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Principles of Business Taxation: Taxation Framework - © E-Learning Product 2010 (ICTA Graduate School)
Principles of Business Taxation: Taxation Framework - © E-Learning Product 2010 (ICTA Graduate School)
Principles of Business Taxation: Taxation Framework - © E-Learning Product 2010 (ICTA Graduate School)
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
•
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.
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 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.
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
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
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
ADDITIONAL INFORMATION
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
+ [$] - [$]
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
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
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:-
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
[b] The Income Tax Values of the above assets were as follows:-
[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.
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
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
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
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.
The income of the company was made up of the following other items:-
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
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Taxation Framework – © e-Learning Product 2010 [ICTA Graduate School] 2010
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
Mining 25%
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