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APPLIED ZIMBABWE TAXATION 2015

POSTGRADUATE DIPLOMA IN APPLIED ACCOUNTING


SCIENCES

CTA LEVEL 2 [CAZ 2]

TUTORIAL 1

Prepared by:

Maxwell Ngorima
Dumisani Ngwenya
Tutorial Letter 1-CAZ 2 2015

The Tutorial Letters will be structured as follows:


TUTORIAL LETTER 101
INCOME TAX
1. Introduction and Welcome
1.1 Syllabus
1.2 Legislation cut off for exam
1.3 Tests/ Examinations
2. Tax Rates, Credits, Allowances
3 Administrative and legal framework
4. Outline of the Tax System
` 4.1 Gross Income
Received by/ Accrued
Source
.
Capital and Revenue Accruals and Outlays
5. Taxation of Employment Income
6. VALUE ADDED TAX

6.1 Interpretation of Law and Definitions

6.2 General Operational Aspects of VAT

6.3 Supplies

6.4 Taxable Supplies

6.5 Exempt Supplies

6.6 Importation of Goods and Services

6.7 Accounting and Calculation of VAT

6.8 Input Tax and Documentation

6.9 VAT Registration

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Tutorial Letter 1-CAZ 2 2015

TESTS TIMETABLE

Scope Test Number Test/Exam date

Tutorial 1 Test 1 17 March 2015

Tutorial 2 Test 2 28 April 2015

Tutorial 3 Test 3 23 June 2015

Tutorial 4 Test 4 4 August 2015

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Tutorial Letter 1-CAZ 2 2015

STUDY UNIT 1

The Administrative Framework and Legal Framework

The final examination will be based on legislation in force as at 31 December 2014. For
planning type questions, candidates should also be aware of the legislative changes which
have recently been promulgated, following the parliamentary approval of the National
Budget presented by the Minister of Finance to Parliament in December 2014

Key Concepts
The following key concepts are underlying to this study unit:

Understand the purpose of taxation


Identify the different types of taxes
Describe the overall structure of the Zimbabwe tax system
Explain the terms tax avoidance and tax evasion
The different tax rates for various sources of Income
Filing of returns and tax assessment

Prescribed Study Material


The following must be studied before you attempt the questions in this
study unit:
ZCTA Taxation 2015 Handbook
Income Tax Act Chapter 23:06
Finance/Charging Act

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Tutorial Letter 1-CAZ 2 2015
SECTION A ADDITIONAL INFORMATION

THE OVERALL FUNCTION AND PURPOSE OF TAXATION


Taxation is a government policy targeted at collecting revenue for the financing of
public expenditure.
Tax is also levied as means of discouraging demand of demerit goods i.e. tobacco,
alcohol etc. and promoting or protecting local industries.
The main collecting agent of tax for the state is the Zimbabwe Revenue Authority
ZIMRA
ZIMRA came into being with effect from 19 January 2001 and the Commissioner
General of taxes is vested with the power and responsibility of administering the tax
statutes.

OVERALL STRUCTURE OF THE TAX SYSTEM


ZIMRA is responsible for administering the following taxes;
Customs Duty levied on imported goods in terms the Customs and Excise Act
[Chapter 23:02]
Value Added Tax (VAT) - levied on consumption of goods and services
Excise Duty - levied on specified locally manufactured goods
Income Tax - levied on income earned from trade
Pay As You Earn (PAYE)- levied on income earned from employment
Presumptive Taxes- its a concept of taxation according to which Income Tax is
based on average income instead of actual income
Road Tolls - fees levied for the use of the roads
Capital Gains Tax (CGT) levied on sale of immovable properties and marketable
securities
Surtax levied on imported vehicles older than five years

TYPES OF TAXES

There are two broad categories of taxes namely, direct and indirect taxes.
Direct taxes:
These are taxes levied on income and wealth of individuals and companies. The
burden of these taxes is borne by the person or organisation responsible for paying
taxes i.e.
o Corporate tax tax on business income (profits)
o Pay as you earn- tax earned by individuals from employment.
o Investment income tax on dividends and interest
o Capital gains tax- tax on sale of immovable property and shares
o Estate duty tax- on the property of a deceased person etc.

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Tutorial Letter 1-CAZ 2 2015
INDIRECT TAXES

Are levied on one set of individuals or organisations, but may be partly or wholly
passed onto others and are largely related to consumption.
For example, sales tax, value added tax, custom & excise duty etc.
Key difference between direct and indirect taxes
Indirect taxes tend to be regressive. In other words they have a relatively greater
impact on the poor. Yet direct taxes are progressive in nature. The more you earn
the more tax you pay.

TAX AVOIDANCE AND TAX EVASION

Tax planning this involves the organizing of a tax payers affairs in a way that legally
minimizes the impact of taxation imposed by statutes.
Therefore in light of the need for tax planning the following issues become pertinent:
o Tax avoidance: this is the arrangement of ones affairs in a legal manner
which results in minimization of tax liabilities. (Sect 98 of the income tax act)
o Tax evasion: this is minimization of tax liability by means which are outside
the law e.g. falsification of records, misrepresentation etc.

FILING OF RETURNS AND ASSESSMENTS

Individuals: PAYE

Employers who have been placed on the final deduction system for their employees
have the responsibility to deduct the correct amount of PAYE for the year.
Such PAYE deducted from the employees remuneration should be remitted to
ZIMRA within 10 days from the end of the month to which such PAYE refers.
The penalty for late payment of PAYE is 100% of the tax payable, and interest also
accrues for any unpaid amounts at a rate of 10%.
Therefore if an individual is earning only income from employment they would not
have an obligation to file tax returns with ZIMRA.

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Tutorial Letter 1-CAZ 2 2015
INCOME FROM TRADE AND INVESTMEMTS

Taxpayers who are earning income from trade and investment activities are required
to be on the Quarterly Payment Dates (QPDs).
Under the QPD system taxpayers are required to prepare tax assessments/returns
and pay estimated tax liabilities in four instalments on dates allocated throughout
the year, as follows

25 March 10% of tax payable


25 June 25% of tax payable
25 September 30% of tax payable
20 December 35% of tax payable

Who should file returns on the above QPDs


o Partners forming part of a partnership
o Individuals earning income as sole traders
o Companies
o Non-executive directors - earning directors fees

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Tutorial Letter 1-CAZ 2 2015
STUDY UNIT 2

GROSS INCOME

The objective of this study unit is to define what constitutes gross income and
the application of case law in interpreting the gross income concept.

KEY CONCEPTS
The following key concepts are underlying to this study unit:
Definition of gross income in accordance with section 8 of the Income
Tax Act
Apply case law to interpret the definition of gross income
Concept of source in determining taxable income
Distinguish between capital receipts and revenue receipts
Deemed received or deemed accrued Sect 10 of the Income tax Act

Prescribed Study Material


The following must be studied before you attempt the questions in this study
unit:
ZCTA Taxation 2015 Handbook
Income Tax Act
Finance/Charging Act

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Tutorial Letter 1-CAZ 2 2015
SECTION A ADDITIONAL INFORMATION

1. Overview
Section 8 of the income tax Act defines Gross Income and identifies the following key
elements to the definition
o Amount
o Received by or accrued to or in favour of a person
o Deemed to be received or accrued
o In any year of assessment
o From a source within or deemed to be within Zimbabwe
o Excluding amounts proved to be of a capital nature

NB: Please refer to the prescribed study material for further information

Our Zimbabwe tax system is source based, which means that for income to be
taxable in Zimbabwe it should be from a source within or deemed to be within
Zimbabwe
The definition also specifically excludes all amounts which are capital in nature; this
therefore follows similar principles to IFRS in identifying items which are capital in
nature.
The definition of gross income in the Income Tax Act (Chapter 23:06) can further be
clarified by application of case law as identified in the prescribed study material.

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Tutorial Letter 1-CAZ 2 2015
SECTION B ADDITIONAL QUESTIONS

Question 2.1

You are a tax consultant. The following information has been presented to you:
Midlands (Pvt) Ltd (Midlands), a resident company, owns a hotel in Gweru. Midlands had a
contract with a resident company called Nashen Ltd (Nashen) to provide accommodation
and meals for a period of six months for students from a country which does not have a
double tax agreement with Zimbabwe. Nashen had a contract to train the students.

During September 2014, after staying at the hotel for only two months, the students left the
hotel without giving any reasons for their departure. They had caused extensive damage to
the hotel rooms they had occupied. Midlands sought legal advice on the matter and, based
on that advice, threatened to sue Nashen unless it settled a claim for damages of $400,000.

The claim consisted of the following:


$60 000 for meals and accommodation for the remaining four months of the contract;
$140 000 to effect repairs to the hotel rooms; and
$200 000 for loss of goodwill which Midlands suffered as a result of the events which led
to the claim.

On 15 November 2014 the parties agreed to settle the matter out of court.

Nashen paid Midlands $200 000 and Midlands undertook to abandon any rights it may have
had for the damages and any pending or contemplated court action against Nashen. The
parties agreed that the $200 000 represented 50% of each of the three items in the claim.

Midlands incurred legal expenses of $30 000 in respect of this matter, which it settled
during December 2014.

It is also incurred $140 000 to effect repairs to the hotel rooms which it claimed as a
deduction in terms of section 15 (2) (b) and this amount is included in the net income of
$500 000 (see below).

In the completion of the tax return of the company for its 2014 year of assessment ended 31
December 2014, the accountant of Midlands adjusted its accounting net income that
included the $200 000 received for damages and $30 000 legal expenses paid as, as follows:

$
Net income 500 000
Less: Loss of goodwill received (a capital receipt) (100 000)
400 000
Add: Legal expenses of a capital nature (50% of 30 000) 15 000
Taxable Income 415 000

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Tutorial Letter 1-CAZ 2 2015

However, The Zimbabwe Revenue Authority (ZIMRA) queried the above treatment and
stated that it was treating the full $200 000 damages received as being of a revenue nature
and thus taxable, but that it would allow the legal expenses in full in terms of section
15(2)(a).

The 2014 assessment which ZIMRA accordingly issued on 15 February 2015 reflected
taxable income of $470 000

The company plans to lodge an objection to this assessment.


REQUIRED
Discuss, with reference to relevant case law and legislation, whether the accountants
income tax treatment of the damages receipt and related legal expenses was correct.

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Tutorial Letter 1-CAZ 2 2015
Question 2.1 Solution

Damages receipt of $200 000


The pertinent question to be answered is whether the damages receipt of $200 000
(or part thereof) is of a capital or revenue nature. 1

Should the receipt (or part thereof) be of a capital nature it is excluded from the
gross income definition but may have capital gains tax (CGT) consequences? 1

It is submitted the receipt of $200 000 can be separated into its component parts as
contractually agreed by the relevant parties. Each component of the claim therefore 1
needs to be considered.

The courts have held that damages and compensation receipt will be of a capital 1
nature if the payment is for the loss or sterilisation of the taxpayers capital asset (i.e
his income producing machine). However if the payment is made for the 1
compensation of loss of profits it will be of a revenue nature in the hands of the
recipient. As was said in the Burmah Steam Ship Co case (bonus mark for mentioning 1
the case) is the receipt to fill a hole in profits or in fixed capital assets.

The part of the receipt relating to meals and accommodation is compensation for loss
of profits and of a revenue nature and included in gross income. 1

The part of the receipt relating to repairs is a recoupment of section 15 2 (b)


expenses claimed and is included in gross income. 1

It is submitted that goodwill is generally an asset of a capital nature and the proceeds
from disposal of goodwill will be of a capital nature. 1

Thus it is submitted that the damages receipt relating to the loss of goodwill is of a 1
capital nature.

Thus the accountant has correctly excluded $100 000 of the damages receipt from 1
gross income.

Legal expenses

The accountant has correctly added back 50% of the legal expenses as section 15 (2)
(a) disallow expenses of a capital nature. 1

The balance of the legal expenses represents legal expenses actually incurred in
respect of a claim made by the taxpayer for payment to him for an amount which 1
would be included in his income.

13
Max 13

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Tutorial Letter 1-CAZ 2 2015
STUDY UNIT 3

TAXATION OF EMPLOYMENT INCOME INCOME TAX ACT (CHAPTER 23:06)

Key Issue
Employment income and income from trade and investment activities
are taxed under different tax regimes therefore it is important that
students are able to distinguish the two sources of income.

Key Concepts
The following key concepts are underlying to this study unit:
Define employment Income (Sect 8 (1) (b)) The identification
and taxation of employment income

Understand the concept of PAYE The calculation and the


responsibility for remitting PAYE

Employment benefits (Sect 8 (1) (f)) inclusion of employment


benefits into gross income

Tax implications of contributions and proceeds from Pension


and Retirement Annuity Funds (RAF) (Sect 8(1) (n) & Sect 8(1) (r)

Tax concessions for the elderly (Tax payer of the age of 55years)

Exempt Income (Sect 14 & 3rd Schedule)

Tax credits(Sect 7c)

Allowable deductions on employment income Sect 15

Prepare a tax computation for employment income

Prescribed Study Material


The following must be studied before you attempt the questions in this study
unit:
ZCTA Taxation 2015 Handbook
Income Tax Act
Finance/Charging Act

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Tutorial Letter 1-CAZ 2 2015
SECTION A ADDITIONAL INFORMATION

Framework for the taxation of Employment Income

Total employment Income (Sect 8 (1) (b) xxxx


Less Exempt income (Sect 14 & 3rd schedule (xxxx)
Income xxxx

Less Allowable deduction (sect 15) (xxxx)


Taxable Income xxxx

Calculate tax using the tax tables xxxx


Less Credits (Sect 7 (c)) (xxxx)
xxxx
Add 3% aids levy xxxx
xxxx
Less PAYE (Remitted over the course of the year) xxxx
Tax liability xxxx

Employment Benefits Sec 8 (1) (f)

Also taxable under employment income are benefits accruing from employment. Some of
the benefits are as follows,

Motoring benefits
School fees benefit
Loan benefit
Housing benefit
Passage benefit
Entertainment allowance

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Tutorial Letter 1-CAZ 2 2015
SECTION B ADDITIONAL QUESTIONS

QUESTION 3.1 30 MARKS

This question consists of two unrelated parts.


Part A (15 marks)
Thabisile Mazai, 37 years of age and is ordinarily resident in Zimbabwe, is the Creative
Director and Project Manager of Creative Events (Pty) Ltd, a company that manages and
promotes events such as conferences, weddings, promotions etc. Thabisile had been
appointed a director of the company on 1 January 2012.
Thabisile earns a basic salary and a commission of 5% of the net profit of each event
managed by her. The commission is determined and paid in the month following the
completion of each event.
During the 2013 year of assessment Thabisile earned a basic salary of $2 400 per month and
total commission earned during the year amounted to $12 000. Her basic salary for the
2014 year of assessment is $2 800 per month. Commission paid to Thabisile in January 2014
amounted to $1 500.
Thabisile is also a member of the Adventure Medical Aid Scheme. The monthly contribution
for herself, her husband and two children is $300 of which her employer pays $150 and
Thabisile pays $150. These contributions have remained unchanged since 1 January 2012.
Since 1 January 2012 Thabisile has been granted the right of use of a company vehicle. It is
a BMW one Series 120I which cost the company $45 000 inclusive of VAT. The vehicle has a
5 year maintenance plan. The company pays for the licences, insurance in respect of the
vehicle. Thabisile has not kept records of her business travel in this vehicle. The engine
capacity of the BMW is 3000ccs. In addition to the free use of the motor vehicle Thabisile
also receives a monthly fuel allowance of $300.
REQUIRED
Calculate Thabisile Taxable income for the 2013 and 2014 tax years and highlight any credit
available to her. (15)
Part B (15 marks)
You are a partner of a tax consulting firm. One of your clients have approached you for
advice on the matters listed below:
Mr Eddy, A 45 year-old Zimbabwean Resident, is the marketing director of Easy Sales Ltd.
He participates in a share option scheme that is only available to senior management
personnel.
On the 15 October 2009 Mr Eddy acquired the right to purchase 100 000 shares in Easy
Sales Ltd at par value, which is $0.5 per share. At the time the right was granted the market
value of the share was $1.
In terms of the rules of the share option scheme Mr Eddy is not allowed to sell the shares
from the date of exercising the option. Mr Eddy exercised his right on 30 November 2014
when the market value was $2.50 per share. Mr Eddy plans to hold the shares as an
investment and does not intend to sell these shares until his retirement at the age of 55.
Mr Eddy has requested your advice on the current and future income tax implications of the
shares he acquired in Easy Sales Ltd.
REQUIRED
Provide Mr Eddy with the advice he has requested.

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Tutorial Letter 1-CAZ 2 2015
Question 3.1 Suggested solution

Part A: Thabisile Calculation of taxable Income

2013 2014
$ $
Basic Salary sec 8 (1) (b) (2400*12) 28,800.00 (2800*12) 33,600.00
Commission sec 8 (1) (b) 12,000.00 1,500.00
Medical Aid Contributions - -
Motoring Benefit Sect 8
(f) 600p.m 7,200.00 7,200.00
Fuel Allowance- Part of
motoring benefit NIL NIL
Taxable Income 48,000.00 42,300.00
Credits
Medical Aid contributions
(own) $150*12*50% 900 $150*12*50% 900

Part B: Client 1 Mr Eddy


Mr Eddy (45)
Share Issue advice
Grant Date
The right was acquired on the 15th of October 2009, on this date a taxable benefit accrues
in terms of S 8 (1)(d).
This is ($1 - $0, 5) x 100 000 = $50 000
Exercise date
At exercise date a benefit accrues to Mr Eddy in terms of (Section 8 1(t)) of the Income Tax
Act
The taxable benefit will be calculated by applying the following formula.
A - (B+C)
A= Market Value of Share at Exercise Date
B= Exercise price
C= Inflation allowance
Benefit on exercise of option = ($2.5 $1.0) * 100,000
= $150,000
Therefore the benefit of $150,000 is included in Mr Eddys taxable income for the 2014 tax
year.
Disposal date
On the subsequent disposal of the shares, an amount receivable Mr Eddy is Taxable in terms
of the Capital Gains Tax Act. In terms of the Capital Gains Tax the first $1,800 of the
proceeds from disposal of a marketable security by a tax payer over 55 years is exempt from
CGT. There it would be advisable for Mr Eddy to dispose of his shares after he has reached
the age of 55 years to take advantage of this exemption.

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Tutorial Letter 1-CAZ 2 2015

Question 3.2 10 marks


Vuyo Mathebula, aged 62, is a Zimbabwean resident as defined having emigrated from
South Africa in 2003. Prior to his retirement Vuyo had been employed by a university in
Germany. He has a number of foreign investments in Europe as he inherited a substantial
sum of money from his late father in 1995.
Vuyo has approached you to assist him with the calculation of his Zimbabwean normal tax
liability for the 2014 year of assessment. He has provided you with the following
information.
Foreign Income

A pension, from the South Africa social security system of $1,600 per month. No tax was
deducted from the pension and the amount was paid into a bank account in South
Africa.

Interest on a fixed deposit investment in a South African bank account. The monthly
gross interest is $1,000 per month. In terms of South African domestic law, the interest
is subject to a withholding tax of 10%. The interest accrues monthly in arrears and is
transferred to Vuyos Zimbabwean bank account on the last day of each month.

Rentals from a building situated in South Africa for the period 1 January 2014 to 31 May
2014 at a monthly rental of $4,800. The building was sold for 2 500 000 Rands to a Swiss
company on 1 June 2014. The building had originally cost 1 800 00 Rands in 1998 and
had a market value of 2 000 000 Rands when Vuyo immigrated to Zimbabwe in 2002.
The rentals and the capital gain of 700 000 Rands were not subject to any South African
taxes.

A net dividend of $5 400 from an Irish company in which Vuyo holds 8% of the equity
shares. The dividend was subject to a withholding tax of 10%.
Vuyo incurred the following expenditure during the 2014 year of assessment which may be
relevant for his normal tax liability.
$
Medical aid contributions ($250 per month) 3 000
Vuyo is married with no other dependants
All medical expenses were recovered from the medical aid society

Your fee for doing the 2014 tax return 300

REQUIRED
Calculate Vuyo taxable income for 2014 year of assessment. Confine your answer to the
available information and ignore the possible impact of any double tax agreement.
NB: Also highlight any available credits

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Tutorial Letter 1-CAZ 2 2015
Question 3.2: Suggested Solution

Vuyo Mathebula

$ $
Vuyos taxable Income
Pension from South Africa( Not from Zimbabwean source) -
Interest from South Africa(taxed gross) 12,000
Rent from South Africa not from Zimbabwean source -
Disposal of building Specified assets, therefore consider CGT
Dividend from Irish company (taxed gross) 6,000
Fee for preparation of tax return (300)
Taxable income 17,700

Available Credits
Medical Aid Contributions ($3,000 * 50%) 1,500
Elderly persons credit 900 2,400

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Tutorial Letter 1-CAZ 2 2015
Question 3.3

Timothy Guyo is a qualified geologist with several years working experience in geological
surveys. He also sits on the boards of a number of reputable mining conglomerates
including the company he currently works for, Ngoda Limited. Due to his extensive
knowledge in geological work, Timothy is often subcontracted by Ngoda Limited to offer
training services to other unconnected mining companies.

During the year ended 31 December 2014, Ngoda Limited established an office in Harare
and Timothy was transferred to work at the new office. He was offered a fully furnished
company house for his accommodation. The company house is located in Dawning Park just
outside the municipality of Harare. The household furniture was bought by Ngoda Limited at
a total cost of US$35 000.

Timothys earnings and deductions from employment for the year ended 31 December
2014:

Notes US$
Salary from Ngoda Limited 80 000
Earnings from subcontracted work (1) 95 000
Passage benefit (2) 5 000
Directors fees for acting as a director of Ngoda Limited (3) 40 000
Thirteenth cheque 7 000
Conference allowance (4) 15 000
Fuel allowance (5) 12 000
Leave pay 6 700
Performance bonus 9 500
Rental paid to Ngoda Limited for company house (3 000)
Funeral policy contributions (2 000)
Subscriptions paid by Timothy to the Institute of Geological Surveys (4 000)
Pension and NSSA contributions paid by Timothy (8 000)
PAYE (6) (23 000)

Other earnings
Rental income from principal private residence 95 000
Contract fees (7) 65 000

Notes
(1) The amount is calculated based on 5% of the amount invoiced by Timothys employer
whenever he is subcontracted to offer training to other mining companies.

(2) The amount refers to the cost of Timothys relocation to Harare. The amount was paid in
full by his employer. His place of ordinary residence before his engagement with the mining
company has always been Mutare in Manicaland province.

(3) The amount was paid by Ngoda Limited for the year ended 31 December 2014.

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Tutorial Letter 1-CAZ 2 2015
Question 3.3 (continued)

(4) The amount detailed below was paid by Ngoda Limited for his participation at a week-
long mining managers conference held in the resort town of Victoria Falls during the year:
US$
Travelling expenses (amount incurred) 2 000
Spouses shopping 5 000
Accommodation, meals and related direct expenses 8 000
15 000

(5) Fuel allowance for the year refers to the amount paid by Ngoda Limited to Timothy to
cover the fuel expenses for his company allocated vehicle, a Nissan Navara, engine capacity
3300cc. The total mileage for the year was 30 000km of which 20 000 km was directly
related to the business of the employer.

(6) The PAYE was wholly paid by Ngoda Limited on behalf of Timothy as part of the agreed
engagement terms, such that Timothy received his full gross salary.

(7) The contract fees were paid by one of the two companies which engaged Timothy as an
independent contractor during the year. The other company paid Timothy for his services by
giving him 30 000 listed shares valued at US$150 per share on 31 March 2014. On 5 August
2014, Timothy disposed of 10 000 of the shares at a market value of US$7 a share and used
the proceeds to set up a business for his spouse.

Additional information

While analysing the chemical composition of a mineral deposit in the laboratory on 30 June
2014, Timothy was accidentally permanently blinded in one eye. The medical expenses were
covered by Ngoda Limited and NSSA also paid Timothy a total amount of U$20 000 as
compensation for the occupational accident. Ngoda Limited also increased his monthly
medical contributions from US$1 000 to US$1 200 per month in order to ensure his
adequate medical cover. The amount was paid by Ngoda limited in full as part of the
contractual agreement.

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Tutorial Letter 1-CAZ 2 2015
Question 3.3 (continued)

Required:

(a) Identify ANY TWO factors which determine an engagement is treated as employment
and ANY TWO factors which indicate self-employment; (2 marks)

(b) Explain the tax treatment of the following items:

(i) Earnings from subcontracted work (note 1); (1 mark)

(ii) Passage benefit (note 2); (1 mark)

(iii) Conference allowance (note 4); (1 mark)

(iv) PAYE (note 6); (1 mark)

(v) NSSA compensation as detailed in the additional information. (1 mark)

Note: No calculations are required in part (b).

(c) (i) Calculate the value of the taxable benefits arising from Timothy Guyos usage of the
company house; (2 marks)

(ii) Calculate the taxable income and tax arising from the share transactions detailed in
note (7) above; (3 marks)

(iii) Calculate the taxable income and tax payable by Timothy Guyo for the year ended

31 December 2014.

Note: Indicate any amounts not taxable or not deductible by the use of a zero. (13 marks)

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Tutorial Letter 1-CAZ 2 2015
Question 3.3: Suggested Solution

(a) Factors which determine whether an engagement is treated as employment or self-


employment
Employment engagement
Employee subject to the organisations code of conduct.
Employee entitled to leave and benefits such as pension, medical aid, etc.
There is an employment contract for the rendering of services
Self-employment engagement
The contractor is independent of the employer.
Raises an invoice for the work completed.
(b) Tax treatment of the following:
Earnings from subcontracted work
The amount is subject to PAYE since it was paid consequent to John Kyle
being an employee and rendering his services to his employer. Sect 8 (1) (b)
Passage benefit
The amount is exempted from tax since it was incurred by the employer for
the first time since Timothys engagement. Sect 8 (f)
Conference allowance
The US$5 000 relating to Timothys spouse shopping is taxed in his hands. The
amount relating to travelling and other direct conference expenses is not taxable.
Sect 8 (f)
PAYE
The amount is treated as a taxable benefit and included in Johns gross
income. Sect 8 (f)

NSSA compensation

The amount is specifically exempt from gross income in terms of the 3rd
schedule.

(c) Calculation of the taxable benefits


Housing benefit (125% of salary: 125% x 80 000) less rent charged by employer (10
000 3 000) = US$7 000
Furniture benefit (8% of furniture cost: 8% x 35 000) = US$2 800

(d) Calculation of the taxable income and tax arising from the share transactions
Taxable income corporate tax rate
30 000 x 150 US$45 000
Tax at 2575% US$11 588

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Tutorial Letter 1-CAZ 2 2015

Question 3.3: Suggested Solution - continued

(e) Calculation of the taxable income and tax payable by Timothy Guyo for the year
ended 31 December 2014

Employment Income $ $ $
Salary 80,000
Earnings from subcontracted work 95,000
Passage benefit - exempt -
Directors fees executive director therefore employment Income 40,000
Thirteenth Cheque 7,000
Less exempt 3rd schedule (1,000) 6,000
Conference allowance- see above 5,000
Fuel allowance Included in motor vehicle deemed benefit -
Car benefit based on engine capacity 3300cc 9,600
Leave pay - 6,700
Performance bonus 9,500
Housing benefit see above 7,000
Furniture benefit see above 2,800
PAYE Benefit 23,000
NSSA compensation exempt (3rd Schedule) -
Funeral policy contributions not allowable -
Subscriptions to the Institute of Geological Surveys (4,000)
NSSA & Pension contributions Limited to $5,400 (5,400)
Taxable Income 275,200

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Tutorial Letter 1-CAZ 2 2015
STUDY UNIT 4
VALUE ADDED TAX - VALUE ADDED TAX ACT CHAPTER 23:12

Key Issue
The purpose of the Value Added Tax Act is to prescribe the levying
of VAT

KEY CONCEPTS
The following key concepts are underlying to this study unit:
Interpretation of Key terms and definitions
General operational Aspects of VAT
Define and identify taxable supplies
Apply the concept of deemed supplies
Identify exempt and zero rated supplies
Importation of goods and services
Accounting and calculation of VAT
Input tax and Documentation
VAT Registration

Prescribed Study Material


The following must be studied before you attempt the questions in
this study unit:
ZCTA Taxation 2015 Handbook
VALUE ADDED TAX ACT (CHAPTER 23:12)
Finance/Charging Act

ZCTA TAX TEAM Page 23


Tutorial Letter 1-CAZ 2 2015
SECTION A ADDITIONAL INFORMATION

Students should understand and be able to apply the following key terms
o Connected person
o Consideration
o Entertainment
o Financial services
o Fixed property
o Goods
o Imported Service
o Input Tax
o Instalment Credit Agreement
o Open Market Value
o Output Tax
o Person
o Trade
Supplies
o Apply the definition of supply in terms of the VAT act to identify taxable
supplies
o What constitutes the supply of services
o When is a supply deemed to take place
o How to quantify the value of supply
There three distinct types of supplies
o Zero rated
o Standard rated
o Exempt

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Tutorial Letter 1-CAZ 2 2015
Zero rated Goods (section 10(1)

a) Goods exported to an address in an export country. To qualify for zero rating, the
operator must have consigned the goods to an export country or must have
delivered the goods to a foreign going courier for onward delivery to an export
country. There must be documentary evidence to prove that the goods have actually
been exported. Such proof could be in the form of bills of entry export or customs
export documents CD1s. Zero rating will not apply where the goods are purchased in
the country by a non-resident who will in turn export the goods on his own to his
home country.
b) Goods (including consumables) supplied to repair goods temporarily admitted into
Zimbabwe. Zero rating applies if the goods are essentially fixed to or incorporated
into the admitted goods or are consumed as a direct result of the repair,
modification or treatment process for the admitted goods.
c) Goods supplied under a rental agreement if used exclusively in an export country.
d) Goods supplied under a rental agreement if used in or paid for from an export
country. Only applies to foreign registered businesses.
e) The disposal of a business as a going concern. Where any part of a business capable
of separate operation is disposed of as a going concern to another registered
operator, the disposal of that part of the business may also be zero rated. However,
zero rating will be granted upon meeting the following requirements:
Both seller and buyer must be registered operators
The parties must agree in writing that the business is being disposed as a
going concern.
The assets necessary for carrying on the business must be disposed of by the
seller to the buyer
f) Gold supplied to the Reserve Bank or any other registered banks.
g) Regular agricultural inputs supplied to farmers e.g. animal feeds, animal remedy,
fertilizer, pesticides and seed.
h) Goods for disabled persons.
i) The supply by a registered operator of goods to an independent branch in an export
country is zero rated if that branch is separately identifiable and an independent
system of accounting is maintained for it.
j) Supply of gold coins issued by the Reserve Bank
k) Drugs as defined in the Medicines & Allied Substances control Act.
l) Building bricks
m) Basic food stuff, such as plain bread, plain buns, milk, cooking oil etc.

ZCTA TAX TEAM Page 25


Tutorial Letter 1-CAZ 2 2015
Zero rated services (section 10(2)

(a) Transportation of PASSENGERS or GOODS to, from and outside Zimbabwe.

(b) Transportation of PASSENGERS from one place to another place in Zimbabwe by aircraft to
the extent that the travel constitutes international carriage

(c) Transport and ancillary transport services supplied within Zimbabwe in respect of imports and
exports of GOODS, if supplied by the same supplier responsible for the international transport of
those goods.

(e) Transportation services for the movement of goods through Zimbabwe from one export
country to another, when provided to a non-resident (non-registered operator), who does not
carry on a business in Zimbabwe (includes an ancillary transport services as defined).

(f) Services rendered in connection with land or improvements OUTSIDE Zimbabwe

(g) Services rendered in connection with movables situated in an export country: goods
temporarily admitted into Zimbabwe which are exempted from import duties, and certain
services relating to foreign going aircraft

(h) Services comprising handling, pilotage salvage, towage and operation or management of any
foreign going aircraft: where the services are supplied to a non-resident and a non-registered
operator.

(i) Services of arranging the supply of goods, services or transport of goods for a person who is
non-resident and a non-registered operator.

(j) Services rendered in connection with the repair of a train operated by non-residents, not
carrying on business in Zimbabwe

(k) Services rendered whilst physically outside Zimbabwe (other than telecommunication services
utilized in Zimbabwe).

(l) Services supplied to a non-resident who is outside Zimbabwe at the time the services are
rendered, except where related to land and improvements thereto, or movable property situated
inside Zimbabwe. (There are some exceptions to this rule)

(m) Patents and other intellectual property for use outside Zimbabwe.

(n) Deemed Services in terms of section 7 (5) supplied by a charitable organisation to a public or
local authority.

(o) The supply of services by a registered operator to his branch situated in an export country

(p) Transfer payments received from Government Departments

ZCTA TAX TEAM Page 26


Tutorial Letter 1-CAZ 2 2015
Types of Exempt Supplies

a) Supply of Financial Services


b) The supply by an association not for gain of any donated goods or services OR where the
association manufactures goods, if at least 80% of the value of the materials used consist of
donated goods.
c) The supply of residential accommodation in a dwelling under a lease or hire agreement OR,
where an employer permits his employee to occupy the accommodation as a fringe benefit
for the duration of the employment.
d) The supply of leasehold land used to erect dwellings and for existing dwellings
e) Sale or letting of land outside Zimbabwe. Note that any SERVICES relating to such land is
zero-rated. S10(2) (f)
f) The supply of public road and railway transport to fare paying passengers and their luggage.
Note that the transport of passengers to an export country is zero-rated and this will
override the exemption.
g) Any educational services for pre-school, primary, secondary, tertiary and technical
education and the education or training of physically/ mentally handicapped persons at any
institution, which meets the requirements of the Ministry responsible for education or
higher education.
h) Medical services supplied by any person. This includes incidental and subordinate services
in respect thereof.
i) The supply of goods and services by an employee organisation to any of its members to the
extent that the consideration for the supply consists of membership contributions.
j) The supply of piped water, rates charged by a local authority and domestic electricity
k) Supply of fuel and fuel products.

ZCTA TAX TEAM Page 27


Tutorial Letter 1-CAZ 2 2015
SECTION B ADDITIONAL QUESTIONS

Question 4.1

Kiddies World (Pvt) Ltd (Kiddies) trades from property which it owns in Graniteside. The
property had originally been acquired on 1 October 2010 for $2 million from a non-
registered operator. The property consists of a ground floor retail space, a first floor which
houses a small toy manufacturing plant and four further storeys of residential flats which
are rented out as residential accommodation. No tax allowances were claimed on the
building.

In the retail space, Kiddies sells a large variety of kids toys some of which it manufactures
on the first floor and others which are obtained from local and foreign suppliers. Kiddies is a
registered operator, has a two month tax period and has financial year which ends on 31
October.

The bookkeeper of the company who normally completes the VAT returns has been
tragically killed in a car accident and you have been asked to assist the company with its VAT
return for the tax period which ended on 31 October 2014 and to advise it on related issues.

The following information, relating to revenue of the company, has been extracted from the
books and records for the tax period. All amounts are inclusive of VAT where relevant.
$

Toy sales (local) 143 840

Toy sales (exports) - (note 1) 48 000

Rental of flats 14 000

Sale of motor vehicle (note 2) 10 000

Sale of toy making machine (note 3) 600

Sale of computer (note 4) 600

The following further information may be relevant to the tax period.


Notes

1. This represents the sale of toys to a retail chain in Botswana. Kiddies contracted with a
local transport company to transport the toys to the retail chain. The invoice from the
transport company for the transport costs for the period under review amounted to $3
750.

2. The sale of the motor vehicle was to an employee of Kiddies at 20% below market value.
The vehicle was a Toyota Corolla which had been used as a general pool car.

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Tutorial Letter 1-CAZ 2 2015
3. This amount represents the first instalment (received on 20 October 2014) under a sale
agreement for the toy making machine, manufactured by Kiddies. In terms of the
agreement the buyer will pay Kiddies 24 monthly instalments of $600. The cash value of
the machine sold amounts to $10 600 (including of VAT). Ownership passes on receipt
of the last instalment. The machine was delivered to the acquirer on 1 October 2014.

4. Kiddies had acquired the computer on 1 November 2012 for $1 100 (including VAT) and
used it both in the toy business and rental activities. Kiddies sold the computer to a
computer shop, another registered operator, for $600 on 1 October 2014 in an arms-
length transaction. The open market value of the computer was $760.

5. The company is aware that it may not claim input tax deductions in respect of
expenditure which relates to the making of non-taxable supplies. In this respect an
apportionment on the turnover method reflects a ratio of taxable supplies to total
supplies of 85%. The following is a list of the other expenditure incurred in the two
month period. Kiddies is in possession of the relevant tax invoices where appropriate.
VAT is included where appropriate. $

Purchases toys (local) 98 820

Water and electricity (piped water $300 and electricity $620) 920

Municipal rates 1 000

Telephone 990

Salaries (toy business) 24 000

Salaries (rental business) 16 000

Bank charges 320

Purchase of a new single cab 12 000

(This was acquired from another registered operator in an arms-length transaction

on 12 October 2014 - payment was effected on 28 November 2014).

The vehicle is used exclusively for the toy business.

REQUIRED

1. Calculate the output tax for the VAT period ended 31 October 2014. Give reasons for
your determinations. (9 marks)

2. Calculate the input tax for the VAT period ended 31 October 2014 based on the available
information. (11 marks

ZCTA TAX TEAM Page 29


Tutorial Letter 1-CAZ 2 2015
Question 4.1: Suggested Solution -

Marks

Part 1

Output tax

Local sales - 15/115 x 143 840 18 761.74 1

Export sales zero rated supply - 1

Flat rentals - exempt supply - 1

Sale of motor vehicle -no input tax allowed and therefore

deemed to be supplied otherwise than

in the course or furtherance of the trade - 1

The fringe benefit that arises as the sale of the motor vehicle is made at lower than market
value is taxable in the hands on the employee in terms of section 8(1)(f) of the Income Tax
Act. The vehicle was not used by the purchaser for private purposes prior to the sale hence
no motoring benefit arises in the hands of the employee who purchased it. Therefore no
deemed output tax as there was no motoring benefit.
1

Sale of toy making machine-this would be an installment sale agreement.

the consideration for the supply would be

the cash value of the machine

15/115 x 10 600 1 382.61 1

no VAT on the finance charges (exempt supply) - 1

Sale of computer - would have claimed partial input tax, however output tax must be
accounted for in full.

15/115 x 600 78.26 2

20 222.61 9

ZCTA TAX TEAM Page 30


Tutorial Letter 1-CAZ 2 2015
Part 2

Input tax

Transport cost - zero-rated therefore no input tax deduction - 1

Purchases local - 15/115 x 98 820 12 820.57 1

Piped Water - exempt 1

Electricity -partly for exempt supplies

- 85% of 15/115 x 620 68.74 1

Municipal rates - exempt therefore no input tax deduction - 1

Telephone - partly for exempt supplies

- 85% of 15/115 x 990 109.76 1

Salaries (toy and rental business- no a trade hence no VAT - 1

Bank charges - exempt supplies no hence no VAT 1

Purchase of single cab -claim full input tax deduction on purchase

Consideration.

15/115 x 12 000 1 565.22 2

Input tax adjustment re computer (see note 4 above)

Based on lesser of adjusted cost ($1 100) or open market value ($760)

15/115 x 760 x 15% 14.87 1

14 579.16 11

ZCTA TAX TEAM Page 31


Tutorial Letter 1-CAZ 2 2015
Question 4.2

ICAZ Manufacturing ceased to be a VAT registered operator on 31 January 2014 because


their turnover was less than the registration threshold of $60,000 p.a. On the date ICAZ
Manufacturing deregisters for VAT it had the following:

Cost (Inc VAT) Open Market Value

Plant and Equipment $150,000 $125,000

Delivery Vehicle (note 1) $50,000 $60,000

Toyota Yaris 1500cc (note 1) $6,000 $7,500

Furniture (note 2) $3,000 $2,500

Trading Stock (raw material) $4,500 $4,000

Trading Stock (finished goods) $8,000 $8,500

Debtors (note 3) $7,000

Note 1: The delivery vehicle was used solely for delivering is produce whilst the Toyota Yaris
was used by the sales manager as his company vehicle.

Note 2: The furniture was used solely for business.

Note 3: The company was of the opinion that 25% of the debtors amount will not be
recoverable and consequently wrote it off on 25 January 2014. The company did not charge
any interest on outstanding accounts.

REQUIRED:
Advise the company of the VAT implications of the cessation of trade. Calculate VAT
payable, if any and state the time of supply of the transaction. (10 marks)

ZCTA TAX TEAM Page 32


Tutorial Letter 1-CAZ 2 2015
Question 4.2: Suggested Solution -

Marks

A registered operator who ceases to be a registered operator 1


while having in possession goods on which input tax was
claimed is deemed in terms of section 7(2) of the VAT Act to
have supplied the goods and is thus required to account for
VAT.

The value of such supply will be the lesser of cost or open


market value. 1

Time of supply will be a day prior to deregistration. 1

Output Tax will thus be:

Plant and Equipment: $125,000 *15/115 $16,304.34 1

Delivery vehicle: $50,000 * 0 (2nd hand vehicle hence is not


subject to VAT but 5% excise duty) 0
1
Toyota Yaris: (input tax not claimed on its initial purchase) 0
1
Furniture: $2,500 * 15/115 $326.09
1
Trading stock (raw material): $4,000 *15/115 $521.74
1
Trading stock (fin. Goods): $8,000 *15/115 $1,043.48
1
Debtors: (VAT is accounted for on the earlier of an invoice being
issued or any payment being made. VAT was accounted for
on the debt when an invoice was raised hence no output tax 0.5
arise with deregistration.

Total Output Tax $18,195.65

Input Tax

Bad Debts W/off: ($7,000 * 25%)* 15/115 $228.26


0.5
Total VAT payable $18,195.65
(10)

ZCTA TAX TEAM Page 33


Tutorial Letter 1-CAZ 2 2015

Question 4.3

Agricultural Equipment (Pvt) Ltd a company incorporated in Zimbabwe selling a wide range
of agricultural equipment in Zimbabwe.

It also exports some equipment to Namibia and Botswana. The company is a registered VAT
operator and has a two month tax period. It only makes taxable supplies.

An inexperienced bookkeeper is currently completing the companys VAT return for the tax
period ended 30 September 2014 and seeks your assistance in respect of the following
transactions which may be relevant to the tax period.

The company acquired a brand new Mazda B1800 single cab, with an engine capacity of
1800cc, on 1 August 2014 for use by one of the salespersons, Tendai Makoma. Tendai
uses the vehicle for private and business purposes. The vehicle was acquired from Dulys
Zimbabwe a registered operator for a cash consideration of $18 400. The corporation
incurred the following expenses in respect of the vehicle in the tax period.
$

Insurance 1 140

Fuel 875

Repairs 1 425

3 440

On 31 August 2014 a Toyota Camry with an engine capacity of 2000cc which had a
market value of $14 000 was sold to the sales manager on his retirement at 60 years for
$10 000. This vehicle had been previously used by the sales manager as his company
car. It initially had cost $20 000 (including VAT) on 1 September 2009 and the free use
thereof was granted from that date onwards to him. From 1 August to 31 August the
only expenses incurred by the corporation on this motor car was fuel amounting to
$750.
On 15 August 2014 equipment with a selling price of $200 000 (excluding VAT) was sold
to a customer in Namibia. The equipment was consigned and delivered by the company
to the customers factory in Windhoek.
On 1 January 2014 equipment with a selling price of $120 000 (excluding VAT) had been
sold to a customer in Botswana. The equipment had been damaged while being
delivered to the customer and after a protracted dispute the company decided to write
off 50% of the cost as a bad debt in the current tax period. The customer settled the
other 50% in this tax period.
During the tax period, the following entertainment, subsistence and related expenses
were incurred (amounts include VAT where relevant).
$

ZCTA TAX TEAM Page 34


Tutorial Letter 1-CAZ 2 2015
Staff teas and coffee 342

Club subscriptions for the managing directors membership of the 1 210


local golf club
Hotel costs incurred by the managing director while away on out 1 938
of town business for two nights
Subsistence allowance paid to one of the salespersons who was 276
out of town on business
3 766

An advance payment of $22 800 was received on 28 September 2014 from a customer in
respect of a tax invoice which was only issued on 5 October 2014 (the date the goods
were delivered to the customer.)
During a heavy storm on 24 August 2014 certain of the equipment for resale (trading
stock) was damaged. In terms of the companys insurance policy an indemnity payment
of $45 600 was received on 28 September 2014 from the insurer in respect of the
insurance claim.
An analysis of the bank statements for the months of August and September reflect the
following:
$

Bank charges (Loan establishment fees) 1 596


Bank charges 600
Interest on overdraft 784
2 980
An analysis of the amounts received from debtors reflects the following:
$

Invoices dated and issued prior to 1 August 2014 73 400


Invoices dated during August and September 2014 126 000
199 400
On 15 April 2013 a debtor overpaid his account by $4 788. Numerous attempts to
contact the debtor, so that a refund could be made, have failed. The excess amount has
now been credited by the bookkeeper to sundry income.

Goods purchased from a creditor amounting to $3 762 on 1 July 2013 remain unpaid.
The bookkeeper had also transferred this amount to sundry income.

REQUIRED:

Advise the bookkeeper how each of the above transactions must be treated in the VAT
return (if at all) for the tax period ended 30 September 2014. Support your advice with the
necessary calculations. All amounts include VAT where appropriate and the relevant tax
invoices have been obtained.

ZCTA TAX TEAM Page 35


Tutorial Letter 1-CAZ 2 2015
Question 4.3 Suggested Solution

Marks

Mazda B1800 Single cab

The single cab is not a passenger motor vehicle as defined and therefore 1
input tax is claimable.
$

15/115 x $18 400 = (2 400) 1

An input tax deduction can be claimed on repairs

15/115 x ($1 425) = (315) 1

Insurance and fuel are exempt, so no VAT is paid and


therefore no input tax deduction is available - 2

The right of use of the single cab is a taxable fringe benefit


and in terms of section 17(3) deemed output tax must be
accounted for as follows: 1

Deemed value based on engine capacity $400 1

Output tax 15/115 x $400 x 2 months 104.34 1

Toyota Camry

No taxable benefit will arise in the hands of the sales manager


from the sale of the vehicle by the company to him since he is
1
above the age of 55 years.

However as Agricultural Equipment (Pvt) Ltd was denied an


input tax deduction on the acquisition of the motor car,
section 7(14) deems the supply to be otherwise than in the
course or furtherance of the registered operators trade.
Therefore no output tax or deemed output tax arises. 1

However the free use of the motor vehicle for the month of
August 2014 results in the following deemed output tax

15/115 x 400 = 52.16 2

ZCTA TAX TEAM Page 36


Tutorial Letter 1-CAZ 2 2015
There is no VAT on fuel therefore no input tax deduction is - 1
available

Export to Namibia

The export will meet the criteria for zero-rating

Therefore output tax at 0% is accounted for - 1

No input tax deduction can be claimed as the original debt - 1


was zero-rated (export)

The 50% proceeds from the debtor have no VAT


consequences as the output tax (0% in this case) would have
-
been accounted for in a prior tax period.
1

Entertainment and subsistence


Input tax deductions are denied on entertainment as defined
unless an exception applies.

Thus an input tax deduction will be denied on the staff teas and - 1
coffee
The club subscriptions are specifically not allowed as an input
tax deduction (see section 16(2)(b))
- 1

The hotel costs for an out of town visit is one of the


exceptions (see section 16(2)(a)(ii)
1

Therefore claim 15/115 x $1 938 as an input tax deduction (252.78) 1


The subsistence allowance of $276 has no VAT implications as - 1
there is no supply of goods or service. It is also not a taxable
fringe benefit in terms of section 8(1)(f) of the Income Tax Act.

Advance payment
The time of supply is the earlier of any consideration received
for the supply and the date the invoice is issued. 1

Thus, in this case, the receipt of $22 800 results in output tax of
$2973.91 (15 x 115 x $22 800) being accounted for in this tax
period 1

ZCTA TAX TEAM Page 37


Tutorial Letter 1-CAZ 2 2015
(It is assumed that the advance payment is not a deposit)

Indemnity payment
In terms of section 7(7) output tax must be accounted for on
receipt of the indemnity payment. (Please note, insurance is
exempt from VAT. In view of the fact that this provision was
not repealed, ZIMRA may apply it hence this claim but in
theory the transaction may not be subject to VAT as it is a
financial service as defined and hence exempt)

15/115 x $45 600 5 947.83 1


Bank statement
There is no VAT on loan establishment fees as it represents exempt
financial services. 1

There is no VAT on bank charges as it represents exempt financial 1


services.
There is no VAT on interest as it represents in exempt financial - 1
service

Debtor receipts
Receipts from debtors in respect of invoices relating to prior tax
period has no VAT implications as the VAT would have been
accounted for in a previous tax period - 1

Invoices issued during the tax period would have resulted in output
tax of 15/115 x $126 000
16 434.78 1

The subsequent payment by the debtor has no VAT consequences.


It is assumed that no discounts or overpayments occurred

Overpayment
A deemed supply arises as a result of this overpayment which has
not been refunded.
1

Therefore output tax must be accounted for 15/115 x $4 788 624.52 1

ZCTA TAX TEAM Page 38


Tutorial Letter 1-CAZ 2 2015
Outstanding creditor
Originally an input tax deduction of 15/11 x 3 762 = $490.70 was 1
claimed

As the creditor has not been settled within a twelve month period
deemed output tax arises (see section 22(4))
490.70 1

35

ZCTA TAX TEAM Page 39


Tutorial Letter 1-CAZ 2 2015
SELF ASSESSMENT QUESTIONS

Question Topic Marks Minutes


1 Taxation of Employment Income 18 27
employee benefits and tax planning

2 Taxation of Employment Income 30 45


various issues

3 VAT Various Issues 15 22.5

4 VAT Calculation of VAT Output 18 27

5 Taxation of employment income


elderly person 10 15

6 Taxation of Individuals Various issues 17 25.5

HOW TO ATTEMPT THESE SELF ASSESSMENT QUESTIONS


The purpose of the self-assessment questions is to assist you in determining if you have
mastered the topics covered in this tutorial letter. In order to gain the maximum value from
these questions and to improve your exam technique, it is suggested that you approach
these questions as follows:
1. Prepare to attempt each of the questions as if it is a formal test or exam by doing the
following:
a. Ensure that it is quiet and that you will not be disturbed.
b. Prepare the place where you are going to attempt the question by only keeping
your books that is allowed to be taken into an examination venue and your financial
calculator next to you.
c. Use reading time for the question as is done in the tests and exam.
d. Only start writing when your reading time has lapsed. Attempt the question as
seriously as if it was a real test or exam.
e. Keep within the time limit when you attempt the question and DO NOT refer to
the suggested solution.
f. If the time runs out and you prefer to complete the question, complete the
question in a different colour pen and make a note of how much extra time you
spend on the question.
2. After marking your own answer, it is very important that you reflect on the mark and how
you have experienced the level of difficulty of the question.
a. Did you complete your answer in the time limit?
b. How many minutes did you use extra?
c. How many marks did you score after the available time expired?
d. Do you need to refer back to specific study units to clarify the tax treatment of
certain items?
e. Is your answer set out in a logical manner, i.e. is it easy to follow your workings
when marking your answer?

ZCTA TAX TEAM Page 40


Tutorial Letter 1-CAZ 2 2015

Question 1 (18 Marks)


Joseph Marange is currently employed with Musasa Limited. He has reached his maximum
earning capacity at Musasa Limited. He currently earns a salary of $4 500 per month with a
guaranteed bonus the equivalent of $4 500 (i.e. annual income of $58 500. He has decided
to test the market place to see if he can find employment with another company that is
prepared to pay him a higher salary. He has received an offer from Newdawn (Pvt) Limited.
Newdawn (Pvt) Limited are prepared to pay him a salary of $5,200 per month plus a travel
allowance of $500 per month (i.e. $68 400 per annum). Joseph is excited about the prospect
of earning an additional $9 900 per annum ($825 per month). However he has been warned
to take advice before accepting the new offer as Musasa Limited offers a number of non-
cash benefits that Newdawn (Pvt) Limited does not.
Joseph Marange has approached you for assistance in establishing his after-tax income for
both his current package and that of the new offers from Newdawn (Pvt) Limited. Details of
each package follow below:
Musasa Limited $
Cash salary $4 500 per month 54 000
Annual bonus (payable in December each year) 4 500
Membership of a non-contributory medical aid scheme employer

contributes the equivalent of $400 per month. 4 800


Pension fund membership own-contributions (10% of salary) 5 850
Pension fund membership employer contributions (10% of salary) 5 850

Newdawn (Pvt) Limited


Cash salary $5 200 per month 62 400
Travel allowance $500 per month 6 000
Employer contribution to retirement annuity fund $300 per month 3 600

You have further established:


Joseph is 42 years of age and married with two minor children. Membership to a medical
aid society is important to him. To join a medical aid in his private capacity will cost him
$420 per month (or $5 040 per annum) to cover himself and his family.
At Musasa Limited Joseph has the free use of a motor vehicle which has an engine
capacity of 1500ccs. He uses the motor vehicle for both private and business purposes. If
he decides to take up Newdawn (Pvt) Ltd.s offer he will be given an interest free loan of
$25,000 to acquire a vehicle of his choice. The condition for the interest free loan is that
the motor vehicle will also be used for the business of Newdawn (Pvt) Limited
Newdawn (Pvt) Limited does not have an approved pension fund but encourages its
employees to join a retirement annuity fund (RAF) and contributes 50% of any amount
payable to the fund by the employee. Should Joseph decide to join a RAF his monthly
contribution will be $600, his 50% share being $300.

ZCTA TAX TEAM Page 41


Tutorial Letter 1-CAZ 2 2015

Required

To advise Joseph whether he should accept the offer of employment from Newdawn (Pvt)
Limited. Base your answer on the following assumptions:
his choice will be influenced only by his after-tax income;
he will take up employment on 1 January 2014;
the full $6 000 travel allowance will be utilized for business purposes;
he joins both the medical aid and RAF as described above
assume LIBOR rate of 1%

ZCTA TAX TEAM Page 42


Tutorial Letter 1-CAZ 2 2015
Question 1 Suggested Solution

Mark
$ $ s
After tax income for package from Musasa Limited:
Salary 54 000
Bonus 4 500
Less Exempt portion (1 000) 3 500 1

Medical contributions paid by employer Exempt fringe benefit - 1


Pension contribution paid by employer Pension contributions paid by
employer not a defined benefit, no receipt or accrual under gross
income definition - 1
Free use of motor vehicle ($300*12) 3 600 1

Allowable deductions
Pension contributions (own) $5 850 limited to lower of: 1
Amount paid and $5 400 (5 400) 1

Taxable income 55 700

Tax thereon
Tax on the first $24 000 4 800
Tax on ($55 700- $24 001) * 30% 9 510 14 310
ADD 3% Aids Levy ($14 310*0.03) 429
Normal tax liability 14 739

After tax income


Annual salary + bonus ($54 000 + $4 500) 58 500 1
(14
Less normal tax liability 739) 1
Pension fund contributions (own share) (5 850)
After tax income from Musasa Limited 37 911

After tax income for package from New Dawn (Pvt) Limited:
Cash salary (5 200 x 12) 62 400
Employer contribution to RAF [ 300 x 12] 600 1
Add travel allowance ($500 x 12) 6 000 1
Less cost of business travel given) (6 000) - 1
Fringe benefit (Interest free loan) (25 000* 6%) 1 500 1

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Tutorial Letter 1-CAZ 2 2015

Question 1: Joseph - continued

$ $ Marks
67 500
Allowable deductions
Contributions to RAF ($300 * 12) (3 600) 1
63 900
Tax thereon
Tax on first $60 000 15 600
Tax on ($63 900- $60 001) * 35% 1 365 16 905
Less Credits
Contributions to medical aid ($5 040 * 50%) (2 520)
14 445
Add 3% Aids Levy 433
Normal tax liability 14 878

After Tax Income


Annual salary + travel allowance ($62 400 + $6 000) 68 400 1
Less normal tax liability (14 878)
RAF contributions ($300 x 12) (3 600)
Medical aid contributions ($420 x 12) (5 040)
44 882

The cash offer from New Dawn (Pvt) Limited, the after tax
income is favourable at $6 971($44 882 $37 911) less than his
present situation. 1

However the estimates assume the travel allowance will be


fully utilized for business purposes and not taxable. Should the
full travel allowance not be expended for business purposes the
taxable income and normal tax liability will increase, thereby
reducing his after-tax income from employment with Newdawn
(Pvt) Limited. 1

It is suggested that the offer be accepted as there are tax


benefits in doing so. 1
24

ZCTA TAX TEAM Page 44


Tutorial Letter 1-CAZ 2 2015
Question 2 30 Marks

Mugoni Mukuru is divorced and is 60 years old. Mugoni had been employed by Vavaki (Pvt)
Ltd for the past 30 years and had been responsible for the development of software suitable
for the building industry. Mugoni was retrenched on 31 December 2014. The companys
Scheme of retrenchment was approved by the relevant Minister.

The following information relates to his year of assessment ended 31 December 2014:

Income and benefits accrued from Vavaki (Pvt) Ltd Notes $

Salary 36 000
Incentive bonus paid December 2014 3 000
Free use of motor vehicle 1 ?
Reimbursive travel allowance 2 1 500
Medical aid fund contributions paid by the company on 3 2 160
behalf of Mugoni
Contributions to a pension fund paid by the company on 2 700
behalf of Mugoni
Lump sums 4 34 500

Other income accrued


Lump sum from pension fund (total amount accrued) 5 80 000
Pension Annuity 5 4 800
Net taxable profit from his business 6 30 000
Other Income 7 26 500

Expenses
Own contributions to medical aid fund and extra medical 3 3 660
costs incurred (2 160 + 1 500)
Contributions to pension fund 8 200

1. Mugoni had the exclusive use of a company-provided 4 x 4 double cab Ford Ranger
as from 1 April 2014. Vavaki (Pvt) Ltd outsources the services of Mugoni to various
clients. There is a qualifying maintenance plan in respect of the Ford Ranger. The
company paid all expenses in respect of the vehicle. Mugoni kept accurate records
of all his travelling.
Further details are as follows:
Kilometres travelled for business purposes during the year 36 000 km
Kilometres travelled for private use 7 560 km
43560 km
The engine capacity of the Ford Ranger is 3000cc

ZCTA TAX TEAM Page 45


Tutorial Letter 1-CAZ 2 2015
Question 2 continued

2. During June 2014, Mugoni was involved in an accident with the Ford Ranger. The
vehicle was at the panel beaters from 15 June 2014 to 30 June 2014. During that
period Mugoni used his neighbours Ranger and Vavaki (Pvt) Ltd paid him $1 per
kilometre travelled for business (he travelled 1 500 kilometres for business
purposes).

3. Mugoni is the member of the medical aid fund with no dependants. In terms of the
rules of the fund, Mugoni and the company contributed equal amounts to the
medical aid fund. Other qualifying medical expenses paid by Mugoni amounted to $1
500, none of which were refunded by the medical aid fund.

4. Upon retirement, the following lump sums accrued to Mugoni from Vavaki (Pvt)
Ltd:
$
Accumulated leave 5 000
Gratuity 12 500
Severance Pay 5 000
Restraint of trade payment 12 000
34 500

Restraint of trade payment. Mugoni and the company signed a


restraint of trade agreement on 31 December 2014, prohibiting
Mugoni from using software developed specifically for the
company for the benefit of any other business for the next five
years

5. In April 2014, Mugoni received a lump sum payment of $80,000 being a


commutation of his pension. The gross pension entitlement prior to the
commutation amounted to $180,000. His monthly pension from 1 May 2014 was
$600 per month.

6. With the permission of Vavaki (Pvt) Ltd, Mugoni conducted his own two businesses
after hours and during weekends. His businesses entailed the development of
specialised software for companies in Australia and software support services in
Zimbabwe. He operated these two businesses as two independent trades as a sole
proprietor. His net taxable income of $30 000 for the 2014 year of assessment was
correctly calculated as follows:
$
Taxable income from Zimbabwe 50 000
Taxable loss from South Africa (20 000)
Net taxable income 30 000

ZCTA TAX TEAM Page 46


Tutorial Letter 1-CAZ 2 2015

Question 2 continued

7. Mugoni earned the following other income during the 2014 assessment year.
$
Gross dividends from a Zambian company 8 000
(Zambian tax deducted at source $800)
Gross royalties from USA for a book he co-authored* 11 000
(USA tax deducted at source $1 000)
Rental from a house in Gweru 7 500
Total other income 26 500
*Mugoni co-authored the book whilst he was in Zimbabwe.

Required

Calculate the normal tax payable by Mugoni Mukuru for his 2014 year of assessment.
Where any income or deductions are not taken into account in calculating the taxable
income, provide reasons. Round off all amounts to the nearest $1.

ZCTA TAX TEAM Page 47


Tutorial Letter 1-CAZ 2 2015
Question 2 : Suggested Solution

Amounts Marks

$
Salary 36 000 (1)
Incentive bonus (3000 1000) (see tax tables for tax free bonus) 2 000 (1)
Free use of company vehicles ( 600 X 8.5) N1 5 100 (2)
Reimburse travel allowance - Par 15, 3rd Schedule exempts the portion - (1)
of allowances expended on the employers business.
Medical aid contributions paid by company (3rd Schedule Para 8e - (1)
exempts medical contributions paid by the employer on behalf of the
employee)
Contribution to pension fund by employer - (no fringe benefit as is - (1)
below the allowed maximum contribution by employer of $3 600
Section 15, 2h,i)
Accumulated leave - (regarded as salary, only taxed when paid) 5 000 (1)
Gratuity 12 500 (3)
Severance Pay 5 000
7 500

Less Exemption (10 000) 7 500

1/3 X 17500 = 5 833 (Greater of 10 000 or 1/3 of up to $60 000) 3rd Sch
pa 4 (p)
Restraint of trade ( Capital nature ) - (2)
Lump sum from 80 000 (1)
pension fund
Less: 1/3 x 180 000 (60 000) 20 000 (1)
Section 8 (1) n 1/3 is
of a capital nature
Pension Received (600 X 8) - Exempt over 55years - (1)
Contribution to pension fund (Section 15, (2) h, i (2 700) (1)
Taxable Income 72 900

60 000 15 600 (1c)


(72 900 60 000) x 35% - refer to tax tables 4 515 (1C)
Total Tax Payable 20 115

Credits
50 % Medical Aid Contributions (2 160 x 50%) (1 080) (1)
Other Medical Expenses (1 500 x 50%) (750) (1)
Elderly credits (900) (1)
17 385
Aids Levy (3% x 17 385) refer to tax tables 522 (1)
Total Tax Payable 17 907

ZCTA TAX TEAM Page 48


Tutorial Letter 1-CAZ 2 2015
Taxable profit from business:

- Zimbabwe taxable income (Sec 20(1)(a),) 50 000 (1)


- South African source (loss) carry forward N2 - (1)
- Royalties Sect 12 11 000 (1)
- Rental from House in Gweru (7500 3000) 3rd par 4 (v) 4 500 (2)
exempts the first 3000 rental income for tax payers above 55
years of age
- Total Taxable income 65 500
- Tax at 25.75% - Refer tax tables 16 867 (1C)
- Less double taxation relief (800 + 1000) Sect 91-96 1 000 (1)
- Tax Payable from trade 15 867
- Dividends from Zambia Section 12 8 000
- Tax at 20% 1 600
- Presentation Marks (1)
- Total Available Marks 34
- Maximum 30

Notes:

N1: The use of motor vehicle fringe benefit: (1)

The motor vehicle is used for both business and private and all expenses are paid by the
company, the employee is getting the fringe benefit on the private use of the motor vehicle
paid by the company. The benefit per month is given on the tax table (3000cc - $600 per
month), multiplied by the number of months of use, 8 months (exclude the time the car
was in service) allocated between private and business based on the kilometres.

N2: The loss is not deductible from income other than from operations in South Africa (1)

ZCTA TAX TEAM Page 49


Tutorial Letter 1-CAZ 2 2015
Question 3 15 marks

You are a Zimbabwean tax practitioner registered with both the Institute of Chartered Accountants
of Zimbabwe (ICAZ) and the Institute of Certified Tax Accountants. You are a VAT registered operator
and your charge-out rate for services rendered is $130 per hour or part of an hour (inclusive of VAT).
You have received the following unrelated enquiries.

Enquiry 1:

Murray Lippy Estate (Pvt) Ltd, a Zimbabwean estate agent and a registered operator wants to
motivate its estate agents, both employees and independent agents, to work harder to find more
properties to sell in order to increase its profits. Murray Lippy Estate is considering offering the
person that brings in the highest amount of commission an overseas holiday.

The owner of Murray Lippy Estate, Murray Lippy, owns a house on the Spanish island of Majorca, in
Europe, and is prepared to allow the winner to stay in the house for two weeks and for Murray Lippy
Estate to pay for the winners air flight ticket. The winner will not be able to sell or exchange the
prize and if the winner cannot go within a period of twelve months, the winner will forfeit the prize.
The last condition relating to the prize will require the winner to give Murray Lippy Estate three
months notice to book and finalise the trip.

Murray Lippy wanted nothing in exchange from Murray Lippy Estate for the use of the house
because he is the main member of the company and only rents out the house during the holiday
seasons that he and his family are unable to use it.

Enquiry 2:

St Joseph Hotel (Pvt) Limited trades as the Lilly Hotel in Kwekwe in the midlands province and is a
VAT registered operator. Potential guests of the Lilly Hotel are required to pay a deposit with the
Lilly Hotel when they make a reservation to stay at the hotel. The accountant of the Lilly Hotel has
opened a special bank account for possible refund/deposit claims and always maintains a minimum
balance in the account of at least $10 000, deposits received are not paid directly into this account.

At the moment all deposits are forfeited should guests be unable to take up their holiday and stay at
the hotel. During the last two years the Lilly Hotels reservations outside of peak holiday seasons
during the year have declined and the accountant is convinced it is as a result of the fact that the
Lilly Hotel does not refund any deposits for cancelled reservations unless extraordinary events occur
for example in the case of death.

The accountant proposed a dual system of dealing with deposits that will work as follows:

During peak holiday seasons: Deposits paid will be forfeited in case of cancellation.

Outside of peak holiday seasons: Deposits will be refundable in case of cancellations made more
than 24 hours before the reserved date.

Lilly Hotel currently, during the 2014 year of assessment, received $114 000 in deposits.

The amount was calculated from the actual invoice totals and not the accounting records.

ZCTA TAX TEAM Page 50


Tutorial Letter 1-CAZ 2 2015
Required

All answers should make reference to appropriate provisions of legislation and appropriate case law
where applicable.

Enquiry 1:

Advise Murray Lippy Estate on all possible tax implications for both Murray Lippy Estate and the
potential winner of the prize.

In answering this enquiry you may assume that neither the employees nor the independent agents
that could be potential winners are registered operators.

Enquiry 2

Advise the accountant of VAT implications relating to the deposits in the 2014 year of assessment.

ZCTA TAX TEAM Page 51


Tutorial Letter 1-CAZ 2 2015
Question 3: Suggested Solution

Enquiry 1

In the Hands of Murray Lipp Estate

Granting of overseas holiday to employees constitutes fringe benefit in terms of section


8(1) (f) of the Income Tax Act and is taxable in the hands of the employees.
Any employer who provides fringe benefits to employees is deemed to have supplied
goods or services in terms of section 17(3) and is required to account for output tax on the
benefit.
However, the provision of an overseas holiday constitutes entertainment which is a
prohibited deduction under section 16 and hence the employer is not required to account
for output tax on the benefit as they would have been denied input tax on its acquisition.
The definition of entertainment includes the provision of accommodation, recreation or
hospitality whether directly or indirectly to anyone in connection with an enterprise
carried by him

No Vat consequences arise in the hands of the winner and the company as this constitute
entertainment.

Enquiry 2

The 2014 Deposits constitutes a taxable supply and therefore output tax should be
accounted for by applying the tax fraction to the invoice value
Time of supply is the earlier of receipt or invoice so Output tax should be calculated
for all the amounts received in relation to the deposits in 2014. Output tax should be
accounted for as follows: 15/115 *114000 = $14 870
Output tax should be accounted for on all deposits as they are received by Joseph
Hotel despite whether they are refundable or not.
However input tax will be claimed on the amount refundable to clients.

ZCTA TAX TEAM Page 52


Tutorial Letter 1-CAZ 2 2015
Question 4 18 marks

All references are to the Income Tax Act, unless stated otherwise.

Emerald Properties Ltd

Emerald Properties Ltd ('Emerald') is a listed property company. It has one million equity
shares in issue which are widely held. Emerald is a resident as defined and does not form
part of a group of companies as defined.

Emerald is a VAT registered operator and its financial year and tax year of assessment end
on the last day of December. Emerald obtained a ruling to determine input tax in
accordance with the turnover method where the ratio of taxable supplies to total supplies is
90: 100.

Emerald's portfolio of investment properties consists of -

Commercial properties (shopping centers and office buildings); and

Income Items Notes $

Commercial properties gross rentals 3 600 000


Residential properties gross rentals 400 000

Total rental income (other income) 4 000 000

Interest financial institutions/other 25 000


Accounting profit on disposal of assets 1.2 1 200
Expense Items
Depreciation and fair value adjustments 1 (320 600)
Medical, pension and provident fund contribution (120 000)

Salaries and wages 4 (902 200)

Other (1 368 890)

Net profit- subtotal (profit per financial statements) 1 314 510

Debit adjustments

Accounting profit on disposal of fixed and/ or other assets 1.2 ( 1 200)

ZCTA TAX TEAM Page 53


Tutorial Letter 1-CAZ 2 2015
Capital allowances not claimed in the income statements

Special Initial Allowance on ten-ton trucks (112 500)

Wear and tear allowances (162 800)

Credit adjustment

Depreciation according to financial statements 1.1-1.3 170 600


Provisions not deductible in current year 5 300

Accounting/Fair value adjustments to comply with IFRS 1.4 150 000

Other 2500
Recoupment of allowances previously granted 1200
Taxable income 1 367 610

Information on the 2014 year of assessment

Notes

ZIMRA query

After submitting its tax returns for the year, Emerald received a request for further
information from ZIMRA. ZIMRA wants the company to pay VAT of $560 000, based on total
rental income of $4 million.

Required

Discuss, with reasons, the correctness of the output VAT amount of $560 000 in terms of the
ZIMRA query with reference to the actual amount of output VAT payable. Include the effect
of all supplies in terms of the VAT Act. (10 marks)

ZCTA TAX TEAM Page 54


Tutorial Letter 1-CAZ 2 2015
Question 4 : Suggested Solution

The supply of commercial properties is a standard rated supply,


therefore VAT should be levied at the standard rate of 15% of all
rental income earned. 2
The supply of residential properties is an exempt supply in terms of
the VAT act; therefore no Output Tax should be levied on the
rentals earned from residential properties. 2
Therefore ZIMRA is incorrect in charging $560,000 as the VAT
output should be calculated as follows
Rentals from commercial properties 3,600,000 1
VAT output ($3,600,000 *15%) 540,000 1
Interest Financial Institutions
No VAT accrues on Interest since its arising from financial services
which constitutes an exempt supply. 2
Disposal of Twin Cab Passenger motor Vehicle
Since no input tax would have been claimable on the purchase of
the Twin Cab, therefore no Output tax will arise on the disposal of
the Twin Cab 2

ZCTA TAX TEAM Page 55


Tutorial Letter 1-CAZ 2 2015
Question 5 10 marks

Mr Alistair Murphy, a widower who is 58 years of age, is a qualified quantity surveyor. He


had worked abroad for several years and was then employed by the local government in
Bulawayo. With the approval of his employer, he also performed part time services for
another quantity surveyor, Mr A Moyo.

Mr. Murphys remuneration for the period January 2014 to 30 April 2014 was as follows:

Salary 4 500
Bonus paid in March 2014 1 500
Medical aid [ 50 % paid by employer] 160
Total 6 160

Mr. Murphy had the use of a vehicle with an engine capacity of 1 500cc for the period
January to April 2014. On the termination of his services he was allowed to purchase this
vehicle for $900. The market value of the vehicle was $3 750 and the original cost to his
employer was equivalent of $2 700.

Mr. Murphy used this vehicle for business, and it was agreed with ZIMRA that 30% was for
business purposes and 70% was for private use.

He received a Zimbabwe pension which amounted to $12 250 for the 2014 tax year.

Required
Calculate Mr. Murphys taxable employment income (not his tax liability) for the tax year
ended 31 December 2014. In your solution you should provide brief reasons for the
inclusion/exclusion of accruals and/or expenses for the calculation of taxable income, even
in instances where in your own opinion there is no tax effect.

ZCTA TAX TEAM Page 56


Tutorial Letter 1-CAZ 2 2015
Question 5 Suggested Solutions

Mr. Murphy
Taxable Employment income $ $ $ MARKS

Salary 4,500 1

Bonus (March 2014) 1,500 1

Exempt portion (1 000) 1

500 0.5

Medical aid (exempt) - 1

Motor vehicle benefit (4 x 300) 1 200 1

Benefit on purchase of car exempt (S 8 (1) f (x)) - 1

Zimbabwe pension (exempt para 6(h) 3rd Sched) - 1

Taxable income from employment 6,200 0.5


8

Tax credit due to Mr Murphy

Elderly persons credit 900 1

Medical aid self 160 @ 50% 80 1


980 2

ZCTA TAX TEAM Page 57


Tutorial Letter 1-CAZ 2 2015
Question 6 14 marks

In December 2014, tax auditors from Zimbabwe Revenue Authority (ZIMRA), visited ABC
(Pvt) Limited, a food manufacturing company in Harare and carried out a tax audit in respect
of the year ended 31st December 2014.

In January 2015, the ZIMRA officials presented the following findings to the company:

1. The company advanced a loan of $10,000 to the accountant for him to seek medical
treatment for his father in South Africa. In addition to the loan of $10,000, the
company gave the accountant an additional $2,000 to cover travelling expenses
which would be incurred by the father while seeking medical treatment in South
Africa. The company has not made any tax adjustments in respect of this
transaction.
4 MARKS

2. The companys selling price is arrive at by adding a mark up of 20% to the cost of
production. The companys employees are offered a 15% discount on all purchases
of the firms products. It has been established that goods which cost the company
$5,000 were sold to employees for $5,100 instead of the normal retail price of
$6,000. ZIMRA officials contend that the discount of $900 should be treated as a
taxable benefit liable to employees tax (PAYE).
4 MARKS
3. On 29 December 2014, the company paid an amount of $12,000 being insurance
premiums for motor vehicles in respect of the period 1 January 2015 to 31
December 2015. The amount has not been debited to the income statement but is
shown in the balance sheet as a prepayment. The companys directors are not sure
on how to treat this amount for tax purposes.

3 MARKS
4. On 23 December 2014, the company received $20,000 from a customer whose
goods were only delivered after the annual shutdown in January 2015. The amount
has not been treated as a sale in the year ended 31 December 2014 but as a
prepayment. ZIMRA officials contend that the amount of $20,000 should be taxed
in the year ended 31 December 2014.
3 MARKS

Write a report to the directors of ABC (Pvt) Limited on the tax implications of the
ZIMRA findings

ZCTA TAX TEAM Page 58


Tutorial Letter 1-CAZ 2 2015
Question 6 Suggested Solutions

1. In terms of section 8(1)(f) of the Income Tax Act (Chapter 23 :06), a loan benefit
calculated at a rate of 5% plus LIBOR rate accrues on a loan granted directly or
indirectly to an employee, his spouse or child.
1 MARK

The loan benefit does however not extend to a loan granted for the purpose of
the education, technical training or medical treatment of such employee, spouse
or child. Since the loan is for the medical treatment of the father, a loan benefit
of 5% plus LIBOR accrues on the loan amount of $10,000.
1 MARK

Paragraph 8(1) of the 3rd Schedule to the Income Tax Act provides for an
exemption on the value of travelling to obtain medical treatment provided by an
employer for an employee or the dependent of such employee. Since the father
can be reasonably assumed to be a dependent of the employee, the $2,000 is
exempt from tax.
2 MARKS

2. Section 8(1)(b) of the Act brings into tax any amount so received or accrued in
respect of services rendered under a contract of employment. The discount can
be viewed as an amount accruing under this section and therefore be liable to
tax. 1 MARK

SECTION 8(i)(f) of the Income Tax Act brings into tax an advantage or benefit
accruing from the use or enjoyment of any property whatsoever
1 MARK

The value of such advantage or benefit is determined in the case of use of


furniture, residence by reference to value to the employee while in the cae of
any advantage or benefit by cost to the employer. It can therefore be argued that
since the goods were sold for $5,100 which is a price above the cost to the
employer ($5,000), then there is no taxable benefit that accrues in terms of
section 8(1)(f). 2 MARKS

3. Section 15 (2)(a) of the Income Tax Act allows a deduction for ..


expenditure and losses to the extend to which they are incurred for the purposes
of trade or in the production of income except to the extend to which they are
expenditure and losses of a capital nature.
1 MARK

The word incurred does not mean paid ; if legal liability has risen such
expenditure is deductible even though payment occurs at some time later. The
insurance premium of $12 000 are therefore allowable.
2 MARKS

ZCTA TAX TEAM Page 59


Tutorial Letter 1-CAZ 2 2015

4. Section 8(1) of the Act brings into tax any amount so received by or accrued to or
in favour of a person or deemed to have been received by or accrued to or in
favour of a person in any year of assessment.
1 MARK

The income received in the year ended 31 December 2014 therefore constitute
gross income in that year and is therefore liable to tax in that year.
2 MARKS

ZCTA TAX TEAM Page 60


Tutorial Letter 1-CAZ 2 2015

THE END

ZCTA TAX TEAM Page 61