deemed sale price (DSP) = Deemed cost x Actual sale price

Original cost
Provided that the deemed selling price should not exceed the deemed cost.
5.2 Change of ownership of assets
The Act provides that on change of ownership of immovable asset ( e.g. commercial buildings, farm
improvements, industrial buildings, railway lines, staff housing or tobacco barns), the buyer and
the seller must set out the market value of the underlying assets and provide a statement to the
Commissioner in support of this. If the Commissioner is satisfied with such statement, he shall allow the
amount so declared to be the cost to the transferee and deemed selling price for purposes computing
recoupment in the hands of the transferor. The Commissioner may determine the value where he is not
satisfied with the statement.
Where immovable assets (e.g. commercial buildings, farm improvements, industrial buildings,
railway lines, staff housing or tobacco barns) are sold for lump sum payment, the buyer and the
seller must set out details of the allocation of the purchase price to the various classes of the
property transferred as required by the Commissioner and provide a statement to the Commissioner
in support of this. If the Commissioner is satisfied with such statement, the amounts so allocated shall
rank as cost to the transferee for purposes of claiming capital allowances and deemed selling price for
purposes computing recoupment in the hands of the transferor. The Commissioner may determine the
value where he is not satisfied with the statement.
Where the ownership was acquired by the transferee for no valuable consideration, the Commissioner
shall determine the cost of the immovable asset (e.g. commercial buildings, farm improvements,
industrial buildings, railway lines, staff housing or tobacco barns)
The Act provides that on change of ownership of movable assets ( e.g. articles, implements, machinery
or utensils), the buyer and the seller must set out the market value of the underlying assets and provide a
statement to the Commissioner in support of this. If the Commissioner is satisfied with such statement,
he shall allow the amount so declared to be the cost to the transferee and deemed selling price for
purposes computing recoupment in the hands of the transferor. The Commissioner may determine the
value where he is not satisfied with the statement
5.3 Schemes of Reconstruction (recoupment relief)

Fast Forward
Recoupment can be avoided when assets are transferred under circumstances stated below, subject to
election being made. The aim of the relief is to allow for group restructurings and for the transfer of assets
between group companies with neutral tax consequences. The rules also apply to VAT and capital gains
tax. The reconstruction should have commercial and economic considerations, otherwise the Commissioner
reserve the right to reject application if its sole or main objection is tax motivated
5.3.1 Foreign company
Where the ownership of an asset is transferred from a company formally incorporated outside Zimbabwe
(non-resident company), which was carrying on its principal business within Zimbabwe to its successor
Zimbabwean incorporated company the transferor and transferee may elect to transfer such asset at
income tax value (ITV) notwithstanding the terms of the agreement of sale. The income tax value will
227

lOMoARcPSD|3494582
then become the price to be used by the transferor for purposes of computing recoupment and the
amount which will rank for capital allowances in the hands of the transferee. The effect of this provision
is a complete tax relief on recoupment in the hands of the transferor. It does not matter whether the
transfer is made from a company with or without assessed loss. On conversion no new shareholder
should be taken aboard and the old shareholding should not be varied.
5.3.2 Conversion of a company to private business corporation or vice-versa
A company which is incorporated under the Companies Act [Chapter 24:03] which converted into a
private business corporation or vice versa would also qualify for the recoupment relief subject to an
election being made, whether or not there is assessed loss.
A transfer of an asset between related companies (companies under the same control) or between
spouses is treated in the same manner subject to an election being made. The transfer between
companies must be in the course of or furtherance of a scheme of reconstruction of a group of
companies or a merger or other business operation which, in the opinion of the Commissioner, is of a
similar nature. The election thus allows the transferor to minimise recoupment through the use of
income tax value (ITV) as the transfer value notwithstanding the terms of any agreement of sale i.e. as
opposed to the fair market value of the assets on date of transfer.
5.3.4 Transferee’s capital allowances
The transferee has the right to claim capital allowances on the transferred assets. However, such capital
allowances are capped to the income tax value of the asset as established in the hands of the transferor. In
other words, the transferee must inherit the capital allowance policy of the transferor on the transferred
asset.
EXAMPLE
Super Large is the parent company of Smallings (Pvt) Ltd. In July 2012 Super Large bought ginnery
equipment for $75,000, which it subsequently sold to Smallings (Pvt) Ltd for $90,000. Both companies
maximise their tax benefits.
Calculate Smallings (Pvt) Ltd’s capital allowances on the ginnery.
ANSWER
Super Large claimed SIA in 2012 and accelerated wear & tear of 25% p.a in 2013 and 2014. Therefore
Smallings’s capital allowances on the ginnery in 2015 are $18,750 (75,000 x 25%).
5.3.5 Sale to third party
In all above cases, recoupment will only arise when the asset is eventually sold by the transferee to a third
party. Such recoupment shall be computed as if the asset has always been in the hands of the transferor. The
implication is to limit the transferee’s recoupment to a maximum of the cost of the assets as established in
the hands of the transferor. A perpetual sale of an asset between companies under the same control will not
result in tax recoupment, as long as an election is made
EXAMPLE
228

lOMoARcPSD|3494582
Continent Limited is a fellow subsidiary to Tasty (Pvt) Limited. In 2015 Continent sold Tasty a delivery
truck for $40,000. Continent had bought the truck in 2013 for $60,000. During the current year Tasty (Pvt)
Limited sold the truck to an unrelated party for $50,000. The companies have no capital allowance policy.
Compute Continent’s capital allowances and recoupment in the hands of Tasty (Pvt) Limited
ANSWER
Continent’s Capital allowances

2013 $60,000 x 20% = $12,000
2014 ($60,000 – 12,000) x 20% = $9,600
Total = $21,600
Recoupment Tasty
Selling 50,000
Less ITV (see working below) 30,720
Recoupment 19,280
Tasty’s capital allowances in 2015 ($60,000 - $21,600) x 20% = $7,680
Tasty’s ITV ($60,000 - $21,600 - $7,680) =$30,720
5.3.6 Stock sold with business
The relief only applies to fixed assets that ranked for capital allowances. Trading stock sold as consequence
of the group restructuring or in whatever circumstances are deemed sold at the price stipulated in the sale
agreement. In the case of trading stock given away for free, if the Commissioner is of the opinion that such
trading stock has been given away or disposed of in pursuance of a transaction, operation or scheme whose
sole or main purpose is tax avoidance or postponement of tax liability, he can determine the amount which
he considers as the value of trading stock which would have been realized had it been disposed of or sold in
the ordinary course of the taxpayer’s trade.
5.3.7 Tax planning
An election to transfer assets at income tax value is more beneficial when a transferee is in an assessed loss
situation and the transferor is not. A company should make use of its recoupment if it has assessed loss
which are approaching maturity, rather than transferring the recoupment.
A transferee who expects to be in a future tax paying position must opt to acquire the assets at market value
as opposed to income tax value. Adopting the market value would entitle him to higher capital allowances
through high transfer value which can then be used to reduce the taxable income.
EXAMPLE
Wazs Limited sold its machinery on 1 December 2014 to Gill a fellow subsidiary company for $145,000.
This asset was purchased by Wazs on 1 January 2011Error! Bookmark not defined. for $132,000. Wazs
Limited has assessed loss of $99,000. Grill has a taxable of $50,000. Grill has built up losses amounting to
$48,000 which are unlikely to reverse in the next 6 years if a claim is not made in the current year. Capital
allowances are maximized.
Advise of an appropriate transfer scheme.
ANSWER
Decision Transfer at ITV Transfer at market value

229

lOMoARcPSD|3494582
Companies Wazs Grill Wazs Grill

Taxable income -99,000 50,000 -99,000 50,000
Recoupment ($132,000 x 75%) 99,000
Capital allowances -33,000 -36,250
Taxable income -99,000 17,000 0 13,750
Tax @ 25.75% 4,378 3,541
Companies must opt to transfer the asset at market value, this result in less tax being paid by the group.
6 Capital gains tax relief

Fast Forward
Companies within the same group can transfer specified assets without suffering capital gains tax if an
election is made.
6.1 Schemes of Reconstruction
6.1.1 Introduction
Companies under the same control may transfer specified assets without suffering capital gains tax. Thus,
if a member of a capital gains group disposes of a specified asset, subject to an election being made,
he can rollover the capital gains tax until the specified asset is sold to a third party.
6.1.2 Conditions to be satisfied:

 Transferor and transferee must elect to transfer the assets at their base cost, notwithstanding any price
paid in exchange of those assets.
 The election must be made not later than the date of submitting capital gains tax a return for assessment
of capital gain.
 The disposal is must be made in the course or in furtherance of a scheme of reconstruction, merger or a
similar business combination within a group of companies.
 Such scheme of reconstruction must first have been approved by the Commissioner.
6.1.3 Conversion of foreign company
Where the ownership of a specified is transferred from a company formally incorporated outside
Zimbabwe (non-resident company), which was carrying on its principal business within Zimbabwe to its
successor Zimbabwean incorporated company the transferor and transferee may elect to transfer such
specified asset at base cost notwithstanding the terms of the agreement of sale. The base cost will then
become the price to be used by the transferor capital gains tax and the cost of the specified asset to the
transferee. The effect of this provision is a complete capital gains tax relief in the hands of the transferor.
It does not matter whether the transfer is made from a company with or without assessed loss. On
conversion no new shareholder should be taken aboard and the old shareholding should not be varied.
Capital gain tax shall be computed when the specified asset is eventually sold to a third party.
A transfer of a specified asset between related companies (companies under the same control) shall not
be subject to capital gains tax, subject to an election being made. The specified asset will be deemed
transferred at their base cost at the date of transfer, notwithstanding any price paid in exchange of the
specified asset. The base cost will then become the price to be used by the transferor and the cost of the
specified asset to the transferee. The transfer should be made between companies under the same control
230

lOMoARcPSD|3494582
in the course of or furtherance of a scheme of reconstruction of a group of companies or a merger or

other business operation which, in the opinion of the Commissioner, is of a similar nature.
The relief of capital gain tax is conditional upon the election being made not later than the date of
submitting capital gains tax a return for assessment of capital gain.
The section provides taxpayer with an opportunity to sale or transfer specified assets to their sister
companies without charging tax, by rolling forward the capital gain tax until the property is sold or
disposed of outside the group i.e. capital gains tax will only become payable when the specified asset is
sold to a third party. Thus, a perpetual sale of an asset between companies under the same control will not
result in capital gains tax, as long as an election is made.
When the specified asset is sold to third party, capital gains tax shall be computed as if the specified asset
has always been in the hands of the transferor. A company is under the same control with another, if it is
controlled by another. A company is deemed to be under the control of an individual if the majority of
voting rights attaching to all classes of shares in the company is controlled, directly or indirectly, by the
individual. An individual and his nominee are deemed to be one individual. Companies that are controlled
by one company are companies under the same control i.e. fellow subsidiaries. The subsidiaries still need to
be effectively controlled at least 50% by one company.
6.1.5 Conversion of a company to private business corporation
A company which is incorporated under the Companies Act [Chapter 24:03] which converted into a private
business corporation or vice versa would also qualify for the capital gain tax subject to an election being
made, whether or not there is assessed loss. Capital gain tax will however arise when the specified assets
are eventually sold by the transferee to a third party. Such capital gain tax shall be computed as if the asset
has always been in the hands of the transferor.
6.1.6 Share exchange
The CGTA provides for capital gains tax relief in a 'share-for-share transaction'. A share for share
transaction involves an exchange arises when a marketable security issued by a company involved in the
scheme, merger or operation is transferred from one person to another for no cash consideration, in
exchange for a marketable security issued by another such company. The exchange must take place
between related companies (companies under the same control) in the course of or furtherance of a scheme
of reconstruction of a group of companies or a merger or other business operation which, in the opinion of
the Commissioner, is of a similar nature or between a former foreign company and its successor Zimbabwe
company (i.e in a conversion of foreign company). Thus, the transferor may elect that, notwithstanding the
terms of any agreement of sale, the marketable security transferred by him shall be deemed to have been
sold for an amount equal to the base cost at the date of transfer in respect of marketable security transferred
by him. The election should be made not later than the date for submission a return for the assessment of
capital gain.
Reorganization takes place where new shares or a mixture of new shares and debentures are issued in
exchange for the original shareholdings. The new shares take the place of the old shares. If an election is
made these shares will not suffer capital gains tax or withholding tax. The problem is how to apportion the
original cost between the different types of capital issued on the reorganization. If the new shares are
quoted, then the cost is apportioned by reference to the market values of the new types of capital on the first
day of quotation after the reorganization.
6.2 Sale outside the group

A perpetual sale of an asset between companies under the same control will not result in capital gains tax,
as long as an election is made. When the specified asset is then sold by the transferee to a third party
231

lOMoARcPSD|3494582
(outside the group), capital gains becomes taxable. The capital gains tax shall be computed as if the
specified asset has always been in the hands of the transferor.
7 Transfer pricing
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 can result in low tax being paid.
7.1 Defining transfer pricing

A transfer price is the price charged in transactions between firms that are related, for example, in a trade
between a company and its subsidiary or between affiliates.
The transfer pricing rules restricts the freedom of a company to buy and sell goods or services at whatever
price it wishes where such goods or services are bought from a related party. A profit on such a transfer
must be computed as though the transfer had been made at an arm's length price.
Companies under a common control could structure their transactions in such a way that they can shift
profit (or losses) from one company to another. This technique could be used to direct profits to a company
which will pay less tax on those profits. For example, shifting deductible expenses to the high tax location
and revenues to a low tax location in order to reduce overall corporate tax payments.
An arm’s length transaction is a transaction which is entered into between a willing buyer and
willing seller. The transaction must not be affected by the relationship between the parties
According to arm’s length rule, transactions between related parties should be priced in the same way as
those entered into between independent parties. A transaction is not an arm’s length when a price used to
transfer goods or services is manipulated, when goods or services are offered free of charge, for example
loans advanced free of interest between related parties.
The Income Tax Act has anti avoidance legislation which requires the profit to be computed as if the
transactions had been carried out at arm's length and not at the prices actually used. Generally, a
transfer or a sale of any property must take place at fair market price.
The legislation is used along with the general deduction formula. The formula restricts deductible
expenditure to those incurred for purposes of taxpayer’s trade or in the production of taxpayer’s income.
For example excessive interest, management fee payable between related parties may be disallowed on the
basis that they are not incurred in the production of the payer’s income. When a subsidiary pays the (head
office) company’s expenses or vice versa these may also be viewed not to be incurred in the production of
the paying company’s income.
7.2 Application of transfer pricing rules

The transfer pricing rules apply to transactions between two persons if:
 A person carrying on business in Zimbabwe participates directly or indirectly in the management,

control or capital of a business carried on by some other person outside Zimbabwe,
 A person carrying on business outside Zimbabwe participates directly or indirectly in the management,
control or capital of a business carried on by some other person in Zimbabwe,
 A person participates directly or indirectly in the management, control or capital both of a business
carried on in Zimbabwe by some other person and of a business carried on outside Zimbabwe by some
other person
232

lOMoARcPSD|3494582
 A person buys and sells any property at a price in excess of or less than the fair market price and of
non-resident persons exporting products of Zimbabwe without prior sale.
 A person sells goods or services at above or below selling price to a related party
7.3 Transfer pricing rules

New transfer pricing rules were introduced on 1 January 2014 which is meant to forestall transfer pricing in
transactions involving associates. The new rules are both domestically and externally focused. These
include anti-income splitting and anti-transfer of items between associate at non- arm’s length rule. The
rule against income splitting empowers the Commissioner to distribute, apportion or allocate income,
deductions or tax credits between the associates or persons on the taxable income accruing to parties using
arm’s length rule. In doing this he can re-characterise the source of income and the nature of any payment
or loss as revenue, capital or otherwise. This is intended for purposes of achieving equitable tax treatment
of transaction of associates and similar uncontrolled transactions undertaken by independent parties.
Whereas, the rule against property transfer provides that the income with respect to transfer or license of
intangible property should “be commensurate with the income attributable to the intangible property.
7.4 Intra-group transactions

The following table is a summary of tax implication of intra-group transactions.
Payment Paying entity Receiving entity
Sale of goods Amount is income tax deductible Amount constitute gross income
Can claim input tax on VAT when registered Register VAT if amount exceeds
Sale of services as VAT operator $60,000 p.a and charge VAT
Royalty/Rent Amount is income tax deductible Amount constitute gross income
Can claim input tax on VAT when registered Register VAT if amount exceeds
as VAT operator $60,000 p.a and charge VAT
Management fee Amount is income tax deductible Amount constitute gross income
Commission etc. Can claim input tax on VAT when registered Register VAT if amount exceeds
as VAT operator $60,000 p.a and charge VAT
Dividend Non-deductible Exempt from income tax

No VAT implication No VAT implication
Interest Amount is income tax deductible Amount is taxable
No VAT implication No VAT implication
7.5 Transactions with a division or branch
In irrespective of the above, a company and its division or branch is not a tax group, but considered as a
single person for tax ( be it under income tax, VAT or capital gains tax ) purposes. A single return must be
prepared by the company and its divisions or branches. Transactions between them have no tax
consequences.
8 Double taxation relief
8.1 Introduction
233

lOMoARcPSD|3494582
Double taxation occurs when, two different states levy a comparable tax on the same taxpayer on the
same income or when two or more persons are taxed on the same income.
The former is called juridical double taxation and the latter is called economic double taxation
Tax treaties seek to eliminate juridical double taxation, while economic double taxation requires a bilateral
agreement to be eliminated.
8.2 Source of double taxation

Double taxation of Zimbabweans largely stems from the extension of the source concept to cross border
transactions i.e the deemed source concept. For example, the following incomes may potentially suffer
double taxation:
 Income of Zimbabwean residents employed outside Zimbabwe for less than 183 days in the year of
assessment
 Income of Zimbabwean residents working for the government of Zimbabwe outside Zimbabwe.
 Dividend and interest from a foreign source accruing or received by a person at the time he/she is
ordinarily resident in Zimbabwe.
8.3 Double taxation relief (DTR)

Zimbabwe is a source based country. Therefore, any income from business conducted outside and rent from
immovable property situated outside Zimbabwe are not taxed in Zimbabwe. Computation of DTR for a
company would therefore apply only to cases of interest, dividend and royalties.
8.3.1 Types of DTR
In Zimbabwe, relief for overseas tax suffered by a Zimbabwean company is available in two ways:
(a) Treaty relief
Under a treaty entered into between Zimbabwe and the overseas country, a treaty may exempt certain
profits from taxation in one of the countries involved, thus completely avoiding double taxation.
More usually treaties provide for credit to be given for tax suffered in one of the countries against the tax
liability in the other.
(b) Unilateral credit relief
Where no treaty relief is available, unilateral relief may be available in Zimbabwe; giving credit for the
overseas tax against the Zimbabwean tax.This provision has the same effect as if there is a tax treaty. The
relief is granted using the ordinary credit method. To be granted the relief, the recipient of the foreign
income need to prove that the amount arose from a foreign source and that tax was deducted on the income
by the other state.
8.3.2 Computation of foreign credit relief
Double tax relief (DTR) is the lower of:
• the Zimbabwean tax on overseas income and

• the overseas tax on overseas income
234

lOMoARcPSD|3494582
The double taxation relief should not exceed the total tax chargeable in terms of the Act in respect of the
year of assessment. Besides, a taxpayer must prove by way of tax withholding certificate issued by the
foreign country that tax was paid in the foreign country.
We show below how the relief is computed on foreign dividend and interest. The aggregate relief must not
exceed an amount determined using the formula stated below:
ExF
F+G
E is the tax which would have been payable on all foreign source dividend or interest
F is the amount of such foreign income in respect of which a reduction is to be allowed
G is the amount of any other foreign income
The relief is the lower of local tax and foreign tax on the foreign income.
EXAMPLE
A foreign subsidiary of a Zimbabwean resident company remits $40,000 dividend to its parent company.
The dividend has borne foreign withholding tax at 20%. The subsidiary is also paying interest of net cash of
$13,500 on loan obligation from the parent company. Again the interest bears a 10% withholding tax in the
foreign country. Calculate the company’s tax liability.
ANSWER
Dividend (100/80 x $40,000) 50,000

Interest (100/90 x $13,500) 15,000
Dividend: $50,000 @ 20% 10,000

Interest: $15,000 @ 25.75% 3,863
Tax on foreign income 13,863 E
Less DTR 9,000
Tax payable/ (refund) 4,863
Relief computation
Zimbabwe Foreign Relief
Tax Tax Tax
Dividend 50,000 x 13,863 = 10,664 7,500 7,500
65,000
Interest 15,000 x 13,863 = 3,199 1,500 1,500
65,000 .........
Relief 9,000
235

lOMoARcPSD|3494582
Chapter roundup
 Although the carrying forward of loss relief is restricted to future profits of the same business, the
trading loss can be transferred to another company if there is an acquisition of majority voting shares of
a company with assessed loss or if there is a change in shareholding in the company that controls a
company with assessed loss.
 Capital loss can be transferred between members of the same group where there is a change in
shareholding.
 Companies within the same group can transfer assets that are subject to capital allowances without
suffering tax on recoupment, if an election is made.
 Companies within the same group can transfer specified assets without suffering capital gains tax, if an
election is made.
 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 its division or branch are tax neutral
 Double tax relief (DTR) is the lower of the Zimbabwean tax on overseas income and the overseas tax
on overseas income
Exam Bank
236

lOMoARcPSD|3494582
Partnerships
11
1 Basis of assessment B3(j)(i), B3(j)(ii) & B3(j)(iii)
2 Loss reliefs B3(j)(iv) B3(j)(i)
Introduction
A partnership is not a legal persona and is not liable for income tax liabilities. Its profits or losses are
allocated to the partners according to their rights to share in the partnership profits.
In the previous chapters we covered the computation of trading income, trading deductions, capital
allowances and tax liability. The rules covered under these topics also apply to income of partners. On the
one hand, a partnership is a single trading entity, making profits as a whole, while each partner has a
personal tax computation, so the profits must be apportioned to the partners.
The chapter looks at the basis of assessing income of partners. It deals with profit allocation after change of
sharing ratio or change of partnership membership. We conclude the chapter by discussing the loss relief
provisions as they apply to a partner in a partnership business.
In the next chapter we deal with the taxation of farmers.
237

lOMoARcPSD|3494582
Study guide
Intellectual
level
B3 Partnerships
B3(j)(i) Explain how a partnership is taxed 2
B3(j)(ii) Compute the taxable income for each partner following a change in the 2
profit sharing ratio
B3(j)(iii) Compute the taxable income for each partner following a change in 2
the membership of the partnership
B3(j)(iv) Describe the loss relief claims that are available to partners 2
Exam guide
Partnership can be examined as a structured question or under multiple choice questions. Your first step in
dealing with any partnership is to compute the joint taxable income of the partnership, commencing with
the net profit as per accounts. The deduction rules and capital allowances rules will apply as if you are
dealing with an ordinary taxpayer, and making sure expenditure of the partner is claimed against the
partnership joint taxable. The next steps will be to compute separate taxable income for each partner. You
must add to his profit or loss the income which the partner gets from the partnership e.g. his salary, interest
on his capital and his private expenditure paid on his behalf by the partnership.
1. Partnership
Fast Forward
A partnership is simply a group of individuals trading together. Its income and losses is shared between the
partners as agreed in the partnership deed and then assessed to tax in the hands of the individual partners.
1.1 Introduction
A partnership is simply a group of individuals who lawful carry on business or an undertaking and agreeing
to share profits and loss of the undertaking or business. The partnership itself is not a separate legal entity
compared to its members and not a person for income tax purposes. It is simply a conduit pipe of the profits
or losses of the partners. The essential elements of partnership are that each of the partners ought to bring or
promise to bring something into the partnership, money, labour or otherwise. The partnership must be
carried on for profit and for the joint benefit of partners. As held in Hoheisen v CIR 5 SATC 207 at 210-
211, 1931 CPD, a partnership must be a legitimate contract and not consist merely of a contract. If the
contract is not carried out a partnership does not come into existence. Its profits and losses must be shared
and be taxed in the hands of the individual partners. The profits and losses are shared between the partners
according to the profit sharing arrangements in the period of account concerned.
1.2 Basis of assessment

238

lOMoARcPSD|3494582
Fast Forward
Partnership 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 the partnership income.
1.2.1 Overview
The definition of a person under the Act does not include a partnership, which makes it not liable to income
tax. Partners are however required to submit a joint return in respect of income or losses generated by the
partnership each partner is separately and individually liable for the rendering of the joint return, but the
partners shall be liable to tax only in their separate individual capacities. In practice however the income of
partners is first determined on the assumption that a partnership is a separate taxable person by applying the
rules on gross income and expenditure as if the partnership was a taxable business. After the said joint
taxable income is obtained it is then split between or amongst partners according to their agreed profit or
loss sharing ratio.
1.2.2 Salaries, interest etc.
Salary paid to a partner is not remuneration on that basis it is not subject employees’ tax. However, the
salary is a deductible expenditure when determining joint taxable income of partners but then included in
the taxable income of the partner. Therefore, the fact that a partner shall receive a salary does not affect
how a partner is taxed or the nature of the partnership income. The salary is deducted in the computation of
partnership income and aggregated with other incomes in determining the partner’s income. In the same
manner interest on partners’ capital accounts is deductible to the partnership and brought back into the
partner’s taxable income. Any other payments e.g. domestic expense of a partner payable or paid to a
partner or on behalf of a partner by the partnership are deductible in the joint taxable income statement and
taxable to the beneficial partner. Deductible also are payments to a partner in respect of assets which they
own personally and which they have rented or hired to the partnership. The rent likewise is then brought
into the gross income of the partner.
Interest on money borrowed to purchase interest in partnership or for on-lending to the partnership, by a
partner, is a deductible expense to the partner. The interest is regarded to have been incurred in the
production of a partner’s income. On the other hand, a partner who incurs interest on drawings from the
partnership is not allowed to deduct that interest despite the interest being taxable to the partnership. The
drawings themselves are of a capital nature. They are neither taxable to the partner nor deductible to the
partnership
1.2.3 Insurance policies
A partnership may take out a policy on the joint lives of the partners (joint insurance/accident policy or
joint survivorship policy). Joint survivorship policies are policies which provide liquid funds for the
partnership in the event of a death of partner. The purpose of such an arrangement is usually to provide
ready cash to pay out either the whole or a portion of a deceased partner’s share of goodwill, as well as the
amount standing to the credit of his capital account. The premiums payable under joint survivorship is non-
tax deductible to the partnership. When the policy matures the proceeds payable or paid out of the policy
are non-taxable they are accrual of a capital nature.
Where Error! Bookmark not defined.instead of the joint survivorship policy, each individual partner
takes out a separate policy on his life whose premiums are paid by the partnership; the premium shall be
deductible to the partnership. A partner will then be taxed on the premiums of a separate accident/life
policy paid on his behalf by the partnership. The payment of the premium on behalf of a partner is
considered to be an allocation of partnership profits. Where instead a partner takes out a separate policy but
239

lOMoARcPSD|3494582
which he then cedes to the partnership, i.e. the partnership then becomes responsible for paying the
premiums; such arrangement will be treated in the same manner as if it were a joint survivorship policy.
1.2.4 Pension, annuities paid to former partners
Annuities, allowances or pensions paid voluntarily to former partners or their dependents are deductible.
Such amounts are called ex-gratia payments. A partner must have retired on grounds of ill-health, old age
or infirmity. The deductible amount must not exceed $200 for each payment to a former partner. This
amount is reduced by any pension received by a partner from any fund, wherever situated, to which the
partnership contributed in respect of that former partner. Annuities, pensions or allowances paid to
dependents of a former partner are deductible up to a maximum of $200, per former partner, regardless of
the number of dependents. A dependent is a person who relied for his maintenance upon a former partner
and depended on a person immediately prior his death.
1.2.5 Medical expenses
Contributions paid to medical aid societies by partnerships on behalf of partners are a deductible expense to
partnerships. Since a partner is not an employee as required by the Act, the contribution is simply another
private expense of a partner paid by the partnership on behalf the partner. After the deduction by the
partnership, the contributions will then constitute taxable income of a partner. A partner may then claim a
tax credit in respect of the medical contributions. The same treatment is accorded to medical expenses paid
by the partnership on behalf of a partner.
1.2.6 Membership of pension funds
Notwithstanding the common law that a partnership cannot be an employer of partner, an exception applies
in respect of benefit or pension fund rules. As such an employer in relation to a member of a benefit or
pension fund means the partnership. The partnership can therefore deduct contributions it makes on behalf
of a partner to a pension fund or a benefit fund i.e. up to $5,400 per year for pension contributions and
$1500 per year of assessment in the case benefit fund contributions. No further adjustment is made
whether to the partnership or partner after allowing to the partnership the statutory limits.
A different treatment is implied for retirement annuity contributions made on behalf of the partner by the
partnership. Since the Act does not provide for deduction of retirement annuity contribution by an
employer, retirement annuity fund contributions made by the partnership should be deductible in full to the
partnership and fully taxable to the partner. A partner can then deduct those contributions up to $5,400 per
annum as if they were made by him.
1.2.7 Trade convention and mission
Expenditure incurred on a trade convention and that on a trade mission is tax deductible. A trade
convention must be related to the partnership’s trade, while a trade mission needs the approval of the
Minister of Finance and Economic Development. If a partner attends a trade mission or a trade convention
whose cost is incurred by a partnership, a deduction shall be allowed to the partners in proportion to their
profit and loss sharing ratios. The deduction shall only be granted for one trade convention and one mission
for each partner up to a maximum of $2,500 each. If a trade mission or convention commences in one year
and ends in another, the deduction is granted in the year in which it ends.
1.2.8 Subscriptions
Subscriptions paid on behalf of a partner by a partnership are deductible to the partnership and taxable to
that partner. A partner can then deduct the same subscriptions. If dual usage can be established, a partner
will be called upon to submit his estimate of business and private usage with a view to allow a deduction in
respect of his business usage only.
1.2.9 Passage benefit
240

lOMoARcPSD|3494582
The cost of partner’s business trip is deductible to the partnership even if he uses the opportunity to take a
holiday after the business has been concluded. However, if the partnership bears the cost of a holiday for a
partner the amount is taxable to the partner (on the assumption that such cost contributes towards that
partner’s share of partnership profit) and deductible to the partnership.
1.2.10 Deductions
A partnership, like other legal structures, can deduct expenses incurred by it in the production of income. If
a partner bears the burden of partnership loss or obligation to a creditor on behalf of a fellow partner, he
cannot claim a deduction of amount paid to a creditor. The amount is considered as of a capital nature. It is
considered paid as a result of partnership law and not in the production of income. Partners are jointly and
severally liable to the debts of a partnership. However, if a partner overdraws funds from the partnership
and later default on the obligation, the fellow partners cannot deduct the irrecoverable amount.
1.2.11 Summary
Below is a summary of tax treatment of expenditure paid by the partnership on behalf of a partner:
Expenditure Tax treatment to:

Partner Partnership
Taxable or not? Deductible
Or not?
Salary, interest on capital, rent or a partner’s private expenses Yes Yes
Pension, NSSA or RAF contributions No Deduct up to

$5,400
Medical expenses & contributions Yes. Then claim 50% credit Yes
Joint life policy , ceded life policy or policy benefiting No No
a partnership
Separate life policy or a policy benefiting a partner Yes Yes
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.
ANSWER
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)
1.3 Changes in membership

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.
241

lOMoARcPSD|3494582
A change in a partnership membership as a result of a new partner joining an existing partnership, death of
a partner or a partner(s) leaving or retiring, constitute a fresh partnership.
If this change causes a change in sharing ratio, the accounting period is split into “min-periods” before and
after each change. The profits are then allocated to each “mini-period” according to the appropriate basis
and then shared amongst the partners present in each period.
EXAMPLE
Mucha and Musoni are in a partnership sharing profits 2:3. Mucha is entitled to an annual salary of
$24,000. On 1 May 2015, Sophia joined the partnership. The sharing ratio changed to 2:1:2. Profits for the
year amounted to $120,000.
How much is each partner’s taxable income?
ANSWER
Total Mucha Musoni Sophia
1 January –April 2015
Trading profits (4/12 x $120,000) 40,000
Mucha‘s salary (4/12 x $24,000) (8,000) 8,000
Joint taxable income 32,000
Profit sharing ratio (PSR) (32,000) 12,800 19,200
1 May –December 2015

Trading profits (8/12 x $120,000) 80,000
Mucha‘s salary (8/12 x $24,000) (16,000) 16,000
Profit sharing ratio (PSR) (64,000) 25,600 12,800 25,600
Taxable income 62,400 32,000 25,600
Note that, the 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. The surviving partners are however, not required to show their share of the income as shown
by those accounts in any return. They are only required to do so when a partner dies before the accounting
date of the partnership’s first anniversary year.
1.4 Change in profit sharing arrangements

If the profit sharing arrangements change part way through the period of account, the profits, salaries and
interest for the period of account must be pro-rated accordingly.
EXAMPLE
Freddy, Joshua and Forlorn are in partnership as FJF Associates sharing profits and losses equally. The
partnership’s accounting year end is 31 December. With effective 1 July 2015, Joshua and Forlorn were
allocated increased responsibilities in the partnership and it was decided that the new profit and loss
sharing will be 2: 3: 3 in favour of Freddy, Joshua and Forlorn, respectively.
The total earnings of the firm for January to December 2015 were $731,250. According to the
partnership agreement, the partners were to make the following withdrawals per month: Freddy $8,000,
Joshua $6,000 and Forlorn $4,000. The capital allowance allowed for the partnership was $85,000.
242

lOMoARcPSD|3494582
The following expenses were incurred during the year by the firm:
Staff Salaries 350,000
Office rentals 27,000
Repairs 8,438
Electricity 7,425
Generator: repair & servicing 9,563
Industrial Training Fund levy 5,456
Approved Pension Fund 12,656
Bank charges 23,513
Miscellaneous 24,300
Total 468,351
Compute the partnership income of each partner for the relevant year.
ANSWER
Computation of partners’ taxable income

Professional earnings 731,250
Deduct
Salaries 350,000
Rent 27,000
Repairs 8,438
Electricity 7,425
Repairs and servicing 9,563
Bank charges 23,513
Industrial training & levy 5,456
Pension fund 12,656
Miscellaneous 24,300
Capital allowances 85,000 553,351
Total Freddy Joshua Forlorn

1/1/15-30/6/15
Profit 88,950
Share of profit (88,950) 29,650 29,650 29,650
1/7/15-31/12/15
Profit 88,950
Share of profit (88,950) 22,238 33,356 33,356
Partnership income 51,888 63,006 63,006
Share of profit between periods:

Before of change in ratios: 1/1/15 - 30/6/15: $177,899 x 6/12 = $88,950
After change of ratios: 1/7/15 - 31/12/15: $177,899 x 6/12 = $88,950
Drawings are non-deductible.
1.5 Assets co-owned
243

lOMoARcPSD|3494582
A partnership cannot own property in its own capacity, property held in it is held by partners jointly, as co-
owners. Any capital allowances and balancing charges on such property are apportioned between the
partners according to their sharing ratio.
When there is a change in membership or when a sole trader forms a partnership, the sole trader or the old
partnership is deemed to have sold its business at its market value to the new partnership. The resulting
recoupment or scrapping allowance shall be attributed to the sole trader or old partners in proportion to
their old sharing ratio.
EXAMPLE
Tom has been operating a business as a sole trade since 2011. On 2 February 2015 he decided to invite
Anna on a 50:50 profit sharing ratio. Anna will be paid annual salary of $24,000.
Tom brings to partnership an office building which he acquired at $40,000 in July 2011 and its fair market
price was established at $45,000. The partnership’s annual profit before adjusting any of the above items is
$85,000.
Compute taxable income for each partner for year ending 31 December 2015.
ANSWER
Total Tom Anna
Net profit 85,000
Anna’s salary ($24,000 x 11/12) (22,000)
W&T on office building ($45,000 x 2.5%) (1,125)
Share of profits (61,875) 30,938 30,938
Salary 22,000
Recoupment ($40,000 x 4 years x 2.5%) 4,000
Partner’s taxable income - 34,938 52,938
On the other hand, if a partner avails an asset for use in the partnership which he clearly states that such an
asset is not to form part of the partnership property, then capital allowances and the balancing charge on
that asset must be granted to that partner only. If a partner is being paid rent on this asset, he will be taxed
on that rent and the partnership is allowed to deduct it as a business expense.
EXAMPLE
Jasper is in a partnership business with Alice, manufacturing agricultural chemicals. He owns a building
which is used by the partnership for storing its raw materials. Jasper is paid an annual rental of $40,000 for
the use by the partnership of his building. The building has an ITV of $32,000 ($65,000 original cost). The
partnership has a taxable income of $84,000, before adjustment of this item.
How much is Jasper’s tax liability for 2015 tax year?
ANSWER

Less Rent for Jasper 40,000
Partnership taxable income 44,000
Jasper’s share of partnership taxable income (50% x $44,000) 22,000

Rental income 40,000
Less Wear & tear (5%) on building 3,250
Tax @ 25.75% 15,128
244

lOMoARcPSD|3494582
1.6 GoodwillError! Bookmark not defined.

Goodwill is capital in nature and has no tax effect to either the seller or the buyer. It is closely associated
with the business income earning structure than it is with income earning operations.
The only time goodwill is taxable is when it is used as a trade good in a profit making scheme or sold to
one of the remaining partners. For example, a goodwill exchanged by a partner for payments representing
partnership share of profits is taxable to the seller (partner). To the purchaser, goodwill is still considered an
amount of capital nature.
1.7 Other aspects

1.7.1 Bad debts
Conditions for deduction of bad debts are similar to the general rules. Refer to chapter 7. Note that an
incoming partner cannot claim any bad debts arising out of those debts which occurred before he
was a partner. He cannot be taxed too, on recovered debts of a sale which occurred before he joined the
partnership. If a partner leaves a partnership, the remaining partners cannot claim the full allowance,
because the portion of the debts was never due to them only.
1.7.2 Interest on money borrowed by partner
Interest on money borrowed to purchase interest in partnership or for on-lending to partnership, by a

partner, is a deductible expense to the partner. The interest is regarded to have been incurred in the
production of a partner’s income.
On the other hand, a partner who incurs interest on drawings from the partnership is not allowed to deduct
that interest despite the interest being taxable to the partnership. The drawings themselves are of a capital
nature which is neither taxable to the partner nor deductible the partnership
1.7.3 Returns and assessment
Partners must submit a joint tax return of their partnership income together with other information as is
required by Zimra from time to time. The return must be accompanied by the financial report necessary to
show the result of the partnership’s operations. Each partner is separately and individually liable for the
rendering of the joint return, although he is liable to tax only on his share of partnership profit or loss.
2. Assessed loss relief
Assessed loss is deductible and carried forward at a partner level, subject to a six year limit.
2.1 Claiming of assessed loss

The partnership's losses are apportioned between the partners in the same way the profits made from the
partnership are shared. Assessed loss belongs to the individual partners forever even if he or she leaves the
partnership or dies, but may not be carried forward for a period exceeding six years. The partners are
individually entitled to loss relief in the same way as sole traders.
They are allowed to carry forward the losses and claim them against future trading profits of that
partner. They can also set off the losses against general income of the same year from other trades.
A partner who has trading losses cannot set it off against capital gain or vice versa.
A partner who has been declared insolvent or had his property or estate assigned for the benefit of creditors
is prohibited from carrying forward assessed loss.
245

lOMoARcPSD|3494582
EXAMPLE
Diana and Dinah have been trading for many years sharing profits equally. On 1 June 2015 Diana retired
and Rodgers joined the partnership. Dinah and Rodgers share profits in the ratio of 3:2. Although the
partnership had previously been profitable it made a loss of $48,000 for the year to 31 December 2015. The
partnership is expected to be profitable in the future.
Calculate the loss accruing to each partner for 2015.
ANSWER
We must first share the loss for the period of account between the partners.
Total Diana Dinah Rodgers
Y/e 31.12.15
1.1.15 – 30.05.15
Total $24,000 × 5/12 (20,000) (10,000) (10,000)
1.6.14 – 31.12.15
Total $48,000 × 7/12 (28,000) (16,800) (11,200)
Total for y/e 31.12.15 (48,000) (10,000) (26,800) (11,200)
Chapter roundup
A partnership is not a person for tax purposes and is non-taxable. Its profits and losses must be shared and
be taxed in the hands of the individual partners. The profits or losses are shared between the partners
according to the profit sharing arrangements in the tax period concerned.
 Partnership income is first determined on the basis that partnership 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.
Exam Bank

Q10 Exam 15 27 mins
246

lOMoARcPSD|3494582
Farming
12
1. Standard values and valuation of stock B3(i)(i)
2. Special farmer deductions B3(i)(ii))
3. Computation of farming taxable income B3(i)(iii))
4. Reliefs B3(i)(iv))
Introduction
In the previous chapter we looked at taxation of partners. We now turn our attention to taxation of income
derived from farming operations.
Farming is any operation of pastoral, agricultural in nature or similar activities, including leasing of grazing
lands, hunting or race horses breeding. Farming also includes a person who derives income from letting of a
farm. Farming as a hobby or for own consumption and selling the surplus is not a taxable activity.
In this chapter, we deal with the valuation of farm trading stock, farmer special deductions, enforced
livestock sales and restocking allowance. Specifically, we look at standard values as they relate to valuation
of livestock and the computation of livestock trading stock. Next, we consider the farmer’s special
deductions which are claimed 100% in the year in which they are incurred in lieu of capital allowances.
Assessed loss relief as it applies to other taxpayers applies to farmers as well. We will discuss this once
again. We conclude the chapter by looking at other farming reliefs.
In the next chapter we look at capital gains tax.
247

lOMoARcPSD|3494582
Study guide
Intellectual
level
B3 Farming
B3(i)(i) Apply standard values to the valuation of stock 2
B3(i)(ii) Recognise the special deductions available to farmers 2
B3(i)(iii) Compute farming taxable income 2
B3(i)(iv) Understand how relief for farming losses is given. 2
Exam guide
Farming can be examined as a structured question or as part of multiple choice questions. It has been a
regular feature in the last two exam papers (June 2013 and December 2013). On both occasions, special
deductions available to farmers were examined.
1. Livestock trading stock
Fast Forward
Trading stock (closing stock) at the end of a tax year is gross income, while the opening stock is a
deductible expenditure. The accounting practice satisfies this requirement; hence no adjustment is required
other than that emanating from the valuation methods.
1.1 Introduction
Livestock is 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.
Ordinary livestock are valued using the fixed standard value, while stud livestock are valued using the
purchase price value method.
1.2 Importance of trading stock valuation

In ascertaining the taxable income from a business, the value of the stock in trade at the beginning and at
the end of the tax period should be taken into account. The trading stock at the beginning is deductible
expenditure, while the trading stock at the end of the year is gross income.
The current accounting practice of taking into account the value of the stock in trade in the profit
and loss account satisfies this requirement.
1.3 Trading stock at the beginning of the year

248

lOMoARcPSD|3494582
The value of opening stock at the beginning of the tax year, unless it is in the year of commencing of a
business, must always be the same as the value of the stock in trade at the end of the immediately
preceding basis period.
1.4 Bases of valuation of stock in trade

In the actual accounts prepared by the taxpayer, however, stock in trade may be valued on a basis which
is not acceptable for income tax purposes. If the stock in trade has been valued on some basis other than
that required by the Act, the taxpayer must make the appropriate adjustment so that the adjusted income
is correctly computed.
1.5 Fixed standard value, purchase price or cost & maintenance

The PPV or FSV for a stud livestock acquired for less than $150 shall be the actual cost incurred and if the
cost of acquisition was more than $150, the farmer may elect to use $150 or the actual cost incurred.
The value of any particular livestock at the end of the basis period should be valued using the fixed
standard value (FSV) or a person may elect to use the purchase price value (PPV) for stud livestock.
A standard value (fixed standard value) is a livestock valuation basis. It is the price per each class of
ordinary livestock fixed by the farmer and approved by the Commissioner.
The PPV or FSV for a stud livestock acquired for less than $150 shall be the actual cost incurred and if the
cost of acquisition was more than $150, the farmer may elect to use $150 or the actual cost incurred.
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
Cost and maintenance (CMV) is rarely used in practice.
1.6 Consistency
Any acceptable method used in the valuation of stock in trade should be elected and applied
consistently. If there is a valid reason for a change, details of the change should be appropriately
documented and disclosed in the statement of accounts and/or the tax computation. The election must be
made at the time of lodging an income tax return which includes a class of livestock.
1.7 Trading stock withdrawn for own use
Where any stock in trade of the business is withdrawn for the person’s own use the FSV of the stock
drawn is taken as part of the gross income of the taxpayer.
249

lOMoARcPSD|3494582
1.8 Trading stock on cessation of business

Trading stock held at the time of ceasing to trade constitutes gross income. The stock shall be valued at
the fair market price. Where the stock is transferred to another person for a valuable consideration, the
price paid for the stock in trade or the value of the consideration is to be taken as the value of the stock
in trade at the cessation of the business.
1.9 Livestock reconciliation
Before livestock are valued they must be reclassified. The process is required because some animals might
have moved 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.
EXAMPLE
Mr. Baraza 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. The FSVs are, cows
$180, heifers $150, tollies $140, calves $100 and oxen $170. Bulls are valued at a minimum statutory price.
Reconcile the stock and compute the value of trading stock.
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
SV/PPV 150 180 150 140 170 100 -
Trading stock 600 2,700 1,500 980 2,890 1,600 10,270
1.10 Summary valuation table

Type of stock Date of Ordinary Stud livestock Crops
Valuation livestock (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 FSV PPV Fair & reasonable
or put to own use Use CMV FSV
Stock on hand: Date of such FSV PPV Fair & reasonable
On date of death, insolvency Happening CMV FSV
or donation
Attached by court order End of tax year. FSV PPV Fair & reasonable
CMV FSV
Sold with Business or Date sold Selling price Selling price Selling price
Pursuance of court order
2. Farming special capital expenditure

Special capital expenditure is deductible in full in the year in which it is incurred, whether or not there is
income. The 100% deduction precludes claiming of capital expenditure.
250

lOMoARcPSD|3494582
2.1 Introduction
A farmer is allowed a 100% deduction of the following 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 bore holes and wells, but borehole equipment (pipes and pumps) are granted capital
allowances.
 Aerial and geophysical surveys.
 Fencing used in farming operations.
Fence must be erected by the taxpayer 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.
2.2 Conditions
The following points are important:
 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.
EXAMPLE
Mr. Murimi commenced farming operations on 1 January 2015. He incurred the following initial
expenditure in starting the project:
Cost of 35 hectare site 150,000

Clearing of land 25,000
Construction of temporary road 10,000
Construction of water reservoir 70,000
Construction of a drainage system 12,000
Construction of Abattoir 113,000
Construction of 2 units of staff housing 45,000
Construction of farm school 118,000
Construction 1 unit teacher’s house 40,000
Compute Mr. Murimi’s maximum deductible expenditure in 2015.
ANSWER
Item Allowance claimed $

Land (35 ha) none n/a
Clearing of land Farmer special exp. 25,000
Construction of temporary road Farmer special exp 10,000
Construction of water reservoir Farmer special exp 70,000
Construction of a drainage system SIA 3,000
Construction of Abattoir SIA 28,250
Constructed 2 units of staff housing SIA 11,250
Construction of farm school SIA 2,500
Construction 1 unit teacher’s house SIA 2,500
251

lOMoARcPSD|3494582
Maximum deductions 152,500
Note.
1. 2 units of staff housing have been qualified because each of them is less than $25,000 per unit and
capital allowances computed on the actual cost.
2. For farm school and a teacher’s house allowances are computed on maximum of $10,000 per unit no
matter the cost incurred.
Exam focus point

The expenditure under this section is deductible during the year of assessment, no matter the
taxpayer has not commenced production. It cannot be carried forward to be deductible in future.
The farm capital expenditure does not suffer recoupment on their disposal. You must therefore not compute
any recoupment on their disposal.
EXAMPLE
XYZ Ltd sold its farms together with farm improvements and farm implements. The breakdown of the
selling prices on sale of the farm and assets were as follows:
Asset Date acquired Cost ITV Selling price

Land 2012 18,000 18,000 100,000
Farm house 2012 180,000 180,000 160,000
School 2013 490,000 5,000 470,000
Tractors 2013 50,000 25,000 35,000
Dam 2013 450,000 - 510,000
Fence 2013 61,000 - 69,000
How much is XYZ’s recoupment from the disposal of the above assets?
ANSWER
Land Non recoupable 0

Farm house Non recoupable no capital allowances 0
School $9,592 - $5,000 4,592
Tractors $$35,000 - $25,000 10,000
Dam Non recoupable 0
Fence Non recoupable 0
Total 14,592
 Land and farm house are non-ranking assets hence there is no recoupment on assets that do not
qualify for capital allowances.
 Capital allowances on the school were computed based on a deemed cost of $10,000. Recoupment is
computed using deemed selling i.e. $9,592 ($10,000/$490,000 x $470,000). Recoupment is then
deemed selling price less ITV.
 Farmer’s special capital expenditure is non-recoupable.
3 Trading income
Fast Forward
The process of computing farmer’s income is similar to that of an ordinary taxpayer. The farmer may
however minimise his tax liability by spreading taxable income from forced sale over 3 years in equal
instalment.
252

lOMoARcPSD|3494582
3.1 Introduction
Tax is paid on taxable income, and not on net profits. The farmer’s taxable income is the adjusted net profit
as per financial statements. The process of determining the taxable income is similar to what we discussed
in chapter 5. In addition, an adjustment is required by deducting from the net profit of 2/3 of the forced sale
relief which will have to be taxed in the next 2 years. You may also need to adjust for subsidies or grants of
a capital nature included in net profit, fair value of standing trading stock sold together with farm etc.
3.2 Enforced sale of livestock

Fast Forward
Taxable income arising from sale of livestock due to drought, epidemic disease or land acquisition can be
taxed over 3 year, equally, if an election is made.
3.2.1 Introduction
Where a farmer carrying farming operations in a drought stricken area or due to an epidemic disease or due
to a compulsory acquisition of the farm, has been forced by such conditions to dispose some of the
livestock, he may elect to have the income so derived from the disposal of such livestock to be allocated
equally between that year of assessment in which such disposal took place and the following 2 years in
equal instalments. Such election cannot be reversed.
Where income from such forced sales exceeds the income of the farmer from his other farming operations
in a particular year, then the farmer may elect to spread the taxable income from all the operations in the
current year and the next 2 years in equal instalments.
A return of grazers to their owners due to the stress of drought conditions is a deemed disposal for purposes
of claiming a relief.
Exam focus point

The enforced sale relief is a tax planning tool, which must be utilised in order to pay lower taxes. You
must use the relief when asked to compute the farmer’s minimum tax liability.
3.2.2 Computation of relief
The enforced sale taxable income shall be taxed over 3 years equally commencing the year of sale. The
relief is not automatically granted. A farmer must make an election to qualify for it. Once the election is
made it is irreversible.
The enforced sale taxable income is computed as follows:
Livestock enforced sales xxx

PurchasesError! Bookmark not defined. [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:
Direct expenses = Number of Enforced sales x Total farm direct expenses

Average stock (number)
253

lOMoARcPSD|3494582
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.
ANSWER
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
3.3 Election to spread other taxable income

A farmer who has enforced sale taxable income may also elect to spread his other farm taxable income
equally, over 3 years, if that income is less than the enforced sale income. The election once made, is
irrevocable.
EXAMPLE
Mr. Nleya has $120,000 taxable income from enforced sales and $60,000 from other farming operations.
Compute Mr.Nleya’s taxable income.
ANSWER
Taxable income: enforced sales 120,000

Taxable income: other farming activities 60,000
In order to minimise taxable income, the income is spread over 3 years and only $60,000 is taxable in the
current year of assessment.
Further, an enforced sale taxable income accruing to an individual (a person or partner) shall be taxed at the
highest rate applicable to the individual’s last dollar of the employment income.
3.4 Subsidies or grants

A subsidy or grant which relieves a farmer of special expenditure i.e expenditure on dams, fencing etc.
must be included in the farmer’s gross income. When the subsidy or grant is toward capital nature
254

lOMoARcPSD|3494582
expenditure it is capitalised. The grant or subsidy reliving a farmer of capital expenditure must be deducted
from net profit if it has been included in the computation.
You will then need to compute capital allowances on the net capital expenditure.
EXAMPLE
Ms. Denga is a farmer in Nyanga. During the current year of assessment he incurred the following
expenditure.
Construction of dam 55,000
Farm implement 90,000
You are told that Ms. Denga received a government grant of $75,000 (allocated $45,000 for the dam and
$30,000 for the farm implement). The grant was included in the net profit for the year, which amounted to
$125,600. The net profit is before accounting for allowances on the dam and the farm implement.
Compute Ms. Denga’s taxable income.
ANSWER
Net profit 125,600

Dam (100% allowance) (55,000)
Grant on the dam (suppose to be taxed –hence treated correctly) 0
Farm implements (w&t- 60,000 x 10%) (6,000)
Grant on farm implements (capital nature) (30,000)
Note that a grant on farm implement is capitalized, result in net capital expenditure qualifying for capital
allowance of $60,000 ($90,000- $30,000)
3.5 Standing crops, timber or produce

A farmer who sales a farm together with standing crops must determine the market value of such crop and
include that value in his gross income.
3.6 Leasing of farming land or equipment

Farming includes the letting of a farm for farming purpose. The rental received therefrom constitutes
gross income. The farmer is entitled to a deduction of expenditure incurred in earn such income. He can
also carry forward the balance of expenditure or assessed loss which cannot be claimed in the year
assessment, just like other traders. However, the letting of equipment or machinery for farming
purposes, such as shearing, harvesting, and transportation services on behalf of other farmers on their
land was held not to be farming operations in ITC 1548 (191) 555 SATC 2 (C)
4 Trading deductions
Fast Forward
Farming income is trading income from which the farmer is also entitled to trading deductions and capital
allowances. Specific deductions which must also be deducted includes restocking allowance, special farm
capital expenditure and donation or inherited stock
4.1 Introduction
255

lOMoARcPSD|3494582
A farmer is also allowed to deduct the trading deductions and capital allowances that we covered in chapter
7 and 8. In addition to that there are farming specific deductions e.g. special capital expenditure (covered
above), livestock restocking allowance, expenditure on livestock acquired by way of inheritance or
donation and cost of standing crops acquired together with the farm.
4.2 Restocking allowance

A restocking allowance of 50% of the cost of livestock purchased to replace those sold due to drought,
epidemic disease or land acquisition is granted to the farmer.
A farmer who restocks livestock which were sold due to impending drought, epidemics or farm acquisition
is entitled to a restocking allowance of 50% of the purchase price of every animal he purchases in order to
restocking his herd. The allowance is limited to livestock purchased as shall not exceed the assessed
carrying capacity of the land (ACCL), i.e. it must not exceed the amount computed using the following
formula:
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
EXAMPLE
Mr. F bought 400 sheep for $9 300 in order to restock the herd sold due to drought. The ACCL is 500 sheep
and his stock on hand before restocking was 300.
Compute Mr. F’s restocking allowance.
ANSWER
9,300 x (500-300)/2x400 = $2,325
4.3 Inheritance and donation

A farmer who acquires farm trading stock i.e. livestock or produce by way of a donation or inheritance may
deduct against his trading income as follows:
 Inherited stock is value of stock assigned for estate duty purposes (estate value)
 Donation is the fair market price of stock at the time of donation
The deduction is not available to a person who is not a farmer or farmer who sold such stock immediately
after acquisition. In such event, the proceeds from sale will be excluded from income on the basis of
being capital in nature.
4.4 Capital allowances

Farmers are also entitled to claim capital allowances.
Exam focus point
256

lOMoARcPSD|3494582
Please pay particular attention to qualifying requirements of farm schools, hospitals, house for
teachers and nurses and the ordinary staff houses.
EXAMPLE
Natsai bought a farm in Wedza on 30 October 2014, on which she commenced mixed crop farming on 1
January 2015. The following are the fixed assets acquired/constructed and used on the farm for the year
ended 31 December 2015.
Tractor 44,000
Borehole and water tank 19,500
Farm workers compounds (10 units) 150,000
Farm house (used by Natsai) 22,000
Fencing 28,000
Fowl runs 7,800
School 69,000
Two passenger motor vehicles 65,000
The cost of borehole and water tank is split as $18,500 for the borehole and $1,000 for the tank. Natsai’s
farm hosts the only school within a radius of 5kms. During 2014, the surrounding farms contributed 200
pupils of the 350 intake.
Natsai also incurred the following expenses in 2015 tax year.
Stumping and clearing of the land 15,000

Contour ridges 10,000
Compute Natsai’s deductions in 2015.
ANSWER
Item Allowance claimed $

Tractor wear & tear @ 20% 8,800
Borehole Purchased together with farm 0
Water tank wear & tear @ 10% 100
Farm workers compounds wear & tear @ 5% 7,500
Farm house (used by Natsai) disqualified 0
Fencing Purchased together with farm 0
Fowl runs wear & tear @ 5% 390
School disqualified less than 50% pupils 0
Two passenger motor vehicles wear & tear @ 20% 4,000
Stumping and clearing of the land Farmer special exp. 15,000
Contour ridges Farmer special exp 10,000
Total deductions 45,790
4.5 Other deductions

A farmer is also allowed to claim the following expenses against his trading income.
4.5.1 Other capital expenditure
The following items of capital expenditure are also deductible to farmers:
257

lOMoARcPSD|3494582
 Cost of temporary farm roads or realigning of temporary farm roads,

 Cost of realigning permanent farm roads for the avoidance of soil erosion,
 Cost of protective works in respect of abandoned mines or prospects, and
 Cost of refilling or blocking shafts.
 Expenditure on bilharzia and liver fluke eradication expenses.
4.5.2 Standing crops bought with the land
A farmer who buys land together with crops, timber or produce growing on that land can deduct the
acquisition cost of such crops, timber produce. Where the acquisition was for no valuable consideration,
the deduction shall be the amount fixed by the Commissioner as representing the stock of such timber,
crops or produce. .
5 Assessed loss
Fast forward
Assessed loss is carried forward and can be claimed against future trading income of the farmer, subject to
a six year limit.
A farmer is allowed to carry forward the losses and claim them against his future trading profits,
subject to a six year limit. He can also set off the losses against general income of the same year from
other trades. This means that a farmer who has trading losses cannot offset them against capital gain. But
can offset Assessed loss from one trading activity against the income of another trading activity which is
carried on by him.
A farmer who has been declared insolvent or had his property or estate assigned for the benefit of creditors
is prohibited from carrying forward assessed loss.
Chapter roundup
 Trading stock at the end of a tax year is gross income, while the opening stock is a deductible
expenditure. The accounting practice satisfies this requirement; hence no adjustment is required other
than that emanating from the valuation methods.
 The PPV or FSV for a stud livestock acquired for less than $150 shall be the actual cost incurred and if
the cost of acquisition was more than $150, the farmer may elect to use $150 or the actual cost
incurred.
 Special capital expenditure is deductible in full in the year in which it is incurred, whether or not there
is income. The 100% deduction precludes claiming of capital expenditure on the expenditure.
 Taxable income arising from sale of livestock due to drought, epidemic disease or land acquisition can
be taxed over 3 years equally, if an election is made.
 A restocking allowance of 50% of the cost of livestock purchased to replace those sold due to drought,
epidemic disease or land acquisition is granted to the farmer.
 Assessed loss is carried forward and can be claimed against future trading income of the farmer, subject
to a six year limit.
Exam Bank

Q11 Exam 10 18 mins
258

lOMoARcPSD|3494582
Part D
Capital gains
259

lOMoARcPSD|3494582
Computing capital gains tax
13
2.1 Scope of capital gains tax D1(a)
2.2 Gross capital amount D1(a)

2.3 Exemptions from capital gains tax D1(b)
2.4 Deductions D2(b)

2.5 Capital loss D2 (c)
Introduction
The previous sections dealt with employment and income tax. We turn our attention to the capital gains tax
computation, which is a completely different tax head altogether.
Capital allowances and recoupment provisions are very much relevant to this chapter. If you are not
yet comfortable with these topics, you will need to revisit them before you continue.
This chapter introduces the capital gains tax principles i.e the scope of capital gains tax and the
computation of the gain or loss on a disposal of an asset.
We will then consider the exemptions available under Capital Gains Tax Act and rules for relief of capital
losses. This background will enable you to compute CGT payable by both companies and individuals.
Following on from this, we start to identify the different types of disposals you may be presented with in
the exam. We look first at part disposals. If only part of an asset has been disposed of we need to know how
to allocate the cost between the part that is disposed of and the part retained.
In the next chapter, we consider the damage or destruction of an asset, and look at the other reliefs available
to individuals and companies under Capital Gains Tax Act.
260

lOMoARcPSD|3494582
Study guide
Intellectual
level
D1 Capital gains tax
D1(a) Describe the scope of capital gains tax. 2
D1(b) List those assets which are exempt. 2
D2(a) Compute capital gains on specified assets for both individuals and companies. 2
D2(b) Recognise deductible expenditure, including adjustment for inflation 2

D2(c) Explain the treatment of capital losses for both individuals and companies. 1
Exam guide
Capital gains tax can be examined as short structured question or as part of multiple choice questions. You
need to be prepared for a detailed capital gains computation, whether for an individual or company. Learn
the basic layout, so that slotting in the figures becomes automatic.
You also need to be familiar with all tax reliefs. The capital gains deferment through rollover e.g.
reinvestment, transfer of assets between related, incorporation relief and installment relief are frequently
examined items. You will also need to know how to compute capital gains on disposal of principal private
residence. You must pay attention to the rollover reliefs and the exemptions of an elderly person. Knowing
how to compute withholding tax is also critical and must be mastered.
1 The scope of capital gains tax

Fast forward
Assets chargeable to capital gains tax are immovable assets and marketable securities only.
1.1 Assets chargeable
Capital gains tax is chargeable on sale or disposal of specified assets. A specified asset is an immovable
property or a marketable security.
Nature of specified asset Description

Bond tradable or exchangeable on stock market
Marketable security Debenture, share or stock
Shares in private business corporation
Any right derived out of participation in a unit trust
Business immovable property e.g. commercial building,
Immovable property industrial buildings, farm improvements etc.
Principal private residence and other residential premises
Dams, land, roads, mining claims
Mining claims
261

lOMoARcPSD|3494582
1.2 Source rules

Gross capital amount is from a source within Zimbabwe if it arises from a disposal of an immovable
property situated in Zimbabwe or disposal of marketable securities by resident company.
Capital Gains Tax Act also employs a source based taxation system. It is founded on principles that
chargeable gains only arise from specified assets that are located in Zimbabwe are taxable. It makes no
reference to the residence status of the owner of the specified asset. Whether or not a person is a resident of
Zimbabwe, capital gains tax will only arise if the gross capital is from a source within Zimbabwe.
Chargeable gains from disposal of immovable property are treated as from a source within Zimbabwe if
they arise from the disposal of an immovable property situated in Zimbabwe
Gross capital amount from disposal of a marketable security is from a source within Zimbabwe if it is from
a sale of marketable securities in a resident company. We saw in chapter 9, that a company is regarded as
resident if its place of central management and control abides in Zimbabwe. However, in the context of the
sale by an investment company of some of its shares, it was held in ITC 1395 (1985) that the source of the
gross capital was where the seller carries his investing or trading activities. If this principle is applied in
converse, a non-resident who undertakes his investing activities outside Zimbabwe would not be taxed here
on disposal of marketable securities.
1.3 Computation of capital gains
1.3.1 Layout
Capital gain/loss is computed as gross capital amount net of exempt income and deductions, as follows:
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
262

lOMoARcPSD|3494582
1.3.2 Flow chart
Yes Specified Non

No
asset is from taxable
ZIM source
Gross capital amount

Acquired
after 1 Listed No Exemptions
Yes shares
Feb 2009
Capital amount
Deductions
Yes
Capital gain
Rate of tax (20%)

1% final
withholding tax
Tax payable
Listed
shares
No
5% of gross
Other assets
capital amount
A capital gain which is $50 or less is written off; no capital gains tax will arise and shall also not be carried
forward to future periods.
EXAMPLE
Mr. Sifiso, a resident of Zambia sold his house located in Zambia for $200,500. He also sold a showroom
which he has been using in his trade in Zimbabwe for $250,000. The house was bought in 2011 for
$120,000, while the showroom was acquired by him in June 2012 at a cost $230,000. Appropriate capital
allowances were claimed on the showroom.
Compute Mr. Sifiso capital amount from disposal of his assets.
ANSWER
Goss capital amount

House (not from a Zim source) 0
Showroom 250,000
Total 250,000
Less exemption 0
Less Recoupment ($230,000 x 2.5% x 2 years) (11,500)
Capital amount 238,500
263

lOMoARcPSD|3494582
In the exam you must not claim or deduct the base cost of non-Zimbabwe source assets or specified assets
whose gross capital amount is exempt from capital gains tax.
1.4 Computation of capital gains tax
No capital gains tax is computed on items acquired before 1 February 2009. Specified asset acquired
before this date is subject to 5% capital gain tax, but listed marketable securities are subject to 1%
withholding tax.
Capital gains tax shall be computed by reference to the capital gains of a person in the year of assessment
and the fixed rate of capital gains tax. The current tax rate is 20% and it applies to all taxpayers.
From the capital gains tax due the taxpayer is allowed to claim as a credit capital gains withholding tax in
respect of the chargeable assets which was deducted at in source.
The tax payable/refund is computed as follows:
Tax on capital gain @ 20% xxx

Less withholding tax (xxx)
Capital gain payable/refund xxx
We discuss withholding tax in the next chapter.
2 Gross capital amount
2.1 Introduction
Key term
Gross capital amount refers:
To 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
from the sale on or after the 1st August, 1981, of specified assets excluding any amount so received or
accrued which is proved by the taxpayer to constitute “gross income” (i.e recoupment), but including
capital allowances.
The expressions “total amount”, “received by or accrued to or in favour of a person” have the same
meaning as those contained in chapter 2
In the exam you should not include as part of computation of capital gains tax proceeds from disposal of
movable, loan, overdrafts and options.
2.2 Received by or accrued to or in favour of a person

An amount is brought into gross capital amount when received or when it accrues to the taxpayer,
whichever occurs first. Even if the full value of consideration agreed upon is received in installments in
different years, the entire value of consideration has to be taken into account in computing the capital gains
in the year of sale. Thus, gross capital amount becomes due when the taxpayer acquires the right to receive
the price, notwithstanding it is received in instalment. An accrual will however not occur in respect of a
sale which subject to dispute or when the sale is conditional to the happening of a future uncertain event.
264

lOMoARcPSD|3494582
In practice, capital gain arises only when there is a transfer of capital asset. If the capital asset is not
transferred, there will be no capital gain. However, in the case of gains from insurance claim due to damage
or destruction of property, there will be capital gain on such deemed transfer although no asset has been
actually transferred in such case.
2.3 Capital gain v business income

Receipts of a revenue nature do not attract capital gains tax. Receipts and accruals of revenue nature arise
from business operations (trading and investing activities) i.e. buying and selling immovable property.
Whether the selling of an immovable property or shares constitutes a revenue operation or capital operation
this sometimes depends on the nature of the transaction and the manner in which the property was held. The
same item may be stock-in-trade in the hands of the person who deals in that item. But it will be capital
asset in the case of a person who uses it for earning income or holds as an investment.
Ordinarily, where a person acquired land with a view to selling it later after developing it and actually
divided the land into plots and sold the same in parcels, the activity could only be described as a business
adventure. In practice, the original intention of the party in purchasing the property, the magnitude of the
transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and
subsequent dealings of the person in respect of the property, the manner of its disposal and the frequency
and multiplicity of transactions afforded valuable guides in determining whether the person was carrying on
a trading activity.
It may happen that you render services or sale goods or services and you are paid by shares. In such
event the shares received will constitute taxable income. Any subsequent disposal of those shares will
constitute a capital gains tax issues.
Shares held as personal investment by a share broker are subject to capital gains since these shares were
capital assets and not stock-in-trade of the business. The same rule will apply on shares held for the purpose
of earning dividend income.
2.4 Adjustment to eliminate double taxation

To eliminate double taxation, amounts that are taxable under the Income tax Act, e.g recoupment are
excluded from gross capital amount. There is no recoupment adjustment required when an asset did not
qualify for capital allowances in the place. For example there is no recoupment on disposal of assets by:
 Agricultural, mining and commercial institutions or societies not operating for profit or gain.
 Building Societies.
 Employees saving schemes or funds approved by the Commissioner.
The above entities are exempt from income tax on their profits but not from capital gains tax.
EXAMPLE
XYZ (Pty) Limited purchased a commercial building in 2012 for $100, 000 and sold it for $150 000 on 30
September 2015. The building was used by XYZ (Pvt) Limited wholly for purposes of its trade.
Calculate XYZ (Pvt) Limited’s capital amount.
ANSWER
Gross capital amount 150,000

Less Recoupment ($100,000 x 2.5% x 3 years) 7,500
265

lOMoARcPSD|3494582
Only recoupment relating to specified assets must be deducted from gross capital amount. Do not deduct
recoupment relating to movable assets. Movable assets are not specified assets and are never brought into
the capital gains tax layout.
2.5 Gross capital received in foreign currency

Gross capital amount is an amount received or accruing in the United States dollar. If it is received or
accruing in some other currency the following rules shall apply:
If due to a variation in exchange rates such that the amount that had accrued prior to the variation differs
from the amount received:
 the amount to be included in the gross capital amount shall be the said amount received, expressed in
Zimbabwean currency; and
 If the receipt and the accrual occur in different years of assessment, effect shall be given to the increase
or reduction in the gross capital amount in the year of assessment in which the amount accrued.
2.6 Cases in which a sale is deemed to have taken place
Case Valuation basis (amount to include in gross capital amount)
Donation or disposal otherwise by An amount which in the opinion of the Commissioner, is equal to the fair
way of sale market price of the asset at the time of disposal
Expropriation An amount paid by way of compensation for the expropriation of such

specified asset.
Sale in execution of a court order An amount for which it was sold for
Maturity or redemption An amount received or accruing on redemption or maturity

of a specified asset
Deed of sale The full amount specified on the deed of sale agreement
Cession of stands The amount paid to or accruing to the transferor

Relinquishing of rights in the amount paid to or accruing to the member as a relinquishing his rights in
condominium the property
Redemption of preference shares by a company is a transfer in the hands of shareholders and they will
be liable to capital gain for the same.
A deed of sale is a sale on which ownership of the specified asset will pass to another person upon the
payment of the whole or a portion of the sale agreement.
A donation by a company or group of companies of immovable property to an approved employee housing

trust fund is not a deemed disposal. Therefore no capital gains tax is applicable on this donation.
3. Exemptions from capital gains 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 $1,800 on disposal of unlisted marketable securities.
266

lOMoARcPSD|3494582
3.1 Introduction
Exemptions can be very important tax planning tools. They are very useful in minimising capital gains tax
liability. Generally, entities that are exempt from income tax are also exempted from capital gains tax,
subject to few exceptions e.g.
 Agricultural, mining and commercial institutions or societies not operating for profit or gain.
 Building Societies.
 Employees saving schemes or funds approved by the Commissioner.
3.2 Exemption list

Gains on the disposal of some assets are specifically exempted from capital gains tax. These include:
 Sale of a principal private residence if such person was, on the date of the sale, 55 years or above
 The first $1,800 on sale of any marketable security by a person who is 55 years or above. The
exemption does not apply to disposal of listed shares.
 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 realization or distribution by the executor of a deceased estate of a specified asset forming part of
such estate
 Sale of specified asset by licensed investor or industrial park development
 Sale of any marketable security in respect of any loan to the State or any company all the shares of
which are owned by the State, a local authority or a statutory corporation
 Sale by a petroleum operator of immovable property used for the purposes of petroleum operations, to
another petroleum operator, property must be applied to same use by the buyer
 Disposals of specified assets by public utilities i.e. Local authorities, The Reserve Bank of Zimbabwe,
the Zambezi River Authority, the Natural Resources Board and the POSB
 Sale of any shares in the Infrastructure Development Bank of Zimbabwe to an institutional shareholder
who is not ordinarily resident in Zimbabwe;
 Disposals of specified assets by non-profit making organizations, for example
o pension fund, benefit fund, clubs, societies
o Institutes and associations organized and operated solely for social welfare etc.
o Ecclesiastical, charitable and educational institutions of a public character;
o Friendly, benefit or medical aid societies
o Trade unions, trusts of a public character and the Deposit Protection Fund
 Disposals of specified assets by non-profit making organizations, for example
o Any agency of any government, Any international organization in terms of the Privileges and
Immunities, the International Financial Organization, the African Development Bank, the African
Development Fund and the South African Reserve Bank, etc.
 Sale by a life insurance business of specified assets which are investments (securities) in Zimbabwe
 Disposal of any shares withheld by an insurance company for purposes of paying demutualisation levy
 The amount by which the fair market price of shares sold to an indigenisation partner or community
share ownership trust or scheme exceeds the actual price at which those shares were sold i.e the
component representing excess of fair market price over the actual amount received by the taxpayer.
The bullet point was enacted by Finance no. 1 of 2014, but measure to take effect from 1 January 2013. A
community share ownership trust or scheme is a scheme approved in terms of the Indigensation and
Economic Empowerment (General) Regulations, 2010, published in SI 21 of 2010. An Indigensation
partner is an indigenous person who benefits (whether as an employee or in any other capacity) under an
267

lOMoARcPSD|3494582
Indigensation implementation plan approved in terms of the Indigensation and Economic Empowerment
(General) Regulations, 2010, published in SI 21 of 2010
Exam focus point

The exemptions enter the capital gains tax computation layout but must be indicated by a zero.
Deductions of exempt specified asset do not enter the layout.
4 Deduction of base cost
Fast forward
Deductible costs include original cost of acquiring or constructing the specified asset, enhancement cost,
inflation and selling cost. No deduction is allowed of costs deducted under the Income Tax Act or of a
specified asset acquired before 1 February 2009.
4.1 Introduction
The base cost of an asset is generally the expenditure actually incurred in acquiring the asset together with
expenditure directly related to its improvement and direct costs in respect of its acquisition and disposal and
certain holding costs. The base cost does not include any amounts allowed as a deduction against income
tax, such as a capital allowance. In addition, an inflation of 2.5% on cost of the original cost and
improvement is also deducted. Inflation is computed for each year during the asset holding period.
4.2 Cost of acquisitions
4.2.1 Purchased or constructed assets
The direct costs of purchased or constructed specified assets include:
 Cost of acquisition
 Cost of creating an asset
 Interest on bond used to purchase asset to the extent to which such interest was not claimed and
granted under the Income Tax Act
 Cost of obtaining a valuation for CGT purposes
 Cost surveyor, valuer, auctioneer, accountant, broker, agent, conveyancer etc.
 Stamp duty, transfer duty or similar duty
 Advertising costs to find a seller or to find a buyer
 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 or right in the asset
EXAMPLE
Zvikomborero bought a house for $400,000 in 2012 by paying $130,000 out of his own funds and $270,000
using bank loan. The loan is secured by a mortgage on the home. Zvikomborero paid the bank $27,000 in
interest in the year he purchased the home. He sold the property for $600,000 on 2 June 2015.
Compute Zvikomborero’s capital gain.
ANSWER

Less Deduction
Cost of house 400,000
268

lOMoARcPSD|3494582
Interest 27,000
427,000
Inflation $400,000 x 2.5% x 4 yrs 40,000 467,000
Capital gain 133,000
4.2.2 Inheritance or donation
The base cost of specified assets acquired by way of inheritance or donation is computed as follows:
Item Cost of acquisition
Inherited asset Value of asset assigned for estate duty purposes (estate value)
Donation made on Donor’s gross income or gross capital amount in respect of the asset, whichever is
or after1 August 1981 applicable
EXAMPLE
Charles inherited a house from his father in July 2012. His father had purchased in the house in March 2010
for $45,000. The market value of the house on date of his father death was $56,000 and was valued by the
administrator for estate purposes at $55,000.
What is Charles’ acquisition cost should he wish to sale the property?
ANSWER
$55,000 i.e value used for estate purposes.
4.3 Improvements
Expenditure incurred for the purposes of enhancing the value of the asset. The cost incurred on alterations,
additions or improvements made to a specified asset are deductible in the computation of capital gains tax.
If a company which owns an immovable is selling shares instead of the immovable property, the cost of
alterations, additions or improvements to an immovable property shall be deducted when computing capital
gains arising from share disposal.
4.4 Inflation allowance
Adjustment for inflation is made at 2.5% on the cost of acquisition and improvement for each year or part
of the year during the holding period.
The formula is as follows:
2.5% x cost x holding period
EXAMPLE
Starmark (Pvt) Ltd sold a capital allowance non ranking building for $59,000 on 30 June 2015. The
building was purchased on 29 December 2012 for $64,000.
Compute Startmark’s deductible inflation allowance
ANSWER
269

lOMoARcPSD|3494582
64,000 x 2.5% x 4 years = $6,400
The allowance is given from the date property is purchased or the date improvements are completed. For
example, if the property is constructed on a site purchased much earlier, the inflation allowance on the
constructed property must be given from the date of completion of the construction of the property,
while the allowance on the land is given from the date of its acquisition.
EXAMPLE
On 2 June 2012, Bick purchased a block of land for $250,000 on which to erect a factory building. After
receiving several quotations, Bick signed a contract for the construction of the factory with HYT Builder
Contractors
The factory was constructed and completed on 2 June 2013 at a cost of $500,000. However, due to
continued economic downturn in the country, the building and the land were later sold for $950,000 on 3
June 2015. The building was never used. An independent valuation revealed that the land component of this
value at the time of sale was $275,000.
ANSWER

Land 275,000
Building ($950,000 -$275,000) 675,000
950,000
Less Deduction
Land 250,000
Building 500,000
Inflation
250,000 x 2.5% x 4 years 25,000
500,000 x 2.5% x 3 yeas 37,500 812,500
Where the shares are acquired from a company and the payment is made after allotment of shares as and
when the call is made by the company, it would appear the holding period of such shares shall be
computed from the date of allotment of shares even though the call money has been paid after
allotment of such shares
4.5 Incidental cost of disposal
Incidental disposal cost, i.e legal costs, advertising costs, selling expenses, estate agency fees or
commission, brokerage commission or fee, valuation costs, etc. Since the selling costs are deductible
under capital gains tax, they should not be deducted for income tax purposes.
4.6 Base cost
For purposes of capital gains tax, base cost is comprised of original cost, cost of improvements, inflation
allowance and selling costs (cost of disposing the specified asset).
4.7 Bad debts
A bad debt, other than doubtful debts, arising out of sale of specified assets is deductible. Refer to chapter 6
for conditions to be met.
4.8 Legal expenses
270

lOMoARcPSD|3494582
Expenditure incurred for successful capital gains tax appeal cases in the High Court, Special Court or
Supreme Court.
4.9 Lease improvements
The owner of leased property (lessor) is allowed to deduct expenditure on lease improvements on
immovable property. The lessor should have been taxable on the improvements in terms of the Income Tax
Act. The deduction is incurred in the year in which each installment is included the lessor’s taxable income.
EXAMPLE
On 1 June, 2012, Tinker (Pvt) Ltd signed a 9- year lease agreement with Escrow (Pvt) Ltd for the leasing of
a commercial building. In the agreement, Escrow effected lease improvements valued at $94,500. The work
was completed on 30 August, 2012 and first used by Escrow on 1 November 2012. On 2 June 2014, the
underlying building was sold for $300,000. The building was original purchased by Tinker (Pvt) Ltd in
June 2010 for $180,000. Appropriate capital allowances were claimed.
Compute Tinker (Pvt) Ltd’s taxable lease improvement in each year from 2012- 2014 and capital gains tax
liability in 2014.
ANSWER
Taxable lease improvement
Monthly taxable lease improvement = $94,500/ (108-3) = $900

Taxable income
2012 ($900 x 4) 3,600
2013 ($900 x 12) 10,800
2014 ($94,500 -$3,600-$10,800) 80,100
Total 94,500
Capital gain

Less Recoupment ($180,000 x 2.5% x 4 years) 18,000
282,000
Less Deduction
Original cost 180,000
Lease improvements 94,500
Less Capital allowances (18,000)
Inflation
180,000 x 2.5% x 5 years 22,500
3,600 x 2.5% x 3 years 270
10,800 x 2.5% x 2 years 540
80,100 x 2.5% x 1 year 2,003 281,813
Capital gain 187
4.10 Exchange losses
Foreign currency losses are deductible in the computation of capital gains tax. However, capital exchange
losses are not allowable until they are realized. Exchange losses are realized when the foreign currencies
are physical converted into the functional currencies of the business.
4.11 Adjustment to eliminate double deduction

271

lOMoARcPSD|3494582
To eliminate double deduction, part of the cost of the specified asset which was deducted in the
computation of a taxpayer’s income tax should not be deducted in the computation of capital gains tax, for
example:
- Capital allowances
- Repairs and maintenance.
- Rates and water
- Ground rent is not part of actual cost of asset
- Special deduction applicable to farmer’s i.e on dams, farm clearing costs.
EXAMPLE
Apple (Pvt) Ltd constructed a factory building in March 2009 for $310,000. The building was sold on 14
July 2013 for $365,000. The building was being used by Apple (Pvt) Ltd for purposes of its trade. Apple
(Pvt) Ltd is an aggressive taxpayer.
Compute Apple (Pvt) Ltd’s capital gain tax, if any
ANSWER

Less Recoupment (310,000)
Less Deduction
Acquisition cost 310,000
Less Capital allowance (SIA 50% 2009 plus 25% p.a 2010 &11) (310,000)
Inflation allowance ($310,000 x 2.5% x 5 years) 38,750 38,750
Capital gain 16,250
4.12 Prohibited deductions
The following shall not be deducted in the computation of capital gains tax:
 Expenditure incurred of a specified asset situated outside Zimbabwe

 Expenditure incurred of a specified asset exempt from capital gains tax.
 Expenditure not related to the capital asset disposed.
 Double deduction of expenditure i.e if expenditure is deductible under more than one provision in the
Act it shall only be claimed once, a taxpayer must elect the provision which he want it deducted.
4.13 Fair valuation

Transfer pricing rules are also applied under Capital Gains Tax Act. Where the purchase or selling price
is not at arm’s length rule, the Commissioner has the power to reset the price. For the purpose of
determining the capital gain or assessed capital loss, as the case may be, of the seller, the Commissioner
shall determine the fair market price at which such purchase or sale shall be taken into his accounts or
returns for assessment.
A specified asset is deemed not to be sold at arm’s length if its price is in excess of the fair market price
or where it is sold at a price less than the fair market price.
EXAMPLE
Energy bought a piece of land for $300,000 in 2011 and further spent $20,000 in improving the property.
On 2 January 2014, he sold part of the land to his sister for $200,000 and on 15 September of the same
year, another portion was sold to someone unknown for $162,500.
272

lOMoARcPSD|3494582
On valuation, a professional valuer valued the land sold to his sister at $260,000 while the other was valued
at $162,500. The remaining parcel of land was also valued at $227,500.
Compute capital gains tax payable by Energy.
ANSWER

Sold to sister 260,000
Third party 162,500
422,500
Less:
Cost of land sold ($128,000 + $80,000) 208,000
Inflation ($208,000 x 2.5% x 4yrs) 20,800 228,800
Tax payable @ 20% 38,740
Since Energy sold land worth $260,000 to his sister not at arm’s length the Commissioner will use
its FMV as the deemed gross capital amount. Cost workings are as follows:
Total cost of the land = $300,000 + $20,000 = $320,000.
FMV of the land = $260,000 +$162,500 + $227,500
Cost of land sold to his sister = $260,000/$650,000 x $320,000 = $128,000
Cost of land sold to unknown = $162,500/$650,000 x $320, 000 = $ 80,000
4.14 Capital losses
Fast Forward
Losses are set off against gains of the same year and any excess carried forward. Where losses cannot be
utilised, they can be carried forward indefinitely.
4.14.1 Introduction
Allowable capital losses arising in a tax year are carried forward and be deducted from gains arising
in the future years. Unlike trading losses which can only be carried forward for a maximum of six
years, capital losses can be carried forward indefinitely.
.
An assessed capital loss of a person which in the year of assessment is $100 or less cannot be carried
forward, but shall be reduced to nil
Assessed capital loss is also ring fenced to capital gains tax. This means that capital losses cannot be set off
against employment income, trading income or any other form of income.
EXAMPLE
AEC (Pvt) Limited sold the following assets during the 2010 year of assessment:
Asset Date acquired Cost Selling price

Vacant land 2 Feb 2009 50 000 90,000
Trade mark 15 June 2009 5,000 6,000
Truck 12 Jul 2010 15,000 15,000
Staff house (1 unit) 15 Sept 2010 30,000 50,000
AEC (Pvt) Limited has an assessed capital loss from the previous year of assessment amounting to $20,000.
273

lOMoARcPSD|3494582
Compute AEC (Pvt) Limited’s capital gain or loss
ANSWER

Vacant land 90,000
Staff house (1 unit) 50,000
Less exemption 0
Less Recoupment (none of the assets qualified for capital allowances) 0
140,000
Less Deduction
Vacant land 50,000
Staff house 30,000
Less Capital allowance 0
Inflation
$50,000 x 2.5% x 5 years 6,250
$30,000 x 2.5% x 4 years 3,000 89,250
Capital gain 50,750
Less Assessed loss b/f 20,000
Capital gain 30,750
Trademark and the truck are not specified assets and not subject to capital gains tax.
4.14.2 Cases in which carry forward is prohibited

Capital losses are personal and cannot be transferred to another person. They will remain in the hands of
the person until he has available capital gain from which to claim the capital loss.
The balance of unclaimed capital losses are however written off immediately under the following
circumstances:
 When a taxpayer has been declared insolvent or had his property or estate assigned for the benefit of
creditors.
 When a company with assessed loss converts to a private business corporation (PBC) or vice-versa
cannot if its conversion has been motivated solely or mainly by the existence of assessed loss.
274

lOMoARcPSD|3494582
Chapter roundup
 Assets that are chargeable to capital gains tax are immovable assets and marketable securities.
Movable assets are excluded.
 Gross capital amount is from a source within Zimbabwe if it arise from a disposal of an immovable
property situated in Zimbabwe or marketable securities disposed by a person carrying on investment
activities in Zimbabwe
 No capital gains tax is computed on items acquired before 1 February 2009. A specified asset acquired
before this date is subject to 5% capital gain tax, but listed marketable securities are subject to 1%
withholding tax.
 A person who is 55 years or above is exempt from capital gains tax on disposal of his principal private
and on the first $1,800 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. No deduction is allowed of costs deducted under the Income Tax Act or
of a specified asset acquired before 1 February 2009.
 Inflation allowance is computed thus, 2.5% x cost x holding period
 Losses are set off against gains of the same year and any excess carried forward.
 Capital losses which cannot be utilised are carried forward indefinitely.
Exam Bank
Q12 Exam 10 15 mins
275

lOMoARcPSD|3494582
Capital gains withholding tax
14
1. Scope of withholding D4(a) & D4(b)
2. Duties of depositories G1
Introduction
Withholding tax is the process of deducting tax at source by the payer of the amount. In some instances the
tax becomes a final tax, but is normally an interim tax which will then be offset against final tax on
assessment.
In this chapter we look at capital gains withholding tax. All items defined as specified assets are subject to
withholding tax, notwithstanding the fact that rates of tax applicable may be different.
Next we deal with the payment of the withholding tax to Zimra and the consequences for delay. We then
consider in detail the duties of a “depository”, being the person responsible for deducting the withholding
tax upon sale by him of the specified asset on behalf of the seller.
We conclude the chapter by looking at the process of transferring title in the specified asset.
In the next chapter we continue with capital gains tax, but looking at capital gains tax reliefs.
276

lOMoARcPSD|3494582
Study guide
Intellectual
level
D4 The computation of the capital gains tax payable by individuals and companies
4(b) Understand the application of capital gains withholding tax 2
Exam guide
Capital gains tax can be examined as a short structured question or under multiple choice questions. You
need to be prepared for a capital gains computation, whether for an individual or company. Learn the basic
layout, so that slotting in the figures becomes automatic.
examined. You will also need to know how to compute capital gains on disposal of a principal private
residence. You must pay particular attention to the rollover reliefs and the exemptions of an elderly person.
Knowing how to compute withholding tax is also critical and must be mastered.
1. Scope of withholding tax
Fast Forward
Withholding tax is computed on the gross capital amount (gross proceeds) and is deducted at source by the
person who sales a specified asset on behalf of the owner of the specified asset.
1.1 Introduction
Capital gains tax is tax obtained by way of an assessment i.e. after deducting from gross proceeds the asset
base cost. On the other hand, withholding tax is computed on the gross proceeds of the specified asset. It is
a mechanism of deducting tax at source in order to minimize the risk of tax evasion. The withholding tax is
only a final tax on disposal of marketable securities listed on the Zimbabwe stock exchange.
1.2 Withholding tax rates

The CGTA provides for charging, levying and collection of capital gains withholding tax in accordance
with the rates fixed in the Finance Act. The withholding tax is chargeable on the price realised from the
sale or disposal of a specified asset at the rate of 15% for an immovable property, 5% unlisted
marketable securities and 1% for listed marketable security. If an immovable property or unlisted
marketable was acquired by the seller before 1 February, withholding tax is 5% of the sale price of the
specified asset. However, no withholding tax shall be deducted on an immovable property or unlisted
marketable security which is exempt from capital gains tax.
277

lOMoARcPSD|3494582
Summary of the withholding tax rates:

Asset Gross capital Rate Comment
Amount
Listed shares xxx 1% Final tax
Specified assets acquired xxx 5% Final tax

before 1 Feb 2009
Unlisted shares xxx 5% Subject to assessment of capital gains tax
Immovable property xxx 15% Subject to assessment of capital gains tax
EXAMPLE
On 2 April 2002, Henry Chiutsi purchased 20000 shares in RISKCOM Ltd for $1 each. On 15 July 2007,
he also purchased 1000 shares TGH, a company listed on stock exchange, at a cost of $2.50 per share. In
order to purchase a residential stand, Henry sold some of his shares on 2 December 2013 as follows:
10,000 RISKCOM $3 per share
500 TGH $2.5 per share
300 TGH $4 per share
Advise Henry of his tax consequences on sale of his shares.
ANSWER
Henry will be subject to withholding tax as follows:

Item Amount Rate WHT Comment
RISKCOM (10,000 x $3) 30,000 5% 1,500 final tax
TGH (500 x $2.5) 1,250 1% 13 final tax
TGH (300 x $3) 900 1% 9 final tax
Total 1,522
1.3 In cases in which withholding tax is exempted
If a specified asset is exempted from capital gains tax, no withholding tax shall be deducted or paid.
Capital gains withholding tax does not apply to immovable property and unlisted marketable securities
which are exempt from capital gains tax (refer to section 3.2 of chapter 13). It is also exempted on the sale
of marketable securities by a unit trust registered as an internal scheme under the Collective Investment
Schemes Act (Chapter 24:19) or as an asset manager under the Asset Management Act (Chapter 24:26).
However, redemption by the investor of his unit or units in the unit trust is subject to withholding tax.
1.4 Withholding and remitting of tax
A depositary who mediates the sale or transfer of specified asset must withhold the tax from the amount he
received and remit the tax to Zimra not later than 3rd working days of receiving sale proceeds of the
specified asset, unless he/she is granted extension of time by the Commissioner.
278

lOMoARcPSD|3494582
In the event that a payment is received in instalment, the depositary will be required to withhold the full tax.
However, if the withholding tax exceeds the amount received the depositary must only pay all what he
received to Zimra.
A depositary need not withhold tax on a seller who has given him a tax clearance from the Commissioner
with instructions that tax must not be withheld or when a seller who has made or will make adequate
arrangements for the payment of any capital gains tax payable in respect of the sale.
Thus, a seller who has made an application for assessment of capital gains tax or who is exempt from
paying capital gains tax is not liable to pay withholding tax. He should obtain a tax clearance which he
must furnish to the depositary before the withholding tax is due to be deducted. Depositaries must file the
tax clearance as evidence that tax was not required to be withheld to avoid conflict with Zimra. A
depositary who has deduct tax must issue the payee with a withholding tax certificate, which must show the
depositary’s name and address, the payee’s name and address; details of the property sold; and the
withholding tax withheld.
Where the depositary fails to withhold the tax an agent of the payee must do so and remit the tax to Zimra
not later than 3 working days of receiving proceeds on sale specified asset from the depositary.
In event of there being two or more withholding agents, they shall be jointly and severally liable to deduct
and remit the tax to Zimra. An agent must also issue to the payee a withholding tax certificate (same
particulars as above). An agent of the payee includes person whose address appears as the address of the
payee in the records of the depositary who paid the amount and to whom the warrant, cheque or draft in
payment of the amount has been delivered to. For a beneficiary of a trust, an agent is the trust which has
received an amount on sale of specified asset from the depositary.
A payee who receives proceeds from which withholding tax was not deducted must remit the applicable
withholding tax to Zimra by the 3rd working day of receiving him of proceeds from sale of the specified
asset.
Withholding tax which is not paid on time attracts 15% penalty and 10% interest p.a. Note that these
charges shall only be charged once and in this case to the depository. The Commissioner may waive or
reduce the penalty if he is satisfied that the reason for not paying the tax was not due to any intent to evade
tax. He may also extend the period for payment of penalty without charging interest.
Capital gains tax must be paid within 30 days of sale agreement in the case of a specified asset sold
under a hire purchase agreement or credit sale agreement i.e the date gross amount accrues. In other
cases it is within 30 days of the date of transfer of title. Capital gains tax which is not paid on time is
subject to interest of 10% p.a.
1.5 Withholding tax Credit
Withholding tax on immovable property and unlisted marketable securities is credited or set off against
capital gains tax.
Withholding tax is not a final tax on immovable property and unlisted marketable securities. The tax is
credited against capital gains tax on assessment of capital gains tax. The capital gains tax so chargeable
shall be reduced accordingly and any excess refunded.
The excess withholding tax is first set off against other tax obligations of the person to Zimra and balance
will then be refunded to the taxpayer. To be granted the credit, withholding tax in respect of that capital
gain must have been deducted. The credit should be supported by a withholding tax certificate.
EXAMPLE
279

lOMoARcPSD|3494582
Jacqui sold her rented building through an estate agent for $584,000 net of $16,000 selling expenses. The
property was bought in 2012 at cost of $510,000. She also sold her shares held in Mart (Pvt) Ltd for
$20,000 and shares held by her in a listed company for $10,000. These shares were acquired in 2012 for
$12,000 and $8,000 respectively.
Compute the applicable withholding tax and the capital gain tax payable or refundable.
ANSWER
Withholding tax computation

Asset Gross Rate WHT
Building 600,000 15% 90,000
Unlisted shares 20,000 5% 1,000
Listed shares 10,000 1% 100
Total 91,100
Capital gain tax computation

Gross amount
Building 600,000
Unlisted shares 20,000
620,000
Less deduction
Building 510,000
Shares 12,000
Inflation building $510,000 x 2.5% x 4 years 51,000
Inflation shares $12,000 x 2.5% x 4 years 1,200
Selling expenses 16,000 590,200
Capital gain 29,800
Tax @ 20% 5,960

Les withholding tax ($90,000 + $1,000) 91,000
Refund 85,040
Listed shares are subject to a final withholding tax at source, no further tax is computed.
1.6 Penalty for non-payment of tax
A depository or agent is personally liable to pay the amount of capital gains withholding tax and 15%
penalty if he defaults in withholding and remitting the tax to Zimra. However, the Commissioner must
collect the penalty first from the depository and if the depositary discharges the onus he cannot then collect
the same amount from the agent. The Commissioner can however waive the full or part of the penalty if he
is satisfied that a failure to pay capital gains withholding tax was not due to any intent to evade the tax.
1.7 Refund of overpayments
The CGTA provides for the refunding of overpaid withholding taxes. All what the taxpayer needs to do is
to prove to the satisfaction of the Commissioner that withholding tax was paid in excess of the amount
properly chargeable to him. The claim should be made within 6 years of the date on which the tax was paid
or else the withholding tax becomes non-refundable. The Commissioner should pay interest on overpaid
withholding tax not refunded within 60 days of application by taxpayer or the date of completion of the
assessment, whichever is the later date, unless the overpayment was due to an incomplete or defective
return or error of the taxpayer.
1.8 Credit where tax has been withheld
280

lOMoARcPSD|3494582
A person (payee) is entitled to crediting of capital withholding tax deducted when he submit a return for
assessment of capital gains on the specified asset concerned. The excess over capital gains tax chargeable
should be refunded to the person. However, in practice the Commissioner first set off against other tax
obligations of the person to Zimra and the balance will then be refunded to the taxpayer. Note that, the
credit is granted only when the withholding tax in respect of that capital gain was deducted at source and
must be supported by a withholding tax certificate.
1.9 Administration
1.9.1 Returns, assessments, tax collection, etc.
The CGTA adopts the provisions of the Income Tax Act regarding matters such as returns, assessments,
penalties, representative taxpayers, objections, appeals and offences (Chapter 20 -22). CGTA return
(CGT1) should be submitted to Zimra by 30 April of the following year (for 31 December tax year of
assessment) in the case for taxpayers on self-assessment and for others the period specified by the
Commissioner in a public notice. A fine of $30 a day up to 181 days is payable for late submitted return.
Regarding details on assessments, penalties, representative taxpayers, objections, appeals and offences see
chapter 1.
1.9.2 Payment of capital gains tax
Capital gains tax is paid to Zimra within 30 days of sale agreement in the case of suspensive sales (a hire
purchase sale) or credit sale. In other cases it must be paid to Zimra within 30 days of transfer of ownership
(title) in the specified asset. Capital gains tax which is not paid on time is subject to interest of 10% p.a and
penalty at 15%.
1.9.3 Offences, forms and regulation
The CGTA adopts the provisions of the Income Tax Act (refer chapter 1).
1.9.4 Tax avoidance
The CGTA adopts the provision of the Income Act for purposes of determining capital gains tax liability
where Commissioner is of the view that capital gains tax is being avoided (refer to chapter 1 for details on
tax avoidance)
1.10 Depository
The responsibility for collection of withholding tax lies with a depositary.
A depositary is a conveyancer, legal practitioner, estate agent, a registered building society, the Sheriff or
Master of the High Court, a stockbroker and financial institution. It includes also any other person who on
behalf of any party to a sale of immovable property or marketable security, holds the whole or any part of
the price paid or payable in respect of the sale and is required, on completion of the sale or on transfer of
the property, to pay the whole or any part of the amount he holds to the seller of the immovable property or
to some other person for the seller’s credit.
The definition of “depositary” was expanded on 1 January 2014 to the cedent, land developer, the local
authority, and the owner of the condominium, the custodian of the register of membership interests in the
condominium or any person who mediates such acquisition or relinquishment.
Business of a land developer- the business of acquisition of land for subdivision into more than three
stands for residential, commercial or industrial purposes and the servicing and the selling of such stands. It
281

lOMoARcPSD|3494582
also includes the servicing of stands acquired by another person for residential, commercial, or industrial
purposes.
Cession of a stand- is transfer to a cessionary for money or other valuable consideration of all rights in
respect of the stand that is part of a land development scheme acquired by the cedent under the agreement
by which he or she took possession of the stand from the local authority or the land developer.
Condominium- this is a company, partnership or other association of persons owing any immovable
property comprised one or more flats, apartments or other units of residential accommodation and the
members, by virtue of their membership a right to occupy or time-sharing interest in particular flats,
apartments or units of residential accommodation comprising the immovable property.
Membership interest in a condominium – this is an interest or share in a condominium that confers on

the holder thereof any of the rights referred to in paragraph (b) of the definition of “condominium”,
however such membership, interest or share is evidenced, whether by the holding or transfer of shares in a
condominium that is a company, or in the form of a partnership interest, or by registration of sectional title
in terms of section 27 of the Deeds Registries Act [Chapter 20:05];
Service- is clearing of the land constituting the stand and to drain, dredge, pave, excavate, grade, landscape,
construct buildings upon or otherwise develop the stand in such way that will render it suitable for
residential, commercial or industrial purposes.
Stand- is any unserviced or partly unserviced piece of land whether or not registered as a stand in terms of
the Deeds Registries Act [Chapter 20:05].
1.10.1 Registration of depositaries
A person whose ordinary course of trade or business is that of a depository should register with Zimra
within 30 days after he commences such business. Should complete a CGTA 1, have a place of business
and the nature and extent of his business as a depositary. The person is guilty of an offence and liable to a
fine not exceeding level three or to imprisonment for a period not exceeding one month or to both such fine
and such imprisonment for failing to register.
1.10.2 Depositaries to furnish returns
A depositary must by the last day of every month or other period approved by the Commissioner, submit to
the Commissioner a return which shows all sales of specified assets concluded or negotiated by him on
behalf of any other person and all amounts of capital gains withholding tax he has withheld during the
preceding month. If the depositary is a partnership or an association, a joint return must be submitted by the
partners or the association. If a depositary is an employee, the return may be submitted by the person’s
employer.
1.10.3 Summary duties of depository
A depository must comply with the following requirements of the CGT Act:
a) Apply for registration certificate to ZIMRA within 30 days of commencing his business
b) Complete and submit returns showing all sales of specified assets which he has concluded or negotiated
on behalf of any other person
c) Remit withholding tax by the 3rd day of receiving proceeds from a sale of a specified asset.
d) Issue to the payee a withholding tax certificate showing the details:
 name and address of the depository or agent
 name and address of the payee
 details of the specified asset sold
 the amount of withholding tax withheld
282

lOMoARcPSD|3494582
For failing to discharge this responsibility, the depositary shall be guilty of an offence and liable to a fine
not exceeding level 3 or to imprisonment for a period not exceeding one month or both such fine and such
imprisonment.
1.11 Returns
The Registrar of Deeds shall be required to notify the CG in a return of:
 All transfers of immovable property registered in the Deeds registry during the period covered by the
return,
 The name and address of the transferor and the transferee in each transfer,
 The transfer price, if any, of property.
Where any marketable security is sold by or through the agency of a bank or other institution, registered or
required to be registered under the Banking Act, a building society or a broker licensed or required to be
licensed under the Securities Act, the return to be submitted the institution, society or broker, shall include
the following information:
 The name and address of the seller and the purchaser; and
 The nature of the marketable security; and
 The price, if any, at which the marketable security was transferred
1.12 Transfer of property
Fast Forward
No transfer of title in a property is permitted until withholding tax has been paid.
The registration, execution or attestation of a specified asset by the registrar of deeds or transfer secretary is
not permitted unless the withholding tax/capital gain tax has been paid to Zimra. Zimra will issue a tax
clearance as proof of payment of tax or that the specified asset is exempted from capital gains tax. And this
is the document which the transfer secretary or the deeds office will need to effect transfer or ownership in
a specified asset. It is an offence to register a specified asset without a tax clearance certificate.
With effect from 1 January 2014 this was extended to a stand that originated from a land development
scheme and was subsequently ceded by the original beneficiary of the scheme to a cessionary and
membership interest in a condominium that is evidenced by the registration of sectional title. Thus, the
cessionary or acquirer of the membership interest in the condominium must present a tax clearance to deeds
office for registration to be effected
It is an offence to register a specified asset without a tax clearance certificate. The certificate issued to a
taxpayer who has paid capital gains tax or withholding tax. When applying for a tax clearance certificate, a
taxpayer must supply the following documents:
1. Fully completed Capital Gains Tax form (CGT1)

2. Fully completed Rev 1 form.
3. Agreement of sale (copy & original)
4. Deed of Transfer( Title Deed)/share certificate(copy & original)
5. Copy of proof of payment ( Original& Copy )
6. National identification for the seller and the buyer(copy & original)
7. Copies of two different utility bills if seller is claiming rollover/exemption
283

lOMoARcPSD|3494582
8. Special power of attorney sealed by notary public if the buyer/seller is out of the country or is
unable to present oneself at Zimra offices for good reason and is being represented by an Agent
(copy & original)
If the buyer or seller is a company the following additional information is required:
1. Certified copy of certificate of incorporation

2. Certified copy of CR6 & CR14
3. Copy of company resolution to sell / buy appointing two directors /a representative and the
resolution signed by two directors.
4. National identification particulars for the representative(s) /directors. (original & copy)
If the specified asset is sold by a deceased estate the following additional documentation apply:
1. Certified copy of the death certificate of the deceased person

2. Certified copy of the final liquidation and distribution account of the deceased estate
3. Certified copy of the letter of administration from the court specifying the executor/executrix of the
estate.
4. Letter from the court giving authority to dispose of the property in question.
If a minor is the seller of the specified additional requirements:
1. Letter of authority from the High Court authorising the sell.

2. Birth certificate of the minor.
3. Letter of guardianship from the court if the person representing the minor is not the parent.
Exam focus point

You must note that withholding tax must be paid before title in a property can be transferred,
whereas capital gains tax can be paid after the property has been transferred (i.e within 30 days of
transfer of title in the property).
1.13 Transfer of title between related parties
The following documentation is required to affect transfer when a specified asset is transferred between
related parties:
 A completed Capital Gains Tax 1 form

 A property sale agreement
 A sale agreement for the new property when claiming partial or full rollover
 A deed of transfer or title deeds
 A proof of payment for addition as, alterations or improvements incurred on the property
 A letter of undertaking to pay withholding tax for client represented by a depository
 A proof of payment of Capital Gains Tax or withholding tax
 A copy of a marriage certificate for a transfer between spouses
 A special board resolution signed by the Company Secretary or Chairman an agreement of the
proposed mergers or reconstruction.
 An organization chart, share register of the company and CR 14.
284

lOMoARcPSD|3494582
Chapter roundup
 Withholding tax is computed on the gross proceeds and is deducted at source by the person who sales a
specified asset on behalf of the owner of the specified asset.
 If an amount or a specified asset is exempted from capital gains tax, no withholding tax shall be
deducted or paid.
 Withholding tax must be deducted and remitted by the depository. In the event that the depository has
failed to discharge this duty the agent of the seller or the owner of the property must pay the tax to
Zimra.
 Withholding tax on immovable property and unlisted marketable securities is credited or set off against
capital gains tax.
 A depository is a legal practitioner, a conveyance, an estate agent, a stockbroker, a financial institution,
a Sheriff or the Master of High Court or any person selling the property on behalf of the owner of the
property.
 No transfer of title in a property is permitted until withholding tax has been paid.
Exam Bank
285

lOMoARcPSD|3494582
Capital gains tax reliefs
15
1 Part disposal D2(e)
2 Damage or lost asset D2(f)
3 Incorporation relief D5(b)
4 Transfer of assets between related parties D5(c)

5 Hire purchase relief D5(d)
6 Replacement relief
Introduction
In this chapter we proceed to tackle capital gains tax from the point of view of minimising capital gains tax.
Tax reliefs are an important tax minimisation strategy and must be always taken.
We start by looking at the relief that is available when a specified asset is damaged or destroyed. You will
recall income tax has similar provision.
Another important relief is the rollover relief granted on the transfer of immovable asset by an individual to
a company he controls. This enables the payment of tax to be deferred until the property is sold to a third
party.
Next we consider the relief for transfer of specified assets between group members. This relief allows
capital gain to be deferred when a specified asset is sold between members of the same group.
We also look at the relief that is available to companies and individuals who reinvest the proceeds from the
sale of immovable properties into other immovable property. Capital gains tax is completely avoided to the
extent the proceeds from the old property are reinvested on the new property.
Finally, we consider the installment relief which arises when a specified asset is sold on credit. The relief is
meant to spread the taxation of the capital gain according to the manner the taxpayer is paid by the debtor.
In the next chapter we will cover the computation of capital gains on the disposal of a principal private
residence.
286

lOMoARcPSD|3494582
Study guide
Intellectual
level
D2 Capital gains tax reliefs

& D5
D2(e) Compute the amount of allowable expenditure for a part disposal. 2
D2(f) Explain the treatment where an asset is damaged, lost or destroyed, and the implications2
of receiving insurance proceeds and reinvesting such proceeds
D5(a) Explain and apply rollover relief as it applies to individuals and companies. 2
D5(b) Explain and apply the relief available upon the transfer of assets by an individual to a2
company which he controls.
D5 (c) Explain and apply the relief available for transfers of assets between companies under2
common control.
D5 (d) Explain and apply the relief available where the purchase price is paid by instalments. 2
Exam guide
Capital gains tax is examined in question 3 of the exam and will always come. It may also be examined in
part outside question 3. You need to be prepared for a detailed capital gains computation, whether for an
individual or company. Learn the basic layout, so that slotting in the figures becomes automatic.
examined items. You will also need to know how to compute capital gains on disposal of principal private
1. Part disposals
Where a part of the specified asset is sold and the other portion is retained, rules of apportionment of
cost will apply. The cost shall be split between the part sold and the part retained, using the appropriate
basis.
When a part of the property is disposed of, the cost must be apportioned between the part disposed of
and the part retained. The disposal of part of a specified asset is subject to capital gains tax. The
chargeable gain (or allowable loss) is computed by deducting a fraction of the original cost of the
whole asset from the disposal value. The balance of the cost is carried forward until the eventual
disposal of the remaining part of the asset.
EXAMPLE
Ms. Muponese owns a 4 hectare plot of land which originally cost her $150,000. The land was bought in
August 2010. She sold one hectare in July2015 for $60,000. The incidental costs of sales were $3,000.
The market value of the 3 hectares remaining is estimated to be $180,000.
287

lOMoARcPSD|3494582
Compute Ms. Muponese’s capital gain or loss on the sale of the one hectare.
ANSWER

Less Deduction
Original cost ($150000/4) 37,500
Inflation ($37,500 x 2.5% x 5 yeas 4,688
Selling costs 3,000 45,188
Capital gain 14,812
2. Damage, loss or destruction of an asset

Fast Forward
A damage of an asset for which compensation is received, is deemed to be a disposal on which capital gains
tax is chargeable, unless the compensation received is less than the base cost or is used to repair or replace
the damaged asset.
2.1 Introduction
The gain which would otherwise arise on the receipt of insurance proceeds may, subject to certain
conditions, be deferred. As long as the insurance proceeds are less than the base cost, the full gain is
deferred. The gain is also deferred in proportionate to compensation used to replace or repair the damaged
asset.
2.2 Asset not replaced

If an asset is destroyed any compensation or insurance monies received will normally be brought into
an ordinary capital gains tax disposal computation as proceeds.
If the compensation or insurance monies received is not sufficient to cover the original cost plus cost of
improvements of the destroyed or damaged asset, the asset shall be deemed not to have been sold.
Instead, the compensation or insurance monies will be set off against the aggregate of such original
cost and the cost of improvements
When that asset is eventually sold the reduced cost base will become the original cost of the specified asset.
The inflation allowance of the asset will be computed on such reduced cost base with effect from the date
of reduction.
EXAMPLE
Chena Juan bought a warehouse in 2013 for $80,000. The warehouse was used for storing finished goods.
In 2014, the warehouse was damaged by fire and Chena Juan got insurance monies amounting to $60,000
as compensation. In 2015, the warehouse was eventually sold for $50,000.
Show how the above transaction is treated for capital gain tax purposes. Ignore capital allowances.
ANSWER
2014
288

lOMoARcPSD|3494582
Insurance monies 60,000

Less Deduction
Cost (80,000)
Reduced cost c/f (20,000)
2015
Less Deduction
Reduced cost 20,000
Inflation
On original cost ($80,000 x 2 year x 2.5%) 4,000
On reduced cost ($20,000 x 2 years x 2.5%) 1,000 25,000
Capital gain 25,000
If any amount is used to replace or repair the specified asset (see next section), then it cannot be used to
reduce the cost base as stated above. In other words, provisions stated under this section would apply.
2.3 Specified asset is replaced or repaired

When a taxpayer decides to use the compensation to repair or replace the damaged specified asset, capital
gain that would otherwise be taxable shall not be taxable. It is deferred until such a time the repaired or
replaced specified asset is sold.
The following conditions must be met:
 The Commissioner must be satisfied that the asset will be replaced or repaired within 2 years of the
date of damage or destruction of the specified asset and to the extend the compensation is not fully
utilised capital gain on the amount not expended is taxable immediately.
 The replaced or repaired specified asset must be of a like nature.
Exam focus point

Whenever a specified asset is damaged, the provision of both Capital Gains Tax Act and Income Tax
Act will apply. As such you should be able to calculate deferred recoupment and list income tax
conditions for one to qualify for a relief of tax on recoupment, when asked to do so.
EXAMPLE
Southlea (Pvt) Ltd constructed a finished goods warehouse in June 2009 for $125,000, which it has been
using in its trade. In July 2013 the building caught fire and was badly damaged and the company was paid
$150,000 by its insurer as compensation for the loss. It used $130,000 of this money to replace the building,
which was brought into use on 1 January 2013.
Southlea maximizes its tax benefits
Compute Southlea (Pvt) Ltd’s taxable recoupment and taxable capital gain.
ANSWER
Recoupment
Recoupment (100% x $125,000) 125,000
Less Recoupment on amount expended ($125,000 x $130,000/$150,000) 108,333
Capital gain
Less recoupment (125,000)
289

lOMoARcPSD|3494582
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
Whenever the repaired or replaced specified asset is sold that expenditure used to replace or repair the old
specified asset shall be disregarded as a deduction.
EXAMPLE
Continued from the previous example. Southlea (Pvt) Ltd sold the reconstructed specified asset on 3
September 2013 for $160,000.
Compute Southlea (Pvt) Ltd’s capital gain, if any
ANSWER

Less Deduction
Cost ($150,000 -$130,000) 20,000
Inflation ($20,000 x 2.5% x 1 year) 500 20,500
3 Transfer of building to a company one controls
Fast Forward
A transfer by individual of an immovable asset used by him in his trade to a company he controls does not
result in a chargeable capital gain provided the person makes an election.
3.1 Introduction
An individual can transfer ownership of an immovable property to a company he controls without suffering
capital gains tax.
The following conditions must be:
• The asset must have been used by the individual for purposes of his trade
• The company will continue to use the property for purposes of its trade
• The individual must control the company whether through holding majority of the company's shares or
otherwise
• The election must be made not later than the date of submitting a return for assessment of capital gain.
• The transferor and the transferee must elect that the transfer price of the property shall be its base cost
as established in the hands of the transferor (the individual), notwithstanding the price exchanged
The company can also roll forward the capital gain if it transfers the property to a company under
the same control. However, if the property is sold to an unrelated party (third party), capital gains tax shall
be computed as if the specified asset had always been with the transferor.
EXAMPLE
290

lOMoARcPSD|3494582
Simba has been carrying on sole trading business, leasing investment property to companies and
individuals requiring offices. The leased property was constructed in June 2011 for $380,000. On 11
January 2015, Simba incorporated a company controlled 80% buy him and 20% by his spouse, which took
over the investment property at a fair market price of $450,000.
What election does Simba have and how much is gain to be avoided following this election?
ANSWER:
Since Simba controls the company, he can elect to transfer the property at its cost base, making neither
capital gain nor loss on transfer. The gain he can defer by making this election is calculated as follows:
Goss capital amount 450,000

Less Recoupment ($380,000 x 2.5% x 4 years) (38,000)
Less deduction
Cost 380,000
Capital allowances ($380,000 x 2.5% x 4 years) (38,000)
Capital gain 22,500
4 Reconstruction schemes
Fast Forward
Transfer of specified assets between related parties is capital gains tax neutral, should the election be made.
In other words, no capital gains tax liability will arise
4.1Conversion of foreign company

Where the ownership of a specified is transferred from a company formally incorporated outside
Zimbabwe (non-resident company), which was carrying on its principal business within Zimbabwe to its
successor Zimbabwean incorporated company the transferor and transferee may elect to transfer such
specified asset at base cost notwithstanding the terms of the agreement of sale. The base cost will then
become the price to be used by the transferor capital gains tax and the cost of the specified asset to the
transferee. The effect of this provision is a complete capital gains tax relief in the hands of the transferor.
It does not matter whether the transfer is made from a company with or without assessed loss. On
conversion no new shareholder should be taken aboard and the old shareholding should not be varied.
Capital gain tax will be computed when the specified asset is eventually sold to a third party.
4.2 Conversion of a company to private business corporation

A company which is incorporated under the Companies Act [Chapter 24:03] which is converted into a
private business corporation or vice versa would also qualify for the capital gain tax relief subject to an
election being made, whether or not there is assessed loss. Capital gain tax will however arise when the
specified assets are eventually sold by the transferee to a third party. Such capital gain tax shall be
computed as if the asset has always been in the hands of the transferor.
4.3 Related companies

A transfer of a specified asset between related companies (companies under the same control) shall not be
subject to capital gains tax, subject to an election being made. The specified asset will be deemed
transferred at its base cost, notwithstanding any price paid in exchange of the specified asset. The base cost
will then become the price to be used by the transferor capital gains tax and the cost of the specified asset to
291

lOMoARcPSD|3494582
the transferee. The transfer should be made between companies under the same control in the course of or
furtherance of a scheme of reconstruction of a group of companies or a merger or other business operation
which, in the opinion of the Commissioner, is of a similar nature.
The relief of capital gain tax is conditional upon the election being made not later than the date of
submitting capital gains tax a return for assessment of capital gain.
It provides a taxpayer with an opportunity to sale or transfer specified assets to its sister companies without
charging tax, by rolling forward the capital gain tax. Thus, a perpetual sale of an asset between companies
under the same control will not result in capital gains tax, as long as an election is made.
A company is under the same control with the other, if it is controlled by another. A company is deemed to
be under the control of an individual if the majority of voting rights attaching to all classes of shares in the
company is controlled, directly or indirectly, by the individual. An individual and his nominee are deemed
to be one individual. Companies that are controlled by one company are companies under the same control
i.e. fellow subsidiaries. The subsidiaries still need to be effectively controlled at least 50% by one company.
4.4 Sale to third party

Capital gains tax will only become payable when the specified asset is sold to a third party.When the
specified asset is sold to third party, capital gains tax shall be computed as if the specified asset has always
been in the hands of the transferor.
Exam focus point

Whenever a specified asset is transferred as contemplated above, the provision of both Capital Gains
Tax Act and Income Tax Act will apply. As such you should be able to calculate deferred recoupment
and list income tax conditions for one to qualify for a relief of tax on recoupment, when asked to do
so.
4.5 Deferment conditions

The following conditions must be met for the Commissioner to allow deferment of capital gains in all
above situation:
• The transfer must be triggered by a scheme of reconstruction, merger, takeover or some other similar
• The election must be made not later than the date of submitting a return for assessment of capital gain.
• The transferor and the transferee must agree that the transfer price of the assets shall be their base cost
as established in the hands of the transferor, notwithstanding the price exchanged.
When the specified asset is eventually sold to a third party, capital gain that is realised becomes taxable.
The capital gains shall be computed as if the asset has always been in the hands of the transferor.
5 Hire purchase relief

Fast Forward
A taxpayer who sales a specified asset on hire purchase or on credit sale will be granted an allowance on
outstanding receivable. The allowance which is a deduction in the year shall be taxable in the following
year, when a fresh allowance is computed.
5.1 Introduction
292

lOMoARcPSD|3494582
The full gross capital amount is deemed to accrue the moment an agreement of sale is concluded. Even
if the full value of consideration agreed upon is received in instalments in different years, the entire
value of consideration must be included in gross capital amount in the year in which the sale was
concluded.
Therefore, when a specified asset is sold under a hire purchase agreement, a deed of sale or credit sale
agreement the full gross capital amount accrues to a taxpayer on the date an agreement is entered. A
taxpayer will then be granted a relief (allowance) on the outstanding debtors. The relief is deducted from
the taxpayer’s capital gain, but will be brought into capital gain in the following year of assessment.
5.2 Hire purchase agreement

Where a specified asset is sold under a hire purchase agreement, a deed of sale or credit sale agreement
the full gross capital amount accrues to a taxpayer on the date an agreement is entered. It does not matter
whether the full value of consideration agreed upon is received in instalments in different years. A
taxpayer will then be granted a relief (allowance) on the outstanding debtors. The relief is deducted
from the taxpayer’s capital gain, but will be brought into capital gain in the following year of
assessment. The allowance under a hire purchase agreement is computed as follows:
A x (B-C)
D
A is the amount not yet receivable (debtors) at the end of the 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
Note that the Capital amount (B) is gross capital less exemptions less exemptions.
The hire purchase allowance computed as above must be entered as 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 2012 for $400,000 and had been using it in its
business since that date. On 2 March 2015 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:
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 2016
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
Compute HYT (Pvt) Ltd’s capital gains tax in 2015, 2016 and 2017
ANSWER
2015
Less recoupment ($400,000 x 2.5% x 4years) (60,000)
690,000
Less Deduction
Cost 400,000
293

lOMoARcPSD|3494582
Less capital allowances (3 years x 5% x $400,000) (60,000)

Inflation ($400,000 x 2.5% x 4 years) 40,000
Selling expenses 75,000 455,000
Less Hire purchase allowance ($375,000 x ($690,000 -$455,000)/$750,000) 117,500
Tax @ 20% 23,500
2016
Hire purchase allowance b/f 117,500
Less Hire purchase allowance ($187,500 x ($690,000 -$455,000)/$750,000) 58,750
Capital gain 58,750
Tax @20% 11,750
2017
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:

Less cash paid (50% x $750,000) 375,000
Debtors (D in the formula) 2015 375,000
Less cash paid in 2016 187,500
Debtors (D) in 2015 187,500
Less cash paid in 2017 187,500
Debtors (D) in 2017 nil
5.3 Ceded hire purchase agreement

In the event that the agreement is ceded or otherwise disposed the hire purchase allowance shall ceases to
be granted in the year of assessment in which the agreement is ceded or otherwise disposed.
5.4 Cancellation of hire purchase agreement

In the year in which the agreement is cancelled the difference between the total of the amounts received by
the seller and the total of the amounts included in the capital gains is taxable. This hire purchase will cease
to apply after that year of assessment.
Should the agreement be cancelled the difference between the total of the amounts received by the seller
and the total of the amounts included in the capital gains is taxable in the year of assessment in which the
cancellation takes place. The hire purchase provision will cease to apply after that year of assessment.
5.5 Allowance below $50

If the hire purchase allowance is $50 or below it shall be disregarded.
5.6 Credit sales agreement

This is an agreement where the ownership of a property passes to a buyer on the date of its delivery. An
allowance that the Commissioner considers as fair and reasonable will be granted in respect of outstanding
receivables. The allowance is similar to the hire purchase allowance, except that it is computed on debtors
net of bad debts.
294

lOMoARcPSD|3494582
6 Replacement of immovable property

Fast Forward
A taxpayer who sales his immovable property and uses the proceeds from this sale to purchase or construct
another immovable property can defer capital gain accruing from on that sale if he makes an election for
capital gains rollover. A partial rollover is given where the proceeds are partially utilized.
6.1 Introduction
A taxpayer who receives or accrues a gain from a sale by him of immovable property previously used for
purposes of his trade (called the old property) can defer the gain when he/she uses the proceeds from
disposal to purchase or construct another immovable property (called the new property) to be used for the
purposes of his trade.
ST FORWARD
All the following conditions must be met:
 A taxpayer must elect to be granted a rollover relief.

 The election must be made by a taxpayer on or before the date of submitting a return for assessment of
capital gain.
 The old property sold and the new property bought must be used by taxpayer for purposes of his trade.
 The old property and the new property must both be immovable property.
 Reinvestment of the proceeds received on the disposal of the old asset must be made on or before the
end of the year of assessment following that of sale.
 The new property must belong for the individual concerned.
The Act does not specify the time period for bringing the new asset into use in the trade (not necessarily
immediately, but not after any significant and unnecessary delay). The new property does not necessarily
have to be used in the same trade as the old property.
6.2 Partial rollover
Where the proceeds are partially expended, the individual shall only be relieved of the gain applicable on
the amount expended to purchase or construct the new property.
The rollover relief shall be computed using the following formula:
AxB
C
A is the amount used to purchase/construction of 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
Davidzo owned a retail shop in Msasa which had an income tax value of $46,250. The shop was acquired
by her in 2012 for $50,000. Davidzo sold this shop in May 2015 for $80,000 and used $60,000 of the
proceeds to purchase another shop in Westgate.
Compute Davidzo’s minimum capital gain/ (loss) on sale of her old shop.
ANSWER

Less Recoupment ($50,000 - $46,250) (3,750)
295

lOMoARcPSD|3494582
Less Deduction
Cost 50,000
Capital gain 25,000
Less rollover ($25,000 x $60,000/$80,000) 18,750
Capital gain 6,250
6.3 Cost of new property
A rolled over gain is deducted from the base cost of the replacement asset acquired. To qualify for a full
rollover relief, the full proceeds from the disposal of the property must be reinvested.
The base cost of the new asset will be its cost less the gain rolled over. The inflation allowance will also be
computed on the actual purchase or construction price of the new property less the gain rolled over.
Exam focus point

The provision only applies under Capital Gains Tax Act no similar provision under Income Tax Act.
FA
EXAMPLE
In 2014 Goddard sold his old house to purchase another house for $120,000. From the sale of the old house
he accrued a gain of $20,000. He applied to the Commissioner and was granted 100% rollover relief on this
gain. On 2 September 2015 he sold his new a house for $150,000 and is not thinking of replacing it.
Compute Goddard’s capital gain/loss on disposal?
ANSWER

Less Deduction
Cost ($120,000 - $20,000) 100,000
Inflation ($100,000 x 2 years x 2.5%) 5,000 105,000
Capital gain 45,000
Chapter roundup
 A damage of an asset for which compensation is received, is deemed to be a disposal on which capital
gains tax is chargeable, unless the compensation received is less than the base cost or is used to repair
or replace the damaged asset.
 A transfer by an individual of an immovable asset used by him in his trade to a company he controls
does not result in chargeable gains.
 A transfer of specified assets between group members is capital gains tax neutral, should the election be
made.
 A taxpayer who sales 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 utilized.
 A taxpayer who sales a specified asset on hire purchase or on credit sale will be granted an allowance
on outstanding receivable. The allowance which is a deduction in the year shall be taxable in the
following year, when a fresh allowance is being computed.
 Where a part of the specified asset is sold and the other portion is retained, rules of apportionment of
cost will apply. The cost shall be split between the part sold and the part retained, using the appropriate
basis.
296

lOMoARcPSD|3494582
Exam Bank
Principal Private Residence
16
1. Computation of capital gains tax D2(a)
2. Rollover relief D5
3. Exemptions D3(a)
4. Transfer between spouses D2(d)
Introduction
In the previous chapter we dealt with the various capital gains tax relief.
In this chapter we look at disposal of a principal private residence (PPR). The computation of capital gains
tax on a principal private residence is no different from what was discussed in the previous chapter.
However, a gain on a principal private residence may be exempt in part or in full in the event of it being
replaced. We look at the rules to see when this concession is granted.
Next we will consider the relief available to spouses who transfer a principal private residence to each
other.
We conclude the chapter by considering the exemption of an elderly person upon disposal of his/her home
(PPR).
297

lOMoARcPSD|3494582
Study guide
Intellectual
level
D2 &3 Principal private residence
D3(b) Calculate the capital gain when a principal private residence has been used for 2
business purposes.
D3(a) Compute the exemption when a principal private residence is disposed of between 2
related parties.
D2(d) Explain the treatment of transfers between a husband and wife. 2
Exam guide
individual or for a company. Learn the basic layout, so that slotting in the figures becomes automatic.
examined items. You will also need to know how to compute capital gains on disposal of a principal private
1. Computation of capital gains tax

A disposal of a dwelling or a residential stand, constitute a chargeable gain for capital gains tax purposes.
Key point
Note that for purposes of capital gains tax we are keeping all acquisitions to a date not prior to 1 February
2009, because assets acquired before this date are not subject to capital gains tax.
1.1 Introduction
A disposal of a dwelling or a residential stand is subject to capital gains tax, unless the dwelling is situated
outside Zimbabwe. The terms “a dwelling” and “a residential stand” are defined below:
Key points
A dwelling” is a building, or any part of a building, which is used wholly or mainly for the purpose of
residential accommodation.
298

lOMoARcPSD|3494582
A residential stand, in relation to an individual, is any land, whether or not it is a piece of land registered
as a separate entity in a Deeds Registry, which:
• is owned by the individual concerned, and
• is proved to the satisfaction of the Commissioner to be intended for the building of a principal private
residence thereon.
Exam focus point

You must ignore recoupment contained in the layout when computing capital gains on dwelling. A
dwelling does not qualify for capital allowances, so recoupment rules do not apply.
EXAMPLE
Vincent Hughes inherited a house from his late father in May 2012. The fair market value of the house at
the time of inheritance by Vincent was $110,000, against an estate value of $105,000. In 2013 he added a
lockup garage on the house at cost of $20,000 and a storeroom at a cost of $30,000 in 2013.Vincent sold the
house on 2 December 2015 for $160,000, in contemplation of migrating to New Zealand.
Compute Vincent Hughes’s capital gains or loss.
ANSWER

Less Deduction
Cost 105,000
Garage 20,000
Storeroom 30,000
Inflation
$105,000 x 4 years x 2.5% 10,500
$20,000 x 3 years x 2.5% 1,500
$30,000 x 2 years x 2.5% 1,500 168,500
Capital loss (8,500)
1.2 Definition of principal private residence

A principal private residence is a dwelling, but not all dwellings are principal private residences. A
dwelling must be the person’s main or sole residence to be a principal private residence.
A principal private is residential accommodation, but not all residential accommodations are principal
private residence. A dwelling must be a person’s sole or main residence to be a principal private residence.
The term principal private residence is defined in three parts as follows:
A. Dwelling
Any dwelling which is proved to the satisfaction of the commissioner that:
a) It has been a person’s sole or main residence during the period it was owned by him
b) 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 period as approved by the Commissioner.
c) It must have been a person’s sole or main residence despite him being prevented from residing in it due
to employment or such other circumstances as approved by the Commissioner.
B. Land
299

lOMoARcPSD|3494582
Any land, whether or not it is a piece of land registered as a separate entity in a Deeds Registry,
which:
a) is owned by the individual concerned; and surrounds or is adjacent to the dwelling; and
b) is used by the individual primarily for private or domestic purposes in association with the dwelling
c) does not exceed 2 hectares or such larger area as the Commissioner having regard to the size and
character of the dwelling is satisfied for the reasonable enjoyment of the dwelling as a principal private
residence:
C. Other structures
Any garage, storeroom or other building or structure which:
a) Is owned by the individual concerned; and
b) Forms part of or is attached to or otherwise associated with the dwelling, and
c) Is used by the individual concerned primarily for private or domestic purposes in association with the
dwelling
2. Rollover relief
Fast Forward
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.
2.1 Introduction
An individual who receives or accrues a gain from a sale of his principal private residence or residential
stand (called the old principal private residence) can defer the gain when he/she uses the proceeds from
disposal to purchase another principal private residence (called the new principal private residence) or
residential stand.
Rollover conditions:
 A taxpayer must elect to be granted a rollover relief

 The election must be made by a taxpayer on or before the date of submitting a return for assessment of
capital gain.
 The dwelling must be replaced on or before the end of the year of assessment following that of sale
 The purchase or construction of the new PPR or residential stand must be made on a land owned by the
taxpayer in Zimbabwe
 The new PPR or residential stand must be for the individual concerned
A person, who utilize the sale consideration for other purposes and borrowed an equal amount for the
purpose of purchasing the residential house property to claim rollover relief, would not qualify for the
rollover provisions. The Act requires that the proceeds received or accruing from the sale be utilised.
In practice the Commissioner accepts an agreement entered for the purchase of new house prior to sale of
the house, but this is not automatic.
EXAMPLE
Mrs. Boar sold her house in Victoria Falls for $200,000 and utilised the full proceeds to purchase another
house in Hwange. Mrs. Boar has satisfied the Commissioner that the sold house was his main and sole
residence in Zimbabwe. The house was purchased by him in 2012 for $159,000.
300

lOMoARcPSD|3494582
Compute Mrs. Boar’s taxable capital gain
ANSWER

Less Deduction
Cost 159,000
Inflation $(159,000 x 2.5% x 4 years) 15,900 174,900
Capital gain 25,100
Less 100% Rollover 25,100
Taxable gain nil
Exam focus point

You must ensure that the person personally and ordinarily resided in the PPR before you grant the
relief and that the PPR is the main or the sole PPR of the individual in the case of a person owning
more than one residence. The relief is granted only on a single residence of the person; no matter
how many times that same residence is replaced.
EXAMPLE
Mr. Rashid sold his house in Glen View for $200,000 and utilised the full proceeds to purchase another
house in Tanzania his home country. Mr. Rashid has satisfied the Commissioner the sold house was his
main and sole residence in Zimbabwe. The Glen View house had been purchased by him in 2012 for
$159,000.
Compute Mr. Rashid’s taxable capital gain
ANSWER

Less Deduction
Cost 159,000
Inflation $(159,000 x 2.5% x 4 years) 15,900 174,900
Taxable capital gain 25,100
No rollover relief is granted, the replacement house is not in Zimbabwe
For the relief to apply the replacement house or stand must be for the individual concerned. Where a person
who owned a house property, sold the same and purchased another property in the name of spouse, the
relief shall not apply. Instead, the person must first purchase the house then transfer to the spouse. See relief
available for transfers between spouses below.
An individual, who disposes of a “residential stand”, would also qualify for a rollover relief, whether he
disposes of the residential stand to purchase a principal private residence or another residential stand. The
replacement residential stand or principal private residence must be situated in Zimbabwe. Like the relief
on a principal private residence, this relief is not available to company staff houses or residential stands.
The residential stand must be owned by the individual concerned and the Commissioner needs to be
satisfied that it is intended for the building of a principal private residence thereon. The Act also makes no
difference whether the proceeds from principal private residence are applied to purchase a residential stand
or vice versa. In practice however, where a principal private residence is replaced by a residential stand, it
is expected that the full proceeds from the principal private residence should be fully utilised, otherwise the
rollover relief would not be granted by the Commissioner.
301

lOMoARcPSD|3494582
EXAMPLE
Chris bought a residential stand in 2011 for $40,000. Before he could develop it, he got information from
his friend that there were low –cost housing which were being sold at a reasonable price. Acting on the
advice of his friend, Chris sold the residential stand for $50,000 on 3 July 2015 and applied all the proceeds
to purchase the low cost house.
Advice Chris whether he is required to pay tax on disposal of his residential.
ANSWER
Chris would not be required to account for capital gains tax on disposal of his residential stand because he
has utilised the full proceeds to purchase the, provided he makes an election.
2.2 Partial rollover
Where the proceeds from the disposal of a PPR or a residential stand are partially utilised on replacement
PPR or a residential stand, only capital gain applicable to amount used shall be deferred.
Where the proceeds are partially expended, the individual shall only be relieved of the gain applicable on
the amount expended to purchase another PPR or residential stand. The rollover relief shall be computed
using the following formula:
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
On January 5, 2015, Janna sold her principal residence for $120,000. The house was bought by her in June
2011 for $65,000. She paid $10,500 in commissions and $1,500 in legal fees in connection with the sale.
One month before the sale, Janna painted the house at a cost of $5,000 and repaired various items at a cost
of $2,500. On January 15, 2015, Janna bought a new home for $95,000.
Compute Janna’s minimum capital gains tax’
ANSWER

Less Deduction
Cost 65,000
Improvements 5,000
Inflation
$65,000 x 2.5% x 5 yeas 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
302

lOMoARcPSD|3494582
Tax @ 20% 1,240
A repair is not an improvement and therefore not recognized capital gains tax expenditure.
The relief is granted only on a single residence for each person; no matter how many times that same
residence is sold. A residential stand held for the purpose of being converted into a PPR also qualifies
for a rollover relief.
2.3 Cost of new principal private residence
The amount granted as a rollover relief on the old principal private residence shall be deducted from the
cost of the new PPR when determining the capital gain of the new principal private residence. The inflation
allowance will also be based on that new cost base.
EXAMPLE
In 2014 Goddard sold his old house to purchase another house for $120,000. From the sale of the old house
he accrued a gain of $20,000. He applied to the Commissioner and was granted 100% rollover relief on this
gain. On 2 September 2015 he sold his new PPR for $150,000 and is not thinking of replacing it.
Compute Goddard’s capital gain/loss on disposal?
ANSWER

Less Deduction
Cost ($120,000 - $20,000) 100,000
Capital gain 45,000
2.4 Sale of other structures separately
Where land referred to in (b) of the definition of the principal private residence stated above or any other
structure referred to in (c) of the definition of the PPR (i.e garage, storeroom etc.) is sold separate from a
PPR, rollover provisions do not apply. Note that this restriction does not apply to a residential stand.
2.5 Buildings used by partners or shareholders
If a partner, shareholder or director has a right to occupy an apartment, flat or other residential unit
belonging to the company or partnership, capital gain/loss is realized when he ceases to be a partner,
shareholder or director of the partnership or of the company.
2.6 Business use

Where part of a residence is used exclusively for business purposes throughout the entire period of
ownership, the gain attributable to use of that part is taxable. The rollover relief will only be granted to that
of the principal private residence used as dwelling.
EXAMPLE
303

lOMoARcPSD|3494582
Estgar John bought a house for $150,000 for use as his dwelling in 2012, which he converted half of the
floor area for use as business offices. Estgar subsequently sold the whole building for $184,000 in May
2015, to buy another house for $160,000.
Compute Estgar’s capital gain/loss on disposal?
ANSWER

Less Deduction
Cost 150,000
Capital gain 19,000
Less Rollover relief (1/2 x $19,000 x $160,000/$184,000) 8,261
Capital gain 10,739
The same rules shall be applied when a PPR is sold jointly with some other property not used as residential
accommodation. The transferor and transferee must submit a statement to the Commissioner of the
breakdown of the individual assets selling price. If the statement is not submitted or is not acceptable to the
Commissioner, the Commissioner is empowered to determine the prices.
3. Exemptions
We have already seen from above that 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. Besides a PPR an elderly
person is also exempt from capital gains tax the first $1,800 on disposal of his unlisted shares.
EXAMPLE
Don, 62 years, sells his personal residence on 5 December 2013, for $380,000. His adjusted basis was
$112,000. He owned and occupied the residence for 4 years. Having decided that he no longer wants the
burdens of home ownership, he invests the sales proceeds in a mutual fund and enters into a 1-year lease on
an apartment. The detriments of renting, including a crying child next door, cause Don to rethink his
decision. Therefore, he purchases another residence on November 6, 2014, for $175,000. Is Don eligible for
rollover relief?
ANSWER
Don would have been eligible for rollover relief, but he is tax exempted on sale of his PPR. Amounts
received by a person on sale of his or her PPR if such person is, on the date of the sale, 55 years old or
above are exempt from capital gains tax.
4. Transfer of specified assets between spouses
A transfer or disposal of a specified asset by a person to his/her spouse give rise to no chargeable gain,
provided an election is made.
4.1 Introduction
Spouses are taxed separately. If they jointly own the asset, any gain accruing is apportioned between them
in the ratio of their respective interests in that asset at the time of disposal. However, they enjoy a benefit of
capital gain deferment should they transfer or sale specified assets to each other. Any capital gain accruing
304

lOMoARcPSD|3494582
will be deferred until the specified asset is sold to a third. An election must be made to qualify for this
relief.
4.2 Transfer of Principal Private Residence

A disposal of a PPR or any part of a PPR between spouses give rise to no gain or loss, no matter the actual
price (if any) was charged by the transferor. It makes no difference whether the transfer is a gift or sale.
This means that there is no chargeable gain or allowable loss, and the transferee takes over the
transferor’s cost. This is not the same as the disposal being exempt from capital gains tax, since the
specified asset will be eventually taxed when disposed by the transferee to a third party.
All the following conditions must be met:
• Transferor and transferee must elect to be granted this rollover relief.

• The election must be made on or before the date of submitting a return for assessment of capital gain.
• The spouses must agree that the transfer price of the PPR shall be its base cost as established in the
hands of the transferor, notwithstanding the price exchanged.
The term base cost is the aggregate of cost of acquisition, cost of improvements, inflation allowances and
selling costs.
The relief is also granted when a PPR is transferred to a former spouse in compliance with a court order,
providing for the maintenance of the former spouse or dividing, apportioning or distributing the assets of
the former spouse on or after the dissolution of marriage.
If the asset is subsequently sold to a third party, the first owner’s (transferor) base cost is used in computing
the second owner’s (transferee) capital gain. In other words, the transferee will inherit the transferor’s costs
and will be deemed to have acquired the specified asset on the same date as the original owner (spouse).
EXAMPLE
In August 2011, Takurai bought a house in Mandara for $95,000. Takurai is married to Anna. On 3 July
2014, on Anna’s birthday, Takurai gifted his Manadara to Anna. On that date the house had a fair market
value of $125,000. Anna however sold the house to her uncle on 2 December 2015 for $120,000. The
couple always maximise their tax benefits.
Show how the above is treated under Capital Gains Tax Act.
ANSWER
On 3 July 2014 Takurai will dispose the house to Anna at base cost, despite the actual market price i.e
Cost of acquisition 95,000
Inflation allowance $95,000 x 2.5% x 4 years 9,500
Base cost 104,500
Capital gains realised will be taxed when Anna disposes the house to her uncle (a third party):

Less deduction
Inflation allowance $95,000 x 2.5% x 5 years 11,875 106,875
Capital gain 13,125
Tax thereon @ 20% 2,625
305

lOMoARcPSD|3494582
4.3 Transfer of other specified assets
The above relief is not restricted to a PPR. It is also available when a person transfers the whole or any part
of any other specified asset to his/her spouse or former spouse. This means that a person who disposes any
immovable property or marketable securities to his/her spouse, whether in the ordinary course of life or as a
consequence of divorce, can defer the gain until the property is transferred to a third party. All the
conditions as stated above must be met.
Exam focus point

A transfer relief used in conjuncture with capital loss relief can be very useful tax planning
technique. It is quite beneficial to transfer a specified asset to the spouse with an unused capital loss.
EXAMPLE
Fred and Fungisai, a married couple, jointly acquired a commercial building $270,000 in 2011. The
building was owned 50:50 by the spouse until Freda decided to cede his share to Fungisai on 2 July 2013
when it was worth $320,000. Fungisai sold it on 3 November 2014 for $325,000. The commercial building
has always been used 100% in the production of rental income. You are told that Fungisai has a capital loss
of $28,000, from disposal of her other specified assets.
Fred and Fungisai are very conscious about tax issues
Show how the above is treated under Capital Gains Tax Act.
ANSWER
On 2 July 2013 Freda will be deemed to have disposed his share of the commercial building to Fungisai at
base cost, notwithstanding the actual market price i.e
Cost of acquisition ($270,000 x ½) 135,000
Inflation allowance ($135,000 x 2.5% x 3 years) 10,125
Base cost 145,125
Capital gains will be realised when Fungisai disposes the commercial building to a third party i.e:
Less recoupment (270,000 x 2.5% x 3 years) (20,250)
Less deduction
Inflation allowance $270,000 x 2.5% x 4 years 27,000 276,750
Capital gain 28,000
Less Capital loss (28,000)
Capital gain nil
306

lOMoARcPSD|3494582
Chapter roundup
 A disposal of a dwelling or a residential stand, constitute a chargeable gain for capital gains tax
purposes.
 A principal private residence is a dwelling, but not all dwellings are principal private residence. A
dwelling must be the person’s main or sole residence to be 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.
 The person must personally and ordinarily reside in the PPR and the PPR must be his main or the sole
residence, to qualify for the rollover relief.
 The relief is granted only on a single residence of the person; no matter how many times that same
residence is replaced.
 Where the proceeds from the disposal of a PPR or a residential stand are partially utilised on
replacement PPR or a residential stand, only capital gain applicable to amount used shall be deferred.
 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.
 An elderly person is also exempt from capital gains tax on the first $1,800 on disposal of his unlisted
shares.
 A transfer or disposal of a specified asset by a person to his/her spouse give rise to no chargeable gain,
provided an election is made.
 A transfer relief used in conjunction with capital loss relief can be very helpful tax planning technique.
It is quite beneficial to transfer a specified asset to the spouse with an unused capital loss.
307

lOMoARcPSD|3494582
Marketable securities
17
1. Valuation of shares D3(c)
2. Capital gain on shares D2(a)
3. Bonus issues, rights issues D3(d)
4. Takeovers and reorganisations D3(d)

5. Tax planning D5
Introduction
We saw in chapter 13 that marketable securities includes any bond tradable on the stock market,
debentures, share or stock and any right derived out of participation in a unit trust, excluding any form of
loan or overdraft.
If the marketable security is listed on Zimbabwean Stock Exchange it is subject to 1% withholding tax and
not capital gains tax. Only unlisted shares are subject to capital gains tax
In this chapter, we look at valuation of quoted shares and unquoted shares. We also outline the tax reliefs
on share disposals, for example hire purchase relief, loss relief, relief on transfer of shares between related
parties and reorganisation and takeover reliefs. Next we look at share reduction, conversion and
redemptions/maturity.
Next we show how capital gains tax and withholding tax are computed in transactions involving bonus and
rights issues.
We conclude the Capital Gain Tax section by summing up the CGTC tax planning key points.
The next chapter deals with Value Added Tax.
308

lOMoARcPSD|3494582
Study guide
Intellectual
level
D2,3&5 Marketable securities
D3 (c) Calculate the value of quoted shares where they are disposed of by way of a gift 2
D3(d) Explain the treatment of bonus issues, rights issues, takeovers and reorganizations. 2
D5 The use of exemptions and reliefs in deferring and minimising tax liabilities
arising on the disposal of specified assets
Exam guide
individual or company. Learn the basic layout, so that slotting in the figures becomes automatic.
You also need to be familiar with reliefs outlined in the next chapters. The capital gains deferment through
rollover e.g. reinvestment, transfer of assets between related, incorporation relief and installment relief are
frequently examined items. You will also need to know how to compute capital gains on disposal of
principal private residence. You must pay attention to the rollover reliefs and the exemptions of an elderly
person.
1. Valuation of quoted shares
Listed shares are valued on a willing buyer willing seller, whereas for unquoted shares valuation is usually
done by the auditors.
The value of a share is determined on a willing buyer and willing seller principle on the stock exchange.
The price agreed between a buyer and a seller is the market price. This is what should be used for purposes
of computing withholding tax on the quoted shares
Where quoted shares are disposed of by way of a gift, the market value of these shares is needed as
‘proceeds’ in order to calculate the withholding tax. The market value on valuation date of such shares will
be the average of their trading values on the ZSE at close of business.
Valuation of shares in a company not quoted is usually carried out by the auditors, accountants or
bookkeepers. If the directors do the valuation, it must be independently be reviewed by the auditors.
2. Computation of capital gains on shares

Fast Forward
309

lOMoARcPSD|3494582
Only when there is a disposal of unlisted shares is capital gains tax computed on shares. Whereas, quoted
shares are subject to final withholding tax of 1% at source.
2.1 Introduction
Quoted shares are subject to 1% final withholding tax. On the other hand, unquoted shares are subject to
withholding tax of 5%. This withholding tax is not a final tax, a taxpayer can get this back as a credit
against the capital gains tax on assessment. Where the unquoted shares were acquired before 1 February
2009, the 5% will become a final tax. Therefore the only shares that subject to capital gains tax are
unquoted shares.
EXAMPLE
Tapiwa bought 2000 shares in Brokered (Pvt) Ltd at cost of $10 per share on 2 July 2010. Tapiwa sold all
her shares in Brokered (Pvt) Limited at $12 each on 13 July 2013.
Compute capital gains tax payable by Tapiwa.
ANSWER

Less Deduction
Cost 20,000
Capital gain 2,000
Tax thereon @ 20% 400
Less Withholding tax ($24,000 x 5%) 1,200
Tax refund 800
Note that rules for computing capital gains on unlisted shares and on immovable property are the same. The
only difference is that some of the reliefs discussed in the previous chapter for example rollover on
substitution of specified asset, damaged relief and transfer of property by individual to a company he
controls do not apply.
Exam focus point

You must not compute capital gains tax on listed shares in the exam. These shares do not enter the
capital gains tax layout at all, because they are subject to 1% final withholding tax at source.
3. Capital gains reliefs
Fast Forward
This is rewind of earlier discussion. Capital gains tax reliefs are offered when a taxpayer sales his shares on
hire purchase, transfer shares to spouse or has capital loss from other disposals or previous year etc.
3.1 Hire purchase relief
Where capital gains tax is computed, the rules will be similar to those dealt with in chapter 15. A hire
purchase relief is granted where shares are sold on hire purchase or credit.
EXAMPLE
310

lOMoARcPSD|3494582
Enerita a self-employed incorporated a company in 2011 with equity worth $80,000 at that time. In the
current year, 2014, she sold her business to Hilary for $140,000.In terms of the sale agreement, this amount
is payable over two years in equal instalment.
Compute capital gains in each of the two years 2014 and 2015.
ANSWER
2014
Less Deduction
Cost 80,000
Capital gain 52,000
Less Hire purchase relief ($52,000 x $70,000/$140,000) 26,000
Capital gain 26,000
2015
Hire purchase relief b/f 26,000
Less Hire purchase relief ($52,000 x $0/140,000) 0
Capital gain 26,000
3.2 Transfers between related parties

Spouses can transfer shares without suffering capital gains tax, provided an election is made. Transfers
between group members are also free of capital gains tax, subject to an election being made. We covered
this in chapter 15.
3.3 Capital loss relief
Refer to chapter 13.
3.4 Exemption relief
The first $1,800 of proceeds from disposal of unquoted marketable securities by an elderly person is
exempt from capital gains tax. An elderly person is a person who is 55 years or above. Note this
exemption is not granted on quoted shares and on unlisted shares acquired before 1 February 2009.
EXAMPLE
Fichani, 58 years old, bought 10000 shares in Kains Produce (Pvt) Ltd at cost of $2 per share on 2 July
2011. He sold all her shares in Kains Produce (Pvt) Limited at $2.80 each on 3 November 2014.
Compute Fichani’s tax payable or refund.
ANSWER
Gross capital 28,000

Less exemption for elderly persons 1,800
Less Deduction
Cost 20,000
Capital gain 4,200
Tax @ 20% 840
Less withholding tax 1,400
311

lOMoARcPSD|3494582
Refund 560
4. Reorganisations
Fast Forward
Further reliefs are granted on share exchange for shares and on share reduction.
4.1 Introduction
Reorganization takes place where new shares or a mixture of new shares and debentures are issued in
exchange for the original shareholdings. The new shares take the place of the old shares. If an election is
made these shares will not suffer capital gains tax or withholding tax. The problem is how to apportion the
original cost between the different types of capital issued on the reorganization. If the new shares are
quoted, then the cost is apportioned by reference to the market values of the new types of capital on the first
day of quotation after the reorganization.
The following conditions must however be satisfied:
 The exchange must be between companies under the same control and should be triggered by a scheme
of reconstruction, merger, takeover or some other similar business combination, which in the opinion of
the Commissioner is of a similar nature
 The exchange must result from the localization of a foreign company i.e when a company which was
incorporated outside Zimbabwe, but carrying its principal business in Zimbabwe, decides to voluntarily
deregister in its country of corporation for purposes of the transfer of the whole of its business and
property wherever situated to a new company in Zimbabwe. The consideration for the transfer must be
the issue of shares to shareholder in the new company in proportion to their holding in the old
company. No new member must be issued with share in the new company.
 An election must be made to qualify for this relief and the election should be made not later than the
date of submitting a return for assessment of capital gain.
The relief is available to both quoted and unquoted shares.
4.2 Share exchange

The CGTA provides for capital gains tax relief in a 'share-for-share transaction'. A share for share exchange
arises when a marketable security issued by a company involved in the scheme, merger, reconstruction,
takeover or similar operation is transferred from one person to another for no cash consideration, in
exchange for a marketable security issued by another such company.
The exchange must take place between related companies (companies under the same control) in the course
of or furtherance of a scheme of reconstruction of a group of companies or a merger or other business
operation which, in the opinion of the Commissioner, is of a similar nature or between a former foreign
company and its successor Zimbabwe company (i.e in a conversion of foreign company).
Thus, the transferor may elect that, notwithstanding the terms of any agreement of sale, that the marketable
security transferred by him shall be deemed to have been sold for an amount equal to the base cost at the
date of transfer in respect of marketable security transferred by him. The election should be made not later
than the date for submission a return for the assessment of capital gain.
312

lOMoARcPSD|3494582
4.3 Share reductions and buy backs
A capital gain/loss is recognized when a company recovers or recoups proceeds from specified asset which
has not been sold. For example when a share reduction or redemption occurs. The gain can be deferred if
the proceeds of the share reduction or buy back are insufficient to cover the base cost of the shares (original
cost plus improvements). The proceeds will be set off against the new shares. The tax deferral would last
until the time the asset is sold or when it is disposed of at above the base cost. At that time, inflation
allowance shall be computed based on each successive reduction.
Steps
a) Establish whether proceeds from reduction exceeds the base cost of the shares (original cost plus
improvement cost)
b) Where the proceeds are less than base cost, reduce base cost by proceeds. No capital capitals tax is
computed
c) When the shares are eventual sold use the reduced cost as the cost of the disposed of shares.
EXAMPLE
Eugene bought 100,000 shares at 40c each in S Ltd in June 2009. In December 2010, she received 20,000
shares of 25c each when S Ltd effected a share reduction. Another share reduction was effected in June
2011 and Eugene was paid 30c share for 30,000 shares. She sold the remainder of the shares for 80c each
in June 2014. Show Eugene’s capital gain/loss.
ANSWER
No gain/loss accrues as long as the reduction proceeds cannot cover the base cost of the shares. The
proceeds shall be set-off against the base cost of the shares.

Less reduction (20,000 x 25c) 5,000
New share cost on 21 Dec 2010 35,000
Less reduction (30,000 x 30c) 9,000
New share cost on 21 Jun 2011 26,000

Less Deduction
Cost of shares (new cost) 26,000
Inflation
$40,000 x 2, 5% years 2,000
$35,000 x 2, 5% x 2 years 1,750
426,000 x 2, 5% x 4 years 2,600 (32,350)
Capital gain (loss) 7,650
4.4 Share redemption and conversion
A share redemption/maturity constitutes a disposal for capital tax purposes. Share conversion also
constitutes a capital gains tax disposal.
Redemption of preference shares by a company is a transfer in the hands of shareholders and they will
be liable to capital gain for the same.
Capital gains tax must therefore be computed whenever there is share redemption or maturity. The gross
capital amount for purposes of computing the capital is the amount received on maturity or redemption
of the shares.
313

lOMoARcPSD|3494582
It can however be submitted that the issue of shares by the company does not constitute a sale or a
disposal for capital gains tax purposes. No capital gains will arise.
In addition, the Capital Gains Tax Act further submits that disposal of a specified asset otherwise than
by way of sale such disposal shall be deemed to be a sale. The gross capital shall be equal to the fair
market price of such asset at the time of disposal. In the same manner, the conversion of preference or
debentures into equity shares or vice versa is regarded to be a transfer and there will be capital gain to
the shareholder on the date of allotment of equity shares in exchange of preference shares or vice versa
The full consideration in this case shall be fair market value of equity shares (item exchanged for) on the
date of its allotment.
EXAMPLE
Aaron bought convertible preference shares in Ceria (Pvt) Limited in 2011 for $30,000. The shares were
duly converted into equity shares on 1 June 2014. The fair market value of the preference shares and equity
shares were $40,000 and $38,000, respectively.
ANSWER
Compute Aaron’s capital gain.

Less Cost
Capital gain 3,000
4.5 Takeovers
A chargeable gain does not arise on a 'paper for paper' takeover. The cost of the original holding is
passed on to the new holding which takes the place of the original holding. If part of the takeover
consideration is cash then a gain must be computed: the normal part disposal rules will apply.
Steps
a) Determine whether an election has been made

b) Where there is part cash consideration, compute capital gains applicable on cash consideration
received
c) Determine the cost base equivalent of the cash consideration received.
d) The cost base is computed as follows :
Cash consideration received x Original cost of shares of the transferor

Total consideration received
Note that the total consideration received is equal to the cash consideration plus the market value of
shares received.
EXAMPLE
Van Dart Limited was taken over by Sham Limited. In terms of the scheme Van Dart is to receive 2
shares for every 3 shares held plus a cash consideration of $6,000. Sham Limited’s shares are valued at
$1.5 a shares. Van Dart’s shares on date of the scheme were 21,000 and were acquired in 2010 for $0.40
each.
Compute Van Dart Limited’s minimum capital gain.
314

lOMoARcPSD|3494582
ANSWER

Less Cost
Original cost 1,867
Inflation ($1,867 x 2.5% x 4 years) 187 2,054
Capital gain 3,946
Workings computation of cost equivalent of cash consideration:

Cash consideration 6,000
Value of the shares (2/3 x 21,000 x $1.5) 21,000
Total consideration 27,000
Original cost of shares of Van Dart shares (21,000 x $0.40) 8,400
Allocated cost ($6,000/$27,000 x $8,400) 1,867
4.6 Bonus issue
Fast Forward
A bonus issue constitutes an acquisition at nil value, whereas the cost of a rights issue constitutes cost of
improvement. Inflation on this cost is computed effective the date the shares on which the rights issue is
granted were original acquired.
A bonus issue constitutes an acquisition at nil value. Capital gains tax is only triggered on the disposal of
those shares and the cost of original shares is diluted (shared) between original shares and the bonus shares.
It does not result in the change in the cost base. Its effect is that the existing base cost will be spread
amongst increased shares. The inflation allowance will still be computed effective the original shares were
acquired.
EXAMPLE
Mrs. X acquired 10000 shares in Portfolio Securities in June 2012 at 20 cents a share. In 2014, Portfolio
Securities made a bonus issue of 1 new share for every 2 held. As a result, Mrs. X received 500 shares
more and sold 50% of his total shares for 80cents each on 16 April 2015. Show the new cost per share and
Mrs. X’s capital gain/ (loss).
ANSWER
New cost per share is 13.33 cents i.e $2,000/ (10,000 + 5,000).
Capital gain
Original cost (13.33 x 7,500 shares) 1,000
Inflation ($1,000 x 2.5% x 4 years) 100 1,200
Capital gain loss 4,800
4.7 Rights issue

315

lOMoARcPSD|3494582
With regard to a rights issues the person is given shares which he should pay for at a discount upon exercise
of the right. It results in the increase in the base cost of the shares. The additional cost is treated as an
enhancement cost, which is deductible when computing capital gains tax. Inflation allowance on the cost of
the rights issue is computed from the date it was incurred.
EXAMPLE
On 1 June 2012, Anne sold her 10,000 shares in Soda Ltd for $12,000. She had purchases 15,000 shares in
Soda on 1 May 2008 for $7,500. In 2008, Soda made a rights issue of 1 for 2 held. Anne exercised her
rights in full and paid 60 centers for each share. Compute her capital tax.
ANSWER:

Original cost 3,333
Improvements 2,000
Inflation ($5,333 x 5 years x 2, 5%) 667 (6,000)
Capital gain (loss) 6,000
The right issue shares are 7,500 i.e ½ x 15,000 and rights issue cost of shares sold is $2,000 (10,000/22,500
x $4,500) and original cost of sold shares is $3,333 (10,000/22,500 x $7,500)
5. Share block companies
If a company which owns an immovable property is selling shares instead of the immovable property, the
cost of alterations, additions or improvements to an immovable property shall be deducted when computing
capital gains arising from share disposal. This is unique allowance which allows a person selling shares to
claim deduction of improvements on immovable property.
6. Tax planning
There many capital gains opportunities, which include relief when specified assets are transferred between
related parties, rollover relief on a PPR, replacement relief etc.
The charge to CGT depends upon the nature of the asset and the person making the disposal. There are
detailed rules defining the scope of the charge, the availability of reliefs and the effective rate of tax. Each
of these elements is subject to detailed rules which provide an opportunity to mitigate the tax cost.
It may also be possible to transfer assets without suffering capital gains tax by ‘replacing an immovable
property’ by a similar property or by affecting a transfer to another legal entity.
It is essential that the alternatives are considered well in advance. In particular, it should be noted that:
 The relief is lost if an election is not made by the date of submitting a return for assessment of
capital gain tax.
 Some reliefs are time restricted (e.g. business asset replacement relief and damage relief).
Exemptions too must be utilised in order to minimize the impact of capital gains tax, e.g. exemption of
PPR and unlisted shares for a person who is 55 years or above, etc.
316

lOMoARcPSD|3494582
Chapter roundup
 Listed shares are valued on a willing buyer willing seller, whereas for unquoted shares valuation is
usually done by the auditors.
 Only when there is a disposal of unlisted is capital gains tax computed on shares. Whereas, quoted
shares are subject to final withholding tax of 1% at source.
 A bonus issue constitutes an acquisition at nil value, whereas the cost of a rights issue constitutes cost
of improvement. Inflation on this cost is computed effective the date the shares on which the rights
issue is granted were original acquired
 There is no capital gains tax or capital gains withholding tax on shares (quoted or unquoted shares)
which are exchanged for shares as consequence of a reorganization or takeover between related
companies or a localization of a foreign company, provided an election is made
 A capital gain/loss is recognized when there is a share reduction, provided no capital gain shall arise if
proceeds from reduction are less than the base cost of the shares (original cost and cost of
improvement).
 A share redemption/maturity constitutes a disposal for capital tax purposes. Share conversion also
constitutes a capital gains tax disposal.
 There are many capital gains opportunities, which include relief when specified assets are transferred
between related parties, rollover relief on a PPR, replacement relief etc.
317

lOMoARcPSD|3494582
Part F
Value Added Tax
318

lOMoARcPSD|3494582
VAT introduction
18
1. Describe the scope of VAT F1 (a)

2 Zero-rated and exempt supplies F1(b)
3 Registration F2(a) & F2(b)
4 Pre-registration input VAT F2 (c )
5 Deregistration F2(d)
6 Tax periods F2(e)
Introduction
To date we have covered employment tax, income tax and capital gains tax. We now turn to VAT which is
one of the 4 tax heads covered under F6 syllabus. We cover VAT in this and the next chapter.
Valued added tax (VAT) is tax levied on goods and services, including imports. It is also referred to as
“consumption tax” i.e. charged on goods and services consumed within the economy. VAT is charged and
collected at each stage within the value chain, but the burden is eventually borne by the final consumer.
In this chapter we look at the scope of VAT and then consider when a business must, or may, be required to
register for VAT. We also look at deregistration requirements, the tax periods and circumstances under
which pre-registration can be claimed as input tax deduction.
We conclude VAT in the following chapter by looking at supply rules, time and value of supply, the
accounting of VAT, claimable input tax and duties of registered operators among other issues.
319

lOMoARcPSD|3494582
Study guide
Intellectual
level
F1 The scope of value added tax (VAT) 2
(a) Describe the scope of VAT 2
(b) List the principal zero-rated and exempt supplies 1

F2 The VAT registration requirements
(a) Recognise the circumstances in which a person must register for VAT 2
(b) Explain the advantages of voluntary VAT registration. 2
(c ) Explain the circumstances in which pre- registration input VAT can be recovered. 2
(d) Explain how and when a person can deregister for VAT 1
(e) Explain the four categories of tax period. 1
Exam guide
VAT is examined in question 5 as a full question carrying at least 15% of the marks in the exam. It may
however be examined in some parts of the exam. Some of the common examinable items include
registration requirements and the consequences of failing to register when required to do so, the
computation of VAT payable or refund (this will include computation of VAT on employee benefits e.g.
motoring benefits), stating the expenses which are denied claim of input tax etc. Do not overlook pre-
registration input VAT. You may be required to calculate the VAT due for a return period. You should
watch out for non-deductible input tax and check the debts for any possible impairment losses.
1 Introduction
Value Added Tax (VAT) is an indirect tax levied on the supply of goods and/or services. So when you buy
goods from the shop you are likely to pay VAT, although not all goods and services are subject to VAT.
1.1 The scope of VAT
VAT is charged, levied and collected on:
a. Supply of goods and/or services by a registered operator in the furtherance of a trade carried on in
Zimbabwe on a continuous or a regular basis, excluding the sale of second hand motor vehicles.
Importation of goods into Zimbabwe by any person
b. Importation of services by a non-registered operator e.g. banks, insurance companies, educational
institutions of a public character etc.
320

lOMoARcPSD|3494582
Second hand motor vehicles are subject to 5% excise duty which is computed on market value when
ownership is being changed.
1.2 Elements that triggers VAT
Fast forward
Generally, the essential elements required for the charging of VAT is that one must be carrying on a trade
and charge a consideration for the supply.
1.2.1 In the furtherance or in the course of trade
Generally, the supply of goods or services must be made in the course or furtherance of a trade for VAT to
apply. If the person supplies goods or services and the transaction is not entered into the course of his trade,
it does not attract VAT.
The trade must be carried on a continuous or a regular basis in Zimbabwe or partly in Zimbabwe and in
the course or furtherance of which goods or services are supplied to any other person for a consideration,
whether or not for profit.
Therefore, a non-resident who carries on a trade or a business in Zimbabwe, whether through a fixed base
or not, on regular basis is also affected by the VAT rules.
Key point
A trade means “In the case of any registered operator, other than a local authority, any trade or activity
which is carried on continuously or regularly by any person in Zimbabwe or partly in Zimbabwe and in
the course or furtherance of which goods or services are supplied to any other person for a consideration,
whether or not for profit, including any trade or activity carried on in the form of a commercial, financial,
industrial, mining, farming, fishing or professional concern or any other concern of a continuing nature or
in the form of an association or club….”
The following are also regarded to be trading activities:
• Supplies by any public authority in the course or furtherance of a trade

• Activities of any private voluntary organisation (PVO)
• Supply by a local authority of water, drainage, removal or disposal of sewage or garbage;
• Anything done in connection with the commencement or termination of any such trade or activity
A trade does not include an employment relationship to the extent any amount constituting remuneration is
paid or is payable to such employee or office holder. However services rendered by an independent
contractor constitute the undertaking of a trade, as such an independent contract must charge VAT. A trade
does not extend to an activity which is in the nature of private or recreational pursuit or hobby and an
activity which is stated in the VAT Act to be VAT exempt. We consider exempt in the next chapter.
1.2.2 For a consideration
Where the supply is for donated goods or supply of services free of charge, it ceases to be a supply made in
the furtherance of a trade. Thus, the supply must be for a consideration not of gratuitous nature.
A consideration includes any payment made or to be made, including any deposit on any returnable
container and tax, whether in money or otherwise, or any act or forbearance, whether or not voluntary, in
respect of, in response to, or for the inducement of, the supply of any goods or services, whether by that
321

lOMoARcPSD|3494582
person or by any other person, but does not include any payment in the form of unconditional gift to any
association not for gain.
A deposit, not being a deposit on a returnable container, whether refundable or not shall not constitute a
consideration or payment made for the supply unless and until the supplier appropriates the deposit as
consideration for the supply or such deposit is forfeited.
1.2.3 A supply
The VAT Act defines supply as “including all forms of supply, irrespective of where the supply is effected,
and any derivative of “supply” shall be construed accordingly”
2 Operation of VAT system

Under the VAT system, tax is charged and collected at each stage within the value chain, but the burden is
eventually borne by the final consumer. It is a multi-stage tax and is being charged at every stage of sale
and these stages are called stages of VAT and are as given below:
Manufacturer to Distributor
Distributor to Wholesale
Wholesaler to Retailer
Retailer to Consumer
It is based on the value addition at each of the above stages, and the related VAT liability of the operator is
calculated by deducting input tax credit from tax collected on sales during the payment period. Input tax
credit is allowed only to registered operators, but if the goods have been purchased from unregistered
dealer, no VAT credit is allowed.
EXAMPLE
XYZ Limited bought inputs worth $6,000 and its sales are $8,000 in a month. The VAT rate is 15%.
Compute the input tax credit/set-off and calculation of VAT.
ANSWER
Item Amount VAT Tax

Inputs 12,000 15% 1,800
Sales (output) 8,000 15% 1,200
Input tax credit 600
The input tax credit will be given to registered operators for purchase of inputs/supplies meant for
producing taxable supplies, whether the goods are sold in or outside Zimbabwe. Tax paid on inputs
procured from other countries (imports) will also be eligible for credit.
However, VAT input tax on goods and services for private use are not allowed as a deduction for VAT
paid. No input tax is claimed on items which are ordinarily not entered as trades e.g. salaries and wages
paid under an employment relation and goods or services acquired from a VAT exempt entity e.g. banks,
insurance companies, churches etc.
The standard rate for VAT is 15% (15/115 where the supply is VAT inclusive). For other supplies, i.e.
“zero rated supplies”, the rate is 0%. The 15/115 (3/23) is referred to as the tax fraction.
2.1Output tax and input tax
Fast forward
322

lOMoARcPSD|3494582
VAT is chargeable on taxable supplies made by a taxable person in the course or furtherance of any
business carried on by him. The supply must be for goods or services and must be for a consideration.
2.1.1 Output tax
This is the tax which is levied when an operator supplies goods and services in the course of conducting
any trade. This tax charged to customers.
2.1.2 Input tax
The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the
concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the
amount of input tax by a registered dealer against the amount of his output tax.
Input tax is the tax incurred by the registered operator on the acquisition of any goods or services. The
input tax is only deducted by a registered operator if goods or services were acquired for the purposes of
making taxable supplies. The following are some of the conditions that must also be satisfied:
 The supplier must have charged VAT on the supply and must issue a valid tax invoice to his
customer.
 The operator must have paid VAT on the importation of goods and is in possession of a bill of entry
as required.
 Where goods or services were acquired partly for taxable supplies and partly for some other
purpose, input tax may be apportioned. Furthermore, the amount of input tax claimable in any tax
period will depend on whether the registered operator is registered on the invoice or the payments
basis.
If raw material or other goods have been purchased and have been utilized in manufacturing, processing
or packing of the product which is exempt from VAT, no VAT credit shall be allowed for such input
tax.
3 Taxable and non-taxable supplies
Fast forward
A taxable supply is a supply of goods or services sold within Zimbabwe other than an exempt supply. A
non-taxable is supply which is not chargeable to VAT e.g. exempt supplies and non-trade activities.
3.1 Introduction
All VAT transactions are classified as being taxable or exempt. Taxable supplies are standard rated supplies
or zero-rated supplies. Generally, every supply is taxable at the standard rate, unless specially exempted or
taxed at zero percent (zero rated). The standard rate is 15%. A VAT inclusive standard rate is (3/23).
Zero-rated supplies are taxable at 0%.
3.2 Zero-rated supplies
Zero rated supplies are supplies on which output tax is charged at 0%. A supplier of zero rated items must
register as an operator if he meets the registration threshold. The operator is entitled to claim input tax
incurred by him on goods or services used to produce zero rated supplies. The operator will be required to
keep and retain documentary evidence acceptable to the Commissioner to support the zero rating.
323

lOMoARcPSD|3494582
3.3 Exempt Supplies

Exempt supplies are supplies on which output tax is not charged. A person who makes exempt supplies has
no obligation to register for VAT. Any VAT incurred by him on his purchases is non-refundable. The
following are some of the examples of exempt supplies. Thus, suppliers of exempt goods and/ services are
not entitled to refund of input tax.
4. Types of Zero-rated supplies
The following are some of the supplies which are zero-rated:
4.1 Certain basic food stuff
Supply of food for human consumption is zero-rated, excluding those supplied for immediate consumption
e.g. by hotels, restaurants or take-always. All luxury items of food (e.g. crisps, peanuts, chocolate covered
biscuits) are not zero-rated, but standard rated.
4.2Agricultural goods or farm produce
Supply of agricultural goods and farm produce generally are zero rated. The zero rating applies to all sales
along the distribution chain, but not to goods supplied in the course of carrying out any agreement for the
furnishing or serving of any meal, refreshments, cooked or prepared food or drink for immediate
consumption.
4.3Exported movable goods
Movable goods that are supplied under a sale agreement or installment agreement are charged at zero rates,
provided that they are sold to an export country or having exported. The goods must be consigned or
delivered by the registered operator to the recipient at an address in an export country or removed from
Zimbabwe by the recipient, who is not a resident of Zimbabwe.
4.4Goods supplied in course of repair or renovation
The supply of goods (spares or consumables) in the course of repairing, renovating, and modifying,
reconditioning, maintenance, cleaning or treating a foreign going aircraft or to goods temporarily imported
into Zimbabwe is zero rated. The spare parts must be wrought into, affixed to, attached to or otherwise from
part of those other goods or being consumable goods.
4.5Sales of business as a going concern
An operator selling his enterprise or a part of an enterprise (capable of separate identification) as a going
concern to another registered operator may be taxed at 0% on the supply values. The disposal of part of the
enterprise must represent the disposal of at least 51 percent of the trade. In order to get zero rating, both the
seller and the buyer must be registered operators at the time of concluding the sale agreement.
4.6 Services rendered to non-residents

Services of arranging for the supply of goods for use or consumption in any foreign going aircraft and in
accordance with an export incentive scheme is zero rated.
5. Exempt Supplies
324

lOMoARcPSD|3494582
Fast Forward
Exempt supplies are supplies on which output tax is not charged. Suppliers of exempt goods and/ services
are not entitled to refund of input tax.
5.1Financial services
Services offered by banks, building societies, life insurance and issuance of finance securities. The
exchange of banknotes or foreign currency, except when used as collectors ‘items, is an exempt supply. The
provision of any deposit, loan or credit, any guarantee, indemnity, security or bond against a deposit is an
exempt supply. The issue or transfer of any share in company or interest in a private business corporation is
an exempt supply.
Exceptions
 A supply to the Reserve Bank or a registered bank of gold in the form of bars, blank coins, ingots,
buttons, wire, plate or granules or in solution, which has not undergone any manufacturing or
refining.
 The goods are gold coins supplied as such and which the Reserve Bank has issued in Zimbabwe or
which remain in circulation
 An agent who participates in the financial sector and is paid a commission or explicit fee must
charge VAT.
5.2Residential accommodation
The letting and hiring of residential accommodation, i.e. houses, flats, simplexes and duplexes, etc. is an
exempt supply. This also includes supply accommodation to employees by employers only during the term
of the employment contract.
5.3Association not for gain
The supply by an association not for gain of any donated goods or services, or goods manufactured by the
association if the materials for manufacturing consist of 80% or more in terms of value of donated material.
5.4Passenger transport
Transportation of passengers and their belonging by road or rail, whether by taxi, train, bus or commuter
omnibuses, including transportation of tourists is an exempt supply. The supply should be within
Zimbabwe.
5.5Education
The supply of educational services by an institution registered under The Ministry of Education or Higher
Education. For example educational or training services by a pre-school, a primary or secondary school, a
university or technical institution or for the education of physical and mentally hand capped persons.
Exceptions
 The provision of sporting facilities to third parties other than to other institutions registered under
The Ministry of Education or Higher Education
325

lOMoARcPSD|3494582
 The provision of accommodation to other students, other than to students of other institutions
registered under Ministry of education or higher education
 The provision of hostel or canteen services by independent contractors to students of other

institution registered under The Ministry of Education or Higher Education.
 Services provided by the institution to third parties (not its students)
5.6Medical services
The supply of any medical services by any individual or institution, including the provision of ancillary
medical services such as the provision of blood transfusion, the provision of food in a hospital, the
supply of syringes, bandages, the transportation of patients by ambulance for a fee.
5.7Other exempt supplies
 Water supplied through a pipe for domestic use;

 Supply of domestic electricity
 Rates charged by a local authority
 Fuel and fuel products
 Supply of all tobacco
 Commission charges on tobacco sales at auction floors
6. Detailed example
Tuck’s Corner is a grocery shop and was registered as a VAT operator on 1 May 2014. Its details for the
2 months July and August 2014 are as follows:
Grocery store 80,000

Grocery store returns (8 000)
72,000
Cost of sales
Grocery store – standard rated supplies 20,000
Grocery store – zero-rated supplies 6,000 26,000
Gross profit 46,000
Overheads for the year

Rent 13,500
Communication expenses 6,500
Staff costs 7,000
Transport expenses 3,500
Depreciation 2,000
Marketing expenses 2,000 44,000
Net profit 2,000
Calculate Tuck Corner’s VAT payable for the 2- months July and August.
ANSWER
Amount Rate VAT VAT
Output tax
Grocery store 80,000 15% 12,000
Grocery store returns (8,000) 15% (1,200)
326

lOMoARcPSD|3494582
10,800
Less Input tax
Rent 13,500 15% 2,025
Communication expenses 6,500 15% 975
Printing and stationery 3,000 15% 450
Staff costs 7,000 exempt -
Repairs and maintenance 6,500 15% 975
Transport expenses 3,500 15% 525
Depreciation 2,000 no cashflow -
Marketing expenses 2,000 15% 300 5,250
VAT payable/ (refund) 5,550
7. Registration
Fast forward
A trader becomes liable to register for VAT if the value of taxable supplies in any past period up to 12
months exceeds $60,000 or if there are reasonable grounds for believing that the value of the taxable
supplies will exceed $60,000 in the next 12 months. A trader may also register voluntarily.
7.1Compulsory registration
7.1.1 Historical test
At the end of every month a trader must calculate his cumulative turnover of taxable supplies for the
previous 12 months to date. A “trader” must register as a VAT registered operator once his cumulative
turnover in the previous 12 months exceeds $60,000 per annum (exceeds $5,000 per month). If the taxable
supplies exceed $240,000 p.a, the registered is required to fiscalise. Taxable supplies are the total of
standard rated supplies and zero rated supplies, but not exempt supplies.
The trader must notify Zimra within 30 days of expecting to meet the threshold. Zimra will then register the
trader with effect from the 1 st day of the month following that of notification, provided that all particulars
and documentation as required by ZIMRA are supplied. Notification of liability to register must be made on
form VAT 1. Simply writing to, or telephoning, a local VAT office is not enough. On registration the VAT
office will send the trader a certificate of registration.
EXAMPLE
Fred started to trade cutlery on 1 January 2014. Sales (excluding VAT) were $6,000 a month for the first
nine months and $8,000 a month thereafter.
From what date should Fred be registered for VAT?
ANSWER
Sales to 30September 2014 54,000

Sales to 31October 2014 62,000 (exceeds $60,000)
Fred must notify his liability to register by 30 November 2014 and will be registered from 1 December
2014 or from an agreed earlier date.
7.1.2 Future test
327

lOMoARcPSD|3494582
A person is also liable to register at any time if there are reasonable grounds for believing that his
cumulative taxable supplies (excluding VAT) in the next 12 months is expected to exceed $60,000 per
annum ($5,000 per month). The trader must notify Zimra within 30 days of expecting to meet the
threshold. Zimra will then register the trader with effect from the 1 st day of the month following that of
notification, provided that all particulars and documentation as required by ZIMRA as supplied.
7.1.3 Other registration issues
Registration is not required in respect of services rendered by an employee to his employer in the course of
his employment, private recreational pursuits or hobbies of any person, suppliers of exempt supplies and
private occasional transaction, e.g. sale of domestic or personal effects.
For purposes of determining the threshold, exempt supplies, the sale of capital assets which have been
used in the business and abnormal sale of stock are ignored. However, zero-rated supplies are
considered.
EXAMPLE
Kimberly (Pvt) Limited’s sales for the period of 12 months ending on December 2014 were as follows:
Standard rated sales 30,000
Sale of out-dated machinery 12,000
Exports to South Africa 15,000
Exempt supplies made 14 000
State whether Kimberly (Pvt) Limited is liable for registration.
ANSWER
Kimberly (Pvt) Limited is not required to register for VAT as the total value of taxable supplies
(standard and zero rated- exports to South Africa) do not exceed $60 000. The sale of the out-dated
machinery and exempt supplies need not be taken into account, when determining registration threshold.
However, once registered, disposal of moveable asset will attract VAT.
Any person who has become liable for registration must apply not later than 30 days after such a person
has become liable to register for the first time and furnish all particulars as required by the
Commissioner.
A non-resident taxpayer will need to appoint a representative registered operator for purposes of
registration and representing him on VAT issues.
7.1.4 Consequences of failing to register
Fast forward
Zimra can backdate the registration and can call upon the person to pay output tax he was supposed to have
paid from the effective date of registration.
A person who fails to register when required to do so may be registered by Zimra with effect from the day
he was due to be registered. He will then become liable to pay output tax he should have collected from
customers from that date. In addition, interest and penalty will become chargeable on the output tax he
should have collected from the date of effective registration to-date.
328

lOMoARcPSD|3494582
7.1.5 Notify change of status
The registered operator is obliged to notify the Commissioner, within twenty-one days, of any change
in the following business details:-
 Name , address, constitution or nature of the principal trade(s) of that registered operator
 Physical business address and trading name
 Accounting basis
 Tax category if the registered operator qualifies to be in Category C
The notification must be made in writing.
7.2Voluntary registration
A person who has less than a sales threshold of $60,000 in any period of 12 months may apply to Zimra
for voluntary registration and may be registered subject to the Commissioner’s discretion.
7.2.1 Introduction
A person may volunteer to register despite his turnover being less than $60,000. To do this he may apply
to the Commissioner for voluntary registration. The Commissioner must be satisfied that the person
intends to carry on any trade from a specified date. This is to cater for longer term projects (e.g. mining
ventures) that may only commence making taxable supplies at a date beyond the 12 months for
compulsory VAT registration.
ZIMRA has the capacity to back date registration to the date when you should have effectively
registered. In such an instance you would likely be made to account to ZIMRA for the output tax not
charged. Also, it is unlikely he will accept your claim for input prior to formal registration.
The following conditions must be met for the voluntary registered to be accepted by the Commissioner:
 Is carrying on any trade or intends to carry on any trade from a specified date, and
 has a fixed place of abode or business, and
 keeps proper accounting records, and
 has opened a banking account with any bank or similar institution and
 if the person was previously registered for Sales Tax purposes and has not failed to perform
the prescribed duties under the Repealed Act.
If any of the above conditions is not met, the Commissioner may refuse registration and will notify the
person in writing.
7.2.2 Merits and demerits of voluntary registration
Voluntary registration is advantageous where a trader wishes to recover input tax on purchases. It also
serves the person of the hassle of having to monitor turnover and possibility of a late registration penalty, as
the business grows. Registration also allows the person to participate in government tenders, which are
usually offered to registered operators. For a registered operator who deals with other registered operators,
a recovery of input tax is simply an advantage and it makes no difference charging output tax.
The charging of output tax to unregistered customers may not always outweigh the advantage of recovering
input tax. For example, a person may have his main expense in the form of salaries and wages, which he
cannot claim input tax on. Where the customers cannot recover input tax, VAT registration may result in
loss of income. Unregistered traders would prefer to buy from other unregistered operators, because of
pricing. VAT registration also comes with its administrative costs and exposure to penalties.
8. Pre-registration VAT
329

lOMoARcPSD|3494582
Fast forward
An operator is entitled to claim VAT charged on trading stock and consumables on hand at the date he is
registered for VAT purposes (date he become a registered operator).
8.1 Pre-incorporation
A company, being a registered operator, shall be entitled to claim a refund of tax paid on acquisition of
goods or services for or on behalf of that company or in connection with the incorporation of that
company, if the expenditure was incurred by a person who:
 was reimbursed by the company for the whole amount of the consideration paid for the goods or
services, and
 acquired those goods or services wholly for the purpose of a trade to be carried on by the company
The claim is denied where:
 The supply of those goods or services by that person to the company is a taxable supply, or is a
supply of second-hand goods not being a taxable supply; or
 Those goods or services were so acquired more than six months prior to the date of incorporation of
the company; or
 The company does not hold sufficient records to establish the particulars relating to the deduction to
be made.
8.2 Pre-registration VAT
A person shall be entitled to claim VAT input tax if he is a registered operator, but is not allowed to
claim VAT on purchases made before registration. However, input tax on trading stock and
consumables purchased by a person prior to registration and which is on hand on date of
registration shall be claimed. The claim is made once the person becomes a registered operator.
Stock take is required and properly prepared stock list must be retained. Where no proper stock take is
done, the Commissioner may agree on the amount to be claimed over six months or any other shorter
period the Commissioner may allow. The registered operator must levy VAT output tax when on
subsequent sale of the stock.
9. Deregistration
VAT registration can be cancelled on discontinuance of business, or disposal of business or death of the
dealer or an annual turnover falling below the specified limit or in the case of a voluntary registration,
when the operator violates the provisions of VAT Act
9.1Introduction
A person may be deregistered if Zimra is satisfied that the value of his taxable supplies (net of
VAT and excluding supplies of capital assets) in the following one year period will not exceed
330

lOMoARcPSD|3494582
$60,000. Zimra will cancel the person's registration from the date the request is made or from an agreed
later date.
A trader may also be deregistered if Zimra is satisfied that he is no longer making nor intending to
make taxable supplies. The Commissioner may effect such cancellation from the last day of the tax
period or from such other date as he may consider.
Once an operator has ceased to carry on trade and with no intention to recommence business
within the next 12 months, he must notify the Commissioner in writing within 21 days of the date of
such cessation so that he may be deregistered. The notification must state date of such cessation.
A person who registered under voluntary registration shall be deregistered should he fail to comply with
the conditions of voluntary registration. The Commissioner shall notify the person of his decision to de-
register him in writing.
An operator may apply for cancellation of registration if the value of taxable supplies falls below $60,000
in any consecutive period of 12months.
An operator must deregister if he never actually commenced trade or will not commence trade in the next
12 months.
.
Deregistration will normally take place the last day of the operator’s tax period. However, the
Commissioner can refuse to deregister an operator who has outstanding VAT liabilities. He may also
refuse to deregister an operator if he has reasons to believe that the operator will recommence business
within 12 months of ceasing to trade.
9.2 The consequences of deregistration

VAT is chargeable on all goods and services on hand at the date of deregistration. On deregistration,
VAT is chargeable on all stocks and capital assets on which input tax was claimed, since the registered
trader is in effect making a taxable supply to himself as a newly unregistered trader.
Upon being deregistered, you must surrender the registration certificate. You will be required to pay output
tax on inventory and any other assets you were using in your business. The assets should have been used to
produce taxable supplies and input tax on such assets must been claimed. However, assets like PMVs are
excluded because they do not qualify for input tax refund in the first place. The tax is computed on the
lesser of cost inclusive of tax and the open market value of the asset.
Any registered operator who ceases to be one shall be required to fulfil all his obligations and liabilities
under this Act. If the operator was required to do anything or omitted to do anything provided in this Act
he shall be required to do that even after cancellation of registration.
10. Tax periods
Operators are required to submit returns and account for VAT on a regular interval known as tax period.
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.
All registered operators are required to submit returns and account for VAT to Zimbabwe Revenue
Authority at regular intervals. These intervals are called tax periods. A registered operator’s first tax
period will commence on the date of registration as a registered operator.
There are four categories of tax periods, category A, B, C and D. Under categories A and B, returns are
submitted bi-monthly , whereas Category C is a monthly tax period and Category D is any other period as
may be approved by the Commissioner.
331

lOMoARcPSD|3494582
Category A and B
Category A–Registered operators in this category must submit returns for each of the two monthly periods
ending on the last day of: January, March, May, July, September and November.
Category B – Operators in this category must submit returns for each of the two monthly periods on the last
day of: February, April, June, August, October and December.
EXAMPLE
TryAgain (Pvt) Limited, a sawmill operator, is a registered VAT operator under category B. The following
are its details for the period January/February 2013.
Invoices issued 30,000

Cash received from sales 15,000
Sale of old computer 2,000
Purchases of wood 15,000
Purchases of computers 6,000
Petrol costs 2,000
Van repairs 1,200
All above items are VAT inclusive of VAT. Prepare the VAT return for January/February 2013.
ANSWER
Amount Rate VAT VAT
Invoices issued 30,000 3/23 3,913
Cash received from sales 15,000 3/23 1,957
Sale of old computer 2,000 3/23 261
6,131
Less input tax
Purchases of wood 15,000 3/23 1,957
Purchases of computers 6,000 3/23 983
Petrol costs 2,000 exempt
Van repairs 1,200 3/23 157 3,097
VAT payable/ (refundable) 3,034
Category C
Operators in this category must submit one return every month. Every operator with a turnover (excluding
VAT) amounting to US$240,000 p.a is supposed to be in this category. The category is also granted upon
the application to the Commissioner by the operator. An operator who has repeatedly defaulted in
performing any of his obligations as a registered operator is also likely to be placed in this category.
Category D
Certain registered operators carrying on seasonal activities may apply for this tax period. These include:
 Any registered operator whose trades consists solely of farming activities
 Any registered operator who is separately registered trade, branch or division consists solely of farming
activities provided that any other trades, branches or divisions carried on by that registered operator do
not consist of farming activities.
 Any trade, branch or division of an association not for gain, which is treated as a separate person for
registration purposes and whose activities consists solely of farming activities provided that any other
trades, branches or division of such association not for gain do not consist of farming activities.
332

lOMoARcPSD|3494582
The total turnover (excluding VAT) of such registered operator, form all farming activities does not exceed
or is not likely to exceed $120,000 p.a
The registered operator may not have been allocated a one month tax period (Category C);
The category will end on the last day of such other months as approved by the Commissioner
Chapter roundup
 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%. Suppliers of zero rated goods or
services are entitled to claim input tax.
 Exempt supplies are supplies on which output tax is not charged. Suppliers of exempt goods and/
services are not entitled to refund of input tax.
 A trader becomes liable to register for VAT if the value of taxable supplies in any past period up to 12
months exceeds $60,000 or if there are reasonable grounds for believing that the value of the taxable
supplies will exceed $60,000 in the next 12 months. A trader may also register voluntarily.
 Zimra can backdate the registration and can call upon the person to pay output tax he was supposed to
have paid from the effective date of registration.
 A person who has less than sales threshold of $60,000 in any period of 12 months may apply to Zimra
for voluntary registration and may be registered subject to the Commissioner’s discretion
 A person who has less than a sales threshold of $60,000 in any period of 12 months may apply to
Zimra for voluntary registration and may be registered subject to the Commissioner’s discretion
 An operator is entitled to claim VAT charged on trading stock and consumables on hand at the date he
is registered for VAT purposes (date he become a registered operator).
 VAT registration can be cancelled on discontinuance of business, or disposal of business or death of the
dealer or an annual turnover falling below the specified limit or in the case of a voluntary registration,
when the operator violates the provisions of VAT Act.
 Operators are required to submit returns and account for VAT on a regular interval known as tax
period.
 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.
Exam Bank
Q15 Exam 20 30 mins
333

lOMoARcPSD|3494582
VAT further aspects
19
F3(a)
1 Accounting and administration of VAT
2 Time of supply F3(b)
3 Value of supply F3(d)

4 Invoices F3(c)
5 Non-deductible input tax F3(e)

6 Bad debts and other adjustments F3(f)
7 Default penalty and interest F3(g)
Introduction
The previous chapter introduced VAT. We described the scope of VAT, dealt with the various types of
supplies, registration and deregistration processes, tax periods and the claiming of pre-registration VAT.
In this chapter we deal with further aspects of VAT. First we explain how the VAT is accounted for and
administered. Next we look at the tax point for levying VAT on transactions. The definition of “tax point”
is crucial because it defines the timing for accounting of VAT. Related to the timing of supply is the value
of supply. The value of supply defines the amount to be used for purposes of computing VAT.
Documentation is also important, without which no VAT input tax can be claimed. We therefore look at the
key features required of a valid invoice.
A registered operator is entitled to claim VAT input tax, as long as it relates to goods and services used to
produce taxable supplies. Certain goods and services are said not to be used in the production of taxable
supplies and VAT input tax incurred on them is non-deductible.
Finally we deal with VAT on bad debts and fringe benefits.
In the next chapter we deal with the obligations of taxpayers/and or agents.
334

lOMoARcPSD|3494582
Study guide
Intellectual
level
F3 The computation of VAT liabilities
(a) Explain how VAT is accounted for and administered. 2
(b) Recognise the tax point when goods or services are supplied. 2
(c ) List the information that must be given on a VAT invoice. 1
(d) Explain and apply the principles regarding the valuation of supplies 2
(e) Recognise the circumstances in which input VAT is non-deductible 2
(f ) Compute the relief that is available for impairment losses on trade debts. 2
(g) Explain the circumstances in which the default penalty interest will be applied. 1
Exam guide
VAT is examined in question 5 as a full question carrying at least 15% of the marks in the exam. It may
however be examined in some parts of the exam. Some of the common examinable items include
registration requirements and the consequences of failing to register when required to do so, the
computation of VAT payable or refund (this will include computation of VAT on employee benefits e.g.
motoring benefits), stating the expenses which are denied claim of input tax etc. Do not overlook pre-
registration input VAT. You may be required to calculate the VAT due for a return period. You must watch
out for non-deductible input tax and reversing output tax on bad debts.
1 Accounting and administration of VAT
VAT is accounted for using the accrual or cash basis. The accrual basis is based on invoicing, while the
cash basis is based on actual cash outflow or inflow.
VAT can be accounted for using either the accrual or the cash basis. An accrual basis is also referred to as
an invoice-basis. All operators are required to account for VAT on invoice basis. However, where a
taxpayer has made an application and has been approved by the Commissioner, the “payments basis” or
“cash basis” of accounting can be used.
1.1 Invoice basis- accrual basis
Under the invoice basis, VAT is accounted for when an invoice is issued or when a payment is made,
whichever occurs first. This rule applies to the accounting of both VAT output tax and input tax.
The advantages and disadvantages of the invoice basis over the cash basis are as follows:
Advantages:
 Operator can claim VAT incurred on purchases prior to payment or settlement of the bill.
 Fewer adjustments required when reconciling VAT returns against the income tax return.
 VAT is accounted for on the value per invoice despite that invoice being settled in multiple payments.
335

lOMoARcPSD|3494582
Disadvantages
 Account for VAT on sales prior to receiving payment from debtors

 List of debtors and creditors must be retained at the end of each tax period
 Can lead to cash flow problems
EXAMPLE
A Manufacturer (RO) sold goods to Distributor (RO) for $20,000. The Distributor sold the goods to the
Wholesaler (RO) for $24,000. The Wholesaler sold the goods to the Retailer (Registered Dealer) for
$30,000. The Retailer sold the goods to the final consumer for $40,000.
Compute VAT liability under Invoice method. State why this method is preferable by the government?
ANSWER
Particulars Output Tax` Input Tax Net Tax`

Manufacturer sells to the distributor $20,000 x 15% 3,000 -- 3,000
Distributor sells to wholesaler $24,000 x 15% 3,600 3,000 600
Wholesaler sells to a retailer $30,000 x 15% 4,500 3,600 900
Retailer sells to consumer $40,000 x 15% 6,000 4,500 1,500
Total 17,100 9,250 6,000
This method is preferable as the tax is charged at each stage of sales on the entire sales value and the tax
paid at the earlier stage is allowed as set off. This method ensures payment of tax at the earlier stage.
1.2 Cash basis –payment basis
Under the cash basis, VAT is accounted for when a payment is made or received for the supply . The
method is currently available to public authorities, local authorities and associations not operating for gain
only. An application must be made in writing to the Commissioner to be granted this basis.
Cash basis is an appropriate basis for operators offering customers a more extended credit period than what
they get from their suppliers. The disadvantage of this method is that it is administratively expensive. The
VAT is computed on every payment received or paid even if they related to one invoice. In addition, input
tax can only be claimed once payment is made.
EXAMPLE
Calculate the VAT payable/ (refundable) under the accrual basis and cash for XZY a registered operator.
XZY made $50,000 sales, $28,000 of which was credit sales. The purchases figures amounted to $30,000,
of which $20,000 were cash purchases. Amounts are inclusive of VAT.
ANSWER
Invoice basis Payment basis
Sales ($50, 000 x 15/115 & $22,000 x 15/115) 6,522 2,870
Purchases ($30,000 x 15/115 & $20,000 x15/115) 3,913 2,609
VAT payable/ (refundable) 2,609 261
1.3 Changing the basis
Where a registered operator moves from one basis to the other, VAT adjustments are required. Adjustments
are required to eliminate double claim or charge of VAT embedded in debtors and creditors.
336

lOMoARcPSD|3494582
The adjustments may either lead to an additional amount of tax being payable by the registered operator, or
an amount being refundable by the Commissioner. A registered operator is required to submit a list of all
outstanding debtors and creditors to the Commissioner.
1.4Time of supply
Fast forward
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.
VAT accrues by reference to a specific date:
• Invoice date or date when any payment is made, whichever is earlier, or

• Date of delivery/removal (connected persons) if no invoice is issued, or
• Date of agreement (fixed property) where no transfer or payment has been made, or
• When the token or coin is taken/inserted from/into the machine
Linked to the accounting basis is the tax point (time of supply). The tax point is the rule that determines the
timing for accounting of VAT. The ‘time of supply’ determines the tax period in which a transaction must
fall into. A mistake regarding the tax point of a transaction can lead to accounting for output tax late or
input early, which can lead to a penalty and interest charges.
The general rule of the time of supply is the earlier of an invoice being issued or the time any
payment is received for the supply. If the time of supply cannot be ascertained VAT cannot be accounted
for.
With regard to certain types of transactions, as follows, specific time rules which override the general
rule exist:
1.4.1 Connected parties
Goods are supplied between related parties when they are made available to the customer. On the other
hand, services are supplied to a related party when they are ‘performed’ (i.e. completed). If a supplier
receives a payment in respect of the supply, or raises a tax invoice before this, then the tax point is brought
forward to the earliest of the three dates i.e the earliest of date goods are made available to the customer or
the date services are rendered, the date of invoice or the date of payment.
A part payment in advance will trigger a tax point for that part of the supply and the balance is charged to
VAT according to the basic tax point.
EXAMPLE
NPQ a Category 'A' registered operator sold its 60 KVA generator to its subsidiary, ACE Ltd, on 1 October
2013 for $25,000. ACE Limited collected the generator on 15 October 2013, was issued with the invoice
on 2 December 2013 and paid in full for the supply on 16 December 2013.
What is the time of supply of the generator for purposes of accounting for VAT?
ANSWER
The time of supply between related parties is the time the good is made available (delivered) to the
customer, unless the payment or invoice for the supply occurs first.
337

lOMoARcPSD|3494582
Since the payment was not received and no invoice was issued by 30 November 2013 (the last day of the
tax period for ACE Limited), the tax point is the day the generator was removed. NPQ must account for
the supply in its October –November return.
1.4.2 Successive supply
The tax point for any agreement which provides for periodic payment (supply shall be deemed to be made
for each successive parts of the period of the agreement) is the date the payment is due or the date of
payment, whichever comes first.
1.4.3 Rental credit agreement
The tax point for any rental agreement which provides for periodic payment (supply shall be deemed to be
made for successive parts of the period of the agreement) is the date the payment is due or date of payment,
whichever comes first.
1.4.4 Coin operated machines
A coin operated machine includes Zimbabwe boxes, mini soccer machines fruit machines, etc. For the
recipient, the time of supply is deemed to be the time the coin is inserted in the machine and for the
supplier, the time of supply is the time when the coins are removed from the machine.
1.4.5 Construction contracts
Where goods or services are supplied under a construction, repair, manufacture, improvement, assembly,
erection contract etc., which provides for the consideration to become due and payable in installments
periodically in relation to the progressive nature of the work, the tax point is the date of payment or of the
invoice for each successive supply, whichever comes first. Under a construction contract, the contractor is
paid as and when an architects’ certificate is issued as each stage of the contract is completed, it is this
certification that triggers the tax point.
EXAMPLE
RSE Contractors, a registered operator under Category C tax period is building a hotel for a total contract
price of $5, 600,000 (VAT inclusive). The agreement provides for progress payments to be made over a
period of 12 months. By end of 30 April 2014, the work certified as completed was 10% of the contract
value. The Contractor issued the invoice based on this certification on 30 April 2014.
What is the tax point in relation to this supply?
ANSWER
For a construction contract, goods supplied progressively, the contractor will only account for VAT based
on the stage completed and certified i.e $73,043 (15/115) x 10% $5,600,000). This must be shown as output
tax in April 2014 return.
1.4.6 Installment credit agreement
An installment credit agreement is a hire purchase or finance lease agreement. The time of supply for an
installment credit agreement occurs at the earliest of the date the goods are delivered, made available or of
receiving payment by the supplier, whichever occurs first. The full VAT liability is raised once the tax
point is triggered.
1.4.7 Fixed property
338

lOMoARcPSD|3494582
The term fixed refers to the real assets e.g. land or buildings. The supply time for fixed is the earlier of date
a registration of transfer of the property is effected in a deeds registry and the date of any payment in
respect of the consideration. Note that a “deposit’ is not considered to be “any payment” until the seller is
able to apply that payment as consideration for the supply. Similarly, where the payment is held in a trust
by an estate agent or attorney, it does not constitute payment made, as the seller cannot apply at that amount
against the outstanding debt at that time
1.4.8 Other supplies
 Lay-by- sale is the date goods are delivered and if the agreement is cancelled, the time of supply
becomes the date the agreement is cancelled.
 For a person ceasing to be a registered operator, the supply time is the date immediately before he
ceases to be an operator.
 Supply for an enterprise sold as a going concern is the earlier of the time an invoice is issued or the date
a payment of consideration is received by the supplier.
2 Value of supply
The value of supply is value on which VAT must be computed on. As a general rule, the value of a supply
is a consideration in the form of money (excluding VAT) received for the supply.
As a general rule, the value of a supply is a consideration in the form of money received, excluding
VAT. A supply not expressed in monetary terms e.g. barter or donation is valued at the open market value
of an item received or given way. A supply made for no consideration is valued at nil, unless the supply is
between connected persons.
If a supply is made between connected parties and the goods or services are supplied for a nil consideration
or for a consideration less than the one market value, valuation is as follows:
 If the recipient can claim input tax –the value of supply is the consideration,
 If the recipient cannot claim input tax- the value of supply is the open market value.
An open market value is the consideration in money that the supply of those goods or services would
generally fetch if supplied in similar circumstances on the relevant date in Zimbabwe if the supply were
freely offered and made between persons who are not connected persons.
3 Documentation
VAT input tax is claimed on valid tax invoice, without which input tax cannot be claimed.
The design of VAT with input tax credit is crucially based on documentation of tax invoice, credit note,
debit note etc. Every registered operator shall issue to the purchaser serially numbered tax invoice with the
prescribed particulars. Failure to comply with the above will attract penalty.
3.1Tax invoice
A tax invoice is the most important document in a VAT system. It forms the basis for claiming input tax.
It is mandatory for registered operators to issue the recipient with a tax invoice and it is an offence to sale
goods or services without raising a tax invoice.
A tax invoice must be issued within 30 days of the date of the supply to the recipient and only one tax
invoice should be issued for each taxable supply. In the event that the originally tax invoice is lost or
damaged, a replacement tax invoice should be made and must be clearly marked ‘copy’. A tax invoice is
not required to be issued on the total consideration for a supply, which is in money, not exceeding $10.
339

lOMoARcPSD|3494582
3.2 Features of an invoice

An invoice must have the following features to be valid:
 The words “Tax Invoice” in a prominent place,

 Name, address and VAT registration number of the supplier,
 Name, address and VAT registration number of recipient,
 Serial number and date of issue,
 Full and proper description of the goods and/or services,
 Quantity or volume of goods or services supplied,
 Price and VAT charge.
A tax invoice lacking any of the above features is a non-compliant invoice. Zimra would disallow any
claim of input tax made using a non-compliant invoice. A penalty and interest may also be raised against
the registered operator
Where it has become difficult to issue a tax invoice, and there are sufficient records available to establish
the particulars of the supply, the Commissioner may allow the registered operator not to issue a tax invoice.
A copy of VAT invoice issued by a registered operator must be retained for a period of at least 6 years after
the completion of the transaction to which it relates.
3.3 Features debit and credit notes

A debit note is issued by a supplier when the tax invoice for the supply has already been issued and the
previously agreed consideration is subsequently increased. A credit note is issued by a supplier when the
tax invoice for the supply has already been issued and the previously agreed consideration is subsequently
or when faulty goods are returned by the customer.
A debit or credit note may not be issued unless an issued tax invoice or the tax charged is incorrect or when
a VAT return in which the incorrect amount of output tax was accounted for was furnished. Like the tax
invoice, a debit or note must be tax compliant. A tax compliant debit or credit note must have the following
features:
 The words “Debit/ Credit” in a prominent place

 Name, address and VAT registration number of the supplier,
 Name, address and VAT registration number of recipient,
 Date of issue
 Tax invoice number and date to which the Debit /Credit Note relates,
 Reason for the Credit /debit Not,
It is unlawful to issue more than one credit or debit not for the amount of the excess. A replacement
debit/credit should be clearly marked ‘copy; The registered operator is not required to issue a credit note
where the adjustment in price is as a result of a discount being granted for prompt payment and the terms of
the prompt payment discount offer are clearly stated on the face of the tax invoice.
4 Claiming input tax
Registered operators can claim VAT incurred on goods or services used by them in production of taxable,
unless it’s on entertainment expenditure, supply of passenger motor vehicle, subscriptions, medical supplies
or exempt supplies
340

lOMoARcPSD|3494582
4.1Conditions for claiming input tax
Input tax is claimed on goods or services acquired by a registered operator for use in the making of taxable
supplies. The following further conditions must also be satisfied:
 The operator must be in possession of a valid tax invoice or debit note or credit note in relation to the
supply. If the tax invoice is not received within the tax period no claim can be made in that period.
You are allowed to claim the input tax within the tax period or 12 months from the date of the supply,
whichever is the longer, otherwise the claim is forfeited.
 A bill of entry or other document required in terms of the Customs Act for the importation has been
delivered and is held by the registered operator making that deduction or by his agent at the time that
any return in respect of that importation is furnished.
 Sufficient records are maintained
 An operator who gets a refund is the one who was charged and paid input tax, unless the supply was for
second hand item by a non -registered operator.
On acquisition of fiscalised electronic registers by registered operators input tax is claimed of 50%
of the cost of the device, whereas the other 50% would be granted SIA.
EXAMPLE
Sumac (Pvt) Limited, a registered operator acquired a fiscal device for $20,000. Show how this item will be
treated for tax purposes.
ANSWER
Input tax = $20,000 x 50% = $10,000

SIA = $20,000 x 50% x 25% = $2,500
4.2 Non-claimable input tax
The following are cases on which VAT input tax is non-deductible:
4.2.1 Entertainment
Input tax incurred on goods or services to be used in the production of supplies consisting of entertainment
is a denied input tax. Entertainment is a hospitality activity of any kind, e.g. provision of food, drink,
accommodation or recreational facilities, etc.
Exceptions:
 Entertainment expenditure incurred by a hospitality business e.g. hotels.

 Bona fide promotion expenditure made free of charge to business clients or customers.
 Food left over which had initially been acquired for making taxable supplies of entertainment and are
subsequently made to any employee of the registered operator, seminar food left-overs.
 Travelling and subsistence allowance given to an employee or partner away overnight on the business
of the employer or partnership which is refundable by the employer or partnership.
 Meals or refreshments supplied by operators of taxable passenger transport service (travel by air or on a
ship), provided the cost of the meal is included in the price, the ticket or entrance fee.
 Goods or services of sport, recreational facilities or public amenities acquired by a local authority or
charitable organisation for provision of entertainment to public.
4.2.2 Passenger motor vehicles
341

lOMoARcPSD|3494582
The input tax incurred by an operator on acquisition or hiring a PMV is not deductible. Refer to the
definition of a passenger motor in chapter 8.
Exceptions:
 Input tax incurred on running expenses i.e. repairs, maintenances and insurance of the PMV.
 Input tax on modification or installation costs on a PMV after it has been delivered.
 Input tax on acquisition or hiring costs on vehicles other than a PMV used to produce taxable supplies.
 Input tax incurred by a motor dealer on PMV acquired by him for demonstration purposes or for
temporary use prior to a taxable supply by such registered operator.
EXAMPLE
Smartair (Pvt) Limited bought a Nissan Double cab for use by its senior manager for $40,000. In the first
year of use of the vehicle the company incurred the following expenses
Bought a canopy $2,000

Fuel $3,200
Repairs $1,560
Insurance and licenses $320
Show the amount input tax the company is entitled to claim
ANSWER
Acquisition cost of vehicle input is non-claimable -

Canopy (modification after delivery- $2,000 x 15%) 300
Fuel (no VAT charged- supply of fuel is an exempt supply) -
Repairs ($1,560 x 15%) 234
Insurance and licenses (no VAT charged- exempt supply) 0
Total 534
4.2.3 Exempt supplies
If a supply is exempted from VAT, no VAT is charged on such a supply and the operator acquires them
without paying VAT. Therefore no claim for input tax can be made when no tax was paid or suffered.
4.2.4 Subscriptions
VAT input tax is non-claimable on any membership fees to a club, association or society of a sporting or
recreational in nature. The operator is however entitled to claim input tax incurred by him on subscriptions
for magazines, trade journal, membership of trade association or professional body, incurred in the
production of taxable supplies.
4.2.5 Medical services
Since medical societies and other benefit schemes are not registered for VAT purposes, in so far as they
provide medical benefits to their members any VAT paid by them is non-recoverable. The operator is
prohibited from claiming VAT on goods or services for use in the production of medical or dental services,
medical aid insurance services or any other services directly connected with medical services. In addition,
input tax may not be claimed in respect of any payment or request for reimbursement of expenses incurred
by members covered under the scheme in respect of medical and dental services.
4.3Input tax apportionment
342

lOMoARcPSD|3494582
A claim for input tax is granted in full on acquired or imported goods or services used, consumed or
supplied to the extent of least 90% in the course of making taxable supplies.
If on the other hand, the goods or services are used to the extent of at least 90% in the making of exempt
supplies, then the whole input tax is non-claimable. In some other cases, the VAT to be claimed is
computed using the following method, or some other basis approved by the Commissioner:
Total value of taxable supplies (excluding VAT)

Total value of all supplies (excluding)
This method is known as the turnover based method.
5 Adjustments
Fast Forward
An adjustment must be made where input tax was claimed but the goods or services are subsequently used
to produce non-taxable supplies.
5.1 Introduction
Tax adjustments are made when there is a subsequent change of events after input tax or output tax has
been accounted for. For example, goods or services which were intended to be used in producing taxable
supplies are subsequently used for something else. Another example is of price or quantity adjustments
made after the supply has been made which warrant the issue of credit/debit note or the writing off of an
amount.
We consider some of the common adjustments below:
5.2 Bad debts
An operator may claim input tax on irrecoverable debts. The input tax is computed as a tax fraction of the
debt.
The following conditions must be met before an input tax claim on irrecoverable debts can be made:
 The debt must belong to the registered operator and output tax must have been accounted for.
 The tax invoice or invoice relating to that debt must be made available.
 All reasonable steps have been taken to recover the debt without success.
EXAMPLE
MCT (Pvt) Ltd, a VAT category “A” operator sold goods amounting to $22,200 including VAT and
properly accounted for output tax on the supply. The client then paid $20,000 only and absconded. All
efforts to trace the client were fruitless and the debt became irrecoverable and was written off.
How much must he claim as input tax credit?
ANSWER
Total sales 22,200

Less amount paid 20,000
Outstanding amount / irrecoverable debt 2,200
Input tax claim 15/115 x $2,200 = $287
343

lOMoARcPSD|3494582
In addition, an operator who sold goods or services on credit and who had accounted for output tax on an
invoice basis may claim input tax an invoice or amount not settled within 12 months of the date of
supply.
The debtor on the other hand, must pay input tax on an amount not settled within 12 months of the tax
period in which the input tax in respect of such supply was claimed.
5.3 Credit notes

A supplier must make an adjustment in the VAT return when a credit note is issued. This adjustment has
the effect of increasing the input tax deduction or reducing the output tax for the tax period. The credit
note could arise as result of bulk discounts or incorrectly invoiced amounts. The credit note reduces the
suppliers’ original selling price as well as the VAT. The registered operator would have accounted for
excess output tax.
5.4 Debit notes

A registered operator may be issued with a debit note as a result of an increase in the consideration
charged for a supply. The registered operator [recipient] may make an input tax deduction for the tax on
the increased portion of the consideration, in the tax period in which the debit note is issued. `
5.5 Fringe benefits

A registered operator who grants a benefit or an advantage to an employee (including a director) in terms of
the Income Tax Act is deemed to have supplied goods or services in the course of his trade. The operator
will be required to account for output tax on such benefits.
The output tax is computed as 3/23 of the value of the benefit for the Income Tax Act purposes. In the
case of right of use of motor vehicle, the calculation is based on the engine capacity of the motor vehicle.
The output tax accounted must be based on the number of months in the tax period.
 Step 1: Determine the engine capacity of the vehicle and look out in the motoring benefit table the
annual value
 Step 2: Multiple the value obtained in step 1 by the tax period i.e 2 months for Category A and B and 1
month for Category C etc. and divide the amount by 12 months
 Step 3: Multiple the value obtained in step 2 by the tax factor (3/23).
EXAMPLE
Calculate VAT liability by Premier (Pvt) Ltd, a Category C registered operator, which availed the free use
of a Mercedes Benz E322 with an engine capacity of 3200cc to its MD on the day the vehicle was
purchased, as part of his employment package.
ANSWER
Step 1 For an engine capacity of 3200cc the annual income tax benefit is $9,600
Step 2 This is a Category C i.e 1 month tax period. Thus, $9,600 x 1/12 = $800
Step 3 $800 x 3/23 = $104
A supply is not deemed to have taken place if the goods or services in question are ordinarily
exempted or zero rated. The following are the benefits that are not chargeable to output tax.
 Provision of residential accommodation

344

lOMoARcPSD|3494582
 Provision of loans
 Provision of zero rated items, e.g. basic food i.e. bread or sugar etc.
 Provision of entertainment e.g. supply of free meals, etc.
 Motor vehicle supplied to an employee by exempt supplier e.g. educational institution
5.6 Detailed example
Sweetener (Pvt) Limited produces and retails sweets and sweets products. The company’s gross revenue
and operating expenses for the year ended 31 December 2013 were as follows:
Sales: local 130 000

Export 80,000
Raw materials purchased 52,000
Utility costs 3,800
Motor vehicle expenses 2,009
Diesel for car 8,000
Petrol for truck 1,000
Staff food stuff 6,000
Salaries and wages 20,362
Consumables 467
Communication expenses 4,300
The company’s senior managers have had free use of the following PMVs during the year:
Nissan Almeria, engine capacity 1800cc

Mercedes Benz Sedan C230, engine capacity 2300cc
Ford Ranger, engine capacity 3300cc
Calculate the potential VAT liability of Aroma for the year ended 31 December 2013.
Amount Rate VAT VAT
Output tax
Sales: local 130 000 15% 19,500
Export 80,000 0% 0
Nissan Almeria 3,600 3/23 470
Mercedes Benz Sedan C230 4,800 3/23 626
Ford Ranger 9,600 3/23 1,252
21,848
Less Input tax
Raw materials purchased 52,000 15% 7,800
Utility costs 3,800 15% 570
Motor vehicle expenses 2,009 15% 301
Diesel for car 8,000 exempt 0
Petrol for truck 1,000 exempt 0
Staff food stuff 6,000 exempt 0
Salaries and wages 20,362 exempt 0
Consumables 467 15% 70
Communication expenses 4,300 15% 645 9,386
Tax payable/ (refund) 12,462
6 Default penalty
An operator who pays tax late may be liable to 100% penalty and 10% interest p.a. Where a tax has
attempted to evade tax 200% additional tax is applicable.
345

lOMoARcPSD|3494582
If an operator pays the VAT shown on the return late, this amounts to an offence which can be penalized.
The operator will be liable for a penalty equal to 100% of the outstanding tax. Interest is also charged from
the date the VAT ought to have been paid until the date it is paid. The rate of interest is 10% p.a.
A 200% penalty (additional tax) is levied on an operator who has attempted to evade tax. Interest is also
payable in the case of late payment of additional tax which may be imposed on an operator who has
attempted to evade tax.
The Commissioner may however, waive interest or penalty if he is satisfied that the failure to pay the tax by
the operator was not due to intent to avoid or postpone liability.
7 VAT claim and refunds
Input tax that cannot be fully absorbed by the output tax is refunded to the operator. A refund can also arise
where an operator overpaid VAT for an earlier period. Note that input tax cannot be given back to the
operator under the following circumstances:
 Where a claim is made after six years from the date of the tax period in which VAT was charged
 Where the repayment would ‘unjustly enrich’ the operator.
 Where the amount being claimed is $60 or less. The amount is carried forward to the next tax period.
An operator is unjust enriched when he is refunded an amount which was not borne by him. For example,
if an operator incorrectly charges a customer VAT and the trader has collected the VAT, it would be
improper to refund this tax to the operator because he is not the one who was prejudiced.
A refund can be set off against any other taxes due by the operator to Zimra e.g. income tax, penalty,
additional VAT etc. The Commissioner must pay interest on refunds not paid within 30 days after the date
from which he received the tax return or there fund application. The interest is payable at the rate of 10%
p.a. He is not liable to pay interest if the delay has been caused by the fault of the registered operator e.g.
the delay is caused by incomplete or defective return submitted by the registered operator.
Chapter roundup
 VAT is accounted for using the accrual basis or cash basis. The accrual basis is based on invoicing,
while the cash basis is based on actual cash outflow or inflow.
 Under the invoice basis, VAT is accounted for when an invoice is issued or when a payment is made,
whichever occurs first.
 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. As a general rule, the value of a
supply is a consideration in the form of money (excluding VAT) received for the supply.
 VAT input tax is claimed on valid tax invoice, without which input tax cannot be claimed.
 Registered operators can claim VAT incurred on goods or services used by them in production of
taxable supplies, unless the goods or services have been acquired for purposes entertainment, is a
supply of passenger motor vehicle, club subscriptions, medical supplies or exempt supplies
 An adjustment must be made where input tax was claimed but the goods or services in question are
subsequently used to produce non-taxable supplies.
 An operator who pays tax late may be liable to 100% penalty and 10% interest p.a. Where a taxpayer
has attempted to evade tax 200% additional tax is applicable.
346

lOMoARcPSD|3494582
Exam Bank
Q16 Exam 16 24 mins
Exam bank
1. Kona Maombi (17 marks =25.5 mins)
Kona Maombi is first year tax student. He is requiring assistance with the following questions.
a. List the 4 situations in which an employer is subject to penalties or imprisonment in relation to pay
as you earn issues (4 marks).
b. List any 4 types of assessments that may be made by Zimra (2 marks).
c. Briefly state the right to object of the taxpayer (in terms of time) and if the taxpayer cannot reach an
agreement with the Commissioner, what is the next channel of appeal? [2 marks]
d. To whom may a person aggrieved by the outcome of an objection appeal and within what period? (2
marks)
e. What is meant by Self-Assessment? When is Self-Assessment applicable? (2 marks)
f. The Income tax stipulates that an appeal against an assessment should state the grounds of the
appeal”. With reference to the above statement, briefly explain what you understand by the term
“grounds of appeal”. (2 marks)
g. State the circumstances under which Zimra under the Income Tax Act may issue an estimated
assessment. (3 marks)
2. Prosper & Last (Pvt) Ltd (35 marks =52.5 mins)

You are Tadiwa Masikati of Prosper & Last (Pvt) Ltd. You have recently been appointed to act for Hoya
Ltd. You have had a telephone conversation with Isaac Doro, the new finance director of Hoya Ltd. He
informed you that, in the past, the company incurred a number of penalties and interest charges due to the
late payment of tax and late filing of corporation tax returns. Isaac has requested that you write to him
detailing the corporation tax obligations of the company and any consequences for failing to meet them. In
your letter to him you must state:
(a) The due dates for submitting corporation tax returns and amended returns.
(b) The due dates for the payment of corporation tax.
(c) Penalties for late submission of tax returns and how these may be avoided.
(d) Briefly explain the implications for tax not paid on the correct date.
(e) The time limits for ZIMRA to open enquiries on corporation tax returns.
(f) Briefly explain the dispute resolution procedure, pointing out the valid essentials of a valid objection (4
marks)
3. Bullock (Pvt) Ltd (16 marks = 24 mins)

Bullock (Pvt) Ltd was incorporated in 2010 as manufacturer of “plastic and metal containers” for the dairy
industry in Zimbabwe and is a retail company which is experiencing significant growth in demand of its
products. The company has complied with the Indigenisation and Empowerment Act, and is owned 21% by
Mr Maringa (a resident) and 30% Yellow (Pvt) Ltd (a local company) and 49% by Scorch (Pvt) Ltd,
foreign company.
The following are its results for the year ended 31 December 2015.
347

lOMoARcPSD|3494582
Notes $
Turnover 800,000
Less cost of sales 500,000
Gross profit 300,000
Add Other Income 1 30,000
330,000
Less Operating costs 2 220,000
Net profit before tax 110,000
Tax 30,000
Net profit after tax 80,000
Dividend paid 3 50,000
Retained income 30,000
1. Other Income
Deposit interest received (net of WHT) 5,000

Rental from a Malawian fixed property 7,000
Dividend received from a local company 10,000
Dividends received from a Irish company 8,000
2. Operating costs.
Salaries and wages 141,000

Advertising costs 50,000
Donation 20,000
Traffic fines 4,000
Staff Christmas party 2,000
Client entertainment 3,000
220,000
3. The dividend was paid out on 20 December 2015.
Required
a) Briefly explain how a dividend from Irish should be treated (2 marks).
b) State how the dividend paid to shareholders will be treated for tax purposes, show computation (6
marks)
c) Explain the basis of taxing rentals from fixed property in Zimbabwe and show how much tax is due on
rentals from Malawi property (2 marks).
d) Prepare the company’s minimum taxable income for the year ended 31 December 2015 (6 marks).
4. Tasha Guni (12 marks=18 mins)
Tasha is a computer programmer. Until 28 February 2015 she was employed by Wan Computers plc, since
then she has worked independently from home (acting in the capacity of an MD). Tasha's income for the
year ended 31 December 2015 is $60,000. All of this relates to work done for Net Computers plc. Her
expenditure for the year ended 31 December 2015 is as follows:
a. The business proportion of light, heat and telephone for Tasha's home is $880.
b. Computer consumables were purchased on 6 April 2015 for $4,000.
348

lOMoARcPSD|3494582
c. Tasha purchased a motor car on 1 January 2015 for $15,000 with engine capacity of 2200cc (capital
allowances $2,500).
d. Motor expenses for the year ended 31 December 2015 amount to $5,200, of which 40% relate to
business use of the vehicle. The other 60% relate to private mileage. The expenses were refunded by
the company.
Required:
a) List eight factors that will indicate that a worker should be treated as an employee rather than as
self-employed. (4 marks)
b) Calculate the amount of taxable trading profits if Tasha is treated as self-employed during 2015 (4
marks).
c) Calculate the amount of Tasha's taxable earnings if she is treated as an employee during 2015. (4
marks)
5. Kutenda Maluku (23 marks =34.5 mins)

Kutenda Maluku, a widow aged 56, is employed as a mental health coordinator in the Ministry of Health
and Child Welfare. In October 2015 she was involved in an accident while travelling to South Africa for
a mental health seminar. The accident has caused her to be wheelchair bound. Kutenda has approached
you for assistance in computing her taxable income for the year ended 31 December 2015.
Employment earnings and deductions for the year:
Compensation from NSSA for permanent injuries 12,000

Salary (PAYE $8,780) 28,400
Representation allowance 5 000
Housing allowance 5,600
Encashment of leave days 8 000
Bonus 7 000
Pension contributions 3,800
Medical aid contributions 2,400
Travel allowance 9,000
Subscriptions to the Spinal Injuries Association 800
Widow’s pension received 9,600
Medical shortfall 986
Kutenda had free use of a Government vehicle, a Volvo with an engine capacity of 2200cc, during the
course of the year.
Other income received:

Rental income and deductions in respect of a house being managed by a Real Estate:
Gross rent received 8 800

Estate agent’s management fees 1,200
Repairs and maintenance 850
Rates and security 190
Construction of a lock up garage and driveway 5,400
Mortgage bond repayment 6,500
Interest paid on mortgage bond 2,200
Insurance premium for the property 700
349

lOMoARcPSD|3494582
Other investment income:

Interest received from Bankers’ Acceptances with Zimbabwean Bank 4,500
Interest received from a Building Society 6 000
Dividends received from a Zimbabwean listed company (gross) 3,500
Required:
a) Identify those items of income in respect of which Kutenda Maluku’s tax liability will be satisfied
by final withholding tax and state the rate of withholding tax applicable. (3 marks)
b) Compute Kutenda Maluku’s taxable income from employment in respect of the tax year ended 31
December 2015. (12 marks)
c) State and quantify the tax credits that Kutenda Maluku can claim against the tax payable by her on
this income. (2 marks)
d) Compute Kutenda Maluku’s taxable business income in respect of the tax year ended 31 December
2015. (6 marks)
6. BabyToy (Pvt) Limited (14 marks =21 mins)

BabyToy (Pvt) Ltd manufactures toys and computer games for children. Its profit and loss account for the
year ended 31 December 2015 is as follows:
Note $000 $000
Sales 42,900
Less: Cost of sales 1 (36,753)
6,147
Add: Other income 2 40
6,187
Less: Expenses:
Remuneration 3 1,970
Professional fees 4 32
Entertainment expenses 5 66
Bad debts 6 170
Lease rental 7 16
Repairs and maintenance 8 108
Foreign exchange 9 (95)
Fines 10 18
Donations 11 336
Miscellaneous losses 12 10
Depreciation 156 (2,827)
Net profit before tax 3,360
Notes:
1. Cost of sales includes toys costing $38,000 donated to an approved orphanage on 13 September 2015.
The normal selling price was $42,000.
2. Other income is in respect of rent derived from a property in Namibia and received in Zimbabwe in
July 2015
3. Remuneration includes:
 Entertainment allowance of $3,500 paid to the managing director and the general manager.
350

lOMoARcPSD|3494582
 Employees Provident Fund (EPF) contributions of $75,500 made by the company in respect of its 10
employees.
 Cost of maintaining a holiday bungalow in Nyanga used by senior executives of the company, $45,000
4. Professional fees comprise:
Registration of the company’s new trademark 5,500

Legal fees on compensation claim by a dismissed employee 3,600
Non-trade debt collection expenses 1,700
Accounting and auditing fees 8,200
Income tax appeal (case lost) 9,000
Feasibility study for expansion of operations in Japan 4,000
32,000
5. Entertainment expenses comprise:
Entertainment of suppliers 40,000

Staff lunches and refreshments 8,000
Promotional gifts (own product i.e. computer games) 6,000
Subsidy for customer purchase* 12,000
66,000
* During the year, the company implemented a promotional campaign whereby customers are allowed to
buy an electronic toy at $1 for every computer game purchased. The actual cost to the company was $5.
6. Provision for doubtful debts (trade)
Balance as at 1 January 2015 220,000

Add: Provision for the year 40,000
Less: Amount written off (90,000)
Balance as at 31 December 2015 170,000
7. Lease rental comprises the rental paid for three motor vehicles for use by the salesmen. The salesmen
are allowed to take the cars home. The lease rentals paid were as follows:
Year 2013 2014 2015
Honda CVR 2,000 2,000 7,000

Toyota Ipsum 1,000 2,000 6,000
Nissan Sunny 2,000 6,000 3,000
Total 5,000 10,000 16,000
8. Repairs and maintenance expenses comprise:
Replacement of office glass doors 26,000

Replacement of component parts of machinery 4,000
Cleaning and repainting of factory premises 30,000
Cost of office computers 48,000
108,000
9. Foreign exchange comprises:
Realised gain on payments made to trade creditors (140,000)

Unrealised loss on trade creditors 55,000
(95,000)
10. Fines for late payment submission of VAT returns 18,000
11. During the year, Baby Toy Ltd made the following donations:
351

lOMoARcPSD|3494582
Provision of a wheel chair to a disabled employee 8,500

Sponsoring a local cultural show approved by the Minister of Youth and Sport 28,000
Cash donation to the NUST for research contribution
Approved by Higher & Tertiary Education Minister 124,000
Donation of a painting to the National Art Gallery (market value) 65,000
Cash donation to a Public Private Partnership Fund 110,500
12. During the year, Toy Ltd incurred the following miscellaneous losses:
The shareholder’s nephew who is employed as his shop assistant embezzled $3,000. The nephew
apologized for his misdeed and remained as the shop assistant.
The Managing director reported a loss of $7,000 to a snatch thief during her trip back from the bank,
having withdrawn $7,000 comprising $5,000 wages to pay her staff and $2,000 from her personal
savings for personal expenditure.
Required:
a) State, with brief explanations, whether or not the loss of cash under each of the circumstances outlined
in note 12 above are tax deductible (2 marks).
b) Compute the tax payable of BabyToy (Pvt) Ltd for the tax year ended 31 December 2015 (12 marks).
7. Crossfire Plc (19 marks =28.5 mins)

Crossfire plc. is a manufacturer of machine tools. The following information is available for the year ended
31 December 2015:
Trading profit
The tax adjusted trading profit for the year ended 31 December 2015 is $2,138,415. This figure is before
making any deductions required for:
 Interest payable
 Capital allowances.
 Any revenue expenditure that may have been debited to the company’s capital expenditure account in
error and all other items listed below.
Interest payable
During the year ended 31 December 2015 Crossfire plc. paid interest of $22,500. Interest of $3,700 was
accrued at 31 December 2015, with the corresponding accrual at 31 December 2014 being $4,200. The loan
is used for trading purposes.
The company also incurred a loan interest expense of $6,800 in respect of a loan that was used for non-
trading purposes.
Capital expenditure account

The following items of expenditure have been debited to the capital expenditure account during the year
ended 31 December 2015:
 February 2015 Purchase of a second-hand freehold office building for $378,000. This figure included
$11,000 for a ventilation system and $12,000 for a lift. Both the ventilation system and the lift are
integral to the office building. During February 2015, Crossfire plc. spent a further $97,400 on repairs.
The office building was not usable until these repairs were carried out, and this fact was represented by
a reduced purchase price.
352

lOMoARcPSD|3494582
 26 March 2015, purchase of machinery for $61,600. During March 2015 a further $7,700 was spent on
building alterations that were necessary for the installation of the machinery. The machinery will be
used no more than 16 hours a day.
 August 2015, a payment of $41,200 for the construction of a new decorative wall around the
company’s factory premises.
 27 August 2015, purchase of movable partition walls for $22,900. Crossfire PLC uses these to divide
up its open plan offices, and the partition walls are moved around on a regular basis.
 18 November 2015, purchase of Double Cab car costing $24,000. This car is used only for business
purposes.
 28 January 2015 Purchase of a computer costing $2,500. This computer has an expected working life of
5 years.
 December 2015, purchase of two motor cars each costing $17,300. One motor car is used by the factory
manager, and 60% of the mileage is for private journeys. The other motor car is used as a pool car,
mostly to transport staff.
Written down value

On 1 January 2015 the tax written down value of plant and machinery was $87,800.
Property income
Since 1 February 2015 Crossfire plc. has let out a freehold office building that is surplus to requirements.
On that date the tenant paid the company $78,800, consisting of a premium of $68,000 for the grant of a
six-year lease, and the advance payment of three months’ rent.
Interest receivable
Crossfire plc. made a loan for non-trading purposes on 1 May 2015. Loan interest of $9,800 was received
on 31 October 2015, and $3,100 was accrued at 31 December 2015.
The company also received bank interest of $2,600 during the year ended 31 December 2015. The bank
deposits are held for non-trading purposes.
Disposal of office building
On 20 February 2015 Crossfire plc. sold a freehold office building for $872,000. The office building had
been purchased on 13 June 2011 for $396,200 (including legal fees). During June 2012 the office building
was extended at a cost of $146,000, and during the same month the company spent $48,000 replacing part
of the office building roof following a fire. Crossfire plc. incurred legal fees of $28,400 in connection with
the disposal.
Quarterly instalment payments
Crossfire plc. makes quarterly instalment payments in respect of its corporation tax liability. The first three
instalment payments for the year ended 31 December 2015 totaled $398,200.
Required
a) Comment on the tax treatment of each of expenditure items (second hand freehold office building). (3
marks)
b) State how each of the items shown under “disposal of office building” would be treated for tax
purposes (4 marks).
c) Calculate Crossfire plc.’s corporation tax liability for the year ended 31 December 2015. (10 marks)
353

lOMoARcPSD|3494582
d) Calculate the final quarterly instalment payment that will have to be made by Crossfire plc. for the year
ended 31 December 2015, and state when this will be due. (2 marks)
8. Board Markers (Pty) Ltd (21 marks =31.5 mins)

Board Markers (Pty) Ltd commenced board marker manufacturing business in Zimbabwe in 2008. The
company has a 31 December tax year end. During the current year it made a net profit before tax
amounting to $456,800.
On 30 October 2015, Board Markers (Pty) Ltd acquired machinery from India for $447,000, before
customs duty and VAT, to augment the existing plant. The machine was released on 2 November 2015
from a Customs and Excise bonded warehouse. The customs duty payable thereon was $145, 800 and
VAT chargeable was $88,920. Upon settlement on 2 November 2015, Board Markers (Pty) Ltd incurred
a foreign currency exchange loss of $3,000.
In a bid to increase presence of its products in the Far East, Board Markers (Pty) Ltd incurred the
following marketing expenses (the expenses were deductible in arriving at the net profit):
Sales monitoring equipment 5,550
Advertisement in Singapore (local paper) 8,000
Participating in Indian Trade Far 56,000
Exhibiting of its goods on Japan Auction floor 23,450
Included in Board Markers (Pty) Ltd’s net profit is $6,000 loss from disposal of an Isuzu double cab
used by the company finance manager, for $28,000. The car originally cost $42,000 when purchased in
2013. On the same day, it purchased a new car for $37,000 to be used by the company’s sales manager.
The following is the breakdown of Board Markers (Pty) Ltd’s sales units by market, actual 2015 and
forecast 2016 follows:
Local Far East SADC region Total

Sales 2015 460 230 40 730
Forecast sales 2016 400 200 340 940
Following the rationalization of its operations, the finance director of Board Markers (Pty) Ltd
predicated a surge in taxable income to $746,667 in 2016 and by 2% p.a from 2016 onwards.
Board Markers (Pty) Ltd deducted the following in the computation of its net profit:
Fine for dumping defective manufactured goods 10,000

Valuation of warehouse for insurance 33,000
New manufacturing license 59,000
Advertising for share offer 1,000
Debt collection expenses 7,000
Bad debts re salary advance to deceased employee 2,000
Provision for bad debts 15,000
Voluntary annuity paid to former employee 8,000
Tax health check conducted by local accounting firm 12,000
Subscriptions for payroll and accounting packages 3,000
Board Markers (Pty) Ltd is a tax compliant taxpayer, up to 1 December 2015 it had paid provisional tax
amounting to $79,900.
354

lOMoARcPSD|3494582
Required:
a) Calculate the fourth provisional tax payment that Board Markers (Pty) Ltd has to make for the 2015
year of assessment to avoid any liability for interest and state when it should be paid (2 marks).
b) Briefly explain the income tax provisions relating to Far East expenditure stated above (3 marks).
c) Compute the provisional tax to be paid in 2016, clearly stating when the tax should be paid (4 marks).
d) Compute the taxable income and tax payable by Board Markers (Pty) Ltd for the 2015 year of
assessment (12 marks).
9. Drake Group (23 marks =34.5 mins)
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 2015. Drake
Ltd generated a profit of $105,000 for the same period. On the 29 December 2015 the board of Drake
Ltd made a resolution to rationalize 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 2014:
Acquired in the year Qualifying Cost ITV Market value

31 December
Industrial building (constructed 2013) 2,000,000 1,000,000 2,300,000

Production plant 450,000 nil 564,000
Computers 2009 15,000 nil 16,500
Commercial vehicles 2014 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 2015.
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) 22,500
Amortization 43,000
Golf club membership dues for the MD to entertain suppliers 2,000
355

lOMoARcPSD|3494582
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)
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 (10 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 (2 marks).
f. Under what other circumstances is loss resulting from theft disallowed (1 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
10. HR Consultants (15 marks=22.5 mins)
Nyasha and Nancy commenced partnership, trading as HR Consultant, on 1 June 2014. Nancy has vast
experience in HR issues having been employed by various companies as human resources practitioner
home and abroad. Nyasha is a former trade unionist and has a bachelor of administration. When they
formed the partnership it was agreed that Nyasha will take a third of the partnership profits, while Nancy
will take the remainder. For extra roles as an administrator Nyasha will be paid annual salary of $12,000,
Nancy takes no salary but enjoys unlimited use of the partnership vehicle whose cost of maintenance and
fuel to the partnership is $9,000 p.a. The vehicle, whose engine capacity is 2700 cc, is used 20% for
partnership business by Nancy.
The partnership has one employee, Miranda, who commenced employment with the partnership after
graduating from the University of Science and Technology (Nust). She joined the partnership on 2 March
2014 at annual salary of $15,000.
Owing to irreconcilable differences with Nyasha, Nancy decided to quit the partnership on 1 June 2015 and
Miranda was introduced as a new partner on that date. From 1 June 2015, the profits are apportioned
between Nyasha and Miranda as follows:
Annual salary, $ Balance, %
Nyasha 37,000 60
Miranda 34,000 40
On that date Nyasha gave up the car, when she made the decision to take a salary
The pre-capital allowances annual profits of the partnership amounted to $275,000.

Capital additions and disposals in the two-year period were as follows:
1 May 2014 IT equipment purchased 6,000

10 June 2014 Office furniture purchased 3,500
23 June 2014 Isuzu KB (for use by Miranda) purchased 45,000
356

lOMoARcPSD|3494582
17 May 2015 Ford Mondeo purchased (for Nyasha) 72,500
The Isuzu which was being used by Miranda was involved in an accident and was sold as scrape on 3
January 2015 for $38,000; the profit on its disposal amounting to $5,600 is incorporated in pre-capital
allowances profits stated above.
For purposes of determining the partners’ taxable income expenditure should be apportioned on time basis.
The following items which were incurred after 1 June 2015 have not been incorporated into the pre-capital
allowance profit stated above:
a) The partnership paid $2,000 to Nyasha as a voluntary payment on 31 July 2015

b) Partnership made contributions on behalf of the partners to a registered Provident Pension fund i.e.
$9800 for Nyasha and $8,800 for Miranda.
c) Partnership made contributions on behalf of the partners to CIMAS medical aid society i.e. $1,800 for
Nyasha and $2,050 for Miranda.
d) In October 2015 Miranda attended a trade mission in USA, which was approved by Minister of
Finance; the mission cost $8,900 and was paid for by the partnership.
e) The partnership paid $600 for Nyasha’s life policy ceded to the partnership, $780 for joint life policy
of Nyasha and Miranda, $500 for Miranda’s separate and $900 for public liability policy.
The partnership has no capital allowance policy.
Required
a. Compute partnership joint taxable income for the year of assessment ending 31 December 2015 (8
marks)
b. Compute tax payable by partners for the year ending 31 December 2015 ( 7 marks)
11. Sakurai Farm (Pvt) Limited (10 marks=15 mins)
Sakurai Farm has been farming in Mutepatepa for the last couple of years. During the current year the area
was seriously affected by drought and Sakurai Farm was forced to sale 102 livestock. Being 50 cows sold
for $15,000 and 52 oxen sold for $14,500. These figures are already incorporated in the annual net profit
figure of $60,000. On 30 December 2015 when the pastures improved the Sakura Farm purchased 30 cows,
40 tollies, 34 heifers and 16 calves, for $10,200 in order to replace those depleted by drought. The cost of
these livestock was incorporated in the profit figure stated above.
Stock on hand at the beginning of the year is as follows:
Herd Number FSV ($ each) PPV ($ each)

Heifers 200 200
Tollies 100 190
Oxen 95 180
Bulls 5 750
Cows 130 195
Calves 110 100
During the year 10 calves were born, 15 calves became heifers and 5 of them became tollies, 3 tollies
became oxen.
The ACCL of the farm is 610 livestock and the total livestock expenses for the year amounted to $60,000.
357

lOMoARcPSD|3494582
Sakurai (Pvt) Ltd claimed depreciation amounting to $5,500 in respect of the following capital expenditure
incurred during the 2015 year of assessment:
Standby power generator 6,500

Tractor 45,500
Dam 30,000
The cost of the foundation for the standby generator amounts to $500 and is not included in the cost of
$6,500. The foundation is regarded as being integrated with the generator and its useful life is limited to
that of the generator. The generator was purchased on 1 December 2015 and brought into use on 1 January
2016 once the foundation had been laid.
The dam was incomplete as at year end.
The company minimises its tax benefits:
Required:
a) Prepare a livestock reconciliation account for the year end 31 December 2015. Note, stock valuation is
not required (3 marks)
b) Calculate the taxable income by Sakurai Farm for the year ended 31 December 2015 (7 marks)
12. GAAP Poultry Group (GPG) (10 marks=15 mins)

GAAP Poultry Group (GPG) is contemplating disposing Green Farm together with the improvements
thereon for purposes of raising capital to finance group operations. Green Farm is a wholly owned
subsidiary of GPG. The group has identified a buyer who is willing to buy the assets of Green Farm (Pvt)
Ltd and the price has been agreed at $1.7 million, broken down as follows:
Asset Cost Income Tax value Market values

Farm school July 2011 100,000 8,500 150,000
Tobacco barns Feb 2011 300,000 Nil 400,000
Fencing bought April 2012 40,000 Nil 50,000
Communal dam May 2013 200,000 Nil 300,000
Farm Jan 2011 120,000 n/a 800,000
Decision to dispose is being made in 2015
Required:
a) State any tax relief available if the assets were to be sold within the group (3 marks)
b) Calculate the income tax payable by Green Farm, in the absence of any tax dispensations on the
disposal of the business assets (2 marks).
c) Calculate the Capital Gains tax payable by Green Farm, in the absence of any tax dispensations on the
disposal of the business assets (5 marks)
13. Charles Carling (15 marks=22.5 mins)

Charles Carling, a widower, aged 53, was diagnosed with a terminal illness on 24 February 2015. He
decided to prepare well for his fate and move into a retirement home at Athol Evans Hospital in Harare.
358

lOMoARcPSD|3494582
On 15 March 2015, Charles sold his entire shareholding of 30 000 shares in Cahoots Holdings, a listed
company. The shares were quoted at $45 a share on the date of sale and had been purchased as follows:
Number of shares Date purchased Total cost
15 000 23 April 2010 150,000
15 000 28 July 2011 375,000
.
Charles paid a stock brokerage commission of 1·5% on the consideration amount in connection with this
transaction.
On 31 March 2015, Charles further disposed of his 20 000 shares in Muhute Group Limited, an unquoted
company. He sold 10 000 of these shares for $100,000 and donated the other 10 000 shares to Hope Alive
children’s home for the terminally ill children. The 20 000 shares had all been purchased on 25 May 2011
for $80,000.
On 10 April 2015, Charles sold his residential house in Mabelreign, Harare for $830,000 and immediately
purchased his retirement home at Athol Evans Hospital for $500,000. The Mabelreign house had been
acquired on 19 May 2012 for $250,000 and Charles had effected improvements to the property at a cost of
$45,000 in January 2013.
Charles incurred the following expenses in connection with the disposal of the Mabelreign property:
Estate agent’s commission 43,000

Transfer fees 6,450
Required:
a) Calculate the applicable withholding tax payable by Charles on all his disposals (3 marks).
b) Calculate Charles’s capital gains tax payable/ (refundable) as a result of the disposal of the shares (5
marks).
c) Calculate the tax payable/ (refundable) by Charles in connection with the sale of his principal private
residence on the assumption that he minimises his tax liability (7 marks).
14. Lawson (Pvt) Limited (19 marks=28.5 mins)
Lawson (Pvt) Limited has two branches, in Gweru and Harare. The Gweru branch generated a profit of
$75,000 (net of deductible expenses) in the year to 31December 2015. The Harare branch generated a profit
of $105,000 for the same period. On the 29 December 2015, Lawson (Pvt) limited decided to close Gweru
Branch due to viability problems, when it opened another branch in Asipindale, Harare, and moved all the
Gweru equipment which it could not sale.
The following was extracted from the books of Gweru branch for the year of assessment 2015:
Acquired in the year Qualifying Cost ITV

31 December
Industrial building 2011 2,000,000 nil

Production plant 2011 450,000 nil
Computers 2012 15,000 3,750
Commercial vehicles 2014 120,000 90,000
Lawson (Pvt) Limited acquired a new production plant for $647,000 after disposing the existing plant for
$550,000 on 30 December 2015. Upon settlement, Lawson incurred a foreign currency exchange loss of
$3,000 which was taken to expense in the next financial year.
359

lOMoARcPSD|3494582
Lawson realised $2,900,000 from the sale of Gweru industrial building. It used $1,500,000 of the proceeds
to purchase another industrial building in Asipindale. It paid the conveyancer $190,000 for facilitating the
sale of this property.
On 2 June 2015 Harare branch’s finished goods warehouse which was acquired in 2013 at a cost of
$800,000 was destroyed by fire. The branch had the building insured against fire, accordingly on 6 October
2015 the branch received $950,000 from its insurers and is contemplating using $750,000 towards
construction of similar building, which is due to be completed by 2 January 2016.
Required:
a) Briefly explain the tax treatment of proceeds from disposal of Harare branch’s finished goods
warehouse (3 marks).
b) Compute Lawson (Pvt) Limited’s minimum income tax liability for the year ended 31 December (7
marks)
c) Compute Lawson (Pvt) Limited’s capital gains withholding tax and state when it should be remitted to
Zimra. (3 marks)
d) Compute capital gains tax payable by Lawson (Pvt) Limited, if any, taking into account the
withholding tax you computed in b) above (6 marks)
15. Mr. Shiri (15 makes= 22.5 mins)
Mr. Shiri left his employment in December 2014 to set up his own business as a computer and IT
consultant. He commenced trading in January 2015 through a limited company called Bird Computers Ltd
and he is the sole director. Mr. Shiri has provided you with the following financial information about the
company:
The company’s turnover in period January to November 2015 was as follows:
Jan $3,500 Jul $7,200
Feb $4,500 Aug $7,300
Mar $6,000 Sept $7,800
Apr $6,500 Oct $7,900
May $7,800 Nov $8,200 (estimate)
June $6,600
Mr. Shiri instructed an accountancy practice to prepare a business plan for the company and the invoice for
this was issued in December 2014 in the sum of $500 plus $75 VAT. Mr. Shiri was subsequently
reimbursed by the company. The company purchased a computer in January 2015 for $2,000 plus $300
VAT for use in the consultancy business.
Mr. Shiri advised Zimra in January 2015 that the company had commenced trading but has not registered
for VAT, believing that this will be dealt with at the end of the first years’ trading.
The company works mainly for private individuals and small businesses, which pay on completion of the
work. A couple of larger clients have requested VAT invoices. The company has therefore issued two
invoices in August showing VAT amounts of $750 and $900, although these do not show any VAT
number. The company intends to pay this VAT to Zimra once the company’s VAT position is settled.
One of these customers has advised Mr. Shiri that the company’s procedures in relation to VAT are
incorrect and Mr. Shiri has asked for a meeting with you to discuss the company’s VAT position.
Required:
a) Briefly explain how VAT incurred prior to incorporation and prior to registration is treated (4 marks)
360

lOMoARcPSD|3494582
b) State the company’s effective date of VAT registration and calculate the estimated net VAT due to 30
November 2015. (8)
c) Calculate the estimated amount of any potential penalties in relation to the failure to register for VAT,
on the assumption that the company notifies Zimra of its liability to register at the end of November
2015( 3 marks)
16. VATEX (Pvt) Ltd (16 marks=24 mins)
VATEX Ltd is a category ‘C’ VAT vendor (accounts for VAT on a monthly basis). Included in its July
2015 operations were the following transactions:
a) A machine was acquired on 10 July in terms of a suspensive sale agreement. In terms of the agreement
VATEX is required to pay a deposit of $10 000 and 60 monthly instalments of $2 000. The interest
component of the total payments is $33 100. Amounts do not include VAT.
b) A machine was leased on 10 July in terms of a finance lease. In terms of the lease a monthly rental of
$5 000 is payable for 48 months. Had VATEX purchased the asset, the cash cost would have been
$93,800.
c) In April 2014 VATEX acquired goods from Z Malaya (Pvt) Ltd for $57 000 (including VAT). Malaya
informed VATEX (in July 2015) that it is writing of its claim in respect of the debt owed to it.
d) VATEX acquired a motor car, engine capacity 3200 cc, for $39,000 on 1 July. The use of the motor car
was given to a senior employee as a fringe benefit.
e) On 1 July it acquired a racing bicycle for $2,500 and gave it to a retiring employee (a keen cyclist) as a
long service award in recognition of 35 years of service.
All the figures are stated inclusive of any applicable VAT, unless otherwise stated.
Required:
a) What is the difference between the cash basis and the invoice basis of accounting for VAT, and which
one would you recommend? (4 marks)
b) List the main accounting records which must be kept for VAT purposes by registered operators (2
marks)
c) What is the civil penalty which may be charged for failing to use a fiscalised register? (1 mark)
d) Calculate the input tax and/or output tax in respect of each of the above transactions for July 2015 (6
marks).
e) State any 3 items of expenditure which are disqualified from input tax credit (3 marks)
361

lOMoARcPSD|3494582
Answers
1. Kona Maombi
a) Situations in which employer is subject to penalties or imprisonment.
 Failure to withhold employees’ tax.

 Failure without just cause to comply with any directive issued to him by the Commissioner.
 Failure to keep any records.
 Failure to apply to the Commissioner for registration as an employer.
 Failure to notify the Commissioner of any change of his address
b) 4 types of assessment that may be made by Zimra.
 Estimated assessment
 Amended assessment
 Additional assessment
 Reduced assessment
c) Objection of the taxpayer
A taxpayer has a right to object to an assessment, decision or determination made by the Commissioner.
He however cannot object an agreed upon assessment.
If the taxpayer is no happy with the decision of the Commissioner he may appeal to the Special Income
Tax Court of Appeal in relation to income tax or capital gains tax issues and to the Fiscal Court of
Appeal for VAT, customs and excise taxes. Instead of appealing to Special Income Tax Court of
Appeal/Fiscal Court of Appeal the taxpayer may opt to appeal to the High Court.
An objection must be made within 30 days of the assessment, decision or determination of the
Commissioner.
d) Appeal
A taxpayer may appeal to the Special Income Tax Court of Appeal in relation to income tax or capital gains
tax issues and to the Fiscal Court of Appeal for VAT, customs and excise taxes. Instead of appealing to
Special Income Tax Court of Appeal/Fiscal Court of Appeal the taxpayer may opt to appeal to the High
Court. The appeal must be lodged within 21 days of the date of receiving the CG’s objection decision.
e) Self-Assessment
362

lOMoARcPSD|3494582
A self-assessment is a system where a taxpayer determines own tax liability and pay the tax according to
that assessment. A registered bank, insurance company and VAT category C operators (operators with
annual turnover of at least $240,000 per annum) must prepare and submit a self-assessment return.
f) Grounds of appeal
The term grounds of appeal mean the reasons supporting the tax appeal, which is the reference tax
legislation supporting the appeal or any relevant tax re-computations.
g) Issuing of an advance assessment.
 When a taxpayer is unable from any source to submit a return

 Where a taxpayer is about to leave the country before submitting a return
 When a taxpayer has not kept accounting records
 When the Commissioner is not happy with an assessment submitted by the taxpayer
2. Prosper & Last (Pvt) Limited
a) Date for submission of Corporation Tax returns is not prescribed in the Act as such. The
Commissioner through a public notice can call for returns and in practice they must be submitted
within 30 days of the date of notice. Generally, for persons on self-assessment (e.g. banks, insurance
and Category C VAT registered operators) returns are furnished by 30 April of the year following
that of accounts.
b) The tax is paid on quarterly basis during the year of accounts , as follows:
1st QPD due on 25 March 2013

2nd QPD due on 25 June 2013
3rd QPD due on 25 September 2013
4th QPD due on 20 December 2013
c) Failure to submit a return after a notice is issued by the Commissioner or by 30 April for that on
self-assessment or within a reasonable period result in the person being liable to a penalty of $30 a
day up to a maximum of 181 days’ penalty ($5,430). If a return remains outstanding after 181 days,
prosecution may be instituted in addition to the payment of any penalty levied
A fine equal to level 7 or 1 year in prison, or both such fine and imprisonment may also be levied.
The implications can be avoided if there is a reasonable excuse for failure to submit the returns by
the due date. If the company is unable to produce final figures for the return by the due date, it may
be possible, in exceptional cases to avoid a late filing penalty by submitting an estimated return
which is then amended when final figures are available.
d) Interest is charged on tax paid late at a rate of 10% per annum for each day tax is outstanding. The
Commissioner may however, waive payment of interest where there are justified reasons for failing
to pay tax.
e) An enquiry can be re-opened within 6 years of the issue of an assessment. During this period, the
Commissioner may reopen the assessment or call upon a taxpayer to submit further information on
his income and expenditure relating to the issued assessment. After this period, the Commissioner
can only call back an assessment, if a taxpayer has deliberately or fraudulently filed a tax return with
the intention of evading tax.
f) Dispute resolution procedure
The following is the procedure for tax appeal.
363

lOMoARcPSD|3494582
 Formally object to the Commissioner’s assessment, decision or determination within 30 days of date
of notice of assessment, decision or determination.
 The objection will be heard by the Commissioner who will then issue a determination.
 If dissatisfied, seek full rehearing from the Special Court of Tax Appeals of High Court.
 The Appeal to the Special Court of Tax Appeal or High Court must be in writing and must be
lodged within 21 days of the CG’s objection.
 If dissatisfied with the determination in the High Court or the Special Court of Tax Appeal, an
appeal can be made to the Supreme Court
 All appeals to the Supreme Court can only be made on a point which involve a question of law alone
with the leave of the High Court judge or Special Court of Tax Appeal President, on grounds of
appeal which involves a question of fact alone or a question of mixed law and fact.
 However, tax payment must be made pending tax appeal outcome.
g) An objection must have the following essentials to be valid:
 must be made in writing for review

 must state the grounds of the objection clearly
 must be made within 30 days from the date of service of notice
 must file the notice to the CG
I trust the above provide details of Hoya Limited’s income tax obligations relating to filing of returns
and paying of tax. Should you have any queries, please do not hesitate to get in touch.
3. Bullock (Pvt) Ltd

a) Dividend from an Irish Company is deemed to be from a source within Zimbabwe and is taxed at
20%
b) Dividend paid to:
 Mr Maringa a resident of Zimbabwe is subject to 15% withholding tax.

 A dividend paid to Yellow (Pvt) Ltd is exempt from withholding tax. Dividend paid by a local
company to another local company is exempt from tax
 Dividend paid to Scorch (Pvt) Ltd is subject to 15% withholding tax
c) Computation of withholding tax
Shareholder % Dividend Rate Withholding Tax

Mr Maringa 21 21% x $50 000=$10 500 15% 1,575
Yellow (Pvt) Ltd 30 30% x $50 000 =$15 000 N/A -
Scorch (Pvt) Ltd 49 49% x $50 000 =$24 500 15% 3 ,675
d) Rental income is taxed based on the place where the property is situated. Rental income from
Malawi property is not taxed in Zimbabwe since the property is not situated in Zimbabwe
e) Computation of tax payable

Net profit before tax 110 000
Less
Deposit interest received 5000
Rental from Malawi property 7000
Dividend from a local source (exempt) 10 000
Dividend from Irish Company (taxed separately) 8 000
(30 000)
Add
Salaries and wages -
Advertising cost -
364

lOMoARcPSD|3494582
Donation 20 000
Traffic fines 4 000
Staff Christmas party -
Client entertainment 3 000
27 000
Taxable income 107 000
Tax thereon @ 25.75% 27,553
4. Tasha Guni
a. Factors indicating a person is an employee:
 Entitlement to fringe benefits

 under the control of the employer
 Established starting and finishing working times
 Paid based on time worked as opposed to output
 Governed by the Labour Act
 Employer is vicariously liable for the faults of the employee
 Employee is supplied with detailed instructions and working tools
 Employee is entitled to sick leave and holiday pay
b. Tax payable as a self-employed
Gross income 60 000

Less
Light, heat and telephone 880
Computer Consumables 4 000
Capital Allowances 2 500
Motor Vehicle expenses (5 200 x 40%) 2 080 (9 460)
Tax Thereon @ 25.75% 13 014
c. Tax payable as an employee
Salary 60 000
Use of own vehicle 7,200 x 60% 4 320
Tax on $60,000 x 30% - $3,420 14 580
Add 3% Aids Levy 437
Total 15,017
Note: Assumed that the vehicle was bought by the business.
5. Kutenda Maluku
a) Incomes to be satisfied by final withholding tax
Withholding tax is final on dividend and local financial institution interest. The following are therefore
incomes that are satisfied by a final withholding tax.
 Interest received from Bankers’ Acceptances with a Zimbabwean Bank

 Interest received from a Building Society
 Dividends received from Zimbabwean listed company
The rate of withholding tax on all of the above incomes is 15%. However, where interest is received from
a fixed deposit account (a deposit with tenure of at least 90 days); the rate is reduced to 5%.
365

lOMoARcPSD|3494582
b) Computation of Kutenda Maluku’s employment and other taxable income
Compensation from NSSA (exempt) -

Salary 28,400
Representation allowance -
Housing allowance -
Leave days 8,000
Bonus 7,000
Less Bonus exemption (1,000)
Pension contribution (3,800)
Retirement annuity fund ($5,400-$3,800) (1,600)
Travel allowance (exempt) -
Subscriptions to the Spinal Injuries Association (not a professional Association) -
Widow’s pension (exempt) -
Motoring benefit (exempt) -
Loan from employment (exempt) -
Comments:
Generally Civil servants are exempted on the value of any benefit or allowances granted to them by the
State
In terms of SI 319 of 1985, representation allowances and entertainment allowances are granted to full time
employees of the state are exempted from tax.
SI 153 of 1994 exempt from tax travel allowances granted to members of public service commission and to
permanent secretaries, deputy services and other members of public service.
c) Tax credits that Kutenda can claim
 Elderly credit 900

 Disability credit 900
 Medical shortfall ($986 x 50%) 493
d) Computation of business tax liability
Gross rent 8,800

Elderly person exemption (3,000)
Estate agent’s fees (1,200)
Repairs (850)
Rates and security (190)
Mortgage bond repayment -
Interest paid on mortgage bond (2,200)
Insurance premium (700)
Wear & tear on garage and driveway ($5,400×2.5%) (135)
Taxable income 525
6. BabyToy(Pvt) Limited
a) Loss of cash
Cash embezzled of $3,000 by the shop Assistant is not deductible for two reasons. The fact that no
action was taken to either recover or dismiss the shop Assistant because of their relationship with the
366

lOMoARcPSD|3494582
shop owner are the reasons for disallowing the amount as tax deductible. Also the shop assistant still
maintains his job position with the employer.
Loss of cash by the MD is allowed. It is a risk inseparable from carrying on of trade. The amount would
have been disallowed if it occurred as result of the acts of the MD. The personal cash of the MD, also
lost in the process, would not be deducted because that is a private loss.
b) Taxable income
Net Profit per amounts 3 360,000

Rent from property (40,000)
Add Back
Donation to an approved orphanage (allowable) -
Depreciation 156,000
Entertainment allowance 3,500
Excess pension contribution (75,500- 5400x 10) 21,500
Holiday home (entertainment) 45,000
Registration of company trademark 5,500
Legal expenses- dismissed employee 0
Non-trade collection expenses 1,700
Accounting fees 0
Income tax appeal (case should be won or partial won) 9,000
Feasibility study (marketing research- double deduction) (4,000)
Entertainment of suppliers 40,000
Staff lunch and refreshments 8,000
Promotional gifts (marketing) 0
Subsidy for customer purchase (marketing) 0
Bad debts 170,000
Actual bad debts- amounts written (90,000)
Rentals: Honda CVR (11,000 - $10,000) 1,000
Rentals: Toyota Ipsum (not exceeding $10,000) 0
Rentals: Nissan Sunny ($11,000- $10,000) 1,000
Replacement of office glass doors- repairs 0
Replacement of component parts of machinery (repair) 0
Cleaning & repainting of factory premises (repair) 0
Cost of office computers (asset) 48,000
Wear & tear computers ($48,000 x 10%) (4,800)
Realised gain on creditors 0
Unrealized loss on trade creditors 55,000
Fines 18,000
Donations: provision of wheel chair 8,500
Sponsoring local cultural show 28,000
Cash donation to NUST ($124,000- $100,000) 24,000
Painting to the National Art 65,000
Public Private Partnership fund ($110, 5000- $50,000) 60,500
Shop assistant embezzlement 3,000
Loss to snatching MD (company money) 0
Loss to snatching MD (personal savings) 2,000 675,400
Taxable income 3,995,400
Tax liability @ 25.75% 1,028,816
7. Crossfire Plc
a) Treatment of cost incurred on second hand building
367

lOMoARcPSD|3494582
 A lift constitutes an article. An article includes a movable asset with an independent identity, despite
it being an integral part of a building. We believe the lift is capable of being mounted or demounted
and for this reason it cannot constitute part of the building or the building. Articles qualify for wear
& tear at the rate of 10%.
 As for the ventilation system such it lacks an independent identity to a building to which it is
attached or forms part of, hence it ceases to qualify as an article. We believe it is an item which is so
integrated into a building that it loses its own separate identity.
 An initial repair to property i.e repairs incurred on the property prior to its being used is an
improvement. The cost is capitalised to form part of the building for purposes of capital allowances.
 The aggregate cost of the building is therefore $486,400 ($378,000 + $11,000 +97,400), while the
cost of the lift $12,000 is treated as a movable asset.
b) Disposal of office building
Recoupment on office building: Note where the selling price of an asset is more than its original cost
recoupment is equal to capital allowances previously claimed. This is computed as follows:
Office building ($396,000 x 2.5% x 4 years) = $39,600

Improvement ($146,000 x 2.5% x 3 years) = $10,950
Total = $50,550
Cost of replacing the roof is an expenditure which can be classified under repair. The expenditure should
have been deducted in 2012 i.e the year in which it was incurred.
The legal fees of $28,400 in connection with the disposal are considered selling expenses. These costs are
deductible under Capital Gains Tax Act where they are incurred on the disposal of a specified asset. For
this reason they are non-deductible under the Income Tax Act.
c) Corporation tax liability
Adjusted trading profit 2,138,415

Interest paid (22,500 – 4,200 accounted for last year) (18,300)
Accrued interest (3,700)
Interest for non-trading purposes 0
Wear & tear freehold office building ($486,400 x 2.5%) (12,160)
Wear & tear on lift ($12,000 x 10%) (1,200)
Wear & tear machinery (69,300 x 17.5%) (12,128)
Wear & tear on decorative wall ($41,200 x 5%) (2,060)
Wear & tear on movable partions ($22,900 x 10%) (2,290)
Wear & tear Double cab ($10,000 x 20%) (2,000)
Wear & tear computer ($2,500 x 10%) (250)
Wear & tear Factory manager’s car ($10,000 x 20%) (2,000)
Wear & tear Pool car ($10,000 x 20%) (2,000)
Wear & tear plant and machinery ($87,800 x 10%) (8,780)
Lease premium 68,000
Rental advance 10,800
Interest receivable ($9,800 +$3,100) 12,900
Bank interest (exempt) 0
Recoupment on office building 50,550
d) Quarterly instalment payment
368

lOMoARcPSD|3494582
The 4th QPD is equal to $214,415($398,200 x 35/65). It must be remitted to Zimra by the 20 th of
December 2015.
8. Board Markers (Pvt) Ltd
a) Fourth QPD
4th quarterly payment $79,900 x 35/65 = $43 023
The tax must be remitted to Zimra by the 20th December 2015.
b) Far East expenditure
Expenditure for seeking export market or marketing product outside Zimbabwe is called export market
development expenditure. The expenditure qualifies for a double deduction i.e $2 for a $1 incurred.
All Far East expenses are export market development expenses except sales monitoring equipment
which is capital nature expenditure.
c) QPDs for 2016
Estimated Taxable income 746,667

Tax @ 15% (volume of exports are at least 51%) 112 000
1st QPD 25 March 2016 $112 000 x 10% 11 200

2nd QPD 25 June 2016 $112 000 x 25% 28 000
3rd QPD 25 September 2016 $112 000 x 30% 33 600
4th QPD 20 December 2016 $112 000 x 35% 39 200
d) Taxable income and tax payable
Net profit before tax 456 800

Machine France India Trade – note
Wear & tear ($447,000 + $145 800 + $3 000) 10% (59 580)
Sales Monitoring equipment 5 550
Wear & tear monitoring equipment ($5,550 x 10%) (555)
Advert to Singapore (8000)
Participating in India Trade fair (56,000)
Exhibiting goods in Japan (23 450)
Loss on disposal of Isuzu 6,000
Recoupment – Isuzu (WI) 267
Dumping fine 10,000
Valuation for insurance -
New licence 59 000
Advertising for hare offer 1 000
Bad debts- salary advance 2 000
Provision for bad debts 15,000
Annuity ($8,000 -$500) 7 500
Tax health check -
Payroll and accounting packages -
Wear and tear – new car ($10,000 x 20%) (2,000)
Tax @ 20% 82,706

369

lOMoARcPSD|3494582
Recoupment
ITV as at 1 Jan 2015 (10,000 x 80 % x 80%) 6 400
Less deemed selling price 6 667
Recoupment 267
Deemed Selling price $10,000/ $42,000 x $28,000 $6,667
Machine India
Cost 447,000
Customs duty 145,800
VAT (Recoverable) -
Exchange loss 3 000
595 800
Note
The company only meets the first threshold of export manufacturing company (30%- 40%) in 2015.
Therefore it will qualify for a reduced income tax rate in that year of 20%.
9. Drake Group
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).
b) Time limit for election
The election must be submitted at the time of submitting a return for assessment of capital gains. 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.
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. The
transferor and transferee must also elect to transfer specified assets at base cost to avoid capital gains
tax.
Income tax
Industrial building ($2,000 000 x 50%) 1,000,000

Production plant ($450 000 x 100%) 450,000
Computers ($15,000 x 100%) 15,000
Commercial vehicles (102 000 – 90,000) 12 000
Recoupment 1,477,000
Less loss (75 000)
Tax @ 25.75% 361,015
Capital Gains tax
Industrial building 2 300 000

Less recoupment (1,000,000)
1 300 000
Less cost
370

lOMoARcPSD|3494582
Original cost 2,000,000

Less capital allowances 1,000,000
1,000,000
Add inflation $2,000,000 x 3 years x 2.5% 150,000 (1 150 000)
Capital gain 150 000
Tax @ 20% 30 000
d) Assessed losses
 Assessed losses belong to a person and cannot be utilized by another person.

 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.
 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.
 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.
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.
 The loss of cash by MD is also deductible. It is also on inherent business expense, unless it
occurred as a result of a theft by the MD.
 The loss of his/her money is non-deductible, being a private expenditure.
f) Disallowed theft/loss
 A loss or embezzlement resulting from the acts of the shareholder or by someone in the position of
a proprietor.
 Loss or theft not ordinarily incurred in the bona fide carrying on of a business e.g. theft by external
auditors etc.
g) Removal Costs
 Transportation of fixed assets is expenditure of a capital nature and non-deductible

 Removal of rubbish is expenditure of revenue nature which is tax deductible.
h) Computation of minimum taxable income for Drake ltd
Net Profit 105 000

Cash loss- shop assistant -
Wages to pay staff stolen -
Personal cash of MD stolen 10 000
Transport of fixed assets 7 500
SIA removal cost on fixed assets ($7,500 x 25%) (1 875)
Removal of rubbish -
Site investigation for new building 12 700
Drafting and registering mortgage 1,500
Drafting purchase agreement 3 000
Supplier breaching a construct -
Annual audit fee -
Lease of Isuzu (PMV 22 500 -10 000) 12 500
Amortization 43 000
Golf Club Subs – entertainment 2 000
371

lOMoARcPSD|3494582
10. HR Consultants
a) Computation of joint partners taxable income
Year Jan-May Jun-Dec

Pre-capital allowances net profit 275,000
W&T IT: Equipment purchased W1 (5650 x 10%) (565)
W&T: Office furniture purchased W2 (3296 x 10%) (330)
Ford Mondeo (10000 x 20%) (2,000)
Scrapping Allowance (389)
Profit on disposal (5,600)
Joint taxable income 266,116 110,882 155,234
Pension contributions(5400+5400) (10,800)
Medical expenses for partners (1800 +2050) (3,850)
Nyasha ceded life policy -non deductible -
Joint lives of Nyasha &Miranda- non deductible -
Miranda separate policy (500)
Public liability (900)
Nyasha: Ex-graita payment restricted to $200 - (200)
Joint partnership income 110,882 138,984
b) Computation partners’ tax payable
Details Total Nyasha Nancy Miranda

Share of profits Jan-May 110,882 36,961 73,921
Share of profits Jun-Dec 138,984 83,390 55,594
Nyasha's salary (12000 x 5/12) 5,000 5,000
Nancy use of car ($9,000 x 20% x 5/12) 750 750
Nyasha's salary (37000 x 7/12) Jun-Dec 21,583 21,583
Miranda's salary (34000 x 7/12) Jun-Dec 19,833 19,833
Medical expenses 3,850 1,800 2,050
Miranda separate life policy 500 500
Trade convention restricted (share
according to ratio) (2,500) - (1,500) (1,000)
Taxable income 298,882 146,934 74,971 76,977
Tax thereon @ 25% 74,721 36,734 18,743 19,244
Less Medical aid credit (1,925) - (900) (1,025)
72,796 36,734 17,843 18,219
Add 3% Aids levy 2,184 1,102 535 547
Tax payable 74,980 37,836 18,378 18,766
W1 IT Equipment
ITV as at 1 Jan 2015(6000-6000 x 7/12 x 10%) 5,650
Note: Wear & Tear is apportioned in the first year of commencing business since equipment was
purchased during the year.
W2 Office Equipment: ITV as at 1 Jan 2015 (3500-3500 x 7/12 x 10%) 3,296
W3 Motor Vehicle: ITV as at 1 Jan 2015 (10000-10000 x 7/12 x 20%) 8,833
372

lOMoARcPSD|3494582
W4 Recoupment Deemed selling price (10000/45 x 38000) 8,444

Less ITV 8,833
Scrapping Allowance 389
11. Sakurai Farm

a) Livestock reconciliation
Heifer Bul C
Details s Tollies Oxen ls Cows alves Total
Open stock 200 100 95 5 130 110 640
Sales (52) (50) (102)
Purchases 34 40 30 16 120
Births 10 10
Promotion in 15 5 3 23
Promotion out (3) (20) (23)
Total 249 142 46 5 110 116 668
b) Taxable income
Net profit 60,000

Less 2/3 of enforced sales (1032 x 2/3) (688)
Restock relief (W2) (2,635)
Standby power generator (granted allowance the year in which first used) 0
SIA Tractor ($45,500 x 25%) (11,375)
Dam (amount incurred in the year is claimed even incomplete) (30,000)
Depreciation 5,500
W1 Enforced sales
Sales
50 cows 15,000
52 oxen 14,500
Income 29,500
Less cost of sales
50 cows x 195 9,750
52 Oxen x 180 9,360
Direct costs 9,358 28,468
Direct costs = $60,000 x 102x 2/ (64 0 +668) = $9,358
W2 Restocking
AxB = $10,200/2 x 62/120 = $2,635

2xC
A = $10,200
B = (610- (668 -120) = 62
C = 120
12. GAAP Poultry Group
373

lOMoARcPSD|3494582
a) Disposal of assets within the group will save the transferor of the following:
Any tax on recoupment that could arise will be avoided when the assets are transferred at ITV.
Any tax on capital gain that could arise will be avoided when the assets are transferred at base cost.
The above tax reliefs will only be granted where assets are transferred between related parties, upon
election, under a scheme of reconstruction, merger or similar business combinations.
b) Income tax payable by Green Farm, in the absence of any tax dispensations
Recoupment
Item Selling price ITV P/Recoup Allowance A/Recoup
School 15,000 8,500 6,500 1,500 1,500
Tobacco 400,000 - 400,000 300,000 300,000
Fencing Non recoupable 40,000
Dam Non recoupable 200,000 ………
Total 541,500 301,500
Tax thereon @ 25.75% 77,636
c) Capital Gains tax payable by Green Farm

Farm school 150,000
Tobacco barns 400,000
Communal dam 300,000
Farm 800,000
1,650,000
Less recoupment (301,500)
1,348,500
Deductions
Farm school 100,000
Tobacco barns 300,000
Communal dam 200,000
Farm 120,000
(541,500)
Inflation
100000 x 2.5% x5 12,500
300000 x 2.5% x5 37,500
200000 x 2.5% x 3 15,000
120000 x 2.5% x 5 15,000 258,500
Capital gain 1,090,000
Withholding tax 247,500
Tax payable/ (refundable) ($1,650,000 x 15%) (29,500)
13. Charles Carling
a) Calculation of the withholding tax payable
Proceeds from listed shares ($30 000 x 45) 1,350,000

Withholding tax at 1% 13,500
Proceeds from unlisted shares 100,000
Withholding tax at 5% 5,000
b) Calculation of capital gains tax on the disposal of the shares

374

lOMoARcPSD|3494582
Proceeds from unlisted shares 100,000

Donated shares (deemed sale) 100,000
Less: Cost:
Unlisted shares 80,000
Unlisted shares $80,000 x 2.5% x 5 years 10,000 90,000

Less withholding 5,000
Tax payable 17,000
Since withholding tax on listed marketable is a final withholding tax no further tax is computed in the
hands of the seller. No tax return is required in respect of such shares.
c) Capital gain and applicable tax in connection with the disposal of principal private residence
Proceeds from the sale of immovable property 830 000

Less:
Cost 250,000
Improvements 45,000
250,000 x 2.5% x 4 years 25,000
45,000 x 2.5% x 3 years 3,375
Selling expenses:
Estate agent’s commission 43,000
Transfer fees 6,450 372,825
Less roll over relief: 500,000 x 457,175/830,000 (275,407)
Taxable amount 181,768
Tax thereon on @ 20% 36,354

Less withholding tax ($830,000 x 15%) (124 500)
Amount refundable (88, 146)
14. Lawson (Pvt) Limited
a) Tax treatment of disposal of Harare warehouse
Recoupment on destruction of an asset shall not be included in gross income if a taxpayer satisfies the
Commissioner that:
 It has purchased or constructed or will purchase or construct, within a period of 18 months from the
date of damaged an asset of similar nature
 Such further asset has been or will be brought into use within a period of 3 years from date of
destruction of original asset
 Recoupment, however applicable to the amount not expended shall be taxed
a) Minimum tax liability

Gweru Harare Total
Net profit 75,000 105,000 180,000
Recoupment: Industrial building ($2m x 100%) 2,000,000 2,000,000
Recoupment: Plant ($450,000 x 100%) 450,000 450,000
Recoupment: Warehouse (see workings) 16,842 16,842
375

lOMoARcPSD|3494582
Wear & tear (including accelerated w&t) (108,750)

SIA (161,750)
Tax liability @ 25.75% 611,908
W1: Recoupment on Harare warehouse

Recoupment ($800,000 x 5% x 2 years) 80,000
Less Replacement relief ($750,000/$950,000 x $80,000) (63,158)
W2: Capital allowances

Item Cost Rate SIA Wear &tear
New industrial building 1,500,000 5% 75,000
New plant 647,000 25% 161,750
Commercial vehicles transferred 120,000 25% 30,000
Computers 15,000 25% - 3,750
2,282,000 161,750 108,750
New Harare warehouse allowances will be granted in the year in which it is put into use i.e 2015
b) Capital gains withholding tax
Item Proceeds Rate Withholding tax

Industrial building 2,900,000 15% 435,000
Warehouse 950,000 15% 142,500
3,850,000 577,500
The withholding tax must be remitted to Zimra within 3 working days of paying the seller proceeds from
sale of a specified asset
Gross capital
Industrial building 2,900,000
Warehouse 950,000
3,850,000
Less Recoupment ($2,000,000 +$80,000) 2,080,000
1,770,000
Less Deduction
Industrial building 2,000,000
Warehouse 800,000
Less Capital allowances ($2,000,000 + $80,000) (2,080,000)
Inflation
2,000,000 x 2.5% x 5 years 250,000
800,000 x 2.5% x 3 years 60,000
Selling 190,000 1,220,000
Less Replacement relief industrial building ($1, 5m/$2,9m x $460,000) (237,931)
Less Repair relief (750,000/950,000 x $90,000) (71,053)
Tax @ 20% 48,203

Less withholding 577,500
Tax refund 529,297
Workings
Industrial building capital gain = $2,900,000-2,000,000-250,000-$190,000 =$460,000
Warehouse capital gain = $950,000-800,000-$60,000 = $90,000
376

lOMoARcPSD|3494582
15. Mr. Shiri
a) Pre-incorporation and pre-registration VAT
Pre-incorporation expenses
Input tax incurred on goods or services paid prior to incorporation acquired on behalf of the operator which
are reimbursed to the person by the company can be claimed. The goods or services must have been
acquired no more than six months prior to the date of incorporation of the company and the company must
hold sufficient records to establish the particulars relating to the deduction to be made.
Pre-registration
Input tax incurred prior to registration is non-claimable. The only exception is in respect of inventory and
consumable held by the taxpayer at time of registration.
b) Registration and estimated net VAT
A person must register for VAT when his/her expected taxable turnover in any 12 months period exceeded
$60,000. The company exceeded this limit at the end of October 2015. The company should have notified
its liability to register Zimra by 30 November 2015 and been registered with effect from 1 December 2015.
A person may also be required to register if he/she anticipate that his/her turnover will in the next 12
months exceed $60,000. From end of March 2015, it is clear that the business will likely to surpass the
$60,000 threshold in the next 12 months commencing that month. There is a guaranteed $5,000 monthly
turnover, which has continued to peak and showing no signs of dropping. Mr. Shiri should have notified
Zimra on its liability to register by 30 April 2015 and been registered with effect from 1 May 2015. On the
basis of this assumption the net tax due to Zimra is as follows:
Calculation of net tax due

Output tax Amount Rate Tax Comment
May $7,800 15% $1,170
June $6,600 15% $990
Jul $7,200 15% $1,080
Aug $7,300 15% $1,095
Sept $7,800 15% $1,170
Oct $7,900 15% $1,185
Nov $8,200 15% $1,230
Input tax
Computer $2,000 Pre-registration
Business plan $500 Pre-registration
Net due $7,920
c) Penalties
Zimra may back date registration to 1 May 2015 and charge penalty of 100% on the tax due from that date
until date of registration. Interest is also charged on this tax.
The company is liable to a level seven ($400) fine for failing to register by 1 May 2015. The company is
also liable to a penalty in relation to the issue of invoices showing an amount attributable to VAT whilst an
unauthorized VAT registered operator.
Tutorial note: It is also an offence to issue an invoice showing VAT when one is not a registered operator.
377

lOMoARcPSD|3494582
16. VATEX (Pvt) Ltd
a) Cash basis and invoice basis
 Under invoice basis , accrual basis, VAT is accounted for on the basis of invoices being issued or
received
 Under cash basis, cash accounting, VAT is accounted only to the extend payment is received or made
 Cash basis is only applicable to public authorities, local authorities and associations not operating for
gain
 Invoice basis allows you to claim VAT before you make payments to creditors. The basis is good for
zero rated suppliers
 Invoice basis is administrative efficient than cash basis, VAT is accounted on invoice rather than on a
number of payments
 Cash basis is good for cash flow management purposes, especially for operators with more debtors than
creditors
b) Documents to be kept
Tax invoices, credit note, debit notices, books of accounts generally, ledger etc.
c) Civil penalty for failing to use a fiscalised register
Every Category C operator (operator with annual turnover exceeding $240,000) must fiscalise. An
operator who fails to comply is liable to a civil penalty of $25/day per point of sale, for each day the
taxpayer remains in default up to a period of 181 days
d) Output tax and input tax
Item Amount Rate Tax

Machine on suspensive sale (cash value= 60x $2000 + $10000-33100) -96,900 15% (14,535)
Machine on finance lease (based on cash cost) -93,800 15/115 (12,235)
Bad debts written off by Malaya (claw back of input tax) 57,000 15/115 7,435
Cost of purchasing a Passenger Motor vehicle -39,000 denied -
Passenger motor vehicle ($4,800 x 15/115 x 1/12) 4,800 15/115 52
Bicycle (entertainment) -2,500 denied -
Tax payable/(refundable) (19,283)
e) Items on which input tax is cannot be claimed
 Provision of food, drink or accommodation supplied to a taxable person, his agents or employees.
 Entertainment expenses
 Purchase or hiring of passenger motor vehicles other than as stock in trade
 Cost of goods or services used by the registered operator for the purposes of an exempt activity or
for personal use
 Cost of goods and services for which the registered trader does not have a valid VAT invoice.
 Social or recreational subscriptions.
378

lOMoARcPSD|3494582
Tax tables
1 Employment tax rates
ANNUAL TABLE
Rates
from 0 to 3,600.00 multiply by 0% Deduct -
from 3,600 to 18,000.00 multiply by 20% Deduct 720
from 18,000 to 36,000.00 multiply by 25% Deduct 1,620
from 240,000 and above multiply by 50% Deduct 33,420
Aids Levy is 3% of the Individuals' Tax payable
2. Trade and investment income tax rates
Self-employed , sole trader or partners 25.75%

Companies and trusts 25.75%
Licensed investor
First five years of the arrangement 0%
Second five years of the arrangement 25%
An approved BOOT or BOT arrangement :
Thereafter 25%
Industrial park developer
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
A manufacturing company which exports 50% or more of its output 20%
3. Withholding tax rates

379

lOMoARcPSD|3494582
Nature of payment Rate

Bank interest earned by residents 15%
Bank interest on fixed deposit earned by residents 5%
Fees paid to non-residents 20%
Royalties payments to non-residents 15%
Dividends paid by ZSE listed co. 10%
Dividends paid by an unlisted Zimbabwean company. 15%
4. Capital gains tax
Capital Gains Tax
Listed marketable securities acquired after 1 February 2009 1% of gross proceeds

Specified assets (not listed shares) acquired prior to 1 February 2009
– sold prior to 1 February 2009 20% of gain
– sold after 1 February 2009 5% of gross proceeds
Specified assets acquired after 1 February 2009 (not listed securities) 20% of gain
Capital gains withholding tax
Immovable property 15% of gross proceeds

Unlisted securities 5% of gross proceeds
Listed marketable securities (final tax) 1% of gross proceeds
Inflation adjustment rate 2·5%
5. Value Added Tax (VAT) 15%
Standard rate 15%

Zero rate 0%
Exempt rate nil
VAT inclusive rate 3/23
6. Deemed annual motoring benefits:
Engine capacity Annual benefit

Up to 1500cc 3,600
1501 – 2000cc 4,800
2001 – 3000cc 7,200
3001 and above 9,600
7. Pension Contributions
Annual limit
In relation to employers:
Contribution to employer’s pension fund per employee 5,400
Contribution to employer’s benefit fund per employee 1,500
National Social Security: maximum 3.5% of $8,400
In relation to member
Contribution to employer’s pension fund 5,400
Arrear pension contributions 1,800
Retirement annuity fund/Self-employed pension fund 5,400
National Social Security: maximum 3.5% of $8,400
8. Tax credits
380

lOMoARcPSD|3494582
Credit Annual credit

Elderly person (55 years and over) 900
Physically disabled person 900
Blind person 900
Medical aid and expenses 50% of amount paid in each year
9. Elderly person’s exemptions
Item Annual
Rental income 3 000
Interest on deposits with a financial institution 3 000
Interest on discounted instruments 3 000
Pension No limit
Gain on disposal of Principal Private Residence No limit
Gain on disposal of unlisted marketable securities 1,800
On acquisition of motor vehicle from employer No limit
10. Capital Allowances
Special initial allowance 25%

Accelerated wear and tear 25%
Industrial building 5%
Commercial building 2.5%
Motor vehicles 20%
Movable assets in general 10%
Multiple Choice Questions

381

lOMoARcPSD|3494582
1. John has just discovered that his employer is using two sets of books to record accounting
transactions; the one that is used for tax transactions does not include all the invoices. Advice what
John should do?
A Report to the police

B Report to Zimra
C Report to his superior
D Approach the employer to discuss the issue
2. Which of the following statements best describe transfer pricing?
A Prices charged between multinational companies

B Prices charged between related companies
C Prices charged between divisions in a group
D Prices charged between family members
3. Which of the following is a case of tax evasion?
A Claiming capital allowances on commercial building

B Undervaluation of stock
C Claiming a blind credit for spouse
D Deferring income to next year
4. Which of the following does require a tax clearance?
A Purchase of vegetables from a farmer

B Payment of taxes to Zimra
C Payment of goods by an individual from a retail shop
D Payment of accounting services
5. Which of the following describe a valid objection?
A Must be in writing, stating the grounds of objection and lodged with Zimra within 30 days of
notice of assessment
B Must be in writing, lodged with the Commissioner General within 30 days of date of notice of
assessment and stating grounds of objection
C Must be in writing, lodged with the Commissioner General within 30 days of date of submission
of returns and stating grounds of objection
D Must be in writing, lodged with the Fiscal Court within 30 days of date of notice of assessment
and stating grounds of objection
6. Which of the following best describes PAYE registration requirements of a non-resident employer?
A Appointment resident representative, register resident representative as principal officer and

register as an employer within 14 days of becoming an employer
B Appoint resident representative and register as an employer within 14 days of becoming an
employer
C Appoint a Zimbabwean and register as an employer within 14 days of becoming an employer
D No answer
7. Mr David Taylor works for Green (Pvt) Ltd. During the year of assessment the company was unable
to pay cash salary due to cashflow problem. It was resolved that they should appropriate certain
shares for Mr Taylor’s benefit as payment in lieu of cash salary. What should the correct tax
treatment of these shares on date of appropriation to Mr Taylor by the company?
A The value of shares are not taxable, they are of a capital nature
382

lOMoARcPSD|3494582
B The value of shares are taxable; they constitute remuneration for services rendered
C The shares have no value since there is no tax liability
D The value shares are regarded as specified assets, capital gain tax is applicable
8. Case law has set down certain criteria in determining whether an individual is employed or self-
employed. Which of the following types of contracts would constitute self-employment?
A Contract of service
B Commission income taxed schedule
C Holder of public office
D Contract for services
9. Which of the following would not be treated as an employment taxable benefit?
A Interest free loan to buy a car

B A monthly bus pass
C The use of a company property without charge
D Medical insurance paid by an employer
10. Mrs X aged 27 resigned on 30 June 2015.When she resigned she received a lump sum payment of
amounting to $6000 from a pension fund she joined in 2008.She purchased an annuity on retirement
for $1000 and transferred $2000 to a benefit fund and $1200 to a pension fund. Her salary before
resigning was $3600 and was a teacher at a private school in Harare. The school had offered her
80% school fees discount on school fees of $1300 per pupil per term. Mrs. X has 4 children who
learning at the school. The school is payable at the beginning of the term, which is in January, May
and September. How much is Mrs. X’s taxable income?
A 12600
B 10600
C 11560
D 10800
11. Arc (Pvt) Ltd entered into an 8 year lease contract on 1 May 2015 with Buwe Investments. Arc was
to effect lease improvements to the minimum value of $400,000. The lease improvements were
completed at an actual cost of $410,000 on 6 June 2015 and first used by Arc 60% for purposes of
his trade on 1 September 2015. On that day it was agreed to extend the lease period to 9years
effective the date the lease agreement was entered into. How much should Arc deduct in 2015?
A No answer
B $10,435
C $ 9,462
D $10,696
12. On 1 June, 2015, XYZ (Pvt) Ltd signed an 8- year lease agreement with ABC (Pvt) Ltd, the lessee.
In the agreement, the lessee was to effect lease improvements valued at $55,000. The work was
completed on 30 August 2015 and first used by the lessee on 1 November 2015 at an actual cost of
$80,000. The lessee paid an upfront payment of $12,000 and pays a monthly rent of $900. The
lessee always maximizes his tax benefits. The tax position for the lessor and lessee, respectively are
as follows;
A Lessor taxable $20,666 and lessee deductible expenditure $8,384

B Lessor taxable $20,666 and lessee deductible expenditure $9,593
C Lessor taxable $20,666 and lessee deductible expenditure $14,634
D Lessor taxable $20,666 and lessee deductible expenditure $9,009
383

lOMoARcPSD|3494582
13. Farai Investment and John (56 years old) entered into a 11 year leasing agreement on 2 March 2014.
The leasing object is a warehouse which John acquired for $240,000 in 2011. John has always used
the building 100% in his business. Farai Investment is using it to store its goods. On 5 April 2014 an
agreement was entered to extend the warehouse and Farai Investment was tasked to effect these
improvements which were capped at $40,000. The improvements were completed on 2 May 2015,
but were only brought into use on 1 September 2015. Farai Investment is required to pay monthly
rental of $15,000 and an upfront payment of $10,000. Compute John’s taxable income for 2015.
A $179,712
B $182,712
C $173,712
D $176,712
14. Raft (Pvt) Ltd, a Category B VAT registered operator bought a truck from South Africa on 1
January 2015 for $55,430, inclusive of 25% duty and 15% VAT. Note that VAT is computed on the
cost plus duty. Mr Banes had earlier on travelled to South Africa to inspect and choose the truck, for
this trip the company paid $300 travelling expenses. Raft (Pvt) Ltd always minimizes its tax
liability. Compute capital allowances to be claimed by Raft (Pvt) Ltd in view of its standing policy
of minimizing tax liabilities.
A $12,125
B $13,933
C $13,858
D $12,050
15. Mr. Jacobs commenced printing business on 1April 2015. He makes up his accounts to 31
December annually. Upon commencement of his business Mr Jacobs constructed and acquired the
following assets:
Printing machine 15,000

Office building constructed 85,500
Print House constricted 90,000
Delivery truck 16,000
Prado (Mr Jacobs) 75,000
2 staff quarters (1 for $20, 000 and another for $27,500) 47,500
Mr. Jacobs uses the Prado 70% in his business. Mr. Jacobs has no capital allowance policy. Mr
Jacob’s capital allowances for 31 December 2015 is:
A $11,663
B $13,338
C $12,213
D $11,213
16. State which of the following conditions should be satisfied for recoupment not to be taxable if, arose
on a damaged asset.
1. New asset must be brought into use within 3 years

of date of damage
2. New asset must be purchased or constructed within
18 months of date of damage original asset.
3. New asset must be bought or constructed within
18months of date of damage of the original asset and brought into use within 3 years of damage of
original asset.
4. New asset must be purchased or constructed within
18months of the date of original asset or brought into use within 3 years of damage of the original
asset.
384

lOMoARcPSD|3494582
17. The following are some of the statement regarding Special Initial Allowances.
1. SIA is computed based on cost (straight line method) and never apportioned
2. An asset whose trade usage is less than 90% does not qualify for SIA
3. SIA is an elective capital allowance
4. A lessor who purchases an asset for leasing purposes does not qualify for SIA
5. SIA is granted only on new or unused property used by a taxpayer for purposes of trade
Which of the statements is untrue about SIA?
A (2) only
B (5) only
C (2) and (4)
D None of the above
18. Which of the following is a taxable benefit for VAT purposes?
A Provision of accommodation by the employer to employee

B Provision of sugar and bread to employees by employer
C Provision of interest free loans to employees by employer
D Provision of fuel vouchers to employees by the employer
19. A VAT registered trader who accounts for VAT on the cash receipts basis pays VAT on?
A The total amount of sales invoiced in the relevant VAT period

B The total amount of cash received in the relevant VAT period
C The total amount of sales invoiced and cash received in the relevant VAT period
D The total amount of cash sales made by the company in VAT period
20. Heather an accomplished engineer and self –employed (independent consultant) employs over 10
staff. Which of the following is a tax deductible bursary, grants or scholarship?
a) $3,000 for her sister Janet undertaking an engineering course

b) $4,000 for her cousin Maurice undertaking same course as Janet
c) $12,000 for Tatenda undertaking a course in hotel management
d) $7,000 to her fellow director’s son with 7% voting shares undergoing engineering course
21. Cookies (Pvt) limited a Category C VAT operator have a financial year end 31 December 2014 and
should submit annual return by which of the following date:
a. 3 January 2015
b. 30 April 2015
c. 25 March 2015
d. No answer
22. Mr Marufu, 57 bought shares in Southlea Investments on 1 January 2009 at a cost of $7, 000 and
sold them in the current year (2015) for $11,000. His capital gains tax liability is closets to:
A. $590
B. $230
C. $460
D. $550
23. Which of the following statements is untrue in respect of recoupment? That recoupment is equal to:
385

lOMoARcPSD|3494582
A. Capital allowances if selling price is below cost.

B. Selling price –income tax value if selling price below original cost
C. Deemed selling price – income tax value if deemed cost greater than selling price.
D. Deemed cost if income tax value is zero and deemed selling price exceeds deemed cost.
24. Which of the following is the main source of revenue law in Zimbabwe?
A. Judicial precedents
B. Civil society
C. Legislature
D. Agency interpretation
25. A company must register for Income Tax purposes within the following timeframe.
A. Within 30 days of commencing business

B. Within 30 days of being issued with a certificate of incorporation
C. Within 30 days of opening a bank account
D. Within 30 days of issued with trade licence
26. Simba Power (Pvt) Ltd submitted its ITF 16 (PAYE return) for 2015 on 5 February 2016. The
commissioner invoking his discretion, Simba Power would be liable to pay a civil penalty of :
A. Nil plus a written warning

B. $180
C. $120
D. None of the above
27. Gurepack (Pvt) prepared its December 2015 financial statements with the actual taxable income of
$320,000. The total QPDs paid by the company amounted to $76,000. All the QPDs were paid on
time. Gurepack (Pvt) Ltd should:
A. Pay the understated tax plus interest of 10% p.a

B. Pay the understated tax plus interest of 10% p.a and penalty of 100% on tax due
C. Pay the understated tax only in terms of section 72 of the Act
D. Pay the understated tax plus additional tax in terms of section 46 of the Act
28. Which of the following is incorrect regarding the keeping of records by a person deriving income
from trade and investment?
A. Keep records in English

B. Keep records for 6 years from the end of year of assessment
C. Records may not be kept in English or for 6 years if authority is obtained from the commissioner or
a competent court
29. Matrix (Pvt) Ltd has three employees earning monthly salaries of $700, $800 and $980. The
employees were officially employed on the 5 th of March 2015. However, the company registered
with ZIMRA on the 10th of May 2015. On the date of registration the company would be liable to
pay to ZIMRA.
A. $I,785
B. $1,733
C. $1,428
D. $1,098
30. Which of the following is/are incorrect regarding the source of the stated income?
386

lOMoARcPSD|3494582
(i) The source of directors fees is the head office

(ii) The source of the income from a patent is where the patent was created or perfected
(iii) The source of interest is where the lender provides the credit
(iv) The source of income from hiring a motor vehicle is where the lessor is resident
(v) The source of employees salary is where the employee reports for work
A. (i) only
B. (i), (ii) and (iv)
C. (ii), (iii) and (iv)
D. (iv) only
31. Which of the following is/are incorrect regarding the definition of gross income?
a) It includes both tangible and intangible property with an ascertainable money

b) It includes stolen amounts
c) It includes only amounts with actual source within Zimbabwe
d) It includes both capital and revenue receipts
e) Brought into tax income based on the earlier of receipt or accrual
f) It includes forfeited deposit on containers
A. b, c, d and f
B. a, c, d and f
C. c and d
D. d and f
32. Which of the following tests is used the most by the courts when testing for employee-employer
relationship?
A. Organisation test
B. Specific results
C. Supervision and control
D. Financial independence
33. Which of the following is/are not remuneration?
(i). Amount paid to a partner by the partnership

(ii) Fees paid to non-executive director with a right to use the payer’s car
(iii) Fees paid to a freelance estate agent
(iv) Reimbursable overnight allowances of an employee
A. (i), (ii) and ( iii )

B. (i), (ii) and (iv)
C. (i),( iii ) and (iv)
D. All incomes
34. Marisa retired from her employment on 1 August 2015 and shall be entitled to monthly pension of
$3,200 commencing 1August 2015 for the next 10 years. During the time of contribution $5,000 0f
her contribution was not allowable as a deduction to her. Her salary to date of retirement was
$14,500. Her taxable income is.
A. $30,292
B. $28,425
C. $30,229
D. No Answer
35. Which of the following is not a form of tax planning under Income Tax Act?
387

lOMoARcPSD|3494582
a. Transferring land to a sister company

b. Divisionalising subsidiaries
c. Transferring goods at a low pricing to a sister company with an assessed loss
d. Investing in fixed term money market deposit as opposed to be debenture market
A. a and c
B. a, b and d
C. b and d
D. All income
36. Which of the following factor is not meant to be addressed by taxation
A. Economic
B. Social
C. Environmental
D. Political
37. Toll-E was awarded a contract to operate a toll system in Zimbabwe in 2010. In terms of the
contract Toll-E was required to construct Tollgates throughout Zimbabwe and to commercially
operate them for 25 years and then hand them over to a Zimbabwean. In the current year of
assessment (2015) it expects to earn revenue of $2,500,000. Operating expenses of $1,500,000. Its
4th QPD is closed to.
A. $90,125
B. $52,500
C. $54,075
D. $72,100
38. Muchena, 50 years won lotto on 2 January 2015 amounting to $120,000. He reinvested the amount
in a fixed deposit account held at a local financial institution with a 4 month maturity. On 1 May
2015 he withdrew the principal amount plus $12,000 interest. He immediately used the whole
proceeds to purchase a house in Westgate. Due to tough economic times he sold the house for
$200,000 on October 2015 and used $180,000 to buy a house in Zambia. The house was his
principal private residence. His tax liability is the aggregate of:
A. $14,740
B. $1,854
C. $13,540
D. $3,094
39. On 31 December 2015 Kanga (Pvt) was recently visited by Zimra and it was discovered that the
company had 6 sales points which operated with no a fiscal device. This has been the case since 1
June 2015 when the company was duly registered as VAT operator under Category C. The company
is liable for a civil penalty of:
A. $ 32,580
B. $27,150
C. $32, 100
D. $38 520
40. Continued from previous question, Kanga acquired the 6 fiscal register as required for $36,000. The
aggregated maximum of the Income Tax and VAT relief to which Kanga is entitled to in the year
of acquisition is :
A. $ 11,700
B. $7,200
388

lOMoARcPSD|3494582
C. $22, 500
D. $14,400.
41. Mr Simon bought a double cab which he has been using in his business as a consultant on a ratio of
70% and 30% respectively. The vehicle was bought in 2012 for $55000 and sold in the current year,
2015 for $40000. Appropriate capital allowances were claimed. Simons recoupment/scraping
allowance is
A. (247)
B. ($173)
C. $1448
D. No answer
42. Which of the following interest is tax deductible?
(i) Interest on money used to buy a PMV whose cost amounted to $30,000
(ii) Interest on money used to pay dividend
(iii) Interest on money used to pay for shares in XYZ (Pvt) Ltd
(iv) Interest incurred during construction of a factory building
(v) Interest on money used to maintain a vacant Budiriro business stand
A. (ii) only
B. (iv) only
C. (i) 0nly
D. None
43. Which of the following is/are not prohibited deduction under the VAT Act section 16?
(i) Food given to participants at seminar

(ii) Cost of acquiring a Passenger Motor Vehicle
(iii) Staff Christmas party
(iv) Subscriptions to CZI by the company
(v) Repairs incurred on a Passenger Motor vehicle
A. (i), (ii) and (iv)

B. (i), (iv) and (v)
C. (i) and (iv)
D. (iv), (iii) and (v)
44. Tiger (Pvt) Ltd incurred lease rental on the motor vehicles for use by the salesman as follows:
Year 2013 2014 2015

Nissan 2.7 Pickup 2,000 2,000 8,000
Isuzu Double Cab 1,000 2,000 6,000
Benz C200 2,000 6,000 8,000
Total 5,000 10,000 22,000
Tiger (Pvt Ltd can deduct the following amount against its income in 2015:
A. $22,000
B. $14,000
C. $16,000
389

lOMoARcPSD|3494582
45. Putting (Pvt) Ltd bought a factory building in 2012 for $280,000 and has been using it in its
business. During the current year (2015) it sold the building to XYZ (Pvt) Ltd for $350,000. It used
$300,000 to construct another factory building upon relocation to new premises and which became
functional on 1 November 2015. Putting (Pvt) Ltd always maximizes its benefits. The tax capital
gains tax payable or refundable by/ to putting (Pvt) Ltd in 2015 is;
A. No answer
B. ($ 51,300)
C. ($16,300)
D. ($1,198)
46. Continued from previous question. Putting (Pvt) Ltd had envisaged carrying out the above
transaction when it made its budget estimates in February 2015. It had estimated annual taxable
income before taking into account transaction in above question to be $720,000. Putting (Pvt) Ltd’s
4th QPD is:
A. $61,916
B. No answer
C. $49,533
D. $58,131
47. Which of the following is/are not a disposal for capital gains tax purposes?
i. Any sale by court order

ii. Share redemption of shares
iii. Donation for fencing by a farm
iv. Relinquishing of rights in a condominium by a partner
v. Cession of stand
vi. Expropriation of equipment
A. (i), (iii), (iv) and (vi)

B. (i), (ii), (iv), and (v)
C. (iv) only
D. (i), (iii) and (vi)
48. Which of the following is/are chargeable gain under capital gains act?
(i) A disposal by an elderly person

(ii) A disposal by a government school of its immovable property
(iii) A disposal in a deceased estate of principal private residence
(iv) A disposal by an employee of his interest in an approved employee share trust to another employee
(v) A disposal of shares by a private trust
A. (i), (iv) and (v)

B. (ii), (iv) and (v)
C. (i), (ii), (iii) and (iv)
D. (ii), (iii) and (v)
49. Which of these is/are considered a supply by a VAT registered operator employer to its employees?
(i) Free use of company vehicle

(ii) Fuel coupons given to employees
(iii) Granting of the right of use of company houses
(iv) Interest free loans given to employees
(v) Free use of airtime cost borne by employer
A. (i), (iii), (iv) and (v)

390

lOMoARcPSD|3494582
B. (ii), (iv) and (v)

C. (i) and (ii)
D. (i) and (v)
50. On 31 March 2015, Nothando received a loan of US$9 000 from her employer. The interest payable
on the loan was 2% per year. Nothando used US$6 000 of the loan to start a small business and the
balance to pay for her medical expenses. What is the value of Nothando’s taxable benefit in respect
of the loan for the year ended 31 December 2014? Note: You should assume that the LIBOR rate
was 1·5% throughout 2014.
A. US$405
B. US$304
C. US$270
D. US$203
51. Which of the following documents are among the Zimbabwe Revenue Authority’s (ZIMRA’s)
requirements when applying for a capital gains tax clearance certificate (form CGWT 4A) on the
sale of immovable property?
(1) Agreement of sale

(2) Copy of proof of payment of the sale price
(3) Completed return for remittance of capital gains tax (CGT1 form)
(4) Original tax invoice
A. 1, 2 and 3 only
B. 1, 2, 3, and 4
C. 1 and 2 only
D. 3 only
52. XYL Limited is registered for Value Added Tax (VAT) under category B and entered into certain
taxable supplies during December 2015. What is the tax period and due date for remittance in
respect of the value added tax (VAT) arising on XYL Limited’s taxable supplies for December
2015? Tax period Latest remittance date
A. December 2014/January 2015 25 February 2015

B. December 2014 25 January 2015
C. November/December 2014 25 January 2015
D. December 2014 25 February 2015
53. Jeff’s employer calculated the income tax due on his remuneration under the pay as you earn
(PAYE) system after taking into account the following expenses incurred by Jeff during the year
ended 31 December 2015:
US$
Professional subscriptions 800
Medical aid contributions 3 000
What is the effect of these expenses on the operation of PAYE on Jeff’s remuneration from employment
for the year ended 31 December 2015?
A. They result in allowable deductions of US$3 800

B. They result in an allowable deduction of US$800 and a tax credit of US$3 000
C. They result in tax credits of US$3 800
D. They result in an allowable deduction of US$800 and a tax credit of US$1 500
54. Which of the following are examples of direct taxes?
391

lOMoARcPSD|3494582
(1) Employees’ tax – pay as you earn (PAYE)

(2) Value added tax (VAT)
(3) Corporation tax
(4) Capital gains tax (CGT)
A. 4 only
B. 1, 2, 3 and 4
C. 1, 3 and 4 only
D. 3 only
55. Smiles (Private) Limited paid a subcontractor’s invoice of US$10 000 on 15 June 2015. The
subcontractor did not have a valid tax clearance certificate at the time of payment. What amount of
withholding tax should Smiles (Private) Limited have deducted from the subcontractor’s payment
and by when should it have been remitted to the Zimbabwe Revenue Authority (ZIMRA)?
A. US$1 030, remittance date 10 July 2015

B. US$1 000, remittance date 25 June 2015
C. US$1 030, remittance date 25 June 2015
D. US$1 000, remittance date 10 July 2015
56. Which of the following are examples of the purpose of taxation in a modern economy?
(1) To generate revenue for public services

(2) To reward hard work
(3) To reduce the income gap between the rich and the poor
(4) To encourage marriage and family life
A. 1 and 2
B. 3 and 4
C. 1 and 3
D. 2 and 4
57. Lyn is 58 years old. She sold her unlisted shares on 9 April 2015 for US$7 000. The shares were
originally acquired on 10 May 2011 for US$2 500. What is the capital gains tax payable on the
disposal of the shares?
A. US$477
B. US$837
C. US$350
D. US$70
58. Tsitsi is an employee and contributes US$300 monthly to a retirement annuity fund (RAF). She also
pays the maximum amount towards her National Social Security Authority (NSSA) monthly
contributions. What is the total amount of Tsitsi’s allowable deductions from employment income in
respect of her retirement annuity fund (RAF) and National Social Security Authority (NSSA)
contributions for the year ended 31 December 2014?
A. US$5 400
B. US$2 994
C. US$3 894
D. US$3 600
59. J&J Limited issued a tax invoice for goods sold of US$20 000 (including value added tax (VAT)) in
December 2015 to its customer. Later in the month, the customer returned goods valued at
US$6,000 (including VAT) as they were below the expected standard. During the month of
392

lOMoARcPSD|3494582
December 2015, J&J Limited owned only one passenger vehicle which had an engine capacity of
2800cc. Use of the vehicle was provided to the production manager as a benefit of his employment.
What is the net amount of value added tax (VAT) payable by J&J Limited in respect of the month of
December 2015?
A. US$3 090
B. US$2 687
C. US$2 190
D. US$1 904
60. AB Limited is currently preparing its self-assessment return for the year ended 31 December 2015
and its pay as you earn (PAYE) return for the month of December 2015. By when should AB
Limited submit both its returns to the Zimbabwe Revenue Authority (ZIMRA) in order to avoid any
default penalties? Self-assessment return PAYE return
A. 30 April 2016 10 January 2016
B. 31 May 2016 15 January 2016
C. 31 May 2016 10 January 2016
D. 30 April 2016 15 January 2016
61. Liz earned the following gross income from investments during the year ended 31 December 2015:
US$
Interest on a savings account with a commercial bank 2 500
Interest on a savings account with the Post Office Savings Bank 3 000
Dividends received from a company listed on the Zimbabwe Stock Exchange 1 200
What is the amount of withholding tax deductible from Liz’s interest and dividend income for the year
ended 31 December 2015?
A. US$495
B. US$1 005
C. US$555
D. US$945
62. Fly Transport Limited submitted its self-assessment return for the year ended 31 December 2013 on
2 November 2015. What is the penalty which will be levied on Fly Transport Limited in respect of
the late submission of its tax return?
A. US$5 580
B. US$2 700
C. US$5 430
D. US$5 400
63. Duiker Limited received net management fees of US$35 000 from its Botswana-based subsidiary
company during the year ended 31 December 2015. The amount received was net of foreign
withholding tax deducted of 15%. How much double taxation relief can Duiker Limited claim in
respect of the management fees received?
A. US$10 603
B. US$6 176
C. US$5 250
D. US$9 013
393

lOMoARcPSD|3494582
Answers to multiple choice questions

1. D
2. B
3. B
4. D
5. B
6. A
7. B
8. D
9. D
10. D
11. D
12. D
13. A
14. A
15. D
16. C
17. B
18. B
19. B
20. B
21. B
22. C
23. A
24. C
25. A
26. A
27. C
28. D
29. D
30. A
31. C
32. C
33. C
34. A
35. A
36. D
37. B
38. C
39. B
40. C
41. D
42. D
43. C
44. C
45. B
46. D
47. D
48. A
49. D
50. D
51. A
52. C
53. D
394

lOMoARcPSD|3494582
54. C
55. D
56. C
57. A
58. B
59. D
60. A
61. A
62. C
63. B
395

Zimbabwe Tax System

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Zimbabwe Tax System

Încărcat de

Drepturi de autor:

Formate disponibile

lOMoARcPSD|3494582

Zimbabwe Tax System

Masters in accounting (University of Zimbabwe)

StuDocu is not sponsored or endorsed by any college or university

The Zimbabwean tax system

Downloaded by MK Mkl (leppyimelda@gmail.com)

The Zimbabwean Tax System

3. Principal sources of revenue and practice A2(a), A2(b) & A2(c)

5. Tax obligations and penalties A3 & A4

Downloaded by MK Mkl (leppyimelda@gmail.com)

A1 The overall function and purpose of taxation in a modern economy

(b) Identify the different types of capital and revenue tax. 1

(c) Explain the difference between direct and indirect taxation. 2

A2 Principal sources of revenue law and practice

(a) Describe the overall structure of the Zimbabwean tax system. 1

(b) State the different sources of revenue law. 1

(c ) Appreciate the interaction of the Zimbabwean tax system with that 2

A3 The systems for assessment and the making of returns

Downloaded by MK Mkl (leppyimelda@gmail.com)

1. Purpose of taxation in modern economy

1.2 Economic factors

Downloaded by MK Mkl (leppyimelda@gmail.com)

1.3 Social factors

1.4 Environmental factors

2. Different types of taxes

Tax Type Act

Downloaded by MK Mkl (leppyimelda@gmail.com)

7. Withholding Tax Chargeable on passive investment income Income Tax Act

2.2 Capital vs. Revenue taxes

2.3 Direct and indirect taxes

Direct taxes Indirect taxes

Downloaded by MK Mkl (leppyimelda@gmail.com)

A good tax system should adhere to a certain set of principles:

3. Principal sources of revenue and practice

3.1 Structure of the Zimbabwean tax system

1) Assessing, collecting and managing taxes and duties

3.2 Different sources of revenue law

3.2.1 Legislative law

Downloaded by MK Mkl (leppyimelda@gmail.com)

3.2.2 Judicial law

3.2.3 Agency interpretation

4. Tax avoidance and evasion

Downloaded by MK Mkl (leppyimelda@gmail.com)

4.1 Tax avoidance

4.2 Tax evasion

4.3 The need for an ethical and professional approach

Downloaded by MK Mkl (leppyimelda@gmail.com)

5.1 Taxpayers obligations

Downloaded by MK Mkl (leppyimelda@gmail.com)

 Register as a taxpayer with Zimra

5.1.1 Employer obligations

b) Withhold and remit PAYE

Downloaded by MK Mkl (leppyimelda@gmail.com)

d) Maintain records for 6 years

e) PAYE Offences and penalties

Downloaded by MK Mkl (leppyimelda@gmail.com)

The penalty is increased on subsequent conviction.

5.1.2 VAT Registered operator

c) Compute and remit VAT

Downloaded by MK Mkl (leppyimelda@gmail.com)

Principal amount 15,567

When is its tax return due?

e) Maintenance of proper records