Tax law
INTRODUCTION
What is tax?
The starting point is section 298 of the Constitution which provides as follows:
“No taxes may be levied except under the specific authority of this Constitution or an Act of
Parliament”
This provision signals the importance of a tax, hence the very clear prohibition against the
imposition of a tax outside the parameters of the Constitution or an Act of Parliament. The
constitution defines a tax as follows; “includes a duty, rate, levy or due” section 332. This
definition does not appear to be helpful.
In Nyambirai v NSSA 1995 (2) ZLR 1 (S) the court defined a tax. It said that a had the
following four features;
a. It is a compulsory and not an optional contribution
b. It is imposed by the legislature or other competent public authority
c. It is imposed upon the public as a whole or a substantial sector thereof.
d. It is to be utilised for the public benefit or to provide a service in the public interest
This means that a tax is a compulsory levy imposed by the legislature or other competent
authority upon the public as a whole or a substantial sector thereof, for purposes of raising
revenue for the public benefit. If any of the features is missing, the levy is not a tax.
The approach of the Supreme Court in the Nyambirai case follows a respectable trend by
academic commentators. Some authors have defined a tax as follows; “the basic features of
a tax may be simply stated. Firstly, it is a compulsory levy. Secondly, it should be imposed by
the government or a public authority. Thirdly, it must be for purposes of raising money for
public purposes or if the purpose of the tax is not to raise money, it should encourage social
justice within the community”. Whitehouse and Stewart, Buttle: Revenue Law 7th Edition,
page 3
What is tax law?
Tax law defines the nature of the various taxes that are charged and payable. In respect of
each tax, tax law identifies the tax base and the incidence of tax. The tax base refers to the
asset or transaction or other thing which is liable to a particular tax. This may be income, or
capital or expenditure or profit. Each tax will have a tax base and the law must define the
limits of that base and any specific exceptions. Essentially, the question will be, what is it
that we are taxing? The incidence of tax refers to the identity of the tax power, i.e. the
person who actually pays the tax. Note the difference between the base of tax and the
incidence of tax.
A distinction may be made between the formal incidence of tax and the effective incidence
of tax. Formal incidence falls on those who have the actual legal liability of paying tax, whilst
effective incidence identifies those who are in the end (the people who effectively pay the
tax).
Tax law, in general, is concerned with the formal incidence (who is it who has the legal
liability), e.g. with VAT, formal incidence is on the supplier, while effective incidence is on
the purchaser. The supplier is required to pay the VAT whether or not it has charged it on
the purchase. NB. Tax law is in the field of public in the sense that the State or public
authority is the tax authority. There can be no tax without the involvement of a public
authority.
Sources of tax law
Unlike other law, tax law has one principal source – legislation. Section 298 (2) of the
Constitution. There is no such thing as a common law tax. This does not mean, however,
that the common law is irrelevant. The common law is a relevant source of tax law in one
respect, namely, the interpretation of tax legislation (fiscal statutes). In the interpretation of
tax statutes, a question may arise regarding the relevance of international law.
In terms of the constitution, international law is a source of law in 3 respects, namely;
a. When an international treaty is incorporated into our law through an Act of
Parliament, section 327 (2)
b. Through interpretation of legislation in line with international treaties binding on
Zimbabwe, section 327 (6).
c. As part of customary international law, section 326 of the Constitution.
The common law is a source but only to the point that it gives us the interpretation.
Authoritative texts still have a role to play as sources of law. They are referred to as
persuasive authority in their explanation relating to tax concepts and are very helpful
sources in explaining concepts.
Purpose of taxation
Taxation has a principle purpose and other purposes. The principle purpose of taxation is to
raise revenue for the state. Of course there are other avenues of raising government
revenue. These other avenues play second fiddle to taxation. Taxation is the most viable
option for raising public funds. The other methods of raising revenue include borrowing,
selling assets, involving itself in profitable business, printing money.
The nature of government expenditure that is funded from taxes, varies from government
to government and in almost all democracies, this is a key component of political debates.
The other purposes of taxation include, to redistribute wealth and income – although this is
a controversial purpose, some aspects of it are generally accepted; such as the idea that the
rich must pay more tax than the poor; and that the money collected must in turn be used to
provide basic social services for the poor. Secondly, to manage the economy in an effective
manner – taxes may be imposed to regulate economic behaviour, e.g. high customs duty to
protect local industry. Lastly, to promote the public good as a form of social engineering –
taxes may be used to discourage some pattern of behaviour (taxes on tobacco and alcohol)
or to promote a public good (AIDS levy).
Types of taxes
i.
Direct tax – this is an expression used to refer to a tax where the taxpayer has
both legal liability and economic liability. The person, who at law pays the tax, is
the person who also has the economic burden to pay the tax. This is case with
such taxes as income tax and capital gains tax.
ii.
Indirect tax – with these taxes, legal liability and economic liability are generally
separate. The person paying the tax may not necessarily be the person bearing
the economic burden. The person with the legal liability passes on the burden to
his or her customers. Further, indirect taxes are such that the identity of the tax
payer is generally irrelevant. The most common types of indirect taxes are VATs,
import duties, tourism levies, airport departures etc.
iii.
Progressive tax – this is an expression to denote a state of affairs where the tax
system adheres to or respects the principle that those who have more should
pay more tax. A person’s ability to pay determine the extent of their tax liability.
The opposite is regressive tax.
iv.
Tax on wealth – this expression if falling into disuse. It used to be prominent
when a distinction was drawn between income tax (which covered both poor
and rich) and those tax which where specific to the rich people, e.g. capital gains
tax, i.e. a tax on transfer of wealth; land tax; inheritance tax.
Tax law and the constitution
In the last few years constitutional has developed to affect virtually every facet of life. Tax
issues must now be considered in the light of the supremacy of the constitution. The most
important framework of the constitution is the Bill of rights. Some of the fundamental rights
granted by the constitution have a close connection with tax matters. The most important
rights relate to property (s 71), equality (s56) and the right to administrative justice (s 68).
At the level of tax liability, it may be argued that the effect of some tax laws is to treat
people in an unequal manner. If liability is based on expenditure, it has been argued that,
that must be the only form of tax base, as it has no discriminatory tendencies. Others have a
different view – they argue that equality issues must not enter the tax field as ability to pay
is an objective basis for determining tax liability.
In Nyambirai v NSSA 1995 (2) ZLR 17, a young lawyer argued that he had resources to look
after himself and family. He did not require the state, on that basis, he wanted the courts to
declare the compulsory levy unreasonable and unjustifiable. This brought the courts in the
arena – they had to decide whether the tax imposed “was reasonably justifiable in a
democratic society”. The court took the view that the tax was reasonably justifiable. This
case demonstrates the centrality of constitutional matters in tax law. Under section 86, the
courts may be called upon to determine the legality of tax legislation – is it fair, reasonable,
necessary and justifiable in an open and democratic society.
Regarding section 68, it appears that the conduct of tax authorities is subject to strict
principles of administrative fairness. In Zimbabwe, many of ZIMRA’s actions are not likely to
survive a challenge under section 68.
The ZIMRA garnishee powers are being challenged in the constitutional court
Taxation in a historical context
Taxes came into being with the advent of the state, and when it became apparent that
maintaining state institutions required extensive access to revenue, therefore taxes have
not always existed. Some theorists have even suggested that taxation is essential to the
maintenance of a fully functioning democracy and that is the responsibility of citizens to
contribute to existence of the state. John Locke’s social contract theory postulates that
individual citizens support giving up part of their liberty in return for state protection. This
implies that individuals are prepared to contribute towards that protection.
Taxation is therefore historically proceeded from the premise of raising for the state but has
also grown to encompass other features such as the regulation of the economy and social
engineering. In Zimbabwe, modern tax law came with the colonial occupation of the
territory in 1890. In the pre-colonial feudal societies, various modes of taxes existed, but
these are not related to the modern form of tax. At the inception of colonial rule, taxation
was used not to raise revenue, but to destroy feudal structures and create a capitalist
economy premised on hard labour, e.g. cattle tax, hut tax. This was designed to create a
money economy, thereby forcing Africans to seek employment.
It was only later after a period of almost 60 years that the colonial regime constructed a tax
system tailored towards revenue raising. In the early years of the new tax system, the tax
rates where low as an incentive to promote white agriculture and white settlement (at tax
haven). It was only after UDI in 1965 when Smith was facing resistance from the British
government and international community, that the country entered a phase of a high tax
regime. This has remained the case.
Interpretation of fiscal statutes or tax legislation (Examinable)
It has been suggested that there are specific rules of tax legislation. A lot of learning has
been devoted to this discussion. Various cases have been cited in support of this position.
The old English case of Pattington v AG 1869 AC 375 is prominently cited. In that case, the
judge said “If the person sought to be taxed comes within the letter of the law, he must be
taxed, however great the hardship may appear to the judicial mind to be. On the other hand,
if the state seeking to recover the tax, cannot bring the subject within the letter of the law,
the subject is free, however apparently within the law the subject might appear to be. In
other words, if there be an equitable construction, certainly such a construction is not
admissible in a taxing statute where you must simply adhere to the words of the statute.”
In Cape Branch Syndicate v IRC 1921 KB 69, it was said, “It simply means that in a taxing Act,
one has to look at what is clearly said - there is not equity about a tax. There are no
presumptions to be implied. One can only look fairly at the language used.
NB. The above statements were taken by the South African Courts and given a life of their
own. The courts treated the statements as signalling a specific setoff rules for fiscal statutes.
Yet the statements appear to be nothing other than an enunciation of the literal rule.
The better view is that there are no special rules of interpretation of fiscal statutes. Tax
legislation is legislation like any other legislation. In terms of the Constitution of Zimbabwe,
every piece of legislation must be interpreted with due regard to the fundamental rights in
chapter 4. See section 46. Accordingly, it can no longer be correct to say that there is no
equity about a tax. Outside this Constitutional dispensation, there’s already support for the
view that even a purposive interpretation is required in the interpretation of fiscal statutes.
In Pepper v Hart (1993)… the House of Lords delivered a shock, a bombshell. It held that it
was permissible to examine Parliamentary reports in the case of ambiguity when
interpreting statutes. For centuries, English law had refused to take into account
Parliamentary debates. Pepper v Hart was a tax case in and it is noteworthy that the English
court went beyond the language of the statute.
The importance of this case is to remove the distinction between tax statutes and other
statutes. Our own Chidyausiku CJ followed Pepper v Hart in Tsvangirai v Registrar General
2002 (1) ZLR 113. After Pepper v Hart it can no longer be seriously claimed that fiscal
legislation is in a class of its own. The principles of interpretation apply in the same way as
they apply in other areas. However, the literal rule tends to be the most dominant. Merely
because it is preferred by the courts – not because there is a rule of law requiring its
application.
INCOME TAX – CONCEPTUAL ISSUES
The most dominant tax in Zimbabwe. Is the income. Income tax is charged on ‘income’. It is
not charged on profits. This raises the critical issue of – what is income? Not every income is
taxable. Some tax payers are allowed certain deductions before their income is tax. That
portion of income which is taxable is called taxable income.
The Act does not define income. It defines a concept defined as gross income (see section 8).
Income, for purposes of the Income Tax Act is a legal concept. It may not be income in the
economic sense. A thing is income merely because the Act calls it income. Therefore it is
important to analyse the provision of the Act and ascertain the concept of income.
The courts have already done so. They have analysed the definition of gross income and
from it, a conception of income has been put forward. The standard approach is to
distinguish between income and capital. Capital is not taxed. The general principle is that
capital produces income. While income is that which is earned from the employment of
capital or the exertion of ones labour.
Some receipts are regarded as of a capital nature if they emanate neither from the use of
capital nor the employment of one’s labour or rendering of services. For example, a
donation has been regarded as a capital receipt. It is not income. NB. The distinction
between income and capital lies at the heart of income tax law. However, as already noted,
capital maybe income if the Income Tax Act says so.
Our tax law also uses the concept of source as the basis for taxing income. Income is taxable
if it is from a source within Zimbabwe or deemed to be a source from within Zimbabwe. In
general, the residence or citizenship of the tax payer is irrelevant. What matters is the
source of income. If it is from within Zimbabwe or deemed to be from within Zimbabwe, it is
subject to tax regardless of the status of the recipient of the income. Nb. This means that
source is the tax base. To ensure equity, tax law creates deemed sources to catch income
that would otherwise escape because it is from a source outside Zimbabwe. For deeming
purposes, residence is used as a connecting factor.
In other countries, the tax base is residence – some of these countries have moved away
from source. The Americans, for example, tax their residence on their worldwide income.
Read on tax bases. South Africa and England use residence – the South Africa started so in
the year 2000. The Biti Bill 2013 (Income Tax Bill 2013)
INCOME TAX ACT DETAILED STUDY
The starting point is the definition of ‘gross income’ in section 8 of the Act. it is defined as ‘
“the total amount received by or accrued to as in favour of a person or deemed by or
deemed to have been accrued to or in favour of a person in any year of assessment from a
source within or deemed to be within Zimbabwe, not being a receipt as accrual of a capital
nature
Requirements
a. Total amount
Total amount refers to all receipts or accrauls which qualify to be an amount. An amount is
defined in the act as: ‘money or other property corporeal or incorporeal, having an
ascertainable money value’. This means that non –monetary items having an ascertainable
monetary value are include. If it is not money, it must be a thing having a money value. If it
is something that cannot be turned into money, the cases suggest that it is outside the
scope of the amount. For old cases, see CIR v Delfos 1933 AD 242.
In recent cases, however, the SA SC of appeal has held that what is required is a money
value and not necessarily that the receipt or accrual can be turned into a money value – see
CSARC v Brummeira Reneira 2007 (6) SA 601 where it was said that: ‘the question whether a
receipt or accrual in a form other than money has a money value is the primary question and
the question whether such receipt or accrual can be turned into money is but one of the
ways in which it can be determined whether or not this is the case, in other words, it does
not follow if a receipt or an accrual cannot be turned into money, it has no money value. The
test os object, not subjective’.
The onus is on the tax authority to prove on a balance of probabilities that there is a
monetary value and therefore, an amount has been received. The most common receipts
other than money are gifts and free benefits for employees. These clearly have a money
value and constitute part of the total amount. Even the exchange of one item for another
has been held to be an amount if there is a difference between the amount of the item
received and the item exchanged – see Royal Insurance Company v Steven 1928 14 Tax
Cases TC 22
b. Received (receipt), i.e. accrual must be received
An amount must be received by the tax payer for tax liability to arise except where the Act
deems a receipt or an accrual, there can be no liability for income tax unless there is a
receipt or an accrual. You must receive something or something must accrue to you. The
words, ‘received by’ indicate that the tax payer must have received the amount on his own
behalf and for his own benefit. See the case of Geldenhuys v CIR 1947 (3) SA 256. A thief
does not receive anything, so money or items stolen are not received within the
contemplation of the Act. see COT v G 1981 (4) SA 167
Nb. It must be noted however, that the courts been inconsistent in their treatment of
receipt from ‘illegal activates’. In earlier cases some receipts from illegal activities could not
be receipts within the contemplation of the Act. The logic of the approach is that a receipt
rising from an illegal action cannot be said to be received for one’s own benefit when there
is no legal entitlement to one’s benefit
The SA courts appear to have moved in a different direction. It has been held that receipt
from illegal activities are received within the contemplation of the Act by applying a
subjective test – that the tax payer received the earning with the intention of benefiting
from them. The nature of the activity is irrelevant. See MP Finance Group v CSARS 2007
(5)SA 521.
The latest approach raises moral and political questions, may also raise issue of equity and
justice. A person who is said have received an amount even where it is not paid to him
personally, but to his agent or on his behalf such as where it is paid to his bank account. The
concept of received becomes problematic where an amount is not yet received in the
popular sense but the tax payer has become entitled to the proceeds. In the Cape of Brooks
Lemos Ltd v CIR 1947 (2) SA 976 (A), it was held that deposits charged by the Company for
glass containers of products supplied by the company to customers constituted gross
income. The customers were entitled to be refunded upon returning the empty containers.
The view of the court was that tax payer was entitled to use money received for the
deposits and there was no absolute obligation on a customer to return the container. See
also Greacess (SA) ltd v CIR 1951 (3) SA 518.
It would appear that the approach favours what is called ‘beneficial receipt’ it is your benefit
you can actually use it. On the other hand, in C v COOT 1984 (46) SA TC 57, the company
operated a petrol station and was obliged to pay cash for its supply. It then requested… of
its regular customer to deposit with it a sum of money equal to half of their annual
purchases. The amounts were paid into the company’s bank account. The company utilised
the money but each amount was credited to the respective customer. The court held that
the was more than the form of a loan than of a receipt by the company – there was an
absolute obligation to repay or provide fuel. The deposit were held not to be part of ‘gross
income’. This is because they have not received. They have an obligation to pay
Nb. What distinguishes this case with the other case is that there is an obligation to repay.
c. Accrued (when you become entitled
If an amount has not been received, it may have been accrued. For a long period, the
concept of accrued was problematic. There appeared to have been 2 different
interpretations. One interpretation was ‘due and payable’. The other was ‘be entitled to’.
The leading case is the 1926 case of Lattegan v CIR 1926 CPD 203. In that case. Watermeyer
JA was the presiding judge. Lattegan was a wine farmer. He sold and delivered wine to a
customer. Although part of the purchase price was payable in the year of assessment in
which delivery was effected, that balance was only payable in the subsequent tax year. The
tax payer’s contention was that the outstanding balance had not been accrued to him at the
end of the year in which the wine was sold. The contention was rejected by the court which
held that ‘accrued to’ meant that the taxpayer had become entitled to the amount
notwithstanding the fact that it was payable in the future.
However, in CIR v Delofos 1923 AD, the Appellate division was divided on the Lattegan
principle. Five members of the court sat. Two supported Lattegan including the CJ Wessels.
Two were opposed to the view including De Villiers JA. The fifth judge did not express a view.
The opposing view was that ‘accrued to’ meant an amount becoming due and payable. The
South Africans have now settled the matter, see CIR v People’s Stores 19 (2) SA 353 (A). The
Lategan principle was endorsed. That appears to be the law in SA and is assumed to be the
law in Zimbabwe. Thus, accrued to means ‘being entitled to’
In the case of Building Contractors v COT 1941 (12) SATC 182, the appellants were building
contractors and had entered into a contract with a customer in terms of which 10% of the
contract price was retained by the customer for a period of 3 months to enable the
appellants to remedy any faults which might develop. It was held that the10% only accrued
to the contractors after the expiry of 3 months. This was because the appellants could only
be entitled to the money after the 3 month period.
d. Received or accrued
Where income has accrued in one year of assessment, but received in another year, it is for
the Commissioner of Taxes to exercise a discretion whether to levy the tax in the year of
accrual or in the year of receipt provided that the same amount shall not be taxed twice.
See CIR Delfos
e. Person
Defined in the Act as to include a company, body of persons, corporate or unincorporated.
The significance of .. is that it names its ordinary meaning of an individual person. It is
important to note that there is no residential qualification in tax definitions. An individual
tax payer is a person regardless of the place of residence of the person. In the case of a
company, its place of registration is relevant. The concept of a person has not raised legal
problems as the legislature is clear as to who the tax payer is. Our income law legislation
does not draw a distinction between an individual person and a corporate body. The
distinction between an individual and a corporation will only arise in specific instances
governing exemptions, deductions and tax rates.
f. From a source within Zimbabwe
For income to be taxable, it must be from a source within Zimbabwe. There are 2 types of
sources – actual source and deemed source. The Act covers both an actual source and a
deemed source. This means that income is taxable if it is from a source or a deemed source
within Zimbabwe.
NB. The deeming provisions are critical. A deemed source is that regarded by the Act as
being within Zimbabwe, whether or not as a matter of fact it is within Zimbabwe. The Act
does not define a source. This concept is therefore a matter of case law so we turn to the
courts. For Zimbabwe, the concept has been defined by judges with a clear ideological
direction to protect certain business interests.
According to the cases, the source of income is “the originating cause of the income”. In a
leading judgment it was said, “The source of receipts received as income is not the quarter
whence they come, but the originating cause of their received as income. This originating
cause is the work which the tax payer does to earn them. The quid pro quo, which he gives
in return for receiving them, the work which he does, may be a business which he carries on
or an enterprise in which he undertakes or an activity in which he engages. It may take the
form of personal exertion or it may take the form of employment of capital, either by using
it to earn income. Or by letting its use to someone else”. See CIR v Lever brothers 1946 (14)
SATC 1.
NB. It would appear that the originating cause is the business activity producing the income.
This means that the enquiry resolves into two issues, namely,
a. What is the originating cause of the income?
b. Is the originating cause in Zimbabwe?
The second question may more accurately be phrased as follows; “Is the originating cause in,
or deemed to be in Zimbabwe”.
In general it is not difficult to determine the source of income. This is because the courts
prefer a practical mode of determining the sources. In Rhodesian Metals Limited v COT 1938
(9) SATC 363, the court said, “source means not a legal concept, but something which the
practical man regards as a real source of income”. The courts have developed guidelines on
a case by case basis. The following examples are important;
i.
Dividends: it has been held that the source of dividends of a company, is not the
country which that company is doing business, but the country in which such is
incorporated and its register of shareholders is situated. See Boyd v CIR 1951. Nb.
Thus the originating cause is not the doing of business by the company but the
shareholding, i.e. ownership of shares. The dividends come from the employment of
capital. The capital is employed in the country in which shares are subscribed.
A company may be a holding company and itself deriving profits from companies
registered and doing business in other countries. If the holding company is outside
Zimbabwe, its dividends escapes tax on the basis of being from a source outside
Zimbabwe.
This is subject to the deemed source provisions, see section 12. The deemed source
of dividends for a person who is ordinarily resident in Zimbabwe at the time the
dividend accrues to him or her is Zimbabwe. In this situation, the foreign nature of
the securities is irrelevant. What is to be ordinarily resident in Zimbabwe? (to
supplement taxation sources)
ii.
Annuities
It is whereby, through a contract, one person agrees to pay another an annual income. It
has been held that the source of an annuity is the formal act giving rise to the annuity. The
place where this formal act is performed is the source. In the case of a contractual annuity,
it the place where the contract is concluded. The place where the annuity is received is
irrelevant.
This is subject to the deemed source provisions – section 12. If, at the time of the conclusion
of the contract, the tax payer was ordinarily resident in Zimbabwe. The source is deemed to
be in Zimbabwe.
iii.
Director’s fees
The courts have held that the services of a director are rendered at the head office of the
company. If the head office of the company is outside Zimbabwe, directors fees are derived
from a source outside Zimbabwe. See ITC 250 1932 7 SATC 46. This is subject to the deemed
source provisions. A directors fees from a company whose head office is outside Zimbabwe,
may be deemed to be from a source within Zimbabwe if the director is ordinarily resident in
Zimbabwe.
iv.
Interest
The originating cause of interest accruing from the lending of money has been held to be
the service rendered by the lender in supplying the credit. It is not the loan. This means that
the source of interest is the place where the creditor renders the service and this is the
place of business of the lender. The residence of the borrower is irrelevant. The activities of
the borrower are not taken into account. See CIR v Lever Brothers. This means that were a
creditor transfers funds from outside Zimbabwe. This is subject to the deemed source
provisions. In terms of section 12 of the Act, if a person is ordinarily resident in Zimbabwe at
the time the interest accrues to him on the foreign loans, such interest is deemed to be
from a Zimbabwean source. This is rare.
v.
Sale of immovable property
If a company or person is in the business of buying and selling immovable property, thereby
deriving an income from it, the source of the income is the place where the immobile
property is located. This is the position even where the company is incorporated outside the
country.
vi.
Income from employment
The general rule is that the originating cause of the income is the rendering of services
regardless of the place where the contract is concluded or where payment is made. The
source is the place where the service is rendered. See COT v Shen 1988 22 SATC. This is
subject to the deemed source provision. In terms of section 12, a person who is ordinarily
resident in Zimbabwe and who receives remuneration for services rendered outside as an
employee is deem to have received income from a source within Zimbabwe except were his
absence from Zimbabwe exceeds 183 days during any year of assessment.
Services rendered to the Zimbabwean government outside of Zimbabwe are deemed to be
services rendered in Zimbabwe and are therefore taxable.
g. Not being a receipt of a capital nature
A receipt must not be of a capital nature – it must be of what is called a ‘revenue nature’.
The distinction between capital and revenue or income is critical. A receipt of a revenue
nature is subject to taxation, while that of a capital nature may be subject to capital gains
tax. It must be emphasised that a receipt that escapes taxation under the income tax act on
the basis that it is a capital receipt is not necessarily subject to tax under the capital gains
tax act.
The Act does not defines the term ‘receipt of a nature’. The courts have devised numerous
approaches to determine the distinction between capital and revenue. An analysis of the
case suggest that common sense applies. Capital is that which is intended to earn income
while income is that which is derived from an investment of capital. The courts have held
that the intention of the tax payer is crucial in determining whether the acquisition of an
asset is for capital or revenue purposes.
In the case of CIR v Visser 1937 TPD 77, it was stated that “income is what capital produces
or something in the nature of fruit as opposed to principal or tree” this has been called the
tree and fruit test but it has not been able to explain all the cases. It is a matter of
determining each case on the basis of its own facts. The general rule being that it is for the
taxpayer to prove on a balance of probabilities that the amount is not of an income nature.
See Reliance Land and Investment Company v CIR 1946 NLD at 181 to 182. See also… 1946
14 SATC 47@57.
It would appear clear that receipts on an income nature are easy to determine such as
remuneration for services rendered, interest or royalties, proceeds from the sale of trading
stock – generally those item included as income in a profit and loss account. Nb. These are
receipts derived from the employment of capital (the tree and fruit test). On the other hand,
some receipts are recognised as in income tax law as capital receipts, e.g.
1. a donation
2. proceeds from a sale of capital asset (an investment)
3. an inheritance
4. damages for loss of capital
The main problem arises whenever a tax payer disposes of an asset. The courts have utilised
the mechanism of intention and have held that what has to be established is whether the
tax payer intended to resale the asset at a profit through a scheme of profit making or
whether he merely intended to realise an investment. In the former, the proceeds are
revenue and it must be taxed, while in the later, they are capital. See the case of CIR v
George Forest 1924 AD 516 @ 524. If the taxpayer acquired an asset as an investment, it is a
capital asset whereas if the taxpayer acquired it with a view to selling it or as part of a
schement of profit making, it is not a capital asset – it constitutes trading stock and its
disposal produces income. The mere realisation of profit by a tax payer does not cause the
proceeds to be classified as revenue in nature.
A tax payer has a right to realise a capital asset to his best advantage. See CIR v Stott 1928
AD 252. See also John Bell and Company SIR 1976 (4) SA 415 (A)
Qn. Scheme of profit making. Income/capital, i.e. intention to acquire.
Nb. Where a taxpayer changes his or her intention, the courts have held that they will
investigate the entire scheme from the original intention to the intention of the time of
disposal. It is a matter of fact. What the ultimate intention was. It is the totality of the
circumstances which matter
Nb. This is obviously problematic. Read book no 4 pages 86-89.
The income tax act may deem a receipt to be a revenue receipt even where it is a capital
receipt. This is done under the concept of included receipts which are described as ‘specific
inclusions’ - deemed income receipts. The opposite is exempt income.
Specific inclusions and exemptions income
Notwithstanding the above definition, section 8 of the Act exempts some receipts from
taxation. It also includes other receipts, whether or not they are of a capital nature. What is
included by the Act must be included and there is no debate relating to the nature of the
income. On the other hand, what is exempted must be taken out whatever the nature of the
income. Nb. In practice it is advisable to ascertain exemptions and specific inclusions before
determining tax liability for the avenues already discussed.
Section 8 deals with specific inclusions. It also covers some exemptions although a number
of exemptions are found in different parts of the Act. Examples of exempt income includes
salaries and allowances payable to the president, ministers, members of parliament and
judges. Other are receipts and accruals of local government bodies and other statutory
bodies. Some pension benefits are exempt from tax, e.g. War Veterans Allowances. Some
church organisations are exempt from tax in respect of contributions by their members, e.g.
tithes. Scholarship funds and other funds received by non-profit making organisations are
exempted from tax etc. Nb. For an exemption to be an exemption it must be granted by or
in terms of the act. But there must always be a statutory provision. Even some portion of
retrenchment benefits are exempt from tax or an exemption may take the form of a tax
holiday
Deductions (section 15 and 16)
Up to this point, we have gross income. The Act allows a tax payer to deduct certain
expenditures that have been incurred in the production of the income. Once deductions
have been made, we arrive at the tax payer’s taxable income. Deductions are provided for in
terms of section 15 of the Act. There are 3 aspects to note, namely,
a. The general deduction formula
b. Prohibited deductions
c. Deductions specifically allowed.
Where a deduction is specifically allowed, the general deduction formula does not arise.
Similarly, if a deduction is prohibited, there is no room for the general deduction formula. It
is a matter of reading the Act to determine specifically allowed deductions and prohibited
deductions.
In terms of the general deduction formula, a tax payer may deduct any expenditure or loss
incurred in the production of income provided such expenditure or loss is not of a capital
nature. There are the following elements
a. Expenditure and loss
b. Incurred
c. In the production of income
d. Not of a capital nature
Expenditure and loss
Expenditure rarely causes problems, but the word loss maybe problematic. It would appear
that an expenditure is any use of money by the tax payer that is designed to pay for a
service or asset required in the course of business. A loss appears to be related to a state of
affairs where a tax payer in the business is made to pay to a third party damages arising
from the business operation. See Joffe and Co v CIR 1946 AD 157. It was held in that case
that where the trading operations caused damage to third parties and that loss/ damage has
to be made good. The payment which is made in satisfaction of that damage.
It would also appear that the use of the word ‘loss’ maybe superfluous if the word
expenditure is given a wide meaning covering any reduction in the assets of the taxpayer
caused by a transaction in which the taxpayer is voluntarily involved for the sake of his
business.
Incurred
The expenditure must be incurred for it to be deducted. The act does not define incurred. It
appear however, that incurred means actually incurred. But actually incurred does not
mean, actually paid. See Port Elizabeth Electric Co v Commissioner for Inland Revenue 1936
CPD 241. To be incurred means that the tax payer has an unconditional liability to pay.
Where the liability is still conditional on the happening of some future event, the
expenditure is not incurred. This means that the tax payer cannot deduct amounts set aside
as reserved for future expenditure.
Problems arise where employers make provision for what is owed to employees in the form
of bonuses or cash in lieu of leave. These problems… by applying basic principles- the tax
payer must have an unconditional liability to pay. An issue which also arises is whether
incurred means necessarily incurred. Is extravagant expenditure deductible. The act is only
concerned with expenditure actually incurred. It does not matter whether the expenditure
is unnecessary, as long as it has been incurred. See Port Elizabeth case.
In the Production of income
The expenditure must be for purposes of trade. It is important to note that the expenditure
that is sort to be deducted must be for trade or production purposes. In British tax law,
expenditure is only deducted where it is ‘wholly and exclusively. In our law, the emphasis of
the act is on ‘the extent to which the expenditure if involved’ in the production of income.
This means that where expenditure serves 2 purposes such as trade and personal, there’s
room to deduct that proportion of the expenditure that is for business or trade purposes.
Some problems have arisen where the tax payer’s expenditure is not bona fide. But is used
in the production of income. It is unclear what would happen to such expenditure. In other
words, are the motives of the tax payer relevant. An example is where a tax payer incurs
expenses related to paying employees for work done for non business purposes but the
payments are disguised as allowances e.g. for overtime. This appears often but old South
African cases suggest that the motive of the tax payer is irrelevant. This is also practically
convenient.
Where the expenditure is unexpected or fortuitous, is it for purposes of trade or production
of income. In the Rhodesian case of Commissioner of Taxes v Rendel 1965 (1) SA 59 RSA
Rendel was an accountant who suffered loss as a result of the misappropriation of client
moneys and theft of money belonging to his accounting business. He incurred costs in
conducting an investigation to establish the presis quantum of funds misappropriated byt
the employee. The commissioner disallowed deduction on the basis that the expenditure
was not incurred on the production of income nor for purposes of the taxpayer’s trade.
Beadle CJ allowed the deductions on the basis that the risk of embezzlement by employees
was inseparable from the business itself – it was a necessarily incidental to the carrying out
of the business.
These principles means that the question of whether or not expenditure is incurred in the
production of trade is determined from case to case and cannot be exhaustively defined. Nb.
Deductions claimed on the basis that the expenditure is for purposes of trade constitutes
one of the biggest components of tax practice.
Not of a capital nature
The test to be applied in determining whether expenditure is of a capital nature is the same
as the test applied in determining whether a receipt is of a capital nature. This is a general
rule and it must be expected that some principle have developed which only apply here. In
determining whether an item of expenditure is deductible as not of a capital nature. The
courts have stressed the importance of establishing the purpose. For which the amount was
expended. The leading case is commissioner for Inland Revenue v Genn and company Pty ltd
1955 (3) SA 293 (A). The tax payer procured loans from another company to finance the
purchase of its trading stock. It became liable to pay interest and fees on those loans. The
commissioner allowed the deduction of interest but disallowed the claim of the raising fees
on the basis that those fees constituted expenditure of a capital nature. The court took the
view that it was not possible to treat the interest and the raising fees differently as both
where expended to secure the purchase of the company’s trading stock. This was a revenue
expenditure and therefore deductible. The basic principle is to determine the purpose of the
expenditure – where the expenditure is for purposes of raising the stock in trade or income
earning operations. On the other hand. If the expenditure is designed to enhance the
investment itself or the value of the capital assets, it is of a capital nature and therefore, not
deductible. Read cases in the textbooks.
Capital allowances
After allowable deduction have been taken into account, it is not the end of the matter. To
arrive at the taxable income, the Act allows what are called Capital Allowances. This is relief
granted to a taxpayer with respect to capital expenditure. As already noted, capital
expenditure is not deducted under the general deduction formula. The net effect of a
capital allowance is a deduction.
These allowances are given with a wide range of capital assets used for trade purposes. If an
allowance is available, it must be deducted from the taxpayer’s income before arriving at
the taxable income.
Capital allowances are asset-specific. This means that an allowance is only available in
respect of a specified asset. Nb. Capital allowances are a form of tax incentive. This means
that they are used to encourage tax payers to invest in particular assets related to identify
businesses. It is through capital allowances that our tax law creates specialisations such as
farming, mining, manufacturing and construction
Most of the capital allowances are calculated as a percentage of the costs or market value of
the relevant asset. Reference must always be made for the detailed provisions of the Act.
The following capital allowances are available:
a. Farming assets
b. Manufacturing assets
c. Industrial buildings
d. Commercial buildings
Nb. Whether an asset is a farming asset or a manufacturing asset is a question of law.
Similarly, whether a building is a commercial building or an industrial building is a question
of law. Issues between the tax payer and the tax authorities normally revolve around
definitions. Is this the farming asset? Is this machinery? What is to manufacture? Is this a
building?
There is very little case law in our jurisdiction and South African case may be helpful, for e.g.
an issue has arisen in relation to the meaning of the word ‘building’. There is no definition of
building in the Act, for a tax payer to be able to claim a building allowance, it must be able
to show that the relevant structure qualifies as a building. In the case of CIR v Lee Sueur
1960 (2) SA 708 (A), a building was defined as follows, “ A building is a substantial structure,
more or less of a permanent nature consisting of walls, a roof and the necessary apertures
thereto. The court went on to further say that any movables attached to a building may be
regarded as part of the building if they have had separate identity or have become so
securely attached to the immovable that separation would involve substantial injury to the
immovable. It is a question of fact whether or not this is the case.”
Other cases have held that the term building is not synonymous with the word structure – it
should be understood in a non-technical sense as it would be used in everyday speech, see
ITC 1007 1962 (25) SATC 251.
In relation to industrial and commercial buildings, the courts have … definition that appear
to follow the business person’s understanding of these concepts. This may be regarded as a
tax payer’s approach. The same approach has been adopted in respect of … in the case of
CIR v Safranmark (Pvt) Ltd 1982 (1) SA 113 (A) the court said, “the ordinary connotation of
the term ‘process of manufacturing is an action or series of actions directed to the
production of an object or thing which is different from the materials or components which
went into its making..”
Nb. It is always a question of determining that which the Act allows as a capital allowance.
After capital allowance have been taken into account, the result is the taxable income. In
Zimbabwe, capital allowances may be determined by the place of doing business, e.g.
growth point. There is also a government programme that allows companies to build,
operate and transfer (BOOT). There are also what are called export processing zones (EPZ)
where capital allowances are generously granted for commercial and industrial building.
Taxable income
This is an important concept. A taxpayer’s taxable income is the amount that remains after
deductions and capital allowances. A potion of the amount must be paid as tax. The amount
of the tax payable depends on the rate of tax. This is a percentage of the taxable income e.g.
10%. Tax rates are determined by the tax authorities from time to time
Tax credits
When the tax amount has been determined, some taxpayers are entitled to what are called
tax credits. This is the amount that a tax payer is deemed to have already paid and deducted
from the tax payable. In Zimbabwe, there are only 3 groups of tax payers that are entitled to
tax credits:
a. Blind persons
b. Disabled persons
c. Persons above 59 years
Position of companies and individuals
A question may arise, why tax companies? Zimbabwean Income Tax law does not create a
special distinction between companies and individuals. In other countries, a special regime
for corporate tax exists, with specific principles which are usually different from those
applying to individuals. It is settled law that a company is a separate legal persona and has
an existence separate and distinct from its shareholders. A company is the owner of its
assets and shareholder have no proportionate property rights in the assets of a company.
It has been argued that taxing companies leads to double taxation because it is the
shareholders who ultimately bear the burden of the tax. Taxing income in the hands of a
company and thereafter taxing dividends in the hands of a shareholder appears to be an
injustice. This is how the argument has been made. Nb. There is a lot of education around
this area. No country has respected this argument, however, it has been taken into account.
It has argued that the corporate status itself leads to benefits and privileges which justify
taxing companies. Further, if companies where not to be taxed, it would create enormous
difficulties for the tax regime as the corporate status might be abused in sophisticated tax
avoidance schemes. For that reason, corporate taxation is recognised in almost every legal
system. Tax systems, however, create exemptions and allowances that ensure that the
injustice which may arise from any form of double taxation is minimised.
In Zimbabwe, there are 2 main distinctions between individuals and companies, namely,
a. There is a fixed rate of taxation for companies. Although this rate changes from time
to time, it is always promulgated as a corporate rate. Currently, it is 25%. Income
from employment activities is progressive – there are different rates for different
levels of income.
b. There are a variety of allowances and incentives that are only available to companies.
Further the taxation of dividends is only specific to companies.
c. The taxation of companies creates issues in respect of all the elements applying to
individuals merely because of the nature of the company, for example, where a
group of companies is involved, it may be necessary to determine who the tax payer
is. Where dividends are involved issues may arise relating to foreign shareholders.
Where companies are involved, it is important to determine which tax incentives available.
Some incentive are only available to companies, e.g. operating in export processing zones,
or allowances for manufacturing companies. Some allowances available to farmers are
better enjoyed by farming companies. For individuals, the Income Tax Act distinguishes
between taxable income from employment and taxable income from trade and other
investments. Income from trade and other investment is taxed at fixed rates depending on
the nature of the activity…. Normally applicable to companies – currently 25%. Income from
investments is taxed at the rate applicable to the particular investment, e.g. dividends,
interest etc.
Employment income is taxed at specified rates that vary with the level of income. The
scheme of the Act is that different bands of income are taxed progressively – the higher the
income, the higher the rate of tax. These rates are published every year. However, the tax
rate applicable at the lower level applies to all tax payers. Employment income is taxed at
source and the system and the system is call (PAYE). The system imposes an obligation on
the employer to deduct the appropriate tax and remit it to ZIMRA. With the other forms of
income, it is the duty of the tax payer at the end of each tax year to declare his or her
income to the tax authorities and to pay the relevant tax.
Only individuals are entitled to tax credits, i.e. the three tax credits already indicated. There
is an AIDS levy of 3% which is chargeable on the tax payable – 3% of the tax payable and not
3% of taxable income. This levy is payable by both individuals and companies
Nb. Husbands and wives are now taxed separately. The position in the past was that for
employment income, both salaries were put together and the tax deducted from the wives’
salaries till 1992.
The tax treatment of trusts is regulated on the same basis as individuals. Trust income is
regarded as the individual income of the trustees, but for administrative purposes, a trust
may be taxed as a person. Very few trusts pay taxes. Deceased estates are not subject to
payment of tax except where it is involved in trading, otherwise they are only liable to
estate duty. Where they are subject to tax, the executor is the one who is liable, and not the
estate. Nb. The rates applicable to employment income are published every year in the
annual finance act. see the rates applicable in 2016 in the finance act No 2 2016.
Income, Tax administration and policy
The administration of taxes, is an important issue of policy. How best should taxes be
collected? Who should collect them? Up to 1999, the administration of taxes.. Variety of
institutions each concentrating on a specified tax. The Commissioner of taxes was
responsible for income tax, capital gains tax and sales tax. There was a separate
administrative system for customs duty. Al the tax collectors reported to the minister of
finance. This system was not conducive to an effective tax administration. It was blamed for
low levels of tax collection. It appears to have also been corrupt. See generally, the report of
the Commission of inquiry into taxation 1986. In 1999, the system was replaced after the
enactment of the revenue authority act chapter 23:11. The act established ZIMRA which is
supervised by a revenue board. It is headed by a commissioner general who is responsible
for a state revenue. Every form of revenue designated as a tax falls under one department.
The most significant change is that ZIMRA is not a mere department of the Ministry of
Finance. It has been given more autonomy – it is a body corporate capable of suing and
being sued in its own name.
Its board is appointed by the Minister, in consultation with the President. In practice it is the
president. In practice the main change is that the condition of service of the employees of
ZIMRA are different from those of the public service see sec 20 of the Revenue Act. ZIMRA
has wide powers. There are recent attempts to challenge these powers. There is a pending
challenge in the constitutional court. It appears futile.
One of the mechanisms available to ZIMRA in tax enforcement is a garnishee order on the
tax payer’s bank account, see sec 58 of the Income Tax Act. The courts have not challenged
this power, but have insisted that the preconditions of their exercise must be in place
before effecting a garnishee order. For example, ZIMRA must issue an assessment in terms
of section 51. See Barclays v ZIMRA 2004 (2) ZLR 151 (H) and Hunting Industries v Barclays
2005 (1) ZRL 447 (H). the effect of a garnishee order is to freeze the account and allow
ZIMRA to finalise its dispute with the tax payer. Thereafter, the funds may be transferred to
ZIMRA. The argument before the courts is that this power is unconstitutional as ZIMRA is
allowed to act in the absence of a court order.
Tax evasion and avoidance
…
This is illegal and in many cases, a criminal offence. This is because where tax is due and
payable, it must be paid.
Tax evasion aso incudes, reduction of a tax payer’s tax liability by illegal means, e.g. by not
declaring income.
Tax avoidance is a different concept, it is tax payer’s use of schemes or transactions that are
legal, but with a view to reducing one’s tax liability. It may take several forms, including,
avoiding the tax, or reducing a tax, or postponing a tax. In many case, tax avoidance is
described as tax planning. Others may call it tax mitigation. The courts have taken an
attitude – it is legitimate to avoid tax, provided the tax payer does not break the law. In the
leading of IRC v Duke of Westminister 1936 AC 1 @ 19, Lord Tomlin stated as follows, “every
man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate
acts is less than it would otherwise be. If he succeeds in ordering them, so as to secure this
result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax
payers may be of his ingenuity, he cannot be compelled to pay an increased tax
Qn 2. Question on tax avoidance exam question
This approach has influenced tax legislation in many countries. The difficulty is to strike an
appropriate balance between legitimate tax planning and unacceptable avoidance schemes.
Which schemes are allowed, and which schemes are prohibited? Our tax law takes the
approach of an anti-avoidance rule – sec 98 of the Act. It empowers the Commissioner of
Taxes to strike down impermissible tax avoidance arrangements. The principle features of
section 98 are designed to penalise schemes that go beyond acceptable tax planning. It uses
the concept of abnormality as an avenue for ZIMRA to intervene, this means that, for a
scheme to succeed as a tax avoidance measure, it must not be abnormal. Any scheme
whose sole or main purpose is to avoid tax and is tainted by some abnormality is hit by
section 98. It must be set aside and the tax payer subjected to tax as if that scheme where
not in existence.
There are 2 important aspects of section 98, namely,
a. The purpose of the transaction
b. Whether or not it may be characterised as normal or abnormal
What is being penalised by section 98 is not just a transaction whose purpose is tax
avoidance, but hose which seek to avoid tax in an abnormal manner. This means that
section 98 seems .. to save legitimate business… even if the consequence of their existence
is to avoid tax. If a tax payer’s purpose is found to be tax avoidance, that is not the end of
the matter – it is still necessary to establish whether the transaction is abnormal. If the
purpose is found not to be tax avoidance, that is the end of the enquiry – section 98 does
not arise.
Regarding purpose, see the case of CIR v Forsyth 1971 33 SATC 113, where a company with
unlimited liability had been formed to take over the business of consulting engineers, the
company undertook to employ the 3 former partners at a salary and to pay the partnership
an amount of goodwill equal to 3 years of partnership profits. No employment contracts
were signed and the payment of the goodwill was not guaranteed. The Commissioner
wanted to treat this scheme as a tax avoidance scheme. This would have meant
disregarding the existence of the company and treating the company’s income as if it were
of the three former partners.
The commissioner lost the battle on the basis that
a. Regarding purpose, the court came to the conclusion that tax avoidance was not the
sole or main purpose of the scheme. There were other advantages that the tax
payers sought to gain, e.g. separate legal persona status.
b. In the alternative, the court considered the abnormality test and recognised that the
transfer of a professional practice into a company with unlimited liability was a wide
spread practice and therefore not abnormal by any stretch of that expression.
In COT v Ferreira 1976 38 SATC 66, the tax payer had formed a company to take over his
existing shareholding. The sole purpose of the … was for the avoidance of a death duty – a
tax. This fact was accepted. The tax payer went on to utilise some provisions of the Income
Tax Act which were designed to avoid or to minimise super tax. His scheme was set aside on
the basis of the abnormality test. Forming a company to avoid death duties was held to be
normal. What was abnormal were the various schemes he entered into to avoid super tax. It
was on that basis that his scheme was hit by section 98.
Regarding abnormality, the courts have not developed a solid guide. The general rule is that
for transaction to be normal, it must create rights and obligations that would normally be
created between people dealing at ‘arm’s length’ – Hicklin v SIR 1980 (1) SA 481 (A). Various
expressions have been used to deal with abnormality. The first is the commercial substance
test (Business substance test). If an arrangement lacks commercial substance it is likely to be
held abnormal. The other one is the legal substance test. With this test, the legal
consequences of the transactions must be examined. If there is more form to substance, the
transaction is likely to be abnormal, e.g. a one person company, notwithstanding the
separate legal persona principle, may be regarded as abnormal. So each case must be
determined on the basis of its own facts. Read 1961 Rhodesian Law Journal Dewhurst.
Nb. For section 98 to be invoked, the sole of main purpose of the scheme must be tax
avoidance. If this requirement is fulfilled, the Commissioner has a further hurdle, namely,
the scheme must be tainted by abnormality. In practice, good lawyers survive section 98.
Does section 98 strike an appropriate balance between legitimate tax planning and
unacceptable tax avoidance? There are a number of provisions in the act that are specifically
designed to tax transactions that would otherwise be used for tax avoidance.
Capital gains tax
This is a separate tax. What has been considered so far is the most prominent tax – income
tax. The distinction we have made in income tax law between income and capital, does not
necessarily mean that once a receipt is characterised as capital, it necessarily attracts capital
gains tax. For a receipt to attract capital gains tax, the Capital Gains Tax Act must say so. the
sole question becomes – under what circumstances is capital gains tax chargeable when
they charge capital gains tax? Under the act, Capital gains tax is chargeable under section 8.
This is chargeable on gains from the sale or deemed sale. There are 3 key words – ‘gains’,
‘sale’, and specified asset.
Sale
The law of sale is outside the scope of tax law. What must always be considered is whether
or not there has been a sale. Nb. Always take into account the context of a deemed sale.
Specified asset
To attract capital gains tax, there must be the sale of a specified asset. Specified assets are
defined in section 2 of the Act. There are only 2 specified assets, namely,
a. Immovable property’
b. Any marketable security
Immovable property has its ordinary meaning in property law, i.e. land plus anything else
attached to it. A marketable security is defined in section 2 as ‘any bond capable of being
sold in a share market/stock exchange or any debenture scheme or stock or any right arising
from participation in a unity trust’. Nb. Marketable securities are concepts in corporate law.
Gain
This is not necessarily a profit. This is a concept similar to taxable income. This is an amount
available to the tax payer after the disposal of a specified asset and when permissible
deductions have been effected. The starting point is a gross capital amount – being the
receipts from the sale of a specified asset. The Act takes every care to ensure that what is
taxable is a fair amount that has taken into account permissible deductions. There may be a
loss after the disposal of an asset. In terms of section 11(2) of the Act, deductions are
permitted in respect of any expenditure on the acquisition of the asset concerned including
ay improvement on the property. the date of the acquisition of the asset is only relevant for
purposes of assessing the cost of acquisition. Adjustments are always made to take into
account inflation.
An important concept is what is called a fair market price. This is relevant where a person
purchases a specified asset in excess of the fair market priceor where he or she sells a
specified aseet at less than the fair market price. In each case, the commissioner is
empowered to disregard such a price and take into account a fair market price for purposes
of determining capital gains.
The capital gains tax is a tax in Zimbabwe, for this purpose the sale must be a Zimbabwean
sale. The act uses the concept of source to limit the tax to those transactions that are in
Zimbabwe or deemed to be in Zimbabwe. For this purpose, reference must be made to the
concept of a deemed sale. Where a loss has been incurred on the disposal of an asset. A
setoff is allowed against any capital gain on the disposal of another asset in the same year of
assessment. This applies regardless of the nature of the asset as long as it is a specified asset.
The loss in this context is referred to as an assessed loss.
Exam question. Our law has special provision for what is called principal private residence. If
a taxpayer sells a principal private residence, he or she may take advantage of what are
called ‘rollover provisions’ in the capital gains act. These provisions apply as follows –
proceeds from the principal private residence which are utilised for the acquisition of
another private residence are exempt from tax in the year of assessment following the year
of sale of the principal private residence. The proceeds are said to be rolled-over. See
section 21
What is a principal private residence? The act defines this expression. It is defined as the
taxpayer’s sole or main residence. This requirement is satisfied if it can be shown that the
taxpayer regarded it as his sole or principal residence although he may have resided
elsewhere for good reasons. An example of a good reason would be that of employment.
The taxpayer must elect to take advantage of the provisions. The requirement is that the
expenditure on the replacement – of the new residence must be taken before the end of
the following year of assessment. In practice, this requirement is not strictly by the
commissioner. As a general rule rollover relief is available where capital gain has arisen. If
there is no capita gain, rollover relief does not arise.
See reference no 2 govt thingy
Estate duty
Thi is a special form of tax which is not universal in the sense that other countries do not
find it worth it to tax a deceased estates. Even in jurisdictions where this tax is available, the
rates of tax are generally low. The latter is the case in Zimbabwe. Estate duty is chargeable
in terms of the estate duty act [chapter 23:03. Nb. Read the act for details. An estate is a
legal persona which comes into existence immediately upon the death of an individual. This
is by operation of law. A deceased estate consists of all the assets of a deceased person. The
estate comes to an end when all the processes specified in the administration of estates act
have been followed.
The tax is chargeable as soon as the assets have been realised. The master of the high court
is responsible for the valuation of the assets. he or she also acts as an agent of zimra to
transmit the tax. The tax is charged on what is called the residue, i.e. a specific concept
which takes into account liabilities of the estate. There a period where the deceased’s
estate may pay income tax, e.g. where income continues to accrue after death in a trading
activity. Nb. Refer to the distribution of assets in terms of a will – some assets may be taxed
in the hands of the heir from the date of death.
Indirect taxes
The expression, indirect tax, no longer has the significance it used to have. This is because
modern tax law is exclusively an affair of legislative provisions – what is taxable in that
specified by statute. Whether it I direct or indirect is a question of policy and falls to be
considered when devising a tax system. An indirect tax is one that does not focus on the
ultimate taxpayer, but on the services or activities that are subject to tax with the taxpayer
being relevant. A person is required to pay tax whether or not they have the economic
obligation to pay.
Examples of indirect tax are import duty, value added tax VAT, (formerly sales tax), carbon
tax, tourism levy, airport departure fees. What makes these taxes indirect is that the
ultimate taxpayer is not the person with the legal liability to pay tax. For example, VAT is
paid by the trader and not the customer, while import duty is paid by the importer and not
the customer. In both cases, however, the customer ultimately pays the tax.
Nb. Apart from revenue raising, indirect taxes are normally utilised for 2 other purposes
a. Regulation of consumption patterns, excise duties on tobacco and alcohol
b. Protection of the domestic economy
In some cases indirect taxes have some political value in that they disguise tax liability in
communities of high unemployment and low levels of wealth.
The most important example of indirect tax is Value Added Tax VAT
Value Added Tax
Nb. It is becoming increasingly important in practice. Before the introduction of VAT, there
was sales tax. Under the sales tax system, which was regulated by the sales tax act, the
taxpayer was the seller of the goods that fell under the sales tax system. Legal liability was
on the seller. But in practice, this was passed on to the customer. It was chargeable at the
point of sale in respect of goods and services.
Not all goods and services attracted sales tax. A wide range of assets and services escaped
the net, either on the basis that no sale was involved, or that the service was not subject to
sales tax. Further, not every seller was covered. Only those involved in registered
commercial enterprises where covered. The administration of the system was chaotic as
many businesses did not remit the sales tax collected.
VAT was introduced purportedly to address these deficiencies. It is not a Zimbabwean
invention. Sales tax had become anachronistic. Systems around the world had moved to
VAT. Zimbabwe was a late convert. The major attribute of VAT is that it is not focused
exclusively on sales. It cover all aspects where assets or services move from one person to
the other in such a manner that the recipient is said to be getting enhanced value. It seeks
to be more efficient by adopting the approach where many taxpayers are involved. There is
a taxpayer at each stage of the production framework. There is VAT at each stage.
The governing legislation is the VAT Act [Chapter 23:12]. As the name implies, it is a tax on
value added. The charging section, is section 6. It is a tax on supply. The rate of tax is fixed
from time to time by the finance act. The tax is levied on the following 3 aspects.
a. The supply of goods or services in the furtherance of any trade, by any registered
operator.
b. The importation of any goods into Zimbabwe by any person.
c. The supply of any imported services by any person.
These are the only 3 aspects that attract VAT. It does not replace import duty. VAT is
payable if the transaction is covered by section 6, regardless of whether or not some other
tax may also be payable. The Act is unhelpful in that it does not define its major components.
(As with all tax statutes such that it does not limit the scope.). The word supply must be
given its ordinary and natural meaning. It appears that to supply is to furnish or to serve.
There must be 2 parties to a supplier – the person who furnishes or serves goods or services
and the person who receives them. This means that a trader supplies to the customer. See
the English case of Carlton Lodge Club v Customs and Excise Commission 1974 3 ALL ER 798.
It also appears that the word supply has a wide meaning and covers anything done for a
consideration.
Some supplies are exempted from VAT – read the Act and the relevant SI’s. The VAT Act
considerably expands the scope of what is taxable beyond what used to be covered under
the sales tax act. Nb. Its major attribute is that the tax is payable at various points of the
economic chain – the person supplying raw materials to a manufacturer, the manufacturer
selling goods to the wholesaler, the wholesaler selling goods to the retailer and finally the
retailer to the customer.
Exam qn. Write short notes on VAT
International tax law
International tax law arises where there is a foreign element. There may be a foreign
element in that, the taxpayer is liable to tax in both Zimbabwe and another jurisdiction.
Either the taxpayer is a non-resident, but does business in the country (they are taxed on
the source base) while they may be taxed on the residence base in their respective country).
Or the taxpayer is a resident in Zimbabwe, but I involved in transactions outside the country
(taxed on a deemed source basis here and on a source base in the other country of business)
These aspects raise what is called double taxation. Nb. In the absence of specific provisions
exempting the taxpayer, double taxation is irrelevant. The legislation provides for certain
exemptions or tax credits that take into account the need to minimise double taxation. In
the Income Tax Act, non-residents are subject to withholding taxes in respect of dividends
regardless of any double taxation consequences.
International tax law relies on what are called double taxation treaties. A country may enter
into an agreement with another country regulating taxation of their citizen or residents so
that tax payble in one countray is taken into account in the other or tax is only payable in
one country. Zimbabwe has double taxation agreements with the following countries, South
Africa, UK, Netherlands, Germany, Iran, Malaysia, China?, Namibia, Botswana, France,
Mauritius, Sweden, Norway, Poland.
Six questions, Answer 4
Qn 1: tax liability: gross income, debate on source residence
Qn 2: tax avoidance, tax planning
Qn 3: problems qns on source of income, originating cause, deemed source
Qn 4: deductions, how do u tax fringe benefits, falls under total amount
Qn 5: capital gains tax, is it wide, or narrow, roll over relief
Qn 6: write short notes, e.g. VAT