Taxation of fringe benefits

December 5, 2013 Business

Did you know that it is common for employers to come up with incentives and other payments to
retain the services of critical employees? This might entail the payment or granting of benefits or
advantages. Such benefits or advantages constitute remuneration and should be subjected to tax
in terms of the Income Tax Act [Chapter 23:06].
What is an advantage or benefit for Income Tax Purposes?

An “advantage or benefit” is defined as the occupation of quarters or a residence, the use of

furniture or a motor vehicle, the use or enjoyment of any property whatsoever corporeal or
incorporeal and an allowance granted by or on behalf of an employer to an employee, his spouse
or child. An employee in this case includes a director or a person otherwise gainfully employed.

From the definition provided in the foregoing, it can be noted that a number of benefits granted
under contracts of employment are subject to income tax. In this case the employer should ensure
that the amounts are properly quantified, valued and subjected to employees tax (PAYE) every
month. This is in addition to salaries and other emoluments paid to employees.

Basis of valuation of advantages or benefits

The correct valuation of benefits for income tax purposes is as follows:
(a) Allowances:  The payment made by the employer excluding the portion expended for the
purposes of the employer’s business should be subjected to tax

(b) Occupation or use of quarters, residence or furniture – the value to the employee should be
determined and subjected to tax.

(c) In the case of any other advantage or benefit — the value of the taxable benefit is determined
by reference to the cost to the employer
A brief explanation on the taxation of some of the benefits is given below.

Taxation of specific benefits

Housing Benefit
The value for a free use of a residence or quarters granted by an employer or its associate to
director or an employee is the residence or quarters’ open market rental. For a house located
outside the municipal area, the benefit to the employee is the greatest of 12,5 percent of his
salary and 7 percent of the cost construction of the house. A further benefit of 8 percent of the
cost of furniture accrues to an employee for a furnished house.
The benefit is reduced by any rent paid by a person for the occupation.

Passage Benefit
A passage benefit is the cost borne by an employer towards any journey by an employee, his
spouse and children in connection with his taking up of employment or terminating and any
other journey made by the employee during the course of his employment. This excludes the
costs incurred by the employer towards:
The employee’s taking up employment (if no other trips were not borne or sponsored by the
same employer).
Termination of employment (if no other trips were not sponsored by the same employer).

Any costs incurred by the employee for the purposes of the business transactions  of the
employer
All the private trips and family member trips borne by the employer on behalf of the employee
are taxed to the employee.

Motoring Benefit
A motoring benefit arises where an employer grants an employee usage of a vehicle for business
and private purposes. Private usage includes travelling between home and place of work or
between two distinct businesses or use of the vehicle over the weekends for private purposes.
The benefit is valued on the basis of a deemed cost as prescribed in the Income Tax Act.
The deemed costs are based on the engine capacity of the vehicle and these are as follows:
Engine Capacity    Value (Deemed Benefit) per Year (in US$)
1500cc or Less              1 800,00
1501cc to 2000cc         2 400,00
2001cc to 3000cc        3 600,00
Above 3000cc             4 800,00

Where an employee does not have a company car but is granted fuel or fuel costs are financed
by the employer, the fuel allowance or other costs incurred by the employer on behalf of the
employer are taxable. The benefit is computed on the basis of costs to the employer.
To contact ZIMRA: Visit our website: www. zimra.co.zw. Follow us on Twitter: @Zimra_11;
Like us on Facebook: www.facebook.com/ZIMRA.11; Send us an e-mail: pr@zimra.co.zw.
Call us (Head Office): 04-758891/5; 790813; 790814; 781345; 751624; 752731;

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Salary earned from working abroad

Is salary earned from working abroad taxed in Zimbabwe? If so, how?

No, but may be taxable if salary earned during temporary (not exceeding 183 days per tax year)
absence from Zimbabwe.

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Taxation of investment income and capital gains
Are investment income and capital gains taxed in Zimbabwe? If so, how?

Yes, investment income is taxable at 25 percent while capital gains on specified assets are
taxable at 20 percent.

Dividends

15 percent if from an unlisted entity and 10 percent if from a listed entity.

Interest

Bank interest is subject to withholding tax of 15 percent, other interest is 25 percent.

Rental income

25 percent.

Gains from stock option exercises

Taxed as employment income.

Five Tax Mistakes to Avoid

March 21, 2012
One of the best ways of ensuring success and continuity in any business is to ensure that all
statutory obligations are met in time. This includes paying taxes due to Zimra.

30 April is the deadline for submitting income tax returns for companies and all people doing
any type of business, while the first QPD is due on 25th March.  The annual tax deadline is no
one’s favourite occasion, but dealing with your taxes is as inevitable as it is unpleasant.
Unfortunately, for business owners the process is even more complicated and onerous. So how
can you stay on the right side of the Zimbabwean Revenue Authority while minimizing the
amount you have to pay?

In our work with small to medium sized enterprises, we found a number of mistakes that
business owners make when filing tax returns.  Here are five of the common ones:

Understating income / Overstating expenses: a number of business owners overstate expenses

and / or understate their revenues in order to reduce their taxable income and the tax they have to
pay. Excessive expenses or unrealistic revenues disproportionate to your type of business will
raise the suspicion of Zimra auditors. Some have been asked to provide receipts or proof of their
expenses, but then the sums don’t add up. In other cases, owners have been asked to produce
their bank statements, which showed transactions well over their stated revenues. They end up
incurring penalties on the unproven expenses.

Mixing business and pleasure: some business owners mix business and personal expenses.
Things such as your home expenses, personal travel, your children’s school fees, entertainment
expenses etc are allowable as business expenses. If Zimra finds out, you will be liable for the tax
due and in addition some heavy penalties.

Not claiming for bad debts: many businesses fail to collect all the monies due from their
customers. Bad debts should be written off as an expense. Just make sure keep the relevant proof
in case Zimra demands it.

Not claiming capital allowances: businesses are allowed to claim allowances on capital
expenditure made during the year. For most assets, the allowance is equivalent to 100% of the
cost of the assets bought. There are some special allowances due to SMES, such as 150%
deduction on the cost of plant and machinery. If you are not claiming these allowances, you are
overpaying your taxes.

Not knowing your financials: some business owners don’t have ongoing insight into their
financials. When it comes to calculating taxes, they just tell their accountant to pay a certain
amount not related to their actual income.  As Zimra officials carry out random audits, if you are
found without proper and accurate financial records, you will certainly be in trouble.

If you need more information on how to be tax compliant and save yourself the stress when
dealing with Zimra, please download my free Simplified Guide to Taxes for SMEs at
http://smebusinesslink.com, or send me an email request and I will forward it to you.

To receive my free weekly BusinessLink Newsletter, please send an email with SUBSCRIBE on
the subject line to chichonip@smebusinesslink.com.