Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010

PRINCIPLES OF BUSINESS TAXATION

BACKGROUND

This chapter of the lecture is concerned with the calculation of taxable income of businesses that are
operating here in Zimbabwe as companies registered under the Companies Act. From your Financial
Accounting studies, you have often encountered the term corporation tax, this of course being supplied to
you by the author or examiner. It is now the right time that you be able to calculate the tax liability of a
company so that you can be a very competent Tax Advisor or Accountant. Its calculation is so simple and
straight forward if you have mastered the contents of the chapter that was dealing with allowable
deductions and other preceding chapters.

OBJECTIVES

By the end of this chapter, a reader of this book is expected to:-

• Be able to calculate the taxable income of a business.

• Be able to treat allowable deductions correctly.

•
rd
Be able to determine exempt income according to the 3 Schedule and to treat them correctly in the
income tax computations of a business.

• Be able to determine the income tax liability of a company.

CALCULATION OF THE TAXABLE INCOME OF A COMPANY

The format that is used in this part of the book is quite very simple and straightforward and if employed in
the examination room, you should be able to score some very high marks. After all, it is the format that is
preferred by most examiners in taxation. It should be appreciated right from the onset that income tax
calculation is basically a re-writing of the final accounts of a company especially the profit and loss
account. If accounting was similar in nature to the rules of taxation, there was going to be no need for
carrying out income tax computations, as the profit of a company will be similar in amount to the
company's taxable income. There are many reasons why the net profit of a company differs from the
taxable income of a company for example, depreciation is not an allowable deduction, being an
expenditure of a capital nature, and profit on sale of an asset is not income as it is income of a capital
nature. Some donations, though business expenses are not allowed as deductions in pursuance of
Section 15(2) to the Income Tax Act. The reasons are numerous and are inexhaustible.

The plus sign [+] column shall be used to record:-

• The net profit of the business as shown by the profit and loss account.

• All amounts shown in the profit and loss account, which are disallowable deductions e.g.,
depreciation, loss on sale of a capital asset, etc.

The minus sign [-] column shall be used to record:-

All allowances to which the business is entitled to under the Act.

Allowable deductions under the Act.

Profit on sale of a capital asset.

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It is now important to illustrate what we have learnt so far by a very comprehensive and simple question.
The question, though very long, is one of the easiest questions to tackle in an examination room. Through
practice, you will very soon be able to tackle these long questions in a matter of a few minutes. For now,
let us try this one.

EXAMPLE
st
The following information relates to Avalino [Pvt] Ltd during the year ending 31 December 2002.

$ $
Gross Profit 13 565 000
Income Received 435 000
14 000 000
Less Expenses
Repairs 190 000
Administration Costs 500 000
General Expenses 700 000
Depreciation 210 000
Loss on sale of motor vehicle 60 000
Bad debts 900 000
Miscellaneous expenses 140 000 2 700 000
Net Profit 11 300 000

NOTES

[a] The amount for income received was determined as follows:-

- POSB Interest $300 000

- Donations $ 35 000
- Rent received $ 70 000
- Inheritance $ 30 000

[b] Repairs were made up as follows:-

- Repainting the premises $110 000
- Decorations to premises $ 60 000
- Extension to main factory $ 20 000

[c] Administration costs consisted of:-

- Radio advertising $ 80 000
- Cost of neon signs $120 000
- Press advertising $ 50 000
- Lights and water $210 000
- Rent and rates $ 40 000

[d] General expenses comprised of:-

- Donations to National Scholarship Fund $200 000
- Income tax successful appeal $ 50 000
- Medical aid contributions for employees $300 000
- Donations to street kids $130 000
- Legal charges to compel debtor $ 20 000
st
[e] A motor vehicle which was bought for $200 000 on 21 March 2000, was sold during the year for
$110 000. S.I.A was claimed in respect of this motor vehicle.

[f] Bad debts consisted of the following items:-

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- General bad debts $400 000

- Specific bad debts $300 000
- Doubt bad debts based on a % $200 000

[g] Miscellaneous expenses comprised of:-

- Registration of trade mark $ 20 000
- Renewal of a licence $ 10 000
- Cost of direction signs $ 30 000
- Traffic tickets $ 70 000
- Penalty for violating customs regulations $ 20 000

ADDITIONAL INFORMATION

Commercial buildings ITV 01/01/2002 [Cost $60 000] $ 40 000

Plant and Machinery ITV 31/12/2001 $ 90 000
Motor vehicles purchased 10/08/2002 $150 000
Nissan Sentra purchased [New] 01/02/2002 $700 000

The company elected to claim special initial allowance.

REQUIRED
st
Calculate the minimum taxable income of Avalino [Pvt] Ltd during the year ending 31 December 2002. A
schedule of capital allowances should accompany your solution and all necessary workings are to be
disclosed.

INCOME TAX COMPUTATIONS OF AVALINO [PVT] LTD FOR THE YEAR OF ASSESSMENT
ST
ENDING 31 DECEMBER 2002

+ [$] - [$]

Net profit as per accounts 11 300 000

Depreciation 210 000
Loss on sale of motor vehicle 60 000
POSB Interest 300 000
Donations 35 000
Inheritance 30 000
Decorations to premises 60 000
Extension to main factory 20 000
Cost of neon signs 120 000
Donations to street kids 130 000
General bad debts 40 000
Doubtful bad debts 200 000
Registration of trade mark 20 000
Cost of direction signs 30 000
Traffic tickets 70 000
Penalty for violating customs regulations 20 000
Recoupment 10 000
Special Initial Allowance 440 000
Wear and Tear Allowance 10 000
Taxable Income _________ 11 834 500
12 650 000 12 650 000

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SCHEDULE OF CAPITAL ALLOWANCES

Recoupment / S.I.A [$] W & T [$]

[Scrapping
Allowance] [$]
Commercial Buildings ITV 40 000
Less W & T 1 500 1 500
ITV 31/12/2002 38 500

Plant & Machinery ITV 90 000

Less W & T 9 000
ITV 31/12/2002 81 000

Motor Vehicles 150 000

Less S.I.A 75 000 75 000
ITV 31/12/2002 150 000

Nissan Sentra 500 000

Less S.I.A 250 000 250 000
ITV 31/12/2002 250 000

Improvements
Decorations to prem. 60 000
Extension to factory 20 000
80 000
Less S.I.A 40 000 40 000
ITV 31/12/2002 40 000

Cost of neon sign 120 000

Less S.I.A 60 000 60 000
ITV 31/12/2002 60 000

Motor Vehicle 200 000

Less S.I.A 50 000
ITV 31/12/2000 150 000
Less Acc. W & T 50 000
ITV 31/12/2001 100 000
Sold 2002 for 110 000
Recoupment 10 000 10 000

Cost of direction sign 30 000

Less S.I.A 15 000 15 000
ITV 31/12/2002 15 000

TOTAL 10 000 440 000 10 500

EXAMPLE
st
Muzuva [Pvt] Ltd's profit and loss account showed a net profit of $350 750 during the year ending 31
December 2002. The net profit was arrived at after taking into account the following transactions:-

[a] Depreciation: Motor vehicles $10 000

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Plant and machinery $15 000

Furniture and fittings $ 5 000
Industrial buildings $ 1 000

[b] The Income Tax Values of the above assets were as follows:-

Motor vehicles $20 000

Plant and machinery $90 000
Furniture and fittings $75 000
Industrial buildings [cost $150 000] $45 000

[c] During the year, a motor vehicle with a net book value of $15 000 and an income tax value of
$20 000 was sold during the year for $18 000.

[d] Goodwill written off during the year was $9 000.

[e] The figure for repairs was made up as follows:-

Construction of a new tarmac road $ 2 500

Extension of an old factory $10 000
Repainting of the worn out premises $ 2 100
Installation of two additional windows $ 3 000

[f] General expenses included the following amounts:-

Postage expenses $ 1 500

Unsuccessful tax appeal $ 500
Fines paid for traffic offences $15 000
Income tax paid on behalf of managing director $ 5 000
Interest on income tax $ 1 000
Registration of a trade mark $ 400

[g] Donations are as listed below:-

Donations to street kids $ 2 200

Donations to National Scholarship Fund $ 6 000
Donations to an organisation administered by
the Minister of Social Welfare $ 100

[h] The amount of interest was made up as follows:-

Interest from the POSB $ 5 000

Interest on overdue loan $ 3 100
Interest on tax reserve certificates $ 1 000

[I] Bad debts consist of:-

Debts proved to be bad $ 2 500

Loan to the company secretary who absconded $ 1 060

[j] Advertising consist of:-

Newspaper advertising $ 1 040

Radio advertising $ 500

The company elected to claim special initial allowance.

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You are required to calculate the taxable income of the company and to prepare the wear and tear
schedule.

SOLUTION

INCOME TAX COMPUTATIONS OF MUZUVA [PVT] LTD FOR THE YEAR ENDING 31
DECEMBER 2002

+ -
Net profit as per accounts 350 750
Depreciation:- Motor vehicles 10 000
Plant and machinery 15 000
Furniture and fittings 5 000
Industrial buildings 1 000
Profit on sale of motor vehicle 3 000
Goodwill 9 000
Construction of new tarmac road 2 500
Extension of an old factory 10 000
Two additional windows 3 000
Unsuccessful tax appeal 500
Traffic fines 15 000
Interest on income tax 1 000
Registration of a trade mark 400
Donations to street kids 2 200
Interest from POSB 5 000
Interest on Tax Reserve Certificates 1 000
Loan to the company secretary 1 060
Scrapping Allowance 2 000
Wear and Tear Allowance 44 000
Special Initial Allowance 7 750
Taxable Income 363 660
426 410 426 410

SCHEDULE OF WEAR AND TEAR AND S.I.A FOR YEAR ENDING 31/12/2002

SCRAPPING W & T ALL. S.I.A

Motor vehicles
ITV 01/01/2002 120 000
Less ITV of M/V sold 20 000
100 000
W & T @ 20% 20 000 20 000
ITV 31/12/2002 80 000

ITV 01/01/2002 20 000

Sold for 18 000
Scrapping Allowance 2 000 2 000

Plant and Machinery

ITV 01/01/2002 90 000

W & T @ 10% 9 000 9 000

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ITV 31/12/2002 81 000

Furniture & Fittings

ITV 01/01/2002 75 000
W & T @ 10% 7 500 7 500
ITV 31/12/2002 67 500
Industrial Buildings

ITV 01/01/2002 45 000

W & T @ 5% 7 500 7 500
37 500
Additions
Tarmac Road 2 500
Extension to factory 10 000
Two Windows 3 000
53 000
S.I.A on additions 7 750 7 750
ITV 31/12/2002 45 250
____ _____ ____
TOTAL 2 000 44 000 7 750

EXAMPLE
st
Chikara [Pvt] Ltd scored a net profit of $30 000 000 during the year ending 31 December 2003. This
profit was arrived at after charging the following expenses.

• Depreciation $100 000

• Loss on sale of plant $200 000
• Cost of a successful tax appeal $ 50 000
• Salaries and Wages $900 000
• Donations to National Scholarship Fund $150 000

The income of the company was made up of the following other items:-

• POSB Interest $4 000 000

• CABS Class "C" Permanent Shares $ 500 000
• Donation $1 500 000
• Subsidy $9 000 000

During the year, the following assets were bought.

♦ Defender Landrover $10 000 000

♦ Computer $ 4 000 000

The plant that was sold had an NBV of $400 000 and an Income Tax Value of $300 000. The sale
proceeds from this plant amounted to $200 000.

REQUIRED

Calculate the taxable income of this income.

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SOLUTION
st
INCOME TAX COMPUTATION OF CHIKARA LTD FOR YEAR ENDING 31 DECEMBER 2003

+ -
Net profit as per P&L Account 30 000 000
Depreciation 100 000
Loss on sale of plant 200 000
POSB Interest [Exempt] 4 000 000
CABS Class "C" Shares 500 000
Donation 1 500 000
S.I.A 2 500 000
Scrapping Allowance 100 000
Taxable Income ___ 21 700 000
30 300 000 30 300 000

WORKINGS

Cost of Defender $1 000 000

Less S.I.A $ 500 000
Income Tax Value 31/12/2003 $ 500 000

Cost of Computer $4 000 000

Less S.I.A $2 000 000
Income Tax Value 31/12/2003 $2 000 000

Plant ITV $300 000

Sold for $200 000
Scrapping Allowance $100 000

RATES OF TAX FOR COMPANIES

Normal tax 30%

Aids levy on tax payable 3%

SPECIAL RATE INCOME

Approved manufacturing co. in a growth point area 10%

st
BOOT Project : 1 5 years 0%
nd
2 5 years 15%
rd
3 5 years 20%
Thereafter [normal tax] 30%

Mining 25%

Licensed investors in EPZ and Industrial Park Developers

st
1 5 years 0%
Thereafter 15%
Holder of Special Mining lease 25%

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