BUSINESS TAXATION

4.2 General deduction formula

Section 15 (2) (a) of the ITA sets out the General Deduction Formula as follows: “The deductions
allowable shall be expenditure and losses, to the extent to which, they are incurred for the purposes of
trade or in the production of income except to the extent to which they are expenditure or losses of a
capital nature.”

4.2.1 Expenditure and losses

This refers to losses such as pilferage (theft), breakages, destruction and excludes the accountant’s net
loss in the financial statements.

4.2.2 To the extent to which

This creates room for apportionment of expenses incurred for dual purposes by splitting them into
business and private or revenue expenditure and capital expenditure. For example, if a tax payer obtains
a loan and utilises part of it in purchasing a fixed asset and the remainder to acquire trading stock, then
interest attributable to the loan used to acquire trading stock have been incurred for permitted
purposes.

4.2.3 They are incurred

Expenditure will be deductible if it has been incurred by the tax payer. Incurred means that there is an
obligation to pay. Such expenditure is deductible from income even if payment takes place only at some
later date. What is of essence for it to be deducted is that it has been sustained.

4.2.4 For the purposes of trade

It means for the purposes of enabling a person to conduct business activities to generate profit in the
trade. Ordinarily, recurring expenditure such as rentals, rates, electricity, advertising and licence fees
would be deductible.
It may be useful to categorise expenditure for the purposes of trade into 2 ways
a) Designed expenditure
It covers money voluntarily spent by the tax payer for the purposes of this trade.
b) Fortuitous expenditure
It covers money involuntarily spent by the tax payer because of some misfortune, which has overtaken
the tax payer. However, there are exceptions to this rule. A tax payer cannot deduct expenditure
incurred as a result of law breaking such as parking fines, traffic fines and custom fine or penalties.

4.2.5 Or in the production of the income

These are essentially expenses incurred in the process of generating taxable income. These normally
include rent, salaries and insurance premiums to protect business assets.

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4.2.6 Not of a capital nature
It is important to distinguish between capital and revenue expenditure. Capital expenditure increases
the earning capacity of a business whereas revenue expenditure merely maintains the earning capacity
of the business. Put simply, revenue expenditure does not improve or prolong the life of an asset but
simply allows the asset to run.

4.3 Specific Allowable deductions

4.3.1 Repairs [Section 15(2) (b)]

Repairs to articles, implements, machinery and utensils used, and to property occupied for the purpose
of trade and repairs resulting from the letting of property.
Repair is restoration by renewal or replacement of subsidiary parts of the whole i.e. restoring an asset to
its original state at the time it was first owned by the taxpayer. It is not necessary, however that the
materials used should be identical with the materials replaced. Repairs are to be distinguished from
improvements. The test for improvements is whether a new asset has been created resulting in an
increase in the income earning capacity or whether the work undertaken merely represents the cost of
restoring the asset to a state in which it will continue to earn income as before.

4.3.2 Capital allowances [Section 15(2) (c)]

4.3.3 Expenditure to acquire a right to use someone else property [Section 15(2) (d)-(e)]
To be allowed as deductions are expenditure incurred by a taxpayer who is a tenant (lessee) on; rentals,
lease premiums and lease improvement. Lease premium and lease improvements are spread over the
lease period or 10 years, whichever is less.

4.3.4 Bad Debts [Section 15(2) (g)]

A deduction can be claimed in respect of debts, which are irrecoverable as long as all of the following
conditions are met:
 The debt must be due and payable to the taxpayer
 The debt must be proved, to the satisfaction of the Commissioner, to be irrecoverable as at the
end taxpayer’s financial year
 The debt must have been included in the taxpayer’s income either in the current or any previous
year of assessment.

4.3.5 Pension and Retirement Annuity Fund Contributions [Section 15(2) (h) arw 6th Schedule]
The maximum allowable deduction is $5,400 per employee per annum

4.3.6 Arrear Pension Fund Contributions [Section 15 (2) (i)]

Payments in respect of past service, may be deducted in the year of payment, subject to restrictions of
$1,800 per employee per annum

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4.3.7 Medical Aid Societies Contributions [Section 15 (2) (j)]
The amount of any contributions paid to a Medical Aid Society by an employer in respect of his
employees or their dependents.

4.3.8 Experiments and Research [Section 15 (2) (m)]

A tax payer may deduct expenditure incurred during the year in carrying out experiments and research
relating to his trade other than expenditure of a capital nature incurred on plant, machinery, land or
premises or on the acquisition rights.

4.3.9 Experiments and Research [Section 15 (2) (n)]

The principle is extended to sums, which the tax payer contributes to other person carrying out such
experiments and research relating to the taxpayer’s trade or proportion of such contributions if the
other person’s expenditure is not wholly of this nature. The amount allowable as a deduction shall be
determined by the formula.

AxB
C
Where
A = the amount of the tax payer’s contributions
B = the amount incurred by the other person, which would have been allowed as a deduction in terms of
Section 15 (2) (m) above
C = is the total amount of the expenditure incurred on experimenting and research

4.3.10 Scientific Research and Experimental Work [Section 15 (2) (o)]

An amount equal to the sum contributed to approved scientific or educational bodies with the condition
that they be used for industrial research or scientific experimental; work connected with the tax payer’s
trade.

4.3.11 Educational Grant, Bursary or Scholarship [Section 15 (2) (p)]

A deduction is allowed of grants, bursaries, or scholarship paid for a person undergoing technical
education, provided that:
 the course is related to tax payer’s trade and
 the beneficiary is not the tax payer, his spouse or near relative of either spouse.
If the tax payer is a company, the beneficiary should not be a near relative of the individual controlling
the company, his spouse or near relative of the spouse unless the director works full time for the
company and controls not more than 5% of the share votes. A cousin is not a near relative

4.3.12 Voluntary payments to ex-employees and/or their dependents [Section 15 (2) (q)]
Any amount paid during the year of assessment by way of annuity, allowance or pension is deductible
subject to the following
 The employee or partner must have retired because of ill-health, infirmity or old age
 The amount allowed is restricted to US$500 per tax year for each former employee

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 In the case of payments to ex-partners or dependents or persons who were dependent on a retired
or deceased former employee or partner the annual restriction is US$200 in respect of all
dependents of each ex-employee or ex-partner.

In all cases the amount allowed is reduced by any obligatory payments (e.g. pension or annuity) received
during the year by the ex-employee or dependent from any fund of the former employer.

4.3.13 Donations [Section 15 (2) (r)]

A deduction shall be granted for payments made to the National Scholarship Fund, National Bursary
Fund or a trust administered by the Minister responsible for either Social Welfare or Health.

4.3.14 Donations [Section 15 (2) (r1)]

Any amount not exceeding US$100,000 paid by a tax payer during the year of assessment to the State or
to a fund approved by the Minister of Health for, any of the following operated by the state, local
authority or religious organisation.
 The purchase of medical equipment
 The construction, extension or maintenance of a hospital or
 The procurement of hospital drugs (including ARV)

4.3.15 Donations [Section 15 (2) (r2)]

Any amount not exceeding US$100,000 paid by tax payer during the year of assessment without any
consideration at all to a research institution approved by the Minister responsible for Higher and
Tertiary Education

4.3.16 Donations [Section 15 (2) (r3)]

Any amount not exceeding US$100,000 paid a tax payer during the year of assessment, without any
consideration at all, to the State or a fund approved by the Minister responsible for education, for any of
the following operated by the state, local authority or religious organisation
 The purchase of educational equipment
 The construction, extension or maintenance of a school
 The procurement of school books or other educational materials

4.3.17 Donations [Section 15 (2) (r4)]

Any amount not exceeding US$50,000 paid by a tax payer during the year of assessment without any
consideration to the Public Private Partnership Fund.

4.3.18 Donations [Section 15 (2) (r5)]

Any amount not exceeding US$50,000 paid by the tax payer during the year of assessment without any
consideration to the Destitute Homeless Persons Rehabilitation Fund established by the Ministry of
Finance under the Audit and Exchequer Act.

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4.3.19 Subscriptions [Section 15 (2) (s)]
A deduction is allowed for subscriptions paid by a tax payer in respect of his continued membership to
any business, trade, technical or professional association. Entrance fees are not allowable.

4.3.20 Expenditure Prior to commencement of Business [Section 15 (2) (t)]

A deduction is allowed from business income, which
 was incurred by the tax payer, 18 months prior to commencement of business, in the course of
establishing the business and
 would have been allowed as a deduction had it been incurred after beginning the business and
 Is claimed in the year of assessment in which business commences

4.3.21 Opening stock [Section 15 (2) (u)]

Accounting principles are recognised and the tax payer is allowed to deduct the value of the trading
stock, which was on hand at the end of the preceding year of assessment, i.e. opening stock.

4.3.22 Trading Stock acquired other than in the ordinary course of trade [s.15 (2) (v)]
A deduction shall be allowed from the income derived by the tax payer in a year of assessment, for stock
acquired by way of inheritance and mixed with the taxpayer’s trading stock. The amount of deduction
shall be the value as in the deceased estate or in the donor’s hands.

4.3.23 Conventions and Trade Missions [Section 15 (2) (w)]

The cost of attending a convention or trade mission is allowed as a deduction subject to the following:
 The deduction is restricted to US$2,500 of the amount spent in any one tax year and must relate to
not more than one convention, which in the opinion of the Commissioner was in connection with
the trade carried on by the tax payer or one trade mission, approved by the Minister (not both)
 If the convention or trade mission commences in one year of assessment and end in another
deduction is allowed in the tax year it ends
 If the person attending is a member of a partnership and the partnership bears the expense, each
partner is allowed to deduct an amount in proportion to his share of profits. In such a case the limit
of US$2,500 is applicable to one visit to each partner.

4.3.24 Legal Cost On Income tax Appeals [Section 15 (2) (aa)]

A taxpayer who appeal against any decision made by the Commissioner and whose appeal is allowed in
full in the Special Court or the High Court, may deduct their legal costs (allowed by the Registrar of the
court as being in accordance with the proper scale for such costs) in the year of assessment in which the
cost are “taxed”. If the appeal is allowed to a substantial degree the court may direct that the cost be
deductible.

4.3.25 Legal Cost On Income tax Appeals [Section 15 (2) (bb)]

Should an appeal be taken further (by either party) to the Supreme Court, and the tax payer’s case be
upheld in full or to a substantial degree the court may, at its discretion, permit the cost to be deducted.

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4.3.26 Expenditure Not yet Incurred [Section 15 (2) (cc)]
Expenditure may normally be claimed as a deduction only in the year in which it is incurred. An
exception is provided in cases where income accrues in one year assessment in respect of services to be
rendered or goods to be delivered in a subsequent year and it is known that expenditure related to such
income will be incurred in subsequent years. An allowance for such expected costs may be claimed in
the year of accrual of the income but subject to the following:
 The amount of the allowance will be at the discretion of the Commissioner (not subject to objection
or appeal
 Expenditure of a capital nature is ignored
 Current expenditure, which relates directly to future tax years’ income and which would have been
claimable in the current tax year, is set off against the allowance and
 Any allowance granted is brought back into income in the following year

4.3.27 Export Market development Expenditure [Section 15 (2) (gg)]

This paragraph provides for a 200% deduction of expenditure incurred by a taxpayer during the year of
assessment of any export market development. This is money expended on the expansion in presence in
foreign markets. Such expenditure qualifies for double deduction and it includes the following:
 Expenditure in bringing overseas buyers to Zimbabwe
 Expenditure incurred on overseas representation
 Advertising and promotion of goods in foreign markets
 Expenditure on market research
 Expenditure on in market visits
 Expenditure on trade fairs, marketing materials and samples

4.3.28 Tobacco Levy [Section 15 (2) (hh)]

The amount of any tobacco levy paid in the year of assessment in terms of Section 36A.

4.3.29 Approved Employee Share Option Scheme [Section 15 (2) (ii)]

This section allows for a deduction of the fair value of any stock, shares, debentures, units or other
interest paid or given by the client to an employee of the client or for the benefit of an employee of the
client or pursuant to an approved employee share ownership scheme or trust.

4.3.30 Maintenance on behalf of local Government [Section 15 (2) (kk)]

Expenditure not exceeding US$50,000 approved by the Minister responsible for local government on the
maintenance of buildings, roads, bridges, water works, sanitation works, public works and any other
utility, amenity or item of infrastructure

4.3.31 Assessed Losses [Section 15 (2) (3)]

Where a tax payer has income from one business activity but sustain a loss on another the latter is set
off and only the balance is taxable. If the deduction exceeds to income the excess is defined as the
“assessed loss”. Assessed loss determined in the previous year of assessment is deductible. However,

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there are restrictions; the tax payer may not carry forward an assessed loss in the following
circumstances
 After 6 years from the date it was incurred, except in mining where it can be carried forward
indefinitely.
 If the tax payer has been declared insolvent.
 Upon the death of the tax payer
 Where the tax payer has assigned his assets or business for the benefit of creditors.
 Where there has been a change in shareholding by the company with an assessed loss and the
Commissioner is of the view that the change is to take advantage of the loss.

4.4 Prohibited deductions [Section 16 of the ITA]

While the general deduction formula contains its own restrictions further restrictions on deductibility
arise under section 16 of the ITA, parts of which forbid a deduction despite the expense passing the
tests of purposes of trade, non-capital nature, etc.
No deduction shall be allowed in respect of the following expenditures: -
a) The cost incurred in the maintenance of the tax payer, his family or establishment.
b) Domestic expenses including travel between home and place of business or between two
entirely distinct trades. A taxpayer, who carries on trade at home and travels to other places
where he carries on the same trade, may avoid both of these prohibitions. Domestic expenses
include wages paid to a domestic servant who was recruited to enable the taxpayer’s wife to
take up employment.
c) Any loss or expense, which is recoverable under any contract of insurance or indemnity.
d) Tax levied on income and interest on overdue tax. There are nevertheless instances where tax
may rank as a credit against tax payable.
e) Income carried to any reserve fund or capitalised in any way. The commissioner accepts,
however, that specific provisions for director’s fees and staff bonuses are deductible subject to
the following conditions, i.e.
 That they are voted by the date of the relevant accounts or annual general meeting
and:,
 That they accrue for tax purposes in, at the least, the year of assessment after that in
which they are claimed as a deduction.
f) Expenditure incurred in respect of any amount received or accrued which is not included in the
term “income”, as defined. A common example of such disallowable amounts is that of interest
payable on a loan used to purchase Zimbabwean shares as they yield exempt dividends.
Administration expenses may also be affected. It is accepted, however, that audit and accountancy fees
remain fully deductible
g) Contributions by employees to pension/annuity/sickness etc. Funds for employees, except to
the extent permitted in the sixth schedule. The effect is that only contributions to funds
approved or registered in accordance with laid-down procedures are deductible, subject then to
the limits imposed in that schedule.
h) Notional interest which is lost as a result of investing capital in trade

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 i) The rent of, or cost of repairs, or expense incurred on, any premises not occupied for trade or of
any dwelling or domestic premises except in respect of such part as may be occupied for the
purposes of trade
j) The cost of securing sole selling rights. An example is the cost as might be incurred by a petrol
company in payment to a service station which then sells only that company’s brand of petrol
k) Amounts, in excess of US$10,000 paid for leasing a “passenger motor vehicle” (as defined in the
fourth schedule) where the lease was entered into on or after 1st January 1999.
l) The cost of any shares awarded by the company to an employee or director. This prohibition
would counter any claim for a deduction by a company in respect of either an issue of its own
or, an award in another company (for related companies)
m) Expenditure incurred on entertainment whether directly or by the provision of an allowance to
any employee including a director. “Entertainment” is defined as including “hospitality in any
form”. a deduction is therefore clearly precluded in respect of the cost of for example, a lunch
for business associates, despite the host’s purpose being the furtherance of trade relationships
n) Expenditure incurred in the production of any income arising from stocks or shares of any
company. Dividends from foreign companies, which are liable to income tax in the hands of a
taxpayer ordinarily resident in Zimbabwe, are taxable (at a flat rate; without any deduction for
related expenditure . the latter could be a minor matter such as bank charges, or more
substantial such as interest payable on monies borrowed to purchase shares.
o) Expenditure incurred in the production of interest on any loan or deposit with local financial
institution

Business income and expenditure

ALLOWABLE DEDUCTIONS DISALLOWABLE DEDUCTIONS
Administration expenses- cleaning expenses Depreciation on delivery van
Selling expenses e.g. salaries for salesman Fines and penalties
Delivery expenses Provision for bad debts, for obsolete stock
Staff Christmas party and cost of lunch Entertainment allowance
Electricity, water and rates Loss on sale of fixed assets
Bad debts –if they are due and payable to the tax Bad debts inherited through acquisition of a
payer business
Pension contribution by the employer: maximum Interest on loan to construct a building
$5 400/ annum/ employee
Medical aid contributions (allowable in full) Interest on money borrowed to pay dividends
Legal expenses of collecting debts Pay as you earn (PAYE) and NSSA contributions
Overdraft interest Overdraft or bond raising and cancellation fees
Subscription fees (for continued membership even Entrance fees
if not related to trade)
Cost of distributing dividends Value added tax (VAT)
Debenture interest (allowable if money was used Debenture interest ( if money was used to finance
to finance the business as working capital) the purchase of fixed assets)

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 Theft by employees (pilferage or embezzlement) Theft by director, shareholder, partners
Retrenchment package (if the company is Retrenchment package ( if the company is closing)
continuing
Discount allowed Advertising of a share offer
Realised foreign exchange losses on foreign debts Unrealised foreign exchange losses
Donations: Re-connection fees
National bursary fund (no limit)
National scholarship fund (no limit) Travelling expenses to buy fixed assets
Charitable organisation under the Ministry of Legal fees for company formation
health and child welfare up to a maximum of Undercover parking (capital allowances can be
$100,000 claimed)
Schools, hospitals, clinics (for the state) up to a Improvements or renovations (capital allowances
maximum of $100,000 can be claimed)
Public private partnership fund limited to $50,000
Destitute or homeless person Rehab fund limited
to $50,000
Donations and contributions made from purely Donations to a political party, churches, social
business motive not charitable motive activities
Repaving of parking area Paving of buildings (capital allowances can be
claimed)
Research and experiments expenditure or
contributions for research and expenditure related
to trade allowable to a limit of $100,000 each (this
excludes capital expenditure on assets)
Cost of preparing returns Professional advice on income tax matters
Cost of preparing accounts (financial statements) Architect fees
Consultancy fees ( if related to business) Restraint of trade
Connection fees (e.g. telephone fees) Excessive directors’ fees and other remuneration
Pre-production expenses (allowable if they are Loans to directors written off (if the company’s
incurred within 18 months before commencement business is not money lending)
of trade and should not be of a capital nature)
Inventory (allowable at the estate value) Exchange loss on acquisition of fixed assets (capital
allowance may be claimed)
Royalties Installation costs
Rentals (allowable, if the property is put into use) Rentals for property not being utilised
Bank charges Inducement fee
Audit fees Trademark registration
Repairs and maintenance Underpinning foundation of buildings (capital
allowance may be claimed)
License renewals Initial business license
Trade conventions up to $2,500 per annum Expenditure on foreign business

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Lessor’s cost of drawing up a lease agreement Tenant’s cost of drawing up a lease agreement
Educational grants or bursaries (if related to trade Life assurance premium on the life policy of MD
and beneficiary is not a near relative of a director where the company is a beneficiary or where it is
or shareholder) a cousin is deemed not to be a ceded to the company.
relative
Purchase of protective clothing Waiver of debt
Valuation fees for insurance purposes Purchase price of an annuity
Tax reserve certificates
Costs of successfully suing the COT Costs of unsuccessfully suing the COT
Cost of removal of stock or minor removals on Cost of removal and re-erection of partitions
assets within the same premises
Contributions made towards the cost of a private
railway siding in which ownership remains with
NRZ
Ex-gratia payments (voluntary payment by way of
annuity, allowance or pension made by an
employer to an ex-employee or ex-partner who
retired due to illness, infirmity or old age or to
dependents of the ex-employee or ex-partner.
Maximum allowable deduction:
Ex-employee $500 p.a
ex-partner $200 p.a
Dependent(s)[for all dependents] $200 p.a

Exempt income or non-taxable income

 Bank interest
 Dividends received from local companies
 Export trade incentives from the government
 Class C permanent shares of any building society
 Interest on tax reserves certificates
 VAT refund
 Profit on sale assets
 Waiver of a debt

LAYOUT FOR ASSESSING COMPANIES

Profit as per income statement xxx
Add: Disallowable deductions (section 16)
Depreciation xxx
Entertainment expenses xxx
xxx
Add: Recoupment xxx

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 Xxx
Less: Non-taxable income
Bank interest xxx
Dividends received xxx
Export incentives xxx xxx
xxx
Less: Allowable deductions (section 15)
Capital allowances xxx
Other allowable deductions (excluded from accounts) xxx xxx
Taxable income xxx

Remittance of tax by a company

Tax is computed on the basis of projected income and expenditure for the tax year and remitted to
ZIMRA using the Quarterly Payment Dates (QPDs) as follows:

Due date % Due

25 March 10%
25 June 25%
25 September 30%
20 December 35%

Question 1 [GZU Question bank]

BW Limited has estimated its annual profit for 2014 to be $152,800.00. Compute GG
Limited’s 3rd QPD for 2014. (3 marks)

Tax incentives for exporting companies

There is a tax relief for exporting companies as follows:
Export volume Applicable corporate tax rate
30% - 40 % 20%
41% - 50% 17.5%
51% and above 15%

Question 2 [GZU Question bank]

Exquisite Baths Industries (Private) Limited (EBI) specialises in the manufacture of personal hygiene
soaps and related products at their factory in the southern industrial site of Harare. EBI commenced
business operations on 20 April 2013 and had an assessed loss of US$112 000 for the period ended 31
December 2013 attributable to large start-up costs in the first period of trading.

Turnover for the year ended 31 December 2014 amounted to US$1 980 000 of which US$700 000
related to export sales. EBI is trying to increase its turnover from export sales through participation in

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foreign market trade fairs as well as other marketing campaigns. The gross profit margin for the year
ended 31 December 2014 was 60%.

EBI recorded a net profit of US$315 000 for the year ended 31 December 2014 after taking into account
the following transactions:
i) Net rental income of US$280 000 received from the leasing of one wing of the head office
building situated in the central business district (CBD) of Harare.
ii) A refund of US$20 000 representing value added tax (VAT) overpaid for the year.
iii) Net interest received from local commercial banks of US$10 000.
iv) The registration of three trademarks, ‘Cleanex’, ‘Perfect’ and ‘Alfresh’, at a total cost of
US$30,000 in respect of EBI’s personal hygiene soaps. The market research expenses incurred in
connection with the development of these soaps amounted to US$65 000. ‘Alfresh’ is a hygienic
wet paper soap developed specifically to assist in the efforts to fight cholera and other
waterborne diseases in areas where there are erratic water supplies.
v) A donation of US$120 000 to a local council school as part of EBI’s corporate social responsibility
programme.
vi) Depreciation of fixed assets of US$67 000.
vii) Marketing costs of US$88 000. US$25 000 of these costs were incurred when the export market
development manager attended two trade conventions and one trade mission as part of EBI’s
efforts to increase its export sales. The trade mission was duly approved. The remaining
US$63,000 of costs were incurred in marketing EBI’s soaps to foreign markets.
viii) General repairs and maintenance costs amounting to US$140 000. US$28 000 of this amount
was incurred in underpinning the office building to strengthen its foundations against
subsidence.
ix) Exceptional costs amounting to US$290 000 as a result of the production manager incurring an
injury whilst working on one of the production lines in the factory. The production manager was
rendered incapacitated as a result of the incident. EBI settled out of court and US$250 000 of
the costs relate to a payment made to the production manager in full settlement of the case.
US$50 000 of the US$250 000 out-of-court settlement was paid in order to prevent the
production manager from setting up a similar business in competition with EBI. The remaining
US$40 000 of costs represent fines imposed by the factory inspectorate following the incident.
The production line was also condemned as a result.
x) Rental expenses paid for the canteen building and equipment amounting to US$48 000. The
canteen is owned by another company. Other canteen expenses amounted to US$75 000 for the
year.
xi) Interest paid of US$30 000. The interest was incurred in respect of EBI’s US$200 000 overdraft
facility. US$100 000 of the facility was applied towards recurrent expenditure while the other
US$100 000 of the facility was applied towards the cost of a new showroom (see additional
information note 2, below).
xii) Other expenses incurred during the year amounted to US$230 000. ZIMRA considers 40% of
these expenses to be prohibited for tax purposes.

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Additional information
(1) EBI’s projected taxable income for the year ended 31 December 2014 amounted to US$360 000. The
accountant remitted the provisional tax for the three quarterly payment dates (QPDs) on time but,
due to the pressures of year-end work, forgot to submit the return for the final QPD. The accountant
also omitted the brought forward assessed loss from his computations of the provisional tax.
(2) During the year a showroom was constructed in close proximity to EBI’s factory building. The
showroom is used to display the soaps from the factory as well as for storage purposes pending
shipment to various destinations.
The showroom was constructed at a total cost of US$100 000 and was wholly funded by EBI’s
overdraft facility. The showroom was brought into use on 1 August 2014. EBI has made all tax
appropriate elections in connection with the showroom.
(3) Details of EBI’s other fixed assets are provided below. These were all acquired/constructed during
the year ended 31 December 2013:
Cost (US$)
Factory building 200 000
Plant and machinery (operates two shifts) 110 000
Office building 120 000
Furniture and equipment 60 000
Commercial vehicles 50 000
Three passenger vehicles 80 000
Required:
a) Calculate the capital allowances claimable by Exquisite Baths Industries (Private) Limited for the year
ended 31 December 2014, assuming all favourable elections are made. Your answer should explain
the treatment of the showroom. (9 marks)
b) Calculate the provisional tax which should have been paid by Exquisite Baths Industries (Private)
Limited for the year ended 31 December 2014, clearly indicating the due dates and the respective
tax amounts. (4 marks)
c) Calculate the taxable income and corporate tax payable by Exquisite Baths Industries (Private)
Limited for the year ended 31 December 2014.
Note 1: Your answer should start with the net profit figure of $315 000 and list all of the items
referred to in notes (i) to (xii), indicating by the use of zero (0) any items which do not require
adjustment.
Note 2: Your calculations should assume that the provisional tax paid was as calculated in part (b) of
the question. (15 marks)
d) Explain the tax advantage which may accrue to Exquisite Baths Industries (Private) Limited if, in
future years, it increases its export market sales as a proportion of total sales. (2 marks)
(30 marks)

Question 3 [GZU Question bank]

Fambai Ltd operates a fleet of buses that ply intercity routes in Zimbabwe. Fambai Ltd commenced
operations on 1 January 2018. They have a profit before tax of $234 567 for the year ended 31
December 2018. This has been arrived at after the following amounts:

13 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
Payments and provisions
Diesel and petrol $150 000
Repairs (see note 1) $ 50 000
Staff pension contributions $ 30 000
Operating licence (five year) $ 2 000
Legal fees (see note 2) $ 3 200
Salaries and wages $ 60 000
Depreciation $ 33 800
Hire of buses when their own buses were down $ 45 000
Compensation to deceased and injured passengers $ 75 678
Provision for payment to injured or deceased passengers $ 60 000
Loan to Driver (who later died in an accident) written off as bad debt $ 4 500
Fines for road offences $ 3 230
Fine for late submission of QPDs $ 600
Purchase of 5 Yutong buses (2 January 2018) $600 000
Purchase of 2 Marcopolo luxury buses (1 July 2018) $400 000
Computer equipment (purchased 1 January 2018) $ 44 000
Lease premium (note 3) $ 38 000
Lease rentals (note 3) $ 138 000
Donation to Road Accident Fund $ 1 500
General expenses $ 31 510
Compensation paid out to passengers for luggage damaged (note 5) $ 18 000

Incomes received
Compensation received (note 5) $120 000
VAT refund $ 22 500
Sale of excess computers (sold at cost on 1 December 2018) $ 12 000
Dividends received from Shares in Share Stare ltd $ 2 500

Notes
1. Repairs
These are made up of:
Regular service to buses $10 000
Fitting of toilet and ablution system on the two luxury buses $40 000
2. Legal Fees
Cost of appeal on VAT – this was successful $ 4 000
Hire of lawyer to defend a driver who had been arrested for bribe $ 3 200
3. Lease arrangements
Fambai Ltd entered into a lease agreement with Zvivakwa Realtors Ltd for the lease of premises that
were used as offices, garages and parking areas. The lease was for 12 years. Included in lease rentals

14 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
 is an amount of $30 000 that was for the construction of a perimeter wall which had been agreed
upon. The perimeter wall was completed on 1 July 2018.
4. Compensation received comprised of:
Compensation for bus the lost bus in an accident $100 000
Compensation for the down time of the bus involved in the accident $ 2 000
Compensation received on behalf of passengers’ damaged luggage $ 18 000
Required
Determine the minimum tax liability of Fambai Ltd for the year ended 31 December 2018. (25
Marks)

15 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)