Study Text

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Taxation (F6) Zimbabwe (ZWE)June 2008 examinations

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The Association of Chartered Certified Accountants

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Topic PageChapter 1 Introduction To Corporation Tax 12Chapter 2 Calculation Of Corporation Tax Liability 20Chapter 3 Schedule D Case I 30Chapter 4 Capital Allowances On Plant And Machinery 42Chapter 5 Industrial Buildings 57Chapter 6 Capital Gains Act 64Chapter 7 Relief For Company Losses 89Chapter 8 Value Added Tax 100Chapter 9 Income Tax 109Chapter 10 Capital Gains Tax For Individuals 118Chapter 11 Capital Gains Tax For Companies 126AppendicesAppendix 1 Income Tax ActAppendix 2 Finance Act

Table of Contents

Taxation (F6) Zimbabwe (ZWE)

Editors RemarksRendani Neluvhalani

PartnerInternational Tax Services

Ernest and Young

Chief Editor

This is the main text that students, tuition providers and publishers should use as the basis of their studies,instruction and materials. Examinations will be based on the detail of the study guide whichcomprehensively identifies what could be assessed in any examination session. The study guide is aprecise reflection and breakdown ofthe syllabus.

The ACCA qualification does not prescribe or recommend any particular number of learning hoursbecause increasingly study and learning patterns and styles vary greatly between people andorganisations and in different personal, professional and educational circumstances. Each syllabuscontains between 23 and 35 mainsubject area headings depending on the nature of the subject and how these areas have been brokendown in those particular papers.

Knowledge of new examinable regulations will not be assessed until at least six calendar months after thelast day of the month in which documents are issued or legislation is passed. The relevant cut-off date forthe June examinations is 30 November of the previous year, and for the December examinations, it is 31May of the same year. The study guide offers more detailed guidance onthe depth and level at which the examinable documents will be examined. The study guide shouldtherefore be read in conjunction with the examinable documents list.

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5RATIONALEThis syllabus introduces candidates to the subject of taxation and provides the core knowledge of the underlyingprinciples and major technical areas of taxation, as they affect the activities of individuals and businesses.In this syllabus, candidates are introduced to the rationale behind and the functions of the tax system. The syllabus thenconsiders the separate taxes that an accountant would need to have a detailed knowledge of, such as income tax fromself employment, employment and investments; the corporation tax liability of individual companies and groups ofcompanies; the national social security and pension/benefit fund contribution liabilities of both employed and selfemployed persons; the value added tax liability of businesses; and the capital gains tax liabilities of both individuals andcompanies Having covered the core areas of the basic taxes, the candidate should be able to compute tax liabilities,explain the basis of their calculations, apply tax planning techniques for individuals and companies and identify thecompliance issues for each major tax through a variety of business and personal scenarios and situations.

DETAILED SYLLABUSA The Zimbabwe tax system1. The overall function and purpose of taxation in a modern economy2. Different types of taxes3. Principal sources of revenue law and practice4. Tax avoidance and tax evasionB Income tax liabilities1. The scope of income tax2. Income from employment3. Income from self-employment4. Property and investment income5. The comprehensive computation of taxable income and income tax liability6. The use of exemptions and reliefs in deferringand minimising income tax liabilitiesC Corporation tax liabilities1. The scope of corporation tax2. Profits chargeable to corporation tax3. The comprehensive computation of corporation tax liability4. The effect of a group corporate structure for corporation tax purposes5. The use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Syllabus

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D Capital gains tax liabilities1. The scope of the taxation of capital gains2. The basic principles of computing gains and losses3. Gains and losses on the disposal of immovable property and marketable securities4. The computation of the capital gains tax payable by individuals and companies5. The use of exemptions and reliefs in deferring and minimising tax liabilities arising on thedisposal of specified assets for capital gains tax purposesE National social security and pension/benefitfund contributions1. The scope of national social security and pension/benefit fund contributions2. The computation of national social security, pension/benefit fund contributions3. Computation of allowable national social security and pension/benefit fund contributionsfor personal pension schemes and occupational pension schemes6F. Value added tax1. The scope of value added tax (VAT)2. The VAT registration requirements3. The computation of VAT liabilitiesG. The obligations of tax payers and/or their agents1. The systems for self-assessment and the making of returns2. The time limits for the submission of information, claims and payment of tax, including payments on account3. The procedures relating to enquiries, appeals/ objections and disputes4. Penalties for non-complianceAPPROACH TO EXAMINING THE SYLLABUSThe paper will be mainly computational and will have five questions, all of which will be compulsory.• Questions one will focus on personal/individual income tax and question two will focus oncorporation tax. The two questions will be for a total of 55 marks with one of the questionsbeing for 30 marks and the other for 25 marks.

• Question three will be for 15 marks, and will focus on capital gains (either personal orcorporate).• Questions four and five will be on any area of the syllabus and will be for 15 marks each.There will always be at a minimum of 10 marks on value added tax on any paper. These marks mightbe included as part of a question or there might be a separate question on value added tax.National social security, pension/benefit fund contributions will not be examined as a separatequestion, but may be examined in any question involving income tax or corporation tax.Groups and international cross boarder/overseas aspects will only be examined in question two, andwill account for no more than 8 marks in total on any one examination paper.

Capital gains can be examined in questions other than question 3, for example as part of acorporation tax or business income tax scenario. Any of the five questions might include theconsideration of issues relating to the minimization or deferral of tax liabilities.7

Study GuideA THE ZIMBABWE TAX SYSTEM1. The overall function and purpose of taxationin a modern economya) Describe the purpose (economic, social etc) of taxation in a modern economy.[2]

2. Different types of taxesa) Identify the different types of capital and revenue tax.[1]

b) Explain the difference between direct and indirect taxation.[2]

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3. Principal sources of revenue law and practicea) Describe the overall structure of the Zimbabwe tax system.[1]

b) State the different sources of revenue law.[1]

c) Appreciate the interaction of the Zimbabwe tax system with that of other tax jurisdictions.[2]

4. Tax avoidance and tax evasiona) Explain the difference between tax avoidance and tax evasion.[1]

b) Explain the need for an ethical and professional approach.[2]

Excluded topics• Specific anti-avoidance legislation• Assurance/insurance tax legislationB INCOME TAX LIABILITIES1. The scope of income taxa) Explain how the residence of an individual isdetermined.[1]

Excluded topicsIncome from trusts and settlements.2. Income from employmenta) Recognise the factors that determine whether an engagement is treated as employment orself-employment.[2]

b) Recognise the basis of assessment for employment income.[2]

c) Compute the taxable income.[2]

d) Recognise the exemptions and allowable deductions.[2]

e) Compute the value of taxable benefits.[2]

f) Explain the PAYE system.[1]

Excluded topicsShare and share option incentive schemes forEmployees Termination payments3 Income from self-employmenta) Recognise the basis of assessment for self-employment income.[2]

b) Recognise the expenditure that is allowable in calculating the tax-adjusted trading profit.[2]

c) Recognise the relief that can be obtained for pre-trading expenditure.[2]

d) Compute the taxable income on commencement and on cessation.[2]

e) Change of accounting datei) Recognise the factors that will influence the choice of accounting date [2]

ii) State the conditions that must be met for a change of accounting date to be valid [1]

iii) Compute the taxable income on a change of accounting date.[2]

f) Capital allowancesi) Define plant and machinery for capitalallowances purposes [1]

8ii) Compute annual wear and tear (reducing balance method) allowances and specialinitial allowances [2]

iii) Compute capital allowances for commercial and passenger motor vehicles [2]

iv) Compute balancing allowances and balancing charges [2]

v) Define an industrial building and a commercial building for capital allowance purposes [1]

vi) Compute industrial building allowance and commercial buildings allowance for new and second-hand buildings.[2]

g) Incentive allowancesi) Understand the special deductions available for businesses operating in growth point areas [2]

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ii) Recognise the special deductions available for exporters and manufacturing employment creation [2]

h) Relief for trading lossesi) Understand how trading losses can be carried forward [2]

ii) Explain how trading losses can be carried forward following the incorporation of a business [2]

iii) Understand how trading losses can be claimed against total trading income [2]

iv) Explain the relief for trading losses in the early years of a trade.[1]

i) Farmers [2]

i) Apply standard values to the valuation of stockii) Recognise the special deductions available to farmersiii) Compute farming taxable incomeiv) Understand how relief for farming losses is given.j) Partnershipsi) Explain how a partnership is assessed to tax [2]

ii) Compute the taxable income for each partner following a change in the profit sharing ratio [2]

iii) Compute the taxable income for each partner following a change in the membership of the partnership [2]

iv) Describe the loss relief claims that are available to partners.[2]

4. Property and investment incomea) Compute property business taxable income.[2]

b) Compute the taxation of premiums receivable/payable in conjunction to a lease.[2]

c) Distinguish between exempt and taxable interest income.[2]

d) Compute the tax payable on savings income.[2]

e) Compute the tax payable on dividend income.[2]

f) Understand how property and investmentbusiness losses can be carried forward.[2]

5 The comprehensive computation of taxable income and income tax liabilitya) Prepare a basic income tax computation involving different types of income.[2]

b) Calculate the amount of personal allowance available to people aged 55 and above.[2]

c) Compute the amount of income tax payable (including AIDS levy).[2]

d) Compute the amount of applicable tax credits.[2]

e) Explain the treatment of donations.[1]

9f) Explain the treatment of property owned jointly by a married couple.[1]

Excluded topicsMaintenance payments.The income of minor children.6. The use of exemptions and reliefs in deferring and minimising income tax liabilitiesa) Explain and compute the relief given for contributions to personal pension schemes.[2]

b) Describe the relief given for contributions to occupational pension schemes.[1]

c) Explain and apply the exemptions from and reductions in tax payable available to taxpayersin growth point areas and industrial parks, andunder BOOT arrangements.[2]

Excluded topics• The conditions that must be met in order for a pension scheme to obtain approval from the Zimbabwe RevenueAuthority (ZIMRA)C CORPORATION TAX LIABILITIES1. The scope of corporation taxa) Define the terms ‘period of account’, ‘accounting period’, and ‘year of assessment’.[1]

b) Recognise when an accounting period starts and when an accounting period finishes.[1]

c) Explain how the residence of a company isdetermined.[2]

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Excluded topics• Companies in the special economic sectors of assurance/insurance, banking andfinancial institutions and mining • Investment companies.• Close companies.• Companies in receivership or liquidation.• Reorganisations.• The purchase by a company of its ownshares.• Personal service companies• Taxation of Venture capital companies.2. Profits chargeable to corporation taxa) Recognise gross income.[2]

b) Recognise the expenditure that is allowable in calculating taxable business income.[2]

c) Explain how relief can be obtained for pre-trading expenditure.[1]

d) Compute capital allowances (as for individual/personal income tax).[2]

e) Compute investment incentives (as for individual/personal income tax).[2]

f) Compute property business taxable income.[2]

g) Explain the treatment of interest paid and received.[1]

h) Explain the treatment of donations.[2]

i) Understand how assessed trading losses canbe carried forward.[2]

j) Understand how assessed trading losses can be claimed against income of the currentaccounting periods.[2]

k) Recognise the factors that will influence the choice of assessed loss relief claim.[2]

l) Explain how relief for a property business assessed loss is given.[1]

m) Compute the taxable income chargeable tocorporation tax.[2]

10Excluded topics• Research and development expenditure.• Relief for intangible assets.3. The comprehensive computation ofcorporation tax liabilitya) Compute the corporation tax liability (including AIDS levy).[2]

b) .Explain and apply the exemptions from and reductions in tax payable available to taxpayersin growth point areas and industrial parks, and under BOOT arrangements.[2]

4. The effect of a group corporate structure for corporation tax purposesa) Define an associated company and recognize the effect of being an associated company forcorporation tax purposes.[2]

b) Define a 51% group, and recognise the reliefs that are available to members of such agroup.[2]

c) Define a 51% capital gains group, and recognise the reliefs that are available tomembers of such a group.[2]

d) Calculate double taxation relief for withholding tax and underlying tax.[2]

e) Explain the basic principles of the transferpricing rules.[2]

Excluded topics• Relief for trading losses incurred by anoverseas subsidiary.• The anti-avoidance provisions wherearrangements exist for a company to leavea group.• Foreign companies trading in theZimbabwe .• Expense relief in respect of overseas tax.• Transfer pricing transactions not involvingan overseas company.

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5. The use of exemptions and reliefs in deferring and minimising corporation tax liabilities (Theuse of such exemptions and reliefs is implicit within all of the above sections 1 to 4 of partC of the syllabus, concerning corporation tax)D CAPITAL GAINS1. The scope of the taxation of capital gainsa) Describe the scope of capital gains tax.[2]

b) List those assets which are exempt.[1]

Excluded topicsAssets situated overseas and double taxation relief.Partnership capital gains.2. The basic principles of computing gains andlosses.a) Compute capital gains on specified assets for both individuals and companies.[2]

b) Recognise deductible expenditure, including adjustment for inflation.[2]

c) Explain the treatment of capital losses for both individuals and companies.[1]

d) Explain the treatment of transfers between a husband and wife.[2]

e) Compute the amount of allowable expenditure for a part disposal.[2]

f) Explain the treatment where an asset is damaged, lost or destroyed, and theimplications of receiving insurance proceeds and reinvesting such proceeds.[2]

Excluded topicsAssets held at 31 July 1981Assessed losses in the year of death.Negligible value claims.113. Gains and losses on the disposal of immovable property and marketable securitiesa) Compute the exemption when a principal private residence is disposed of betweenrelated parties.[2]

b) Calculate the capital gain when a principal private residence has been used for businesspurposes.[2]

c) Calculate the value of quoted shares where they are disposed of by way of a gift.[2]

d) Explain the treatment of bonus issues, rights issues, takeovers and reorganisations.[2]

Excluded topics• The disposal of leases and the creation of sub-leases.• The capital gains on the disposal of wasting assets4. The computation of the capital gains tax payable by individuals and companiesa) Compute the amount of capital gains tax payable.[2]

b) Understand the application of capital gains withholding tax.[2]

5. The use of exemptions and reliefs in deferring and minimising tax liabilities arising on thedisposal of specified assetsa) Explain and apply rollover relief as it applies to individuals and companies.[2]

b) Explain and apply the incorporation relief that is available upon the transfer of a business to acompany.[2]

c) Explain and apply the relief available for transfers of assets between companies undercommon control.[2]

d) Explain and apply the relief available where the purchase price is paid by instalments.[2]

Excluded topics• Reinvestment relief.E NATIONAL SOCIAL SECURITY AND PENSION/BENEFIT FUND CONTRIBUTIONS1. The scope of the national social security systema) Describe the scope of pension/benefit fund and national social security contributions.[1]

2. The computation of national social security and pension/benefit fund contributionsa) Compute the contributions payable by employed persons.[2]

b) Compute the contributions payable by selfemployedpersons.[2]

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3. Computation of allowable national social security and pension/benefit fund contributions for personalpension schemes and occupational pension schemes.[2]

F VALUE ADDED TAX1. The scope of value added tax (VAT)a) Describe the scope of VAT.[2]

b) List the principal zero-rated and exemptsupplies.[1]

2. The VAT registration requirementsa) Recognise the circumstances in which a person must register for VAT.[2]

b) Explain the advantages of voluntary VAT registration.[2]

c) Explain the circumstances in which pre- registration input VAT can be recovered.[2]

d) Explain how and when a person can deregisterfor VAT.[1]

e) Explain the four categories of tax period.[1]

12Excluded topics• Group registration.3. The computation of VAT liabilitiesa) Explain how VAT is accounted for and administered.[2]

b) Recognise the tax point when goods or services are supplied.[2]

c) List the information that must be given on a VAT invoice.[1]

d) Explain and apply the principles regarding the valuation of supplies.[2]

e) Recognise the circumstances in which input VAT is non-deductible.[2]

f) Compute the relief that is available for impairment losses on trade debts.[2]

g) Explain the circumstances in which the default penalty interest will be applied.[1]

Excluded topics• Imports and exports• Penalties apart from those listed in the study guide (repeated misdeclarations areexcluded).G THE OBLIGATIONS OF TAX PAYERS AND/OR THEIR AGENTS1. The systems for assessment and the making of returnsa) Explain and apply the features of the assessment system as it applies toindividuals and companies.[2]

b) Explain the quarterly payment date system (QPD’s) as it applies to companies and selfemployedindividuals.[2]

2. The time limits for the submission of information, claims and payment of tax,including payments on accounta) Recognise the time limits that apply to the filing of returns and the making of claims.[2]

b) Recognise the due dates for the payment of tax under the assessment system.[2]

c) Compute provisional and quarterly payments of tax.[2]

d) List the information and records that taxpayers need to retain for tax purposes.[1]

3. The procedures relating to enquiries, appeals/objections and disputesa) Explain the circumstances in which ZIMRA can enquire into an assessment tax return.[2]

b) Explain the procedures for dealing with appeals/objections and disputes.[1]

4. Penalties for non-compliancea) Calculate interest on overdue tax.[2]

b) State the penalties that can be charged.[2]

READING LISTStudents’ Guide to Tax in Zimbabwe 2006, Ernst & Young ,by Jonathan Hore and MaxwellMangoro,published and printed by ZXNET (Private)

Limited. The Guide is updated annually.

South African Tax Cases Reports, Juta & co

Zimbabwe Tax Service, ZXNET incorporating theconsolidated Income Tax Act, Capital Gains Tax Act,Finance Act and Regulations, Value Added Tax Actand Regulations and Departmental Practices.The Income Tax Act (Chapter 23:06), Government

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Printer officeThe Capital Gains Tax Act (Chapter 23:01),Government Printer OfficeThe Finance Act (Chapter 23:04), GovernmentPrinter OfficeValue Added Tax Act (Chapter 23:12)Government Printer officeThe Tax Reserves Certificate Act (Chapter 23:10),Government Printer OfficeThe National Social Security Act (Chapter17:04),Government Printer OfficeTax updates are also available online at theZimbabwe Revenue Authority website:http//www.zimra.co.zw

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The structure of a corporation tax computation

The proformaA proforma for a typical corporation tax computation is shown below. The main sections of this Chapter and Chapter 2will then build on this framework.Company nameCorporation tax computation for XX months ending ………

$

Schedule D Case I XSchedule D Case III XTaxed income XSchedule A XChargeable gains XLess: Charges on income (X)

___Profits chargeable to corporation tax X

___Corporation tax liability at relevant rate X

Less: Quarterly instalments paid (if applicable) (X)___

Corporation tax payable (repayable) X___

The relevance of accounting periods

Length of accounting period

A company prepares a computation of ‘profits’ for an accounting period, usually known as a chargeable accountingperiod (CAP). ‘Profits’ include income and gains (covered in Section 3below). From the outset, you need to be aware of the length of the ‘period of account’ and the

Introduction To Corporate TaxChapter 1

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impact this has on a company’s ‘chargeable accounting period’.A CAP can be any length up to 12 months, but cannot exceed 12 months. In a normal situation, a company prepares a12 month set of accounts and has a matching CAP. Where the period of account is shorter (eg 9 months) then there isa shorter CAP. This does not affect how profits are computed, but does affect the computation of the liability.A CAP can never exceed 12 months. Therefore, where the period of account exceeds 12 months, there is a CAP for 12months and then a separate CAP for the balance. No other combination is acceptable. This is illustrated in Figure 1.1.

Figure 1.1 Financial period of account of 18 months

The method of allocating profits from the accounts between the two periods is covered later.A CAP normally starts when the previous CAP ends and runs for 12 months, but there are special situations which cantrigger a start or end.A CAP starts in any of the following circumstances.♦ A company begins to trade.

♦ A company first acquires a source of chargeable income.

♦ A previous CAP ends.

A CAP ends on the earliest date indicated by the following rules.♦ The 12 month rule

♦ The date ‘accounts’ are made up to

♦ The date the company ceases or begins to trade

♦ The start of the winding up of the company

♦ The date when the company begins or ceases to be ZIMBABWE resident

ExampleA Ltd was incorporated on 1 September 2006 and opened a deposit account on 1 October 2006. It commenced to tradeon 1 March 2007, and makes up accounts to 31 December starting in 2006.RequiredState the first four CAPs of the company.

Accounts18 months to 31 March 2008

12 months CAPto 30 September 2007

6 months CAPto 31 March 2008

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Solution1 October 2006 – 31 December 2006 (CAP ends, to coincide with accounts)1 January 2007 – 28 February 2007 (CAP ends, company starts to trade)1 March 2007 – 31 December 2007 (CAP ends, to coincide with accounts)1 January 2008 – 31 December 2008 (12 months – ‘normal’ rule applies)

Financial years

The rates of corporation tax are set for financial years. A financial year (FY) runs from 1 April to the following 31 Marchand is known by the calendar year in which it starts – eg FY 2007 (or FY01) is the year from 1 April 2007 to 31 March2008.In Figure 1.1 above the CAP of 12 months to 30 September 2007 falls six months in FY 2006 and six months in FY2007. Half the profits are therefore taxed using FY 2006 rates and half are taxed at the FY 2007 rates. This is coveredin detail in Chapter 2.Financial years are only relevant to corporation tax. As we see later, individuals and partnerships pay income tax on afiscal year basis. A fiscal year runs from 6 April to the following 5 April, eg ‘2007/08’ is the fiscal year (or ‘tax year’ or‘year of assessment’) from 6 April 2007 to 5 April 2008.3 Profits chargeable to corporation tax (PCTCT)

IntroductionThe first stage of a single company computation is to ascertain the PCTCT. This comprises income and gains, lesscharges on income. There are a variety of topics which could be examined, but key elements frequently recur, and theprocedures below should ensure that you have a sound base. We start with an overview of Schedule D Case I – the taxheading which applies to trading profits.

Schedule D Case I

Schedule D Case I comprises the following elements.Notes $

Adjusted accounting profit of trading 1 X

Less Capital allowances

Plant and machinery 2 (X)

Industrial building allowances 2 (X)

Add Balancing charges 2 X___

Schedule D Case I X

Deduct DI trading loss brought forward from earlier CAP 3 (X)___X

___Notes(1) The adjusted accounting profit of trading is the net profit before taxation, as adjusted for tax purposes, as will be

explained in Chapter 3.(2) Calculations are often required in these areas (see Chapters 4 and 5).(3) Losses will be examined in detail in Chapter 7.Dividends paid by a company are not an allowable deduction in calculating Schedule DI profits being an appropriation ofprofit, not an expense of earning the profit. In any event, these should not have been deducted in arriving at the netaccounting profit.

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Loan relationship rulesWe consider the loan relationship rules at this point because of their potential relevance to Schedule D Case I.The loan relationship rules are highlighted in the Study Guide. They apply to all monetary loans♦ made by a company on which it receives interest and

♦ received by a company on which it pays interest.

The legislation distinguishes between loans for trading purposes and loans for non-trading purposes.For examination purposes, if a company receives a loan you can normally assume that it is for trading purposes. Forexample, a company may borrow money in order to finance the purchase of new assets for use in its trade. If acompany makes a loan, you can normally assume that this is for a non-trading purpose.You will, however, need to read the question carefully to make sure that these assumptions are not contradicted.Net or gross?Prior to 1 April 2007 certain types of interest were paid or received net of 20% income tax. From 1 April 2007 mostinterest is paid or received gross (with the exception of interest paid to individuals).The examiner has stated that the deduction of income tax from interest is no longer examinable, and all receipts andpayments in corporation tax questions should be taken to be gross.Trading loansInterest paid - All interest charged in the profit and loss account will be an allowable deduction for Schedule DIpurposes. The normal accruals basis applies. This means you will not need to make any adjustments in converting theaccounting profit into the Schedule DI profit.Interest received - You are unlikely to see any interest received for trading purposes. However, if you do, such interestwill be included in the trading profit on an accruals basis and therefore needs no adjustment.Capital value - The capital value of a loan may change, for example due to exchange rate variations. Any such changesare treated as trading income (or trading expenses, if applicable). Note that changes in the capital value of a loan due torepayments are ignored.Non-trading loansExamples of non-trading loans are loans to suppliers, customers or employees. Non-trading loans are dealt with underSchedule D Case III rather than Schedule D Case I.Both interest paid and interest received are dealt with on an accruals basis. They are netted off against each other toproduce one overall Schedule DIII figure. Any non-trading loans written off are deducted from the Schedule DIII figure.If the net result is a positive figure, it is included in the corporation tax computation as Schedule DIII income. If the netresult is a negative figure, it is a Schedule DIII deficit. This is a type of loss but we do not consider it further as it isexcluded from the syllabus.

Other profits and charges

In ascertaining Schedule D Case I for a company, various items are adjusted for as they do not represent tradingexpenses or income.Item Reason for adjustment♦ Patent royalties Trade charge♦ Gift Aid donation Non-trade charge♦ Rental income Investment income♦ Interest on bank or building society account Investment income♦ Dividends received Investment income♦ Royalty income Investment income♦ Profit on sale of fixed asset Capital gainFor example, any rental income included in trading profits would have to be deducted (reducing profits) and any patentroyalties deducted from trading profits should be added back (increasing profits).The treatment of these items in finding PCTCT will now be outlined.

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Schedule D Case IIIThe loan relationship rules were covered earlier in this section to explain their relevance for Schedule D Case I. Torecap, various types of interest receivable will be included under the heading Schedule D Case III, not Case I.This includes:♦ interest from banks, building societies, ZIMBABWE government stock,

♦ loan stock and debentures.

In all cases, it is the accrued amount for the accounting period which should be used. This should be the same as theamount shown in the profit and loss account.Schedule DIII also includes interest payable on a loan taken out for a non-trading purpose such as to acquire or improveproperty used for commercial letting. This is known as non-trading interest payable. It is deducted from Schedule DCase III, on an accruals basis. If the interest payable exceeds interest receivable, there will be a DIII deficit – but this isoutside the syllabus.

Other incomePatent royalty income has conventionally been shown separately in the computation.From 1 April 2007 patent royalties are usually received gross, except that patent royalties received from individuals arereceived net of basic rate tax.The examiner has stated that the deduction of tax from patent royalties is no longer examinable, and all receipts shouldbe taken to be gross.Patent royalties are strictly assessable under Schedule D Case III but labelling them ‘DIII’ risks treating them under theloan relationship rules (which only applies to DIII interest). You should simply label them ‘patent royalties’.Dividend income is not chargeable to corporation tax. If it is included in the profit and loss account, it must be deductedfor DI purposes. This is because dividend income is paid out of after-tax profits of another company (ie the profitsgenerating the dividend have already been subject to ZIMBABWE corporation tax). Dividend income is, of course,chargeable to tax when received by individuals.This only applies to dividends from ZIMBABWE resident companies. Overseas dividends are still assessable (underSchedule D Case V) – see Chapter 9.

Schedule A

Rental income is included under the heading Schedule A, and comprises the following.Notes $

(a) Rental income (furnished or unfurnished) 1 X

Less Expenses (excluding loan interest payable) 1 (X)

(b) Income element of premium on any short lease (less than 50years)

2 X___X

___Notes(1) This is the accrued income and expenses for the accounting period. Expenses are allowed (or disallowed) as if

the letting business was a trade (see Chapter 3).

(2) This is premium received ×50

n51 − where n = number of years of lease.

If the property is let furnished the landlord can claim a ‘wear and tear’ allowance equal to 10% of the rent receivable netof any council tax and water rates (if these are paid by the landlord).Schedule A losses are covered in Chapter 7.

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Capital gainsA company’s PCTCT includecapital gains as well as income. The calculation of the capital gain or loss on individual transactions is covered in a laterchapter. For the purpose of this chapter, all individual gains and losses are already computed. You will, however, needto be able to produce a summary of the position for PCTCT.This is formulated as follows.

$Gain (transaction 1) XGain (transaction 2) XLoss (transaction 3) (X)

___X

Less Capital losses brought forward (X)___

Net chargeable gains X___

Current period gains and losses are netted off automatically.Any excess capital losses can only be carried forward for relief against future capital gains.

ChargesThe final component in finding PCTCT is to deduct from the total profits (income and gains) any allowable paymentsknown as charges on income. These comprise two distinct types.♦ Trade charges (eg patent royalties). (The examiner has stated that the deduction of income tax from patent

royalties is no longer examinable, and you should assume that all payments are gross.)

♦ Non trade charges (eg Gift Aid donations). These are paid gross and require no adjustment.

The gross amount deductible for a CAP is the amount paid. This may be different from the amount accrued in theaccounts.The distinction between trade and non-trade charges is significant for loss purposes only.A Gift Aid donation is basically any donation by a company to a charity unless it already qualifies as a businessexpense. Only donations that are ‘small’ and ‘local in effect’ will normally be allowed as a DI expense.There is an example below on computing PCTCT, which will also be used to start developing good habits on examtechnique in your approach to CT questions.

Example

Laserjet Ltd provides you with the following information for its year to 31 March 2008.Note $m

Adjusted trading profit 500,600

Capital allowances 16,000

Rental income (net of expenses) 12,000

Bank loan interest accrued and paid to purchase rental property 4,000

Building society interest (accrued) 1 20,000

10% Debenture interest accrued and received on $60,000 nominalvalue

6,000

Patent royalty received and accrued 20,000

Gift Aid payment made 14,000

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Notes(1) The amount actually received was $15,000,000,000.(2) There were capital losses brought forward of $2,000,000,000.Compute the PCTCT for the year ended 31 March 2008, assuming all reliefs are claimed as early as possible.Approach to the exampleIt is essential to develop a methodical approach from the outset in computing PCTCT, to enable you to tackleexamination level questions later.

Step 1Set up a skeleton CT computation proforma. Keep this on a separate sheet of paper.

$

Schedule D Case I (W1)

Schedule D Case III (W2)

Schedule A

Patent royalties

Chargeable gains

Less Charges on income_______

PCTCT________

The headings are not required to be in any particular order, but it is accepted best practice to put DI first.Step 2Set up a separate working sheet for any necessary workings and work through the information methodically. ScheduleD Case I often (though not in this example) requires more than one working for the component parts of:♦ adjusted profit

♦ capital allowances on plant and machinery, etc.

As you complete each working slot the result into the proforma.Step 3Show clearly the use of any available losses brought forward and, where available, the carrying forward position incompiling step 2.

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SolutionLaserjet LtdCT computation for the year ended 31 March 2008 $mSchedule D Case I (W1) 484,600

Schedule D Case III (W2) 22,000

Schedule A 12,000

Patent royalties 20,000

Gains (W3) Nil_______538,600

Less Charges on income – Gift Aid (14,000)_______

PCTCT 524,600_______

Marks may be awarded for presentation and a clear structured answer creates a good impression with a marker!Workings(W1) Schedule D Case I

$mAdjusted trading profit 500,600

Less Capital allowances (16,000)_______484,600_______

In exam questions take great care not to adjust a profit which has already been adjusted for.(W2) Schedule D Case III

Notes $mBuilding society interest 1 20,000

Debenture interest (10% × $60,000 = $6,000 gross per annum) 6,000______

26,000

Less Loan interest payable – rental property 2 (4,000)______

22,000______

Notes(1) The accrued figure is the assessable amount, not the paid figure.(2) This is not a Schedule A deduction but has to be dealt with as a ‘non-trading’ loan.(W3) Chargeable gainsThere are no gains to utilise losses brought forward of $2,000,000,000 therefore carry forward.SummaryCalculating PCTCT is an essential part of every corporation tax question. In the next chapter you will learn how tocalculate a company’s corporate.

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The corporation tax liability

Introduction

Once you have computed a company’s PCTCT, the next stage of the computation is to calculate the corporation taxliability. This is essentially divided into two steps.♦ Determining PCTCT and ‘profits’ (P), a term which is used to determine the tax rates that will apply.

♦ Applying relevant tax rates to calculate the liability.

Step 1$

PCTCT X ‘I’

Add Current DII X___

Profits for determination of liability X___

‘P’

DII is dividend investment income. Current DII is the term used to describe Zimbabwe dividends received in the currentperiod, grossed up by the tax credit of 100/90.PCTCT (sometimes labelled ‘I’ for short) is the profit which is charged to tax, but ‘P’ is used to determine the rate of tax.Step 2The tax calculation is based on two main factors.♦ ‘Profits’ P

♦ The financial year (FY) which matches the CAP.

For each FY (ie 1 April to following 31 March) the following information is provided.FY01

Fraction401

Ordinary rate 30%For FY00 onwards a new 10% starting rate of corporation tax applies to companies with profits below $10,000,000,000.The rules concerning this new rate are covered later in this chapter.

Calculation Of Corporate Tax LiabilityChapter 2

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Ignoring the starting rate for the moment, there are three situations that can apply.♦ Where ‘profits’ (P) do not exceed the lower limit the small company rate applies to PCTCT.

♦ Where ‘profits’ (P) are at or above the upper limit, the ordinary rate applies to PCTCT.

♦ Where ‘profits’ (P) are between the limits then the following calculation is needed.

PCTCT at ordinary rate X

Less Marginal relief (X)___X

___Marginal relief is found by using the formula (likely to be provided in the examination). Fraction × (M – ‘P’) × P

I where I = PCTCT, M = upper limitThe following examples illustrate the calculation of CT liability.

ExampleSvosve Ltd has the following PCTCT for the year ended 31 March 2008.

$mSchedule D Case I 360,000Schedule A 10,000

_______370,000

Less Patent royalties paid (80,000)_______

PCTCT 290,000_______

RequiredWhat is the corporation tax liability if:(a) no dividends are received from Zimbabwe companies(b) $9,000,000,000 of dividends are received from Zimbabwe companies(c) $45,000,000,000 of dividends are received from Zimbabwe companies?

Solution

(a) Step 1$m

PCTCT 290,000DII Nil

_______‘P’ 290,000

_______Step 2Identify the financial year(s) which applies and determine the tax rate.FY01 applies to the year ended 31 March 2008, and therefore to the whole of the accounting period.‘P’ is below the lower limit so: CT = $290,000,000,000 × 20% = $58,000,000,000.

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(b) Step 1$m

PCTCT 290,000

DII ($9,000 × 90100 ) 10,000

_______‘P’ 300,000

_______Step 2FY01 applies and ‘P’ is equal to the lower limitTherefore CT = $290,000 × 20% = $58,000, as before. The ‘profits’ level has not altered the decision.

(c) Step 1$m

PCTCT 290,000

DII ($45,000 × 90100 ) 50,000

_______‘P’ 340,000

_______

Step 2FY01 applies‘P is above $300,000 but below $1,500,000; marginal relief applies.

$m$290,000 × 30% 87,000

Less Marginal relief401 ($1,500,000 – $340,000) ×

000,340000,290 =

(24,735)______

CT 62,265______

Short accounting periodsShort accounting periods – ie less than 12 months – can have an impact on the calculation of the CT liability as thelower and upper limits are annual limits and have to be time apportioned to fit the length of the accounting period.

Example

If Svosve Ltd (1.2 above) had a nine month accounting period to 31 March 2008 what would be the result assuming thedividend received was $9,000?

Solution

Step 1$m

PCTCT 290,000

DII 10,000_______

‘P’ 300,000_______

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Step 2FY01 applies but to a nine month period therefore:Lower limit = 12

9 × 300,000 = 225,000

Upper limit = 129 × 1,500,000 = 1,125,000

‘P’ is now between the limits so:$

PCTCT $290,000 × 30% 87,000

Less Marginal relief 401 ($1,125,000 – $300,000) ×

000,300000,290 (19,938)

______

67,062______

Make sure you calculate tax on PCTCT not on ‘P’ – an easy mistake to make.

Non 31 March year ends

Many companies do not have CAPs which fall neatly into a financial year.A company with a year end of 31 December 2005 is affected as follows.

FY04 FY051 January 2005 – 31 March 2005 1 April 2005 – 31 December

2005Ordinary rate 30% 30%Fraction

401

401

As the CT rates change from FY04o FY05it is necessary to time apportion the PCTCT and ‘P’ and compute the CT foreach FY separately as follows.Step 1Determine ‘P’ as before and decide the level of tax (ie small, ordinary, marginal).Step 2Time apportion PCTCT between the financial years, and proceed as before, taking the number of months into account.If profits for the year to 31 December 2005 are below $300,000,000,000:

PCTCT × 21% ×123 FY04

PCTCT × 20% ×129 FY25

Note that for the year to 31 December 2006 (ie falling in FY05 and FY00) and to 31 December 2007 (ie falling in FY00and FY01) there will be no need to time apportion as the rates and limits remain the same.If this situation arises in an exam question (ie FY ‘straddle’ without a change of rates) you should explain briefly why youhave not split up the calculation.

ExampleMarginal Ltd had PCTCT of $290,000,000,000 for the year ended 30 September 2005 and received a dividend of$45,000,000,000 on 15 May 2005.RequiredCalculate the company’s corporation tax liability.

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SolutionStep 1

Year ended 30 September2005

$mPCTCT 290,000

DII 45,000 × 90100 50,000

_______ ‘P’ 340,000

_______Therefore we have a marginal company.Step 2

6m 6mFY04 FY05 Total$m $m $m

PCTCT 145,000 145,000

@ 31%/30% 44,950 43,500 88,450

FY04 and FY05 × 401 ($1,500,000 – $340,000) ×

000,340000,290

(24,735)______

63,715______

NoteThe marginal relief calculation is the same for both financial years because both the upper profit threshold and thefraction are the same in FY04 and FY05. The calculation can therefore be done in one step.

The new starting rate of corporation taxA new 10% starting rate of corporation tax was introduced with effect from 1 April 2006. It applies to companies withprofits not exceeding $10,000.Companies with profits between $10,000,000,000 and $50,000,000,000 are taxed at the small company rate of 20%,but their tax liability is then reduced by a form of marginal relief. This is calculated using the limit of $50,000,000,000 inthe relief formula in place of the $1,500,000,000,000 limit used above.

ExampleTiny Ltd has PCTCT of $9,000,000,000 for the year ended 31 March 2008.RequiredCalculate Tiny Ltd’s corporation tax liability assuming that:(a) it received no dividends(b) it received dividends of $1,800,000,000.

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Solution

(a) Tiny Ltd’s profits will be subjected to tax at the new starting rate of 10% as they are below $10,000,000,000.The corporation tax liability will therefore be $9,000 × 10% = $900,000,000.

(b) Tiny Ltd’s profits are as follows.$m

PCTCT 9,000

DII ($1,800 × 100/90) 2,000______

P 11,000______

As Tiny Ltd’s profits fall between $10,000 and $50,000 it will be subjected to corporation tax at the rate of 20%.However, its liability will be reduced by marginal relief as shown.

$mPCTCT ($9,000 × 20%) 1,800

($50,000 – $11,000) ×000,11000,9 × 40

1 (798)_____

Corporation tax liability 1,002______

Long accounting periods

Introduction

In Chapter 1 you learned that, although a company can draw up financial accounts for a period of more than 12 months,a company’s ‘chargeable accounting period’ (CAP) for corporation tax purposes can never exceed 12 months. Thereforeif the financial accounts cover more than 12 months, two chargeable accounting periods are required; one for the first 12months and one for the balance. This section tackles the allocation of income, gains and charges between the twoperiods, in finding PCTCT.The table below summarises the rules to be used.Table 2.1 Allocating income and expenses between CAPsItem Method of allocationTrading income before deducting capitalallowances

Time apportioned

Capital allowances Separate computation for each accountingperiod (see Chapters 4 and 5)

Rents etc under Schedule A Time apportionedPatent royalties Period receivedSchedule DIII Period for which accrued (if the question

provides sufficient information)Chargeable capital gains Period of disposalCharges Period paidDo not miscalculate the number of months in the second period – double check it – as it is crucial for time apportioningcalculations and easy to get wrong.

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ExamplePrinter Ltd has made up accounts for the 17 months to 30 June 2007, with the following information.

$mAdjusted trading profit before capital allowances 365,000

Building society interest

Received 30 April 2006 (of which $1,950 related to year ended31 January 2006)

2,450

Received 30 April 2007 2,675

Accrued on 30 June 2007 200

Rents from property 26,010

Chargeable gains

Disposal on 31 January 2007 28,700

Disposal on 1 February 2007 49,760

Dividend received from Zimbabwe company (gross amount) on 1 December2006

10,000

Patent royalties paid

Paid 31 July 2006 6,000

Paid 31 January 2007 6,000

Accrued to 30 June 2007 5,000Capital allowances for the two CAPs derived from the 17 month period of account are $20,000 and $6,250 respectively.Show how the company’s period of accounts will be divided into CAPs and compute the PCTCT for each CAP. Allincome is deemed to accrue evenly where relevant.

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SolutionThe procedure to be followed is exactly the same as for a 12 month period, but incorporating the allocation rules.

12 months to 31 January2007

5 months to 30 June 2007

$ $Schedule D Case I (W1) 237,647 101,103

Schedule D Case III (W2) 2,382 993

Schedule A (W3) 18,360 7,650

Gains (date of transaction) 28,700 49,760

Less Charges (W4) (12,000)_______

Nil_______

PCTCT 275,089_______

159,506_______

Note The dividend received is not relevant for PCTCT.Workings(W1) Schedule D Case I

Total 12m 5m$m $m $m

Adjusted profit (See note) 365,000 257,647 107,353

Capital allowances_______

(20,000)_______

(6,250)_______

237,647_______

101,103_______

Note Trading profit is time apportioned.

(W2) Building society interestThe amount which would be included in the profit and loss account for the 17 month period on the accrualsbasis would be as follows.

$m 12bn 5bnReceived 30 April 2006 2,450

30 April 2007 2,675

Add Year end accrual 200

Less Opening accrual (1,950)_______ _______ _______

(See note) 3,375_______

2,382_______

993_______

Note This is then time–apportioned as the accrual at 31 January 2007 is not supplied.

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(W3) Schedule ARental income is assessable under Schedule A, which is assessed on an accrued basis for the 17 months andthen time apportioned into the 2 CAPs.

$m 12bn 5bn26,010m

18,360m 7,650m

(W4) Charges are relevant when paid $m

31 July 2006 6,000

31 January 2007 6,000______12,000 in year ended 31 January 2007______

Nil in five months to 30 June 2007 as accrued, not paid.The procedure for finding the corporation tax liability now follows the rules outlined earlier, except that you have twocalculations. The point to watch, however, is that as the second computation is the ‘balance’ of the accounts it willalways be a short period. The limits of $300,000,000 and $1,500,000,000 therefore need to be reduced proportionatelywhen considering the tax rate to apply.

ExampleNow calculate the CT liability for Printer Ltd for its two accounting periods.

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Solution

Step 112 months to 31 January

20075 months to 30 June 2007

$m $mPCTCT (as above) 275,089 159,506

DII (received December2006)

10,000_______

–_______

‘Profits’ 285,089_______

159,506_______

Step 2Matching the financial years

FY052 months

FY0010 months

FY002 months

FY013 months

Lower limit (annual) ( 125 ) $300,000

small rate$125,000marginal

Upper limit ( 125 ) $625,000

Rates to apply 20% 20% 30% 30%Step 3

12 months to31 January 2007

$

PCTCT of $275,089

CT liability @ 20% 55,018_______

5 months to 30 June 2007$

PCTCT $159,506 × 30% 47,852

Less Marginal relief 401 ($625,000 – $159,506) (11,637)

_______CT liability 36,215

_______As you can see, it is possible to have different tax rates applying even though the information is generated from thesame set of accounts.

Approach to the questionThe approach is exactly the same as developed in Chapter 1, except that you are preparing two computations. You firstneed to check in any question whether the accounts provided exceed 12 months, and determine the CAPs needed.

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Measuring Schedule D Case I profitsThe trading profits made by a company are taxed under Schedule D Case I. The starting point in determining theamount of profit assessable under Schedule D Case I is the net profit as shown in the accounts. However, the accountsmay contain expenditure items which are not allowable under Schedule DI. There may also be income which isassessable under a different Schedule or not assessable at all. Therefore the company’s net accounting profit must beadjusted for tax purposes.Schedule D Case I comprises adjusted profits less capital allowances for plant and machinery (Chapter 4), lessindustrial buildings allowances (Chapter 5) for an accounting period.The net profit shown in the accounts of a company must be adjusted to comply with the rules of taxable income andallowable expenditure for Schedule D Case I. The profit as adjusted for tax is referred to as the adjusted profit.Outline proforma for adjustment of profits computation

$ $Net profit per accounts X

Add Disallowable expenditure X____

X

Less Amounts credited in the accounts but not taxable under Case I X

Amounts not charged in the accounts but deductible under Case I (for example, capital allowances) X

____

X____

Adjusted profit X____

The proforma shows three categories of adjustments. The first one – disallowable expenditure – is extensive enough tojustify separate treatment in Section 2 of this Chapter. In Section 3 we will deal with the other categories of adjustment.

Schedule D Case 1Chapter 3

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Disallowable expenditure

The general principle

Expenditure is only allowable as a deduction in calculating Schedule D Case I profits if it has been incurred wholly andexclusively for the purposes of the trade ( Income Taxes Act Chapter 23:06 (ITA) 2007his means that the expense musthave been incurred in earning the profits of that particular business. Certain expenses, such as those which follow, failthis wholly and exclusively test.Fines. Fines on the business should be disallowed as the business is expected to operate within the law. Typicalexamples are penalties for late payment of VAT or for infringing health and safety regulations. In practice, the InlandRevenue usually allow a deduction for parking fines incurred by employees while on company business. Thisconcession does not, however, apply to directors’ parking fines.Fraud. Fraud undertaken by directors is disallowed,. This is because the loss does not relate to the company’s tradingactivities. However, petty theft by non–senior employees which is not covered by insurance is generally allowable.Donations. Donations to charity usually fail the wholly and exclusively test. In practice, this means that there is nodeduction for donations to national charities or political parties, unless there is some clear benefit to the trade. However,small donations to local charities are allowable. Donations under the Gift Aid scheme (including those made under deedof covenant) are classed as charges on income.Charges on income. Charges on income are payments such as deeds of covenant, donations under the Gift Aidscheme or payments of patent royalties. Charges are not allowable under Schedule D Case I but are deducted inarriving at PCTCT.Other major items of expenditure which are not allowed in an adjustment of profits computation are discussed below.Note that we use a statutory reference above –. Unless indicated otherwise, any statutory reference in this text is to ITA2007. However, you do not have to memorise statutory references. They are usually shown in the text as useful labelswhich save writing out the rules – we see this in particular in Chapter 7 on losses.

Capital expenditure

As a rule, capital expenditure charged to the profit and loss account (eg depreciation) is not an allowable expense fortax purposes. For this reason, ‘repairs’ expenditure requires careful review, as it often contains items of a capital nature.In general, repairs and redecoration are considered to be revenue expenditure and are therefore allowable.Improvements, however, are disallowable. In practice, the distinction between a repair and an improvement is not clear-cut. Repairs usually involve restoring an asset to its original condition or replacing part of an asset with a modernequivalent. Improvements usually involve enhancing the asset in some way.If an asset is purchased in a dilapidated state, and the purchase price reflects this, then initial ‘repairs’ expenditure tobring the asset to a fit state for use in the business will not be deductible. Two cases illustrate the difficulty of applyingthis rule in practice.Legal expenses of a capital nature. The general rule to determine whether legal expenses are allowable is to look atwhat they relate to. If they relate to a capital item, such as the purchase of a building, then the expenses will bedisallowed. If they relate to a revenue item, such as the collection of trade debts or employee issues such as drawingup contracts of employment, then they will be allowable.There are some exceptions to the capital rule. The following expenses are allowable.♦ The legal costs of renewing a short lease (50 years or less)

♦ The legal costs of defending title to a fixed asset (eg disputes over land boundaries)

♦ The costs of registering patents and trade marks.

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Depreciation. Depreciation, together with any profits or losses on the sale of fixed assets, is disallowed. Instead ofdepreciation, capital allowances may be given.Lease impairment. This is another form of depreciation whereby the premium paid on the acquisition of a lease iswritten off to the profit and loss account over the life of the lease. The amount deducted in the profit and loss accountmust be added back.If the lease is a short lease (50 years or less) for trading premises, a deduction is given for part of the premium. Theformula is as follows.

nlandlordonchargeASchedule

where n = number of complete years of lease

The part assessable on the landlord under Schedule A is50

n51 − .

The balance is taxed on the landlord under the capital gains rules. In effect, 2% of the premium is treated as capital forevery complete year (except the first) for which the lease can last.

Example

TM Ltd has traded for many years, making up accounts to 30 September. On 1 October 1990, it was granted a lease ofbusiness premises for 15 years, paying a premium of $6,000. TM Ltd’s accounts for the year to 30 September 2007include lease impairment of $400.RequiredShow the adjustment for Schedule D Case I purposes, for the year to 30 September 2007.

Solution

The first stage is to add back the lease impairment in the adjustment of profits computation.$

Net profit per accounts X

Add lease impairment 400A working is then required to calculate the allowable deduction for the lease premium.♦ First calculate the Schedule A charge on the landlord.

Premium ×50

51 n− = $6,000 ×

501551−

= $4,320

♦ Then the allowable deduction isyears15

4,320 = $288

The completed adjustment is therefore as follows.$

Net profit per accounts X

Add lease impairment 400

Less: Allowable lease premium (288)You should show both adjustments rather than just the net result.

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Provisions and appropriations

Dividends. Dividends are appropriations. They are paid out of profits after they have been subjected to tax. They are notexpenses incurred in earning those profits.Bad debts. Movements in the general bad debt provision and non–trade debts written off are not allowable. Movementsin specific provisions and trade debts written off can be deducted.

ExampleThe bad debts account of Greenidge Ltd for the year ended 30 April 2008 appears as follows.

$m $mWritten off Balance brought down

Trade 274 Specific provision 185

Former employee 80 General provision 260

Balance carried down Recoveries – trade 23

Specific provision 194 Profit and loss account 305

General provision 225____ ____

773____

773____

RequiredShow the adjustment for Schedule D Case I purposes.

Solution

In this example, the information is presented in the form of a ‘T’ account. The first stage is to establish a breakdown ofthe profit and loss account charge of $305. Remember that this figure comprises amounts written off and recovered,and movements in provisions.Profit and loss account charge $bn Allowable?Increase in specific provision ($194 – $185) 9 4

Decrease in general provision ($225 –$260)

(35) 8

Amounts written off

Trade debt 274 4

Former employee 80 8

Recoveries – trade (23)____

4

305____

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The movement in the general provision and the amount owed by the former employee are both disallowed. In this case,the movement in the general provision is a decrease, so the adjustment made is to deduct it from the profit per theaccounts.The adjustment for Schedule D Case I purposes is therefore as follows.

$bnAdd Former employee, debt written off 80

Less Decrease in general provision (35)Write-offs of non-trading loans (such as here to the former employee) are allowed as a Schedule D Case III expense –easy to overlook.Note that movements in any other general provisions charged to the profit and loss account should also be disallowed,for example stock provisions.

InterestAll aspects of borrowing and lending money are dealt with under the loan relationship rules. These were covered morefully in Chapter 1.For the purpose of computing a company’s Schedule DI profits you need to distinguish between trading and non-tradingreceipts and payments.Interest payable on trading loans is an allowable expense for Schedule DI purposes. The accruals basis applies. As theaccruals basis should have been used for drawing up the accounts, you should not need to make any adjustments inrespect of, for example, interest payable on bank overdrafts or debentures used for trading purposes.Receipts and payments in respect of non-trading loans need adjustment when calculating Schedule DI profits, as suchitems do not relate to trading. So, for example, interest payable on a loan to purchase a property for renting out must beadded back. Interest received on a deposit with a building society or bank will be deducted. Such items are dealt withinstead under Schedule D III.

Other miscellaneous adjustmentsPre-trading expenditure. Expenditure incurred up to seven years before a trade commences is allowed as an expenseof the first CAP of trading provided it would have been allowable had the trade existed at the time the expenditure wasincurred.Entertaining. The cost of entertaining customers and suppliers is disallowed. However, the cost of entertaining staff isallowable.Gifts. Gifts are only allowable if they fulfil the following three conditions.♦ They incorporate a conspicuous advertisement for the business.

♦ The total cost per donee is not more than $50mper annum.

♦ The gift is not food, drink (alcoholic or otherwise) or tobacco or a voucher for such items.

Note that if the cost exceeds the $50m imit, the whole amount is disallowed.

Therefore desk diaries or biros embossed with the company name usually qualify but a bottle of whisky carrying anadvert for the company would not!

Trade samples (not for resale) are allowable.

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Hire or lease charges (expensive cars). If a car costing more than $12,000m is leased or hired, part of the rental cost isdisallowed. The disallowable amount is calculated using the following formula.

Disallowed amount = chargehire xnew whenpriceRetail

12,000m)$new whenprice(retail21 −

ExampleHuni Ltd incurs annual rental expenditure of $1,960m on leasing a car with a retail price of $14,200,000,000. The carwas first leased on 1 January 2007. Huni Ltdprepares accounts to 31 December.RequiredShow the amount disallowed for Schedule D Case I purposes in the year ended 31 December 2007.

Solution

The following amount is disallowed.

£152m$1,960m x$14,200m

12,000m)£($14,200m21

=−

Other adjustments to accounting profits

Amounts credited in the accounts but not taxable

The following are examples of amounts which may be credited to the profit and loss account, but which are not taxableunder Schedule D Case I.♦ Income taxed in another way, for example rent (Schedule A), interest receivable (Schedule D Case III).

♦ Profits on sales of fixed assets (a chargeable gain may arise – see Chapter 6).

Amounts not charged in the accounts but deductible

Examples of expenditure not charged in the profit and loss account, but for which a deduction can be claimed, are asfollows.♦ Capital allowances (see Chapters 4 and 5).

♦ Deduction for part of the lease premium paid on the granting of a short lease (see under Section 2.2 above).

Now that the separate types of adjustments have been considered, it is appropriate to show you how a typical questionon this area might be constructed.Here is a comprehensive example based on a past examination question, which it is recommended you attempt usingthe typical proforma included below to guide you before considering the detailed solution. Please note that the proformais not intended to cover every possible adjustment but reflects common adjustments only.

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A typical proforma for adjustment of profits+ –$ $

Net profit per accounts X

Add: Items charged in accounts but not allowable for Schedule D Case I purposes:

Depreciation and impairment X

Loss on sale of fixed assets X

Capital expenditure X

Legal expenses of capital nature X

Fines and penalties X

Donations X

Entertaining (other than staff) X

Gifts to customers X

Increase in general bad debt provision X

Proportion of expensive car leasing costs X

Less: Items credited in accounts but not chargeable under Schedule D Case I:

Rental income X

Profit on sale of fixed assets X

Interest receivable X

Dividend income X

Less: Expenditure not charged in accounts but deductible under Schedule D Case I:

Proportion of lease premium paid X____ ____

X X____

(X)____

Schedule D Case I profit before capital allowances X____

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Example

The profit and loss account of STD Ltd for the year ended 31 March 2008 showed a loss of $42,000,000,000 afteraccounting for the under-noted items:Note Expenditure $m Income $m(1) Premium on lease 2,000 Discount received 3,200

Depreciation 9,500 Insurance recovery reflood damage to stock 6,500

Patent registration fees 4,000 Rents received 8,400

Debenture interest 8,000 Interest on tax refund 1,600

Loss on sale of lorry 6,000 Gain on sale of plant 7,400

Bad debts

Amounts written off 4,000

Increase specificprovision 2,000

_____

6,000

Decrease in generalprovision 1,000

_____

5,000

(2) Entertainment expenses 2,600

Legal fees

Re new lease 3,200

Re recovery of employee loan 1,200

Re employees’ service contracts 600

(3) General expenses 4,000

(4) Repairs and renewals 6,400Capital allowances for the accounting period were calculated at $7,160 but have not been taken into account in theabove loss figure.

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Notes(1) This represents the amount written off in respect of a premium of $20,000,000,000 paid by the company on

being granted a 10-year lease on its premises on 1 April 2007.(2) Entertainment consists of expenditure on:

$m Entertaining customers 1,200

Staff dance (40 people) 800

Gifts to customers of food hampers 600(3) General expenses comprises:

$m Penalty for late VAT return 2,200

Parking fines on company cars 300

Fees for employees attending courses 1,500(4) Included in the figure for repairs is an amount of $5,000 incurred in installing new windows in a recently-

acquired second-hand warehouse. This building had suffered fire damage resulting in all of its windows beingblown out shortly before being acquired by STD Ltd. Other repairs were of a routine nature.

RequiredCompute the adjusted Schedule D Case I figure for the above period.Your answer should show clearly your reasons for your treatment of each of the above items including those items notadjusted for in your computation.

(40 marks)

SolutionStart your solution with the company’s net profit or loss.

+ -$m $m

Net loss (42,000)In this question, the company has a loss. This does not affect the way you should approach the computation. Youshould still add back any disallowable items of expenditure. These add backs may turn an accounting loss into aSchedule D I profit.Disallowable expenditure. Go through each expense in turn and decide whether or not it needs to be added back. If itdoes require adding back, add the figure to the + column of your proforma. If you do not know how to treat a particularitem - guess. You have a good chance of getting the right answer. You might find it helpful to tick off each item as youdeal with it. This ensures you do not miss any items.You also need to explain the reason for your chosen treatment. This is probably best done on a separate page.Income credited but not chargeable under Schedule DI. Deal with any credits in the order in which they appear in theaccounts. For each credit, ask yourself whether it relates to the company’s trade. If it does, no action is required. If itdoes not, include the figure in the - column.Expenditure not charged in the accounts but deductible under Schedule DI. The two most likely items under thiscategory are capital allowances and the deduction in respect of any lease premium. Include these items in the - column.Finish by totalling the proforma.Note that it is not essential for you to put headings such as ‘disallowable expenditure’ on your proforma. You couldsimply state ‘add’ and ‘less’. You do, however, need to list each adjusted item in words as well as figures.

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The finished answer is as follows:STD Ltd - Adjustment of profit for the year ended 31 March 2008.

+ -$m $m

Net loss (42,000) Premium on lease 2,000 Depreciation 9,500 Loss on sale of lorry 6,000 Entertainment expenses 1,800 Legal fees 4,400 General expenses 2,200 Repairs and renewals 5,000 Bad debts (1,000) Rents received (8,400) Interest on tax refund (1,600) Gain on sale of plant (7,400) Premium on lease (1,640) Capital allowances (7,160)

_______ _______

30,900 (69,200)

30,900_______ _______

Adjusted Schedule DI loss (38,300)_______

Explanation

1 The lease premium is a capital item. A deduction is available for part of the premium, calculated as follows.

Assessable on landlord: $20,000 ×50

1051 − = $16,400,000,000

Deduction $16,400/10 years = $1,640,000,000 per annum.2 Depreciation is not an allowable deduction. Capital allowances are given instead.3 The costs of registering patents are specifically allowed by statute.4 Debenture interest is allowable (assuming the debenture proceeds were used for trading purposes).5 Losses on the sale of fixed assets are treated in the same way as depreciation - they are added back as capital

allowances are given instead. Conversely, profits on the sale of fixed assets are deducted.6 The decrease in the general bad debts provision is not taxable. Write-offs of trade debts and specific provisions

are allowable.7 Expenditure on entertaining customers is not allowable. Expenditure on entertaining staff is. The cost of the

hampers is not allowable as they contain food.8 The legal fees in respect of the new lease are a capital item and are therefore not allowable. Employee loans

are not for trading purposes, therefore the legal costs are also not allowable. Legal fees in connection with theservice contracts are an allowable business expense.

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9 VAT penalties are not allowable. Parking fines incurred by employees will generally be allowed. Course fees arealso allowable, assuming the course relates to the company’s trade.

10 The cost of new windows is not allowable. It is capital expenditure required to put a new asset into a usablestate. (Law Shipping).

11 The discount received is taxable under Schedule DI as it is a trading item.12 The insurance recovery is in respect of trading stock. It is therefore taxable under Schedule DI.13 Rents received are taxable under Schedule A, not Schedule DI.14 The interest received on the tax refund is taxable under Schedule DIII (see Chapter 1).In an exam you should try to work methodically through the profit and loss account, making sure that if you break off todeal with a note you come back to the same point on the profit and loss account. Ticking off items as you use themshould help.Here is an additional question in an alternative style.

Approach to the questionThis question requires a written answer rather than a full calculation. For each of the items listed there are threepossibilities.♦ If the item is an expense which is disallowable for Schedule DI purposes, it must be added back to the net profit.

♦ If the item is a credit which is not taxable under Schedule DI, it must be deducted from the net profit.

♦ If the accounting treatment of the item is the same as the tax treatment, no adjustment is required. In other words,trading expenditure within the profit and loss account which satisfies the wholly and exclusively test requires noadjustment.

Make sure you explain the reason for your chosen treatment. (Note that you may use the terms ‘deductible’ and ‘non deductible’ in place of ‘allowable’ and disallowable’).

SummaryYou should now be able to successfully attempt questions requiring you to calculate the Schedule DI profit for taxationpurposes, showing knowledge of case law and statute.The starting point for computing profits assessable under Schedule DI is the net profit shown in the company’saccounts. This must be adjusted in respect of the following items.♦ Expenditure charged in the accounts but not allowable for tax purposes. The main types of disallowable expenditure

are

- expenditure not wholly and exclusively for the purpose of the trade - capital expenditure - appropriations and general provisions - charges.

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♦

♦ Amounts credited in the accounts but not taxable under Schedule DI. For example

- investment income - profits on the sale of fixed assets.♦ Amounts not charged in the accounts but deductible under Schedule DI. For example

- deductions for lease premiums - capital allowances.For an exam question, it is advisable to use a ‘+’ and ‘-‘ column and deal with each adjustment as you work methodicallythrough the question. There is no need to arrange your answer into the three types of adjustment shown above.The computation of capital allowances is shown in the next two chapters.

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Qualifying expenditure

Introduction

In Chapter 3 you learned that capital expenditure is not an allowable deduction when calculating Schedule DI profits.Any depreciation charged in the accounts must be added back, as its calculation is highly subjective. Capital allowancesmay be given in place of depreciation. They give a standardised amount of tax relief for capital expenditure. They areeffectively the taxation version of depreciation.There is no automatic right to tax relief for capital expenditure. In order to qualify for capital allowances, expendituremust usually be in respect of plant or machinery.

What qualifies as plant and machinery?

There is no statutory definition of the words machinery and plant. Although the identification of machinery causes fewproblems, in deciding whether an item can be considered to be plant, case law has dictated that the following factorsshould be considered.♦ The degree of permanence – there should be some degree of durability of the item.

♦ The function of the item – plant is an item with which the trade is carried on, as opposed to being part of the settingin which the taxpayer carries on his trade.

The Courts’ interpretation of these factors has led to the following items being classed as plant.Movable partitionsMovable partitioning in an office building was plant. Fixed partitioning, however, would be deemed to be part of thesetting in which the business was carried on, and would not qualify as plant.Swimming and paddling pool at a caravan parkA swimming pool and paddling pool at a caravan park had to be considered as a single unit. The apparatus for purifyingand heating the water, and the water which the pools were designed to contain, could not be divorced from the structureof the pools and their apparatus.

Capital Allowances For Plant And MachineryChapter 4

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Specialist lighting for window displaysThe provision of specialist lighting for window displays, and certain other items such as transformers, played an activerole in the carrying on of the business, and qualified as plant.Movable decorative screensMovable decorative screens which were displayed in the windows of building societies with the intention of attractingpassers–by were plant. Part of the reasoning was that they were not part of or inseparably annexed to the structure ofthe office. They were not capable of use without considerable modification for any business but that of the Society.Indeed, some of them were of such a character that they were really only of use in the particular branch.Dockside concrete silosEven though an item performs more than one function, including a function which is not ‘plant like’, this does not preventit from being plant. The dockside concrete silos of a grain importer were held to be plant on the grounds that theirprimary function was to hold grain in a position from which it would be conveniently delivered to the purchasers and notto store it.The following items have been held not to be plant.General lightingIn Cole Brothers Ltd v Phillips (as discussed above) it was decided that, although specialist lighting qualified as plant,general lighting formed part of the setting, and was not plant.This is a common examinable point. The question should make it clear what part of the electrical equipment, wiring etcis just part of a normal building and which part has a special application and qualifies as plant, eg high current wiring forelectrical machinery.False ceilingsThe physical attachment of an item to something accepted as plant does not make that item plant. A catering companyinstalled false ceilings in the premises from which it traded. The ceilings were a permanent installation and providedcladding and support for pipes carrying refreshments, ventilation trunking and lighting apparatus. It was held that theceilings were not necessary for the functioning of any apparatus used for the purposes of the company’s trade and werenot part of the means by which the trade was carried on. Accordingly, they were not plant.Canopy over a petrol stationA canopy over a petrol station did not perform a function in serving petrol to customers, and must be considered to bepart of the setting. Accordingly, it did not qualify as plant.Football standThe physical attachment of plant to another item does not make that other item plant. In this case, whilst it was agreedthat the seats in a football stand were plant, the stand itself formed part of the stadium within which the football matchestook place, and therefore did not qualify as plant.

Statutory regulationsCertain items have been deemed to be plant by statute.♦ Thermal insulation in industrial buildings (see Chapter 5).

♦ Expenditure on compliance with fire safety requirements of the business premises.

♦ Expenditure necessary to obtain sports stadium safety certificates.

♦ Computer software even where acquired electronically or where the company merely acquires a licence to usesoftware.

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The status of items installed in a building has been a frequent problem which has resulted in disputes resolved throughthe Courts (see above). In the Finance Act 2007 rules were introduced to draw the dividing line but respecting existingcase law decisions.

The following items are ‘building’ (not plant).

♦ Walls, floors, ceilings, doors, gates, windows and stairs.

♦ Mains services and systems of water, electricity and gas.

♦ Waste disposal, sewerage and drainage systems.

The following items may be ‘building’ but are nevertheless normally treated as ‘plant’.

♦ Electrical, cold water and gas systems provided mainly to meet the particular requirements of the trade, or to serveparticular machinery used for the purposes of the trade.

♦ Space or water heating systems, systems of ventilation and air cooling, and any ceiling or floor comprised in suchsystems.

♦ Manufacturing or processing equipment, storage equipment including cold rooms, display equipment, counters,check outs and similar equipment.

♦ Cookers, washing machines, dishwashers, refrigerators and similar equipment.

♦ Wash basins, sinks, baths, showers, sanitary ware and similar equipment.

♦ Furniture and furnishings.

♦ Lifts, escalators and moving walkways.

♦ Sound insulation to meet the particular requirements of the trade.

♦ Computer, telecommunication and surveillance systems (and their wiring).

♦ Sprinkler equipment and fire alarm systems.

♦ Burglar alarm systems and strong rooms.

♦ Movable partition walls where intended to be moved in the course of the trade.

♦ Decorative assets provided for the enjoyment of the public in a hotel, restaurant or similar trade.

♦ Advertising hoardings, signs and similar displays.

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Calculating the allowances

The objective of capital allowances

The aim of capital allowances is to give tax relief for the net cost of an asset. That is the difference between the cost ofan asset and its disposal value. Allowances are calculated for accounting periods and are given as a deduction incalculating Schedule D Case I profits.As it is not known at the outset what the disposal value will be, a special initial allowance (SIA) of 50% is normally givenin the year of purchase. For each following year an annual wear and tear (W&T) of 25% is given. This is calculatedusing the reducing balance method. A balancing adjustment may be given when the asset is disposed of: a balancingallowance gives any additional allowances due, whereas a balancing charge recovers any allowances in excess of thenet cost.

The principle can be illustrated as follows.Asset $m

Cost 10,000Year 1 Allowance 50% (SIA) (5,000)

_______

5,000Year 2 Allowance 25% (W&T) (1,250)

_______

3,750Year 3 Disposal (6,300)

_______

Balancing charge (2,550)_______

Net cost = $10,000 – $6,300 = $3,700Allowances = $5,000 + $1,250 – $2,550 = $3,700Instead of calculating capital allowances for each individual asset, most types of expenditure are pooled.The proforma below shows the layout which you should ideally use to present your answer. The examiner will certainlyexpect to see the use of an orderly layout The various entries will be explained later in the chapter.

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Layout of computation for capital allowances on plant and machineryGeneral

poolExpensiv

ecar (1)

Expensive

car (2)

Totalallowanc

es$ $ $ $ $

WDV b/f X X XAdditions not qualifying for SIAs* XDisposals – lower of cost/sale proceeds (X)

___(X)

______ ___

X X XBA/(BC) X/(X)

______ X/(X)

W&T at 25% (X) XW&T restricted

___(X)___

X

X X

Additions qualifying for SIA XSIA at 50% (X)

___X

X___ ___ ___ ___

WDV c/f X___

-___

X___

X___

*SIA can never be claimed on cars.Note the following abbreviations.♦ WDV = tax written down value (the amount of expenditure not yet written off by means of capital allowances)

♦ SIA = special initial allowance

♦ BA/BC = balancing allowance/balancing charge

Be sure not to confuse the order of the steps. For example, additions qualifying for SIA do not attract W&T in the sameyear so they are dealt with after calculating W&T.

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Classifying plant and machinery

Introduction

As companies may have many assets, it would be extremely time-consuming to calculate allowances separately foreach asset. Therefore, all qualifying expenditure is pooled, apart from:♦ expensive cars, (that is cars costing more than)

♦ assets for which a short life election has been made.

Each of the above categories will now be considered in detail below.

General poolMost items of plant and machinery go into the general pool. Once an asset enters the pool, it loses its identity. Thismeans that the wear and tear (W&T) is calculated on the balance of the pool, rather than on the individual assets.Allowances are given for accounting periods. Allowances commence in the year in which the expenditure is incurred. Afull W&T is given in the year of purchase (unless SIA is claimed) irrespective of the date of purchase.Special initial allowancesPlant and machinery (excluding cars) bought between 2 July 2003 and 1 July 2004 by small and medium–sizedbusinesses qualify for a special initial allowance (SIA) of 50%. For items bought on or after 2 July 2004, the SIAavailable is reduced to 50%. The SIA is given instead of the W&T in the period of the expenditure, after which thebalance is added to the pool, so that a W&T of 25% can be given in subsequent periods. For a business to qualify forspecial initial allowances it must meet at least two of the following three conditions.♦ Turnover not exceeding $11.2 billion

♦ Assets not exceeding $5.6 billion in value

♦ No more than 250 employees.

Small businesses that invest in information and communication technology equipment between 1 April 2006 and 31March 2003 can claim a 100% SIA. This SIA covers expenditure on♦ computers, including peripherals and cabling

♦ software

♦ WAP and 3rd generation mobile phones.

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A business is classed as small for the purpose of claiming the 100% SIA if it satisfies at least two out of the followingconditions.♦ Turnover not exceeding $2.8 billion

♦ Assets not exceeding $1.4 billion in value

♦ No more than 50 employees.

When reading an exam question on CAs look for any indication of business size, ie ‘small’ or ‘medium’. The examinershould tell you or it should be obvious from other details such as turnover.DisposalsWhen a pool item is sold, the sale proceeds are deducted from the pool. This deduction cannot exceed the asset’soriginal cost.If the deduction of the disposal proceeds causes the pool to become negative, the difference is a balancing charge.Otherwise the pool continues to be written down until cessation. This means that there will not usually be a balancingallowance on the general pool.The following example illustrates the working of the general pool.

ExampleChingwa Ltd prepares accounts to 30 April each year.On 1 May 2006 Chingwa Ltd incurred expenditure of $6,000,000,000 on the purchase of shop fittings and machinery.On 1 June 2006 the company sold some machinery for $600,000,000 (cost $400,000,000) and on 1 June 2007purchased more plant for $1,000,000.On 5 May 2007 the company sold equipment for $9,395m which had cost $11,200,000 in May 2004. The tax writtendown value of the pool at 1 May 2006 was $8,260,000,000 .RequiredCompute the capital allowances for the years ended 30 April 2007 and 30 April 2008, assuming that Chingwa Ltd is asmall company.

Solution

The first step is to identify the balance brought forward at the beginning of the accounting period. This is called the taxwritten down value (tax WDV or TWDV).

Pool

Year ended 30 April 2007 $

Tax WDV brought forward 8,260,000,000The next step is to identify the accounting periods in which the additions and disposals occur. In the year ended 30 April2007, Chingwa Ltd acquired plant costing $6,000,000 and sold plant for $600,000. All other additions and disposalsoccur in the second accounting period.

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Identify any additions for which a SIA can be claimed. For example, the plant acquired on 1 May 2006 qualifies for a50% SIA. Deal with this addition after calculating the W&T for that year on the other items in the general pool.The working can then be completed, as shown below, dealing with one accounting period at a time.

Pool Allowances$m $m $m

Year ended 30 April 2007

Tax WDV b/f 8,260Additions without SIA -Disposals 1 June 2006 (proceeds restricted to cost) (400,000)

______7,860,000

W&T at 25% (1,965m) 1,965mAdditions (SIA) 1 May 2006 6,000,000 SIA at 50% (3,000,000) 3,000,000

______Balance added to pool 3,000,000

______ ______Tax WDV c/f 8,995 4,965

______Year ended 30 April 2008Additions (no SIA) -Disposals 5 May 2007 (9,395)

______ 400

W&T at 25% (100) 100Additions (SIA) 1 June 2007 1,000 SIA at 50% (500) 400

______Balance added to pool 500

______ ______Tax WDV c/f 800 500

______ ______If the exam question requires you to maximise capital allowances you might have to consider disclaiming part or all ofthe SIAs available. For example, if the disposal proceeds in the above question were $10,000 on 5 May 2007, thiswould have resulted in a balancing charge of $1005,000 (10,000,000,000 – 8,995,000,000). The technique for avoidingthis would be to split the additions of $1,000 on 1 June 2007 into $1005 without SIA. In effect the $1005 is relieved at100% (instead of 50%) as it covers the BC $1 for $1.

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Expensive carsEach car costing more than $12, billion is given a separate column in the capital allowances working. A 25% W&T iscalculated for each individual car, but the maximum allowance that can be claimed is $3 billion per annum per car.As each car has a separate column, there will be a balancing adjustment (either a balancing allowance or a balancingcharge) on disposal. The balancing adjustment is not restricted to $3 billion.The examples below illustrate the working of capital allowances for both cheap and expensive cars.

Example

Gore Ltd prepares accounts to 31 December each year. No capital expenditure had been incurred prior to 1 January2006. In the year to 31 December 2006 the following expenditure is incurred.

Cost$m

31 January 2006 Motor car 6,00012 February 2006 Motor car 14,00017 June 2006 Motor car 10,000RequiredCalculate Gore Ltd’s capital allowances for the years ended 31 December 2006 and 31 December 2007.

Solution

In this example, there is no tax WDV brought forward, so the first task is to decide which cars will be brought into thegeneral pool, and which need their own separate columns. A proforma can then be set up as below.

General pool Expensive car AllowancesYear ended 31 December 2006 $m $m $mNow the additions can be put into the appropriate columns, and the allowances calculated, remembering that theallowance for the expensive car must be restricted to $3,000. The full working is as follows.

General pool Expensive car AllowancesYear ended 31 December 2006 $m $m $mAdditions 31 January 2006 6,000 12 February 2006 14,000 17 June 2006 10,000

_______16,000

W&T at 25% (restricted) (4,000)_______

(3,000)_______

7,000_______

Tax WDV c/f 12,000 11,000

Year ended 31 December 2007

W&T at 25% (3,000)______

(2,750)_______

5,750______

Tax WDV c/f 9,000_______

8,250_______

Note that the 25% W&T allowance for the expensive car is not restricted for the year ended 31 December 2007, as it isless than $3,000,000,000 . The separate column is, however, retained.

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ExampleGore Ltd (see previous example) sells the car, bought in February 2006, in August 2008.RequiredCalculate the balancing adjustment on the car on the alternative assumptions:(a) that the car is sold for $7,000,000,000(b) that the car is sold for $9,200,000,000

Solution

In this example, the expensive car is sold, so there will be a balancing adjustment.First, the proceeds (restricted to original cost) are deducted from the written down value.

Then, if the remaining balance is positive, a balancing allowance will be given, but if the balance is negative a balancingcharge will arise. This is like a negative allowance. Instead of being deducted from Schedule D Case I profits, it will beadded back. In both cases, the tax WDV carried forward will be nil.The solutions to the two different scenarios are as follows.(a) Proceeds $7,000,000

General pool Expensive car AllowancesYear ended 31 December 2008 $m $m $mTax WDV brought forward 9,000 8,250

Disposal proceeds_______

(7,000)_______

9,000 1,250Balancing allowance (1,250) 1,250

W&T at 25% (2,250)_______ _______

2,250_______

Tax WDV carried forward 6,750_______

–_______

3,500_______

(b) Proceeds $9,200General pool Expensive car Allowances

Year ended 31 December 2008 $m $m $mTax WDV brought forward 9,000 8,250

Disposal proceeds_______

(9,200)_______

9,000 (950)

Balancing charge 950 (950)

W&T at 25% (2,250)_______

–_______

2,250_______

Tax WDV carried forward 6,750_______

–_______

1,300_______

Note that a balancing allowance is usually pooled with W&T/SIA and a balancing charge is usually offset againstW&T/SIA. Technically, however, balancing adjustments should be kept separate. The allowance is deducted incalculating the Schedule D Case I profits and the charge is added back.The example below demonstrates the full capital allowances working.

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ExampleJNN Ltd, a small company, has been trading since 1 June 2005, making up accounts to 31 May each year.The following assets have recently been purchased.Date of purchase Asset Cost

$m1 May 2005 Plant and machinery 11,616

9 November 2005 Used car 1,472

10 February 2006 Used car 928

8 June 2006 New car 19,500

2 July 2006 Equipment 1,720

2 June 2007 Office furniture 982

10 July 2007 Typewriter 876

20 October 2007 Office furniture 2,071RequiredCalculate the capital allowances due for the three years ending 31 March 2008.

Solution

The approach is as follows.♦ Allocate additions and disposals to the relevant accounting periods. Any acquisitions made prior to the

commencement of trading are treated as if made on the first day of trading.

♦ Identify which additions qualify for SIA and which rate of SIA applies.

The solution is then as follows.

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Capital allowances computation Pool Expensive

carAllowance

s$m $m $m $m

Year ending 31 May 2006

Additions (no SIA)9 November 2005 1,47210 February 2006 928

______ 2,400

W&T at 25% (600) 600Addition (SIA)1 May 2005 11,61650% SIA (5,808)

______5,808

______5,808

______ 7,608 6,408

______Year ending 31 May 2007

Additions – not qualifyingfor SIA 19,5008 June 2006W&T 25%/restricted (2,192) (3,000) 5,192Addition qualifying for SIA2 July 2006 1,72050% SIA (860)

______ 860

860______ ______ ______

6,276 16,500 6,052______

Year ending 31 May 2008

W&T 25%/ restricted (1,902) (3,000) 4,902Additions qualifying for SIA2 June 2007 98210 July 2007 87620 October 2007 2,071

_______

3,929

50% SIA (1,965)______

_1,965

1,964_______ _______ _______

3,866_______

13,500_______

6,867_______

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Short–life assets (SLA)Where an asset is expected to have a short life, approximately four years or less, and to decrease in value substantially,it may be beneficial to remove it from the general pool and treat it as a short–life asset. In doing this, a balancingallowance can be claimed when the asset is disposed of. (Remember that a balancing allowance can only be claimedon the general pool on cessation of the business.)Each asset treated as a short–life asset should have a separate column in the capital allowances computation.The following conditions apply.♦ Short–life asset treatment is not available for cars.

♦ If a short–life asset is not sold within four years of the end of the accounting period in which it was purchased, its taxWDV will be transferred back into the general pool.

♦ A short-life asset election must be made within two years of the end of the accounting period in which theexpenditure was incurred.

The following illustration demonstrates how short–life asset treatment accelerates the allowances claimed.IllustrationPurchase (for $10,000,000) and sale (for $1,000,000) of a short-life asset.

Without election With electionGeneral

poolGeneral

poolSLA

Year 1 $m Year 1 $m $mWDV b/f, say 50,000 WDV b/f, say 50,000W&T (12,500) Purchase

________10,000

________

Purchase 10,000 50,000 10,000SIA (5,000)

________W&T/SIA (12,500)

________ (5,000)_______

_Year 2 Year 2WDV b/f 42,500 WDV b/f 37,500 5,000Disposal (1,000)

________Disposal –

________ (1,000)_______

_41,500 37,500 4,000

BA – BA (4,000)W&T (10,325)

________W&T (9,375)

________ ________

WDV c/f 31,125________

WDV c/f 28,125________

–_______

_Total allowances given($12,500 + $5,000 +$10,325)

27,825________

Total allowances given($12,500 + $5,000 +$9,375 + $4,000)

30,875_______

_WDV c/f 31,125

________WDV c/f 28,125

________

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It is important to note that a short-life asset election is not beneficial if the asset is to be sold for more that its tax writtendown value. This is because the disposal would result in a balancing charge.

IllustrationContinuing with the above example, assume instead that the asset was sold for $8,000,000.

Without election With electionGeneral

poolGeneral

poolSLA

Year 2 $m Year 2 $m $mWDV b/f 43,500 WDV b/f 37,500 6,000Disposal (8,000)

________Disposal –

________(8,000)

________

35,500 37,500 (2,000)BC – BC 2,000W&T (8,875)

________W&T (9,375)

________ ________

WDV c/f 26,625________

WDV c/f 28,125________

–_______

_As you can see, by leaving the asset in the general pool, the balancing charge is avoided.Where the asset qualifies for 100% SIA (eg computer bought by a small business) an SLA election should not be madeas a balancing charge would arise on any eventual proceeds.An SLA election could also be a disadvantage if a balancing charge is about to arise on the general pool. An addition tothe general pool would reduce it $1 for $1. If instead it is kept separate in an SLA column, it cannot achieve this saving.

Additional considerations

Hire purchase transactionsAllowances for assets bought on hire purchase are calculated on the full cash price (excluding interest). The allowancescommence on the date the asset is acquired, irrespective of the dates on which instalments are payable. The capitalallowances claimed are thus not affected by the fact that the asset is bought on hire purchase rather than outright.Interest included in instalments is an allowable Schedule D Case I expense for the period in which the instalments arepayable. (This means that there will be no adjustment for hire purchase interest deducted in the profit and loss account).Part exchange transactionsIf an asset is given in part exchange for a new asset, this is treated as a separate acquisition and disposal as follows.♦ The addition should be recorded in the capital allowances working at full price, ie cash paid plus part exchange

allowance.

♦ The disposal proceeds deducted in the capital allowances working are taken as the part exchange allowance(restricted to original cost if lower).

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VAT on capital purchasesVAT is covered later in the text, but you should note that VAT at 15% is normally reclaimed on all purchases, includingcapital additions, with the exception of cars. The cost of a car for capital allowance purposes is therefore its VATinclusive cost. Other assets are recorded at their VAT exclusive cost. When capital assets are sold, VAT will be included in the sale price. However, the disposal value for capital allowanceswill be the VAT exclusive price, with the exception of cars on which no VAT is charged. Most questions involving capitalallowances ignore VAT, but not all.

Basis periods for capital allowances

The impact of the accounting period length

As you have seen, capital allowances are computed for accounting periods and deducted in calculating Schedule DCase I profits.The wear and tears calculated so far were all for 12 month accounting periods.Where the accounting period is less than 12 months long, the W&T must be scaled down accordingly. You mustperform this calculation to the nearest month.If the period for which accounts are drawn up exceeds 12 months, the capital allowances are computed in two stages –the first 12 months, then the balance.Note that special initial allowances are given in full even if the length of the accounting period is less than 12 months.

Example

KNN Ltd started to trade on 1 June 2006 and, on that day, purchased an asset costing $21,900,000,000. KNN Ltd doesnot qualify for SIAs. Calculate the wear and tears due for the accounting period(s) based on the first period of accounton the assumption that accounts are made up to:(i) 31 May 2007(ii) 31 March 2007(iii) 31 December 2007.

Solution

(i) (ii) (iii)First period of account 31 May 2007 31 March 2007 31 December

2007$m $m $m

Cost 21,900 21,900 21,900W&T 25% (5,475) 25% × 12

10 (4,563)

25% (5,475)_______16,425

25% × 127

_______ _______ (2,395)_______

WDV c/f 16,425_______

17,337_______

14,030_______

Note that, as already explained in Chapter 1, in (iii) corporation tax is charged separately on an accounting period of 12months ending on 31 May 2007 and on an accounting period of 7 months ending on 31 December 2007.

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Business cessationIn the accounting period of cessation no W&Ts or SIAs will be given.Any additions and disposals in the final period are allocated to the appropriate columns in the capital allowance working.At the end of the period there will be no tax WDV carried forward, so there must be a balancing adjustment on allcategories in the capital allowances working.♦ If there is a positive balance remaining, a balancing allowance is given.

♦ If there is a negative balance remaining, a balancing charge arises.

Example

DRN Ltd had been trading for many years, preparing accounts to 31 December, when it decided to cease trading on 6June 2007.Expenditure on plant had been as follows.Date Cost

$m

1 October 2006 4,600All items of plant were sold on 30 June 2007 for $5,000,000,000 (no item was sold for more than cost).The tax written down value of the pool at 1 January 2006 was $12,600,000,000.RequiredCalculate the capital allowances due for the year ended 31 December 2006 and the six months ended 30 June 2007.(Ignore VAT).

Solution

Capital allowances computationGeneral

poolAllowance

s$m $m $m

Year ended 31 December 2006Tax WDV brought forward 12,600W&T at 25% (3,150)

_______3,150

9,450

Addition qualifying for SIA 1 October 2006 4,600SIA at 50% (2,300)

_______2,300

2,300_______ _______

Tax WDV carried forward 11,750 5,450_______

6 months ended 30 June 2007Disposals (5,000)

_______ 6,750

Balancing allowance (6,750)_______

7,210_______

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Eligible expenditure for IBA purposesQualifying expenditure

In examination questions you often need to identify the correct amount of expenditure eligible for IBA. You may alsoneed to state the types of buildings which qualify for IBA.Buildings qualify for IBA if they are of an industrial nature and are used in an industrial trade. This includes thefollowing.♦ A mill, factory or any building used in a manufacturing trade.

♦ Warehouses for the storage of stock (ie raw materials, finished goods) provided they are used in or derived from amanufacturing trade.

♦ Buildings used for the repair or maintenance of goods or materials.

♦ Sports pavilions used in any trade.

♦ Canteens and other welfare buildings provided for workers in a manufacturing business.

♦ Drawing offices in factories .

♦ Qualifying hotels.

The qualifying costs of constructing such buildings or acquiring a new building include the following.♦ Professional fees (eg architects, legal fees).

♦ The costs of preparing land (eg levelling, tunnelling, drainage).

♦ Associated structural undertakings (eg a car park adjoining a factory).

Industrial BuildingsChapter 5

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Non-qualifying expenditureThere are also some frequently examined exclusions which do not qualify.♦ Land (including any costs pertaining to the land itself, eg legal fees).

♦ General offices, shops, showrooms and dwelling houses.

♦ Retailers’ warehouses, ie used for storing bought in finished goods.

♦ Items which qualify alternatively for plant and machinery allowances (eg central heating, fire and safety equipment,ventilation, thermal insulation).

Non-industrial partsAny ‘non-industrial’ portion of an industrial building (eg general offices) is only excluded if its cost represents more than25% of the total building costs.

ExampleThe cost of a factory, incurred in September 2007, is shown below.

$mPurchase price of land (including $1,700,000 legal costs) 17,000

Buildings (including drawing office $4,900,000, canteen $10,000,000,general office $30,000,000)

144,000_______161,000_______

Required(a) What amount is eligible for industrial buildings allowance?(b) If the general office had accounted for $37,000,000 of the $144,000,000 cost of the building, what would the

eligible expenditure be?

Solution

(a) There is no allowance for the purchase price of the land. The drawing office and the canteen both qualify for IBAin their own right. The cost of the general offices will also qualify as it represents 20.8%($30,000,000,000/$144,000,000,000) of the total building cost, ie not exceeding 25%. IBA will therefore bebased on $144,000,000.

(b) If the general offices had cost $37,000,000,000, this would amount to 25.7%($37,000,000,000/$144,000,000,000) of the total cost. As this exceeds 25%, none of the $37,000,000 would beallowable. IBA would therefore be based on $107,000,000 ($144,000,000,000 - $37,000,000,000).

Additions to a building

Whenever there is an addition (eg an extension) to an industrial building, the 25% test must be recalculated. This maymean that part of the industrial building which previously qualified now becomes disallowable.

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ExampleHwahwa Ltd purchased a new factory for the following cost.

$mManufacturing area 200,000

Showroom 10,000

General office 30,000

Drawing office 5,000

Land 10,000_______255,000_______

Two years later the company built an office extension at a cost of $35,000,000.

RequiredWhat is the eligible expenditure which qualifies for IBA(a) on purchase and(b) on the subsequent addition?

Solution

(a) The cost of land never qualifies for IBA. The remaining expenditure ($245,000,000,000) could qualify subject tothe 25% rule for non-industrial parts. The showroom and the general office are non-industrial parts.The non-industrial proportion is therefore $40,000,000,000/$245,000,000,000 = 16.3%. As this is less than 25%,the whole $245,000,000 qualifies.

(b) When the extension is added, the building cost becomes $280,000,000,000 ($245,000,000,000 +$35,000,000,000). The non-industrial portion becomes $75,000,000,000 ($40,000,000,000 + $35,000,000,000).The non-industrial proportion is now $75,000/$280,000 = 26.8%. As this is greater than 25%, the whole of thenon-industrial part is no longer eligible for future allowances. Allowances from that point are granted on$205,000 only (ie $280,000,000 – $75,000,000).

OwnershipIn order to be eligible to claim IBA, the claimant must have the relevant interest. This means that the claimant must beeither♦ the freeholder, or

♦ the holder of a long lease (more than 50 years).

In the latter case, a joint election must be made by the tenant and the landlord, to allow the tenant to claim theallowances on the lower of the eligible cost and the premium paid to enter the lease.A landlord can claim IBAs on a factory (etc) provided the tenant uses the building as an ‘industrial building’. The IBAsare set against the Schedule A rental income of the landlord.A tenant could claim IBAs on any additions he makes during the tenancy of the lease.

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HotelsA hotel qualifies for industrial buildings allowances if it is a hotel which is open for at least four months between 1 Apriland 31 October each year (‘the season’).When open in the season:♦ it must have at least 10 bedrooms available to the public for short-term letting (not more than one month at a time);

♦ the sleeping accommodation must comprise wholly or mainly letting bedrooms; and

♦ the services normally provided for guests must include the provision of breakfast and an evening meal, the makingof beds and the cleaning of rooms.

It is a hard definition to satisfy. For example, a convalescent home in which guests stay for only two or three weekswould not qualify even though the above conditions are met. It simply is not a ‘hotel’ in the normal use of the word.

Allowances available for new buildings

Introduction

Three areas of allowance need to be considered.♦ Special Initial allowances

♦ Wear & tears

♦ Balancing adjustments on disposal (see Section 3).

Special Initial allowances (SIA)

These may be available in the accounting period in which the expenditure is incurred. For example, an special Initialallowance of 20% was available for qualifying expenditure incurred between 1 November 1992 and 31 October 1993.Varying percentages of SIA have been available over the years. The current SIA is 50%. This will be provided in theexamination where applicable.

Wear & tears (W&T)W&T is given on a straight line basis of 25% per annum. This means that unless an SIA is available it takes 25 years toobtain full relief, and so industrial buildings are often described as having a 25 year tax life. This tax life commencesfrom the date the building is first put into use, industrial or otherwise, and lasts for 25 years regardless of whether an SIAwas given.A claimant is entitled to W&T provided the building is in industrial use at the end of the accounting period. The W&T andany SIA can both be given in the initial period of expenditure, provided the building is brought into industrial use beforethe end of the period.Periods of temporary disuse during the ownership of the building (eg during contraction of trade) are ignored andallowances still given provided the building had been in industrial use.For the purpose of calculating allowances, each new building or addition has its own 25 year tax life, and shouldtherefore be kept as a separate item.No W&T is given in the accounting period in which a building is sold.

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The disposal of an industrial building

Balancing adjustments

When a building is sold, this triggers a balancing adjustment. Where insufficient allowances have been claimed, abalancing allowance will be given. Otherwise, a balancing charge will occur. Remember that the total allowances givenmust equal the net cost of the building.The easiest way to identify the balancing allowance or charge is to compare the ‘net cost’ of the building with theallowances claimed, as follows.

$Eligible cost X

Less Sale proceeds (X)___

Net cost X___

‘Sale proceeds’ in this calculation cannot exceed the eligible cost.The net cost is therefore the real capital cost (ignoring inflation) incurred by the business.♦ Where the net cost is greater than the total allowances claimed, a balancing allowance for the difference arises.

♦ Where the net cost is less than the total allowances claimed, the difference is clawed back as a balancing charge.

♦ The net cost will be nil if the building is sold for more than its original eligible cost. A balancing charge will thereforearise, to claw back all of the allowances given.

No balancing adjustments are required if a building is sold after its tax life has expired. This is easy to overlook in theexam.Just as the cost of the building has to exclude the land element and the cost of offices etc if not ‘de minimis’ (ie under25%), sale proceeds are also restricted to the qualifying portion. If the exam question just gives ‘sale proceeds’ youshould assume the land etc elements are excluded.

Example

Goredema Ltdmakes up accounts to 31 March. On 1 August 2005 it began to use a newly constructed factory whichcost $60,000,000,000, including $4,000,000 for the land and $2,500,000,000 for offices. On 1 February 2008 thefactory was sold to Heath Ltd for $64,200,000,000, including $12,000 for the land.RequiredCalculate the allowances for Goredema Ltd. Also consider the effect if the sale proceeds were alternatively $53,000mand $71,340m (in each case including $12,000m for the land).

Solution

$m $mCost excluding land (offices allowed, because not over 25%) 56,000

Year ended 31 March 2006 W&T 5% 2,800

Year ended 31 March 2007 W&T 5% 2,800______

(5,600)_______

Residue before sale (RBS) 50,400_______

There is no W&T in the period of sale (the year to 31 March 2008).

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Year ended 31 March 2008(all figures are in $m)Net cost (cost – proceeds) (a) (b) (c)(a) ($56,000 – $52,200) 3,800

(b) ($56,000 – $41,000) 15,000

(c) ($56,000 – $56,000) Nil

Allowances given (5,600)______

(5,600) (5,600)______

Balancing charge (1800)______ ______

(5,600)______

Balancing allowance 9,400______

Allowances for secondhand purchasers

Revised W&TsSo far we have looked at the allowances available to the purchaser of a new industrial building. For the purchaser of aused industrial building, however, neither the special Initial allowance nor the normal 5% Wear & tear is available.Instead, the purchaser of a used industrial building receives a special Wear & tear which spreads relief for theunrelieved original expenditure evenly over the remaining tax life of the building. The W&T is therefore calculated asfollows.

remaininglifeTaxlower)ifpricepurchase(orsaleafterResidue

The residue after sale (RAS) is computed as follows$

Residue before sale (ie tax written down value) X

Plus Any balancing charge orLess Any balancing allowance

X/(X)_____

Residue after sale X_____

The tax life remaining must be computed to the nearest month.

ExampleUsing the details in the earlier example (Goredema Ltd) calculate the allowances for Heath Ltd, the secondhandpurchaser, under the three sale proceeds options.

Solution

(a)$m

(b)$m

(c)$m

Residue before sale 50,400 50,400 50,400

Balancing charge 1,800 5,600

Balancing allowance______

(9,400)______ ______

Residue after sale 52,200______

41,000______

56,000______

All that is happening here is that the Inland Revenue is sharing the eligible cost between the buyer and the seller. Anyamount ‘clawed’ back as a balancing charge from Goredema Ltd(the seller) is instead given to Heath Ltd (the buyer).

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Any allowance already given to the seller (ie $10,520 in option (b)) is not available for the buyer.Heath Ltd then spreads this residue over the remaining tax life.

Tax life from 1 August 2005 to 1 February 2008 = 2 years 6 monthsTherefore remaining life = 25 years – 2 years 6 months = 22 years 6 months

Heath Ltd’s allowance per annum is therefore as follows.(a)$m

(b)$m

(c)$m

5.22200,52

5.22000,41

5.22000,56

2,320_____

1,822_____

2,489_____

Approach to the questionThe first step is to identify the qualifying eligible expenditure.In claiming W&T consider when the building goes into industrial use.Go through the disposal procedure outlined earlier to ascertain the balancing adjustment. Remember there is no W&Tin the year of disposal.Remember that the secondhand purchaser does not get 5% straight line W&T. Instead, you need to work out the W&Tusing the residue after sale divided by the remaining tax life.Non-industrial activity

Impact on the Wear & tearThere may be periods during the ownership of an industrial building when it is used for non-industrial activity. This hasan impact on both the Wear & tear and any balancing adjustment on disposal.Where an industrial building is in non-industrial use at the end of an accounting period the impact is as follows.♦ No W&T is claimed.

♦ A notional W&T reduces the tax balance (ie WDV) to be carried forward.

The reason for this is that the tax life of the building continues to diminish even though the claimant is not entitled to theallowances.

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Disposal of the buildingIf the building is sold above original cost after there has been some non-industrial use, there is a balancing charge equalto the allowances actually given – ie there is no clawback of notional allowances as they were never received in the firstplace.If the building is sold below original cost, there is a complicated adjustment to make in calculating any balancingallowance or charge. This topic is not examinable.

Example

Tsotso Ltd prepares accounts annually to 31 December.A factory costing $375,000,000 was bought on 30 November 2005 and put into industrial use on 31 December 2005.Between 1 March 2006 and 31 January 2007 it was used for non-industrial purposes.The factory is to be sold on 31 March 2008 for $400,000,000.RequiredCompute the industrial buildings allowances for both first and second users.

Solution

IBAs to first userCost$m

Claimed$m

Notional$m

Year ended 31 December 2005 375,000W&T ($375,000 × 5%) (18,750) 18,750

Year ended 31 December 2006 Notional W&T (notin use on 31 December 2006) (18,750) 18,750

Cost$m

Claimed$m

Notional$m

Year ended 31 December 2007W&T at 5% (18,750)

_______18,750

_______ _______IBAs given 37,500

_______ 18,750_______

Tax WDV at 31 December 2006 318,750_______

Year ended 31 December 2008 $mDisposal of building (No W&T in year of disposal)

IBAs claimed (37,500)Balancing charge (37,500)

_______IBAs to subsequent user

remaininglifeTaxchargebalancingsalebeforeWDV +

$318,750,000,000 + $37,500,000,000 = $356,250,000,000

iemonths9 years22months3 years225

360,000=−

= $15,659 per annum for 22 years

and $11,872 in year 23.SummaryThis concludes the material on capital allowances, a core area for the examination as it can feature in both compulsoryand optional questions.The key points concerning IBA are as follows.

356,250,000,000

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♦ Land never qualifies for IBA.

♦ The non-industrial parts of an industrial building will qualify for IBA if they amount to less than 25% of the total cost.

♦ The initial purchaser of an industrial building receives a 4% W&T, calculated using the straight line method, if thebuilding is in industrial use at the end of the accounting period.

The purchaser of a secondhand industrial building receives a W&T based on the residue after sale (or the purchaseprice paid, if lower)

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TITLE 23TITLE 23

Chapter 23:01 PREVIOUS CHAPTER

CAPITAL GAINS TAX ACTActs 54/1981, 30/1982, 32/1983, 7/1984, 24/1984, 19/1985, 4/1988,16/1988,22/1989, 10/1990, 19/1990, 21/1991, 17/1992, 12/1993, 19/1994, 13/1996,29/1998,21/1999, 22/1999, 18/2000, 22/2001, 27/2001, 15/2002, 10/2003. SIs:222E/1999.ARRANGEMENT OF SECTIONS PART IPRELIMINARY Section 1. Short title. 2. Interpretation. PART II ADMINISTRATION 3. Delegation of functions of Commissioner . 4. . . . . . .[Repealed by the Revenue Authority Act] 5. . . . . . .[Repealed by the Finance Act 27/2001.] PART IIICAPITAL GAINS TAX 6. Charging of capital gains tax. 7. Calculation of capital gains tax. 8. Interpretation of terms relating to capital gainstax. 9. When capital amount deemed to have accrued. 10. Exemptions from capital gains tax. 11. Deductions allowed in determination of capital gain. 12. Circumstances in which no deductions may be made. 13. Damage to or destruction of specified asset. 14. Determination of fair market price of specifiedassets.

Capital Gains Tax ActChapter 6

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15. Transfers of specified assets between companies under the samecontrol. 16. Transfers of specified assets between spouses.17. Transfer of business property by individual to company under his control.

18. Provisions for sales of immovable property under suspensive conditions. 19. Provisions relating to credit sales where ownership passes. 20. Provisions for the reductions in costs of specified assets. 21. Provision for sales of principal private residences. 22. Substitution of business property. PART IIIACAPITAL GAINS WITHHOLDING TAX 22A. Interpretation in Part IIIA 22B. Capital gains withholding tax 22C. Depositaries to withhold tax 22D. Agents to withhold tax not withheld by depositaries 22E. Payee to pay tax not withheld by depositary or agent 22F. Exemptions 22FA. Registration of depositaries 22G. Depositaries to furnish returns. 22H. Penalty for non-payment of tax 22I. Refund of overpayments 22J. Credit where tax has been withheld 22K. Application of Part IIIA to sales concluded before1.1.1999. 22L. Suspension of provisions of Part II A to marketable securities. PART IVRETURNS AND ASSESSMENTS23. Application of provisions of Taxes Act relating to returns and assessments.PART VREPRESENTATIVE TAXPAYERS24. Application of provisions of Taxes Act relating to representative taxpayer.PART VIOBJECTIONS AND APPEALS 25. Objections and appeals. PART VIIPAYMENT AND RECOVERY OF TAX 26. Day and place for payment of tax. PART VIIIGENERAL27. Application of provisions of Taxes Act relating to offences, evidence, forms and regulations.28. Application of provisions of Taxes Act relating to relief from double taxation. 29. Application of provisions of Taxes Act relating to tax avoidance. 30. Transitional provision re capital gains and losses of married women.30A. Capital gains tax not withheld in terms of Part IIIA to be paid before transfer of specified asset.31. Returns by Registrar of Deeds , financial institutions and other persons. ACTAN ACT to provide for the raising of a tax on capital gains, and to make provision for matters ancillary or incidentalthereto.

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[DATE OF COMMENCEMENT: 1ST AUGUST, 1981.] PART IPRELIMINARY1 Short titleThis Act may be cited as the Capital Gains Tax Act [Chapter 23:01].2 Interpretation

(1) In this Actassessed capital loss means the amount by which the sum of the deductions to be made under subsections (2) and

(3) of section eleven from the capital amount (as defined in Part III) of any taxpayer exceeds such capitalamount: Provided that where the total amount of the assessed capital loss of a person in respect of sales in any yearof assessment is one thousand dollars or less the assessed capital loss arising from such sales shall bereduced by such amount; means an agreement in respect of a specified asset theeffect of which is that ownership of the specified asset shall pass to aperson upon or after payment by him of the whole or a certain portion ofthe amount payable under the agreement;

marketable security means (a) any bond capable of being sold in a share market or exchange; or (b) any (i) debenture, share or stock; or (ii) right possessed by reason of a person™s participation in any unit trust; whether or not capable of being sold in a sharemarket or exchange; share includes a member™s interest in a private business corporation;

specified asset means (a) immovable property; or (b) any marketable security;

tax means tax leviable in terms of this Act;Taxes Act means the Income Tax Act [Chapter 23:06].

(2) For the purposes of this Act(a) an expression to which a meaning is assigned in subsection (1) of section 2 of the Taxes Act in relation to thegross income, income or taxable income of a person or the making of any assessment or the furnishing of any returnshall, unless the expression is otherwise defined in this Act, have the same meaning in this Act in relation to thegross capital amount, capital amount or capital gain, respectively, of a person or to the making of any assessmentor the furnishing of any return under this Act;(b) an expression to which a meaning is otherwise assigned in subsection(1) of section 2 of the Taxes Act shall, unless the expression is otherwise defined in this Act, have the same meaning inthis Act.(3) For the purposes of this Act(a) a company shall be deemed to be under the control of an individual if the majority of voting rights attaching toall classes of shares in the company is controlled, directly or indirectly, by the individual; (b) an individual and his nominee shall be deemed to be one individual. PART IIADMINISTRATION3 Delegation of functions by CommissionerSection 3 of the Taxes Act relating to the delegation of functions shall apply, mutatis mutandis, in relation to this Act forthe purposes of providing for and giving effect to the matters concerned in relation to this Act.[Sections 3 and 4 repealed and a new s 3 substituted by the Revenue Authority Act[Chapter 23:11] with effect from the 19th January, 2001.]4 . . . . . .5 . . . . . .[Section 5 repealed by Section 21 of the Finance Act No.27 of 2001 with effect from the year of assessment beginningon the 1st January, 2002.]

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PART IIICAPITAL GAINS TAX6 Charging of capital gains taxThere shall be charged, levied and collected throughout Zimbabwe for the benefit of the Consolidated Revenue Fund acapital gains tax in respect of the capital gains, as defined in this Part, received by or accrued to or in favour of anyperson during any year of assessment, other than a capital gain so received or accrued prior to the 1st August, 1981.7 Calculation of capital gains taxSubject to section twenty-one, the capital gains tax with which a person is chargeable shall be calculated in accordancewith the Finance Act [Chapter 23:04] by reference to (a) the capital gains of the person in the year of assessment; and (b) the rate of capital gains tax fixed from time to time in that Act.8 Interpretation of terms relating to capital gains tax(1) For the purpose of this Part(a) gross capital amount means the total amount received by or accrued to or in favour of a person or deemedto have been received by or to have accrued to or in favour of a person in any year of assessment from a source withinZimbabwe from the sale on or after the 1st August, 1981, of specified assets excluding any amount so received oraccrued which is proved by the taxpayer to constitute gross income as defined in subsection (1) of section 8 of theTaxes Act and includes any amount allowed to be deducted in terms of subsection (2) of section eleven which has beenrecovered or recouped:Provided that in the case of bodies referred to in subparagraphs (a), (c)and ( f ) of paragraph 2 of the Third Schedule to the Taxes Act an amount so received or accrued shall, notwithstandingthat it is so proved to constitute gross income as so defined, constitute a gross capital amount;(b) capital amount means the amount remaining of the grosscapital amount of any person, after deducting therefrom any amounts exemptfrom capital gains tax under this Act;(c) capital gain means the amount remaining, after deducting from thecapital amount of any person all the amounts allowed to be deducted from acapital amount under this Act.(2) For the purposes of the definition of gross capital amount insubsection (1)(a) when owing to a variation in the rate of exchange of currency betweenZimbabwe and any other country, the amount received, expressed inZimbabwean currency, differs from the amount that had accrued prior to thevariation in the rate of exchange(i) the amount to be included in the gross capital amount shall be the saidamount received, expressed in Zimbabwean currency; and(ii) if the receipt and the accrual occur in different years of assessment,effect shall be given to the increase or reduction in the gross capitalamount in the year of assessment in which the amount accrued;(b) where a person disposes of a specified asset otherwise than by way ofsale such disposal shall be deemed to be a sale and an amount which, in theopinion of the Commissioner, is equal to the fair market price of suchasset at the time of disposal shall be deemed to have accrued to suchperson at such time;(c) where a specified asset is expropriated such specified asset shall bedeemed to have been sold for an amount equal to the amount paid by way of compensation for the expropriation of such specified asset;(d) where a specified asset is sold in execution of the order of a court,the amount for which it was sold shall be deemed to have accrued to theperson on whose behalf it was sold;(e) where an amount accrues to a person by reason of thematurity or redemption of a specified asset, or in circumstances which inthe opinion of the Commissioner are of a similar nature, such asset shallat the date of such accrual be deemed to have been sold by such person forsuch amount;

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( f ) where a person transfers to another person his rights under a deed ofsale in respect of the passing of ownership of the specified asset which isthe subject of the deed of sale, he shall be deemed to have sold thespecified asset to that other person for an amount equal to the wholeamount received by or accruing to him as a result of the transfer.9 When capital amount deemed to have accruedA capital amount shall be deemed to have accrued to a person in thecircumstances set out in subsections (1) and (2) of section 10 of the TaxesAct, the provisions of which shall, for the purposes concerned, applymutatis mutandis in relation to this Act.10 Exemptions from capital gains taxThere shall be exempt from capital gains tax(a) the receipts and accruals of bodies referred to in paragraphs 1, 2 and3of the Third Schedule to the Taxes Act, other than those referred to insubparagraphs(a), (c) and ( f ) of paragraph 2;(b) amounts received or accrued on the realization or distribution by theexecutor of a deceased estate of a specified asset forming part of suchestate;(c) amounts received or accrued on the sale of any marketable securitybeing any bond or stock in respect of any loan to(i) the State or any company all the shares of which are owned by theState; (ii) a local authority; (iii) a statutory corporation;(d ) amounts received or accrued on the sale, by a person carrying on lifeinsurance business as defined in subparagraph (1) of paragraph 1of the Eighth Schedule to the Taxes Act, of specified assets which areinvestments in Zimbabwe for the purposes of factor F or G in the formula inparagraph 6 of that Schedule;(e) amounts received or accrued on the sale of any shares in theZimbabwe Development Bank established by section 3 of theZimbabwe Development Bank Act [Chapter 24:14].where such sale is by an institutional shareholder as defined in that Act who is not ordinarilyresident in Zimbabwe;( f ) amounts received or accrued on the sale by a petroleum operator,approved by the Minister by notice in the Gazette, of immovable propertyused for the purposes of petroleum operations, to another petroleumoperator, if the Commissioner is satisfied that the property is to beused for such purposes by the purchaser;(g) the receipts and accruals of a licensed investor from the sale of aspecified asset forming the whole or part of the investment to which hisinvestment licence relates.(h) the receipts and accruals of an industrial park developer from the saleof a specified asset that forms part of or is connected with his industrialpark.[Subpara (h) inserted by s 3 of the Presidential Powers (Temporary Measures) (Capital Gains Withholding Tax)Regulations, 1999, SI 222E of 1999, dated 7 July 1999 and subsequently by s 18 of the Finance Act 22 of 1999 witheffect from7 July 1999.]

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(i) amounts received or accrued on the sale or disposal of any shareswithheld by an insurance company in the circumstances described insubparagraph

(2) of paragraph 6 of the Twenty-Seventh Schedule to the Income Tax Act [Chapter 23:06].[subpara (i) inserted by Act 18 of 2000 from 1st January, 1999.]( j) amounts received or accrued on the sale of any marketable security that is a listed security as defined in theZimbabwe Stock Exchange Act [Chapter24:18]. [subpara (j) inserted by Act 27 of 2001 from 1st January, 2002.](k) amounts received by or accruing to an employee from the sale or disposal of his shares or interest in anapproved employee share ownership trust where such sale or disposal is to the trust. [inserted by Act 15 of 2002 witheffect from 1st January, 2003.]11 Deductions allowed in determination of capital gain(1) For the purposes of determining the capital gain of any person thereshall be deducted from the capital amount of such person the amountsallowed to be deducted in terms of this section:Provided that when, owing to a variation in the rate of exchange ofcurrency between Zimbabwe and any other country, the amount actually paidin Zimbabwean currency differs from the amount of the liability that hadbeen incurred prior to the variation in the rate of exchange(a) the amount to be deducted shall be the amount actually paidinZimbabwean currency;(b) if the incurring of the liability and the payment thereforoccur in different years of assessment, effect shall be given to theincrease or reduction in the amount in the year of assessment in which theliability was incurred.(2) The deductions which shall be allowed for the purposes of subsection(1) shall be(a) expenditure to the extent to which it is incurred on the acquisition orconstruction of such specified assets as are sold during the year ofassessment other than expenditure in respect of which a deduction isallowable in the determination of the seller's taxable income as defined insubsection (1) of section 8 of the Taxes Act.For the purposes of this paragraph where a person has acquired aspecified asset(i) by way of inheritance, he shall be deemed to have incurredexpenditure on such acquisition to an amount which is equal to the amountat which the specified asset was valued in the deceased estate concerned; (ii) otherwise than by way of purchase or inheritanceA. prior to the 1st August, 1981, he shall be deemed to haveincurred expenditure on such acquisition to an amount which is equal to anamount proved to the satisfaction of the Commissioner to be the fair marketvalue of the specified asset at the time it was so acquired;B. on or after the 1st August, 1981, he shall be deemed to have incurredexpenditure on such acquisition to an amount equal to the amount, if any,included in respect of the specified assetI. for the purposes of this Act, in the gross capital amount of the persondisposing of the specified asset; orII. for the purposes of the Taxes Act, in the gross income, as defined insubsection (1) of section 8 of that Act, of the person disposing of thespecified asset;

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(b) expenditure to the extent to which it is incurred onadditions, alterations or improvements to specified assets referred to inparagraph (a) other than expenditure in respect of which a deduction isallowable in the determination of the seller™s taxable income as defined insubsection (1) of section 8 of the Taxes Act.For the purposes of this paragraph, in the case of a capital amountarising from the sale of shares in a company which owns immovable property,any expenditure incurred by the seller on additions or alterations to theproperty shall be deemed to be expenditure incurred on additions to theshares; (c) the sum of one hundred per centum of[increased from 30% by Act 15 of 2002, with effect from the 1st January,2003 and increased from 50% by Act 10 of 2003, with effect from the 1stJanuary, 2004.](i) the amounts referred to in paragraph (a), other than any such amountrelating to any shares in a building society; and (ii) the amounts referred to in paragraph (b); and(iii) the amount of any expenditure in respect of which adeduction is allowable in terms of the Taxes Act by way of an allowance interms of the Fourth Schedule, the Fifth Schedule or subparagraph (c), (e)or ( f ) of paragraph 2 of the Seventh Schedule to that Act;in respect of each year or part of a year of assessment from the date ofacquisition, construction, addition or alteration or deemed addition oralteration, as the case may be, to the date of sale;[Para (c) amended by s 33(a) of Act 13 of 1996 with effectfrom the year of assessment beginning on 1 April 1996, and furtheramended by the increase of the % allowed by Section 23 of the Finance ActNo.27 of 2001 with effect from the year of assessment beginning on the 1stJanuary, 2002.](d ) any expenditure to the extent that it is directly incurredfor the purposes of or in connection with the sale of a specified asset;(e) the amount of any debts due to the taxpayer to the extent to whichthey are proved to the satisfaction of the Commissioner to be bad, if suchamount is included in the current year of assessment or was included in anyprevious year of assessment in the taxpayer™s capital amount in terms ofthis Act;( f ) the amount of any costs, taxed by the Registrar of theHigh Court during the year of assessment and not recovered fromany source whatsoever, incurred by the taxpayer in connection with anappeal to the High Court or the Special Court in terms of Part VI, if (i) the appeal is allowed in full; or(ii) the appeal is allowed to a substantial degree and the High Court orthe Special Court, as the case may be, directs that such costs shall beallowed as a deduction in terms of this paragraph: Provided that(i) if any determination of the High Court or the Special Courtis reversed, affirmed or amended by the Supreme Court, no deduction shallbe made in terms of this paragraph unless the decision of theSupreme Court is wholly or substantially favourable to the taxpayer(g) the amount of any costs, taxed by the Registrar of the Supreme Courtduring the year of assessment and not recovered from any sourcewhatsoever, incurred by the taxpayer in connection with an appeal to the

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Supreme Court in terms of Part VI, if(i) the decision of the Supreme Court is wholly or substantiallyfavourable to the taxpayer; and(ii) the Supreme Court directs that such costs shall be allowed as adeduction in terms of this paragraph;(h) where, after the application of the above paragraphs, the total amount of the capital gains of a person in anyyear of assessment is one thousand dollars or less, an amount equal to such total amount.(3) From the amount of the capital amount remaining after the deductions referred to in subsection (2) have been madethere shall be deducted any assessed capital loss determined in respect of the previous year ofassessment: Provided that(i) if during any year of assessment there is a change in the shareholding of a company with an assessed capitalloss or in the shareholding of any company which directly or indirectly controls any company with an assessedcapital loss and the Commissioner is satisfied that such change has been effected solely or mainly in pursuance of or inconnection with any scheme for taking advantage of such assessed capital loss, no assessed capital loss incurredprior to that change shall be deductible. For the purposes of this subparagraph a company shall be deemed to becontrolled by another company if the majority of the voting rights attaching to all classes of its shares are held directly orindirectly by such other company; (ii) no taxpayer who (a) has been adjudged or otherwise declared or become insolvent; or(b) has made an assignment of his property or estate for the benefit of his creditors;shall be entitled to carry forward an assessed capital loss incurred before the date he was adjudged or otherwisedeclared or became insolvent or made the assignment, as the case may be; (iii) where(a) a company which is incorporated under the Companies Act [Chapter 24:03] and which has an assessed capitalloss is converted into a private business corporation; or(b) a private business corporation with an assessed capital loss is converted into a company in terms of theCompanies Act [Chapter 24:03];the new private business corporation or the new company, as the case may be, shall be allowed the assessed capitalloss as a deduction after the conversion.(4) Where, in respect of any amount, a deduction would, but for this subsection, be allowable under more than oneprovision of this Act and whether it would be so allowable in respect of the same or different years of assessment, thetaxpayer shall not be entitled to claim that such amount shall be deducted more than once and, where the deductionwould, but for this subsection, be allowable under more than one provision of this Act in respect of the same year ofassessment, the taxpayer shall elect under which one of those provisions he wishes to claim such amount as adeduction.(5) Where the owner of immovable property has, as the lessor of such property, been charged to income tax in termsof paragraph (e) of the definition of gross income in subsection (1) of section 8 of the Taxes Act, he shall bedeemed to have incurred expenditure in terms of paragraph(a) or (b) of subsection (2) in relation to such immovable property equal to the amount so included in his taxableincome at the time of such inclusion.

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(6) Where a person transfers to another person his rights under a deed of sale in respect of the passing of ownershipof the specified asset which is the subject of the deed of sale, he shall be deemed for the purposes of this section tohave acquired the specified asset from the person with whom he entered into the deed of sale for an amount equal tothe amount payable by him under the deed of sale.12 Circumstances in which no deductions may be made Notwithstanding the provisions of section eleven, nodeduction shall be made in respect of expenditure on or in relation to specified assets thesale of which is exempt from tax.13 Damage to or destruction of specified asset(1) Subject to subsections (2) and (3), where a specified asset is damaged or destroyed it shall for the purposesof the definition of gross capital amount in subsection (1) of section eight be deemed to havebeen sold for an amount equal to the amount of any receipt or accrual inrespect of such damage or destruction.(2) Where the amount referred to in subsection (1) does not exceed thetotal of the amounts referred to in paragraphs (a) and (b) of subsection(2) of section eleven in respect of that asset (a) such asset shall not be deemed to have been sold;and(b) such total amount shall be deemed to be reduced accordinglywith effect from the commencement of the year of assessment in which thereceipt or accrual occurs; and(c) the amount of any subsequent deductions in terms of paragraph (c) ofthat subsection shall be calculated in relation to such reduced totalamount.(3) Where a specified asset is damaged or destroyed and theCommissioner is satisfied that the whole or part of any receipt or accrualin respect of such damage or destruction has been or will be expended,within two years from the date on which the specified asset was damaged ordestroyed, on (a) the purchase or construction of a further specifiedasset of a like nature in replacement of the damaged or destroyed specifiedasset; or(b) the repair of the specified asset, where the specified assetwas damaged;the provisions of subsections (1) and (2) (i) shall not apply in relation to the amount soexpended;(ii) shall apply, with effect from the year of assessment in which the damage or destruction occurred or such lateryear of assessment as the Commissioner may determine, in relation to any part of the receipt oraccrual not so expended.(4) Expenditure to which subsection (3) relates shall not be allowable as a deduction in terms of section eleven uponthe subsequent sale of the specified asset concerned.

14 Determination of fair market price of specified assetsWhere a person purchases a specified asset from any other person at a price in excess of the fair market price orwhere he sells a specified asset to any other person at a price less than the fair market price theCommissioner may, for the purpose of determining the capital gain or assessed capital loss, as the case may be, ofsuch first- mentioned person, determine the fair market price at which such purchase or sale shall betaken into his accounts or returns for assessment.

15 Transfers of specified assets between companies under the samecontrol(1) If the ownership of any specified asset is transferred from one company to another in any of the followingcircumstances (a) where the Commissioner is satisfied that (i) the company that transfers the specified asset A. is incorporated outside Zimbabwe; and B. has carried on its principal business inside

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Zimbabwe; andC. is about to be wound up voluntarily in its country of incorporation for the purpose of the transfer of the whole ofits business and property wherever situate to the company to which the specified asset is transferred; and(ii) the sole consideration for the transfer will be the issue, to the members of the company transferring thespecified asset, of shares in the company to which the specified asset is transferred, in proportion to their holdings inthe first- mentioned company; and(iii) no shares in the company to which the specified asset is transferred will be available for issue to anypersons other than members of the company transferring the specified asset; or(b) the transfer is effected from one company to another under the same control, in the course of or in furtheranceof a scheme of reconstruction of a group of companies or a merger or other business operation which, inthe opinion of the Commissioner, is of a similar nature; or (c) the transfer is effected(i) from a company incorporated under the Companies Act [Chapter24:03] to a private business corporation into which the company has been converted in terms of the Private BusinessCorporations Act [Chapter 24:11]; or(ii) from a private business corporation to a company into which the private business corporation has beenconverted in terms of the Companies Act[Chapter 24:03]; in the course of or in furtherance of that conversion; the transferor and the transferee may elect that,notwithstanding the terms of any agreement of sale, the selling price of the asset shall, in relation to the transferor, bedeemed, for the purposes of this Act, to be an amount equal to the sum of the deductions allowable to the transferor inrespect of the specified asset in terms of paragraphs (a), (b), (c) and (d)of subsection (2) of section eleven at the date of the transfer: Provided that, if the specified asset is subsequently sold,otherwise than to a company under the same control, the capital gain or capital loss inthe hands of the seller shall be calculated as if the asset had at all times remained in the ownership of the firsttransferor in respect of whom the election was made in terms of this section.(2) Where in the circumstances referred to in paragraph (a) or (b) of subsection (1), a marketable security issued by acompany involved in the scheme, merger or operation is transferred from one person to another forno cash consideration, in exchange for a marketable security issued by another such company, the transferor may electthat, notwithstanding the terms of any agreement of sale, the marketable security transferredby him shall be deemed to have been sold for an amount equal to the sum ofthe deductions allowable to him at the date of transfer in terms ofparagraphs (a),(b), (c) and (d) of subsection (2) of section eleven in respect of the marketable security transferred by him.(3) An election in terms of subsection (2) shall be made not later than the date on which the person making the electionsubmits a return for the assessment of his capital gain for the purposes of this Act.16 Transfers of specified assets between spouses (1) In this section

principal private residence has the meaning given to it in section twenty-one.(2) Where (a) the ownership of any specified asset is transferred from a person tohis or her spouse; or (b) a person transfers the ownership of a specified asset which is hisprincipal private residence to his former spouse in compliance with anorder of a court providing for the maintenance of the former spouse ordividing, apportioning or distributing the assets of the former spouses on or after the dissolution of their marriage; the transferor and the transferee may elect that, notwithstanding the termsof any agreement of sale, the selling price of the specified asset shall in relation to the transferor be deemed, for thepurposes of this Act, to be an amount equal to the sum of the deductions allowable to the transferor in respect of thespecified asset in terms of paragraphs (a), (b), (c) and (d) of subsection (2) of section eleven at the date of transfer:Provided that, if after the transfer such asset is sold to a person who is not the spouse of the seller, the capital gain orassessed capital loss in the hands of the seller shall be calculated as if the asset had at all times remained in theownership of the first transferor to whom this section applies.(3) An election in terms of subsection (2) shall be madenot later than the date on which the person making the election submits a return for theassessment of his capital gain for the purposes of this Act.

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17 Transfer of business property by individual to company under hisControl If the ownership of any immovable property is transferred on or after the1st April,1991, from an individual to a company in circumstances where theCommissioner is satisfied that(a) the immovable property was previously used by the individual for thepurposes of his trade; and(b) the company will continue to use the immovable property forthe purposes of its trade; and(c) the individual controls the company, whether through holding amajority of the company™s shares or otherwise;the transferor and the transferee may elect that, notwithstanding the termsof any agreement of sale, the selling price of the immovable propertyshall, in relation to the transferor, be deemed, for the purposes of thisAct, to be an amount equal to the sum of the deductions allowable to thetransferor in respect of the immovable property in terms of paragraphs (a),(b), (c) and (d) of subsection (2) of section eleven at the date of thetransfer:Provided that, if after the transfer the immovable property is sold,otherwise than to a company under the same control, the capital gain orassessed capital loss in the hands of the seller shall be calculated as ifthe property had at all times remained in the hands of the firsttransferor to whom this section applies.(2) An election in terms of subsection (1) shall be made not later thanthe date on which the person making the election submits a return for theassessment of his capital gain for the purposes of this Act.18 Provisions for sales of immovable property under suspensiveconditions(1) If any taxpayer has entered into any agreement with any other personin respect of any specified asset the effect of which is that ownershipshall pass from the taxpayer to that other person upon or after receipt bythe taxpayer of the whole or a certain portion of the amount payable to thetaxpayer under the agreement, the whole of the amount shall, for thepurposes of this Act, be deemed to have accrued to the taxpayer on the dateon which the agreement was entered into:Provided that(i) the Commissioner shall deduct an allowance determined by applying theFormula in whichA represents that portion of the amount deemed to have accrued under the agreement which is not receivable atthe end of the year of assessment; B represents the capital amount deemed to have accrued under theagreement; C represents the aggregate of the sums deductible in respect of such specified asset in terms ofparagraphs (a), (b), (c) and (d) of subsection (2) of section eleven; D represents the amount deemed to have accrued under the agreement;(ii) any allowance so deducted shall be included by the taxpayer as a capital amount in his return for the followingyear of assessment and shall form part of the capital amount of the said taxpayer; (iii) if any such agreement isceded or otherwise disposed of by the taxpayer no such allowance shall be made by the Commissioner inthe year of assessment in which such cession or disposal takes place. (2) Where any agreement referred to insubsection (1) is cancelled there shall be included in the capital amount or assessed capital loss, as thecase may be, of the seller in the year of assessment in which such cancellation takes place an amount equal to thedifference between the total of the amounts received by the seller in terms of the agreement andthe total of the amounts included in the capital gains of the seller in terms of that subsection, and that subsection shallcease to have effect after that year of assessment.(3) Where the capital amount of a person for any year of assessmentincludes any amount to which this section relates no deduction shall beallowed in respect of the amount referred to in paragraph (h) of subsection(2) of section eleven.

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(4) Where a person transfers to another person his rights under a deed ofsale in respect of the passing of ownership of the specified asset which isthe subject of the deed of sale. he shall be deemed for the purposes ofthis section to have entered into an agreement in respect of the specifiedasset the effect of which is that ownership shall pass from him to theother person concerned, and this section shall apply, mutatis mutandis,accordingly.19 Provisions relating to credit sales where ownership passes(1) If any taxpayer has entered into any agreement with any other personin respect of any specified asset the effect of which is that(a) the ownership shall pass to that other person on delivery ofthe specified asset; and(b) the amount payable to the taxpayer under the agreement shall be paid ininstalments;the whole of that amount shall, for the purposes of this Act, be deemed tohave accrued to the taxpayer on the date on which the agreement was enteredinto:Provided that(i) the Commissioner, taking into consideration any deduction underparagraph (e) of subsection (2) of section eleven, may deduct such furtherallowance as seems to him reasonable in respect of all amounts which aredeemed to have accrued under such agreement but are not receivableat the end of the year of assessment;(ii) any allowance so deducted shall he included by the taxpayer as acapital amount in his return for the following year of assessment and shallform part of the capital amount of the taxpayer.(2) Where the capital amount of a person for any year of assessmentincludes any amount to which this section relates, no deduction shall beallowed in respect of the amount referred to in paragraph (h) of subsection(2) of section eleven.20 Provisions for the reductions in costs of specified assetsWhere an amount is received or accrues, whether by way ofrecovery or of recoupment or otherwise, relating to the cost or deemedcost of a specified asset which has not been sold(a) if such amount exceeds the total of the amounts referred toin paragraphs (a) and (b) of subsection (2) of section eleven in respect ofthat asset, such asset shall be deemed to have been sold for an amountequal to the amount so received or accrued;(b) if such amount does not exceed the total of the amounts referred to mparagraphs (a) and (b) of subsection (2) of section eleven in respect ofthat asset(i) such total amount shall be deemed to be reduced accordingly witheffect from the commencement of the year of assessment in which the receiptor accrual occurs; and(ii) the amount of any subsequent deductions in terms of paragraph (c) ofthat subsection shall be calculated in relation to such reduced totalamount;and the asset shall be deemed to have been sold on the date of the finalsuch receipt or accrual.

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21 Provision for sales of principal private residences(1) In this section

dwelling means a building, or any part of a building, which is usedwholly or mainly for the purpose of residential accommodation;

principal private residence , in relation to an individual, means (a) a dwelling which is proved to the satisfaction ofthe Commissioner(i) to have been that individual™s sole or main residence throughout theperiod that he owned it; or(ii) to have been that individual™s sole or main residence for a period offour years or more immediately before the date of its sale, or for suchshorter period immediately before the date of its sale as the Commissionerconsiders reasonable in all the circumstances; or(iii) to have been regarded by that individual as his sole or mainresidence, even though he was prevented from residing in it as provided insubparagraph (i) or(ii) in consequence of his employment or for such other cause as theCommissioner considers reasonable in all the circumstances; and(b) subject to subsection (5), any land, whether or not it is a piece ofland registered as a separate entity in a Deeds Registry, which (i) is owned by the individual concerned; and(ii) surrounds or is adjacent to the dwelling referred to in paragraph (a);and

(iii) is used by the individual concerned primarily for private or domesticpurposes in association with the dwelling referred to in paragraph (a).(2) An individual may elect that, where a capital gain has been receivedby or has accrued to him on or after the 1st April, 1988, in respect of thesale by him of his principal private residence (hereinafter in this sectioncalled the old principal private residence ) and the Commissioner issatisfied that, before the end of the year of assessment next following thesale, an amount equal to the whole or part of the consideration receivedor accrued in respect of the sale has been or will be expended on thepurchase or construction, on land owned by him in Zimbabwe, of anotherprincipal private residence (hereinafter in this section called the

new principal private residence ) for the individual concerned(a) capital gains tax shall not be chargeable, if the amount ofthe consideration so received or accrued is equal to or less than theamount so expended; and(b) capital gains tax shall be chargeable, if the amountof the consideration so received or accrued exceeds the amount so expended, on a proportion of the capital gain determined by applying thefollowing formula in whichA represents that portion of the amount of the consideration received oraccrued on the sale of the old principal private residence not so expendedon the purchase or construction of the new principal private residence; B represents the total amount of the consideration received or accrued on the sale of the old principalprivate residence; C represents the capital gain in respect of the sale of the old principalprivate residence. (2a) An election in terms of subsection (2) shall be made not later thanthe date on which the individual making the election submits a return forthe assessment of his capital gain for the purposes of this Act.[Subsection (2a) inserted by Finance Act (No. 2) 21 of 1999 from 1 January2000.]

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(3) Where an amount is not chargeable to capital gains tax in terms ofsubsection (2), such amount shall be deducted from the amount referred toin paragraph (a) of sub- section (2) of section eleven when determining thecapital gain in respect of the new principal private residence, with effectfrom the year of assessment in which the new principal private residencewas acquired.(4) For the purposes of this section, where(a) a building owned by a company, partnership or other association ofpersons consists of or contains one or more flats, apartments orother units of residential accommodation; and(b) the members of the company, partnership or association, as the case maybe, have the right, by virtue of their membership, to occupy particularflats, apartments or units of residential accommodation in the building;an individual who, by becoming or ceasing to be a member of the company, partnership or association concerned, acquires orrelinquishes such a right of occupation, shall be deemed to havepurchased or sold, as the case may be, the flat, apartment or unit ofresidential accommodation concerned.(5) Where(a) land referred to in paragraph (b) of the definition of principalprivate residence in subsection (1); or(b) a garage, storeroom or other structure referred to in paragraph (c) ofthe definition of principal private residence in subsection (1);is disposed of separately from the dwelling in association with which itwas used, this section shall not apply in relation to its disposal.(6) Where a principal private residence is sold together with or as partof other immovable property which is not used wholly or mainly for the purposes of residential accommodation, the proportion of (a) the gross capital amount in the hands of thetransferor; or (b) the cost of acquisition in the hands of thetransferee;received or accruing in respect of the sale of the principal privateresidence shall be deemed to be(i) such proportion as may be specified by both the parties to the sale ina joint written statement which is submitted to the Commissioner and whichis accepted by him; or(ii) where no statement has been submitted to the Commissioner in terms ofparagraph (i) or where the Commissioner has not accepted such a statement,such proportion as may be determined by the Commissioner to be fair andreasonable.22 Substitution of business property(1) A taxpayer may elect that, where a capital gain has been received byor accrued to him on or after the 1st April, 1991, in respect of the saleby him of immovable property previously used for the purposes of his trade(hereinafter in this section called the old property ) and the

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Commissioner is satisfied that, before the end of the year of assessmentnext following the sale, an amount equal to the whole or partof the consideration received or accrued in respect of the sale has beenor will be expended on the purchase or construction of other immovableproperty (hereinafter in this section called the new property ) to be usedfor the purposes of his trade(a) capital gains tax shall not be chargeable, if the amount ofthe consideration so received or accrued is equal to or less than theamount so expended; and(b) capital gains tax shall be chargeable, if the amountof the consideration so received or accrued exceeds the amount so expended, on a proportion of the capital gain determined by applying thefollowing formula

in whichA represents that portion of the amount of the consideration received oraccrued on the sale of the old property not so expended on thepurchase or construction of the new property; B represents the total amount of the considerationreceived or accrued on the sale of the old property; C represents the capital gain in respect of the sale ofthe old property.(1a) An election in terms of subsection (1) shall be made not later thanthe date on which the taxpayer making the election submits a return for theassessment of his capital gain for the purposes of this Act.Subsection (1a) inserted by Finance Act (No. 2) 21 of 1999 from 1 January2000](2) Where an amount is not chargeable to capital gains tax in terms ofsubsection (1), such amount shall be deducted from the amount referred toin paragraph (a) of sub- section (2) of section eleven when determining thecapital gain in respect of the new property, with effect from the year ofassessment in which the new property was acquired.PART IIIA

CAPITAL GAINS WITHHOLDING TAX22A Interpretation in Part IIIA In this Part depositary means (a) a conveyancer, legal practitioner, estate agent or other person who¾ (i) on behalf of any party to a sale ofimmovable property, holds the whole or any part of the price paid or payable in respect of the sale; and(ii) is required, on completion of the sale or on transfer of the property, to pay the whole or any part of the amounthe holds to the seller of the immovable property or to some other person for the seller™s credit; or(b) a building society registered in terms of the Building Societies Act[Chapter 24:02]; or (c) the Sheriff or Master of the High Court; or (d) a stockbroker, financial institution or other person who¾(i) on behalf of any party to a sale of a marketable security, holds the whole or any part of the price paid orpayable in respect of the sale; and (ii) is required, on completion of the sale or on transfer of themarketable security, to pay the whole or any part of the amount he holds to the seller of the marketable security or tosome other person for the seller™s credit;[amended by Finance Act 10 of 2003 with effect from the year of assessment beginning 1 January 2004]

payee means a person to whom a depositary pays or is required to pay an amount held by him as depositary inrespect of the sale of a specified asset.

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22B Capital gains withholding taxThere shall be charged, levied and collected throughout Zimbabwe in accordance with this Part, for the benefit of theConsolidated Revenue Fund, a capital gains withholding tax calculated in accordance with theFinance Act [Chapter 23:04]. 22C Depositaries to withhold tax(1) Subject to subsections (5) and (7), every depositary who, in consequence of the sale or transfer of a specified asset,pays any amount held by him as depositary to or for the credit of the seller of the specified asset shall withholdcapital gains withholding tax from that amount and shall pay the amount withheld to the Commissioneron or before the last day of the month following the month in which the payment was made or within such further time asthe Commissioner may for good cause allow.[Subsection (1) amended by the Finance Act 22 of 1999 with effect from 7July 1999.](2) If the capital gains withholding tax payable in respect of any sale or transfer exceeds the amount held by adepositary, the depositary shall pay the full amount held by him to the Commissioner in accordance withsubsection (1). (3) Where capital gains withholding tax is withheld in accordance withsubsection (1), the depositary shall provide the payee with a certificate, in a formapproved by the Commissioner, showing the following particulars (a) the depositary™s name and address; and (b) the payee™s name and address; and (c) particulars of the property sold; and (d) the amount of capital gains withholding tax that hasbeen withheld.(4) Where two or more depositaries hold the whole or any part of the pricepaid or payable in respect of any one sale of a specified asset¾¾(a) they shall be severally liable for payment of the full amount ofcapital gains withholding tax in respect of that sale, up to the amount held by them; and(b) payment by any one of them of any amount of capital gains withholding tax in terms of this section shallabsolve the others or reduce their liability pro tanto, as the case may be.(5) A depositary need not withhold capital gains withholding taxin terms of subsection (1) if, before he pays any amount to or for the credit of the seller of the specified assetconcerned¾¾ (a) he or the seller applies to the Commissioner for a clearance certificate in respect of the sale ofthat specified asset, and provides the Commissioner with such information regarding the sale as theCommissioner may reasonably require; and (b) the Commissioner, being satisfied that¾¾(i) no capital gains tax is likely to be payable in respect of the sale orthat any capital gains tax so payable is likely to be less than the capitalgains withholding tax required to be withheld in terms of subsection (1);and(ii) adequate arrangements have been or will be made for the payment of anycapital gains tax payable in respect of the sale; has issued a clearance certificate in respect ofthe sale.(6) A clearance certificate may be issued in terms of subsection (5) onsuch terms and conditions as the Commissioner may fix, including terms andconditions relating to the furnishing of a return or interim return for theassessment of capital gains tax.(7) Where the amount held by a depositary represents the wholeor part of an instalment payable in a sale by instalments, the amount ofcapital gains withholding tax to be withheld from that amount and paid tothe Commissioner in terms of subsection (1) shall be calculated as if theinstalment were the full price at which the specified asset concerned wassold.

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22D Agents to withhold tax not withheld by depositaries (1) Subject to subsections (7) and (9) where(a) an agent, on behalf of a payee, receives from a depositary an amount which represents the whole or part of theprice of a specified asset; and (b) capital gains withholding tax has not been withheld from that amount interms of section twenty-two C, nor has a clearance certificate been issued in terms of that section in respect of the saleof the specified asset concerned;the agent shall withhold capital gains withholding tax from that amount and shall pay the tax withheld to theCommissioner on or before the last day of the month following the month in which he received the amount orwithin such further time as the Commissioner may for good cause allow. (2) Where capital gains withholding tax iswithheld in accordance with subsection(1), the agent shall provide the payee with a certificate, in a form approved by the Commissioner, showing the followingparticulars, to the extent that the agent knows them (a) the depositary™s name and address; and (b) the payee™s name and address; and (c) particulars of the property sold; and (d) the amount of capital gains withholding tax that hasbeen withheld.(3) For the purpose of this section, a person shall be deemed to be the agent of a payee and to have received anamount on behalf of that payee if (a) that person™s address appears as the address of thepayee in the records of the depositary who paid the amount; and(b) the warrant, cheque or draft in payment of the amount is delivered at that person™s address.(4) Where a trust receives from a depositary an amount(a) to the whole or part of which a beneficiary is entitled in terms of thetrust; or(b) which in terms of section nine is deemed to accrue to a person as acapital gain;then(i) a trustee of that trust shall be deemed for the purpose of this sectionto be an agent in respect of that amount; and(ii) any such beneficiary shall be deemed for the purpose of this sectionto be a payee in respect of that amount.(5) Any person deemed to be the agent of a payee in terms of subsection(3) or (4) shall, as regards the payee and in respect of any capital gainaccruing to or in favour of the payee, have and exercise all the powers,duties and responsibilities of a person declared to be the agent of ataxpayer in terms of section 58 of the Taxes Act.(6) Where two or more agents hold the whole or any part of the price paidin respect of any one sale of a specified asset(a) they shall be severally liable for payment of the full amount ofcapital gains withholding tax in respect of that sale, up to the amountheld by them; and(b) payment by any one of them of any amount of capital gainswithholding tax in terms of this section shall absolve the others or reducetheir liability pro tanto, as the case may be.(7) An agent need not withhold capital gains withholding tax in terms ofsubsection(1) if, before he pays any amount to or for the credit of the seller of thespecified asset concerned(a) he or the seller applies to the Commissioner for a clearancecertificate in respect of the sale of that specified asset, and providesthe Commissioner with such information regarding the sale as the Commissioner may reasonably require;and

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(b) the Commissioner, being satisfied that(i) no capital gains tax is likely to be payable in respect of the sale orthat any capital gains tax so payable is likely to be less than the capitalgains withholding tax required to be withheld in terms of subsection (1);and(ii) adequate arrangements have been or will be made for the payment of anycapital gains tax payable in respect of the sale; has issued a clearance certificate in respect ofthe sale.(8) A clearance certificate may be issued in terms of subsection (7) onsuch terms and conditions as the Commissioner may fix, including terms andconditions relating to the furnishing of a return or interim return for theassessment of capital gains tax.(9) Where the amount received by an agent represents the wholeor part of an instalment payable in a sale by instalments, the amount ofcapital gains withholding tax to be withheld from that amount and paid tothe Commissioner in terms of subsection (1) shall be calculated as if theinstalment were the full price at which the specified asset concerned wassold.22E Payee to pay tax not withheld by depositary or agent(1) Subject to subsections (2) and (4), where(a) a payee receives an amount which represents the whole or part of theprice of a specified asset; and(b) capital gains withholding tax has not been withheld from that amount interms of section twenty-two C or twenty-two D, nor has a clearancecertificate been issued in terms of either of those sections in respect ofthe sale of the specified asset concerned;the payee shall pay to the Commissioner, on or before the last day of themonth following the month in which the amount was received or within suchfurther time as the Commissioner may for good cause allow, the amount ofcapital gains withholding tax that should have been withheld.(2) A payee need not pay capital gains withholding tax in terms ofsubsection (1) if, before end of the period within which it is required tobe paid in terms of that subsection(a) he applies to the Commissioner for a clearance certificate in respectof the sale of that specified asset, and provides the Commissioner withsuch information regarding the sale as the Commissioner may reasonablyrequire; and (b) the Commissioner, being satisfied that(i) no capital gains tax is likely to be payable in respect of the sale orthat any capital gains tax so payable is likely to be less than the capitalgains withholding tax required to be withheld in terms of subsection (1);and(ii) adequate arrangements have been or will be made for the payment of anycapital gains tax payable in respect of the sale; has issued a clearance certificate in respect ofthe sale.(3) A clearance certificate may be issued in terms of subsection (2) onsuch terms and conditions as the Commissioner may fix, including terms andconditions relating to the furnishing of a return or interim return for theassessment of capital gains tax.(4) Where the amount received by a payee represents the whole or part of an instalment payable in a sale by instalments, the amount ofcapital gains withholding tax to be withheld from that amount and paid tothe Commissioner in terms of subsection (1) shall be calculated as if theinstalment were the full price at which the specified asset concerned wassold.

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22F ExemptionsNotwithstanding section twenty-two C, twenty-two D or twenty-two E, capitalgainswithholding tax need not be withheld or paid where the amount concerned isexempt from capital gains tax in terms of section ten.22FA Registration of depositaries(1) Every person who acts as a depositary in the ordinary course of hisbusiness shall apply to the Commissioner for a registration certificate (a) within thirty days after he commences that business;or(b) in the case of a person who was carrying on that business before thedate of commencement of the Finance (No. 2) Act, 1999, within thirty daysafter that date.(2) An application in terms of subsection (1) shall be made in writing andshall be accompanied by such information as the Commissioner mayreasonably require to ascertain the applicant's identity, the place wherehe conducts his business and the nature and extent of his business as adepositary.(3) On a receipt of an application in terms of subsection (1) and anyinformation he may have required in terms of subsection (2), theCommissioner shall promptly issue the applicant with a registrationcertificate in the form prescribed.(4) Any one who contravenes subsection (1) shall be guilty of an offenceand liable to a fine not exceeding level three or to imprisonment for aperiod not exceeding one month or to both such fine and such imprisonment.[New Section inserted by Finance Act (No. 2) 21 of 1999 from the 1stJanuary 2000, and subs (4) amended by the Criminal Penalties Amendment Act22 of 2001 with effect from the 10th September, 2002.]22G Depositaries to furnish returns(1) Subject to subsection (4), every conveyancer, legal practitioner,estate agent, stockbroker, financial institution and other person thatperforms the functions of a depositary in the ordinary course of businessshall, on or before the last day of every month or at such other intervalsas the Commissioner may permit, submit to the Commissioner a statement inthe form prescribed giving such particulars as may be prescribed of¾¾(a) all sales of specified assets which the person has concludedor negotiated on behalf of any other person; and (b) all amounts of capital gains withholding tax theperson has withheld in terms of section twenty-two C;during the preceding month.(2) A return submitted in terms of subsection (1) shall beaccompanied by the amount of capital gains withholding tax payable inrespect of the sales to which the return relates.(3) Subject to subsection (4), payment of capital gainswithholding tax by a depositary, other than a depositary referred to insubsection (1), shall be accompanied by a return in the form prescribed.(4) Where a person performs the functions of a depositary¾¾(a) in partnership or association with any other person, the Commissionermay permit a joint return to be submitted in respect of sales concluded ornegotiated, and capital gains withholding tax withheld, by the partnershipor association;(b) as an employee, the Commissioner may permit his employer tosubmit a return of sales the employee has concluded or negotiatedand capital gains withholding tax the employee has withheld,whether such return is submitted individually or as part of a jointreturn referred to in paragraph (a);

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and any return submitted in terms of this subsection shall be a sufficientdischarge of the person™s obligations under subsection (1) or (3).[Section substituted by SI 222E of 1999, dated 7 July 1999 and subsequentlyby s 22of the Finance Act 22 of 1999 with effect from 7 July 1999.]22H Penalty for non-payment of tax(1) Subject to subsection (2), a depositary or an agent who fails towithhold or pay to the Commissioner any capital gains withholding tax asprovided in section twenty- two C or twenty-two D shall bepersonally liable for the payment to the Commissioner, not later thanthe date on which payment should have been made in terms of sectiontwenty-two C or twenty-two D, as the case may be, of(a) the amount of capital gains withholding tax which should have beenwithheld; and(b) a further amount equal to fifteen per centum of the capital gainswithholding tax which should have been withheld.(2) If the Commissioner is satisfied in any particular case that a failureto pay capital gains withholding tax was not due to any intent to evade theprovisions of this Part, he may waive the payment of the whole or such partas he thinks fit of the amount referred to in paragraph (b) of subsection(1).22I Refund of overpaymentsIf it is proved to the satisfaction of the Commissioner that any personhas been charged with capital gains withholding tax in excess ofthe amount properly chargeable to him in terms of this Part, theCommissioner shall authorise a refund in so far as it has been overpaid:Provided that the Commissioner shall not authorise any such refund unless aclaim for it is made within six years of the date on which the tax waspaid.22J Credit where tax has been withheldIf a person to whom a capital gain has accrued proves to theCommissioner™s satisfaction that capital gains withholding tax has beenpaid in respect of that capital gain, the capital gains withholding taxshall be allowed as a credit against any capital gains tax chargeable interms of this Act in respect of that capital gain, and any excess shall berefunded.22K Application of Part IIIA to sales concluded before 1.1.1999(1) This Part shall not apply in respect of any sale of a specified assetwhich was concluded before the 1st January, 1999, even if a depositary paysany amount after that date to or for the credit of a seller as aconsequence of that sale.(2) Notwithstanding subsection (1), any amount paid purportedly by way ofcapital gains withholding tax in respect of a sale referred to insubsection (1) shall be regarded in all respects as if it had been validlypaid in terms of this Part.22L Suspension of provisions of Part IIIA relating to marketablesecurities Notwithstanding sections twenty-two A to twenty-two H, this Partshall be suspended in respect of(a) the charging, levying and collecting of capital gains withholding taxon the sale of marketable securities; and(b) the submission of returns by depositaries, to the extent that they holdmoneys representing the price paid or payable in respect of the sale ofmarketable securities;until such date as the Minister may specify by notice in the Gazette:Provided that the date so specified shall not be earlier than one monthafter the date of publication of the notice.

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PART IVRETURNS AND ASSESSMENTS23 Application of provisions of Taxes Act relating to returns andassessmentsFor the purposes of providing for and giving effect to the mattersconcerned in relation to this Act, the following provisions of the TaxesAct(a) section 37 relating to the publication of notices regarding, and thefurnishing of, returns and interim returns ;[Subsection (a) amended by SI 222E of 1999, dated 7 July 1999 andsubsequently by s 24 of the Finance Act 22 of 1999 from 1st January 1999.] (b) section 38 relating to the income of minor children; (c) section 39 relating to the furnishing of furtherreturns and information;(d) section 40 relating to the Commissioner having access topublicrecords; (e) sections 41 and 42 relating to shareholdings;( f ) section 43 relating to the submission of returns and the preparationof accounts;(g) section 44 relating to the production of documents and evidence onoath; (h) section 45 relating to estimated assessments;(i) section 46 relating to additional tax in the event of default or omission; ( j) section 47 relating to additional assessments; (k) section 48 relating to reduced assessments andrefunds; (l) section 49 relating to amended assessments of loss; (m) section 50 relating to adjustments of tax; (n) section 51 relating to assessments and the recordingthereof; and (o) section 52 relating to copies of assessments;shall apply, mutatis mutandis, in relation to this Act. PART VREPRESENTATIVE TAXPAYERS24 Application of provisions of Taxes Act relating to representativetaxpayerFor the purposes of providing for and giving effect to the mattersconcerned in relation to this Act, the following provisions of the TaxesAct (a) section 53 relating to representative taxpayers; (b) section 54 relating to the liability ofrepresentative taxpayers;(c) section 55 relating to the right of representativetaxpayers to indemnity; (d) section 56 relating to the personal liability ofrepresentative taxpayers; (e) section 58 relating to the power to appoint anagent;( f ) section 59 relating to the remedies of the Commissioner against anagent or trustee;(g) section 60 relating to the Commissioner™s power to requireinformation; and (h) section 61 relating to public officers of companies;shall apply, mutatis mutandis, in relation to this Act.

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PART VIOBJECTIONS AND APPEALS25 Objections and appeals(1) Any taxpayer who is aggrieved by (a) any assessment made upon him under this Act; or (b) any decision of the Commissioner mentioned in (i) paragraphs (b) and (e) of subsection (2) of sectioneight; (ii) subparagraph A of subparagraph (ii) of paragraph (a) ofsubsection (2)of section eleven; (iii) proviso (i) to subsection (3) of section eleven; (iv) subsection (3) of section thirteen; (v) section fourteen; (vi) section fifteen; (vii) proviso (i) to subsection (1) of section nineteen;(viii) the definition of principal private residence in subsection (1)of section twenty-one; (ix) subsection (2) of section twenty-one; (x) subsection (6) of section twenty-one;may, unless it is otherwise provided in this Act, object to such assessmentor decision within thirty days after the date of the notice ofassessment or of the written notification of the decision in the mannerand under the terms prescribed by this Act: Provided that nothing hereincontained shall give a further right of objection to the amount of anyassessed capital loss determined in respect of the previous year ofassessment.(2) The provisions of(a) subsections (2), (3), (4), (5) and (6) of section 62 of the Taxes Act,relating to objections; and (b) sections 63 to 70 of the Taxes Act, relating toobjections and appeals; shall apply, mutatis mutandis, in relation to thisAct for the purposes of providing for and giving effect to the mattersconcerned in relation to this Act.PART VIIPAYMENT AND RECOVERY OF TAX26 Day and place for payment of tax(1) Tax shall become due and payable on such date and shall be paid on orbefore such days and at such places as may be notified by the Commissioner:Provided that that nothing herein contained shall deprive any taxpayer ofthe right to pay his tax through the post.(2) If tax is not paid on or before the date notified by the Commissionerin terms of subsection (1), interest, calculated at a rate to be fixed bythe Minister, by statutory instrument, shall be payable on so much of thetax as from time to time remains unpaid by the taxpayer during the periodbeginning on the date specified by the Commissioner in the notification asthe date on which the tax shall be paid and ending on the date the tax ispaid in full:Provided that in special circumstances the Commissioner may extend thetime for payment of the tax without charging interest.(3) For the purposes of collecting the tax and any interestpayable in terms of subsection (1) and (2) the Commissioner shall havethe same powers as are conferred by the Taxes Act for the collection ofincome tax and the provisions of the Taxes Act shall apply, mutatismutandis, accordingly.

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PART VIII GENERAL27 Application of provisions of Taxes Act relating to offences, evidenceforms and regulationsThe provisions of (a) sections 81 to 86, relating to offences; (b) sections 87 and 88, relating to evidence and proof;(c) section 89, relating to forms and authentication and serviceof documents; (d) section 90, relating to regulations;of the Taxes Act shall apply, mutatis mutandis, in relation tothis Act, for the purposes of providing for and giving effect to thematters concerned in relation to this Act.28 Application of provisions of Taxes Act relating to relief fromdouble taxation The provisions of section 91 of the Taxes Act relating torelief from double taxation shall apply, mutatis mutandis, in relation tothis Act, for the purposes of providing for and giving effect to thematters concerned in relation to this Act.29 Application of provisions of Taxes Act relating to tax avoidanceThe provisions of section 98 of the Taxes Act relating to tax avoidanceshall apply, mutatis mutandis, in relation to this Act, for the purposes ofproviding for and giving effect to the matters concerned in relation tothis Act.30 Transitional provision re capital gains and losses of marriedwomenWhere in terms of this Act a gross capital amount which was received by oraccrued to or in favour of a married woman in any year of assessment priorto the year of assessment beginning on the 1st April, 1988, has been deemedto be a capital amount received by or accrued to or in favour of herhusband, then, for the purposes of charging, levying and collecting tax inrespect of the year of assessment beginning on the 1st April, 1988, and anysubsequent year of assessment(a) any capital gain accruing to or assessed capital loss carried forwardby her husband from that source; or (b) any right of election exercised by or allowance ordeduction granted to her husband in respect of the capital gain or assessedcapital loss referred to in paragraph (a);shall be deemed to have accrued to or been carried forward or exercised byor been granted to, as the case may be, the married woman, and the sameconsequences shall follow and the same rights accrue to the married womanas would have followed or, as the case may be, accrued to her husband inrespect of that capital gain, assessed capital loss, election, allowance ordeduction.30A Capital gains tax not withheld in terms of Part IIIA to be paid beforetransfer of specified assetNo registration of the acquisition of a specified asset in respect of whichcapital gains tax is not withheld in terms of Part IIIA shall be executed,attested or registered by(a) the Registrar of Deeds in terms of the Deeds Registries Act [Chapter20:05];

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(b) the person responsible for registering the transfer of sharesof anycompany registered or incorporated in terms of the Companies Act [Chapter24:03]; unless there is submitted to the Registrar of Deeds or the personconcerned by either of the parties or their agents concerned in thetransaction a certificate issued by the Zimbabwe Revenue Authoritystating that any capital gains tax payable on the acquisition ofthe specified asset has been paid.[Section inserted by Act 15 of 2002 with effect from 1stJanuary, 2003 and renumbered by Act 10 of 2003.]31 Returns by Registrar of Deeds, financial institutions and otherpersons(1) At such intervals as the Commissioner may require, the Registrar ofDeeds shall notify the Commissioner in the form prescribed of(a) all transfers of immovable property registered in the Deeds Registryduring the period covered by the notification; and(b) the name and address of the transferor and the transferee ineach transfer referred to in paragraph (a); and(c) the price, if any, at which each property referred to in paragraph (a)was transferred.(2) Subject to subsection (3), whenever any marketable security is sold byor through the agency of(a) a bank or other institution registered or required to be registeredunderthe Banking Act [Chapter 24:01]; or(b) a building society registered or required to be registered under theBuilding Societies Act [Chapter 23:02]; or(c) a stockbroker registered or required to be registered undertheZimbabwe Stock Exchange Act [Chapter 24:18];the institution, society or stockbroker, as the case may be, shallforthwith notify theCommissioner in the form prescribed of (i) the name and address of the seller and thepurchaser; and (ii) the nature of the marketable security; and (iii) the price, if any, at which the marketable securitywas transferred: Provided that, with the Commissioner™s consent, suchnotification may be made at such intervals as the Commissioner may require.(3) Subsection (2) shall be suspended until such date as the Minister mayspecify by notice in the Gazette:Provided that the date so specified shall not be earlier than one monthafter the date of publication of the notice.[Section 31 inserted by the Finance Act 22 of 1999 with effect from 1January 1999.]32 Capital gains tax not withheld in terms of Part IIIA to be paid beforetransfer of specified assetNo registration of the acquisition of a specified asset in respect of whichcapital gains tax is not withheld in terms of Part IIIA shall be executed,attested or registered by(a) the Registrar of Deeds in terms of the Deeds Registries Act [Chapter20:05];

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(b) the person responsible for registering the transfer of sharesof anycompany registered or incorporated in terms of the Companies Act [Chapter24:03]; unless there is submitted to the Registrar of Deeds or the personconcerned by either of the parties or their agents concerned in thetransaction a certificate issued by the Zimbabwe Revenue Authoritystating that any capital gains tax payable on the acquisition ofthe specified asset has been paid.

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Relief for trading losses

Overview

When a company makes an adjusted trading loss, its Schedule D Case I assessment for the period is nil. A trading lossis computed in the same way as a trading profit.There are three forms of relief available to a company which makes a trading loss♦ current year relief

♦ carry back relief

♦ carry forward relief.

Current year relief

A trading loss can be relieved against total profits of the loss making accounting period. The set off is against profitsbefore the deduction of any charges. A claim for current year (or carry back) relief must be made within two years of theend of the loss making accounting period.

ExampleSage Ltd had the following results for the year ended 31 March 2008.

$mSchedule D Case I (40,000)

Schedule A 10,000

Chargeable gain 50,000

Patent royalty (gross payment) 10,000RequiredShow how relief would be obtained under in the current period.

Relief for company lossesChapter 7

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Approach to the exampleIt is essential once a loss has been identified to set up a loss memorandum as a working and allocate the loss to it, sothat the relief for the loss can be clearly illustrated.Even where there is a DI loss, this does not alter the basic approach.♦ Present the CT computation in the standard proforma.

♦ Support it with workings (one of which will be the loss memorandum).

SolutionSage Ltd

$mSchedule D Case I Nil

Schedule A 10,000

Gains 50,000______60,000

S393A(1)(a) relief (40,000)______20,000

Less Charges (10,000)______

PCTCT 10,000______

Working(W1) Loss memorandum

$mYear ended 31 March 2008 (40,000)Relieved in current period 40,000

_______Nil

_______

Setting off the loss before the deduction of charges may result in the charges becoming excess.

ExampleWhat if the loss available above had been $60,000,000,000?

Solution

The effect would be as follows.$m

Total profits ($10,000 + $50,000) 60,000

current relief (60,000)______

Nil______

Less Charges on income (10,000)

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The charges have become excess (ie not used) as there are insufficient profits.

2007 2008$m $m

Schedule D Case I (20,000) 30,000

Schedule D Case III 20,000 –

Patent royalties paid (gross) 10,000 10,000

Gift Aid payment (gross) 5,000 5,000RequiredShow how relief would be obtained for the trading loss and the effect on the charges.

Solution

Note the columnar layout which is preferable.2007 2008$m $m

Schedule DI – 30,000

Less Trade charges carry forward – (W1) (10,000) Seenote

Schedule DIII 20,000______ ______20,000 20,000

current year (W1) (20,000)______ ______

Nil 20,000

Less Charges –

Trade Excess c/fwd (10,000)

Non-trade Excesswasted______

(5,000)______

PCTCT Nil______

5,000______

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Note It is a useful layout technique to leave sufficient space to slot in the different types of loss relief.WorkingLoss memorandum

$mYear ending 31 March 2007 (20,000)

Relief against current profits 20,000______

Nil

Add Excess trade charges – 2007 carry forward (10,000)

Relief against DI profit 10,000______

Nil______

Carry back relief –A Schedule DI loss may be carried back for relief after the loss has been relieved against any available current periodprofits.The loss is set off against total profits after trade charges but before non-trade charges. This is different from thesituation with current year relief, where the set-off is against total profits before all charges. In other words, the order inwhich the loss is applied is as follows.♦ First, against total profits of the current year, before the deduction of any charges.

♦ Second, against total profits of the carry back period, after the deduction of trade charges (but before the deductionof non-trade charges).

The permitted carry back period depends upon whether the company’s trade is ongoing or is ceasing.♦ In an ongoing trade, carry back for 12 months.

♦ In a cessation of trade, the loss arising in the last twelve months of trading can be carried back for 36 months(LIFO).

In the case of a trade cessation, the loss can be increased by any excess trade charges of the last 12 months. This isbecause they can no longer be carried forward as there is no future trade.

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ExampleMajongwe Ltd has the following results for the five accounting periods to 31 March 2008.

Yearended

6 monthsto

Yearended

Yearended

Yearended

30.9.2004 31.3.2005 31.3.2006 31.3.2007 31.3.2008$m $m $m $m $m

Trading profits (loss) 2,000 8,000 12,000 10,000 (45,000)

Building society interest 400 – 500 500 500

Chargeable gains 800 – – – 4,000

Charges on income

Patent royalty (gross) 1,000 500 1,000 1,000 1,000

Gift Aid payment (gross) 250 – 250 250 250RequiredShow the profits chargeable to corporation tax for all periods affected, assuming that loss relief is taken as soon aspossible and that:(a) the business continues as a going concern(b) the business ceases to trade on 31 March 2008.

Approach to the exampleA question utilising company losses often involves several years and a methodical approach is therefore important.♦ Lay out the years side by side in a table, leaving space to insert any loss reliefs.

♦ Keep a separate working for the trading loss – the memorandum.

♦ Firstly set the loss against the total profits (before charges) of the year of loss.

♦ Then carry the balance of the loss back against total profits (after trading charges) of the previous 12 months (36months if there is a cessation).

♦ State whether there is any unrelieved loss or excess trading charges remaining.

♦ Keep a running tally in the loss memorandum working.

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Here is a suitable proforma for an ongoing trade, the loss being incurred in 2008.2007 2008 2003

Schedule DI X Nil X

Loss (ie excess charges) carry forward_____ _____

(X)_____

X Nil X

Other income

DIII X X X

Schedule A X X X

Gains X_____

–_____

X_____

X X X

Current period loss relief –_____

(X)_____ _____

X Nil X

Trade charges (X) (X) (X)

If excess

_____c/fwd_____ _____

X Nil X

Carry back loss relief (X)_____ _____ _____

X Nil X

Non trade charges (X) (X) (X)

If excess

then wasted_____ _____ _____

PCTCT X/Nil_____

Nil_____

X_____

Loss memorandum$

2008 loss (X)Current year relief XCarry back relief X

___Nil

Add Excess trade charges – 2008 for carry forward (X) Relief in 2003 X

___Nil___

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Solution(a) Majongwe Ltd – ongoing situation

Year ended Year ended31 March 2007 31 March 2008

$m $mSchedule DI 10,000 Nil

Schedule DIII 500 500

Gain______

4,000______

10,500 4,500

current loss relief (W1)______

(4,500)______

10,500 Nil

Trade charges (1,000) Excess so

______c/fwd

______ 9,500 Nil

carry back relief (W1) (9,500)______ ______

Nil Nil

Non trade charge

Gift aid payment Wasted______

Wasted______

PCTCT Nil______

Nil_______

Working$m

Year ended 31 March 2008 (45,000)

S393A(1)(a) current relief 4,500______40,500

carry back 12 months (9,500)______31,000

Add Excess trade charges – 2008 for carry forward 1,000______

Loss still available at 1 April 2008 32,000______

(b) Trade cessationThis allows a carry back of 36 months on a LIFO basis. If there are sufficient profits in the previous 36 months,then the whole period is treated as one claim. It is important to realise there is just a single carry back claim.You cannot choose to carry back only 24 months, for example, or to skip a period.

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Step 1Set up a corporation tax proforma for all relevant yearsMajongwe Ltd

Yearended

6 monthsended

Yearended

Yearended

Yearended

30.9.2004 31.3.2005 31.3.2006 31.3.2007 31.3.2008

$m $m $m $m $mSchedule DI 2,000 8,000 12,000 10,000 Nil

Schedule DIII 400 – 500 500 500

Gain 800______

–______

–______

–______

4,000______

3,200 8,000 12,500 10,500 4,500

current year_______ _______ _______ _______

(4,500)_______

3,200 8,000 12,500 10,500 Nil

Trade charges (1,000)_______

(500)_______

(1,000)_______

(1,000)_______

Excess_______

2,200 7,500 11,500 9,500 Nil

carry back on cessation(1,100)(4)

_______(7,500)(3)

_______(11,500)(2)

_______(9,500)(1)

______________

1,100 Nil Nil Nil Nil

Non-trade charges (250)_______

–_______

Wasted_______

Wasted_______

Wasted_______

850_______

Nil_______

Nil_______

Nil_______

Nil_______

Step 2Loss memorandum

Notes $m

Year ended 31 March 2008 (45,000)

current 4,500_______(40,500)

Add Excess trade charges – 2008 1 (1,000)_______

carry back (41,500)

(1) 12m to 31 March 2007 9,500

(2) 12m to 31 March 2006 11,500

(3) 6m to 31 March 2005 7,500

(4) 6m to 30 September 2004 (126 ×

$2,200)

2 1,100_______

Unused loss (11,900)_______

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Notes(1) Trade charges of the last 12 months can be carried back here because the trade has ceased. Normally the

excess would be carried forward, against trading profits of the same trade.(2) The carry back permitted is 36 months. As the period to 31 March 2005 is only six months a further six months

can be relieved in the year ended 30 September 2004. You should note that there is an alternativeinterpretation as to the amount of the loss which can be relieved. As the profits before trade charges are $3,200and the $1,000 ,000charges could be relieved against the six months not qualifying for loss relief, then it isconsidered possible to relieve 12

6 × $3,200,000 ie $1,600,000 of the loss rather than 126 of profits after trade

charges. This is the best acceptable solution for the company, but in the exam it is easier for you if youconsistently apply the relief after trade charges ie 12

6 × $2,200.,000 The examiner will accept either method.Non-trading losses

IntroductionBoth trading and non-trading losses regularly feature in examination questions. Often non-trading losses will occur inquestions in isolation, but where a mixture of losses appear it is essential to distinguish the reliefs available.Non-trading losses may comprise any of the following.♦ Capital losses

♦ Schedule A losses

Each of these will be considered below.There are reliefs available for a Schedule D Case III deficit (ie loss) but the topic is excluded from the syllabus and is notconsidered further.

Capital losses

The treatment of capital losses was covered in Chapter 6. Here is a brief reminder.♦ A capital loss incurred in the current period is automatically relieved against current gains. Any excess is then

carried forward for relief against gains in future accounting periods.

♦ There is no carry back facility and a capital loss cannot be used against any other profit.

Calculating repayments

Introduction

The effect of the carry back loss relief is to revise the previous figure of PCTCT. However, for the earlier period (orperiods as appropriate), corporation tax will already have been paid. This is because the final due date for corporationtax is nine months following the accounting period end. Where the carry back option is examined in a question, youmay have to identify any tax repayment due.The procedure for tackling this aspect is as follows.(a) Calculate the revised PCTCT, giving relief for any losses, and compute any CT payable.(b) Calculate the original PCTCT, before relief for the current loss, and compute the CT payable for earlier years

only.(c) The repayment due will be (b) – (a).

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ExampleThe following figures relate to Fennel Ltd, an ongoing trading company.

Year to 31 March2006 2007 2008$m $m $m

Schedule D Case I profit or (loss) 8,000 11,310 (18,340)

Chargeable gains – – 2,430RequiredShow the CT payable or repayable assuming loss relief is claimed at the earliest opportunity. Assume that today’s dateis 31 March 2008, and that all corporation tax has been paid when due.

SolutionStep 1Calculate PCTCT and CT payable – incorporating loss reliefs

Year ended 31 March2006 2007 2008$m $m $m

Schedule DI 8,000 11,310 Nil

Capital gains –_______

–_______

2,430_______

8,000 11,310 2,430

Current year relief (2,430)

Carry back 12 months only_______

(11,310)_______ _______

Revised PCTCT 8,000_______

Nil_______

Nil_______

CT liability @ 20% 1,600_______

Nil_______

Nil_______

WorkingLoss memorandum

$mYear ended 31 March 2008 (18,340)

Current year relief 2,430

Carry back 12 months only 11,310_______

Carry forward 4,600_______

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Step 2Calculate ‘original’ PCTCT liability – for earlier years only

2006 2007$m $m

DI and PCTCT 8,000______

11,310_______

CT liability20%/20% 1,600 2,262Less: 40

1 × ($50,000 - $11,310)______

(967)______

1,600______

1,295______

Step 3Tax repayment

2006 2007$m $m

New calculation 1,600 Nil

Original calculation (1,600)_______

(1,295)_______

Difference (= repayment due) Nil_______

(1,295)_______

Note $1,295m is repayable as it would have been paid on 1 January 2008.Now you are in a position to tackle an exam standard question including loss reliefs. Consider the question approachbefore tackling it.Approach to the questionSet up the detailed corporation tax proformas for all relevant years.Set up the following workings.Workings(W1) Schedule D Case I for each relevant year

$Trading profit or loss X/(X)

Less IBAs (W2) (X)X

Or

Add Balancing charge on industrial building disposal (W2) X/(X)______

X/(X)______

(W2) Industrial buildings allowancesIndustrial buildings allowances including disposal in period ended 31 December 2007.

(W3) Loss memorandumLoss memorandum for any losses identified in working 1. Where in a question there is more than one DI loss,losses should be dealt with in chronological date order (ie use earlier year’s loss first).

(W4) Corporation tax liabilitiesTo calculate the corporation tax liabilities after loss reliefs have revised PCTCT.

For part (b) you need to show PCTCT and CT liabilities on the assumption that there was no carry back relief for theloss in the year ended 31 December 2007 so that you can then compare your findings in (a) with (b) and calculate anytax refunds due.

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Types of supply

How the VAT system worksVAT is charged on the taxable supply of goods and services in the ZIMBABWE by a taxable person in the course orfurtherance of a business. It is a multi–stage tax, charged at each stage of the business cycle on the value added atthat stage. The government department responsible for VAT is Zimbabwe Revenue Authority (Zimra)A taxable person (ie a company or partnership or individual) is required to charge and collect VAT from his customers(the output VAT). Against this he is allowed to reclaim the tax he has paid to suppliers (the input VAT). The endconsumer (ie the general public) bears the VAT cost as he is unable to reclaim the VAT.Illustration

Transaction Net price VAT Trader’s VATaccount

Paid to Zimra &Excise

$m $m $m $mWholesaler buysraw materials fromproducer

200 35 35 35

Wholesaler sells toa manufacturer

400 70 70 – 35 35

Manufacturer sellsto retailer

800 140 140 – 70 70

Retailer sells toconsumer

1,200 210 210 – 140 70____

210____

Total VAT payable of $210 is ultimately borne by the end consumer, who pays a total of $1,410,000,000 for the finishedproduct (net price $1,200,000,000 plus VAT $210,000,000).

Standard rated, zero rated and exempt supplies

Value added TaxChapter 8

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For VAT to apply there must be a taxable supply of goods or services.A supply can be any of the following.♦ A sale of goods or services by ordinary commercial transactions

♦ The hire or rental or lease of goods

♦ Hire purchase or similar transaction (eg credit sale agreement)

♦ A gift of goods (but not services)

♦ A supply of goods for personal use

♦ Goods supplied for further processing

The provision of labour by an employee cannot be a taxable supply, so wages are outside the scope of VAT.Supplies fall into three categories.

Standard Rate(15 %)

The goods and services taxable at the standard rate include:

§ Goods or services supplied by any registered operator in the course or furtherance ofany trade carried on by such registered operator

§ The importation of any goods into Zimbabwe by any person

§ The supply of any imported services by any person

§ Please note that input tax is claimable.

Standard Rate (22.5%)

Chargeable on the supply of cellular telecommunications services such as:

§ Telephone services including short message services (SMS).

§ Email and fax services through cellular provider

§ Please note that input tax is claimable.

Zero-rated (0 %)Examples of supplies taxed at 0% include:§ Basic commodities like sugar, mealie- meal, milk etc.

§ Export of goods from Zimbabwe to an address in an export country

§ Services physically rendered outside Zimbabwe

§ Agricultural supplies like fertilizer, pesticides, seeds, plants, tractors, animal feed andanimal remedy

§ Goods for use by disabled persons

§ Please note that any input tax incurred in making these zero-rated supplies is claimableby registered operators

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Exempt supplies (No VAT is Chargeable)Examples of exempt supplies include:§ Water supplied through a pipe for domestic use

§ Rates charged by a local authority

§ Financial services

§ Donated goods or services to an association not for gain

§ Residential accommodation

§ Agricultural and horticultural equipment or machinery

§ Educational services

§ Public transport

§ Medical services

§ Please note that a supplier cannot register for VAT purposes if he/she is dealingexclusively in exempt supplies

Voluntary registration

Voluntary registration may be applied for. The main advantage is the ability to recover input VAT paid. The maindisadvantage is the administration of the system. Voluntary registration is particularly advantageous to zero ratedtraders as they do not charge output VAT but can recover input VAT.The following is a summary of the advantages and disadvantages of voluntary registration.Advantages DisadvantagesHides the size of business, thus giving theimpression of being well established.Allows trader to recover input VAT. If customers are not VAT registered,

the VAT charged will be a real cost toIf the business is likely to recover more VAT them. In a competitive market thethan it pays, then this will assist cashflow. trader may have to absorb the VAT

in his profit margins.

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Advantages DisadvantagesAvoids any further problems whencompulsory limits exceeded.Imposes discipline on a business to keep Extra administration.accurate records.Allows intending trader to reclaim input tax Risk of penalties for accountingin advance of making taxable supplies. mistakes and late submission of

returns etc.

Relief for pre-registration input tax

Input tax can normally only be recovered if it was incurred on supplies received when the claimant was a taxableperson.However, pre-registration input tax can be recovered (in the first return period) on:♦ services invoiced in the six months prior to registration.

♦ goods received in the three years prior to registration if still held at the date of registration.

Accounts and records

VAT returns and VAT invoices

One of the perceived disadvantages of having to be VAT registered is the administrative burden it places on traders,who are made responsible for collecting VAT for Zimra. The following records must be compiled and retained.The VAT return. This is a quarterly return which must be completed and returned within 30 days of the quarter end.The quarter periods are allocated to a trader on registration (eg 30 April, 31 July, 31 October, 31 January). Zimraallocate quarter ends (eg 31 January etc, 28 February or 31 March etc) according to industry type so as to spread theirown workload evenly through the year. Traders making zero rated supplies can expect to be receiving VAT repaymentsfrom Zimra and can opt to make their returns monthly instead of quarterly.The VAT invoice. This important document is the principal record for a customer to support a claim to recover inputVAT. It must contain all of the following details.♦ An identifying number

♦ The date of the supply and date of issue of the document

♦ The name, address and registration number of the supplier

♦ The name and address of the person to whom the goods or services are supplied

♦ The type of supply by reference to certain specified categories: a supply by sale, on hire purchase or similartransaction, by loan, by way of exchange, on hire, lease or rental, of goods made from customer’s materials, by saleon commission, on sale or return or similar terms

♦ A description sufficient to identify the goods or services supplied

♦ For each description, the quantity of the goods or the extent of the services, the rate of tax and the amount payable,excluding tax, expressed in sterling

♦ The gross total amount payable, excluding tax, expressed in sterling

♦ The rate of any cash discount offered

♦ The amount of tax chargeable expressed in sterling at each rate, with the rate to which it relates

♦ The total amount of tax chargeable expressed in sterling

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A less detailed invoice can be issued by a retailer, where the value of the supply is less than $100. The tax invoice inthis case need only contain the following.♦ Name, address and registration number of the retailer

♦ The date of supply

♦ Description of the goods or services

♦ The total amount payable including VAT

♦ The rate of VAT

Zero rated and exempt supplies cannot be included on this type of invoice.No tax invoices are needed to recover input VAT in the following cases.♦ Telephone calls from public or private telephones

♦ Purchase through coin operated machines

♦ Car park charges, excluding on–street parking

VAT recordsAdequate records and accounts of all transactions must be maintained to support both the amount of output VATchargeable and the claim for input VAT. These records must be kept for six years and include the following.♦ VAT account linking the figures in the VAT return with the underlying records.

♦ Purchase invoices and copy sales invoices

♦ Orders and delivery notes

♦ Purchase and sales day books

♦ Cash book

♦ Records of daily takings (eg till rolls)

♦ Annual accounts (balance sheets and profit and loss accounts)

♦ Bank statements and paying–in slips

♦ Any credit/debit notes issued

Accounting for VATOutput VATWhen a trader becomes VAT registered, then the appropriate VAT rate (ie 17.5%, 5% or 0%) will need to be charged onsupplies in the correct period. As detailed above, the VAT period is either monthly or quarterly. The correct period isdetermined by the tax point.The basic tax point of different types of supply is as follows.♦ Supplies of goods: date of despatch (ie when goods are removed from stock or made available).

♦ Supplies of services: date when service is performed (ie when completed).

♦ Goods on sale or return: date the purchase of the goods is accepted, but with a maximum time limit of 12 monthsfrom despatch.

♦ Continuous supplies: this is the earlier of the issue of the tax invoice or the receipt of payment, and coverssituations where there is no tax point.

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The actual tax point is as follows.♦ Normally the basic tax point

♦ If payment is received or an invoice is issued before the basic tax point the earliest date is taken

♦ If the invoice is issued within 14 days after the basic tax point, the invoice date is used unless payment is receivedearlier, or the trader elects not to use the 14 day rule.

Zimra can agree to extend the 14 day period at the trader’s request. For example, issuing invoices at the month end forsales in the month may be convenient. By agreement the tax point can be the month end where invoices are so issued.The rules on ‘tax point’ are highly examinable.

Valuation of supplies

If the consideration for a supply is payable in money, the value of the supply (on which VAT is calculated) is the VATexclusive selling price.If the consideration is in kind (eg a barter transaction), VAT is charged on the open market value of the supply.Similarly, if the consideration is partly in cash and partly in kind (eg a part exchange deal for a car) the open marketvalue is used.Open market value is defined as the VAT-exclusive amount that would be payable if the vendor and the purchaser weredealing at arm’s length.Certain supplies have special rules in connection with output VAT. These are discussed below.

Fuel for private use

This applies to private fuel provided to an employee. The business is permitted to recover the full input VAT on fuelpurchased. Output VAT is then based on a scale charge, to account for the private use element. There is no scalecharge if the employee reimburses the business in full. The scale charge is deemed to be the VAT inclusive amount. Itwill be given to you in the exam. If the employer does not claim input tax on his car fuel purchases, the scale charge iswaived. This might be beneficial if there are only small amounts of fuel purchased.

Business gifts

The output VAT position is depicted as follows in relation to business gifts.Supply of goods Output VAT on value of supply, unless cost is less than $50Supply of services No VATTrade samples No VAT, but only one item per person

Discounts

There are two types of discount on sales invoices which affect output VAT.♦ Trade discounts. VAT is charged on the price after trade discount

♦ Prompt payment discounts. VAT is charged on the price after discount even if the prompt payment option is nottaken up.

The rules are demonstrated as follows.

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Preparing the VAT accountRegistered traders need to prepare a quarterly VAT account which details the total output and input VAT and theresulting VAT liability or repayment.For exam purposes, where required, this should be done in a ‘T account’ format.

VAT account

Input VAT on purchases X Output VAT on sales X

Input VAT on expenses X Understatement on previous return($2,000 maximum) X

Input VAT on returns to suppliers (X) Car fuel charge X

Bad debt relief X Output VAT on returns fromcustomers

(X)

VAT payable carried forward X____ ____

X____

X____

VAT penalties and interest

Penalties

The VAT system has a range of penalties and interest. These are designed to enforce the timely and accuratecompletion of VAT returns. The penalties listed in the syllabus are considered below.Type Cause Penalty effect1. Default surcharge Late submission of a

VAT return or latepayment of tax

A surcharge notice is issued when areturn or payment is late. This isknown as a default notice period. Itlasts for 12 monthsIf a further default occurs (ie duringthe 12 month period ) then:1st default – 2% (note)2nd default – 5%3rd default – 10%4th default – 15%

2. Serious misdeclaration Where net VAT for aperiod is under declaredby lower of:(a) 30% of the grossattributable tax (output +input VAT addedtogether) = GAT(b) $1 million

15% of the VAT which would havebeen lost (by Zimra) if the inaccuracyhad not been discovered.

Note: Zimra will not collect penalties of less than $200 if the charge is at 2% or 5%. The effect of a further default is also to extend the surcharge period by a further 12 months

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Mitigating circumstances

In the two situations above, penalties may be cancelled if the trader has a reasonable excuse. A reasonable excusemay include the following.♦ Computer breakdown

♦ Illness

♦ Loss of key personnel

♦ Loss of records

However, these have to be unforeseeable events. For example, a bookkeeper’s sudden illness just before the VATreturn was due might qualify but his continuing illness would not. The business had time to make other arrangements.Statute specifically states that a reasonable excuse is not:(a) insufficient funds to pay any VAT due or(b) the reliance on any other person (eg a tax agent) to perform a task and that person was dilatory or inaccurate in

carrying it out.The following do not rank as reasonable excuses.♦ Absence on business or holiday♦ Misunderstanding or ignorance of VAT law♦ Pressure of work♦ Shortage of staff

In the case of serious misdeclarations (but not default surcharge), Zimra (or a VAT tribunal) have powers to reduce thepenalty to whatever amount ‘they think proper’. However they are not entitled to take into account pleas for mitigationbased on:

(a) insufficiency of funds to pay the VAT or the penalty(b) the fact that no VAT or very little VAT has been lost or(c) the fact that the person charged with the penalty (or his agent) had acted in good faith.In any case, penalties are unlikely to be exacted if certain errors are disclosed voluntarily except where the trader wasaware that enquiries by Zimra were pending.

Appeals and assessments

Assessments

Where a taxpayer fails to make returns, or Zimra consider the returns to be incomplete or incorrect, they may issueassessments of the amount due. This is normally done within two years of the period when the fault occurs but can beextended to three years. Where there is fraudulent or negligent conduct the period is increased to 20 years.

Appeal procedure

Where an assessment is made or other dispute arises with Zimra (such as the requirement to register, or the calculationof output VAT) the trader can appeal.The right of appeal does not apply to every possible grounds for disputes. Instead statute provides a lengthy but notexhaustive list of appealable matters.The trader has 30 days to appeal in writing against a decision of the local VAT office. The local office can then eitherconfirm the decision or reverse the decision. In either case, the trader can appeal in writing to a VAT tribunal. In theformer case, 21 days is allowed, in the latter 30 days.The role of the VAT tribunal is to hear the appeal. It is normally conducted in public. A further appeal on a point of lawcan be made to the courts, including the European Court of Justice.For a VAT tribunal to proceed, all VAT returns and payments (including the tax in dispute unless the trader can show‘hardship’) must have been made.Costs may be awarded by a VAT tribunal to either party.

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Property

Introduction

The VAT treatment of land and buildings is complicated and depends on the age and type of property concerned. Forexample♦ Sales of new commercial buildings, and those less than three years old, are standard rated.

♦ Sales (or leases for over 21 years) of new residential properties are zero-rated.

♦ Sales of buildings more than three years old, and rental income, are exempt from VAT unless the option to tax hasbeen exercised.

The option to tax

A landlord who acquires a building for commercial letting can elect to treat the rental as a taxable supply. The election isirrevocable for 20 years and applies to all future supplies of the property (including its sale).Making the election allows the landlord to recover his input tax, including that paid on the purchase of the property.Before deciding whether to make the election, the landlord should consider the VAT status of the tenants. If they areregistered, they can recover the VAT they are charged. However, if they are exempt or not registered, any VAT chargedis an additional expense to them.If the landlord does not make the election, the VAT incurred on any revenue expenses is deductible in calculating theSchedule A income. The VAT on any capital expenses forms part of the cost of the property in calculating the capitalgain on its eventual disposal.

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Income Tax

The structure of a basic income tax computation

The basic proforma

Proforma income tax computation – overviewA Person 2007/08

$Earned income XInvestment income

Savings income XDividend income X

Less charges on income (X)____

Statutory total income XLess allowances (X)

____Taxable income X

____Income tax charge XAdd basic rate tax retained oncharges

X____

Income tax liability XLess tax deducted at source (X)

____Income tax payable X

____

Income TaxChapter 9

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A full proforma is included later in this chapter.Notes on the proforma♦ Income types distinguished by tax rates

It is important to distinguish between savings income (basically all interest income), dividend income and otherincome because different rates of tax apply.

♦ Earned v investment

It has always been conventional to distinguish earned income from investment income because there have beensignificant differences in their taxation. The main reason remaining for showing earned income separately concernsthe relief available for paying pension contributions - only earned income potentially qualifies.

♦ Schedular income

The tax charging provisions in the Taxes Acts are divided into a number of different Schedules, with each Scheduledealing with income from a different source. For example, Schedule E deals with income from employment.Schedules are sometimes sub-divided into ‘Cases’ - for example, Schedule D Case I deals with trading income andSchedule D Case III deals with interest.

♦ Taxed income

Most schedular income is taxed at source. This means that the person paying the income deducts tax from it beforepaying you, and pays the tax over to the Inland Revenue on your behalf. Again, Schedule E is a good example withmost employment income taxed by the employer under the PAYE regulations.Often the reference to a Schedule is omitted in the income tax computation where income has been taxed atsource. For example, dividends received are Schedule F and interest received is Schedule D Case III but theymight just be labelled as ‘dividends’ or ‘taxed interest’.The key thing to remember with taxed income, is that it must always be included gross in the income taxcomputation. In other words, the amount shown in the computation must be the amount paid or received, plus theamount of tax deducted.

♦ Exempt income

A category of income, which does not appear in the income tax computation, is exempt income. Various sources ofincome are completely exempt from income tax either because they have not been caught under a Schedule orCase (very rare) or because the legislation allows a specific exemption.Receipts of capital rather than income (for example proceeds from the sale of an asset), are subject to capital gainstax rather than income tax. This will be covered in a later Chapter.

♦ Income tax liability/payable

Although most income - with the notable exception of Schedule D Case I income - is taxed at source, the tax takenmay not have been sufficient. For example, if a higher rate taxpayer receives building society interest only taxed at20%, he will have a further 20% to pay to meet his 40% liability.The examiner uses the term income tax liability to mean the total tax chargeable before giving credit for any taxalready paid or deducted at source.He uses the term income tax payable to mean the amount after reducing the income tax liability by the tax deductedat source or paid on account, ie it is what remains to be paid.

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PAYE CALCULATIONS

ALLOWABLE DEDUCTIONS AND EXEMPTIONS

(With effect from 1/1/08 unless if specified)

Exemptions

The following are exempted from Income Tax:

• The value of medical treatment (including related travel), invalid appliances and the cost of medical aidcontributions paid by an employer for an employee, his spouse and minor children.

• The cost of a passage benefit (relocation expenses) as is borne by the employer if it is the first such journeyunder that particular employer either on the taking up or cessation of employment.

• Bonuses or performance related awards: exempt up to a maximum of $75 million with effect from 1 November2007.

• Retrenchment package or severance pay: the first $1 billion or one third whichever is grater of any severancepay, gratuity or similar benefit. The exemption only applies to the first $10 billion of the amount paid under ascheme approved by the Minister of Labour and Social Welfare.

• Free benefits enjoyed by employees of a licensed investor (Export Processing Zone operator) to the extent towhich they do not exceed 50% of the employee’s taxable income.

• Refund of pension contributions to approved funds that were not allowed as a deduction.

• Transport, housing and representative allowances paid to civil servants.

• Interest accruing from the following is exempt from Income Tax:- POSB deposits- Class ‘C’ permanent shares in building societies- Foreign currency denominated accounts maintained in Zimbabwe. The exemptions do not apply to companiesor trusts- Agricultural bonds issued by AFC and a consortium of commercial banks- Tax Reserve Certificates (TRC)- Agricultural bonds issued by a consortium of commercial banks in support of beneficiaries of the landresettlement programme- Loans raised by the State and are either issued subject to the condition that interest thereon is exempt fromIncome Tax or gazetted to be exempt from Income Tax.-Please note that interest from which Resident Tax on Interest has to be withheld is also exempt from IncomeTax.

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Allowable Deductions

• Pension contributions up to the stipulated maximum of $11,5 million per annum.

• Subscriptions to trade or professional organisations

• Cost of acquiring tradesman’s tools

• Expenses for insurance agents excluding capital expenditure (such as motor vehicles computers, etc)

• Donations to the National Bursary Fund, National Scholarship Fund and charitable trusts administered by eitherthe Minister of Labour and Social Welfare or the Minister of Health and Child Welfare

• Donation for school equipment, construction/extension/ maintenance of a school, up to a maximum of$20 000 000 000.00

• Donation to a research institution approved by the Minister of Higher and Tertiary Education, up to a maximumof $20 000 000 000.00

INDIVIDUAL TAX

Taxable Income

This link focuses on what constitutes income from employment as well as the treatment of benefits like loan benefit,housing benefit, etc.

Credits

Allowable credits are only applicable to individuals and are in the form of blind person’s credit, disabled person’s creditand elderly person’s credit.

Allowable Deductions and Exemptions

This section delves on amounts that are not taxable or are allowed as deductions in calculating taxable income.

Pay As You Earn Tables

The following links provide daily, weekly, monthly and annual Pay As You Earn (PAYE) tables and simplified examplesof how to arrive at tax due. In using the PAYE tables, kindly take note of the following explanatory notes:

Income Tax is calculated as follows:

1. Determine gross income for the day/week/month/year

2. Deduct exempt income, for instance bonus

You get => Income

3. Deduct allowable deductions, e.g. pension

You get => Taxable Income

4. Use the appropriate PAYE Tables to determine the tax charge as per the attached examples.

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Credits

Allowable credits are only applicable to individuals and are in the form of blind persons credit, disabled persons creditand elderly persons credit. The following are the rates for 2008:

Blind persons credit $300 000 000.00 per annumDisabled persons credit $300 000 000.00 per annumElderly persons credit (over 55 years of age) $300 000 000.00 per annum

Notes

§ Medical expenses credit on payment for invalid appliances, consultation fees, drugs and medicines is notavailable to non –residents. However, medical aid contributions are allowable to non-residents.

§ Blind persons and disabled persons credits can be transferred to the spouse when the spouse entitled to thecredit has insufficient income tax chargeable to utilise them.

§ Elderly person’s credit can be reduced proportionately where the period of assessment is less than a year.

§ Total amount of credits is limited to the total income tax chargeable to a taxpayer. No refunds are given wherecredits exceed income tax chargeable.

§ Medical credit applies to payments by a taxpayer covering the taxpayer, the spouse and minor children but notdependants.

Please Note:Disabled person’s credit is not applicable to non-residents and blind taxpayers.

Carbon Tax

Foreign Registered Vehicles

Carbon Tax on foreign registered vehicles is based on the engine capacity of the motor vehicle and is paid in foreigncurrency at the port of entry for each month or part of the month during which the vehicle remains in the country.

Carbon Tax (Monthly Rates)

Engine CapacityUp to 1500cc 1501-2000cc 2001-3000cc Over 3000cc

ZAR 60.00 100.00 140.00 270.00BWP 40.00 60.00 90.00 170.00USD 6.00 11.00 15.00 30.00GBP 5.00 10.00 10.00 20.00EUR 10.00 10.00 20.00 30.00DEM 10.00 20.00 30.00 70.00AUD 10.00 20.00 30.00 60.00

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Carbon Tax (Annual Rates)

Engine Capacity Rate in US$

Up to 1500cc 72.001501-2000cc 132.002001-3000cc 180.00Over 3000cc 360.00

Locally Registered Vehicles

Carbon Tax is paid, with effect from 10 September 2007, at the rate of $5 000.00 per litre of petroleum product importedby the State oil procurement entity and any oil company or other person or entity engaged in oil procurement or wishingto use the petroleum product for own use.

Taxable Income

Taxable Income Formula

Gross income XXXXXLess exemptions XXXXIncome XXXXXLess allowable deductions XXXXXTaxable income XXXXX

What is Income from Employment?

According to Section 8(1)(a), (b), (c), (f), (n), (r) and (t) of the Income Tax Act (Chapter 23:06), income includes:

Salary, gratuity, cash in lieu of leave, retrenchment package, commutation of pension, pension refund, bonus, wages,overtime pay, fees, stipend, retirement allowance and grant, commission and annuity

• Deemed benefits/advantages such as housing, soft loan, education, passage, telephone, grocery, furniture,entertainment allowance, electricity, water, clothing, transport, holiday allowances and security services

• Deemed motoring/vehicle use benefit: This benefit is valued by reference to “cost to the employer”. The IncomeTax Act provides for deemed benefits instead of the actual cost incurred by the employer in running the motorvehicle. This benefit is chargeable to those employees who have a privilege to use employers’ vehicles forprivate use. The deemed motoring benefits are based on the engine capacity of the motor vehicle as tabulatedbelow:

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Engine capacity Monthly deemed benefitfor 2008

Annual deemed benefit for 2008

Up to 1500 cc $40,000,000.00 $480,000,000.00

1501 to 2000 cc $60,000,000.00 $720,000,000.00

2001 to 3000 cc $75,000,000.00 $900,000,000.00

Over 3000 cc $100,000,000.00 $1,200,000,000.00

§

§ Deemed housing benefit: Municipal area - open market rentals.

§ Outside municipal area - 12.5% of salary or 7% of the cost of the house, whichever is greater.

§ Deemed furniture benefit - annual benefit is 8% of cost of furniture.

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Principle and scope of capital gains tax

The charge to taxA charge to capital gains tax (CGT) arises on the disposal of a chargeable asset by a chargeable person.A disposal includes the sale or the gift of an asset.A disposal also arises on the death of an asset’s owner. However, this is an exempt disposal. Assets inherited ondeath are taken over at their probate (ie death) value so that gains (and losses) accruing to the date of death areignored.The term chargeable asset includes all assets except exempt assets. There are a number of categories of exemptassets but the only type within the syllabus is motor cars.A chargeable person may be an individual, a company, or partners in a partnership. We covered the rules forcompanies in Chapter 6.A partner is chargeable on his proportionate share of any gains realised on partnership assets. There are no separatecharging rules (unlike companies). Partnership capital gains are excluded from the syllabus and are not discussedfurther.

The calculation of gains and losses for individuals

The procedure for calculating a chargeable gain or allowable loss on a capital disposal is as follows.Step 1Calculate the gain or loss on each capital transaction (except exempt assets) separately, for the current tax year.The detailed rules for Step 1 were covered in Chapter 6.Step 2Allocate any available losses to reduce the gains chargeable.Current losses may be available and there may be capital losses brought forward.The detailed rules are covered later in this chapter.Step 3Deduct taper relief, if available. The rules are covered later in this Chapter.Step 4Prepare a summary of gains and/or losses still remaining.

Capital Gains Tax For IndividualsChapter 10

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Step 5Find the tax payable.

The basic calculationThe following proforma is used for individuals.

Notes $ $Disposal value 1 X

Less Incidental costs of sale 2 (X)____

Net sale proceeds NSP

Less Allowable expenditure

Acquisition cost 3 X

Incidental costs of acquisition 2 X

Enhancement expenditure 3 X____

(Cost)____

Unindexed gain 4 XLess Indexation allowance (to the earlier of April 2004 and the month of sale) = 0.XXX × Cost (IA)

____

GainLess: Losses (current year/brought forward) X

____Gain remaining chargeable XLess: Taper relief @ ?% (X)

____Final gain X

____Notes to the proforma(1) Disposal value is usually represented by sales proceeds. However, where a transaction is not at arm’s length

(eg a gift), or is between connected persons, then market value will be substituted. A connected person isessentially a relative and their spouses or relatives of your spouse. See Figure 14.1.Figure 14.1 Connected persons

Spous Brothers and sisters

Parents and grandparents

Children and

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Whilst an individual is connected to their spouse, transactions between husband and wife are not done atmarket value but on the basis of nil gain or nil loss. Such transfers are, however, excluded from the syllabus.An individual is also connected with a company he controls and a partner is connected with his other partnersexcept in respect of fully commercial transactions between partners.

(2) The incidental costs incurred on the disposal of an asset are an allowable deduction. Examples of such costsinclude valuation fees, advertising costs, legal fees, auctioneer’s fees. Similarly any incidental costs onacquisition are deductible.

(3) The purchase price of an asset (or its probate value if it was inherited) is the main allowable deduction. Inaddition, any further capital expenditure (known as enhancement expenditure) is deductible.

(4) The gain after deducting the costs above is known as an unindexed gain, because an indexation allowance maythen be available to reduce that gain. This allowance is based upon the retail prices index (RPI) and is intendedto give relief for inflation. It was introduced for expenditure from 31 March 1982 but, for individuals, it can onlyrun up to April 2004.

(5) The gain remaining chargeable (ie after any exemptions or loss relief) may be reduced by taper relief. As thereare potentially different rates of taper relief, loss relief etc should be applied first against gains with no taperrelief or a low rate of taper relief. This is explained later in the Chapter.

Definition of a business asset

Business assets are defined as:♦ Those used for the purposes of a trade carried on by a sole trader or partner

♦ Those used for the purposes of a trade carried on by a qualifying company of the individual concerned

♦ Those held for the purposes of an office or employment

♦ Shares in a qualifying company

A qualifying company is a trading company or the holding company of a trading group which is either:♦ unquoted (this includes companies quoted on the Alternative Investment Market); or

♦ quoted and the individual

- is an employee (full or part-time), or- has at least 5% of the shares.

Provided the shares are held by an employee with less than a material interest (ie not more than 10% of the shares) thecompany does not have to be a trading company for the business asset taper rate to apply.The above definition of business assets applies to disposals made after 5 April 2006. As it has extended the previousdefinition of business assets it means that certain assets, previously classified as non-business assets, may now bereclassified as business assets. Where an asset has been reclassified, it will be necessary to apportion the gainbetween the business and non-business periods. Fortunately, however, this type of apportionment is not examinable.

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Taper relief and capital lossesTaper relief is computed on the gains chargeable after the deduction of any current year losses. Special rules apply tothe treatment of brought forward losses of an individual. These are considered later.A capital loss arising on a disposal to a connected person, however, can only be used against a disposal to the sameconnected person.To ensure that taper relief (where available) is maximised, capital losses can be allocated against chargeable gains onthe most beneficial basis to the taxpayer. This means ranking the various assets, business and non-business,according to the complete years of ownership which qualify for taper relief before allocating the loss.

Example

The total gains on three business assets are $30,000,000 before deducting available current period losses of $5,000.Years qualifying

$m for taper reliefAsset 1 2,000 0

2 10,000 2

3 18,000 4What is the most beneficial allocation of the losses available?

Solution

The loss should be allocated to:$m

Asset 1 (2,000)

2 (3,000)This is to preserve all of the taper relief on asset 3. The gains remaining chargeable will then be as follows.

$mAsset 2 $7,000 x 75% 5,250

3 $18,000 x 25% 4,500_____

9,750_____

Capital losses are not themselves subject to taper relief (ie the whole loss will always be available for relief).

Annual exemptionAn individual has an annual exemption, which is applied to total gains still chargeable after capital losses and taper reliefhave been applied. This is $7,500,000 for 2007/08 and is available to each individual. It must be used against gainsmade in 2007/08. It cannot be carried forward or back.

Example

Kieran sold several assets during 2007/08 with the following results.Gain or (loss)

$m

Business asset (acquired before 6 April 2004) 50,000Non-business asset (acquired before 17 March 2004) 10,000Business asset (acquired during 2006/07) (5,000)Capital losses brought forward were ($2,000).What are the net gains after the annual exemption?

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SolutionStep 1Identify any gains on which taper relief is due.

$ Qualifying period Percentagechargeable

Business gain 50,000 3 50Non-business gain 10,000 4 90Business loss – Not applicable –Step 2Allocate losses in the most beneficial manner.

Indexed gain Current loss Brought forward Net gain$m $m

Gain 50,000 50,000Gain 10,000 (5,000) (2,000) 3,000

______53,000______

Step 3Apply taper relief to any available gains.

$mGain $50,000 × 50% 25,000 $3,000 × 90% 2,700

______27,700______

Step 4Apply annual exemption.

$mChargeable 27,700Less Annual exemption (7,500)

______Net gains 20,200

______If the losses had been applied to the business asset first, Kieran would have had a larger chargeable gain.

$m $mBusiness gain 50,000Less Losses (7,000)

______ 43,000 × 50% 21,500

Non-business gain 10,000 × 90% 9,000______30,500

Less Annual exemption (7,500)______23,000______

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The annual exemption and brought forward losses

Brought forward capital losses are not allocated against gains where this would lead to a wastage of the annualexemption. This rule does not apply to current tax year capital losses, which must be set off against gains and cantherefore result in a wastage of annual exemption. In both situations, taper relief may be wasted where the combinedavailability of losses and annual exemption exceeds any chargeable gains.

ExampleMica has the following chargeable gains and losses for the two years ended 5 April 2008.2006/07 $mGains 12,000

Losses (14,000)

2007/08

Gains 10,000

Losses (2,000)What gains (if any) are chargeable after considering all reliefs and exemptions?

Solution2006/07

$m2007/08

$mCurrent gains 12,000 Current gains 10,000

Current losses (12,000) Current losses (2,000)

______Brought forward losses* (500)

______

Nil______

7,500

Annual exemption Wasted Annual exemption (7,500)______

Nil______

Loss carried forward($14,000 – $12,000) 2,000

Loss carried forward($2,000 – $500) 1,500

*Utilised to reduce gains to annual exemption.

ExampleWhat difference would it have made if the gain in 2007/08 represented the gain on a business asset with two yearsqualifying ownership?

Solution

None. As the capital losses brought forward are sufficient to reduce the capital gains to the annual exemption, any taperrelief available is wasted. Brought forward losses cannot be restricted to preserve a higher chargeable gain, to whichtaper relief would then be applied to reduce the gain to $7,500,000 etc.

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Bonus issues and rights issues

A bonus issue is the distribution of free shares to shareholders based on existing shareholdings.A rights issue involves shareholders paying for new shares, usually at a rate below market price and in proportionsbased on existing shareholdings.

IdentificationIn both cases, therefore, the shareholder is making a new acquisition of shares. However, for identification purposes,such acquisitions arise out of the original holdings.IndexationAs there is no expenditure involved with a bonus issue, there is no impact on the indexation allowance. However, arights issue involves a payment and indexation allowance is only due from the time of payment. Therefore forindividuals, rights issues on or after 6 April 2004 will not attract indexation.Taper reliefBonus and rights issues are treated for the purposes of taper relief as if they were acquired when the originalshareholding was acquired.Relief when a business is transferred to a company

Introduction

The transfer of an unincorporated business by a sole trader to a company, wholly or partly in exchange for shares, is adisposal of the assets of that business by the sole trader.A relief (‘incorporation relief’) is available to defer the net gains arising on the business assets.

Incorporation reliefFor this relief to be available to a sole trader ‘incorporating’ his business there are several conditions that must besatisfied.♦ The transfer must be to a company.

♦ It must be a transfer of a business as a going concern.

♦ All assets of the business must be transferred, with the possible exception of cash.

♦ The consideration received must be wholly or mainly shares in the company.

When the above conditions are satisfied the relief is mandatory. The gains are calculated in the usual way on eachasset and the net gains are deducted from the market value of the shares acquired.The operation of the relief depends on whether the purchase consideration consists wholly or only partly of shares.

Wholly shares Partly shares♦ Whole gain on individual assets

deducted from MV of sharesacquired.

♦ Loan or cash element is taxable now,less any taper relief due.

♦ Taper relief up to incorporation iswasted.

♦ Rest of gain deducted from the MV ofshares acquired.

Rollover relief for business assets

IntroductionRollover relief for replacing business assets was covered in Chapter 6 in the context of incorporated businesses. Welooked at various aspects of the rules, all of which also apply for unincorporated businesses.It appears from the syllabus, however, that rollover relief will only be examined for incorporated businesses although thisis not beyond doubt. In case the examiner assumes otherwise, we cover the one additional aspect relevant forunincorporated businesses - the interaction with taper relief.

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Interaction of taper relief and rollover reliefAs a general principle, taper relief only applies to gains that remain chargeable. Therefore the taper relief entitlement ongains rolled over is wasted. Taper relief for the replacement asset runs from the date the replacement asset is acquired.No recognition is given of the ownership period of the original asset whose gain is rolled over.We looked at this general problem above when considering whether a gift relief claim was advisable. Similarly, if thereplacement asset is likely to be held only briefly, a rollover claim may defer gains but at the expense of generatingmore gains overall due to the wastage of taper relief.If the replacement asset is a depreciating asset, the gain on the original asset is merely ‘put into suspense’ until achargeable event, ie the earliest of the sale of the depreciating asset, ceasing to use it in the trade, and the 10th

anniversary of its acquisition. When it comes out of suspense the original taper relief entitlement is still ‘clinging to it’.

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The charge to taxA charge to taxation of capital gains arises on the disposal of a chargeable asset by a chargeable person.A disposal can arise in a number of ways but as far as the syllabus is concerned only outright sales by a company willbe examined.A chargeable person may be an individual, a company, or partners in a partnership business. For this Chapter,however, you will only be concerned with disposals by companies.The term chargeable asset includes all assets except exempt assets (most such assets relevant to companies are listedbelow).Exempt assets relevant to companies in the list below need to be learned so that you can identify them in a question.♦ Motor cars.

♦ Sterling currency, ie legal tender in the Zimbabwe, notably gold sovereigns minted after 1980.

♦ Any form of loan stock. Gain and losses on any form of lending are dealt with under the loan relationship rules (ieunder Schedule D Case III).

The basic capital gains computation

Capital Gains Tax For CompaniesChapter 11

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The standard proformaNotes $ $

Disposal value 1 XLess Incidental costs of sale 2 (X)

____Net sale proceeds NSPLess Allowable expenditure Acquisition cost 3 X Incidental costs of acquisition 2 X Enhancement expenditure 3 X

____ (Cost)

____Unindexed gain 4 XLess Indexation allowance: Cost × 0.XXX (IA)

____Chargeable gain Gain

_____Notes to the proforma(1) Disposal value is usually the sale proceeds. However, where a transaction is not at arm’s length (eg a gift), or is

between connected persons, then market value will be substituted. A company is connected with♦ the person who controls it

♦ another company under common control.

(See Chapter 8 for the treatment of disposals between members of a capital gains group). (2) The incidental costs incurred on the disposal of an asset are an allowable deduction. Examples of such costs

include valuation fees, advertising costs, legal fees, auctioneer’s fees. Similarly any incidental costs onacquisition including stamp duty are deductible.

(3) The purchase price of an asset is the main allowable deduction. In addition, any further capital expenditure(known as enhancement expenditure) is deductible. This is covered in Section 2.7 below.

(4) The gain after deducting the costs above is known as an unindexed gain, because an indexation allowance maythen be available to reduce that gain. This allowance is based upon the retail prices index (RPI) and is intendedto give relief for inflation. It was introduced for periods from 31 March 1982.

The Paper 2.3 syllabus is only concerned with assets acquired since 31 March 1982. We therefore only consider thecapital gains rules applying to such assets.

The indexation allowanceThe indexation allowance runs from the date of the acquisition expenditure to the date of disposal. It is computed bymultiplying the acquisition cost by an indexation factor. The indexation factor or even the amount of the indexationallowance may be provided in the examination. However, the syllabus requires you to be able to calculate theindexation allowance.The formula for the indexation factor is:

nacquisitioofmonthforRPInacquisitioofmonthforRPI-disposalofmonthforRPI

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This produces a decimal figure which is rounded to three decimal places. If the RPI for the month of disposal is lessthan the RPI for the month of acquisition, the indexation factor is taken as nil – not a negative factor.

Inflationary allowanceIn respect of the year of assessment beginning on January 1 2007, and any subsequent year ofassessment, the inflation allowance shall be determined in accordance with the followingformula:

(A-B)/ Bwhere:A- represents the figure for the All Items Consumer Price Index issued by the Central StatisticsOffice at the time of disposal of the property.B- represents the figure for the All Items Consumer Price Index issued by the Central StatisticsOffice in the month of effecting improvements or month of purchase of the property.

Kindly note: The figures for the All Price Items Consumer Price Index are listed separately andalso published in the local daily newspapers.

All Items CPI for the calculation of inflation allowance

Month and Year All Items Consumer Price Index

January 2007 968 338.90

February 2007 1 334 521.70

March 2007 2 008 932.10

April 2007 4 032 633.70

May 2007 6 265 734.3

June 2007 11 666 826.7

July 2007 15 358 172.2

August 2007 17 171 312.8

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Rates of Inflationary Allowances

Year Annual Rate of Inflation

1981 12.4

1982 13.8

1983 18.1

1990 16.4

1991 10.0

1992 14.6

1993 12.3

1994 7.1

1995 16.1

1990 15.5

1991 23.3

1992 42.1

1993 27.6

1994 22.3

1995 22.6

1996 21.4

2003 18.8

2004 31.7

2005 58.5

2006 55.9

2007 71.9

2008 133.2

2003 365.0

2004 350.0

2005 237.8

2006 1016.7

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Approach to the questionIt is important that the gain or loss on each transaction is separately computed. Finally, prepare a summary adding gainsand losses together to arrive at one overall figure.

Enhancement expenditureThe main allowable deduction in computing an unindexed gain is the acquisition cost (including incidental costs). Anyadditional capital expenditure on the asset is also an allowable deduction. This normally takes the form of improvement(ie enhancement) expenditure, but can also include expenditure incurred to establish, preserve or defend title to theasset.As the additional expenditure is incurred later than the original expenditure, there will be an impact on the calculation ofindexation allowance. Indexation can only be calculated from the actual date of expenditure; therefore where there iscost plus enhancement expenditure two indexation calculations will be required. It is easy to overlook this extra step.

Treatment of capital lossesGains and losses are calculated for chargeable accounting periods. Once you have calculated all the individual gainsand losses for an accounting period, summarise them as follows.

$Gain (1) X

Gain (2) X

Loss (3) (X)___

Net gains/(losses) for the current year X

Capital losses brought forward (X)___

Chargeable gains X___

The chargeable gains are then put into the CT computation and the tax liability is calculated in the normal way. If there isan overall loss, it is carried forward and set against future gains. It cannot be relieved against other income.Disposals of shares and securities

The identification rules

If there is more than one disposal, deal with the earlier disposals before the later disposals.A disposal by a company is matched with acquisitions in the following order.(1) Same day acquisitions(2) Shares acquired in the nine days before the sale(3) 1991 pool (shares acquired from 1 April 1989 onwards)Shares acquired before 1 April 1982 are held in a ‘ pool’ but (fortunately) this is outside the syllabus.(There is a different set of matching rules where the shareholder is an individual. We will look at this later in Chapter14.)

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The operation of a 1991 poolBasic rulesAny acquisitions from 1 April 1982 are ‘pooled’ in the ‘1991 pool’. Indexation will apply from acquisition to the date ofdisposal. To enable the correct indexation to be calculated, a separate working is needed to identify the amountavailable. The working is also used to find the average cost of a partial disposal.The working follows a strict proforma which should always be used.Proforma for 1991 pool

Indexed cost(cost plus

Number Cost$

indexation todate)

$Acquisitions 1.4.82 - 31.3.85 X X X

Index to April 1991 (This is doneseparately for each acquisition) ____ ____

X____

Balance at 1 April 1991 X X X*

Index to next event** X

Purchase X____

X____

X____

X X X

Index to next event**____ ____

X____

X X X

Sale (X) (X) W1 (X) W2

____ ____ ____

Pool carried forward X____

X____

X____

* This will include indexation on additions up to 1 April 1991 and uses an indexation factor rounded as normal to threedecimal places.

** For the post April 1991 ‘indexed rises’ the indexation factor is not rounded. This is the only situation where a non-rounded factor is ever used.

The purpose of the working is to find:♦ the average pool cost of shares disposed of = working 1

♦ the average indexation of shares disposed of = working 2 – working 1.

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Workings 1 and 2 then feed into a normal computation.$

Sale proceeds X

Cost (W1) (X)____

Unindexed gain X

Indexation (W2 – W1) (X)____

Indexed/gain X____

Indexation is always applied to the pool between events, and is applied to the indexed cost column. Events include bothsales and purchases.A partial disposal from a 1991 pool uses straight line apportionment of cost and indexation.The Official Study Guide requires you to ‘Apply the pooling provisions for shares …’ yet the syllabus specificallyexcludes ‘a detailed question on the pooling provisions for shares’.We advise therefore that you should understand how pooling operates but you will probably be supplied in the examwith brought forward figures for pool costs, etc rather than have to reconstruct a pool from scratch.Bonus issues, rights issues and takeovers

Introduction

This section deals with share reorganisations, such as when a company makes a bonus or rights issue of shares toshareholders, or when a company’s shares are taken over by another company in exchange for other shares or cash.In dealing with these situations, it is necessary to understand the fundamental nature of these types of transaction.

Bonus issues and rights issues

A bonus issue is the distribution of free shares to shareholders based on existing shareholdings.A rights issue involves shareholders paying for new shares, usually at a rate below market price and in proportionsbased on existing shareholdings.In both cases, therefore, the shareholder is making a new acquisition of shares. However, for identification purposes,such acquisitions arise out of the original holdings.Bonus and rights issues therefore attach to the original shareholdings for the purposes of the identification rules.

The effect on indexationAs there is no expenditure involved with a bonus issue, there is no impact on the indexation allowance. However, arights issue involves a payment and indexation allowance is only due from the time of payment.

Takeovers

The final aspect of share reorganisations concerns the situation where a company is taken over by another company.This can either be a straight share for share exchange or can be in the form of shares, cash, loan notes or anycombination of these. The precise form of the exchange determines the capital gains position.

Share for share exchangeThe situation here is that Y plc takes over X Ltd, buying up the shares in X Ltd. The shareholders in X Ltd sell theirshares in the company, and in return they receive shares in Y plc.In this situation, the shareholder is simply swapping one form of paper for another.There is no immediate tax liability. However, where the shareholder receives different classes of shares or loan notes,the original cost of the shares must now be allocated between the different classes. This is done on the basis of marketvalues, on the first day of trading following the exchange.

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Rollover relief

Introduction

Rollover relief allows a company to defer a chargeable gain, provided certain conditions are met.In order to qualify for relief, the company must reinvest the proceeds from the sale of a qualifying asset into anotherqualifying asset. Any gain on the disposal of the first asset is then ‘rolled over’ against the capital gains cost of the newasset. Capital allowances (if applicable) are still due on the full cost of the new asset.A typical situation can be depicted as follows.

$m

Asset (1) Sale proceeds 100,000Cost and indexation allowance (40,000)

_______

Indexed gain 60,000_______

Asset (2) Purchase price 150,000‘Rolled over gain’ (60,000)

_______

Revised base cost 90,000_______

The gain on asset (1) has been deferred against the base cost of asset (2). Provided at least the proceeds arereinvested then full deferral applies.On the sale of the second asset a higher gain will result, as this represents both the inherent gain in the second assetand the deferred gain from the first.

If no rollover reliefclaimed on asset (1)

If rollover relief isclaimed on asset

(1)$m $m

Sale of asset (2)Sale proceeds 200,000 Sale proceeds 200,000Original cost (150,000)

________Revised base cost (90,000)

________Unindexed gain 50,000

________Unindexed gain 110,000

________The benefit of rollover relief is that tax, otherwise payable now, is deferred possibly for many years. There is adrawback in that the indexation allowance on the second gain is calculated on a lower base cost if rollover relief isclaimed.

Conditions for reliefNow that we have considered the mechanics, it is necessary to look at the other conditions which apply.There must be a disposal of and reinvestment in:♦ a qualifying asset

♦ within a qualifying time period.

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Qualifying assets. The assets must be used in a trade. Where they are only partly used in trade then only the gain onthe trade portion is eligible. The main qualifying assets are as follows.♦ Land and buildings (freehold and leasehold)

♦ Fixed plant and machinery

♦ Goodwill

♦ Ships/hovercraft/aircraft

Note that shares of a company are never qualifying assets for rollover relief purposes.

Qualifying time period. The qualifying period for reinvestment in the replacement asset is up to 12 months before thesale to within 36 months after the sale.

Partial reinvestmentRollover relief may still be available even where only part of the proceeds is reinvested. However, it will be restricted, asthere is some cash retained available to settle tax liabilities. This is logical as the main purpose of the relief is not tocharge tax where cash has been reinvested in the business.The amount which cannot be rolled over is the lower of:♦ the proceeds not reinvested

♦ the chargeable gain.

The following example will demonstrate where full relief is available, partial relief is available and no relief is available.

Example

AB Ltd sold an office block for $500,000,000,000 in December 2007. It had been acquired for $200,000,000,000 andwas used throughout AB Ltd’s ownership for trade purposes. The indexation on the disposal was $213,100,000,000. Areplacement office block was acquired in February 2008.Assuming rollover relief is claimed where possible, calculate the gain assessable on AB Ltd and the base cost of thereplacement office block if it cost:(a) $610,000,000,000(b) $448,000,000,000(c) $345,000,000,000

SolutionGain on sale of old office block

$mProceeds 500,000

Cost (200,000)_______

300,000

Indexation allowance (213,100)_______

Indexed gain 86,900________

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(a) As all the proceeds have been reinvested, the full gain is rolled over and no gain is immediately chargeable.Base cost of new asset $mCost 610,000

Less gain rolled over (86,900)_______

523,100________

(b) Proceeds not reinvested ($500,000 − $448,000) $52,000 Hence $52,000 of the gain is immediately chargeable. Base cost of new asset $ Cost 448,000

Less gain rolled over ($86,900 – $52,000) (34,900)_______

413,100________

(c) Proceeds not reinvested ($500,000 − $345,000) $155,000As this exceeds the gain, the full gain of $86,900 is chargeableand no rollover relief is available.Base cost of new asset $345,000

Non-business use

If an asset has only been partly used for the vendor’s trade prior to sale, only a corresponding part of the gain can beheld over.The asset is treated as being in two parts – as a business asset and as a non-business asset.

ExampleMasango sells a warehouse it has owned for eight years for $600,000 making a gain of $420,000. For the last twoyears of ownership half the premises was let to another company.How much of the gain can be rolled over?

Solution

Business portion : 86 × 100% 75%

82 × 50% 12½%

_____87½%_____

Proceeds of ‘business asset’ $600,000 × 87½% $525,000________

Gain of ‘business asset’ $420,000 × 87½% $367,500________

A gain of $367,500 can be rolled over by reinvesting at least $525,000 in qualifying replacement assets.6 Reinvestment in depreciating assets

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IntroductionCertain qualifying assets are depreciating assets. A depreciating asset is one which has a life not exceeding 50 years,or which will become a depreciating asset in the next ten years (ie a 56 year lease at today’s date falls within thedefinition). The two key examples of such assets are:♦ leasehold buildings

♦ fixed plant and machinery.

Where a claim for rollover relief is desired, and depreciating assets are the replacement assets, then a special form ofthe relief ensues. This affects:♦ the duration of the deferral

♦ the method by which the deferral is carried forward.

The duration of the deferralThe gain on the sale of the ‘old’ asset is deferred only until the earliest of:♦ the date of sale of the depreciating asset (ie normal rule)

♦ the date the asset ceases to be in use in the owner’s trade

♦ ten years from the date of the acquisition of the depreciating asset.

This effectively means that a depreciating asset can only be used to defer a gain for a maximum of ten years from thedate of acquisition.If the company acquires a non-depreciating asset before the deferred gain ‘crystallises’ the gain can be rolled overagainst the non-depreciating asset in the normal way.

Method of giving relief: depreciating assets

Additionally, where the ‘new’ asset is a depreciating asset, the gain is not deducted from the base cost of the ‘new’asset. Instead, it is said to be ‘held over’. Where this applies, the gain to be deferred must be ‘held’ separately and‘charged’ on the earliest of the three above events.

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