PARTNERSHIPS

Goal:

 To know general tax treatment of partnership income in the hands of the partnership and partners.

 Understand the concept of accounting years

 To know tax treatment of income when membership changes .

 Understand the source of income in a partnership.

 Section 2 of ITA definition of ‘person’ excludes a partnership.

 Section 6 of ITA = income tax charged and levied on taxable income received or accrued in
favour of a person. Tax cannot be charged on partnership.

 A partnership is not a legal persona.

 A partnership consists of two or more people owning a company and sharing profits and losses.
Definition of ‘person’ include a natural person.

 The partners in their individual capacities are liable for income tax on their share of partnership
profits.

 S 37(15) requires a joint return of income from the partnership to be submitted by each partner
separately and individually accompanied by accounts showing operation of the partnership for the
tax year. The partners in their individual capacities are liable for income tax on the share of
partnership profits.

 S 51(5) states that a separate assessment on each partner will be done.

 NB: the CG accepts a senior partner to submit a return showing the results of the partnership
operations for the year.

Taxation of partnership Income

 Partnership suffers no tax liability.

 Calculation of individual partners’ tax liability first starts by calculating the partnership taxable
income/assessed loss. The taxable income/assesses loss is then shared in the agreed ratio to each
partner. Further assessment takes place, taking into account other income and expenses not from
the partnership or not included in the partnership taxable income.

 Each partner will pay tax on his individual taxable income which includes income from other
source other than the partnership. He/she is entitled to credits available to him/her.

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  A partner can offset his/her share of assessed loss from a partnership with any other trade income
(except mining)

 Applicable tax rate 25%

Partnership agreement

 This should be provided to the CG.

Importance of agreement:

 Shows: share of profit basis

 salary payments that might be due to a partner/s.
 interest payments to partner/s

Accrual of profits for a partnership

S 10(2) states that the profits of a partnership accrue on the accounting date, e.g. if accounts are prepared
for the year ended 31/12/2012, it means the profits only accrue on 31/12/2012 to each of the partners in
their profit sharing ratios. If the year-end does not coincide with the tax year, accounting year profits will
accrue on that date, e.g. if the accounts are for the year ended 31/3/2013, the profits accrue to the partners
on 31/3/2013.

Implications of the accounting date

i) A newly admitted partner can only be taxed on the first accounting date after admission.
There is no apportionment if part of the income falls into the previous tax year.
ii) When there is a dissolution of the partnership, income accrues on the date of dissolution even
if part of the income relates to the previous year.
iii) When a partner dies or when the dissolution is due to the death of a partner, income accrues
as follows:
a) If accounts are prepared, partnership profits accrue on the date of death of the deceased
partner.
b) If no accounts are prepared on date of death, the profits from the partnership will accrue
on the accounting date, even to the deceased partner.

NB. Partnership does not qualify as an employer for partners. There is no employer-employee
relationship. A partner is one of the owners of the business.

Effect of absence of employer-employee relationship

 There are no Fringe benefits in terms of S8(1)f, e.g if a partner is using a motor vehicle that
belongs to the partnership, we will not use the deemed benefit but we will only allow expenses
that relate to the business and disallow those that relate to private use.

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  The salary for a partner will be taxed as a share of the profits (COT v Newfield) and is therefore
not subjected to the progressive rates but taxed at 25%

 Medical subscriptions or expenses paid by the partnership are not a deduction instead they are
income to the partner. Same applies to any payment made by the partnership for contributions to
a pension fund or retirement annuity.

 Fringe benefits are not deductible .

 Motor vehicle expenses not subject to the motor vehicle tables deemed benefits.

Steps in determination taxable income for partner.

1. Calculate the taxable business income of the partnership (only income and expenditure distributed
in partnership ratio must be taken into account.

Gross income xx
Less (x)
Less deductions (x)
Taxable income Y

2. Split taxable income by the profit sharing ratio for each partner

3. Determine partner’s taxable income by adding income he personally received from the
partnership and income from other sources (not salary that is not from the partnership.

4. Deduct allowable personal expenses for each partner

5. Apply tax rate ; deduct credits; add 3% levy and deduct PAYE remain tax payable/refund.

Partner A B C
Split taxable income by the profit sharing ratio x x x
Less exemptions x x x
Less deductions x x x
Taxable income
Apply rate (25%) x x x
Less credits x x x
Add AIDS levy (3%) x x x

Specific transactions that affect partnerships

 Partners taxed on share of profits and NOT on drawings.

 Drawings will NOT be a deduction in partnership computation.

 Drawings will NOT be added onto individual partner’s computation.

 Interest charged to a partner on drawings

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 i) Add to partnership income

ii) NO deduction to partner’s computation

Why?

 Salaries and capital/current interest payments to partner/s

 Deduct from partnership

 Add back as income on individual partner’s computation

 Salary accrues on a monthly, quarterly basis depending on contract

Illustration

Mr X enters into a business partnership with Mr Y. The profit sharing ratio is 60:40 respectively. The
partnership paid following expenses:

 Salary to Mr X $24 000

 Interest on capital accounts: Mr Y $3 100

 Partnership profit before the above expenses $64 000

Required:

 Calculate taxable income for Mr X and Mr Y.

Solution

Computation of partnership taxable income

Partnership profits per accounts $64 000

Less salary X ($24 000)

Interest on capital account Y ($3 100)

Distributable partnership profits $36 900

Computation of partners income: profit sharing ratio 60:40

Mr X(60) Mr Y(40)

Share of taxable income $22 140 $14 760

Add salary $24 000

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 Interest on capital account $3 100

Taxable income $46 140 $17 860

Premiums on insurance policy

paid by partnership

1. Partnership beneficiary:

Disallow contributions for joint life policy and individual partner’s life policy to partnership.

DO NOT ADD on individual partner’s computation.

2. Partner beneficiary:

Partner life policy

Allow contributions to partnership

Add back to partner’s contribution

DRAWINGS

 Partners are taxed not on drawings but on share of profits (e.g. ignore).
 Drawings are not deductible in a partnership computation.
 Interest on drawings is included in the partnership computation as income, it’s not allowed as
a deduction in the partnership computation
 Drawings will not be added onto the partners’ computation.
 Interest changed to a partner on drawings
i) Add to partnership income
ii) No deduction to a partner’s computation – Why? – private expenditure, prohibited
deduction S16 (ITA).
Premiums on Insurance policies paid by the partnership

1. Partnership beneficiary
Disallow contributions for joint life policy –capital in nature and neither will it be added to
the partners computation – No benefit and individual partners life policy to partnership.
Do not add to individuals partners.

2. Partner beneficiary
 Partner life policy
 Allow contributions to partnership but will add that as a benefit to the taxpayer – it is -----
- expenditure, partner does not get anything.
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BAD/IRRECOVERABLE DEBTS

In terms of S15 (2) g – irrecoverable debts owed to a taxpayer gone bad during the taxpayer can
be deducted as long as 3 conditions are fulfilled:-
a) Should have been included in gross income this taxpayer year/previous tax years.
b) Proven bad to the satisfaction of the CG.
c) Amount should be due and payable to the taxpayer.
 If the above 3 conditions are fulfilled – Bad debts in a partnership are allowable, in a
partnership irrecoverable loans from employer are not deductible because they would not
have been included in gross income.
 A bad debt deduction will not be allowed to a partner where the 3 conditions do not apply.

Example
Mr Y (40%) joins Mr X (60%) in partnership business. At the end of the tax year there were
irrecoverable debts of $5000. This was a result of sales made for Mr X before Mr Y joins the
partnership. You are required to calculate the deduction that each partner can claim in respect of
the irrecoverable debt.

Solution
Bad debt - $5000
i) Not included in the partnership of XY’s gross 1
ii) Proven – bad debt is a debt proven as bad
iii) Due and payable to the partnership

Bad debt $5,000

X Y
60% 40%
Share of bad debts 3,000 2,000 – Disallowed
Based on the above computation – it is only allowed
To X only why?
i) Included in his income (excludes Y)
ii) Proven bad
iii) Due & payable

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Therefore this transaction is included in the second part only i.e. for partners.
Where there is a change in the profit ratio only the proportion previously included in income will
be allowed as a deduction.

Question 2
X & Y share profits in the ratio 60:40 at the end of the tax year ended 31/12/11. There were
debtors in the financial statements of $6,000. On 05/06/12 one of the debtors was declared
insolvent and he owed the partnership $1,500. This amount was included in the $6,000 (2011
debtors figure). On 31/03/12 Mr Z joined the partnership and the agreement shows a new change
sharing ratio of X (40%), Y (35%), Z (25%). The partners know that the country is going
through a recession therefore debtors may have difficulty in paying their debts they decide to
create a provision of $22,000 for the 2012 tax year.
RQD – How much do the partners have to deduct as bad debt and as provision for B debt
individually.
to 31/03/12 to 31/12/12
X - 600
Y - 525 Allowed as a
Z - 375 deduction

S8 (I) J – Recoupment
A recoupment is taxable in terms of S8(I) J where an amount recovered has been previously
allowed as a deduction. For this recoupment to be taxable in the partners hands the amount
should have been deducted and included in the partners income.
The amount to be included should be in the changing sharing ratio. Where there is a change in
the sharing ratio the amount is limited to what was previously allowed as a deduction.

Question 3
Irrecoverable debts amounting to $1,600 were recouped in respect of a debtor of 2 of the partners
Mr X and Mr Y. Where the sharing ratio was 80:20 respectively. Mr Z had not yet joined the
partnership is 40:40:20 respectively. You are required to calculate how much should be included
in each of the partners income as recoupment.
New Profit Sharing Ratio

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X 40/100 x 1600 640 - Recoupment
Y 40/100 x 1600 640 – Previously allowed 320, limited to $320
Z 20/100 x 1600 320 – Not GI

Capital Allowance
S15 2C 7th Sch

 Capital allowances are deducted as an expense before the tax adjusted change is allocated to
partners in their changed sharing ratios.
Gratuity to a former partner/former partners dependants S15 (2) (q)
Is an allowable deduction to the former partner/to the former partners dependants if the former
partner left the partnership on grounds of health, age and infirmity and is limited to $200
(aggregate amount).

Pension Funds Contributions & Retirement

Annuity Fund & NSSA Contribution

 Pension fund contribution paid by the partnership for its employees are an allowable
deduction which is limited to $5400/employee.
 However payments for the partners are allowable in full and will subsequently be added to
income computations for individual partners.
 Where the partner claims a deduction the limits will apply in terms of S15 (2) h.

Example
Employee 1 Employer – pension fund $8,000
Allowed Maximum $5,400/employee

Partners 2 Employer – pension fund $8,000

*Partnership on behalf of the employees

Calculation of partner’s taxable income

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1. Taxable income – partnership $8,000 in full
2. TI – partner *Add pension contribution $8,000
Less deduction $5,400
Taxable income $2,600

Medical expenses
Medical aid expense and contributions are allowable in full to the partnership and added to the
individual partners computations and then a partner can claim for a medical aid credit.

1. T/I partnership (in full) $8,000

2. TI partner
3. Add Medical Aid Contribution/Expense $8,000
TI XX
Apply rate XX
Less credits XX
Medical aid (50% x 8,000) $4,000

Trade Convention/Trade Mission (S15 (2) W

 If the partnership pays for a trade mission/trade convention on behalf of a partner we allow a
deduction to the partnership of the cost or a maximum of $2,500 for 1 trade mission or a
trade convention paid to each partner for the tax year.
 If a trade mission/convention starts in 1 tax year and ends in the following tax year the
deduction will be allowed in the year in which it ends.

Change in membership composition of a partnership

 Change in membership will occur when a member dies, retire or on admission of a new
member. When a partner leaves/ a new partner joins it may result in recoupments in both
hands of outgoing and remaining partners of capital allowances previously granted and the
granting of further allowances on both remaining and new partner.
 When a member dies potentially it gives rise to an accounting date. Only the estate of the
deceased partner is liable at that date.

Effect of change of membership on tangible assets

 Recoupment/scrapping allowances arises because there will be a transfer value which most
likely may not be the ITV.

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 If assets are transferred at ITV it may raise suspicion of tax avoidance except in situations
where the surviving spouse inherits the deceased partner’s share.

Example
A, B & C are in partnership, were in trade since 2009, sharing profits as 35:35:30 respectively.
The accounting year coincide with the tax year during 2011 tax year machinery was bought for
$50,000, maximum allowances were claimed. Transfer value of the machinery was $45,000
when partner C left the partnership on 31 July 2012 a new partner D was admitted on 01/08/12.
Partner D brought in a motorbike which he retains ownership of. The motorbike is used for
delivery by the partnership messenger. The agreed value of the time he joins the partnership is
$15,800. Calculate capital allowances entitled to each partner for the tax year ended 31
December 2012. The new sharing ratio for A, B & D is 35:35:30.

Solution
2011
Machinery 50,000
C.A 2011 (25% x 50,000) 12,500
37,500

ITV 2011 37,500

2012 – Transfer value 45,000
Recoupment 7,500 – S8 (I) J

Recoupment
A (35) B (35) C (30) D (30)
2,625 2,625 2,250
2012 tax year
Transfer value 45,000 A B C D
SIA 25% x 45,000 11,250 3,938 3,938 - 3,375
ITV 33,750

Motorbike
D retains ownership therefore any capital allowances allowed to the bike is allowed to D.
He is bringing in and is not purchased. The agreed value is $15,800
NB: He cannot be allowed SIA but W & T will be allowed at 20%
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Motorbike 15,800 A B C D
W & T 20% x 5/12 x 15,800 1,317 - - - 1,317
ITV 14,483

Capital allowances A B C D
SIA – Machinery 3,938 3,938 - 3,375
Motorbike W & T - - - 1,317
3,938 3,938 - 4,692

Intangible Assets
 The most common is goodwill.
 Goodwill generally is not taxable in the hands of recipients and non deductable in the hands
of the purchaser. In the hands of the recipients goodwill is generally a capital receipt in the
hands of its purchaser it is capital expenditure.
 Problems will arise when this amount is linked to a share of profits.
 The amount may be disallowed in the hands of the purchaser as the purchaser is deemed to
have been acquiring a right and acquisition of a right is capital in nature but the profits will
be taxable in the hands of the seller because the profits will be construed to be arising from
the right and therefore income arising out of an asset.
 The other problem that can arise is in the use of terminology. If goodwill is referred to as
remuneration the seller may have problems proving that it is indeed goodwill and would
therefore be taken to be revenue in nature instead of being a capital receipt.
 Goodwill payments that take characteristics of an annuity will be taxable – S.8.I.A.

Sources of partners profits (where the partner resides)

In CIR V Epstein it was told that income for the partner carrying out activities in SA was from a
source within SA while the other partners were considered that their income was from a source
not within SA from the case source or from a partnership where the partners are carrying out
business activities. However, where a partner is not resident and is not rendering any service in
the other country that he is resident to the partnership he will be taxable on the profits as the
source will be where the capital is employed/activities are carried out.

Example

Partner resident in SA Partnership

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 Zimbabwe

Source (Capital employed)

Question 3

John & James are partners in ABC & partners on 01/01/12. The partnership purchased a motor
vehicle for John for business and private use at a cost of $68,000. Partnership manned fuel and
insurance expenses of $17,000 and $8,900 respectively. The fuel expenditure relating to the
partners motor vehicle is $9,000 and is included in $17,000 above. Half the fuel was used for
business and the other half for private business. The insurance policy and the remainder is for a
life endowment policy for the senior partner John. The partnership is the beneficiary of both
policies. In addition to the above amounts contributed to the joint policy by the partnership each
partner contributed $500 each to the same policy during the tax year. James receives a salary of
$5,000/A from the partnership. The partnership paid $600 medical expenses on behalf of John.
The partnerships only assets at the beginning of the year were 2 machines. No purchases of
assets took place during the tax year except the car for John.

The ITV for the machine $37,000 at the start of the tax year. The profit sharing ration is James
40, John 60. The partnership earnings show a profit of $130,678 before taking into account the
information mentioned above.

The partnership is a good citizen and pays its tax on time, during the 2012 tax year it paid a total
of $25,000 for all the APDS.

RQD – Calculate tax due/refundable by each partner for the tax year ended 2012.

Calculation of partnership taxable income

$
Profits 130,678
Cost of motor vehicle (68,000)
Fuel expenditure business use (9,000/2) (4,500)
Fuel business use (17,000 – 9,000) (8,000)

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 Joint insurance policy (capital in nature) -
Life policy – John (8,900 – 5,400) -3,500 -
Salary – James (5,000)
Medical expenses (600)
Capital allowances (10% x 37,000) (3,700)
TI 40,878

Taxable Income Computation of Partners

Share of profits James 40 John 60

Share of profits 16,531 24,527
Motor vehicle 68,000
Capital allowance (6,800)
Salary – James 5,000
Medical expenses - 600
Taxable Income 21,351 86,327
Apply tax rate 25% 5,338 21,582
Less Credits (600 x 0,50) - 300
5,338 21,282
Add 3% AIDS levy 160,14 638,46
5,498,14 21,920,46
Less tax payments 10,000 15,000
Tax (refund/payable) (4,501,86) 6,920,46
Motor vehicle $68,000

1. W & T 20% x 0,5 x 68,000 (6,800) – John (Assuming ½ is for business and ½ private)
ITV 61,200
2. 68,000 is not an allowable deduction but a benefit to John hence he must be taxed on that

Machine – ITV 37,000

W & T 10% 3,700

33,300

Summary notes on Partnerships

1. Partners are taxed on their individual share of profits and the partnership is not taxed on profits.

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2. Treatment of some expenditure incurred by partnership.
Expenditure incurred by Hands of partnership Hands of individual
partnership partner
Allowable deduction taxable
a) salary

Not allowable Not taxable

b) joint life policy

Not allowable Not taxable

c) partner’s life policy-
partnership beneficiary

allowable taxable
d) partner’s life policy –
partner beneficiary

Not allowable Not taxable

e) partner’s life policy –
ceded to the partnership

allowable taxable
f) Interest on capital

Not allowable Not taxable

g) drawings

allowable taxable
h) rents payable to partner

allowable taxable
i) sports subscriptions

allowable Not taxable if substantially

j) other club subscriptions patronised by business and
professional persons
allowable Taxable. Exemption
k) medical aid applies to employees only.
contributions Grant medical expenses
credit to partner
Allowable to maximum $2 Not taxable
l) attendance trade mission 500 per partner
or convention

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 Allowable to a maximum Taxable full amount on
m) voluntary payment to $200 per partner or partner
retired partner(on grounds partner’s dependant
of ill health, old age or
infirmity)

allowable taxable
n) partner’s private use of
motor vehicle

allowable Not taxable

o) passage benefit-
business and

FARMING INCOME

Goal

To know definition of a farmer

To know valuation of livestock

To calculate drought and epidemic relief on livestock

(Read Chapter 11.1 -11.2; 11.6.1; 11.6.2 Students’ Guide to Tax in Zimbabwe 2006).

INTRODUCTION

 Farming income is subjected to the same process established in AC 405.

 Establish what constitutes gross income

 Deduct exemptions

 Deduct deductions.

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  Same tests for what constitute gross income will apply

 Same tests for deductions will apply

 Difference to other taxpayers

1. Farmer may earn income in later years after incurring expenditure eg.

Income for farmers fluctuates: why?

Result : Special provisions for farmers:

Faced with fluctuations of prices

Farmers can be affected by the weather

Often farmers are affected by epidemics

ITA (Chapter 23:06: a) valuation of livestock

b) 7th Schedule (deductions and treatment of special sales).

IMPORTANT DEFINITIONS

 In terms of the Act Sec 2

farmer = “ means any person who derives income from pastoral, agricultural or other farming activities,
including any person who derives income from the letting of a farm used for such purposes”

*Farm operations

*Farming purpose

Farming operations and farming purpose shall be construed accordingly, i.e. derived from the meaning of
a farmer.

Note:

Income from letting out land used for farming purposes by lessee will constitute farming income in the
lessor’s hands.

Contention can arise on interpretation of what constitutes farming operations/farming purposes as not
specifically defined in the Act. Case Law and Departmental practices provide the interpretations.

Illustration 1

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Mr Choto has a plot in Chivhu. He grows maize and keeps cattle for his consumption. He also keeps
game on the property and during the tax year allows his brother who lives in the United States to hunt
some of the game so that he can maintain the required numbers.

 Does Mr Choto qualify as carrying on farming operations?

Subjective tests: no profit motive, i.e. growing crops for consumption (most likely to be a capital receipt)

Objective test: Not quite clear how his brother comes into play.

NB: from the definition of a farmer, Mr. Choto qualifies as a farmer

If he had to sell farm produce and sell the game, this would constitute a receipt under S 8.1.

Guidelines to solution

Farming operations

 There must be a genuine intention to farm with a reasonable prospect of eventually realising a
profit.(Case: ITC 1319). Land or/and infrastructure should be developed for farming purposes.
ITC 1424 case showed the taxpayer proved he had developed his land for farming operation
although he had sustained losses yr after yr.

 A hobby not farming operations (H v COT)

 Activity connected to farming. Investment of farming income? Breeding horses and racing?
Breeding horses is closely related to farming but racing is a distinct business on its own.

Illustration 2

 A farmer has a successful livestock farm . He buys many trucks for transporting his livestock to
an abattoir near his farm. On his way to the abattoir he picks his neighbours livestock that needs
to go to the abattoir. He does this for a fee. Discuss how you will treat the receipts from the
abattoir and from his neighbours. Relate your answer to farming.

 Valuation of Livestock (2 nd Sch Part 111)

 7th Schedule par 1 defines livestock as including cattle, sheep,goats,pigs, crocodiles, ostriches,
fowls or any other animal or bird raised by a farmer as livestock in the course of his farming
operations. Game?

 Farm trading stock. Why are we interested in this?

 To Value Livestock

Determine the following :

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 1. The type: is it either stud or ordinary livestock?

2. What are the classes approved by the Commissioner ?

3. What valuation method ?

 Type of Livestock

 Stud = Selective breeding done by professionals to produce a particular trait which can be pure
or cross.

 Ordinary = born or purchased for non stud purposes.

 Classes (must be approved by CG)

 Can be according to :

 Age

 Sex

 Any other class approved

 A combination

 e.g bull, heifer, cow, steer, oxen, tollies.

 Valuation Methods

 3 methods 1. Fixed Standard Value(FSV)

2. Purchase Price value(PPV) or 3 Cost and Maintenance value (CMV)

Fixed standard value = general definition value fixed by farmer approved by CG (see specific definition
under each type of livestock.

PPV = see definition under stud.

CMV = Cost of purchase/ breeding and the cost of maintaining the animal

Valuation of Stud

 Use FSV or PPV (elect first return)

 FSV = actual cost < $150 or $150 if it is greater or whatever value a farmer elects

 PPV = cost of animal if cost <$150 or if >$150 shall be $150 or the cost of the animal farmer
elects.
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 Illustration: Mr Choto has a stud bull which he purchased during the tax year for $500

 The FSV for stud bulls that was approved by the CG in previous returns is $350

 The CMV of the bull from time of purchase to end of the tax year is $590.

 What value will be included in gross income as closing stock for the bull?

Illustration

 Mr Choto has a stud bull which he purchased during the tax year for $500

 The FSV for stud bulls that was approved by the CG in previous returns is $350

 The CMV of the bull from time of purchase to end of the tax year is $590.

 What value will be included in gross income as closing stock for the bull?

 Ordinary Livestock

 Elect in first return.

 Use FSV or CMV

 FSV = fix a value to be approved by CG.

Illustration

same as above but instead of the livestock being a stud it is ordinary.

 Conclusion on livestock valuations:

 Once valuation methods and fixed standard values have been approved:

 The Commissioner cannot change the value unilaterally.

 The farmer can change the values but he cannot change the methods. (If he has elected to value a
group or class by FSV he cannot change to PPV if it is a stud or to CMV if it is ordinary.

Illustration

Mr X is a cattle rancher. He purchases the following animals during the tax year:

 2 bulls @ $275 and $ 315 respectively.

 5 Cows @ $200 each

 20 Oxen @ $190 each

 10 Heifers @ $170 each.

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  He had the following as opening stock:

 Example cont’d

 2 oxen with PPV value $150 each

 7 heifers PPV value $50 each

 9 Tollies PPV value $95 each

 1 bull FSV $150

 10 Calves FSV $20

 During the year one bull dies, 19 oxen are sold @ $152 000, 4 heifers were promoted to cows
(FSV = 100), 6 tollies became oxen, 5 calves were promoted to 3 tollies and two heifers. What
amounts should be included in gross income and deductions if you are told that the cost of
maintenance for the year relating to the herd is $7 585. The cost can be proportionately split
according to numbers.

Solution

Livestock
Reconciliation
Bulls Cows Oxen Heifer Calves Tollies Total
s
FSV / PPV 150 100 150 165 20 95
Opening Stock 1 0 2 7 10 9
Opening Stock S 15 (2) (u) 150 0 300 1155 200 855 2660
value
Purchases 2 5 20 10 0 0
Deaths (1) 0 0 0 0 0
Sales 0 0 (19) 0 0 0
Promotions in 0 4 6 2 0 3
Promotions out 0 0 0 (4) (5) (6)
Closing stock 2 9 9 15 5 6
Closing stock value S 8 (1) (h) 300 900 1350 2475 100 570 5695

Maintenance costs S 15 (2) (a) 7585

Drought and epidemic disease relief (7th Sch)

[Link] on sale proceeds due to

a) forced sales due to drought or epidemic disease

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b) return of grazers due – drought/epidemic

 FORCED SALES

 Available only through election which is irrevocable.

 Taxable income derived from the sale spread over three years

 If taxable income from forced sales exceed his total taxable income may elect to spread the total
taxable amount.

before the provisions are applied.

 2) On Restocking

The area and period of drought is gazetted by a Statutory Instrument by the Minister

Para 5 = grants defferment of tax due to force sales

Para 6 = grants additional deduction on cost of restocking.

Illustration

Mr Choto is forced to sale 50 herd of livestock due to an epidemic in an area declared by the Minister of
Finance for $20 000. Expense directly relating to total herd are: wages $720, veterinary expenses $100;
feed $2 800. He wishes to pay minimum tax. The FSV of the cattle sold is $100 each. 31 st Dec 2011 150
and 2012 90 herd. What amount is taxable for the tax year

Solution

Sales (S8(1) $20 000

Less:

opening stock value* $5 000

Expenses sales

Total expenses = $3 620

Average of herd = (150 +90)/2 = 120

Cost relating to herd =

= ( 3620/120)* 50

= $1508

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Total deductions $6 508

Taxable income 13 492

Taxable income in terms of election

2012 $4 498

2013 $4 497

2014 $4 497

Restocking (para 6)

 An additional 50% of the cost of purchase for restocking allowed in the year of purchase. Note
restocking not limited to sales but also includes death due to drought or epidemic (Area declared
by Minister)

 If restocking makes herd exceeds carrying capacity of land (Dept of Agricultural Technical and
Extension Services

Restocking allowance

Formulae =( A/2) * (B/C)

A = cost of livestock purchased

B = Difference between carrying capacity of the land minus opening stock

C= No of livestock purchased.

Illustration

Mr Choto is restocking his herd that was depleted due to an epidemic disease by purchasing 200 herd of
cattle for $60 000. The carrying capacity of the land is a) 500 b)600. Before restocking the herd was 350.
What is the restocking allowance?

Solution

a) (60 000/2)*(150/200)

= $22 500

= b) (60 000/2) * (200/200)

= $30 000.

Taxation of crops S8(1)g

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Land on which crops grow generally not taxable. Why?

Note: treatment of crops sold/donated on land.

Intention at the time of planting of crops critical.

If it was to resale = taxable using market value

If inherited/or received as gift.

 Tax treatment of crops

 NB. Proceeds from sale of reaped crops taxable.

1. Crops not yet reaped do not constitute gross income

 Definition of trading stock does not include crops still in the ground. Farmer does not need to
include in his/her return.

 If farmer wishes to include can use estimated cost of production ([Link] and cultivation
costs)

2 Crops reaped but not yet sold:

 Valuation method =“ fair and reasonable”

 Could either be selling price or cost

 Disposal of crops

1. Normal sale = selling price

2. Farmer’s consumption

3. Donation

Valuation of 2 and 3 for purposes of gross income = fair and reasonable (cost)

 Deductions land acquired with crops S 15(2)k

 Purchase: expenditure the CG considers just and reasonable of the purchase price.

 Where no consideration is paid by taxpayer an allowance fixed by the CG as value at the time of
acquisition.

 Overview of taxation of timber

 It is a crop and principles discussed apply.

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  Expenditure incurred claimed as and when incurred (seeds, seedlings,purchased trees, cultivation,
fire breaks establishment etc. Capital allowance allowed.

 How is income accounted for? Same as crops.

 Alternative treatment of taxation of timber

 Why? Claim of assessed loss with 6yr rule

carry over may expire before proceeds are received to offset loss in the absence of other income.

b) The farmer can elect c/f accumulating working expenditure and then offset a proportional
amount with volume sold of timber when sales commence. (CG accepts method although not legislated).

c) election terms of 7th Schedule para 3

Complicated in practice.

 Orchards; tea and coffee plantations

 General taxation rules apply.

 Differences with timber in option (normal option)

a) Cost of acquisition of purchased plants and seedlings not allowed as a deduction Why?

b) Alternative method: election irrevocable 7th Sch para 4

c) i) planting costs (exclude costs of trees) and maintenance costs c/f

ii) When orchard matures working capital c/f allowable but spread proportionately over the estimated
productive life of the orchard approved by the CG.

iii) If orchard sold with outstanding working expenditure the expenditure will no longer be deductible.

iv) If an orchard is uprooted and replanted when there is outstanding working the

Following takes place:

a) Working expenditure is claimable in the year of uprooting.

b) The orchard is treated as a new orchard in the following tax years.

Growing Flowers

 Expenditure on purchases of plants for propagation is considered by the CG:

i) revenue expenditure if the productive life of the plant is =3yrs or less.

ii) Capital expenditure if the productive life is > 3yrs.

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Tobacco Levy

 Charged and levied in terms of S36A ITA.

 In terms of the Twenty Fourth Schedule auctioneers required to withhold a tobacco levy from
buyer’s proceeds from tobacco purchases from the auction floors. No tobacco levy charged on
seller. Collected at a rate of 1.5% of price.

 S15(2)hh allows a deduction of any tobacco levy paid in terms S36A.

Capital Allowances

Farmers if entitled are allowed capital deductions in terms of :

a) S 15(2)c arw Fourth Schedule

b) para 2 of the Seventh Schedule deductions

 Fourth Schedule deductions

On purchase or construction

 Farm improvements of a permanent nature.

This includes water furrows used for carrying out farming operations

Note that i) staff housing ii)homestead used by farmer for his/family dwelling iii) tobacco
barn iv) structures referred para 2 Seventh Schedule not included.

 School ; hospital; nursing home clinic in connection with taxpayers farming operations.

 Staff housing cost not to exceed $25 000

 Tobacco barn

 Commercial building

 Industrial building

 Articles, machinery and implements.

 Seventh Schedule para 2

Allowed on expenditure incurred during the tax year on:

Stumping and clearing lands

Works for prevention of soil erosion

Sinking of boreholes and lining and sinking wells (pumps,piping?)

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 Aerial and geophysical surveys

Fencing

Water conservation works (definition)

Contribution in terms of Natural Resources Act to someone else doing water conservation works.

 Importance of classifying deductions under the correct legislation

1. Seventh Schedule allowances granted on the total dollar amount spent in the tax year incurred.
Fourth Sch ?

2. It is only granted on construction/additions/erection and not on purchases with existing farm.

Fourth Schedule?

3. When the assets are sold there is no recoupment. Fourth Schedule?

4. Use during the year not a prerequisite. Fourth Schedule? (Note see definition Fencing.

 Conclusion

Important points to note:

Definition of farmer, different types of livestock, FSV, PPV, fencing, epidemic area,

Drought-stricken area, water conservation works and farming operations.

Valuation methods of ‘farm trading stock’

Know special clauses to farmers in the Act.

FARMING SUMMARY
Farming trading stock

Livestock and crops or water produce

Livestock – ordinary or stud.

Valuation

Ordinary – cost of maintenance or fixed standard value

Stud – purchase price value or fixed standard values.

Crops – fair and reasonable except for sold crops where selling price used.

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Determination of taxable income

Gross income = sales, donations, consumption for domestic purposes , closing stock, slaughter
of livestock or harvesting of produce as rations for farm labourers.

Deductions

opening stock, cost of livestock purchases or fixed standard value of purchases, deductible
expenditure in terms of S15 ( e.g. rent of farm lands, animal feed, fertilizer and manure costs,
wages to farm labourers, rations purchased for employees, purchases of seed, plants and trees,
rates and taxes, water and electricity, slaughter of livestock or harvesting of produce ration for
labourers, packing materials, repairs and lease premiums, 7th Schedule deductions and capital
allowances in terms of 4th Schedule.

7th Schedule deductions( 100% of cost incurred by farmer during year of assessment.

Stumping and clearing of land

Prevention of soil erosion

Construction of dams, reservoir, weir or embankment constructed for impounding water ,

irrigation schemes, sinking boreholes and wells and water pumping plants

Fencing

Aerials and geographical surveys

(The above not qualify for SIA or wear and tear, no recoupment upon sell)

Drought relief

Taxable income resulting from forced livestock sale due to drought, epidemic (declared by
Minister), land acquisition in terms of the Land Acquisition Act Chapter 20:10 can be spread
over 3year in equal instalments (election and election is irrevocable)

Restocking allowance an extra 50 % of purchase price deduction allowed on stock purchased to

restock an area that had been declared drought stricken or epidemic stricken . Where the
restocking exceeds the assessed carrying capacity of the land amount restricted.

4th Schedule allowances

Farm improvements if qualify for SIA 25% first year and then 25% accelerated wear and tear
for the next three years on cost of construction (must elect) Cost of construction of schools and
clinics( part of definition) To qualify as school (more than half pupils must be children of farm
labourers employed by taxpayerand to qualify as hospital or clinic or nursing home more than
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half of farm labourers or family members must be receiving treatment at the clinic, hospital or
nursing home respectively.) Farm improvements exclude expenditure under 2nd para. of the 7th
Sch

Permanent roads construction are a farm [Link] temporary roads are are a deduction
under S15(2)a

Farm improvements also include security items e.g security screens, security lighting, fire
extinguishers if part of main building otherwise classified under articles and implements.

If not qualify for SIA or election is not made allowance 5% wear and tear on cost of
construction

Tobacco barn as above

Staff housing cost of unit not exceed $25 000 to qualify for above

Implements and machinery can qualify for SIA

If not qualifying for SIA or no election is made wear and tear appropriate rate will be on
reducing balance to be calculated as an allowance.

Suggested way of calculating taxable income for a farmer:

1. Calculate farming sale proceeds from livestock

2. Identify capital receipts not to be included or exempt livestock proceeds deduct from
above.
3. Determine value of closing stock of livestock and add it to income (after applying 2
above).
4. Determine value of opening stock of livestock and deduct
5. Determine cost of purchase / fixed standard value of livestock and deduct
6. Calculate farm proceeds from produce (exclude capital and deduct exempt proceeds) and
add
7. Determine value of closing stock of produce and add
8. Determine value of the opening stock of produce and deduct
9. Calculate farming expenses and deduct
10. Calculate capital allowances 4th Schedule and deduct
11. Calculate deductions in terms of the 7th Schedule and deduct
12. Add other taxable income from other sources
13. Deduct other allowable expenses and deductions
14. Result total taxable income for taxpayer.

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Valuation of Farm Trading stock

Sect Type or Date of valuation Ordinary Stud crops 2nd

8(1)(h)para. circumstance livestock livestock Schedule
t/p to elect t/p to elect para.
i Closing stock Last day of tax FSV PPV Fair and 12
year/accounting CMV FSV reasonable
yr
ii Consumed by Date of such use Fair and Fair and Fair and 13
t/p or put to reasonable reasonable reasonable
other use
iii Stock on hand Date of such FSV PPV Fair and 12
on date of death, happening CMV FSV reasonable
insolvency or
donation
iv Attached by End of tax year FSV PPV Fair and 12
court order CMV FSV reasonable
v Sold with Date sold Selling Selling Selling 14
business or price price price
pursuant of
court order

MINING
Mines are taxed as any other taxpayers in business applying the same principles except mines are
not allowed the following deductions:

a) W&T
b) SIA
c) Scrapping allowance
d) Lease premium allowances in terms of S15 2(d)
e) Allowances of improvement in terms of S2 (e)
f) S15 (2) (t) does not apply – pre-trade expenditure
g) 6 year rule limit for carrying forward assessed losses does not apply

What applies in mining?

i) CA that apply are called Capital Redemption (CRA) – Allowance in terms of 5th Sch S15
2(f)(i)
ii) Prospecting deduction S15 2 (f) (ii)
iii) Assessed losses can be carried forward in perpetuity

Definitions
1. Mining – S2

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 Mining is the winning of the mineral from the earth, processing or purifying the mineral or
any activity that the Commissioner determines to be a mining operation e.g. re-working a
mining dumps, slime. Purification relates to minerals won by the taxpayer.

2. Mineral S2
Includes company valuable crystalline/earthly substance forming part of/ found within the
earths surface/produced and deposited there by natural agencies e.g. gold, coal, diamonds,
iron. Excluded from this definition is products like petroleum, any clay other than fire clay,
gravel, sand, stone (exclude limestone) or other like substances that are ordinarily won by the
method of surface making known as quarrying.

3. Capital expenditure – 5th schedule Para 1

1st part It is expenditure on mine buildings, works and equipment & plant, lease premiums,
shaft sinking. Shaft sinking includes sumps, pump chambers, stations and ore bins
accessory to a shaft.
2nd part Expenditure incurred prior to commencement of trade on preliminary surveys,
boreholes, development, general admin and management, interest on loans.
3rd part After 1/4/1988, it includes expenditure on mine schools, nursing homes and clinics.
A school has to be used for mining operations by children/dependants of mine
employee > 50%.
Nursing home/clinic > 50% mine employees and their dependants.
Normal capital expenditure like of mining claims, goodwill/company floatation is not included in
the definition. Expenditure incurred in a tax year is current capital expenditure (CCE).

Unredeemable Balance of Capital Expenditure (UBCE) – comprises of capital expenditure not

finished upon claiming of CRA and carried forward in any particular year or preproduction/non-
production expenditure.

When allowing CRA, allow the total expenditure for most of the assets except for those with
limits where we allow the deemed cost.

LIMITS
In terms of Para 1 (1) (a) (i), a mine building that is used as a dwelling by one of the owners
where the mine has 1 – 4 owners controlling the mine, the limit = $10,000.

In terms of Para 1 (1) (a) (i), a PMV as defined in 4th schedule. Limit = $10,000

Staff housing for employees employed at a clinic, school, nursing home or hospital, the cost of
the staff housing should not exceed $50,000. If in excess of $50k, it does not qualify for staff
housing.
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The cost of the school, clinic, nursing home/hospital, deemed cost = $50,000

Staff housing for mining has no limit

 Will rank for capital allowance in full
Calculation CRA

3 Methods

1. New Mine Method

Only available to those carrying an operation on new mines and the new mine is defined in 5 th
schedule as a mine which commenced production on or after (01/04/68). It would also include a mine
which was closed/changed ownership or was re-organised with substantial new developments and
new plants and then resumed production on or after (01/04/68). The method must be elected in the 1st
year in which production commences. CRA = CCE + UBCE at the beginning of year of assessment.

The method allows the tax payer to deduct all capex brought forward and current in the 1 st year of
production. Thereafter capex is allowed in the year in which it is incurred. This is the fastest way of
claiming CRA and is very popular. The method can be applied whether you own the mine or tributor
or leasing the mine. Any recoupment under this method is taken into account to extinguish the UBCE
before bringing it into gross income e.g. UBCE = $50,000, Recoupment = $52,000

CRA = (UBCE – R) + CCE

Example
Mr Moyo commences gold mining in January 2012. He incurred the following expenditure in 2013, staff
building $50,000. One of the units in the building is used as a dwelling place by Mr Moyo

Shaft sinking $15,000

Survey Costs $ 3,100

Additional Information
2012 Admin & Management cost = $12,000
There was no income in 2012 tax year
Income for gold sales in 2013 tax year = $78,000

Required
Calculate taxable income for 31/12/13

Gross income $78,000

Less CRA
UBCE + CCE

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 12,000 + 10,000 + 5,000 + 3,150) ($40,150)
Taxable income $37,850

2. Method 2 – Life of Mine Method Para 2 of 5th Sch

UBCE at beginning of year less recoupment add CCE
Approved expected life of mine (com)

The life of the mine accepted to CG will be an estimated number of years for which operation is
expected to continue based on a certified estimate of ore reserves. For each tax year, a new estimate is
required.

Estimate of life of mine definition

For a lead & zinc mine = 10 years
Iron mine = 5 years
Any other mine = 20 years

When the company or individual mining is not the owner of a mine, CRA is calculated on what the
CG considers to be a fair and reasonable basis. For a tributor, CRA can be based on normally the
shorter of the life of mine and the period of the tributor.

UBCE – R + CCE
LOM

Individual leasing a mine

CG may allow accumulated expenditure, e.g. shaft sinking costs plus development costs incurred in
the 1st productive year, thereafter the allowance is spread over the remaining period.

Example same as before

Certified ore reserves
Estimated LOM for 2012 tax year = 6 years
Required – Calculate taxable income

Solution
CRA = 40100 = 8,020
5years

Gross income 78,000

CRA 8,020
69,980

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3. Mixed basis Para 4 Sub Para 2 & 3

This is a mixture of the new mine method and LOM method and it is subject to election

UBCE – R + CCE
LOM

Example same as before

Estimated LOM = 6 years for 2013

Solution

CRA = 12,000 – 0 = 2,000 + CCE

6
= 2,000 + 28,100
= 30,100

Gross income 78,000

CRA 30,100
Taxable Income 47,900

a) $9,000 = replacement cost

b) $11,000 = cost of improvement

If TP elects to use the replacement basis

Gross income 78,000
Less CRO (LOM) 8,020
Replacement cost 9,000 17,020

If TP elect not to use replacement costs

CRA = 40,100 + 9,000 + 8,020

5
= 9,820 + 8,020

i) S15 (2) (f) (iii) – Royalties paid by TP

The section allows a deduction of royalties paid by a miner during the year of assessment in terms
of S245 of the Mines & Mineral Act Chapter 21:05

ii) S15 1 (c)

Where a person earns income from mining operations and trade and investments, any amounts
allowed to be deducted shall only be claimed in respect to the income in which they relate.

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 iii) CRA on separate & distinct mines is calculated separately a CRA and all the other expenses.
Cannot offset the assessed losses between mines.

iv) Expenditure or loss can be deducted from income from another mine of the CG is satisfied that
the operations between the mines are substantially inter-dependent/inseparable

Prospecting expenses S15 2 (f) (ii)

2 Methods

1. Such an expenditure is allowable in the year of assessment in which it is incurred and in the
absence of income from such operations, the expenditure may be set-off from other income from
trade/investments. Prospecting expenses are not CRA.

2. A prospector who at a later date intends to eventually carry on mining operations, may elect that
prospecting expenditure incurred be carried forward and be allowed only against income from
mining operations. The TP should note that if mining operations were to fail to materialise upon
making this election, deductibility of the prospecting expenditure would have been lost. The
election is binding for any year of assessment for which it is made but not any subsequent year.

Example of prospecting expense

Surveys, sinking of boreholes, digging of trenches and pits and other prospecting and exploratory works
undertaken for the purposes of acquiring rights to mine minerals or incurred on a mining location in
Zimbabwe. This section excludes expenditure allowable as a deduction under S15 2 (f) (i).

Illustration
1. Exploration for claims cost in 2013 tax year $2,000
2. Exploration for claims cost in 2014 tax year $7,000

The decision for 2013 tax year does not bind 2014.

Change of ownership – 5th Sch Para 8

1. Sale of mine
When a mine is sold, the parties are required to furnish the CG with a jointly signed statement as to
the proportion of the price relating to the “capex” i.e. the defined capex. If no stunt is given or if the
CH is dissatisfied with the one furnished, the CH has powers to determine the proportion. Amounts
relating to the capex will constitute recoupment in terms of S8 (I) (L) in the hands of the transferor
and will rank for CRA in the hands of the transferee. Any UBCE falls away in the hands of the
transferor and cannot be claimed by the transferee.

Illustration
Joyce is a miner emigrated at the end of 2013 tax year. She sold the mining business to Cecilia on
30/11/13 at $55,800. A joint strut signed by both seller and buyer allocates the purchase price as
follows:-

a) Mining claims = $ 800

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 b) Goodwill = $ 5,000
c) Capex = $50,000

Unclaimed UBCE by Joyce is $19,000

a) What constitutes GI in hands of Joyce
b) What deductions can Cecilia claim
Solution

a) UBCE must be extinguished by recoupment

 19,000 – 19,000
 GI = 50,000
19,000
31,000

Goodwill and mining claims are excluded from GI.

b) $50,000 will rank for CRA depending on method used.

Goodwill and claims excluded in terms of S15 (2) (a) and are capex but are not included in the
definition of capex under CRA.
UBCE cannot be claimed by Cecilia

RECOUPMENT IN MINING
Section 2 defines recoupment from capex as any amounts accruing to a person from the sale or other
disposal of or damage to or destruction of an asset ranking for a capital redemption allowance.
An asset in respect of which a deduction for the renewal or replacement of mining building, works or
equipment has been deducted. That will be the replacement cost.
But in the case of any amount accruing from damage to or destruction of such an asset, it does not include
any amount in excess of the original cost of such an asset.
Where capex has been allowed with no limit (the whole amount has been allowed as capital redemption).
A miner mining iron ore builds a blast furnace in 2009 for $57,890. CAR was claimed in the same year
and granted. He left the country in April 2013 and had sold the mine lock stock and barrel in the same
month. The sale agreement was lodged with the CG and showed the value of the blast furnace to be
$105,000.
What is the recoupment if any taxable in terms of Section 8 1 (L)
Solution
$105,000 is the recoupment
Where CRA has been granted with a limit

Illustration
Mr X builds a school in 2009 for his mine employees at a cost of $95,000. He wants to concentrate on his
core business of mining without bothering about the needs for the school. He therefore decides to sell the
school to a private trust. He receives $135,900 as sale proceeds during the 2013 tax year when the sale is
concluded. What is the taxable amount from the sale if any?

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Solution
Cost $95,000
Limit of CRA for school $50,000
Recoupment

= $50,000 x 135,900 Limit x selling price

$95,000 Cost

= $71,526
Assets were there is a reimbursement following destruction

Illustration
Gomo (Pvt) Ltd had one of its buildings gutted by fire. The building costs $30,000. CRA had been
granted on the capex. The insurance company pays Gomo (Pvt) Ltd for the loss
a) $15,000
b) $30,000
c) $35,000

What is the recoupment in each case?

Solution
Recoupment should not exceed cost
a) 15,0000
b) $30,000
c) $30,000

Situations where recoupment may not arise

 Only through election by the top

1. Where there is a reconstruction/merger or another similar transaction according to the CG

2. A transfer between spouses

Assets can be transferred at the ITV even though there might be a consideration price.

Illustration
If Mr X owns a mine with
Mine building cost $100,000
Shaft mine cost $ 50,000

If Mr X decides to sell the mine to his spouse for a specified consideration. Sell agreement value of mine
building = $105,000 and shaft mine $55,000.

If there is no election, there will be a recoupment of $160,000. Mrs X is entitled to CRA of $160,000.

Where there is an election, the assets will be transferred at their ITV which is nil. In the hands of Mr X
there is no recoupment Mrs X cannot claim CRA on these assets.
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What happens to unclaimed UBCE when a mine is transferred between a transferor and transferee?

1. The UBCE falls away in the hands of the transferor and cannot be taken over by a transferee except in
the following situations.
a) Where the transferor was a foreign incorporated company which was carrying out its principal
business in Zimbabwe deciding to voluntarily wind up and being incorporated in Zimbabwe
while maintaining the same shareholders and the proportion of shareholding. The new company
that is the transferee will take over the UBCE.
b) Where the mine is transferred for no consideration e.g. a donation, the transferee can redeem the
UBCE.
c) Where there is a reconstruction or a merger.
d) A transfer between spouses.

In the construction and merger situation and transfer between spouses, an election has to be made.

Sell of mining claims

Determine whether transaction is capital/revenue in nature.
Section 9 was repeated. Result is that receipts on the sale of mining claims if they are of a revenue nature
are taxable in the year of receipt/accrual whichever comes first.

Cessation of mining
If the cessation is due to the life of the mine having come to an end or in the case of a mine worked under
concession, the concession having expired, the balance of the unredeemed capex is allowable as a
deduction in the year of cessation. If however the taxpayer has abandoned the mine, i.e. by forfeiter of the
claim before its life has come to an end, the unredeemed balance of capex is not deductible unless the
taxpayer can show that there has been a material change of circumstances necessitating the revision of the
life of the mine.

DECEASED ESTATES AND TRUST

Deceased estate is the aggregate of assets and liabilities of a person that has died. It will be administered
by an executor if one is appointed in the will or an administrator if one is appointed by the Master of the
High Court in terms of the Administration of Estates Act Chapter 6:01. It starts upon the death of the
person and ends when all assets have been realised, the final liquidation and distribution account has been
approved by the Master of High Court, liabilities have been settled and remaining assets have been
distributed to the heirs.

Insolvency Estates

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This is when a person is bankrupt and his estates can’t pay all his debts. It starts by order of the court and
is then administered under the Insolvency Act Chapter 6:04. The administration is by a trustee under the
control of the Master of the High Court and it ends upon successful application for rehabilitation of the
debtor. One common threat between the deceased estate and insolvency estate is that these estates are
recognised in law as legal persona.

Trusts
A trust is a title of property and/assets held for the benefit of another. It is created through a trust
instrument or deed or in terms of a will. A trust instrument is an instrument in writing executed by a
trustor or a donor or settler to create the trust. It is administered by trustees and is not a legal persona.
There are 2 types of trusts:-

a) Intervivos
Established during the lifetime of the donor/settlor/trustor

b) Testamentary
Established in terms of a will – after the lifetime of the trustor/donor/settlor

Taxation of estates and trusts

A person is defined for us in Section 2 of the ITA to include the following:-
 Deceased estate
 Insolvency estate
 Trust who’s income has no beneficiary

Deceased Estate Taxation

For a deceased estate, there are 2 taxpayers:-

a) Taxpayer from beginning of tax year to date of death

1 January to date of death
Taxation of the late Mr Johns

b) Day after date of death to liquidation of the estate.

NB: Whatever tax is owed from beginning of the year to date of death is settled by the estate.

When a taxpayer dies, an assessment is raised to date of death. The deceased estate is taxed thereafter.
The problem that arises is that sometimes it is not clear who the taxpayer should be for income that is
received as there are a number of interested parties, i.e. beneficiaries of the deceased, the estate itself, the
trust created in terms of the will and sometimes the tax payer before death.

The net assets will be distributed to the heirs or legatees in terms of either the will or the laws of interstate
succession if there is no will. These assets could be producing income in the estate before the assets are
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distributed to the heirs/legatees. What will be of importance may be the will as it usually provides
guidance on whom to tax.

Guidelines on how to tax deceased estates

When a person ceases to be taxpayer on the date of his death, the normal tax payable on the income
derived by the deceased prior to death is a debt due by the estate. The executor/administrator is
representative taxpayer with regards to income received or accrued during the deceased lifetime and
represents the deceased taxpayer in all tax matters.

If the deceased period of assessment is less than a full tax year, the elderly rebate to which the tax payer is
entitled will be proportionally reduced.

1. Employment Income
Amounts may be received after death when they would have accrued or deemed to have accrued to
the taxpayer immediately prior to death e.g. salary earned before death but received/paid after death.
Such income is taxable in the prior to death period. However these are amounts that may be taxed in
the estate’s hands. Such amounts are amounts that the deceased had a right to claim during his
lifetime for example, leave pay due to a service contract, director’s fees and bonuses fixed in the
articles of association of a company even if they are voted for after death.
2. Royalties on a book and contractual commission
3. They are amounts that accrue after death but are not taxable. These are amounts that the deceased had
no right to claim in his lifetime e.g. non-contractual leave such as that which is paid to civil servants.
4. A bonus that is noted after death and director’s fees not fixed in the company’s article of association.

Income for the deceased but deemed to have been received by or accrued to the estate. Hersons Estate
Case – he rendered services and made an undertaking that the remuneration had to be paid to his estate
upon his death. If there is a condition income accrues after the condition has been made. Income that
Herson had rendered services for accrued to his estate because he had made an undertaking that the
income should be paid to his estate.

Any income that is received or distributed to heirs by the executors of the estate retains its identity.

An allowance that is granted to one taxpayer e.g. a bad debt granted to the estate; if it is recovered by the
heir cannot be taxed as income in the hands of the heir. If it is granted in the prior to death period, it can’t
be taxed as income when it is recovered in the estate’s hands. However, there is a difference for
recoupments realised in a business. The recoupments will be arrived at by taking into account the
allowances granted in the prior to death period for purposes of assessing the estate’s income. An assessed
loss incurred by the deceased can’t be offset on estate income, it just falls away. Similarly an assessed
loss for the deceased estate will fall away upon finalisation of liquidation and distribution accounts and
approval of the Master of the High Court.

If assets are disposed of to settle debts of the estate, none of the proceeds are for the immediate or future
benefit of the heir and therefore the heir is not taxable even though he might be the ascertainable
beneficiary.

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Distribution or disposal of assets by the deceased estate to the heirs/legatees is on capital receipt in the
hands of the heirs/legatees unless the payment is made in the form of an annuity, and then the annuity
becomes taxable in the hands of the recipient.

There are no personal credits for deceased estates. The rate of tax is 25% as most of the income will be
from trade and investment.

If the deceased estate is ordinarily resident in Zimbabwe, foreign interest and foreign dividends will be
taxable at the appropriate rate and relief is granted on any foreign tax paid.

Any allowable expenditure in terms of the ITA incurred post death should be allowed in the estate or in
the ascertained beneficiary’s hands.

Any medical expenses paid in the post death period but incurred by the deceased are taken into account
for credit purposes in the pre-death assessment.

Ascertained beneficiary

In relation to a receipt or accrual of income or of income from an asset or of proceeds of an asset in a

deceased estate refers to a person named and identified in terms of a will who acquires an immediate right
to claim the benefit right away or in the future to enjoy the income so received or accruing upon the death
of the deceased.

Guidelines on how to determine who is an ascertained beneficiary.

The wording of the will will guide us and where there is no will, these could still be an ascertained
beneficiary. The principles of the laws of interstate succession may guide us. If there is a contingent
clause upon a future event, the income may only be taxed in the estate’s hands because the heir may never
receive the income if the contingent condition is not fulfilled and therefore it can’t be said that the income
is for the heir’s benefit e.g. if the will states my son can only receive income from rental of my property
when he reaches 21 years of age.

EG 2 when income is bequeathed/left to the children still to be born, it will be taxed in the estate’s hands.

Where an heir has a vested right and income is postponed, the income will be taxable in the hands of the
heir. Although the heir may not be receiving the income, the income will be accumulated for his benefit it
has to be clear in the will that if the heir was not to live long to enjoy the benefit, then the benefits would
dissolve upon his heirs. If in terms of the will, the inheritance will dissolve upon other beneficiaries, then
the ultimate beneficiary is undetermined or unascertained and the income will be taxable in the estate.

Specific language in the will

1. A will may provide for a residue in the estate to be distributed to the heirs, i.e, what remains after
meeting all debts and expenses which the executor has to pay.
 Tax the income in the hands of the deceased estate

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 The heirs will only be taxable after distribution. They are not taxed because the residue has not yet
been determined and therefore the heirs are not ascertained as they have no vested right as yet.

2. Where the whole estate is left to the heir. The estate is taxable and the heir is only taxable after the
distribution. This is just the CG’s practice.

3. Where the will provides usufruct arrangement (right to the income). This is where one beneficiary is
given a right to the usufruct and the asset is left to another beneficiary.

3 ways
a) The asset will be specified with the income and it will also specify who gets the asset and who gets
the income. The beneficiary receiving the income will be taxed immediately.
b) Where the beneficiaries are entitled to the residue from the estate. The estate is taxable on the
income and the beneficiary is only taxable after distribution.
c) Where the usufruct arrangement leaves the whole income to the ascertained beneficiary. This
situation the person enjoying the usufruct is taxable immediately.

4. Where it is intestacy
This is where there is no will. The income will be taxable in the hands of the estate and beneficiary
after distribution.

How to determine the ordinary resident

The ordinarily residency of an estate is determined by the ordinarily residents of the deceased. This is
important for the taxability of foreign interest and foreign dividends.

2 types of marriages

 Out of community of property

 In community of property

Out of community of property

Only the deceased assets and income are considered for the estate.

In community of property

This is a joint estate but one half of the deceased portion is taxed or is considered for the estate. The other
half is considered under the surviving spouse.

Insolvency estates taxation

When a natural person becomes insolvent, there are 3 taxpayers:-
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Taxpayer 1 – Insolvent as a natural person for the period prior to sequestration. Sequestration is the action
of setting apart of a debtor to meet debts and claims.

Taxpayer 2 – insolvent state

Taxpayer 3 – Insolvent as a natural person for the period subsequent to sequestration.

The tax status of TP1 is terminated on the day before sequestration of his estate. On the date of
sequestration a new tax payer comes into existence (TP2). Also from the date of sequestration, the
insolvent (TP3) is a new taxpayer and will be taxed on income he derives in his personal capacity from
that date. The insolvency of a partner brings about dissolution of the partnership. For income tax
purposes, the estate of each insolvent partner constitutes a separate partner.

Taxation of the insolvent natural person TP1

The trustee of the insolvent estate is responsible for tax affairs of the insolvent person for this period. Any
tax payable is a debt due by the insolvent estate. The trustee must admit the claim and accord it the
preference to which it is entitled in terms of the Insolvency Act Chapter 6:04. The CG’s preference claim
ranks after salaries and wages owing to the former employees of the insolvent but before general
mortgage loans. A final assessment has to be made for the period 1 January to day before sequestration.

Insolvency estate

It is taxable on income and from the continuation of the insolvency business by trustees for the benefit of
creditors. The insolvency estate is registered as a separate tax entity. The first period of assessment will
be from date of sequestration to end of the tax year or the date the estate is wound up whichever happens
first. The trustee is the representative taxpayer. He is responsible for the admin and liquidation of an
insolvent estate. He must represent the insolvent estate in all tax matters and must admit any resultant tax
claims against the assets of the estate. The estate can claim all allowable deductions applicable in terms of
the act.

The insolvent as a natural person subsequent to (TP3) sequestration. If the insolvent enters into
employment, consent from the trustees is necessary and this also applies if he carries on a profession or a
business subsequent to sequestration where he derives that income in his own right. It will be insolvent
and not the trustees that will be liable for any tax payable on that income.

General points about insolvency estates

Recoupments realised under insolvency estate will take into account any allowances granted in the period
prior to sequestration. The estate is not entitled to credits.

The rate of tax is 25%.

Assessed loss can’t be carried forward from an insolvent prior to sequestration to the estate or from the
estate to the insolvent later after rehabilitation.

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Ordinarily resident of the estate is determined by the ordinarily residency of the insolvent. In the
assessment of the insolvent, credits arise in each case. The elderly credit is apportioned if it is a period
assessment

Insolvent prior to sequestration to the estate or from the estate to the insolvent later after rehabilitation.

Ordinarily residence of the estate is determined by the ordinary residence of the insolvent.

In the assessment of the insolvent, credits arise in each case. The elderly credit is apportioned if it is a
period assessment.

Trusts – Section 10(3,4,5,6)

Important thing about the trust is that it’s a conduit as far as income it receives.
The principle is derived from the Armstrong Case – Armstrong vs CIR (1938)
It was held that income from a trust retains its identity until it reaches the parties in whose hands it is
taxable. Based on the …………….. principle, it is deemed that all distributions from a trust consist pro-
rata of the different types of income the trust earned.

Identity Foreign Int 2000 distribute

Local Int 1200
3200
Foreign Int = 2000/3200 x 1000 = 625

It is also possible that a trust deed can state that a certain distribution can come from a certain type of
income only or that decision could be left to the discretion of the trustees. When this is stated, the income
will bot be deemed to consist prorate of all income received by the trust.

SIR vs Rosen 1971 Income retains identity

Income would only retain its identity if it received/accrued to the beneficiary the same tax year that is
received/accrued by the trust. Otherwise if the distribution is done the following tax year by the trust to
the beneficiary, it may lose its identity.

Income received into trust 2013 and is taxed, in 2014, when distributing that income to beneficiaries, it is
considered a capital receipt. Not taxable in hands of beneficiary.

Trustees are appointed to act in a fiduciary capacity and their duty is to administer and distribute
income and capital of the trust until termination.
Any distribution has to be in terms of the trust deed. Trustees are the representative taxpayers in
respect of income received or accruing in the trust. The income tax assessment maybe raised in the

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 name of the donor and/or in the name of the beneficiary, and or the name of the trust depending on
the circumstances created by the provisions in the trust deed.
There are different types of administration
1. Discretionary trust
The assets in this trust have legal ownership vested with the trustees and not the beneficiaries.

2. Bewind trust
Ownership of trust assets rests with the beneficiaries with the trustees only having the power to
administer.
Why a trust is needed?
Utilised in estate planning to fulfil a person’s wishes before and after death and also to provide for the
needs of the heirs e.g. provide for needs of a minor child upon the death of a parent.

Possible taxpayers in a trust

1. Beneficiaries
2. The trust
3. Trustees (in terms of trust fees received from the trust)

How Trust Income is taxed

Tax beneficiary where there is one.
Where there is no beneficiary, tax the trust
In order to determine who to tax, 3 things are considered/looked at
 Trust deed
 Income tax act
 Legal precedence

All these 3 help to establish who has vested rights to the income (immediate secured right to an asset or
income or an unconditionally entitlement to income or assets which cannot be taken away by any 3 rd
party. Vested right mean that a beneficiary from the trust will definitely receive the income or assets from
the trust and if he was to die before receiving it, that as or income will fall into his estate.
Other questions in determining who to tax
1. Is there someone with an undisputable right to the income. If answer is yes, then tax the beneficiary.
If not then tax the trust.

When does a beneficiary have vested rights?

1. Is when income paid into trust want trustees having any discretion in the matter. The trust deed is
depended on who the beneficiary is. The beneficiary is taxed on the income subject to its nature.
2. Where a beneficiary is specified but the trustees have discretion over the amount. When they exercise
their discretion by distributing the beneficiary, tax the beneficiary.
3. The trustees have the discretion on when to distribute but are accumulating the income for the benefit
of the beneficiary.

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In ITC 1328, it was stated that it is not a necessary consequence of vesting that a beneficiary should have
a legal right to claim payment. The beneficiary must be entitled to income although the enjoyment of it
may have been postponed.
Delay in enjoyment does not mean there is no vested right.

Circumstances where beneficiary has no vested right

This is when the trustees have discretion over the amount and do not distribute and that accumulated
amount can be distributed to someone else.
 Tax the trust because there is a contingent clause which might not be fulfilled.
 Right to income once one turns 30.
Where there is a condition the vested rights will only occur when the condition is fulfilled. Before that,
the trust is taxable on the income.

Where trust income is payable to a guardian for the benefit of a child, the taxation on under-spending
depends on the accountability of the guardian to the trustees. If accountability of the guardian does not
exist, the guardian will be taxed.

Expenditure is subject to the general rules of deduction. Where a beneficiary receives a capital receipt,
any disallowance of the capital expenditure, will be in his hands.

Tax rate for trust is 25%, foreign dividends at 25%. A trust is not entitled to personal credits.

Determination of ordinarily residence

It is going to be deemed to be in Zimbabwe on the following circumstances:-
If ordinarily residence of the donor at writing the will or trust deed was ordinarily resident in Zimbabwe.
When part of the trust income is from a source within Zimbabwe or if the trustee is ordinarily resident in
Zimbabwe.

Example
Choto is 12 years of age and is one of 3 beneficiaries of a testamentary ordinarily resident trust in
Zimbabwe. In terms of the trust deed, Choto must receive an annuity of $2000 payable half from local
dividends and the remainder from part of the remaining receipts and accruals of the trust. The trustees can
make a further discretionary distribution to Choto and his two sisters, Rudo and Kuda after payment of
the annuity. Undistributed amounts should be retained by the trust. The following income was received by
the trust for the 2013 tax year:-
Local dividends 3,500 (- 1,000)
Foreign dividends 3,000
Foreign interest 2,500

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Interest 1,000
A distribution to Choto of the annuity was made. A discretionary distribution of 1,000 was made to each
of the sisters. What is the taxable income of each of the taxpayers.

1. Taxpayers
Kuda, Choto, Rudo, Trust, Trustees

2. Vested rights – Choto annuity 2,000

Any amount received in the form of an annuity is taxable – Section 8 (i). $1,000 is taxable and losses its
identity.
Rudo - 1,000
Kuda - 1,000

Taxable Income for the trust

Gross Income Section 8 (i) 10,000
Less distributed amounts
Annuity 2,000
Kuda 1,000
Rudo 1,000 4,000
6,000

Local dividend (exempt) 1,875

Taxable Income 4,125

Rudo
Distribution 1,000,00
Less local dividend (exempt) 312,50
Taxable Income 687,50

Local dividend 3,500 Kuda 1,000 x 2,500 = $312,50

Less Choto (½) (1,000) 8,000
2,500 Rudo 1,000 x 2,500 = $312,50
8,000

Balance local dividend =$1,875

Taxable Income for Choto

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Distribution (annuity Section 8(i) 2,000
Taxable Income 2,000
The local dividend loses its identity (annuity)

Double Taxation
Different countries have their own tax rules and laws. When you have income and capital gains from one
country and are resident in another. You may have to pay tax in both countries under their different tax
laws.

To avoid being taxed twice and avoid fiscal evasion, Section 91 gives authority to the President to
enter into double taxation agreements with other countries.
Zimbabwe has negotiated double taxation agreements with many countries after independence.
Botswana, Iran, UK, Germany, South Africa.

Situations where double taxation arise

Person ordinarily resident in Zimbabwe receiving foreign income which is taxed under the regulations for
that country and that some income is taxable under Zimbabwean laws e.g. foreign dividends.
Where a person is ordinarily resident in another country but has income taxable in Zimbabwe and that
same income maybe taxable under the tax laws in the other country e.g. rental income from Zimbabwe
source is Zimbabwe and the other country maybe taxing the same income under the residence of taxation.

How the DTA work

They restrict how much tax can be charged by Zimbabwe on income received by non residence from a
source within Zimbabwe. The reverse is true.

How restriction is achieved

In case of business or professional profits, there might be certain conditions that have to be met for
the tax not to be charged in Zimbabwe e.g. in the double taxation agreement with UK, profits by a
UK resident from a source in Zimbabwe are taxable in the UK unless the business has a permanent
establishment in Zimbabwe.

The agreement defines what it means by permanent establishment, it means a fixed place to carry out
business wholly or partly e.g. a factory, branch, office, workshop, mine. More facilities for storage or
display of goods are excluded.

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 Adopting a ceiling on certain taxes and examples include w/tax. No res tax on dividends on non listed
companies for UK residents is limited to 5% in terms of the agreement with UK, Germany 10%. The
statutory rate for withholding tax on dividends is 15%.
There are other conditions that must be fulfilled for these special rates to apply. If the conditions do
not apply then statutory rates will apply.

Allows a credit on tax payment made in the other country on the Zimbabwe tax payable on the
foreign income. a resident in Zimbabwe would have similar limitations in the other country affecting
him.

In Zimbabwe relief is granted in terms of Section 92 and 93. Section 92 applies where there is a
double taxation agreement. Section 93 applies where there is no double taxation agreement. In both
situations, if a taxpayer has been subjected to tax payments in another country on income that is also
taxable in Zimbabwe, Zimbabwe will grant a relief but allowing a deduction of the tax if it is less than
the Zimbabwe tax.

If the amount paid in the foreign country is greater or equal to the Zimbabwe tax on that foreign
income then the relief is limited to the Zimbabwe tax. Two formulas are used and one relays to all
foreign income excluding dividends and the other one is on foreign income that is only dividends.

1. Foreign income excluding dividends

(A – B) x C
C+D

A - Total tax chargeable in Zimbabwe on all income

B - Tax chargeable in Zimbabwe on all income excluding all foreign income subject to relief.
C - Foreign income for which relief is being sought included in the taxable income
D - Any other foreign income for which relief will be sought included in the taxable income.

2. Foreign dividends

ExF
F+G
E – Zimbabwe tax chargeable on the income (foreign dividend income)
F – Foreign dividend for which reduction is being sought included in the taxable income.
G – Any other foreign dividends for which a reduction would be sought.

Note – Foreign dividends are taxed on gross amount, no aids levy is charged on the tax.

When relief is granted, it is only on income from a deemed source and not income from a true source.

Example

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 Mrs Shumba, a resident of Zimbabwe is retired and is 65 years of age. She has substantial
investments and submits the following information for the tax year ended 2013.
Receipts
Interest from discounted instruments traded by NMB, a financial institution $4,500.
Rental income from a foreign immovable property $2,700
Rental income from a source within Zimbabwe $7,500
Foreign interest from country (A) with a double taxation agreement within Zimbabwe. The gross
is $2,300. The foreign tax deducted $230.
Foreign interest from country (B) – no double taxation agreement. Net receipts = $6,600 Foreign
tax deducted $2,800
Dividends from a local company $9,450. Dividends from country A net amount is $3,100 and tax
deducted $500.

What is the tax payable by Mrs Shumba for the year ended 2013.
Solution
Tax computation for Mrs Shumba for the year ended December 2013
Interest from financial institution (local) 4,500
Foreign rental (source not Zimbabwe Section 8(i) -
Rentals from Zimbabwe (Section 8(i)) 7,500
Foreign interest Country A Section 12(2) 2,300
Foreign interest Country B Section 12(2) 9,400
Dividends from local country 9,450
33,150

Less exemptions
Local dividends 9,450
Rental local 3,000
Interest from financial institution 4,500
16,950

Income 16,200
Less deductions -
Taxable Income 16,200
Apply rate 25% 4,050
Less credits
Elderly 900
Tax chargeable 3,150
Aids levy @ 3% 94,50
3,244,50

Foreign dividends
Country A 3,600
Country B 5,000 8,600
Apply tax @ 20% (8,000 x 0,2) 1,720

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 Tax chargeable 4 964,50

(A-B) C = 3,244,50 – (231,75) 2,300

C +D (2,300 + 9,400)

= 6,929 325
11,700

= 592,25 Zimbabwe tax

230,00 Foreign tax

Workings – (Country A)
1. B = 16,200 – 2,300 – 9,400 4,500
Apply rate @ 25% 1,125
Credit (900)
225
Aids Levy @ 3% 6,75
231,75
2. Country B
(3244,50 – 231,75) 9,400
9,400 + 2,300

= 28 319 850/11,700
=2,420.50

3. Foreign Dividend

ExF 1,720 X 3,600

F+G 3,600 + 5,000

Zimtax = $720
Foreign $500 * Grant relief based on foreign (Less than Zim)

Tax chargeable 4 964,50

Less DTR 230,00
2 420,50
500,00
1,814,00

PENSIONS AND BENEFIT FUNDS

 A pension fund is normally a pension scheme that is run by an employer (usually a company)
while a retirement annuity is a pension scheme for individuals run by an insurance company.
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 They both consist of a pension but the act refers to them individually.
 A benefit fund is a scheme that results in a payment upon the happening of an event which
could be death, sickness or unemployment. Benefits arising from a pension fund are a
pension and from a retirement annuity fund it is an annuity.
 From a benefit fund you can have a lumpsum payment e.g. a payment by a funeral policy
upon the death of the insured/dependant.

General aspects of funds

Taxpayer is entitled to deduction outlined in the 6th sch ITA in respect to contributions they make to

a) Pension fund
b) Retirement annuity fund
c) Employers’ contributions to a benefit fund.

Benefits arise from membership to those funds. Examples: pensions from pension fund; sickness, accident
or unemployment benefits from benefit funds and annuities from RAF.

A retirement annuity fund (RAF) is a contract between an insurance co and an individual (not
necessarily an employee. The individual contributes so that he can eventually receive an annuity from the
insurance in order to supplement his income upon retirement. He may receive a pension from his
employers pension fund in addition. Seems similar to a pension but is separated from pension by the Act
and therefore we will look at them independently.

Sometimes employees terminate membership (due resignations or fund is wound up) before benefits are
due and this results in lump sum payments being made.

BENEFIT FUND/PENSION FUND

Contribution – Deduction

Employer Individual

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 Payments

Paid out prematurely resulting in Due upon maturity of the fund in

lumpsum payments the form of benefits

Definitions – Section 2
1. Fund
 Can be a pension fund which is in terms of a law of Zimbabwe e.g. the NSSA Act or it
will be a fund registered under the Pensions & Provident Funds Act.
 For a RAF to constitute a fund it must be registered under the Pension & Providence Fund
Act.

2. Benefit Fund
 Is registered under the pensions and provident funds, if it is a provident fund.
 It must be approved by the Commissioner.

3. An unapproved
 Is a fund that is established by employer to provide a benefit as a pension or benefit fund
would but is neither registered nor approved by the CG.
 S2 states that the medical aid should be a society approved by the CG.
4. Medical Aid Society
In order for the CG to approve he must be satisfied that the fund is permanent for that it is
established to provide benefits for its members/dependants of the numbers on costs incurred
on medical, dental or optical treatments that includes things like drugs, treatment
recommended by medical practitioners and ambulance services.

To qualify as a fund (S2):

a) A pension fund should be in terms of a law of Zimbabwe (e.g. the NSSA Act) or be
registered under the Pension and Provident funds Act.
b) RAF must be registered under the Pension and Provident Funds Act
c) Benefit fund
i)registered under Pension and Provident Funds if it is a “provident fund” (which
provides a lump sum benefit on retirement or
ii) it must be approved by the Commissioner (if provides group life assurance cover)

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 An unapproved fund is one established by employers to provide benefits as a pension or
benefit fund would but is neither registered nor approved by the CG. Contributions to
such a fund are non-deductible.

S 8 (1) (c) arw 1st Sch – Lumpsum payment from funds

 A lumpsum payment resulting from benefit fund, pension fund and unapproved fund is gross
income.

It is important to distinguish between a lumpsum payment and a terminal benefit

What constitutes a lumpsum payment?

 A lumpsum payment can be a terminal benefit. A terminal benefit will be a payment given
upon termination of services (portion of payments for contribution/refund for services
rendered outside Zimbabwe).
 If a terminal benefit includes a refund for contributions for rendering services outside
Zimbabwe a proportion of terminal benefits relating to the period of rendering services
outside Zimbabwe is excluded.
Distinction between LSP and Terminal benefit
It is important to draw a distinction between ‗Lump sum payment‘and ‗Terminal benefit‘ as defined
in the 1st Schedule. A terminal benefit would include portion of refund of contributions for services
rendered outside Zimbabwe, if any. A lump sum payment would thus be determined as follows:
Terminal benefit xxx
Less:
Proportion of terminal benefit relating to period of service
outside Zimbabwe xxx
Lump sum payment xxx

A lumpsum payment is income that accrues to a person by reason of his withdrawal from or the
winding up of a benefit or a pension fund or an unapproved fund or any amount accruing to a
person by reason of a contribution to the consolidated revenue fund.
An employee will withdraw from a fund because of:-
1. Retirement from work before retirement age.
2. Ceases to be a member of the fund for some reason.
3. When a fund can be wound up because the employer goes out of business/decides to
discontinue the fund.

A lumpsum is not:-

 An annuity/an amount from services rendered.

 A commutation of a pension which might be a terminal benefit received upon retirement.

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 A commutation is a substitution of part of the pension payment that arises upon retirement
and commencement of pension accrual.
 An amount which represent a return/repayment of any money in respect of which payment a
deduction was not allowed under this act.
 A lumpsum payment will be taxed under a special rate.

Specific lumpsum payments

Please Note:-
Part 1 Beneficiary - benefit fund member

Part 2 Beneficiary - is a member of a pension fund

Part 3 Beneficiary - a member of unapproved fund

New fund - means a benefit/pension fund established on/after 1 July 1960

A lumpsum payment from a new Benefit fund

The way you determine taxable income (TI) of a lumpsum payment:-

i) If the amount is less than $1800 do not tax

ii) If >$1800, TI is determined as:-
LSP from a Benefit Fund
Lumpsum payment XXXX
Less exempted in terms of the 1st schedule (1800)
Any amount used to purchase a Retirement annuity fund (XXX)
Transfer to a benefit fund / pension fund ** (XXX)
Taxable amount of the LSP XXXX
** do not qualify for a deduction under section 15 (2) (h) or (i) to another benefit fund or
pension fund

NB:- If we are using progressive rate for taxation of &&&&&& from employment and it will
be last rate applicable. If business use the flat rate of 25%
Take the last rate for the whole amount e.g. TI 9,000 apply 20%.

LSP from a Pension fund

LSP from a pension fund/lumpsum payment for contributions to the consolidated revenue fund
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Par 8/1ST Sch
1. If the <$1800, the whole amount is exempted
2. If the <$1800, treat it as follows:-

Lumpsum payment XXX

Less: Any amount to purchase used to purchase an annuity on retirement (XXX)
Transfer to another pension fund (XXX)
Taxable income XXX

 Apply special rate as above

LSP from an unapproved fund

Para 10/1st Sch
Lumpsum payment XX
Deduct members own contributions XX (taxed already)
Taxable amount XX
The taxable amount is the LSP after deducting the member’s own contributions.

Example 1
Joyce got married to John Mombeshora on the 16th of July 2012. She resigned from her
employment on 30 June 2012 and she receives a lumpsum payment of the pension fund in
Zimbabwe. She received all she contributed amounting to $17,000 and interest amounting to
$5,300 (total $22,300). $10,000 of her contributions were allowed as a deduction previously.
Joyce and her husband used all the money to deposit for a plot in Nyanga resort area.
Required: Calculate the taxable portion of the lumpsum.

Answer
Pension Fund $
LSP 22,300
Taxable amount 22,300
NB: If the lumpsum is less than $1,800, it is not taxable

Example 2
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Mr C submitted the following information related to the 2012 tax year. LSP $100,000, transfer to
a benefit fund $12,000, transfer to a pension fund $20,000, members own contributions $40,000.
Amount used to purchase an annuity on retirement $33,000, disallowed contributions $5,000
(pension fund contribution only).
Required: Calculate the amount to be included in gross income assuming the above lumpsum
payment is from a:-
a) Pension Fund
b) Benefit Fund
c) Unapproved Fund

Answer
Pension fund
a) LSP 100 000
Deduct:
RAF purchase (33 000)
*Transfer to a pension fund (20 000) (53 000)
Taxable amount 47 000

b) Benefit fund

LSP 100 000

Deduct exempt 1 800
RAF purchase 33 000
TRF to pension fund 20 000* 54 800
Taxable Amount 45 200
*Either allow transfer to a benefit fund/pension fund and not both (took the more beneficial
one).

c) Unapproved fund
LSP 100 000
TP own contributions 40 000
Taxable amount 60 000

LSP paid to the Employer that had been contributing to a fund on behalf of an
employee
S 8 (1) (j) Provisory 2 – specific recovering of the employer for lumpsum payments.

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 The lumpsum payment is taxable in the employer’s hands because a deduction would have
been allowed when he was making the contributions on behalf of the employee.

BENEFITS THAT ARISE UPON MATURITY

Receipts upon reaching retirement age

 If the source is from Zimbabwe/is deemed to be from a source in Zimbabwe the pension is
taxable under S 8 (1) (a) and S 12 (2) respectively.
 Where there has been an amount that has been disallowed as a deduction the disallowed
amount becomes the cost of the pension and the purchased annuity formula is used in
calculating the taxable.
 If a taxpayer upon retirement exercises a commutation election the commutation amount is
not taxable. It is normally 1/3 of the pensionable amount and the registrar of pensions and
provident funds does not approve a fund with rules commuting more than 1 person.
 Amounts paid to the consolidated revenue fund from a pension/an annuity are not subject to
tax if the amount would not have been subject to tax.
 A RAF is not included under this annuity and amounts that we are referring to that are
exempted from tax are:-
1. War widow’s pension
2. Pension in terms of the presidential pension and retirement benefit
3. A war disability pension

3rd Sch. (Other forms)

 A pension that is paid to a taxpayer that has attained 55 years of age before the
commencement of a tax year is exempt from tax.
 Benefits that arise from a benefit fund due to injury, sickness/death are exempt.
 For a RAF, if 1/3 of the annuity is commuted the 1/3 is exempt and the excess is taxable –
S.8.1.N

LS Contributions to a pension fund by Employer

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 These are contributions that are not ordinary contributions made by the employer to a
pension fund for purposes of ensuring monies in the fund are enough to meet payments in
terms of a fund’s rules.

Contributions by employer to a benefit fund

 Ordinary contributions to a benefit fund where the member joined on/after 1st of April 1958
will be allowed as a deduction to a maximum of $1500. Employer will be allowed the cost /
$1500 whichever is the lesser.

Contributions by the employer to a pension fund

 Ordinary contributions made by the employer on behalf of the employee are deductable on
the cost or $5400 whichever is the lesser. If the employer is contributing to more than one
fund for the employee the ordinary contribution will still be the cost or $5400 whichever is
the lesser.

LS Contributions contributed by employer

Are allowed as a deduction on the basis decided by the CG. The CG can allow the lumpsum
contributions as a deduction as an expense spread over a period.

Contributions by employee

If the employee makes ordinary contributions to a new fund i.e. a pension fund. He is allowed a
deduction of contributions of $5400 whichever is lesser. If he contributes to more than one
pension fund the contributions are aggregated and a deduction of $5400 or whichever of the
amount is lesser.

Contributions to RAF

 The employee/individual contributing to RAF will be allowed the contribution or $2700

whichever is the lesser amount.

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 S15.2.h – a non resident is not allowed a deduction if he did not join a RAF while he was still
resident in Zimbabwe and if he is allowed a deduction on these contributions in the other
countries.

Employee contributions to RAF and a pension fund

 We aggregate the amount of contributions and allow a deduction on the contributions of

$5400, whichever is the lesser.

Contributions to a benefit fund

 When a member makes ordinary contributions to a benefit fund, the contributions are not
allowed as a deduction.

S15.2.i – Arrear Contributions

 These are contributions that can be made by an employee to a pension fund to make up past
service contributions.
 A deduction will be allowed in the year of payment subject to the restrictions of each year of
which payment is being made.

Example:- TP Arrear Contribution 50 000 2012

2009 3 600
2010 5 400
2011 5 400
14 400 2012 Deduction
+ 5400 for 2012

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PRACTICE QUESTIONS

Question 1

Partnerships:

George(41yrs) and Lilian (39 yrs) carry on a business in Zimbabwe as distributors of

fruit and vegetables. They have offices and business premises in Zimbabwe. They
share profits and losses in the ratio 60% and 40% respectively. They are non-residents
of Zimbabwe. Their accountant has prepared the following statement of comprehensive
income for the tax year ended 2013.

Gross profit 1 220 000

Bad debt recovered (note 1) 5 200

Local dividends (note 2) 6 000

Interest on fixed deposit investment 10 200

Trade discounts received 37 500

1 278 900

Less expenditure

Annuities (note 3) 25 800

Bad debts (note 4) 9 000

Bookkeeping fees 24 000

Second hand delivery motor cycle (note 5) 13 680

Donations (note 6) 35 000

Depreciation:

Shop fittings at 10% (note 5) 5 940

Cash register at 10% (note 5) 2 970

Goodwill (note 7) 75 000

Insurance:
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 - Loss of profits policy 4 800

- Fire policy 6 000

- Partnership survivorship policy 7 200

Interest on capital (note 8) 30 000

Licences – trade and delivery motor cycles 1 500

Delivery motor cycles running expenses 2 700

Rentals 30 000

Retirement annuity fund contributions:

George 3 600

Lilian 4 800

Employees’ salaries 520 000

Shares purchased (note 2) 90 000

Stationery and printing 1 400

Sundry tax deductible expenses 7 510

Taxation paid (provisional payments)

George 48 000

Lilian 60 000 1 008 900

Net Profit 270 000

George 162 000

Lilian 108 000

Notes:

1. The bad debt recovered was from a former debtor of George’s whom he had
been trading with before the partnership was formed.

2. During the 2013 tax year the partners invested their surplus cash funds by
purchasing 30 000 shares in Chimoto Pvt Ltd, a Zimbabwean registered

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 company for $90 000 (at $3 a share). Chimoto Pvt Ltd declared a dividend on
31st October 2013 of $9 000. $6 000 of this has been paid out and the $3 000 is
only payable in the 2014 tax year due to some temporary cash flow problems.

3. It is the policy of the partners to award annuities to dependants of former

[Link] terms of this policy, the following annuities were awarded so as to
assist the recipients who were all in poor financial circumstances after their
husbands or fathers, all former employees, respectively had died:

- Mrs Shoko and her children 12 000

- Mrs Mhofu and her minor daughter 9 000

- Mrs Zhou 4 800

4. Of the $9 000 bad debts, $3 000 relates to debts that the partners took over
when they purchased the business from Choto. $2 000 relate to debts to
employees who have left their employment in the partnership. The partners are
yet to establish a policy on how to deal with this. The balance is from present
customers who have failed to pay their accounts.

5. The depreciation is being calculated at 10% on a reducing balance. The cash

registered and shop fittings were purchased on 1 March 2011. No depreciation
was provided for the second hand motor cycle purchased for $13 680 in the
statement of comprehensive income. It was purchased on the 24 th August 2013.
The motor cycle was being used by a university student before selling it to the
partnership for a year.

6. The donations were made to the following:

Alcoholics Anonymous $5 000

Imba Home for orphaned boys $10 000 (the trust is administered by the
Minister of social welfare and $20 000 for drugs given to a rural hospital in
Chipinge.
7. Goodwill of $75 000 is for the final instalment paid to Choto for the purchase
consideration to take over his business.

8. Interest on capital George $18 000 and Lilian $12 000.

Drawings George $144 000 and Lilian $120 000.

You are required to calculate the taxable income of each partner.

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Question 2

Partnerships:

Moyo and Bhebhe are in partnership. They come to you, as a tax expert, to inquire on
what amounts are tax deductible and what tax allowances they may claim on the
following:

a) A construction company is going to construct an administration block at a cost of

$50 000 and a factory at a cost of $90 000 for the partnership to use for their
business of making curtain hooks from steel that they will be buying from Z Steel
Company. Payment terms of the above construction are as follows: deposit $70
000 and the balance upon completion of the buildings. The construction company
starts and completes the buildings during the tax year and the partnership starts
using the premises on 1 October 2012. Included on the cost of the administration
block is a room used for the display of completed curtain hooks and special wire
hangers for clothes. The wire hangers are bought from another supplier already
made. The cost of this room alone is $15 000.

b) The partnership paid an advance to Z Steel Co. for the supply of wire of $75 000.
Z Steel Co only supplied wire worth $65 000 during the tax year before going into
liquidation. The partnership received only $0.40 per dollar on the balance as full
settlement of their advance. They write off the balance as bad debt.

c) The partnership incurred $800 in legal fees for the claim against Z Steel Co.

d) One employee for the partnership was injured by one of the machines that make
the curtain hooks while he was working. He should have been putting on special
gloves for protection but the partnership had not yet purchased some. The
partnership quickly paid compensation of $15 000 to the employee keep the
incident as quiet as possible to keep their reputation with the trade unions and
other employees. They also quickly purchased the gloves at a cost of $20 000.

e) A lawyer helped them establish the above compensation to the employee and
also the terms. He charged $900 for his services.

f) Bhebhe travelled to Germany to purchase the machinery used for making the
hooks purchased in the tax year for $33 100. His cost of travel not included in the
above cost was $2 800.

g) The factory needed some repair work for damages made during set up of
business. The partners took this as an opportunity to replace the original material

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 (it was of a poor quality) with a different type of material but more durable. The
labour for this was $700 and the material costs were $6 700.

h) Both partners are professionals in making steel. They go for a course to update
themselves on new techniques for purposes of their businesses. They pay $5
600 for both of them.

i) The partnership paid $700 in entertainment of potential clients during the tax
year. The amount was contributed by each partner equally from their personal
funds. There was also advertising costs of $2 900 payable annually in terms of a
contract that they entered into with a local television station.

j) The partnership wrote the following amounts:

debts arising in the course of business after acquisition of the business by

partnership $1 120
debts that arose when Choto used to be the owner $1 600
a debt due resulting from a loan to an employee who absconded $240
a provision for doubtful debts of 5% of outstanding debts at 31st December 2013
$5 200.
k) The partnership made the following payments during the tax year to employees
or former employees:

- A secretary was forced to retire during the tax year due to tuberculosis
complications an annuity of $7200 was paid during the tax year.

- One of the employees was stabbed to death during a beer brawl one week
end, his widow was paid an annuity $6 000 during the tax year.

- Another employee retired due to ill health after having been involved in a
car accident while on duty. A lump sum payment gratuity was paid of $8
000.

l) After the above incidences the partnership insured the lives of their employees.
Premiums paid on these policies up to the end of the tax year amounted to $6
000. No amount has yet become payable to the partnership in terms of the said
policies. These policies provide benefits in the event of death or disability of an
employee.

m) One of the employees stole customer property when they parked their cars in the
premises where the partnership carried out business. The insurer refunded $1

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 000 on the $1 200 claim made to the company by some of the clients. The
partnership settled the balance of $200.

n) The assets of the partnership were insured. The premiums paid during the tax
year were $12 700.

o) A claim of $7 200 was made by the partnership to the loss of an asset. The
insurance contested the amount and only paid out $5 300. The partnership
wishes to claim the balance of $1 900 as a tax deduction. The settlement was
made out of court.

p) The partners joined different clubs to promote their business. Moyo joined a local
club in his neighbourhood and the partnership paid $4 800. $2 000 was entrance
fee while $1 000 was for annual subscriptions. $1 800 was for entertainment at
the club prospective clients. Bhebhe joined the local athletic club. His
entertainment expenses paid by the partenrship connected to trade were $2 700.
This included an entrance fees of $1 000 and an annual subscription of $800.

q) The partners purchased sports cars on suspensive sale agreements. They wish
to claim Moyo, $36 000 and Bhebhe $44 000 as a proportionate share of the
finance charges for the tax year on the loans that they took to purchase the cars.

r) The partnership purchased adjacent land to use as parking for its customers.
They demolished a cottage on the property and wish to claim the demolition
expense on the basis that this was a necessary expense in order to serve their
customers and therefore was “a necessary concomitant” in conducting business.

You are required to advise Moyo and Bhebhe of the income tax implications from all the
above transactions.

Question 3

Benefit and Pension Funds

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Jongwe, 39 years old, is a resident of Zimbabwe. He resigns from the employment of
the government of Zimbabwe on 30 June 2013 to take employment with a private
company Munn Printers Ltd. This is before his retirement date with the government. An
amount of $51 800 accrued to him from the Consolidated Revenue Fund on 30 June
2013. The amount comprised of his contributions to the fund and benefits earned on
these contributions. All his contributions have been deductible for income tax purposes.

Jongwe used part of the $51 800 to settle some personal liabilities.

On the 31st July 2013 he was informed by Munn Printers Ltd Pension Fund that he
could pay his refund from his previous pension fund into its fund. He paid $16 800 (the
balance of the refund) into the Munn Printers Ltd Pension Fund on 1 August 2013.
Munn Printers Ltd Pension Fund treated this contribution by Jongwe as a buying back
service.

You are required to calculate the tax payable on this transaction.

Siponono reached her retirement age on 31st October 2013 the mandatory age of 65
years. Siponono joined ABC company on 31 January 1994. Upon her retirement she
was paid the following:

a) $14 000 cash in lieu of leave

b) Lump sum gratuity of $96 000 as compensation for her loss of office.

c) $577 from the ABC company Benefit Fund. She was a member since joining the
company. Her contributions to the benefit fund were $97 [Link] were based
solely on her salary.

Calculate the taxable amount from the above receipts for Siponono.

On 31 Dec 2011 Alice, aged 37 yrs left the employment of V Ltd. Her resignation
caused her to cease being a member of its pension fund. She was awarded $450 000
by the fund. This amount was made up of:

 Her contributions to it of $120 000

 Her employer’s contributions to it $120 000

 And $210 000 being investment returns allocated to her in terms of the fund.

On 1 January 2012 she became employed by WWW Ltd . She was required to join its
pension fund. On 1 February 2012 she made a lump sum contributiom of $300 000 to

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its pension fund. This contribution was funded by her pension fund award when she left
V Ltd.

On 31 May 2013 Alice left the employment of WWW Ltd which caused her to cease
being a member of its pension fund. She was awarded $490 000 from its pension fund.
The amount was made up of:

 Her lump sum contribution to it of $300 000

 Her contributions $90 000

 Her employer contributions $90 000

 And $55 000 being that portion of benefit from the investment.

On 1 June 2013 she commenced her own business trading in her own name. She used
$360 000 to purchase trade assets for her business. She then used $130 000 to
purchase a retirement annuity fund. In addition to this she took another retirement
annuity fund that she would make annual contributions of $4 800. For the 2013 tax year
she contributed $2 800.

Show the tax implications of the above transaction for each of the tax years affected.

Vernon and Veronica are married in community of property. They are both resident in
Zimbabwe and work for XYZ Ltd. Vernon is 58yrs while Veronica is 41yrs of age.

Vernon earned a salary of $48 000 in the 2013 tax year while Veronica earned $30 000
in the same tax year. They both belong to the XYZ Ltd pension fund and they both
contributed 6% of their salaries to the fund. The employer also contributes another
additional 6% of their salaries for each one of them.

Vernon is a member of burial fund (registered) run by a funeral home for which he
contributed $360 for the tax year. In the event of death of his spouse or himself the fund
will meet all funeral costs and give a cash pay-out of $500.

Veronica contributes to another pension fund run by XYZ Ltd with voluntary
membership for employees because it has not gone through any formalities with the
registrar of Provident or Pension Funds. She contributed $2 500 during the tax year.

Vernon other receipts or accruals were interest of $32 300 and a pension of $6 500
from a pension fund for his former employer whom he left after reaching the retirement
age of 55.

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You are required to calculate the taxable income for Vernon and Veronica for the tax
year ended 31st December 2013.

Question 4

Benefit and Pension Funds

The following information applies to E and Y partnership; partners, employees and

former employee and partners.

D is now a partner of E and Y accountants. Before he became a partner he was

employed by the E and Y as an audit manager. Is it possible that he can continue
contributing to the pension fund which he used to contribute to as an employee?
Support your answer with legislation.

As a result of number of requests from its employees E and Y partners has recently
introduced a provident fund for its employees. To give the fund sufficient amount from
which to start building up its reserves, E and Y partners made a lump sum contribution
to the provident fund of $600 000 in the 2013 tax year. This amount was an estimate of
its (the employer’s) contribution to the fund for a six year period.

The contribution that E and Y made on behalf of D before joining the partnership is $3
000 and after joining the partnership is $3 600 both payments are made in the tax year.

E one of the partners retired from the partnership during the tax year. He is paid an
annuity after retirement of $1 200 during the tax year.

Hlanganani is a former employee of E and Y partnership. He retired due to ill health.

During the tax year the partnership paid $800 in the form of an annuity.

On 1 Dec 2013 E the former partner dies. The E and Y partnership awarded an annuity
of $300 to Sarah, the widow of the late E on the 31st Dec 2013. (This is not a policy of
the partnership to make payments of this nature.

D contributed $ 2 000 to a retirement fund. Payments were made on his behalf by the
partnership.

D dependent was granted a bursary by E and Y partnership for his education of $5 100.

Discuss the tax impact of all these transactions on all the taxpayers affected. Quantify
the impact and support your answers through legislation.

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Question 5

Farming

Edward is a bachelor and lives in Zimbabwe. He retires at age 57 years from his
employment during the tax year and purchases a small farm in the Gokwe area on 1
July 2013 and immediately commences farming operations. Details of his receipts,
accruals and payments for the 2013 tax year follow:

Salary earned 1 January to date of retirement( 31st March 20130) 93 000

Pension fund contributions 4 600

Lumpsum from his employer’s pension fund (commutation) 45 000

A monthly pension from his employer’s fund from 1 April

To the end of the tax year 120 000

Dividends from a South African company’s 6 000

Farm purchased (note 1) 1 912 000

Cost of erection of new fences 4 000

Second hand tractor purchased and brought to use 31st August 213 72 000

Single cab truck acquired 31st August for immediate farm use 49 600

Farm expenditure (all deductible) 14 000

Cash donation to charity 400

Produce consumed by Edward at cost 2 700

Cost of irrigation scheme 22 800

Prevention of soil erosion 3 200

Clearance of trees and weeds in preparation of cultivation 700

Cattle purchased:

Two calves 4 500

20 cows 180 000

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15 oxen 118 125

Seedlings purchased 1 200

Spraying chemicals 2 000

Manure 1 100

Produce sold 168 300

Cattle sold: five oxen 73 300

Egg sales 108 000

Notes:

1. The farm purchase agreement stated that the purchase price of $1 912 000
included $6 000 for standing crops; $34 000 dam; delivery truck $36 000 and
goodwill $11 000.

2. Stock on hand 31st December 2013:

Livestock: 20 cows; 3 calves and 10 oxen

Produce at estimated production costs: in the field $5 900

Reaped but not yet sold $12 000

Eggs $10 000

3. Edward has not yet made an election on the basis of valuation of farm trading
stock. The guidelines he has given you is that he wishes to comply with tax
legislation and therefore legitimately once to take advantage of any tax
allowances or tax incentives available to him.

a) You are required to calculate Edward taxable income.

b) How do you value livestock i) inherited

ii) donated

for purpose of:

 Deduction

 Inclusion into gross income. Give an illustrative transaction.

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 Question 6

Farming

Joseph carries out livestock and general farming in the Midlands province.

1. Movements of his livestock as recorded are as follows for the 2013 tax year:

Bulls Cows Tollies and Heifers Calves

opening stock 10 15 30 20
purchases (note 4) 1 25 0 0
births 0 0 0 30
Transfer in 0 10 10 0
Inheritances 5 10 0 0
Sale - normal (note 3) -1 -5 -10 -5
Sale - abnormal (note 3) 0 -25 0 -5
Thefts 0 0 0 -10
Transfer out 0 0 -10 -10
Deaths -1 -13 -1 -2
Donations made 0 -2 0 0
Closing stock 14 15 19 18

2. The following unit values pertain to the categories stated below for the tax year
ended 31 December 2013:

FSV Market Value

Bulls 50 1 200
Cows 40 900
Tollies and Heifers 14 750
Calves 4 220

3. The normal livestock sales were transacted at the market value .Abnormal sales
refers to cattle that were sold due to a severe drought conditions that occurred
during the 2011 year of assessment. Cows were sold for $8 500 each and calves
at 1 900 each. Of this amount Joseph deposited $200 000 at the Agribank
making Joseph qualify for a subsidy of $12 500 for the loss suffered due to the
forced sales. This was awarded in the same tax year as the sales were made.

4. The bull purchased cost $3 000; the 25 cows cost $900 each. 10 of these
purchase of cows were made to replace cows sold due to drought. The

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 remaining cows were purchased in the ordinary course of farming. The area was
declared drought stricken by the Minister in a statutory instrument.

5. Receipts, accruals and expenses for the tax year follows:

Land rental received 7 200

Leasing of tractor income received 6 00
Grazing fees received 6 50
Expenses:
Cattle feed 3 000
Veterinary expenses 1 500
Medical expenses:
Employees 390
Joseph 885
Salaries:
Farm manager 21 600
Bookkeeper (Joseph’s wife) 7 920
Joseph 4 000
Farm labourers 36 900
Road making and bridge construction 7 590
Prevention of soil erosion 200
New fencing 2 240
Purchase of plough 800.
Cottage 36 000
Staff housing (6 units) 50 000
Homestead 45 000
Aerial survey 2 120
The old plough which had a nil tax value was sold for $500 on 1 December 2013
and the new plough was brought into use on 1 December 2013. Joseph’s mom
lives in the cottage. The homestead is used for accommodation by Joseph and
his wife.
You are required to calculate the taxable income for Joseph for the tax year
ended 31st December 2013. Claim the maximum allowances.

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Question 7

Mining

Mr Svosve, owns a mining business, which commenced regular production of platinum

on 1 January 2009.

You are given the following information for the year of assessment ended 31 December
2013.
1. Profit before tax but after debiting the following was $1 900 000

a) Depreciation 150 000

b) Mining Claims written off 20 000
c) Unrealized exchange loss 1 000
d) Interest on money borrowed to finance working
capital 800
e)First instalment of company formation expenses 5000

2. Capital expenditure incurred during the year was:

a) Dwelling for Mr Svosve the majority shareholder and managing director of the
company 55000
b) Plant 15 000
c) Dump Truck 25 000
d) Peugeot 406 (Sedan) 27 140
e) Railway line 50 000
f) Shaft Sinking 10 000

3. Proceeds from the sale of a VW Sedan sold on 1 January 2013 were $33 000.
(Original cost in 2009 was $37 000 and assume that the deemed cost for passenger
motor vehicles was the same as for 2013.
4. The balance of unredeemed capital expenditure as at 31 December 2012 was $900
000.
5. The estimated life of the mine as at 31 December 2013 is 19 years.
6. On the 31st December 2013 Mr Svosve sells the business to his wife Mrs
AuxilliaSvosve for 1 500 000. Capital expenditure that ranked for allowances is valued
at $1 470 000; mining claims $12 000; goodwill $18 000. Included in the capital
expenditure allowed was renewal of equipment worth for $9 900 in 2011 tax year
(assume the cost of replacement limit was the same as in the 2013 tax year).

REQUIRED:
A. Calculate taxable income or assessed loss of Mr Svosve for the tax year ended
31st December 2013. The methods of determining capital redemption allowances
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 should result in maximum tax. All the other elections (excluding determination of
the capital redemption allowances) available to Mr Svosve should result in him
reducing his tax liability.

B. Comment on how, if any, unredeemed balance of the capital redemption will be

dealt with in the hands of Mrs Svosve in the 2014 tax year.

C. What would be the difference if Mr Svosve in his elections had not wished to
reduce his tax liability? Only highlight the transactions that you would treat
differently.

Question 8

Mining

Simbi Mine Pvt Ltd mines iron in Mazowe and commenced full scale operation on 01
January [Link] company went through a merger scheme on the 31st July 2013 by
acquiring an adjacent iron mine. The following expenditures were incurred during the
year 2012 (Period of non-production)
On-shaft sinking $9 000
Administration Costs $15 000
Buildings $70 000

The company sold a truck at $33 000 (Original cost $23 000). Capital expenditure
incurred during the 2013 year of assessment constituted of:
NissanHardbodyTwincab $50 000
Dwelling for 1 of the 3 Shareholders $40 000
School $53 100

Mules $10 000

Staff House (One Unit) $26 000

Equipment replacement $15 300
The company recorded a net profit $2 600 000 after deducting the following expenses.
Mining Claims Written Off $6 666
Depreciation $160 700
Prospecting Expenses $9 000
Company merger expenses $12 000
Sales of iron for the year amounted to $ 3 600 000. Ore valued at $54 800 was at hand
on 31 December 2013 and had not been considered in the accounts.
The company estimates its life of mine to be 9 years from the end of year of
assessment and elects capital redemption allowances to be granted using Paragraph 2

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of the Fifth Schedule to the ITA. It also elects the allowance in terms of paragraph 6 of
the same schedule.

Assets acquired in the merger were valued at $990 000. There was an assessed loss
by the acquired company of $77 000. Mining claims were $18 000. The assets had all
ranked for capital redemption allowance for the acquired company in previous year. The
assets included in the acquisition costs: a school valued for $65 000 (cost had been $57
000); house for headmaster for the school $37 000 (cost had been $32 000) the
remainder was for either mine buildings or equipment or staff housing and mine shafts.

a) Determine the taxable income of the mine for the tax year ended 31 stDecember
2013 for Simbi Mine Pvt Ltd.

b) What amounts should be included in gross income for the acquired company for
the tax year ended 31st December 2013?

Question 9

Withholding tax & Double taxation

Brice Adam is a resident of Zimbabwe with various investments. He needs your advice on the
following amounts that have accrued to him from Zim for the assessment year 2013:

Dividends from Zimbabwean public companies 6 000

Interest on a loan advanced in Zimbabwe 75 000

Royalties for a patented formulae for making cement 34 000

Trade income from carrying on business from a permanent establishment in

the United Kingdom 25 900

Rentals of equipment being used in Zambia by lessee 81 000

(Zambian tax $810)

Springbok Bank (South African) interest 9 000

(withholding tax $1 950 deducted in S.A. not included)

Canker Bank (Swiss Bank) interest 22 000

(Non resident tax $300)

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 Dividends from Malawi (net) 6 500

(Tax deducted in Malawi $1 200)

Dividends from the Democratic Republic of Congo 45 000

(Non resident tax $4 500)

Interest from loan to Zimbabwean Government 8 000

Salary from employment in South Africa on two week visit he made during
the tax year 10 000

Note: The royalty is being used in Zimbabwe but was invented by him when he was a
resident of Malawi.

You are required:

a) Calculate tax payable for the 2013 tax year for Brice.

b) What are the withholding taxes that Brice should pay in Zimbabwe?

c) Would your answer have been different if Brice was a non resident of Zimbabwe and the
formula had been invented in Malawi but being used in Zimbabwe?

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