MUNHUMUTAPA SCHOOL OF COMMERCE

DEPARTMENT OF ACCOUNTING AND IS

MASTER OF COMMERCE DEGREE

_______________________________________________________________

MAIN EXAMINATION
PART 1 SEMESTER 1
COURSE NARRATION APPLIED TAXATION

COURSE CODE MAAC502

DATE

DURATION 3 HOURS

INSTRUCTIONS TO CANDIDATES
1. ANSWER ALL QUESTIONS
2. START EACH NEW QUESTION ON A FRESH PAGE
3. YOU MAY BRING INTO THE EXAMINATION UNMARKED COPIES OF:
INCOME TAX ACT (CHAPTER 23:06);
VALUE ADDED TAX ACT (CHAPTER 23:12);
CAPITAL GAINS TAX ACT (CHPATER 23:01)
FINANCE ACT (CHAPTER 23:04).

Page 1 of 32
Question 1

A company starts mining operations in year 1 which was not productive. The life of the mine is
estimated at 6 years from year 2 when the mine begins to produce minerals. The following
expenditure was incurred in year 1: $
Buildings 90,000.00
Plant 35,000.00
Shaft sinking 20,000.00
Goodwill written-off 9,000.00
Salaries and wages 15,600.00
Administration expenses 10,000.00
Mazda 626 sedan 11,500.00
191,100.00

In year 2 minerals are sold for $610,000.00 and old plant equipment was disposed realizing
$11,200.00. The following expenditure was incurred in year 2:
$
Machine 12,000.00
Goodwill written-off 9,000.00
Running expenses 35,000.00
Shaft sinking 25,000.00
Administration costs 23,500.00
Salaries and wages 18,900.00.
Required:
Calculate the taxable income for the company for year 2 when using the following methods to
compute capital redemption allowance (CRA):
i) Life of mine method
ii) Mixed basis
iii) New mine or current basis (25 marks)

Possible Solution

Computation of UBCE b/d

Buildings 90,000.00
Plant 35,000.00
Shaft sinking 20,000.00
Goodwill written-off ------------
Salaries and wages 15,600.00
Administration expenses 10,000.00
Mazda 626 sedan 10,000.00
180,600.00

Page 2 of 32
Computation of CCE
Machine 12,000.00
Goodwill written-off ------------
Running expenses ------------
Shaft sinking 25,000.00
Administration costs ------------
Salaries and wages ------------
37,000.00

Computation of CRA

Life of mine Mixed New mine

UBCE b/d 180 600 180 600 180 6 00
Recoupment (11 200) (11 200) (11 200)
169 400 169 400 169 400
CCA 37 000 37 000 37 000
206 400 206 400 206 400
Allow life of mine (206 400 ÷ 6) (34 400) ---------
---------
Allow Mixed (169 400 ÷ 6) ---------- (28 233.33) ---------
Allow CCA ---------- (37 000) ---------
Allow All ---------- ----------- (206 400)
UBCE c/d 172 000 141 166.67 ------------

CRA 34 400 65 233.33 206 400

Computation of Taxable Income

Life of mine Mixed New mine
Sales 610 000 610 000 610 000
Less allowable deductions
CRA 34 400 65 233.33 206 400
Running expenses 35 000
Administration costs 23 500
Salaries and wages 18 900 77 400 77 400 77 400
Taxable income 498 200 467 366.67 326 200

Page 3 of 32
Question 2

Mr Chaurura bought a house in Rhodene, Masvingo for US$85 000 which amount excludes
stamp duty of $2 000 in June 2009 and he had made the following additions/improvements to the
property:
 Constructed a garage and work shop for $14 000 in April 2010 and these were attached to
the main house.
 Tarred the drive way at cost of $10 000 in August 2010.
 Sunk a borehole at a cost of $12 000 in January 2011.

The main house was damaged by fire on 1 January 2012 while the family was away on holiday
and Mr Chaurura received a compensation in the sum of US$66 000 and immediately used the
proceeds to construct a similar structure, after that he made the following additions:
 Constructed a durawall around the property at a cost of $5 500 in July 2012.
 Constructed a swimming pool for $15 000 in July 2013.

He sold his Rhodene, Masvingo House for $220 000 and purchased another Principal Residence
in Messina, South Africa for $140 000 on 28 December 2016 and 30 December 2016
respectively.
Mr Chaurura hopes his move to relocate to Messina will help him to establish a business at
Beitbridge.

Mr Chaurura also incurred expenditure amounting to $4 800.00 in connection with the sale of the
property. The expenditure was broken down as follows:
 Repainting the garage and workshop $1 100
 Goodwill $1 000
 Advertising $500
 Estate Agent’s Commission $2 200

Required
a)Calculate Mr Chaurura Capital gains tax liability if any. You also have to consider his
submission for an election for roll over in terms of section 21 of the Capital Gains Tax
Act. (25 marks)
b) If the payments for the house were made as shown below, what will be the capital gains
tax payable for each of the years the installments are paid:
Year 1: $120,000.00
Year 2: $60,000.00
Year 3: $40,000.00 (6 marks)

Possible solution

Page 4 of 32
Computation of Adjusted cost
House 85 000
Stamp 2 000
Garage and Workshop 14 000
101 000
Compensation (66 000)
Adjusted cost 35 000

Computation of capital Gains Tax

Sale 220 000
Less recoupment xxxxxxx
Capital Amount 220 000
Less allowable deductions
Adjusted cost 35 000
Driveway 10 000
Borehole 12 000
Dura wall 5 500
Swimming pool 15 000
Inflationary allowance- (back to ECD counting fingers)
House (87 000 X 2.5% X 4) 8 700
Garage (14 000 X 2.5% X 3) 1 050
Adjusted cost (35 000X 2.5% X 6) 5 250
Driveway (10 000 X 2.5% X 7) 1 750
Borehole (12 000 X 2.5% X 6) 1 800
Dura wall (5 500 X 2.5% X 5) 687.50
Swimming (15 000 X 2.5% X 4) 1 500
Painting (1 100 X 2.5% X 1) 27.50
Other cost:
Painting 1 100
Goodwill ------
Advertising 500
Commission 2 200 102 065
Capital Gain 117 935
Tax thereon @ 20% 23 587

c) Suspensive sales section 18

Year 1
Capital gain 117 935
Less section 18 allowance
A X B ÷ C = 100 000 X 117 935 ÷ 220 000 53 606.82
Taxable capital gain 64 328.18

Page 5 of 32
 Year 2
Section 18 allowance year 1 53 606.82
Less section 18 allowance 40000 X 117 935 ÷ 220 000 21 442.73
Taxable Capital gain 32 164.09

Year 3
Section 18 allowance year 2 21 442.73
Less section 18 allowance 0 X 117 935 ÷ 220 000 0
Taxable gain 21 442.73

Question 3
Discuss the merits and demerits of a universal wealth tax as compared to the current capital gains
tax system in Zimbabwe.

Possible Solution
 Tax is on one’s world-wide net worth
 Widens the tax base
 Promote the productivity through taxing of idle assets
 Increase revenue of a nation through taxing ones wealth than to wait for their sale
 Taxation of ill-gotten wealth
 Redistribution of the national cake
 Buoyant tax revenue
× Its unfair to tax on idle capital and assets
× Very difficult to administer
× Might contradict territorial treaties
× Results in double taxation
× Difference in currencies makes accounting difficult

Question 4

a) Discuss any seven estate planning options available to taxpayers. (14 marks)

Possible Solution
 Formation of a family partner
 Donation –it should not be donation mutis causa
 Form a trust
 Cash investments
 Insurance
 Do nothing
 Writing a will
 Use the provisions of the law to minimize paying maximum estate duty

b) Discuss the difference between a “Tax” and a “User fees”. (10 marks)

Page 6 of 32
 Possible solutions
 These are compulsory contributions to the government for the purpose of defraying
expenses incurred in the provision of public goods.
 These are monies paid for the use of certain facilities for enjoyment of services or that
cause negative externalities to the wider public
 The distinction of what actually makes a tax a tax and what makes a user fee a user fee is
very murky.

Parameter Tax User fees

 Choice Not Optional Optional
 Uses defray gvt expense Provision of service
 Enjoyment All even non tax payers The one paying fees only
 Fund CRF Different funds, fee specific
 Relationship no direct relationship direct relationship
 Examples VAT, Income, Capital Gains water & electricity rates

Question 5
Mr Chirambamurivo is a livestock farmer in the Sote Source farming area. His farm, Madyira
Zharayapera, was declared an epidemic area by the Minister of Agriculture early in 2015, due to
an outbreak of anthrax. This epidemic status was expected to last for three years from 2015. His
projected taxable income for the three tax years from 2015 is as follows:
i) The total taxable income for the 2015 tax year was $73,000.00, after taking into account
taxable income of $24,000.00 from forced sales of livestock due to the epidemic
breakout.
ii) The total taxable income for the 2016 tax year amounts to $45,000.00 after taking into
consideration $35,000.00 taxable income from forced sales of livestock due to the
epidemic.
iii) For 2017 tax year, taxable income was projected to be $75,000.00 after taking into
consideration taxable income of $88,000.00 from forced sales due to the farm being
acquired by the Government for resettlement purposes.
Required:
Calculate the minimum taxable incomes for the Madyira Zharayapera Farm for each of the
three years – 2015, 2016 and 2017. (15 marks)

Possible Solution

Computation of Madyira Zharayapera minimum taxable income 215 to 2017

2015

Taxable income 73 000

Page 7 of 32
Less forced sales (24 000 X 2/3) (16 000)
Taxable income 57 000

2016

Taxable income 45 000

Add 2015 allowance: (24 000 X 1/3) 8 000
37 000
Less forced sales (35 000 X 2/3) (23 333.33)
Taxable income 29 666.67

2017
Taxable income 75 000
Add 2015 Allowance: (24 000 X 1/3) 8 000
Add 2016 Allowance: (35 000 X 1/3) 11 666.67

94 666.67
Less forced sales: (88 000 X 2/3) (58 66.67)
Taxable income 36 000

Page 8 of 32
Question 6
a)Discuss any five factors that affect the tax effort especially the compliance problem of a
country. Your response should be influenced by the theories on tax compliance that you
learned in class. (10 marks)

Possible solution

Tax effort is the amount of tax that is collected relative to GDP. Factors that affect compliance
are:
Economic deterrence factor
Political legitimacy
Fiscal exchange
Social influence
Comparative treatment
The slippery slope framework

b) Discuss the taxable capacity of Zimbabwe explaining with examples the six main factors
that help economists in determining the taxable capacity of a country. (12 marks)

Possible Solutions
Taxable capacity is the ability is individuals and corporates to pay tax.
Factors
 Size of the population
 Distribution of national income
 Inflation factor
 Psychological effect
 Character of taxation
 Purpose of taxation
 Standard of living

[Total: 22 marks]
Question 7
Chiro International Limited, a company incorporated in UK, has been operating branches
worldwide. The company, in a scheme of reconstruction of its operations in Zimbabwe, has
formed a new company incorporated in Zimbabwe in terms of the Companies Act (Chapter
24:03), in which it owns 65% of the issued share capital. The new company, Chiro Zimbabwe
(PVT) Limited, took over the operations of the local branch of Chiro International Limited with
effect from 1 January 2017. The following business assets which Chiro International Limited had
acquired 13 years ago were taken over:

Business Original Income Tax Value Sale

Page 9 of 32
Asset Cost 31/12/16 Price
$ $ $
Motor Vehicles 40,000.00 30,000.00 35,000.00
Office Equipment 3,000.00 1,500.00 3,500.00
Manufacturing Machinery 50,000.00 22,500.00 45,000.00
Industrial Building 60,000.00 45,000.00 62,000.00

Required:
a) Outline the tax implications of the reconstruction in relation to the business assets taken
over and suggest ways of minimizing any tax arising from the reconstruction.
(15 marks)
Possible Solution
Computation of Recoupment
Motor vehicles [35 000 – 30 000] 5 000
Office equipment [3000 – 1 500] 1 500
Manufacturing Mach [45 000- 22 500] 22 500
Industrial Building [60 000-45 000] 15 000
Taxable income 44 000
Tax thereon @ 25.75% 11330

If an election is made in terms of para 8 section 3 of the 4 th schedule of the ITA, the tax
obligation of 11330 will not be paid in a construction arrangements were assets are transferred
at ITV hence no recoupment will arise.

Computation of Capital Gains Tax: Industrial Building

Gross amount 62 000
Less recoupment 15 000
Potential gain 47 000

Less allowable deduction:

Cost (60 000-15 000) 45 000
Inflation factor: (60 000 X 2.5% X 13) 19 000 64 000
Capital loss/gain (17 000)

There is no tax obligation since there is capital loss. However, if there was ever a gain and the
firm elects to section15 of the CGT which assumes assets are transferred at all deductions

Page 10 of 32
available, no tax shall arise and the tax obligation is deferred to such a time when the specified
asset is disposed off. Under that scenario it is deemed the asset has been held since initial
acquisition

b) Discuss the view by some tax specialists that the imposition of capital gains tax and
estate duty, is a very unfair practice by tax authorities in Zimbabwe. (13 marks)

Possible Solution
 Taxing the dead is unethical, views death as a taxable event
 The property is taxed more than once, eg tax on material for construction as well as CGT
on disposal of specified assets
 Taxing people’s source of living
 Specified assets are taxed every time they are sold
 There are certain sectors of the society exempt of estate duty eg National Heroes,
portraying a picture of different deaths
[Total: 28 marks]

Question 8

a) Garai, a resident of Zimbabwe, earns foreign dividend in the sum of $10,000 of income
from Zambia on which he pays $1,000 of tax to Zambia. Assuming that he pays in
Zimbabwe at the rate of 20 percent, outline the total tax paid by Garai if Zimbabwe uses
the following methods to eliminate international double taxation:
i) Deduction method (4 marks)
ii) Credit method (4 marks)

Possible solution
Deduction Credit Exemption
Foreign income 10 000 10 000 10 000
Foreign tax (1 000) (1 000) (1 000)
Deduction of Foreign tax 1 000 nil nil
Domestic income 9 000 10 000 nil
Domestic tax @ 20% 1 800 2 000 nil

Domestic credit nil 1 000 nil

Final domestic tax 1 800 1 000 nil
Total tax paid 2 800 2 000 1 000

b) Discuss what is meant by “Exemption with progression” and “Participation exemption”

that some countries adopt the “Exemption method” with that extension in eliminating
international double taxation. Give the advantages and disadvantages of these methods.

Page 11 of 32
 Possible solution
Exemption with progression is done when foreign income is included in determining tax
bracket. The foreign income is then removed and the determined tax bracket is applied to
domestic income.

Participation exemption occurs where there is a policy to exempt dividends arising from
investors who have say 5 to 10 percent interest in an organization. However the cost
incurred in gaining such control is not allowable as a deduction.
(12 marks)

[Total: 20 marks]

Question 9
After the death of Mr Flair, his family submitted the following information for processing of his
estate duty:
Assets $
Harare house 150,000.00
Chitungwiza house 80,000.00
Company shares 15,000.00
Debtors 10,500.00
Cash on hand 11,000.00
Bank balance 4,500.00
Cattle valued at 5,500.00
Toyota D4D Twin-cab 26,180.00
Toyota Funcargo 2,600.00
Liabilities $
Funeral expenses 1,500.00
Mortgage 34,000.00
Last medical expenses 6,000.00

Mr Flair was survived by his spouse and had donated a motor vehicle worth $22,000.00 to his
nephew last year.

Required:
Compute the probable estate duty payable on Mr Flair’s estate. (15 marks)

Page 12 of 32
Possible solution

Computation of Estate duty

Income: Harare house -
Chitungwiza house 80 000
Company shares 15 000
Debtors 10 500
Cash on hand 11 000
Bank balance 4 500
Cattle 5 500
Toyota d4d -
Donation (donatio mutis causa) 22 000
Toyota fun cargo 2 600

151 100
Less allowable deductions:
Funeral expenses 1 500
Mortgage 34 000
Last medical expense 6 000
41 500
109 600
Less exemptions:
First 50 000 50 000
Taxable estate 59 600
Tax thereon @ 20% 11 920

Question 14

a) Discuss any seven estate planning options available to taxpayers. (14 marks)
b) Discuss the notion that a regressive corporate tax rate system may help in boosting
production in Zimbabwe. (10 marks)

Question 15

a) Discuss the reasons why it is necessary to do estate planning? (10 marks)

Possible solution
 So that estate can be administered in an orderly manner
 To pay minimum tax possible using the provisions of the law
 To avoid adverse effect in the hands of the planner ie loss of control of assets
 The estate is able to settle all the obligations
 To ensure that hereditary succession takes place smoothly without unnecessary problems.
 To ensure that the dependents are protected and provided for

Page 13 of 32
  To ensure that the plan is financially and economically sound

 To ensure growth of assets & the creation of wealth is not impaired by the plan.
 To reduce or minimise potential estate duty liability by freezing value of the assets in the
hands of the planner eg transfer of growth of assets to a trust.

b) Discuss the concepts “equity” and “equality” in the context of taxation and also point out
the differences between these two concepts using relevant examples. (10 marks)
Possible solution
Equity and equality
 Vertical equity
 Horizontal equity
 Process equity
 Time-horizon equity
 Compliance equity
Every citizen is equal in the eyes of law hence must contribute and benefit equally from taxes, a
concept that is a basis for regressive tax.

c) Does a country needs the principles of a good tax system when it is formulating its tax
system? Give relevant reasons which are backed by examples of tax heads in Zimbabwe.

Possible solutions
Fairness
Neutrality
Equity
Simplicity
Transparency
Economic efficiency (5 marks)
(Total: 25
marks)

Question 16
Discuss the role of tax treaties in a country and clearly outline the methods used to eliminate
double taxation of income deemed to be from a source within Zimbabwe. (15 marks)

Possible Solution
To eliminate double taxation
To address matters to do with tax neutrality
Boost investments
Removal of exporting taxes
Deduction method
Exemption method- with progression
-participatory exemption

Page 14 of 32
  Credit method

Question 17
Some taxpayers are saying “Estate duty” is a tax in bad taste in that the government will be
treating death as a taxing event.

Discuss your understanding of Estate duty provisions, outline its good properties as a tax
administratively and on policy grounds. (20 marks)

Question 18
You met an old friend who is very happy to hear that you are now doing a course in Applied
Taxation. The friend has just won a huge windfall by way of a high dividend from Old Mutual.
He had always been dreaming of starting a business. He believes this is the opportune time and
wants to venture into business without any further delay.

Required:
Write a MEMO to your friend explaining the type of business that he can venture into without
attracting a huge tax liability. (Clearly state the type of business and the tax concessions
available in that sector). (15 marks)

Possible answer
Farming-a farmer is any person who derives income from pastoral, agriculture, agricultural or
other farming activities including any person who derives income from the letting of a farm used
for such purposes.
Farmers enjoy concessions such as:-
 Election of the Purchase Price value as the value of study livestock. This amount is
subject to approval by the commissioner
 Relief from forced sales
 A farmer who is forced to dispose his livestock due to drought, epidemic disease or
compulsory acquisition of land is allowed to spread the taxable income arising from such
sales over three years.
 Restocking allowance-A farmer, who wishes to restock livestock depleted by drought or
epidemic diseases, is allowed to deduct half of the cost of livestock purchased.
 Deduction of opening stock
 Capital allowances
 Seventh schedule paragraph 2 allowances
The schedule allows a 100% deduction of expenditure incurred by a farmer on;
a) The stumping and clearing of lands;
b) Works for the prevention of soil erosion;
c) The sinking of boreholes and wells;
d) Aerial and geophysical surveys;
e) Any water conservation work and any amounts paid by him towards the cost of any
water conservation work done by any other person for which such farmer has become
liable in terms of the Natural Resources Act [Chapter 20:13];
Page 15 of 32
 f) Fencing.
***Assets falling under the seventh schedule have the following qualifying requirements;
- Have to be constructed, erected, etc. by the taxpayer and do not rank for deduction if
they are purchased with an existing farm;
- Rank for deduction in full,
- Do not suffer recoupment on disposal; Fourth schedule allowances are recoupable.

Question 19
Discuss the importance of government having to tax its residents and or citizens as a way of
raising revenue instead of relying on donor funds to finance public expenditure. (15 marks)

Question 24

c) Discuss any seven estate planning options available to taxpayers. (14 marks)
d) Discuss the similarities and differences taxation and “user fees”. (10 marks)
[Total: 24 marks]

Question 25

Mr Tofara, who is 50 years old, purchased a principal private residence (PPR) and incurred a
cost of $90 million Zimbabwe Dollars in August 2006. This property was sold on 30 June 2011
and US$90,000.00 was realized.

Required
a) How much capital gains tax is payable?
b) If Mr Tofara used US$50,000.00 to buy another PPR, what will be the capital gains tax
payable?
Assuming the property referred to in a) and b) above was purchased on 10 May 2009 for
US$60,000.00 and sold on 30 June 2011 for US$90,000.00

c) How much is the capital gains tax payable?

d) If Mr Tofara used US$50,000.00 to buy another PPR, compute the capital gains tax
payable?
e) If Mr Tofara used US$100,000.00 to buy another PPR, compute the capital gains tax
payable.
(30 marks

Possible Solution
a) Capital gains tax (90 000 X 5%) 4 500

Page 16 of 32
 b) Roll over relief A X B ÷ C = 4 500 X 40 000 ÷90 000 2 000
Calculation of capital gains
Sale 90 000
Less allowable deductions
Cost 60 000
Inflation factor [60 000 X 2.5% X 3] 4 500 64 500

Capital gain 25 500

Tax there on @ 20% 5 100

c) Roll over relief AXB÷C

Taxable gain (25 500 X 40 000 ÷ 90 000) 11 333.33
Tax @ 20% 2 266.67

Capital gain 25 500

Section 27
0/90000 X 25500 0
Taxable amount 0
Tax @ 20% 0

d) No tax obligation would arise since the whole amount was expended towards
acquiring PPR section 27 of CGT Act

Question 26

Some people have suggested that instead of requiring the separate depreciation of each asset
for tax purposes we should require taxpayers to pool assets into a limited number of classes
and treat the assets in each class as if it were one property.

What are the advantages and disadvantages of requiring pooling for depreciable properties?
(10 marks)

Question 27
During the year ended 31 December 2011, Mr Moyo who turned 50 years in May 2011 sold
the following capital assets for $1,445,200.00:

US$
Sale of Principal private residence 1,365,000
Sale of 17,500 ordinary shares in a local unlisted company 60,200
Sale of 10,000 ZIMRE shares listed on the ZSE 20,200
$1,445,400

Page 17 of 32
8,750 of the ordinary shares sold were acquired by inheritance in 1982 tax year and were valued
for $2,550 for estate duty purposes. A further 3,500 shares were acquired as a bonus issue in the
1982 tax year. These shares had market values of $1,050 at the time of issue. The balance of
5,250 shares was acquired as a bonus issue in the tax year ended 31 December 2000 when they
had a market value of $21,000.

The 10,000 ZIMRE shares were acquired in November 2009 for $300. The residence was
purchased by Mr Moyo in the year ended 31 December 2002 for $85,000. A swimming pool was
added to the property in the year ended 31 December 2007 for $30,000. Mr Moyo acquired
another principal private residence for $1,100,000.

Required
Prepare a detailed computation of his minimum capital gains tax payable in the tax year ended 31
December 2011. (10 marks)

Possible solution
Gross amount 1 365 000
Less amount rolled over 1 100 000
265 000
Tax there on @ 5% 13 250
Unlisted shares (60 200 X 5%) 3 010
Listed ahares (20 200 X 1%) 202 3 212

Total tax payable 16 462

Question 28
Martha Limited in February 2010 acquired 40 hectares of land for $600,000.00 which it
subdivided for development and resale. 60 plots of 0.5 ha each thus became available, with the
balance of the land being used for roads and other amenities. Development costs were:
$
Survey fees 10,000
Levelling and so on 25,000
Roads 76,000
Water reticulation 89,000
Total 200,000

Sales of 40 plots were effected on 30 September 2015 at $20,000.00 each, half of which was
payable immediately and half on 30 June 2016 at which stage ownership would pass. Interest at
40% per annum was receivable on amounts outstanding.

The remaining plots were sold for cash on 1 May 2017 at $22,000. Assuming that all the terms
were met, the taxable income of Martha Limited for the years ended 31 December 2015, 2016
and 2017.

Page 18 of 32
Required
Calculate the taxable income for each of the years the instalments are paid. (25 marks)

Question 29
Discuss the Zimbabwean tax system focusing on whether it should be Source-based or residence-
based, outline the benefits and shortcomings of each system. Marks will be awarded for citing
relevant tax heads that will be affected by each arrangement. (25 Marks)
Solution
A country can adopt either a source based (territorial) or a residence based tax approach.
Zimbabwe uses a source based tax system.
A country that adopts source based tax system levy taxes only on income, capital, property etc.
that emanates within the boundaries of its borders or that is deemed to be from within its
boundaries.
A residence based tax approach is adopted by a country that seeks to levy tax on income, capital;
property etc. accruing to it‘s the residents regardless of its source.
The source of income is a very important concept in Zimbabwean taxation.
Benefits and shortcomings of source based
 Simple to administer
 sources can identified and measured with certainty
× Limited tax base since the tax confines income to sources within its bounders
Benefits and shortcomings of residence based
 Wider tax base
× Difficult to administer ascertaining the values received from other countries
× Might end up conflicting with policies and legislation of other countries
× Difference in reporting currencies makes accounting difficult
× Double taxation-Residence – source conflict or Residence –residence conflict
...search for more
Tax heads-VAT,CGT, Estate duty, Stamp duty,

Page 19 of 32
Question 30
When a taxpayer sells property on an instalment basis, under generally accepted accounting
principles they are able to spread the gain realized on the sale out over the receipt of the
proceeds. Thus if they receive 10 per cent of the proceeds in one year they only report 10 percent
of profits in that year. I suppose this recognizes that when the property is sold on an instalment
basis all the taxpayer has is a mere claim to future proceed.
Required
Discuss whether we should follow this accounting convention for tax purposes? (10 marks)

Solution

 Under hire purchase the full purchase price and interest are accrued on a yield basis and
deemed to have accrued to the seller on the date of conclusion or signing of agreement.

 The mismatch that arises due to deferred payments and tax is addressed by way of
special Higher purchase allowance calculated in terms of section 17 and 18 of the
income tax act.

 So in a way the commissioner provides some relief which is striking similar to that in the
accounting.

 It is logical since cost associated with the sale is usually on or before conclusion of the
sale agreement.

 It is a legal way of deterring tax avoidance by signing of Deferred payment

× To the tax payer it looks much fairer to spread the income in sync with the
payment plan

× The mismatch is more likely to cause the tax payer to pay high taxes on early
years.

…….Search for more

QUESTION 31
a) Discuss the notion that Progressive tax is unconstitutional in Zimbabwe, state the
relevance legislation citing the sections and subsection and decided cases to support your
answer. Outline the challenges posed by a progressive tax to an economy. (10 marks)
Solution
I think the question is on equity and equality
……..search for more

Page 20 of 32
 b) One of the major problems that economists have with Value Added Taxation is its
regressive tendencies. Discuss what it means to be regressive, and illustrate how VAT is
regressive and outline the challenges of a regressive tax in an economy. (10 marks)
[Total: 20
marks]
Solution

 Regressive tax is where a flat rate of tax is levied on taxpayers regardless of their
incomes.

 Eq VAT is taxed at 15%. Say A and B pays consideration of $100. Vat on this is $15. If A
and B earns $200 and $1000 respectively. Their proportion of VAT to earning will be
7.5% for A and 1.5% for B. Hence A is paying more than B.

× In terms of individual income and wealth, a regressive tax imposes a greater

burden of tax ( relative to resources) on the poor than on the rich there is an
inverse relationship between the tax rate and the taxpayer‘s ability to pay as
measured by assets and income.

Question 32
Assume Jacob, a lawyer, drafts a will (for which he would normally charge $250) for Amy, a
dentist, and Amy does dental work for Jacob (for which she would normally charge $250).

Does either party have any income?

Solution

The answer is based on the definition of gross income in the ITA

 …the total amount received by or accrued to or in favour of a person or deemed to have

been received by or to have accrued to or in favour of a person in any year of
assessment from a source within or deemed to be within Zimbabwe excluding any amount
(not being any amount included in ―gross income‖ by virtue of any of the following
paragraphs of this definition) so received or accrued which is proved by the taxpayer to
be to be of capital nature.

 Section 2 of the ITA, defines an amount as money or any other property corporeal or
incorporeal, having an ascertainable monetary value.

 in the case of De Beers Consolidated Mines v Commissioner for Inland Revenue (1922,
W.L.D. 184). … the taxpayer‘s income for taxation purposes included not only the cash
which he had received or which had accrued to him, but the value of every other form of
property which he had received or which had accrued to him, including debts and rights
of action.

Page 21 of 32
Assume Jacob mows Amy’s lawn while she is on holidays and Amy mows Jacob’s lawn while
he is on holidays.
Does either party have any income?
If these cases are treated differently, explain why. (10 marks)

Question 33
a) Discuss whether taxpayers indeed have a right to avoid tax and what governments can do
to curb tax avoidance. (10 marks)

Solution

 Tax avoidance can be described as the legitimate ordering of one‘s affairs

in such a way as to minimise the tax which is chargeable. It refers to the
legitimate use of loopholes in the tax laws in order to minimize one‘s tax burden

 tax avoidance is the right of a taxpayer as implied in Per Lord Tomlin in

Duke of Westminister v IRC 51 TLR, in that, ―every man is entitled if he can to
order his affairs so that the tax attaching under the appropriate Acts is less than it

otherwise would be…

 Case Law:

Ayreshire Pullman Motor Services and D M Ritchie Vs IRC

Lord Clyde said, “….. No man in this century is under the smallest obligation,
moral or other, .. to arrange his legal relations to his business or property, as to
enable the Inland Revenue to put the largest possible shovel into his stores.

× However, the Commissioner is empowered by the Act to accept or reject any tax
avoidance scheme undertaken by a taxpayer, where he is of the opinion that such
scheme was entered into solely or mainly for the avoidance of tax.eg donatio
mutis causa

× Use of anti-tax provisions in the tax laws thin capitalisation principle- a scenario
whereby a company is capitalised with more debt than, interest on debt is an
allowable deduction.

Page 22 of 32
 b) Discuss the principles of ability to pay and proportionality critically – citing appropriate
examples. (10 marks)
Solution
Ability-to-pay taxation is a progressive taxation principle that maintains that taxes
should be levied according to a taxpayer's ability to pay. This progressive taxation
approach places an increased tax burden on individuals, partnerships, companies,
corporations, trusts, and certain estates with higher incomes eg PAYE

A tax is proportional if all taxpayers pay the same share of taxes. Taxes which are
subject to a fixed rate are examples of proportional taxes. In Zimbabwe, corporate tax is
levied at a flat rate of 25%, meaning all corporates no matter how different their taxable
income, contribute the same proportion to the government coffers.
c) Outline whether a progressive tax is constitutional in Zimbabwe – give reasons that can
be substantiated. (5 marks)

[Total: 25 marks]
Question 34
I am told that if a creditor forgives part of the debt owed by a business person that business
person should have to include the forgiven amount in taxable income. Could this possibly be
correct? It does not seem like income to me, nothing is coming in. Explain the correct tax
treatment of the cancellation of indebtedness. What if the business person is insolvent? Wouldn’t
taxing them on the amount of any forgiven debt perhaps push them into bankruptcy? Would that
be good tax policy? (10 marks)
Solution
 Bad debts: Sect15(2)(g)
To be allowed as deductions are bad debts incurred by a taxpayer in the year of assessment. The
following conditions must be in place for the debt to be allowable: The debt must be proved to
the satisfaction of the Commissioner to be bad; and

The debt should have been included in the taxpayer‘s income either in the current or previous
year.

Question 35
As you may know, the taxation of fringe benefits has caused us a good deal of problems. Kindly
advise your government on whether they should tax the following fringe benefit. Give reasons.

Page 23 of 32
 a) The firm provides employees with a public transportation tickets for travel between work
and home.
b) The firm provides free coffee, tea and bread to some employees once a day.
c) To encourage their employees to keep fit, the firm reimburses them for the $100 fee that
they pay for membership in a downtown gym and tennis club. The firm argues that it is
for the benefit of the firm that they join since it will enable the employees to meet new
clients.
d) What if the firm instead built an exercise facility on the firm premises for its employees
and allowed the taxpayer to use it free of charge.
e) A firm provides the taxpayer with free parking in the office building housing the firm.
(10 marks)

Question 36
Mr Chiramba commenced livestock farming in February 2014 and made the following
purchases:
Animals Cost ($) FSV ($)
1 Stud bull 1,300 -
1 Stud bull 1,800 -
1 Stud bull 1,500 -
110 Cows 11,000 80
110 Oxen 6,600 75
50 Heifers 6,000 70
60 Tollies 5,400 65
70 Calves 2,100 45
During the year ended 31 December 2014, there were 60 births, 4 deaths (2 cows & 2 tollies)
st

and 80 sales for $160,000 (30 tollies & 50 oxen).

Promotions in categories were:

a) 10 Heifers to cows
b) 30 Tollies to oxen
c) 30 Calves to heifers
d) 30 Calves to Tollies

The cost of running the herd for the year was $3,500.

Required

Prepare a Livestock Reconciliation & Trading Account for the year ended 31 December 2014 on
the basis of Fixed Standard Values, except for bulls which are to be valued by reference to the
minimum “Purchase Price Value” as requested by the taxpayer. (20 marks)

Page 24 of 32
Question 37
Some of your colleagues have argued that the mere deferral of income taxes is not of great
importance so long as every element of accretion is eventually accounted for. I have heard you
argue that deferral is of immense importance and that, indeed, under certain assumptions,
allowing taxpayers to defer their business income from tax is equivalent to exempting the return
to capita from tax.

Required
Could you explain this and give examples of why deferring the tax is equivalent to exempting the
return to capita from tax. (10 marks)

Question 38
Your country considering imposing a new excise tax on carbon emissions to attempt to
internalize the production externality of pollution. Briefly suggest what factors you should take
into consideration with the design of the tax to ensure that the ultimate tax burden is fairly
distributed in a society. Limit your answer to factors that would impact on the eventual tax
incidence. (10 marks)

Question 39

Your country is considering an ad valorem tax on alcohol products sold. Their basic reasoning is
that this would prevent all of the social ills associated with alcohol abuse. From what you know
about tax efficiency, would the imposition of this new tax, make the tax more efficient or less
efficient? What alternative views can you offer to the debate that may possibly be used in favour
of this particular tax. (15 marks)
Solution
Ad valorem- in proportion to the estimated value of the goods or transaction concerned
Tax efficiency- is an attempt to minimize tax liability when given many different financial
decisions.

Question 40

Discuss whether an income tax system with a progressive tax rates complies with the
(constitutional) principle of “equal treatment before the law”. (10 marks)

Solution

Page 25 of 32
  We don’t have to penalize taxpayers for working hard
× The purpose of tax is to redistribute wealth; hence the principle may fall short.
× Regressive tax system burdens the poor living the rich richer. A tax system should
have clear fairness.

Question 41
Should tax laws contain a general anti-avoidance provision? State the position of Zimbabwe (that
exits or not), and whether you agree or disagree with this position, substantiate your answer. (10
marks)
Question 42
Discuss the impact of the Intermediated Money Transfer Tax on tax revenue collection in
Zimbabwe. (12 marks)
Solution
× Increase in revenue
× Ability to tax informal traders
× Ability to tax illegal transactions
× Ability to tax non taxable tansactions eg marriage fees
 Not selective to type of transaction-donations
 Impacts on double taxation, tax on transaction eg buying groceries, and MTT
 It taxes transactions allowable in the ITA
 It increases the demand for cash in a bid to avoid MTT
 Increases cost of production that passes on to customers

Page 26 of 32
Question 43
Do Limited and Die Limited are companies in a group of companies under the same control. Die
Limited sold the following non-current assets to Do Limited.

Business Asset Original Cost ($) Selling Price ($)

Industrial Building 28 000 28 500
Passenger Motor Vehicle 13 100 13 100
Manufacturing Machinery 17 000 16 300
Office equipment 12 500 11 900
Commercial Building 45 000 50 000

The sale was made at the end of the year in which the assets were either bought or constructed
(This means that the assets were disposed after being used for 1 year). All these assets were
being used for more than 90% in Die Limited’s business. Management had resolved that Die
Limited should claim all the capital allowances available and at their maximum possible values
or rates. Below is a schedule outlining how these assets were acquired by Die limited:

i) Industrial building was constructed

iii) Passenger motor vehicle was bought
iv) Manufacturing Machinery were bought
v) Office equipment was bought
vi) Commercial building was bought.

The assets were taken over effective 1 January 2018 and we are at the end of December 2018.

Required
Outline the tax implication if this was a scheme in furtherance of a merger in relation to the
business assets taken over. Suggest ways of minimizing any tax liability arising from the
scheme. (25 marks)

Question 44
c)Discuss any five factors that affect the tax effort especially the compliance problem of a
country. (10 marks)
Solution
Tax effort is defined as an index of the ratio between the share of the
actual tax collection in gross domestic product and taxable capacity.
 Economic deterrence theory
 Political legitimacy theory
 Social influence theory
 Fiscal exchange theory
 Comparative treatment theory

d) Discuss the taxable capacity of Zimbabwe explaining with examples the six main factors
that help economists in determining the taxable capacity of a country. (12 marks)

Page 27 of 32
 Solution
 Population growth
 Inflation
 Distribution of national income
 Character of tax- the manner in which tax systems are devised
 Purpose of tax- satisfaction by the use of tax
 Psychological factor
 Standard of living of people

[Total: 22 marks]
Question 45

Discuss the principles “canons” of a good tax system, are they really important? Does your
government adhere to these principles in formulation and administration of the tax system?
Solution
The canons of taxation were first presented by Adam Smith in his famous book ‘The Wealth of
Nations’. These canons of taxation define numerous rules and principles upon which a good
taxation system should be built. Although these canons of taxation were presented a very long
time ago, they are still used as the foundation of discussion on the principles of taxation.

Canon of equality
The word equality here does not mean that everyone should pay the exact, equal amount
of tax. What equality really means here is that the rich people should pay more taxes and
the poor pay less. This is because the amount of tax should be in proportion to the
abilities of the taxpayer. It is one of the fundamental concepts to bring social equality in
the country.
The canon of equality states that there should be justice, in the form of equality, when it
comes to paying taxes. Not only does it bring social justice, it is also one of the primary
means for reaching the equal distribution of wealth in an economy.

Canon of certainity
The tax payers should be well-aware of the purpose, amount and manner of the tax payment.
Everything should be made clear, simple and absolutely certain for the benefit of the taxpayer.
The canon of certainty is considered a very important guidance rule when it comes to
formulating the tax laws and procedures in a country. The canon of certainty ensures that the
taxpayer should have full knowledge about his tax payment, which includes the amount to be
paid, the mode it should be paid in and the due-date. It is believed that if the canon of certainty is
not present, it leads to tax evasion.

Canon of convinience
Canon of convenience can be understood as an extension of canon of certainty. Where canon of
certainty states that the taxpayer should be well-aware of the amount, manner and mode of

Page 28 of 32
paying taxes, the canon of convenience states that all this should easy, convenient and taxpayer-
friendly. The time and manner of payment must be convenient for the tax payer so that he is able
to pay his taxes in due time. If the time and manner of the payment is not convenient, then it may
lead to tax evasion and corruption.

Canon of economy
The whole purpose of collecting taxes is to generate revenue for the company. This revenue, in
turn, is spent on public welfare projects. The canon of economy – keeping in view the above-
mentioned purpose – states that the cost of collecting taxes should be as minimum as possible.
There should not be any leakage in the way. In this way, a large amount of the collections will go
directly to the treasury, and therefore, will be spent in the government projects for the welfare of
the economy, country and the people. On the other hand, if the canon of economy isn’t applied
and the overall cost of collecting taxes is unreasonably high, the collected amount will not be
sufficient in the end.

Question 46
Assuming a LIBOR of 7% compute the tax payable by Beatrice who is employed by Kumirai
(PVT) Ltd given the following annual figures:
(i) Basic salary $25,700.00
(ii) Cash in lieu of leave $3,200.00
(iii) Compensation for injury at work $10,000.00
(iv) Lumpsum payment – Pension Fund $65,000.00
(v) Interest from Zambian Bank $1,234.00 (NRTI $250.00)
(vi) Interest from Namibian Bank $2,545.50 (NRTI $561.23)
(vii) Interest from SA Bank $4,666.12 (NRTI $2,100.00)
(viii) Dividend from Zambian Co. $1,500.00 (NRST $450.00)
(ix) Dividend from SA Co. $554.00 (NRST $175.00)
(x) Dividend from UK Co. $356.12 (NRST $95.00)
(xi) Dividend from Econet Zimbabwe $1,413.11
(xii) Entertainment allowance $1,410.00
(xiii) Lobola for her last daughter $1,100.00
(xiv) Transport allowance $6,500.00
(xv) Bonus $2,500.00
(xvi) Commission $11,100.00
(xvii) She received an interest free loan from her employer in the sum of $15,500.00
which she used to acquire a new car from Singapore.
(xviii) She occupied a house owned by Kumirai P/L from July 2018 onwards and she
paid $450.00 rent per month for the house. The open market rent for similar
houses in the same suburb is $600.00. Before July 2018 she was renting a house
where she was paying $300.00 per month.
(xix) In October 2018 she started using a company car with 2,200cc engine capacity for
employer’s business and private purposes as well.
(xx) Total medical aid contributions for Trish are $900.00 and the company pays 60%
of the medical aid contributions.

Page 29 of 32
 (xxi) She contributed $6,100.00 towards a registered pension fund.
(xxii) She acquired quality costumes from Dubai which she puts on only when attending
important meeting at work valued at $2,500.00 during the year, in fact her
employer expects her to be well dressed when attending important meetings since
she will be representing the company.
(xxiii) Beatrice is 62 years old and her backbone is permanently disabled.
(30 marks)
Question 47
Tax policy is tax administration. Discuss

Question 48
Discuss the merits and demerits of having allowable deductions in a tax system.
Question 49
a) Give any six features of a valid “Tax Invoice” as prescribed by the VAT Act (Chapter
23:12).
(3 marks)
a) Trevor Limited is a dealer. The company made and received supplies for the month of
August 2018 as follows:
Receipts Value Of Supply (US$)
Cash sales 55,600.00
Credit sales 25,600.00
Commission received 32,500.00
Dividend from a Zim company 1,000.00
Bank interest received 14,500.00
Total Receipts 129,200.00
Expenses:
Trade purchases 35,500.00
ZESA bill 6,400.00
Advertising 2,500.00
Telephone 3,500.00
Motor vehicle servicing 6,500.00
Total expenses 54,400.00
Required:
Calculate the VAT due or refundable for the month of August 2018. (12 marks)
[Total: 15 marks]

Question 50
a) Zhou Limited has estimated its taxable income for 2018 to be $62,300.00. Compute Zhou
Limited’s 1st and 3rd QPD for 2018. (4 marks)
Solution
Page 30 of 32
 
1st 25 March 10%

2nd 25 June 25%

3rd 25 September 30%

4th 20 December 35%

b) Outline five tax concessions offered to elderly taxpayers. (5 marks)

Solution
 Sale of PPR not taxed CGT
 A credit of 900 per annum
 Interest received on bankers acceptance the first 3000
 The first 3000 in respect of deposit to financial institution
 Motoring benefit from employ awarded at below market rates
 Pension from CRF

c) A taxpayer phones you one morning, saying ZIMRA officials were all over his place
demanding his financial records for 2011 which he says he has already destroyed.
(3 marks)
d) Give two examples of tax heads where a withholding tax system is used to collect taxes
from taxpayers. (4 marks)
Solution
 CGT
 Estate duty
e) Explain how a housing benefit is determined for tax purposes where the house is:
i) In an urban municipal area. (2 marks)
ii) In a non-urban area such as at a mine or rural area. (2 marks)
[Total: 20 Marks]
Question 51
Discuss the merits and demerits of “Presumptive tax” as a tax head in the Zimbabwean tax
system. (20 Marks)
Solution
 Presumptive tax is levied on informal traders, small scale miners, transport operators,
hair salons and operators of waterborne vessels, etc. The tax is calculated on the basis of
presumed income. A presumptive tax is a tax on a base that tax authorities and not the
taxpayer determine.

Page 31 of 32
APPENDICE TO TAXATION PAPER

1. Individual Tax Table

From To Amount in Tax Tax Cumulative

Bracket Rate (%) ($) Tax ($)
0 to 3 000 3 000 0% 0 0
3 001 to 12 000 9 000 20% 1 800 1 800
12 001 to 24 000 12 000 25% 3 000 4 800
24 001 to 60 000 36 000 30% 10 800 15 600
60 001 to 90 000 30 000 35% 10 500 26 100
90 001 to 120 000 30 000 40% 12 000 38 100
120 001 to 240 000 120 000 45% 54 000 92 100
240 001 and above - 50% - -

2. Corporate Tax 25%

3. AIDS Levy 3%

4. Motoring benefit:
Engine capacity Monthly benefit
Up to 1 500cc US$300.00
1 5001cc to 2 000cc US$400.00
2 001cc to 3 000cc US$600.00
3 001cc and above US$800.00

NB: These RATES are for Examination purpose only.

END OF EXAMINATION

Page 32 of 32