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VEHICLE DUTY REBATE FOR RETURNING STUDENTS 

INTRODUCTION

Returning student refers to an individual who has lived in Zimbabwe before and returns to Zimbabwe once he/she completes a course of study.

The returning students rebate on importation of motor vehicle has over the years allowed them to afford to acquire and import motor vehicles into Zimbabwe at a rational cost.

It should be noted that for the returning student to qualify for the rebate certain conditions should be met as highlighted below.

CONDITIONS FOR THE STUDENT TO QUALIFY FOR REBATE

The returning student must be above the age of 16 years and should have stayed outside Zimbabwe for a period of not less than 2 years. The time of arrival also determines whether or not the student qualifies for the rebate and this can only be established from the returning student.

The first time of entering Zimbabwe by the student after completing the course of study, immigration officers will ask the returning student if he or she wishes to claim the returning student status upon arrival at any entry point. If the students wishes to claim returning students status, the immigration officer will stamp his/her passport with RR which shows that he or she is a returning resident.

The stamp concludes the student’s first occasion of entry and will determine whether or not the student can claim the motor vehicle rebate.  If the student does not import the vehicle on first occasion as above-mentioned he or she forgoes the duty rebate. 

Additionally, ZIMRA will request the returning student to produce academic transcripts, certificates or any other confirmation to ascertain that he or she has indeed completed studies.

The rebate is therefore not available to returning students who have not completed their studies for whatever reason. The vehicle must be in physical existence and fully paid for by the returning resident before the time of his arrival. Therefore if one purchases the motor vehicle after his return he or she may not enjoy the duty rebate, unless one did not declare that he has returned for good.

However, the rebate has led to the abuse by third parties importing vehicles duty-free. This abuse has resulted in the government losing out potential revenue to these 3rd parties.

To curb this risk the government has put a maximum value of US$5000 so as to qualify for the rebate. If a student imports a motor vehicle exceeding this value he/she will forego the rebate and pay the full duty on the imported vehicle.

Conclusively, the rebate has been of great importance as it benefits returning students although this move tend to result in an increase in the importation of second-hand motor vehicles which may pose environmental impacts such as emissions.

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Tax Relief on Medical Expenses

Workers and employers sustain medical costs which negatively affect their disposable income.


To curb this burden on employees and employers, there various tax incentives on medical expenses as well as medical contributions. The tax incentives include tax credits, exemptions and deductions.

Tax exemptions and credits are only applicable to employees whereas tax
deductions are granted to employers. Tax credits refer to the amount of money that a tax payer can subtract from taxable income. It increases disposable income of a tax payer.

Basically, medical cost are categorized into two classes namely medical contributions and medical expenses.

Medical expenses refers to hospitalization cost, treatment costs, drugs as well as purchase, hire, repair of an invalid appliance or fitting. Invalid appliance should be used by taxpayer or his spouse or any child by reason of his or her mental or physical defect or disability so as to qualify for tax credits.

In the case that the employer has paid for medical expenses on behalf of the employee, he/she is granted a tax deduction for the calculation of his tax liability. To the employee, the amount paid by the employer represent a fringe benefit however the law exempts from tax this benefit in the hands of the employee.

On the other hand, an employee gets 50% tax credit in respect of medical expenses incurred by him/her for himself or herself, his/her spouse or child. Only expenditure paid in respect of prescribed drugs are granted tax credit.

The employee should forward the supporting documents such as original invoice of the incurred medical expense, which has not been recovered from any source to the employer to facilitate the claiming of the credit. The bill will be entered in the payroll and the employee’s payable tax will be reduced by 50% of that bill.

When an employer pays medical cost out of his own funds on behalf of his employees it is called a medical contribution. In Zimbabwe medical contributions are made to medical associations such as CIMAS, PSMAS and Fedelity depending on the preference of employers.

Medical contributions on behalf of employees are exempted from PAYE. When computing tax liability in the hands of the employer, medical contributions are deductible which is a benefit as this minimizes tax liability of the employer. However, it should be noted that for medical
contribution to qualify as a deduction they should be paid to approved medical aid society.


Conclusively, when an employee make a contribution to medical aid society from his disposable income he qualifies for 50% tax credit as long the contribution was made to recognized medical aid society. If one is not a permanent resident of Zimbabwe he cannot claim any medical
expense, however he can only claim medical contribution made to a medical aid society.

If the taxpayer is deceased and the estate has made any payment of medical expenses those expenses should be claimed in the person’s pre-death period of assessment.

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Basic Functions of Accounting Systems

An accounting System – is a set of records and the procedures and equipment used to perform the accounting functions. Manual systems consist of journals and ledgers on paper. Computerized accounting systems consist of accounting software, computer files, computers, and related peripheral equipment such as printers.

Basic Functions

Interpret and record business transactions.

The records that are kept for the individual asset, liability, equity, revenue, expense, and dividend components are known as accounts Every time an organisation conducts a business transaction, the status of the account changes. Bookkeeping process keeps track of these changes in various ledgers and journals. The financial statements are then prepared using this information.

Classify similar transactions into useful reports.

Statement of financial position has 3 sections

Assets – the things of value that the company owns.

Liabilities – obligations to pay or provide goods or services at some later date.

Equity – the amount of net assets (assets – liabilities) owing to the owners of the business.The income statement – communicates the inflow of revenue, and the outflow of expenses over a given period of time.

The Cash Flow Statement – records inflows and outflows of cash during a period of time, and is divided into cash flow from operations, financing, and investing activities. 

Summarize and communicate information to decision makers. 

An accounting system is capable of generating summarized and comprehensive statistical reports that provide management or interested parties with a clear set of data to aid in the decision-making process.

An accounting system can also manage

Expenses – An automatic accounting system allows quick entry, categorisation and automatic balance of expenses.

Invoices – Some accounting systems allow for instant invoice creation with the ability to customize and automatically keep track of paid invoices and income.

Funding – All the business liabilities, whether accounts payable, bank loans taken to support the business, or mortgages, etc. An accounting system keeps track of these liabilities as payable values and automatically updates the balances as soon a payment is made and accounts are settled.

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The Basics of Withholding Tax

A withholding tax is an amount that an employer withholds from employees’ wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year.

Withholding tax applies to income earned through wages, pensions, bonuses, commissions, and gambling winnings. Dividends and capital gains, for example, are not subject to withholding tax. Self-employed people generally don’t pay withholding taxes; they typically make quarterly estimated payments instead.

The rate is 15% on dividends distributed by companies listed on the Zimbabwe Stock Exchange. Withholding tax can be final or non-final, when it is final no further tax or return is required from a payee. WHT is final on dividend and on interest from local financial institutions.

Three key types of withholding tax are imposed at various levels:

  • Wage withholding taxes,
  • Withholding tax on payments to foreign persons, and.
  • Backup withholding on dividends and interest.

WHTs are applicable where dividends and royalties or similar payments are declared or distributed to non-Zimbabwean residents (and Zimbabwean residents in some instances).

Dividends

Dividends declared by a Zimbabwean company to a non-resident holding company will be subject to non-resident shareholders tax (NRST), a WHT. NRST is payable at a rate of 15% unless treaty relief is available. Dividends from companies listed on the Zimbabwe Stock Exchange have a rate of 10%. NRST is payable within ten days after declaration of the dividend.

Interest

WHT of 15%, calculated on the gross amount of interest, is payable on interest accruing to any person resident in Zimbabwe. This applies to interest arising from a registered banking institution or unit trust scheme. The tax withheld is a final tax, and the financial institution is responsible to withhold the tax.

Non-resident investors, however, are currently exempt from any WHT on interest.

Royalties or similar payments

WHT on royalties are payable once a Zimbabwean company pays a royalty to a non-Zimbabwean resident. WHT is levied at a rate of 15% and is payable within ten days of the date of payment. The WHT falls due upon accrual (i.e. when payable), and actual payment is not a factor.

A royalty includes payment for the use or right to use any patent or design, trademark, copyright, model, pattern, plan, formula or process, or any other property or right of a similar nature. It also includes the imparting of any scientific, technical, industrial, or commercial knowledge or information for use in Zimbabwe. The nature of the amount payable should therefore be carefully considered in order to determine whether the relevant amount represents a royalty.

Fees

Fees are defined to include amounts that are technical, managerial, administrative, or consultative in nature; costs are paid externally. There are some exceptions, but the definition is broad and brings in most costs that may be charged to a Zimbabwean person.

WHT is levied at a rate of 15% and is payable within ten days of the date of payment.

Is a penalty charged for failure to remit withholding tax on time?

Any person who fails to deduct the 10 percent withholding tax is liable for the payment of the amount due. In addition, a 100 percent penalty is also chargeable on the amount due.

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Tax incentives for Small and Medium Enterprises

Background

With the shrinking economy, the big businesses have become overladen with taxes. It is opined that if the SMEs contributed their fair share of taxes there could be a lot of revenue that may well have been collected for the benefit of the fiscus and ultimately for the benefit of the country.

Fiscal exclusion has also been a factor influencing the lack of formalization of the SMEs. Depending on the type of registration undertaken by SME’s there are tax obligations that must be fulfilled by every business that is registered for tax purposes and this includes the SMEs. These include income tax, withholding tax, PAYE, VAT and Presumptive tax.

These obligations may be greater or lesser depending on the structuring of the business. This piece of writing aims to indicate the tax issues that may affect the SMEs.

The Tax Benefits

In Zimbabwe 10% withholding tax is deducted on local businesses to business sales (B2B) upon payment to a supplier without a valid tax clearance certificate. By virtue of formalizing tax affairs, SMEs can enjoy exemption of the 10% withholding tax on contracts with other businesses. In addition, it is now a prerequisite for most business transactions.

SMEs relationships with big businesses are unavoidable sometimes. A valid tax clearance is one of the documentation required in order to participate in most tenders, including government tenders. Therefore if you do not have a valid tax clearance you will not only suffer withholding tax on payments from customers but you could also lose business opportunities.

Further qualification for duty rebates and other import incentives are also linked to possession of a valid tax clearance. By regularizing your tax affairs, you will be entitled to claim expenses that you incur in your business.

Special Initial Allowance

SMEs even have a better capital allowance regime compared to big companies which write off capital assets against their income to reduce tax payable over three years at 50% in the first year then 25% wear and tear in the second and third year compared to 4 years of 25% per annum.

SMEs do not enjoy assessed losses which can be carried forward for six years. When making losses the law allows you to use such losses to reduce taxable income, until the losses are used up or expires the company will not pay taxes to the fiscus. The reporting of such losses can be only done by a person or company who is formally registered for taxes.

Monthly payment of provisional tax

The income Tax Act provides for payment of provisional income tax in advance on a quarterly basis. And the quarterly payments are done in instalments of 10%; 25% 30% and 35% of the provisional income tax for each of the quarters of the year.

The Income Tax Act provides that the Commissioner-General may, “on application by a taxpayer, who qualifies as a “small or medium enterprise”, permit such taxpayer to pay provisional income tax on a monthly basis, that is, one month at a time in advance.”

This facility is quite favorable and can allow for working capital management flexibility on the part of SMEs given that for most of them, their business models are quite different from those of large enterprises.

Lower rate of mining royalties

The sale of specified minerals by miners to buying agents attract a deduction of tax at rates that vary depending on the mineral being sold. Payments to small scale gold miners, popularly known as “gold panners” or “makorokoza” for gold deliveries are deducted mining royalties at a lower rate of 3% as compared to the general rate of 5% applicable to other enterprises.

The small scale gold miner should be classifiable as a “micro-enterprise” in terms of the mining and quarrying sector of the economy per the SMEs Act.

Access to funding

For SMEs to enjoy funding and fiscal inclusion, they must formalize their businesses. Formalization of the SMEs opens up the access to funding and the protection of the law. Banks and financial institutions are more likely to fund formal businesses as opposed to informal businesses.

For this they would proper books of accounts to be kept and the business to be compliant with the tax laws. Therefore a formalized SME that shows good organization and a good business track record is more likely to get the much needed funding to expand the business as opposed to an informal one.

A brilliant business idea may fail to grow because of lack of funding. Formalization can bridge this gap.

Conclusion

Formal SME’s that keep proper books of accounts, furnish tax returns and pay taxes are not subject to presumptive tax subject to them being in possession of a valid tax clearance.

Informal SME’s on the other hand are liable to pay presumptive tax. It is a misconception that to be registered for tax is expensive. The reverse is actually true. Withholding tax applies on turnover for lack of tax clearance, the business losses on tax opportunities such as claiming business losses when they occur and above all when the taxpayer is eventually caught the law provides for back dating of tax registration and payment of taxes from the date the person was supposed to be tax registered.

This comes along with stiff penalties and interest on late paid taxes and returns. It is wise as a business owner or company executive to gain more understanding on how to go about being tax compliant to avoid missing out on business opportunities and being on the right position for growth.

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Interest rate on late paid taxes skyrockets

Introduction

The concept of interest on late paid taxes is found in most civilised communities as it reflects the interest which would have accrued to the State had the correct amount of tax been paid at the right time. It compensates the State of the opportunity cost of money and in an inflationary environment, the opportunity cost plus loss of monetary value.

With this in mind, the Minister of Finance and Economic Development Prof Mthuli Ncube has issued several Statutory Instruments whose effect is to increase interest rate on tax due and refunds across most tax heads as fully explained below. The SIs were published in the government gazette of 31st of December 2019 and immediately revoked the old interest rate of 10% per annum.

Customs and Excise Duty

The Customs and Excise Act imposes interest on unpaid duty where goods have been released from customs control or are found to be liable to seizure because they were smuggled. The new rate of interest has been fixed at 25% of the duty for any month or part thereof during which the duty remains unpaid. However, it only becomes payable after the first 30 days of the date of release from customs control of goods on which duty was not paid. In other words the government has granted a grace period of 30 days from the date goods are released from customs control.

The Commissioner General may suspend the payment of interest as a result of an incomplete or defective return whereupon he is satisfied that such incompleteness or defect was not due to any negligence or intent to evade the payment of duty on the part of the person responsible for paying the duty. The taxpayer has 30 days from date of notification to him by the Commissioner General to resubmit correct returns.

Meanwhile refunds from ZIMRA are also subject to interest at the same rate if not made within 30 days of the date duty subject to refund was paid, unless the overpayment was due to an incomplete or defective declaration and taxpayer has been advised of this by the Commissioner within that period.

Capital Gains Tax

Late paid capital gains tax is subject to interest and this has been increased to 25% for any month or part thereof during which tax remains unpaid provided it shall only become payable after the first 30 days of the date the tax became due. This gives a grace period of 30 days from the date capital gains tax becomes due.

The interest is suspended where, as a result of incomplete or defective return submitted, the Commissioner General is satisfied that such incompleteness or defect was not due to any negligence or intent to evade the payment of tax on the part of the taxpayer. A taxpayer has 30 days from the date of notification by ZIMRA of defective or incomplete return to correct and resubmit the return. Interest on delayed capital gains tax refunds has also been fixed at the same rate.

Refunds are delayed if not paid within 30 days of the date capital gains tax was paid, unless the overpayment was due to an incomplete or defective return which has been notified to the taxpayer by the ZIMRA.

Income Tax Act

Similarly late paid employees’ tax, provisional tax (QPDs), 10% withholding tax, non-resident shareholders tax, resident shareholders tax, non-resident tax on fees, non-resident tax on remittances, non-resident tax on royalties, property insurance commission etc attract interest.

The new interest is 25% of tax due for any month or part thereof during which tax remains unpaid. The same interest rate applies on reduced assessments and refunds that are delayed by the Commissioner General.

Refunds are deemed delayed if they are not paid to the taxpayer within 30 days of the date of receipt of return by the Commissioner General (CG) unless this was as a result of submission of incomplete or defective return which has been brought to the attention of the taxpayer. The interest will start to accrue after 30 days from the date fresh returns are submitted.

Value Added Tax

Generally VAT is due on or before the 25th of the month following the end of the tax period. If taxpayer fails to meet the deadline he/she will be charged both interest and penalty. The new law revises upwards the interest to 25% of the VAT due for any month or part thereof.

The same rate shall also apply to VAT refunds. However, the Commissioner General is not liable to pay interest if it emanates from defective or incomplete returns and shall only start to run after 30 days of resubmission of the corrected returns. In conclusion interest will be computed based on old rates up to 31st of December 2019 and new rates thereafter.

For instance a tax debt which accrued prior to 31st of December 2019 but remains outstanding in full or in part after this date will be subject to old rate up to 31 December 2019 and new rate after this date. The fact that the interest rate is per month or any part of a month, therefore signifies a higher annualised interest rate of at least 300%. This is by far more than the current penalty rate of up to 100%.  A taxpayer that pays its tax late could therefore be found paying the tax due plus 4 times that tax inclusive of both penalty and interest.

This a serious message from the government against late payment of tax. Taxpayers should take heed and pay their taxes on time in order avoid such cost. Interest is a non-negotiable (are not subject to waiver) debt due to the State.  Further, the fact that the Minister has not ring-fenced the new rate to Zimbabwe dollar taxes makes the interest unbearable for persons liable to pay their taxes in foreign currency. We urge the Minister to revisit this and ring fence the new rate to Zimbabwe dollar tax debts.

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A BRIEF LOOK INTO CR2 SHARE ALLOTMENT (ISSUE OF SHARES)

CR2 is a document used for creating and issuing of new shares, share allotment in a private company means to increase the share capital by issuing new shares after incorporation, Issuing new shares is for many limited companies and it can be for a number of different reasons, such as: raising additional capital from investors, repaying debts, funding a new project, and awarding a bonus share to employees in place of a cash bonus.

FEATURES OF CR2 SHARE ALLOTMENT FORM

  • The registered name and number of the company.
  • The allotment dates.
  • Details of the shares allotted, including: the class, currency and number of shares; the nominal value of each share; and the amount paid or unpaid on each share.
  • Details of any non-cash payments for the shares, for example, awarding bonus shares, or shares given in exchange for anything other than cash.
  • A statement of capital detailing the company’s issued share capital at the date of the return.
  • The prescribed particulars attached to each share.
  • An authorizing signature on behalf of the company.

Before allotting any new shares, it is important to check the company’s articles of association and any shareholders’ agreement for any clause affording pre-emptive rights to existing shareholders. If any such provision is in place, this means existing shareholders have the right to any new shares issued in the company ahead of an incoming shareholder.

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The difference between directors and shareholders

Directors

Directors are known as company officers, can be a natural person (human) or a corporate body. They can also be shareholders. Directors are appointed by the shareholders, they are responsible for managing a company lawfully and ethically in accordance with the Companies Act and the Articles of Association, required to run the business within their powers granted in the articles.

There must always be at least one human director in a company, expected to promote the success of the business with a view to making a profit for the benefit of the company and its shareholders.  Directors receive a salary (and dividend payments where applicable if also a shareholder).

Their rights and powers are determined by the shareholders. Legally responsible for filing true and fair annual accounts, Annual Returns, and Company Tax Returns by the statutory deadlines. Ensuring all required company taxes are paid on time.

They can be removed and disqualified if they are incompetent, display ‘unfit’ conduct or breach their contract in any way. Can be held personally liable and prosecuted if they fail to uphold their legal responsibilities and duties. Normally authorized to issue and transfer shares, but it depends on the powers they are granted in the Articles of Association.

Shareholders

They are known as members. The first shareholders are known as subscribers, can be a natural person or a corporate body. Own some or all of a company through shares. Liability is limited to the nominal value of their shares. If the company gets into debt, they are only responsible for the value of their shares.

Can also be directors if not otherwise prohibited. Receive a portion of the profits in relation to their shareholdings. Not involved with everyday business activities and management, unless they are also directors. Have the power to appoint and remove directors and company secretaries.

Can choose what powers and rights the company directors have. Proportion of ownership depends on the number, value and class of shares held.

 Their voting rights, capital rights and dividend rights depend on the Prescribed Particulars attached to their shares. Make decisions about significant issues such as changing the company name or structure, investment opportunities, issuing shares, appointing an auditor to inspect the accounts, appointing or removing a director, changing a director’s powers, and changing the Articles of Association or Shareholders’ Agreement.

Normally have a right to any surplus capital if the company is wound up (if Articles permit). If a company is owned and managed by a sole director and shareholder, one person alone will have all of these rights and responsibilities. It is important to be aware of these requirements and obligations before committing to limited company formation.

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Rules on VAT Apportionment that every Zimbabwean business owner must know

Input tax is the tax paid on purchases by a registered VAT operator on goods or services acquired for use, consumption or supply in the production of taxable supplies including imports made for use, consumption or supply in the production of taxable supplies. Only persons who are registered for VAT, known as registered operators are permitted to claim input tax. They may either offset it against output VAT or recover it as a refund from the ZIMRA. Taxable supplies are supplied which are charged 15% VAT, known as standard-rated supplies and those charged to tax at 0% rate are called zero-rated supplies.

The third category of supplies is called exempt supplies and individual supplying 100% exempt supplies does not charge VAT on sales nor claim input tax. An operator making both taxable and exempt supplies (non-taxable supplies) during an accounting period can claim input tax in proportion to the taxable element only as fully explained below.

Theoretically, it is easy to account for input tax when an operator only makes taxable supplies or exempt supplies. In practice, an operator will make purely taxable supplies or purely exempt supplies only in exceptional circumstances. Such a mixture of supplies gives rise to one of the most problematic areas in any VAT system, namely the question of apportionment of input tax.

Apportionment refers to the fact that only a portion of input tax that was paid is claimable – the portion not claimable will be added to the expense which will be deductible for income tax purposes under Income Tax. Where input tax is solely attributable to taxable supplies, a trader is entitled to deduct it in full from the output tax due on his taxable supplies.

On the contrary, where input tax is wholly attributable to exempt supplies, none of it is claimable. This means that the use to which input is put is important. Where this is not possible, the input tax becomes residual input tax which must be allocated by way of apportionment.  

In the event that input tax being incurred is for mixed purposes, claimable portion is calculated according to the apportionment percentage by using an approved method by the Commissioner of the Zimbabwe Revenue Authority (ZIMRA).

The only approved method which may be used to apportion input tax in terms of the Act without prior written approval from the Commissioner is the turnover-based method. The turnover-based method should be applied as follows:

                     = Taxable supplies exclusive of VAT   x total input tax

                        Total supplies (taxable plus non-taxable supplies exclusive of VAT)

When computing the income or turnover certain elements should be considered such as the cash value of goods supplied under an installment credit agreement, supplies of capital goods or services which have been used for trade purposes and the value of any goods or services supplied for which input tax deduction is always prohibited, for example, income from sale of passenger motor vehicle are excluded.

A registered operator who wants to use some other method which is not the turnover based should seek the prior approval of the Commissioner. The Commissioner would need to be satisfied that such other method fairly and reasonably represents the extent to which goods or services are used or are to be used by the registered operator in making taxable supplies.

In other words, the method must suit the special circumstances of individual registered businesses or reflect the use made by the taxable person of the relevant goods or services in making taxable supplies. The courts have held that in order for a method to be regarded as fair and reasonable it should be “sensible”, “sane”, and “not asking for too much”..

For example, what may be considered a fair and reasonable basis for apportioning the rent could be the floor space. “Taxable floor space” for this purpose means areas of the building used for making taxable supplies of building space to customers. Meanwhile, taxpayers are warned that methods which are not turnover based should be used or applied with caution because they often change with time.

The use of multiple methods notwithstanding the behavior pattern of the applicable expenses should also be avoided. Furthermore, the method so selected should be based on the information that is in possession of the taxpayer without having to resort to hiring expensive third parties, such as valuators.

The Act provides for de minimis apportionment rules. This means if the proportion of an input tax claim exceeds a given amount or ratio the registered person would be allowed full or 100 percent input tax or refund. The main purpose of this rule is to simplify VAT administration and compliance for tax officers and taxpayers.

The VAT Act makes provision for such rule and provides that where the goods or services so acquired are used at least 90 percent for the purposes of making taxable supplies, the full input tax credit may be granted. This indicates that input tax should be apportioned when the intended use of goods and services in the course of making taxable supplies is less than 90% of the total intended use of such goods and services.

There are tax implications for not apportioning input tax where goods or services are acquired for use, consumption or supply in the making of mixed supplies. ZIMRA will disallow the undue input tax and levy penalties and interest.

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Why Taxpayers must take advantage of Capital Allowances

In Income tax computation, expenditure is deducted if it has been incurred in the production of income for the purpose of trade. Expenditure on acquisition or construction of fixed assets known as Property, Plant, and Equipment (PPE) is not deducted but claimed against taxable income in the form of capital allowances over the useful life of the assets.

Capital allowances can be claimed by all persons deriving income from trade and investments namely sole traders, independent contractors, non -executive directors, partners, companies, and trusts with taxable income irrespective of the type of business undertaken. However, miners and petroleum operators have their own method of claiming capital expenditure.

Capital allowances allow the taxpayer to obtain relief on capital expenditure by deducting it against pre-tax income. If an asset is constructed or acquired in one tax year then put into use in the following year, capital allowances are only claimed in the year the asset has been put into use.

Capital expenditure includes the cost of acquiring or construction of the asset and all costs related in acquiring the asset such as initial set up, installation, programming, travel cost to purchase the asset, freight charges, transit insurance, irrecoverable VAT, borrowing cost, foreign exchange losses in respect of the asset.

There are two methods of claiming capital expenditure namely Special Initial Allowance (SIA) and Wear & Tear (W & T). SIA is a capital allowance granted upon election on constructed buildings, additions, alterations or improvement to the said buildings and movable purchased.

The act provides for 90 percent de minimis use rule, meaning that property used for at least 90 percent in the production of income for purposes of trade to be granted SIA.

The current rate for SIA is 25 percent for annum for big business and 50 percent for SMEs in the first year. After the first year, accelerated wear & tear is 25 percent per annum for the next three years in the case of big business and 25 percent per annum for the next two years for SMEs.

SIA is never apportioned, either taxpayer qualifies or does not qualify for SIA at all and it is also computed based on cost. Assets under a finance lease also qualify for SIA in the hands of the lessee.

Wear and tear is granted in all cases where SIA has never been granted. It is computed on the cost of immovable assets purchased or constructed by the taxpayer, additions, alterations, and improvements made to immovable properties and on movable property including on computer software acquired or developed. The following are rates for wear and tear on;

  • Commercial buildings – 2.5% per annum
  • Immovable property – 5 %per annum
  •  Movable property and computer software -10% on written down values.

Wear and tear is apportioned in the case of movable property used partly for business and private by the owners of the business.

Accelerating capital allowances allow taxpayers to minimize their tax liabilities, making SIA a favorable method to claim wherever possible. However, it is not beneficial for taxpayer with assessed losses which are about to expire to elect SIA because it will result in increased assessed losses which may not be recovered.

Therefore, capital allowances are incentives on capital expenditure which taxpayers must take advantage of, but it is difficult to claim these when an individual is not a registered taxpayer or has no internal system for tracking capital expenditure.